SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberFOR THE QUARTERLY PERIOD ENDED JUNE 30, 19981999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-13459
Affiliated Managers Group, Inc.
-------------------------------AFFILIATED MANAGERS GROUP, INC.
(Exact name of registrant as specified in its charter)
DelawareDELAWARE 04-3218510
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Identification Number)
Two International Place, Boston, MassachusettsTWO INTERNATIONAL PLACE, BOSTON, MASSACHUSETTS 02110
----------------------------------------------------
(Address of principal executive offices)
(617) 747-3300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of the registrant'sRegistrant's Common Stock outstanding at NovemberAugust
13, 1998: 17,531,617,1999: 23,282,747 including 1,886,8001,492,079 shares of Class B Non-Voting Common
Stock. Unless otherwise specified, the term Common Stock includes both Common
Stock and Class B Non-Voting Common Stock.
In addition, unless otherwise
specified, the term Common Stock excludes the 1,750,942 outstanding shares of
the registrant's Series C Convertible Non-Voting Stock.
PART I - FINANCIAL INFORMATION
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)(IN THOUSANDS)
September 30, December 31, June 30,
1998 1997
------------ ------------1999
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 29,87723,735 $ 22,76632,149
Investment advisory fees receivable ............. 35,384 27,061....................... 66,939 42,476
Other current assets ............................ 3,532 2,231...................................... 5,137 5,789
--------- ---------
Total current assets ........................... 68,793 52,058................................ 95,811 80,414
Fixed assets, net .................................. 6,829 4,724............................................ 8,001 12,068
Equity investment in Affiliate ..................... 1,277 1,237............................... 1,340 1,312
Acquired client relationships, net of accumulated amortization
of $11,888 in 1998$13,870 and $6,142 in 1997 163,225 142,875$18,487 .................................... 169,065 192,246
Goodwill, net of accumulated amortization of $20,633
in 1998$23,191
and $13,502 in 1997 ...................... 310,430 249,698$29,425 ............................................... 321,409 391,105
Notes receivable from related parties ........................ 2,800 5,128
Other assets ....................................... 7,226 6,398................................................. 6,908 8,121
--------- ---------
Total assets ............................................................................ $ 557,780605,334 $ 456,990690,394
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ................................ $ 20,37942,617 $ 18,81542,967
Notes payable to related parties ............................. 22,000 --
--------- ---------
Total current liabilities ...................... 20,379 18,815............................ 64,617 42,967
Senior bank debt ................................... 200,300 159,500............................................. 190,500 174,000
Deferred taxes ............................................... 10,410 14,797
Other long-term liabilities ........................ 9,614 1,656.................................. 1,204 1,297
Subordinated debt .............................................................................. 800 800
--------- ---------
Total liabilities .............................. 231,093 180,771.................................... 267,531 233,861
Minority interest .................................. 21,264 16,479............................................ 24,148 24,286
Stockholders' equity:
Convertible stock .............................................................................. 30,992 --
Common stock ........................................................................................ 177 177235
Additional paid-in capital on common stock ......... 273,414 273,475................... 273,413 405,995
Accumulated other comprehensive income ............. 15 (30)
Retained....................... 16 (99)
Accumulated earnings (deficit) ........................ 2,359 (13,882)......................................... 11,669 28,728
--------- ---------
306,957 259,740316,267 434,859
Less treasury shares ............................... (1,534) --
--------- ---------......................................... (2,612) (2,612)
Total stockholders' equity ..................... 305,423 259,740.............................. 313,655 432,247
--------- ---------
Total liabilities and stockholders' equity ................... $ 557,780605,334 $ 456,990690,394
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
2
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months For the NineSix Months
Ended SeptemberJune 30, Ended SeptemberJune 30,
-------------------------- ------------------------------------------------------ ----------------------------
1998 19971999 1998 19971999
------------ ----------- ------------ ----------------------- ------------
Revenues ............................................................ $ 55,89256,586 $ 20,41078,577 $ 158,201102,309 $ 53,280146,704
Operating expenses:
Compensation and related expenses . 19,281 9,947 55,359 25,610... 19,463 26,292 36,078 50,714
Amortization of intangible assets . 4,530 1,078 12,877 3,121... 4,518 5,596 8,347 10,851
Depreciation and other amortization 736 388 1,849 1,059. 600 1,144 1,113 1,891
Selling, general and administrative 8,190 4,412 22,830 11,057. 7,857 13,312 14,640 23,169
Other operating expenses .......... 1,806 1,315 5,011 3,461............ 1,915 1,995 3,205 3,994
------------ ----------- ------------ -----------
34,543 17,140 97,926 44,308
------------ ----------- ------------
-----------34,353 48,339 63,383 90,619
------------ ------------ ------------ ------------
Operating income ........... 21,349 3,270 60,275 8,972............. 22,233 30,238 38,926 56,085
Non-operating (income) and expenses:
Investment and other income ....... (500) (376) (1,341) (814)......... (530) (746) (841) (1,658)
Interest expense .................. 3,564 1,000 10,567 2,707.................... 3,929 2,811 7,003 6,256
------------ ----------- ------------ -----------
3,064 624 9,226 1,893
------------ ----------- ------------
-----------3,399 2,065 6,162 4,598
------------ ------------ ------------ ------------
Income before minority interest and
income taxes ...................... 18,285 2,646 51,049 7,079........................ 18,834 28,173 32,764 51,487
Minority interest .................... (8,512) (2,393) (23,981) (6,025)...................... (8,976) (12,046) (15,469) (22,574)
------------ ----------- ------------ ----------------------- ------------
Income before income taxes ........... 9,773 253 27,068 1,054............. 9,858 16,127 17,295 28,913
Income taxes ......................... 3,909 126 10,827 221........................... 3,943 6,612 6,918 11,854
------------ ----------- ------------ ----------------------- ------------
Net income ........................................................ $ 5,8645,915 $ 1279,515 $ 16,24110,377 $ 83317,059
============ =========== ============ ======================= ============
Net income per share - basic .................... $ 0.330.34 $ 0.210.41 $ 0.920.59 $ 1.480.81
Net income per share - diluted ................ $ 0.30 $ 0.020.41 $ 0.850.55 $ 0.120.77
Average shares outstanding - basic ... 17,627,839 602,038 17,613,291 564,082..... 17,621,371 23,278,438 17,605,896 21,162,488
Average shares outstanding - diluted . 19,546,983 6,862,428 19,146,658 6,850,761... 19,716,449 23,427,243 18,935,919 22,068,094
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)(IN THOUSANDS)
