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 MARCH 31, 2001
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3218510
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
TWO 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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
May 14, 2001 was 22,082,841.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31, 2000 March 31, 2001
---------------------- --------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 31,612 $ 27,147
Investment advisory fees receivable.......................... 66,126 51,313
Other current assets ........................................ 15,448 15,558
---------------------- --------------------
Total current assets................................... 113,186 94,018
Fixed assets, net............................................... 15,346 15,087
Equity investment in Affiliate.................................. 1,816 1,747
Acquired client relationships, net of accumulated amortization
of $33,775 in 2000 and $36,726 in 2001....................... 199,354 197,296
Goodwill, net of accumulated amortization of $51,939 in 2000
and $55,890 in 2001.......................................... 444,116 441,791
Other assets.................................................... 19,912 18,522
---------------------- --------------------
Total assets............................................ $ 793,730 $ 768,461
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................... $ 86,800 $ 54,943
---------------------- --------------------
Total current liabilities............................... 86,800 54,943
Senior bank debt................................................ 151,000 146,700
Deferred taxes.................................................. 31,907 33,159
Other long-term liabilities..................................... 2,636 2,786
Subordinated debt............................................... 800 800
---------------------- --------------------
Total liabilities....................................... 273,143 238,388
Minority interest............................................... 26,677 24,459
Commitments and contingencies................................... --- ---
Stockholders' equity:
Common stock.................................................... 235 235
Additional paid-in capital...................................... 407,057 407,559
Accumulated other comprehensive income.......................... (342) (1,620)
Retained earnings............................................... 140,513 152,443
---------------------- --------------------
547,463 558,617
Less treasury stock, at cost.................................... (53,553) (53,003)
Total stockholders' equity.............................. 493,910 505,614
---------------------- --------------------
Total liabilities and stockholders' equity.............. $ 793,730 $ 768,461
====================== ====================
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)
For the Three Months
Ended March 31,
-------------------------------------
2000 2001
---------------- --------------
Revenues.................................................... $ 114,798 $ 100,475
Operating expenses:
Compensation and related expenses........................ 44,415 34,208
Amortization of intangible assets........................ 6,444 6,902
Depreciation and other amortization...................... 953 1,358
Selling, general and administrative...................... 16,628 18,080
Other operating expenses................................. 2,423 2,615
---------------- --------------
70,863 63,163
---------------- --------------
Operating income.................................. 43,935 37,312
Non-operating (income) and expenses:
Investment and other income.............................. (1,638) (524)
Interest expense......................................... 3,847 3,161
---------------- --------------
2,209 2,637
---------------- --------------
Income before minority interest and income taxes............ 41,726 34,675
Minority interest........................................... (18,311) (14,792)
---------------- --------------
Income before income taxes.................................. 23,415 19,883
Income taxes................................................ 9,600 7,953
---------------- --------------
Net income.................................................. $ 13,815 $ 11,930
================ ==============
Earnings per share - basic.................................. $ 0.61 $ 0.54
Earnings per share - diluted................................ $ 0.60 $ 0.53
Average shares outstanding - basic.......................... 22,722,493 22,063,166
Average shares outstanding - diluted........................ 23,099,721 22,567,819
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)
For the Three Months
Ended March 31,
-------------------------------
2000 2001
------------- -------------
Cash flow from operating activities:
Net income................................................................. $ 13,815 $ 11,930
Adjustments to reconcile net income to net cash flow from operating activities:
Amortization of intangible assets.......................................... 6,444 6,902
Depreciation and other amortization........................................ 953 1,358
Deferred income tax provision.............................................. 2,598 2,115
Changes in assets and liabilities:
Decrease in investment advisory fees receivable............................ 175,082 14,813
Increase in other current assets........................................... (7,635) (110)
(Increase) decrease in non-current other receivables....................... (822) 2,668
Decrease in accounts payable, accrued expenses and other liabilities....... (105,388) (33,866)
Minority interest.......................................................... (33,411) (2,218)
------------- -------------
Cash flow from operating activities................................. 51,636 3,592
------------- -------------
Cash flow used in investing activities:
Purchase of fixed assets................................................... (1,842) (1,046)
Costs of investments, net of cash acquired................................. (99,101) (3,844)
(Increase) decrease in other assets........................................ (212) 63
Loans to employees......................................................... (65) ---
------------- -------------
Cash flow used in investing activities............................... (101,220) (4,827)
------------- -------------
Cash flow from (used in) financing activities:
Borrowings of senior bank debt............................................. 146,000 36,000
Repayments of senior bank debt............................................. (93,000) (40,300)
Issuances of equity securities............................................. 4,173 1,750
Repurchase of stock........................................................ (25,549) (698)
Debt issuance costs........................................................ (15) ---
------------- -------------
Cash flow from (used in) financing activities........................ 31,609 (3,248)
Effect of foreign exchange rate changes on cash flow.......................... (24) 18
Net decrease in cash and cash equivalents..................................... (17,999) (4,465)
Cash and cash equivalents at beginning of period.............................. 53,879 31,612
------------- -------------
Cash and cash equivalents at end of period.................................... $ 35,880 $ 27,147
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
4
1. BASIS 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. All material intercompany balances and transactions have been
eliminated. All dollar amounts except per share data in the text and tables
herein are stated in thousands unless otherwise indicated. 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, 2000 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. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments
and Hedging Activities," as amended by FAS 138 "Accounting For Certain
Derivative Instruments and Certain Hedging Activities." FAS 133 requires that
all derivatives be recorded on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting FAS 133 was not material to the Company's
consolidated financial statements.
The Company is exposed to interest rate risk inherent in its
variable rate debt liabilities. The Company's risk management strategy uses
financial instruments, specifically interest rate swap contracts, to hedge
certain interest rate exposures. In entering into these contracts, AMG
intends to offset cash flow gains and losses that occur on its existing debt
liabilities with cash flow losses and gains on the contracts hedging these
liabilities. The Company agrees with a counterparty (typically a major
commercial bank) to exchange the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount. The Company intends to hold its current interest rate swap
contracts until its revolving credit facility matures in December 2002, or
until the Company repays all senior debt under that facility. During the
period ended March 31, 2001, the Company did not discontinue any hedging
activities or terminate any variable debt instruments.
The Company records all derivatives on the balance sheet at fair value.
As the Company's hedges are designated and qualify as cash flow hedges, the
effective portion of the unrealized gain or loss on the derivative instrument is
recorded in accumulated other comprehensive income as a separate component of
stockholders' equity and reclassified into earnings when periodic settlement of
variable rate liabilities are recorded in earnings. For interest rate swaps,
hedge effectiveness is measured by comparing the cumulative change in the
variable cash flows of the hedged contract with the cumulative change in the
variable cash flows of the hedged item, both of which are based on LIBOR rates.
To the extent that the critical terms of the hedged item and the derivative are
not identical, hedge ineffectiveness is reported in earnings as interest
expense. Hedge ineffectiveness was not material in the first quarter of fiscal
2001.
At March 31, 2001, the net fair value of the Company's interest rate
swap liability was $233, and was recorded on the consolidated balance sheet in
accounts payable and accrued liabilities. AMG estimates the fair values of
derivatives based on quoted market prices.
At March 31, 2001, the Company had recorded approximately $1,296 of
net unrealized losses on derivative instruments, net of taxes, in accumulated
other comprehensive income. AMG expects that approximately 70% of these
losses will be reclassified to earnings within one year, and that the
remainder will be reclassified to earnings after one year.