(UNAUDITED)
For the Three Months For the NineSix Months
Ended SeptemberJune 30, Ended SeptemberJune 30,
-------------------------- --------------------------------------------- -------------------
1998 19971999 1998 1997
------------ ----------- ------------ -----------1999
-------- -------- -------- --------
Net income ............................................ $ 5,8645,915 $ 1279,515 $ 16,24110,377 $ 83317,059
Foreign currency translation
adjustment, net of taxes .......... 7 (92) 45 (99)
------------ ----------- ------------ -----------2 (50) 38 (115)
-------- -------- -------- --------
Comprehensive income ........................ $ 5,8715,917 $ 359,465 $ 16,28610,415 $ 734
============ =========== ============ ===========16,944
======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
3
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)(IN THOUSANDS)
(UNAUDITED)
For the NineSix Months
Ended SeptemberJune 30,
------------------------------------------
1998 1997
-------- --------1999
--------- ---------
Cash flow from operating activities:
Net income ............................................................................................................................. $ 16,24110,377 $ 83317,059
Adjustments to reconcile net income to net cash flow from operating activities:
Amortization of intangible assets .................................. 12,877 3,121............................................. 8,347 10,851
Depreciation and other amortization ................................ 1,849 1,059........................................... 1,113 1,891
Deferred income tax provision ................................................. -- 4,387
Changes in assets and liabilities:
Increase(Increase) decrease in investment advisory fees receivable .................... (8,323) (212)(7,357) 33,644
Increase in other current assets ................................... (1,301) (2,304).............................................. (245) (342)
Increase (decrease) in accounts payable, accrued expenses and other liabilities 9,522 3,4769,412 (10,863)
Minority interest .................................................. 4,785 776
-------- --------............................................................. 3,693 138
--------- ---------
Cash flow from operating activities ......................... 35,650 6,749
-------- --------.................................... 25,340 56,765
--------- ---------
Cash flow used in investing activities:
Purchase of fixed assets ........................................... (2,658) (1,545)...................................................... (1,860) (3,906)
Costs of investments, net of cash acquired ......................... (65,389) (25,315).................................... (64,000) (104,068)
Distribution received from Affiliate equity investment ............. 495 135........................ 263 366
Increase in other assets ........................................... (293) (282)
-------- --------...................................................... (689) (1,269)
Loans to related parties ...................................................... -- (2,328)
--------- ---------
Cash flow used in investing activities ....................... (67,845) (27,007)
-------- --------.................................. (66,286) (111,205)
--------- ---------
Cash flow from financing activities:
Borrowings of senior bank debt ..................................... 74,300 31,900................................................ 72,300 130,300
Repayments of senior bank debt ..................................... (33,500) (2,000)................................................ (17,500) (146,800)
Repayments of notes payable ........................................................................................... -- (5,878)(22,000)
Issuance (repurchase) of equity securities ......................... (1,539) 10
-------- --------.................................... (5) 101,649
Debt issuance costs ........................................................... (76) (180)
--------- ---------
Cash flow from financing activities .......................... 39,261 24,032..................................... 54,719 62,969
Effect of foreign exchange rate changes on cash flow .................. 45 (99)............................. 38 (115)
Net increase in cash and cash equivalents ............................. 7,111 3,675........................................ 13,811 8,414
Cash and cash equivalents at beginning of period ....................................................... 22,766 6,767
-------- --------23,735
--------- ---------
Cash and cash equivalents at end of period ................................................................... $ 29,87736,577 $ 10,442
======== ========32,149
========= =========
Supplemental disclosure of non-cash financing activities:
Stock issued in acquisitions ......................................................................................... $ 30,992 $ 11,101--
The accompanying notes are an integral part of the
consolidated financial statements.
4
1. Basis of PresentationBASIS OF PRESENTATION
The consolidated financial statements of Affiliated Managers Group,
Inc. (the "Company" or "AMG") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The year end condensed
balance sheet data was derived from audited financial statements, but does not
include all of the disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain prior year amounts have been reclassified to conform withto the
current year'syear presentation. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the full year.
The Company's Annual Report on Form 10-K for the fiscal year ended December 31,
19971998 includes additional information about AMG, its operations, and its
financial position, and should be read in conjunction with this quarterly report
on Form 10-Q.
2. Income TaxesACQUISITIONS
On April 1, 1999, the Company completed an investment in substantially
all of the ownership interests in The Managers Funds LLC, which serves as the
adviser to a family of nine equity and fixed income no-load mutual funds. This
transaction was accounted for under the purchase method of accounting.
3. INCOME TAXES
A summary of the provision for income taxes is as follows (in
thousands):
Three Months Ended SeptemberJune 30,
-----------------------------------------------
1998 1997
------ ----1999
----------- --------
Federal: Current .........................Current............................. $ -- $ --
Deferred ........................ 3,103 693,814
Deferred............................ 3,371 1,725
State: Current ......................... 367 57
Deferred ........................ 439 --
------ ----Current............................. 91 701
Deferred............................ 481 372
----------- --------
Provision for income taxes ............... $3,909 $126
====== ====taxes......................... $ 3,943 $ 6,612
=========== ========
The Company has determined that because it is more likely than not that
a majority of its tax net operating loss carryforwards will be utilized
during 1998, the deferred tax valuation allowance which existed at December
31, 1997 was no longer necessary. Accordingly, the Company expects that the
benefit of the reversal of the allowance will be realized ratably over the
year.
3. Earnings Per Share4. EARNINGS PER SHARE
The calculation for the basic earnings per share is based on the
weighted average of common shares outstanding during the period. The calculation
for the diluted earnings per share is based on the weighted average of common
and common equivalent shares outstanding during the period. The following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations.