5
3. COMPREHENSIVE INCOME
The Company's comprehensive income includes net income, changes in
unrealized foreign currency gains and losses and changes in unrealized gains
and losses on derivative instruments, which also include the cumulative
effect of adopting FAS 133. Comprehensive income, net of taxes, was as
follows:
For the Three Months
Ended March 31,
-----------------------------------
2000 2001
--------------- --------------
Net income.......................................................... $ 13,815 $ 11,930
Change in unrealized foreign currency gains (losses)................ (24) 18
Change in net unrealized loss on derivative instruments............. --- (140)
Cumulative effect of change in accounting principle - FAS 133
transition adjustment........................................... --- (1,321)
Reclassification of FAS 133 transition adjustment to net income....... --- 165
--------------- --------------
Comprehensive income................................................ $ 13,791 $ 10,652
=============== ==============
The components of accumulated other comprehensive income, net of taxes,
were as follows:
December 31, March 31,
2000 2001
-------------- -----------
Foreign currency translation adjustment......................... $ (342) $ (324)
Unrealized loss on derivative instruments....................... --- (1,296)
--------------- -------------
Accumulated other comprehensive income.......................... $ (342) $ (1,620)
=============== =============
4. ACQUISITIONS
On March 29, 2001, the Company purchased a minority interest in
Dublin Fund Distributors, N.V., the parent company of Edgehill Select Group,
L.L.C. and Edgehill Select Group, S.A.R.L. The investment was funded through
a borrowing under the Company's revolving credit facility.
5. INCOME TAXES
A summary of the provision for income taxes is as follows:
For the Three Months
Ended March 31,
--------------------------
2000 2001
---------- ----------
Federal:
Current.............................................. $ 5,969 $ 4,744
Deferred............................................. 2,218 2,215
State:
Current.............................................. 1,033 678
Deferred............................................. 380 316
-------------- ------------
Provision for income taxes................................ $ 9,600 $ 7,953
============== ============
6. EARNINGS PER SHARE
The calculation of basic earnings per share is based on the weighted
average of common shares outstanding during the period. The calculation of
diluted earnings per share gives effect to all potential dilution from the
Company's stock option plans. The following is a reconciliation of the
numerators and denominators of the basic and diluted earnings per share
computations. Unlike all other dollar amounts in these footnotes, net income in
this table is not presented in thousands.
6
Three Months Ended March 31,
-----------------------------------------
2000 2001
------------------- -------------------
Numerator:
Net income.......................................... $ 13,815,000 $ 11,930,000
Denominator:
Average shares outstanding - basic.................. 22,722,493 22,063,166
Incremental shares for stock options .............. 377,228 504,653
---------------- --------------
Average shares outstanding - diluted................ 23,099,721 22,567,819
================ ==============
Earnings per share:
Basic............................................... $ 0.61 $ 0.54
Diluted............................................. $ 0.60 $ 0.53
On April 20, 2000, the Board of Directors authorized a share repurchase
program pursuant to which AMG can repurchase up to five percent of its issued
and outstanding shares of Common Stock, with the timing of purchases and the
amount of stock purchased determined at the discretion of AMG's management. The
Board of Directors authorized a similar repurchase program in 1999. For the
twelve-month period ended March 31, 2001, the Company repurchased a total of
594,200 shares of Common Stock under these two programs.
7. SUBSEQUENT EVENTS
On April 10, 2001, Renaissance Investment Management, an investment
management firm in which the Company owns a majority interest, and Bowling
Portfolio Management, Inc. entered into a definitive agreement to merge. Bowling
is a Cincinnati-based asset manager, which has $400 million in assets under
management. AMG will own a majority of the combined firm. This transaction is
expected to close upon receipt of customary approvals and will be funded through
the Company's working capital.
On May 7 and May 14, 2001, the Company completed private placements
of zero-coupon convertible notes in which it realized net proceeds of
approximately $221 million. In the placements, the Company sold a total of
$251 million principal amount at maturity of zero-coupon convertible notes
due 2021, with each $1,000 note issued at 90.495% of such principal amount
and accreting at a rate of 0.50% per annum. Each security is convertible into
11.6195 shares of AMG Common Stock upon the occurrence of any of the
following events: (i) if for certain periods in any calendar quarter, the
closing sale price of AMG Common Stock is more than a specified price
(initially $93.53 and increasing incrementally each calendar quarter for the
next twenty years to $94.62 on April 1, 2021); (ii) if the credit rating
assigned to the security is below a specified level; (iii) if AMG calls the
convertible securities for redemption; or (iv) in the event that AMG takes
certain corporate actions. The Company may redeem the convertible notes for
cash on or after May 7, 2006. The Company may be required to repurchase the
securities at their accreted value at the option of the holders on May 7 of
2002, 2004, 2006, 2011 and 2016. The Company may choose to pay the purchase
price for such repurchases in cash or shares of AMG Common Stock. As of May
14, 2001, AMG had used approximately $101 million of the proceeds to repay
existing indebtedness, and intends to use the balance to repay additional
indebtedness and for general corporate purposes.
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, AMONG OTHERS, THE FOLLOWING:
o OUR PERFORMANCE IS DIRECTLY AFFECTED BY CHANGING CONDITIONS IN THE
FINANCIAL AND SECURITIES MARKETS, AND A DECLINE OR A LACK OF SUSTAINED
GROWTH IN THE FINANCIAL MARKETS MAY RESULT IN DECREASED ADVISORY FEES
OR PERFORMANCE FEES AND A CORRESPONDING DECLINE (OR LACK OF GROWTH) IN
THE CASH FLOW DISTRIBUTABLE TO US FROM OUR AFFILIATES;
7
o WE CANNOT BE CERTAIN THAT WE WILL BE SUCCESSFUL IN FINDING OR INVESTING
IN ADDITIONAL INVESTMENT MANAGEMENT FIRMS ON FAVORABLE TERMS, OR THAT
EXISTING AND NEW AFFILIATES WILL HAVE FAVORABLE OPERATING RESULTS;
o WE WILL NEED TO RAISE CAPITAL BY MAKING LONG-TERM OR SHORT-TERM
BORROWINGS OR BY SELLING SHARES OF OUR STOCK IN ORDER TO FINANCE
INVESTMENTS IN ADDITIONAL INVESTMENT MANAGEMENT FIRMS, AND WE CANNOT BE
SURE THAT SUCH CAPITAL WILL BE AVAILABLE TO US ON ACCEPTABLE TERMS; AND
o THOSE CERTAIN OTHER FACTORS DISCUSSED UNDER THE CAPTION
"BUSINESS-CAUTIONARY STATEMENTS" IN OUR ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2000.
THESE FACTORS (AMONG OTHERS) COULD AFFECT OUR FINANCIAL PERFORMANCE AND
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE
PRESENTLY ANTICIPATED AND PROJECTED. 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. IN THAT RESPECT, WE WISH TO CAUTION READERS NOT TO
PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE MADE.
OVERVIEW
We buy and hold equity interests in investment management firms and
currently derive all of our revenues from those firms. Our affiliated investment
management firms in aggregate managed $69.7 billion in assets at March 31, 2001.
We describe the mid-sized investment management firms in which we
invest as our "Affiliates." We have a revenue sharing arrangement with each of
our Affiliates which allocates a specified percentage of revenues (typically
50-70%) for use by management of that Affiliate in paying operating expenses,
including salaries and bonuses, which we refer to as the "Operating Allocation."
The remaining portion of revenues of each such Affiliate (typically 30-50%) is
referred to as the "Owners' Allocation," and is allocated to the owners of that
Affiliate (including AMG) in general proportion to their ownership of the
Affiliate. In certain cases our profit distribution is paid to us in the form of
a guaranteed payment for the use of our capital or a license fee, which in each
case is paid from the Owners' Allocation. One of the purposes of our revenue
sharing arrangements is to provide ongoing incentives for the managers of these
Affiliates by allowing them:
o to participate in the growth of their firm's revenues, which may
increase their compensation from the Operating Allocation, and profit
distributions from the Owners' Allocation; and
o to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and
compensation.