5
Three Months Ended SeptemberJune 30,
------------------------------------------------
1998 19971999
----------- ---------------------
Numerator:
Net income .................................................................... $ 5,864,0005,915,000 $ 127,0009,515,000
Denominator:
Average shares outstanding - basic ............ 17,627,839 602,038........ 17,621,371 23,278,438
Convertible stock ...................................................... 1,750,942 5,768,247--
Stock options and unvested restricted stock ... 168,202 492,143344,136 148,805
----------- ---------------------
Average shares outstanding - diluted .......... 19,546,983 6,862,428...... 19,716,449 23,427,243
=========== =====================
Net income per share:
Basic .............................................................................. $ 0.330.34 $ 0.210.41
Diluted .......................................................................... $ 0.30 $ 0.020.41
Item 2. Management's Discussion and AnalysisIn March 1998, the Company issued 1,750,942 shares of Financial Condition and ResultsSeries C
Convertible Stock in completing its investment in Essex Investment Management
Company, LLC. Each share converted into one share of Operations
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaningCommon Stock on March 20,
1999. The shares of the Private Securities Litigation Reform Act of 1995, which are
basedCommon Stock converted on management's current views and assumptions regarding future events
and financial performance. Words or phrases such as "will likely result,"
"are expected to," "will continue," "is anticipated," "believes,"
"estimates," "projects" and other similar expressions are intended to
identify such forward-looking statements. Such statements are subject to
certain risks and uncertainties, including those discussed herein andthat date have been included in
the "Business - Cautionary Statements" sectioncalculation of the Company's Annual Report on
Form 10-Kbasic shares outstanding for the fiscal yearthree months ended DecemberJune 30,
1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-Q AND IN OUR FUTURE FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN OUR PRESS RELEASES AND IN ORAL STATEMENTS
MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES
"WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL CONTINUE", "IS ANTICIPATED",
"BELIEVES", "ESTIMATE", "PROJECT" OR SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER THE CAPTION
"BUSINESS-CAUTIONARY STATEMENTS" IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997, that could cause
actual results to differ materially from those discussed in the
forward-looking statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made,1998, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. WE WISH
TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. WE WISH TO ADVISE READERS THAT
THE FACTORS UNDER THE ABOVE DESCRIBED CAPTION "BUSINESS - CAUTIONARY STATEMENTS"
COULD AFFECT OUR FINANCIAL PERFORMANCE AND COULD CAUSE OUR ACTUAL RESULTS FOR
FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED
WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT STATEMENTS.
IN ADDITION, THE DISCUSSION AND ANALYSIS WITH RESPECT TO THE YEAR 2000
(AS DESCRIBED MORE FULLY BELOW), INCLUDING (I) OUR EXPECTATIONS OF WHEN ALL
RELEVANT INTERNAL AND EXTERNAL SYSTEMS WILL BE ABLE TO HANDLE DATES BEYOND 1999
(GENERALLY DESCRIBED AS "YEAR 2000 COMPLIANCE"), (II) OUR ESTIMATES OF THE COSTS
INVOLVED IN ACHIEVING YEAR 2000 COMPLIANCE AND (III) OUR BELIEF THAT THE COSTS
WILL NOT BE MATERIAL TO OPERATING RESULTS, ARE BASED ON OUR ESTIMATES WHICH, IN
TURN, ARE BASED UPON A NUMBER OF ASSUMPTIONS REGARDING FUTURE EVENTS, INCLUDING
THIRD PARTY MODIFICATION PLANS AND THE AVAILABILITY OF CERTAIN RESOURCES. THERE
CAN BE NO GUARANTEE THAT THESE ESTIMATES WILL BE ACHIEVED, AND ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM OUR ESTIMATES. SPECIFIC FACTORS WHICH MIGHT CAUSE
SUCH MATERIAL DIFFERENCES WITH RESPECT TO THE YEAR 2000 INCLUDE, BUT ARE NOT
LIMITED TO, THE FAILURE OF THIRD PARTY PROVIDERS TO ACHIEVE REPRESENTED OR
STATED LEVELS OF YEAR 2000 COMPLIANCE, AVAILABILITY AND COST OF PERSONNEL
TRAINED IN THIS AREA, THE ABILITY TO LOCATE AND CORRECT ALL RELEVANT COMPUTER
CODES, AND SIMILAR UNCERTAINTIES.
WE WILL NOT UNDERTAKE AND WE SPECIFICALLY DISCLAIM ANY OBLIGATION TO
RELEASE PUBLICLY THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF EVENTS, WHETHER OR NOT
ANTICIPATED.
6
OVERVIEW
We buy and the Company will not undertake to release publicly
the result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of events or changes in circumstances
after the date of such statements. In addition, the discussion and analysis
below with respect to the Year 2000 Issue including i) our expectations of
when Year 2000 compliance will actually be achieved, ii) estimates of the
costs involved in achieving Year 2000 readiness and iii) our belief that the
costs will not be material to operating results, are based on management's
estimates which, in turn, are based upon a number of assumptions regarding
future events, including third party modification plans and the availability
of certain resources. There can be no guarantee that these estimates will be
achieved, and actual results may differ materially from management's
estimates. Specific factors which might cause such material differences with
respect to the Year 2000 Issue include, but are not limited to, the failure
of third party providers to achieve represented or stated levels of Year 2000
compliance, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
Overview
The Company acquireshold equity positionsinterests in mid-sized investment management
firms (our "Affiliates") and derives itscurrently derive all of our revenues from suchthose
firms. AMG hasWe hold investments in 14 Affiliates that in aggregate managed $70.9
billion in assets at June 30, 1999. Our most recent investments were in Davis
Hamilton Jackson & Associates, L.P. ("DHJA") in December 1998, Rorer Asset
Management, LLC ("Rorer") in January 1999 and The Managers Funds LLC
("Managers") in April 1999.
We have a revenue sharing arrangement with each investment management firm inof our Affiliates
(other than Managers) which it has an
investment (each, an "Affiliate") which is contained in the organizational
document of that Affiliate. Each such arrangement allocates a specified percentage of revenues
(typically 50-70%) for use by management of that Affiliate in paying operating
expenses, of the Affiliate, including salaries and bonuses (the "Operating Allocation"). The
remaining portion of revenues of theeach such Affiliate, typically 30-50% (the
"Owners' Allocation"), is allocated to the owners of that Affiliate (including
AMG), generally in proportion to their ownership of the Affiliate. SinceOne of the
purposes of our revenue sharing arrangements is to provide ongoing incentives
for the managers of these Affiliates by allowing them:
- - to participate in their firm's growth through their compensation from the
Operating Allocation,
- - to receive a portion of the Owners' Allocation based on their ownership
interest in the Affiliate, and
- - to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and bonuses
for management of such Affiliate.