Under the revenue sharing arrangements, the managers of our Affiliates
have incentives both to increase revenues of the Affiliate (thereby increasing
the Operating Allocation and their share of the 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, 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 Operating 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. Any such reduction in our portion of the Owners'
Allocation is required to be paid back to us out of future Affiliate management
Owners' Allocation. Unlike all other Affiliates, The Managers Funds LLC is not
subject to a revenue sharing arrangement since we own substantially all of the
firm. As a result, we participate fully in any increase or decrease in the
revenues or expenses of Managers.
8
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" in 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.
The portion of our Affiliates' revenues which is allocated to owners of the
Affiliates other than us through their share of Owners' Allocation is included
in "minority interest" on our Consolidated Statements of Operations.
Our revenues are generally derived from the provision of investment
management services for fees by our Affiliates. Investment management fees (or
"asset-based 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 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 based on levels of investment performance
achieved. While the Affiliates bill performance-based fees at various times
throughout the year, the greatest portion of these fees has historically been
billed in the fourth quarter in any given year. All references to "assets under
management" include assets directly managed as well as assets underlying overlay
strategies (which we call "overlay assets"), 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:
o 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;
o 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;
o 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;
o the availability and cost of the capital with which we finance our
existing and new investments;
o our success in making new investments and the terms upon which such
transactions are completed;
o the level of intangible assets and the associated amortization expense
resulting from our investments;
o the level of expenses incurred for holding company operations,
including compensation for its employees; and
o the level of taxation to which we are subject.
In addition, our profitability will depend upon fees paid on the basis
of investment performance at certain Affiliates. Fees based on investment
performance are inherently dependent on investment results, and therefore may
vary substantially from year to year. In particular, performance-based fees were
of an unusual magnitude in 1999, but were not as significant in 2000, and may
not recur even to the same magnitude as in 2000 in future years, if at all. In
addition, while the performance-based fee contracts of our Affiliates apply to
investment management services in a range of investment management styles and
securities market sectors, such contracts may be concentrated in certain styles
and sectors. For example, in 1999 we benefited from a concentration of such
products in technology sectors which performed well in that year but have
declined significantly since that time. To the
9
extent such contracts are concentrated within styles or sectors, they are
subject to the continuing impact of fluctuating securities prices in such styles
and sectors as well as the performance of the relevant Affiliates.
Our investments have been accounted for using 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 our
investments, intangible assets, consisting of acquired client relationships and
goodwill, constitute a substantial percentage of our consolidated assets. As of
March 31, 2001, our total assets were approximately $768.5 million, of which
approximately $197.3 million consisted of acquired client relationships and
$441.8 million consisted of goodwill.
The amortization period for intangible assets for each investment is
assessed individually, with amortization periods for our investments to date
ranging from seven 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, we consider a number of factors including:
o the firm's historical and potential future operating performance and
rate of attrition among clients;
o the stability and longevity of existing client relationships;
o the firm's recent, as well as long-term, investment performance;
o the characteristics of the firm's products and investment styles;
o the stability and depth of the firm's management team; and
o the firm's history and perceived franchise or brand value.
We regularly perform an evaluation of intangible assets on an
investment-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.
As a result of our investments, amortization expense, which is a
non-cash charge, has historically represented a significant percentage of our
expenses. In February 2001, the Financial Accounting Standards Board released a
proposed accounting standard that, if adopted, would change the accounting for
goodwill. If the standard is adopted, goodwill would no longer be amortized.
Since goodwill amortization represented 58% of total intangible amortization
expense in the quarter ended March 31, 2001, in the event that the standard were
to be adopted, our net income and earnings per share under similar circumstances
in a future quarter might potentially be higher. There can be no assurance that
this standard will be adopted in its proposed form, or at all.
Even if the pending accounting changes occur, intangible amortization
(related to acquired client relationships) will continue to be a material
component of our operating expenses. Accordingly, we believe it is significant
to distinguish amortization expense and other non-cash expenses (principally
depreciation) from other operating expenses since these expenses do not require
the use of cash. We have provided additional supplemental information in this
report for "cash" related earnings as an addition to, but not as a substitute
for, measures of financial performance under generally accepted accounting
principles, and our calculations may not be consistent with those of other
companies. Our additional measures of "cash" related earnings are:
o Cash Net Income (net income plus depreciation and amortization), which
we believe is useful to investors as an indicator of funds available to
the Company, which may be used to make new investments, repay debt
obligations, repurchase shares of Common Stock or pay dividends on our
Common Stock (although the Company has no current plans to pay
dividends);
o EBITDA (earnings before interest expense, income taxes, depreciation
and amortization), which we believe is useful to investors as an
indicator of our ability to service debt, make new investments and meet
working capital requirements; and
o EBITDA Contribution (EBITDA plus our holding company operating
expenses), which we believe is useful to investors as an indicator of
funds available from our Affiliates' operations to service debt, make
new investments and meet working capital requirements.
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Assets under management were $69.7 billion at March 31, 2001 versus
$77.5 billion at December 31, 2000. The decrease in assets under management
during the quarter resulted from the net loss of low-fee overlay assets of $1.4
billion, primarily from the loss of one overlay asset account, and a decline in
the value of assets under management of $7.5 billion, resulting principally from
a broad decline in the equity markets. These decreases were offset partially by
positive net client cash flows of directly managed assets of $879.8 million and
our minority investment in Dublin Fund Distributors, N.V. in March 2001
(approximately $200 million in assets under management at the time of
investment).
THE THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2000
We had net income of $11.9 million for the quarter ended March 31, 2001
compared to net income of $13.8 million for the quarter ended March 31, 2000.
The decrease in net income resulted primarily from the decline in the EBITDA
Contribution of our Affiliates, from $38.9 million for the quarter ended March
31, 2000 to $35.8 million for the quarter ended March 31, 2001. This decline
resulted principally from the decrease in asset-based fees reflecting the impact
of a broad equity market decline in the twelve-month period ended March 31,
2001, partially offset by increases in such fees resulting from positive net
client cash flows of directly managed assets.
Total revenues for the quarter ended March 31, 2001 were $100.5
million, a decrease of $14.3 million from the quarter ended March 31, 2000. As
stated above with respect to EBITDA Contribution, this decline resulted
principally from the decrease in asset-based fees reflecting the impact of a
broad equity market decline in the twelve-month period ended March 31, 2001,
partially offset by increases in such fees resulting from positive net client
cash flows of directly managed assets.
Total operating expenses decreased by $7.7 million to $63.2 million for
the quarter ended March 31, 2001 from $70.9 million for the quarter ended March
31, 2000. Compensation and related expenses decreased by $10.2 million to $34.2
million. Amortization of intangible assets increased by $0.5 million to $6.9
million, selling, general and administrative expenses increased by $1.5 million
to $18.1 million, and other operating expenses increased by $0.2 million to $2.6
million. The decrease in operating expenses was the result of a decrease in
Affiliates' Operating Allocation, which was a result of the decline in revenues.
Minority interest decreased by $3.5 million to $14.8 million for the
quarter ended March 31, 2001 from $18.3 million for the quarter ended March 31,
2000, primarily as a result of the decrease in our Affiliates' Owners'
Allocation, as a result of the decline in revenues.
Interest expense decreased by $0.6 million to $3.2 million for the
quarter ended March 31, 2001 from $3.8 million for the quarter ended March
31, 2000. The decrease in interest expense resulted from a decrease in LIBOR
rates and a decrease in the weighted average debt outstanding under our
revolving credit facility. The decrease in the weighted average debt
outstanding under our credit facility is attributable to repayments of our
senior bank debt from cash flows from ongoing operations, partially offset by
borrowings for the repurchase of Common Stock.