Under the revenue sharing arrangements, the managers of our Affiliates
have an incentive to both increase revenues of the Affiliate (thereby increasing
the Operating Allocation and their Owners' Allocation) and to control expenses
of the Affiliate (thereby increasing the excess Operating Allocation).
The revenue sharing arrangements allow us to participate in the revenue
growth of our Affiliates because we receive a portion of the additional revenue
as our share of the Owners' Allocation. However, we participate in that growth
to a lesser extent than the managers of our Affiliates, because we do not share
in the growth of the Operating Allocation.
Under the organizational documents of the Affiliates (other than
Managers), the allocations and distributions of cash to us generally take
priority over the allocations and distributions to the other owners of the
Affiliates. This further protects us if there are any expenses in excess of the
Operating Allocation of an Affiliate. Thus, if an Affiliate's expenses exceed
its foundingOperating Allocation, the excess expenses first reduce the portion of the
Owners' Allocation allocated to the Affiliate's management owners, until that
portion is eliminated, and then reduce the portion allocated to us. Unlike all
other Affiliates, Managers is not subject to a revenue sharing arrangement. As a
result, we participate fully in December 1993,any increase or decrease in the Company has completed 11 investments in Affiliates and has announced the
signingrevenues or
expenses of definitive agreements for investments in two additional
Affiliates, Davis Hamilton Jackson & Associates, L.P. and Rorer Asset
Management, LLC.Managers.
The portion of our Affiliates' revenues which is included in their
Operating Allocation and retained by them to pay salaries, bonuses and other
operating expenses, as well as the portion of our Affiliates' revenues which are
included in their Owners' Allocation and distributed to us and the other owners
of the Affiliates, are included as "revenues" on our Consolidated Statements of
Operations. The expenses of our Affiliates which are paid out of the Operating
Allocation, as well as our holding company expenses which we pay out of the
amounts of the Owners' Allocation which we receive from the Affiliates, are both
included in "operating expenses" on our Consolidated Statements of Operations.
Since Managers is not subject to a revenue sharing arrangement, all revenues and
expenses of Managers are consolidated into the revenues and operating expenses
in our Consolidated Statements of Operations. The portion of our Affiliates'
revenues which is allocated to owners of the Affiliates other than us is
included in "minority interest" on our Consolidated Statements of Operations.
The EBITDA Contribution of an Affiliate represents the Owners'
Allocation of that Affiliate allocated to AMG (or, in the case of Managers, the
income allocated to AMG) before interest, taxes, depreciation and amortization
of that Affiliate. EBITDA Contribution does not include our holding company
expenses.
Our revenues are generally derived from the provision of investment
management services for fees.fees by our Affiliates. Investment management fees are
usually determined as a percentage fee charged on periodic values of a client's
assets under management. Certain of the Affiliates bill advisory fees for all or
a portion of their clients based
7
upon assets under management valued at the beginning of a billing period ("in
advance"). Other Affiliates bill advisory fees for all or a portion of their
clients based upon assets under management valued at the end of the billing
period ("in arrears"), while mutual fund clients are billed based upon daily
assets. Advisory fees billed in advance will not reflect subsequent changes in
the market value of assets under management for that period. Conversely,
advisory fees billed in arrears will reflect changes in the market value of
assets under management for that period. In addition, several of the Affiliates
charge performance-based fees to certain of their clients; these
performance-based fees result in payments to the applicable Affiliate if
specified levels of investment performance are achieved. All references in this report to
"assets under management" include assets directly managed as well as assets
underlying overlay strategies which employ futures, options or other derivative
securities to achieve a particular investment objective.
Our level of profitability will depend on a variety of factors
including principally: (i) the level of Affiliate revenues, which is dependent
on the ability of our existing and future Affiliates to maintain or increase
assets under management by maintaining their existing investment advisory
relationships and fee structures, marketing their services successfully to new
clients, and obtaining favorable investment results; (ii) a variety of factors
affecting the securities markets generally, which could potentially result in
considerable increases or decreases in the assets under management at our
Affiliates; (iii) the receipt of Owners' Allocation, which is dependent on the
ability of our existing and future Affiliates to maintain certain levels of
operating profit margins; (iv) the availability and cost of the capital with
which we finance our existing and new investments; (v) our success in attracting
new investments and the terms upon which such transactions are completed; (vi)
the level of intangible assets and the associated amortization expense resulting
from our investments; (vii) the level of expenses incurred for holding company
operations, including compensation for its employees; and (viii) the level of
taxation to which we are subject. Each of the foregoing are, to some extent,
dependent on factors (including general securities market conditions, as
noted above) which are not in our control.
Assets under management were $50.1 billion at September 30, 1998 versus
$54.9$70.9 billion at June 30, 19981999 versus
$64.2 billion at March 31, 1999 and $45.7$57.7 billion at December 31, 1997.1998. The
declineincrease in assets in the third quarter resulted from adverse conditions in the
equity marketsunder management during the quarter was partially offset by positiverelated to
the closing of our investment in Managers ($1.7 billion) in April 1999. During
the quarter net client cash flows for directly managed assets contributed $997.4
million of $445 millionthe increase while overlay assets (which generally carry lower fees
than directly managed assets) declined $404.0 million. Positive investment
performance accounted for the 6
remaining $4.4 billion increase in assets under
management during the quarter. Year to date growth was driven by the additionour investments
in Rorer ($4.4 billion) and Managers and $1.4 billion of an Affiliate and
positive net client cash flows
of $1.6from directly managed assets (offset by $1.5 billion offsetting negativein declines in overlay
assets). Positive investment performance due primarilyof $7.2 billion increased assets under
management year to the adverse conditions in the equity markets during
the third quarter.
Each of the Company'sdate.
Our investments ishave been accounted for under the purchase method of
accounting under which goodwill is recorded for the excess of the purchase price
for the acquisition of interests in Affiliates over the fair value of the net
assets acquired, including acquired client relationships.
As a result of the series ofour investments, made by the Company, intangible assets, (collectively,consisting of
acquired client relationships and goodwill, are referred to as
"intangible assets") constitute a substantial percentage
of the assetsour consolidated assets. As of the
Company. At SeptemberJune 30, 1998, the Company's1999, our total assets were
$557.8approximately $690.4 million, of which $163.2approximately $192.2 million consisted of
acquired client relationships and $310.4$391.1 million consisted of goodwill.
The amortization period for intangible assets for each investment is
assessed individually, with amortization periods for the Company'sour investments to date
ranging from nineeight to 28 years in the case of acquired client relationships and
15 to 35 years in the case of goodwill. In determining the amortization period
for intangible assets acquired, the Company considerswe consider a number of factors including: the
firm's historical and potential future operating performance; the firm's historicalperformance and potential future ratesrate of
attrition among clients; the stability and longevity of existing client
relationships; the firm's recent, as well as long-term, investment performance;
the characteristics of the firm's products and investment styles; the stability
and depth of the firm's management team and the firm's history and perceived
franchise or brand value. The Company performsWe perform a quarterly evaluation of intangible assets
on an Affiliate-by-Affiliateinvestment-by-investment basis to determine whether there has been any
impairment in their carrying value or their useful lives. If impairment is
indicated, then the carrying amount of intangible assets, including goodwill,
will be reduced to their fair values.
While amortization of intangible assets has been charged to the results
of operations and is expected to be a continuing material component of the
Company'sour
operating expenses, management believes that it is important to distinguish this
8
expense from other operating expenses since such amortization does not require
the use of cash. Also,Because of this, and because the Company'sour distributions from itsour
Affiliates are based on its share oftheir Owners' Allocation, management haswe have provided additional
supplemental information in this report for "cash" related earnings, as an
addition to, but not as a substitute for, measures related to net income. Such
measures are (i) EBITDA, (earnings before interest expense, income taxes,
depreciation and amortization), which the Company believeswe believe is useful to investors as an indicator
of the Company'sour ability to service debt, to make new investments and meet working capital
requirements, and (ii) EBITDA as adjusted, (earnings after interest expense and income taxes but before depreciation and
amortization), which the Company believeswe believe is useful to
investors as another indicator of funds available to the Companywhich may be used to make new
investments, to repay debt obligations, to repurchase shares of our Common Stock
or repay debt obligations.
Three Months Ended Septemberpay dividends on our Common Stock (although the Company has no current plans
to pay dividends).
THE THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1998 as Compared to Three Months Ended
September 30, 1997
The Company had net income of $9.5 million for the quarter ended June
30, 1999 compared to net income of $5.9 million for the quarter ended SeptemberJune 30,
1998 compared to net income of $127,000 for the quarter ended September 30,
1997.1998. The increase in net income resulted primarily from net incomethe growth in EBITDA
contribution from existing Affiliates and also from investments in new
investments.Affiliates. The Company invested in GeoCapital, LLC ("GeoCapital") in September
1997, Tweedy, Browne Company LLC ("Tweedy, Browne") in October 1997,DHJA, Rorer and Essex
Investment Management Company, LLC ("Essex") in MarchManagers on December 31,
1998, January 6, 1999, and included their
results from their respective dates of investment.
RevenuesApril 1, 1999, respectively.
Total revenues for the quarter ended SeptemberJune 30, 19981999 were $55.9$78.6 million,
an increase of $35.5$22.0 million over the quarter ended SeptemberJune 30, 1997,1998, primarily as
a result of the addition of theinvestments in new Affiliates as described above.
Operatingand also from the growth in
revenues from existing Affiliates.
Total operating expenses increased by $17.4$13.9 million to $34.5$48.3 million
for the quarter ended SeptemberJune 30, 1998 over1999 from $34.4 million for the quarter ended
SeptemberJune 30, 1997.1998. Compensation and related expenses increased by $9.3$6.8 million, amortization of
intangible assets increased by $3.5 million, and
selling, general and administrative expenses increased by $3.8$5.5 million, and
amortization of intangible assets increased by $1.1 million. The increases in
operating expenses were primarily due to the investments in the new Affiliates
and also from the growth in the Operating Allocation related to the growth in
revenues from existing Affiliates.
Interest expense decreased by $1.1 million to $2.8 million for the
quarter ended June 30, 1999 from $3.9 million for the quarter ended June 30,
1998. The reduction in interest expense was partially from repayments of
senior bank debt generated from the net proceeds from our public offering of
Common Stock in March 1999 (as described below) and cash flow from ongoing
operations, offset by borrowings related to new investments. In addition,
interest expense decreased due to a favorable interest rate environment.
Minority interest increased by $3.0 million to $12.0 million for the
quarter ended June 30, 1999 from $9.0 million for the quarter ended June 30,
1998. This increase was primarily a result of the addition of new Affiliates and
also from the new Affiliates.
Minority interest increased by $6.1 million to $8.5growth in revenues from existing Affiliates as described above.
Income tax expense was $6.6 million for the quarter ended SeptemberJune 30, 1998 over the quarter ended September 30, 1997,
primarily as a result of the increase in revenues from the addition of the new
Affiliates.
7
Interest expense increased by $2.6 million1999
compared to $3.6 million for the quarter
ended September 30, 1998 over the quarter ended September 30, 1997 as a result
of the increased indebtedness incurred in connection with the investments in the
new Affiliates.
Income tax expense was $3.9 million for the quarter ended SeptemberJune 30, 1998 compared to $126,000 for the quarter ended September 30, 1997.1998. The change in income tax
expense iswas primarily related to an increase in income before taxes in the
quarter ended September 30, 1998.taxes.
EBITDA increased by $15.9$6.8 million to $18.6$25.7 million for the quarter ended
SeptemberJune 30, 1998 over1999 from $18.9 million for the quarter ended SeptemberJune 30, 1997,1998, primarily
as a result of the inclusion ofinvestments in new Affiliates and also from the new Affiliates.growth in
revenues from existing Affiliates as described above.
EBITDA as adjusted increased by $9.5$5.3 million to $11.1$16.3 million for the
quarter ended SeptemberJune 30, 1998 over1999 from $11.0 million for the quarter ended SeptemberJune 30,
19971998 as a result of the factors affecting net income as described above, before non-cash
expenses such as amortization of intangible assets and depreciation of $5.3
million for the quarter ended Septemberabove.