Income tax expense was $8.0 million for the quarter ended March 31,
2001 compared to $9.6 million for the quarter ended March 31, 2000. The change
in tax expense was principally related to the decrease in income before taxes.
EBITDA decreased by $3.4 million to $31.3 million for the quarter ended
March 31, 2001 from $34.7 million for the quarter ended March 31, 2000,
primarily as a result of the decline in revenues.
Cash Net Income decreased by $1.0 million to $20.2 million for the
quarter ended March 31, 2001 from $21.2 million for the quarter ended March 31,
2000, as a result of the factors affecting net income as described above,
excluding the changes in depreciation and amortization during the period.
LIQUIDITY AND CAPITAL RESOURCES
We have met our cash requirements primarily through borrowings from our
banks, cash generated by operating activities and the issuance of equity and
convertible debt securities in public transactions. Our principal uses of cash
have been to make investments, repay indebtedness, pay income taxes, repurchase
shares, support our and our Affiliates' operating activities and for working
capital purposes. We expect that our principal use of funds for the foreseeable
future will be for additional investments, distributions to management owners of
Affiliates, repayments of debt, including interest on outstanding debt, payment
of income taxes, repurchase of shares, capital
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expenditures, additional investments in existing Affiliates, including our
purchase of management owners' retained equity, and for working capital
purposes.
At March 31, 2001, we had outstanding borrowings of senior debt
under our revolving credit facility of $146.7 million and the ability to
borrow an additional $183.3 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 outstanding senior debt balance as of March 31, 2001
decreased by 3% as compared to December 31, 2000 as a result of repayments
from cash flows from ongoing operations and the impact of a cash management
program with our Affiliates which commenced in 2000 and enabled us to access
their excess cash through intercompany loans. At March 31, 2001, we had $36.3
million in such loans. Because these loans are intercompany balances, they
are eliminated for accounting purposes and are not reflected on our
consolidated balance sheet.
Our borrowings under the revolving credit facility are
collateralized by pledges of all of our interests in our affiliated
investment management firms (including all interests which are directly held
by us, as well as all interests which are indirectly held by us through
wholly-owned subsidiaries), which interests represent substantially all of
our assets. Our credit facility contains a 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 or making certain fundamental changes with respect to our
businesses, including a restriction 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, and (iv) declaring or paying dividends on our
Common Stock. Our credit facility bears interest at either LIBOR plus a
margin or the Prime Rate plus a margin. We pay a commitment fee on the daily
unused portion of the facility. In order to partially offset our exposure to
changing interest rates we have entered into interest rate hedging contracts,
as discussed below in "Market Risk." The credit facility matures during
December 2002.
On May 7 and May 14, 2001, we completed private placements of
zero-coupon convertible notes in which we realized net proceeds of
approximately $221 million. In the placements, we sold a total of $251
million principal amount at maturity of zero-coupon convertible notes due
2021, with each $1,000 note issued at 90.495% of such principal amount and
accreting at a rate of 0.50% per annum. Each security is convertible into
11.6195 shares of our Common Stock upon the occurrence of any of the
following events: (i) if for certain periods in any calendar quarter, the
closing sale price of our Common Stock is more than a specified price
(initially $93.53 and increasing incrementally each calendar quarter for the
next twenty years to $94.62 on April 1, 2021); (ii) if the credit rating
assigned to the security is below a specified level; (iii) if we call the
convertible securities for redemption; or (iv) in the event that we take
certain corporate actions. We have the option to redeem the convertible notes
for cash on or after May 7, 2006, and may be required to repurchase the
securities at their accreted value at the option of the holders on May 7 of
2002, 2004, 2006, 2011 and 2016. The purchase price for such repurchases may
be made in cash or shares of our Common Stock. As of May 14, 2001, we had
used approximately $101 million of the proceeds to repay existing
indebtedness, and intend to use the balance to repay additional indebtedness
and for general corporate purposes. Giving effect to the repayment of
existing indebtedness, at May 14, 2001 we had outstanding borrowings of
senior debt under the revolving credit facility of $50 million and the
ability to borrow an additional $280 million.