THE SIX MONTHS ENDED JUNE 30, 1998.
Nine Months Ended September1999 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1998 as Compared to Nine Months Ended
September 30, 1997
The Company had net income of $16.2$17.1 million for the ninesix months ended
SeptemberJune 30, 19981999 compared to net income of $833,000$10.4 million for the ninesix months ended
SeptemberJune 30, 1997.1998. The increase in net income resulted primarilymostly from net incomeEBITDA
contribution from new investments.investments made during and subsequent to the first six
months of 1998. The Company invested in GofenEssex, DHJA, Rorer and Glossberg,
L.L.C. ("GofenManagers on March
20, 1998, December 31, 1998, January 6, 1999 and Glossberg") in May 1997, GeoCapital in September 1997,
Tweedy, Browne in October 1997, and Essex in March 1998 (collectively, the
"New Affiliates") and included their results from their respective dates of
investment.
RevenuesApril 1, 1999, respectively.
9
Total revenues for the ninesix months ended SeptemberJune 30, 19981999 were $158.2$146.7
million, an increase of $104.9$44.4 million over the ninesix months ended SeptemberJune 30, 1997,1998,
primarily as a result of the addition of the Newinvestments in new Affiliates.
OperatingTotal operating expenses increased by $53.6$27.2 million to $97.9$90.6 million
for the ninesix months ended SeptemberJune 30, 1998 over1999 from $63.4 million for the ninesix months
ended SeptemberJune 30, 1997.1998. Compensation and related expenses increased by $29.7 million, amortization
of intangible assets increased by $9.8$14.6
million, selling, general and administrative expenses increased by $11.8$8.6 million,
amortization of intangible assets increased by $2.6 million, and other operating
expenses increased by $1.6 million.$789,000. The growthincreases in operating expenses are
primarily due to the investments in the new Affiliates as described above.
Interest expense decreased by $747,000 to $6.3 million for the six
months ended June 30, 1999 from $7.0 million for the six months ended June
30, 1998. The reduction in interest expense was partially from repayments of
senior bank debt generated from the net proceeds from our public offering of
Common Stock in March 1999 (as described below) and cash flow from ongoing
operations, offset by borrowings related to new investments. In addition,
interest expense decreased due to a favorable interest rate environment.
Minority interest increased by $7.1 million to $22.6 million for the
six months ended June 30, 1999 from $15.5 million for the six months ended June
30, 1998. This increase is primarily a result of the addition of the New Affiliates.
Minority interest increased by $18.0 million to $24.0 million for the nine
months ended September 30, 1998 over the nine months ended September 30, 1997,
primarilynew Affiliates
as a result of the addition of New Affiliates.
Interest expense increased by $7.9 million to $10.6 million for the
nine months ended September 30, 1998 over the nine months ended September 30,
1997, as a result of the increased indebtedness incurred in connection with
the investments in the New Affiliates.described above.
Income tax expense was $10.8$11.9 million for the ninesix months ended SeptemberJune 30,
19981999 compared to $221,000$6.9 million for the ninesix months ended SeptemberJune 30, 1997.1998. The change
in income tax expense iswas primarily related to an increase in income before taxes in the nine months ended September 30, 1998 and the
recognition of the benefit of the reversal of the Company's tax valuation
allowance at December 31, 1996 in the nine months ended September 30, 1997.taxes.
EBITDA increased by $44.4$14.2 million to $52.4$47.9 million for the ninesix months
ended SeptemberJune 30, 1998 over1999 from $33.8 million for the ninesix months ended SeptemberJune 30, 1997,1998,
primarily as a result of the inclusion of the New Affiliates.investments in new Affiliates as described above.
EBITDA as adjusted increased by $26.0$10.0 million to $31.0$29.8 million for the
ninesix months ended SeptemberJune 30, 1998 over1999 from $19.8 million for the ninesix months ended SeptemberJune
30, 19971998 as a result of the factors affecting net income as described above, before
non-cash expenses suchabove.
LIQUIDITY AND CAPITAL RESOURCES
We have met our cash requirements primarily through cash generated
by operating activities, bank borrowings, and the issuance of equity and debt
securities in public and private placement transactions (such as amortizationthe public
offering described below). We anticipate that we will use cash flow from our
operating activities to repay debt and to finance our working capital needs
and will use bank borrowings and issue equity and debt securities to finance
future investments. Our principal uses of intangible assetscash have been to make investments
(such as the acquisition of The Managers Funds LLC), to retire indebtedness,
repurchase shares and depreciationto support our and our Affiliates' operating
activities. We expect that our principal use of $14.7 millionfunds for the nine months ended September 30, 1998.
8
Liquidityforeseeable
future will be for additional investments, repayments of debt, including
interest payments on outstanding debt, distributions to owners of Affiliates
other than us, additional investments in existing Affiliates, including upon
management owners' sales of their retained equity to us, and Capital Resources
At September 30, 1998,for working
capital purposes. We do not expect to make commitments for material capital
expenditures.
On March 3, 1999, the Company completed a public offering of Common
Stock. In the offering 5,529,954 shares of Common Stock were sold, of which
4,000,000 shares were sold by the Company and 1,529,954 shares were sold by
selling stockholders. AMG used the net proceeds from the offering to reduce
indebtedness under our credit facility (as described below) and did not
receive any proceeds from the sale of Common Stock by the selling
stockholders.
On April 1, 1999, we financed our acquisition of The Managers Funds
LLC with a borrowing under our credit facility. At June 30, 1999, we had
cash and cash equivalentsoutstanding borrowings of $29.9senior debt under that credit facility of $174
million and outstanding borrowings under its revolvingthe ability to borrow an additional $156 million. We have the
option, with the consent of our lenders, to increase the facility by another
$70 million to a total of $400 million. Our credit facility ("Credit
Facility") of $200.3 million. The Credit Facility allows for borrowings up to
$300 million (which may be increased to $400 million upon the approval of the
lenders) and matures in December 2002. The Company paysbears interest at
either LIBOR plus a margin ranging from .50% to 2.25% or the Prime Rate plus
a margin as well asranging up to 1.25% and matures during December 2002. We pay a
commitment fee of up to 1/2 of 1% on the daily unused portion of the
facility. On September 11, 1998,In order to partially offset our exposure to changing interest
rates we have entered into interest rate hedging contracts.
Our borrowings under the Company's Boardcredit facility are collateralized by pledges
of Directors authorized a share
repurchase program pursuant toall of our interests in Affiliates (including all interests which AMG could repurchase up to five percent of
AMG's issued and outstanding shares of Common Stock. During the quarter ended
September 30, 1998, the Company repurchased 84,400 shares for $1.5 million.
Subsequent to September 30, 1998 the Company has repurchased an additional
62,600 shares for $1.1 million.
On October 22, 1998, AMG announced an agreement to acquire a 65%
interest in Davis Hamilton Jackson & Associates, L.P.are
directly held by us, as well as all interests which are indirectly held by us
through wholly-owned subsidiaries), which will holdinterests represent substantially all
of our assets. Our credit facility contains a
10
number of negative covenants, including those which generally prevent us and our
Affiliates from: (i) incurring additional indebtedness (other than subordinated
indebtedness) (ii) creating any liens or encumbrances on material assets (with
certain enumerated exceptions), (iii) selling assets outside the ordinary course
of business presently operated by Davis Hamilton Jackson & Associates, Inc.
("DHJA"). DHJA isor making certain fundamental changes with respect to our
businesses, including a Houston based asset managementrestriction on our ability to transfer interests in any
majority owned Affiliate if, as a result of such transfer, we would own less
than 51% of such firm, with approximately
$3.0 billion of assets under management at September 30, 1998. On November 9,
1998, the Company announced an agreement to acquire an approximately 65%
interest in Rorer Asset Management, LLC, which will hold the business
presently operated by Edward C. Rorer & Co., Inc. ("Rorer"). Rorer is a
Philadelphia based investment advisor with approximately $3.6 billion of
assets under management at September 30, 1998. AMG will pay approximately $65
million in cash for its investment in Rorer. AMG will finance these two
investments with borrowings under its Credit Facility.and (iv) declaring or paying dividends on our Common
Stock.
In order to provide the funds necessary for the Companyus to continue to acquire
interests in investment management firms, including additional
investments inour existing Affiliates upon
the management owners' sales of their retained equity to us, it will be
necessary for the Companyus to incur, from time to time, additional long-term bank debt
and/or issue equity or debt securities, depending on market and other
conditions. There can be no assurance that such additional financing will be
available or become available on terms acceptable to the Company.
Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"). FAS 131 requires
disclosure of financial and descriptive information about an entity's reportable
operating segments. This standard is effective for financial statements for
periods beginning after December 15, 1997, with restatement of comparative
information for prior periods.us.
YEAR 2000
The standard is not required"Year 2000" poses a concern to be applied to
interim financial statements in the initial year of its application.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 standardizes the accounting for derivative instruments by
requiring that all derivatives be recognizedour business as assets and liabilities and
measured at fair value. FAS 133 is effective for financial statements for fiscal
years beginning after June 15, 1999.
The Company does not believe that the implementation of FAS 131 or FAS 133
will have a material impact on the Company's financial statements.
Impactresult of the Year 2000 Issue
The Year 2000 Issue isfact
that computer applications have historically used the result of computer programs being written usinglast two digits, rather
than all four digits, to definestore year data. If left unmodified, these applications
would misinterpret the applicable year. AnyYear 2000 for the Year 1900 and would in many cases be
unable to function properly in the Year 2000 and beyond.
We have based our evaluation of the Company's
or its Affiliates' computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Such disruptions could affect the Company's Affiliates'our ability to provide
advisory services.
The Company hasprepare for the Year
2000 upon a number of assumptions regarding future events, including third party
modification plans and the availability of needed resources. We cannot guarantee
that these estimates will be achieved, and actual results may differ materially
from our estimates. Specific factors which might cause such material differences
with respect to the Year 2000 include, but are not limited to, the failure of
our Affiliates to achieve represented or stated levels of Year 2000 Compliance,
the availability and cost of personnel trained in this area and the ability to
locate and correct all relevant computer codes and similar uncertainties.
AMG'S HOLDING COMPANY READINESS
In anticipation of this problem, we have identified all of the
significant computers, software applications and related equipment used at the
holding company that need to be modified, upgraded or replaced to minimize the
possibility of a material disruption to its business.
9
In addition,our business based on the Company hasadvent of the
Year 2000. We anticipate completing our Year 2000 preparations at the holding
company by the end of the third quarter of 1999. We estimate our total cost will
be $500,000 for the four year period ending on December 31, 1999. We cannot be
certain that we will not encounter unforeseen delays or costs in completing our
preparations.
AMG'S AFFILIATES' READINESS
We have also established a time line with each Affiliate a timeline
for complianceof our Affiliates to
complete their Year 2000 preparations and hashave received estimates from each of
compliance costs.them of the costs required to complete their preparations. As part of theour
general compliancepreparedness program, each of theour Affiliates has assigned responsibility
for preparing for the Year 2000 Issue to a member of its senior management in order to
ensure that both proprietary and third party vendor systems will be ready for
the Year 2000
compliant.
All2000. Each of our Affiliates havehas completed theirits assessment and plans are
in place for the renovation or replacement of non-compliantall non-compatible systems. The completionWe
anticipate that most of the Affiliates will complete the
11
renovation or replacement of all non-compatible systems and the subsequent
testing and implementation are
scheduled forof all systems by the end of the third quarter of 1999 with the
remainder completing those activities during the fourth quarter of 1998 and early 1999, while industry wide
testing will take place in 1999. IfMost of
our Affiliates pay for the Affiliates fail to resolvecosts of their Year 2000 issues,preparations out of their
Operating Allocation, which is the Affiliates'portion of their revenues that is allocated
to pay their operating expenses. As a result, these costs will only reduce an
Affiliate's distributions to us based on our ownership interest in the Affiliate
if the Affiliate's operating expenses exceed its Operating Allocation and accordingly, the
Company's business would
be materially disrupted.portion of revenues allocated to the management owners.
OUTSIDE SERVICE PROVIDERS
Outside service providers perform certainseveral processes which are critical
for the Company's Affiliates,to our Affiliates' business operations, including transfer agency and custody
functions. The progress ofOur Affiliates have surveyed these parties is being monitored by the Company's
Affiliates.and are monitoring their
progress. However, theour Affiliates have limited or no control, if any, over the actions
of these outside parties and in certain casessome instances have no alternative vendors
are available.vendors. If
these parties fail to resolve Year 2000 issues, the
Affiliates and, accordingly, the Company's business would be materially
disrupted.
The Company and its Affiliates estimate that its compliance activities
will be completed no later than the second quarter of 1999. Because most of
the Year 2000 costs are being covered by the Affiliates' Operating
Allocation, the total costs of this effort to the Company (as opposed to the
affiliates) are estimated to be less than $800,000 for the four year period
ending December 31, 1999.
European Monetary Unit
On January 1, 1999, a single currency for the European Economic and
Monetary Union (the "Euro") is scheduled to replace the national currency for
participating member countries which include countries in which several of
the Company's Affiliates do business. The managed funds and financial
products of these Affiliates have investments in countries whose currencies
will be replaced by the Euro. Many aspects of these Affiliates' investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custodial accounts and accounting will be affected by the
implementation of the Euro (the "Euro Issue").
The Affiliates impacted have created teams to determine changes that will
be required in connection with the Euro Issue in order to process
transactions accurately with minimal disruption to business activities. These
Affiliates are also communicating with its external partners and vendors to
assess their readiness to manage the Euro Issue without disruption to their
business or operations. If these Affiliatesoutside service providers fail to resolve their Euro Issue,Year 2000 issues, we anticipate
that our Affiliates' operations will experience material disruptions caused by
the Affiliatesinability to process trades and access client and investment research data
files and, accordingly, the Company's businessour and our Affiliates' businesses would be materially
disrupted.adversely
affected.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use interest-rate swaps to manage market exposures associated with
our variable rate debt by creating offsetting market exposures. These
instruments are not held for trading purposes. In the normal course of
operations, we also face risks that are either nonfinancial or nonquantifiable.
Such risks principally include country risk, credit risk, and legal risk, and
are not represented in the analysis that follows.
This analysis presents the hypothetical loss in earnings of the
derivative instruments we held at June 30, 1999 that are sensitive to changes in
interest rates. Interest rate swaps allow us to achieve a level of variable-rate
and fixed-rate debt that is acceptable to us, and to reduce interest rate
exposure. In each of our interest rate swaps, we have agreed with another party
to exchange the difference between fixed-rate and floating rate interest amounts
calculated by reference to an agreed notional principal amount. Under each of
our interest rate swaps, interest rates on the notional amounts are capped at
rates ranging between 6.67% and 6.78% upon quarterly reset dates. In addition,
if LIBOR falls below 5% at a quarterly reset date, we are required to make a
payment to our counterparty equal to the difference between the interest rate on
our floating rate LIBOR debt on an annualized rate of between 6.67% and 6.78%,
multiplied by the notional principal amount. At June 30, 1999, a total of $185
million was subject to interest rate swaps (the "Original Swaps"), and our
exposure was to changes in three-month LIBOR rates. Beginning in January 1999,
we also became a party to additional contracts with a $75 million notional
amount (the "Subsequent Swaps"). These contracts are designed to limit interest
rate increases to 5.99% on this notional amount if three-month LIBOR rates fall
below 5%.
The hypothetical loss in earnings on all derivative instruments that
would have resulted from a hypothetical change of 10 percent in three-month
LIBOR rates, sustained for three months, is estimated to be $291,000. Because
our net-earnings exposure under the combined debt and interest-rate swap was to
three-month LIBOR rates, the hypothetical loss was calculated as follows:
multiplying the notional amount of the swap by the effect of a 10% reduction in
LIBOR under the Original Swaps, partially offset by the Subsequent Swaps and
interest savings on the underlying debt.
PART II - OTHER INFORMATION
ItemITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and its Affiliates may be parties to
various claims, suits and complaints. Currently, there are no such claims, suits
or complaints that, in the opinion of management, would have a material adverse
effect on the Company's financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
12
The Annual Meeting of Stockholders of Affiliated Managers Group, Inc.
was held in Boston, Massachusetts on May 25, 1999. At that meeting, the
stockholders considered and acted upon the following proposals:
A. THE ELECTION OF DIRECTORS. The stockholders elected the following
individuals to serve as directors until the 2000 Annual Meeting of
Stockholders and until their respective successors are duly
elected and qualified:
DIRECTOR SHARES VOTED FOR SHARES WITHHELD
-------- ---------------- ---------------
William J. Nutt 17,339,814 194,085
Richard E. Floor 17,323,841 210,058
P. Andrews McLane 17,327,013 206,886
John M.B. O'Connor 17,258,314 275,585
W.W. Walker, Jr. 17,339,299 194,600
William F. Weld 17,403,127 130,772
B. THE APPROVAL OF AN AMENDMENT AND RESTATEMENT OF THE COMPANY'S 1997
STOCK OPTION AND INCENTIVE PLAN. The stockholders voted to approve
an amendment and restatement of the Company's 1997 Stock Option
and Incentive Plan (the "Plan"). Among other things, the amendment
and restatement increased the number of shares of Common Stock
reserved for issuance under the Plan from 1,750,000 to 3,250,000.
13,706,900 shares voted for the proposal, 1,010,362 voted against
the proposal, and 533,076 shares abstained from voting on the
proposal.
ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.910.11 Affiliated Managers Group, Inc. Amended and Restated 1997
Stock Purchase Agreement dated November 9, 1998, byOption and among the
Company, Edward C. Rorer & Co., Inc. and the stockholders of
Edward C. Rorer & Co., Inc. (excluding schedules and exhibits,
which the Registrant agrees to furnish supplementally to the
Commission upon request)Incentive Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There have been no reports on Form 8-K filed by the Company during the
quarter ended SeptemberJune 30, 1998.1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFFILIATED MANAGERS GROUP, INC.
-------------------------------
(Registrant)
/s/ Darrell W. Crate on behalf of the Registrant as November 16, 1998
- - ---------------------- Senior Vice President,
(Darrell W. Crate)- -------------------- Chief Financial Officer and Treasurer
(Darrell W. Crate) (and also as Principal Financial and
Principal Accounting Officer)
10August 16, 1999
13