During the quarter ended March 31, 2001, we repurchased 14,000
shares of Common Stock at an average price of $49.85, with borrowings under
our revolving credit facility. The repurchases were pursuant to a share
repurchase program authorized by our Board of Directors in April 2000. Under
this program, we are authorized to repurchase up to five percent of our
issued and outstanding shares of Common Stock in open market transactions,
with the timing of purchases and the amount of stock purchased determined at
our discretion. We have the authorization to repurchase an additional 656,781
shares of Common Stock under this program.
In order to provide the funds necessary for us to continue to acquire
interests in investment management firms, including in our existing Affiliates
upon the sale by our Affiliates' owners of their retained equity to us, it will
be necessary for us 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 on terms acceptable to us, if at all.
MARKET RISK
We use interest rate derivative contracts to manage market exposures
associated with our variable rate debt
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by creating offsetting market exposures. During February 2001, we became a
party, with two major commercial banks as counterparties, to $50 million
notional amount of interest rate swap contracts that are linked to the
three-month LIBOR rate. Under these contracts, we have agreed to exchange the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to the notional amount.
These interest rate swap contracts are not held for trading purposes.
In using these derivative instruments, we face certain risks that are not
directly related to market movements and are therefore not easy to quantify, and
as such are not represented in the analysis which follows. These risks include
country risk, legal risk and credit risk. Credit risk, or the risk of loss
arising from a counterparty's failure or inability to meet payment or
performance terms of a contract, is a particularly significant element of an
interest rate swap contract. We attempt to control this risk through analysis of
our counterparties and ongoing examinations of outstanding payments and
delinquencies.
We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in LIBOR rates, sustained for three months. This analysis
reflects the impact of such movement on the combination of our senior debt
under our revolving credit facility and our interest rate derivative
contracts, by multiplying the notional amount of the interest rate derivative
contract by the effect of a 10% decrease in LIBOR rates, and then factoring
in the offsetting interest rate savings on the underlying senior debt. As of
May 14, 2001, this analysis indicated that this hypothetical movement in
LIBOR rates would have resulted in a quarterly loss of approximately $70,000.
There can be no assurance that we will continue to maintain such
derivative contracts at their existing levels of coverage or that the amount of
coverage maintained will cover all of our indebtedness outstanding at any such
time. Therefore, there can be no assurance that the derivative contracts will
meet their overall objective of reducing our interest expense. In addition,
there can be no assurance that we will be successful in obtaining derivative
contracts in the future on our existing or any new indebtedness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk
affecting us, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Market Risk" in Item 2 above, which is incorporated
herein by reference.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we and our 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 our financial position, liquidity or results of operations.
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 2001, we repurchased 14,000
shares of Common Stock under the 2000 Share Repurchase Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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4.8 Liquid Yield Option Notes due May 7, 2021 (Zero Coupon-Senior) Purchase Agreement, Dated as of
May 1, 2001, by and between Affiliated Managers Group, Inc. and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated
4.9 Liquid Yield Option Notes due May 7, 2021 (Zero Coupon-Senior) Indenture, Dated as of May 7,
2001, First Union National Bank, Trustee
4.10 Liquid Yield Option Notes due May 7, 2021 (Zero Coupon-Senior) Registration Rights Agreement,
Dated as of May 7, 2001, by and between Affiliated Managers Group, Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed by the Company during
the quarter ended March 31, 2001.
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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 Senior Vice President, May 14, 2001
- -------------------- Chief Financial Officer and Treasurer
(Darrell W. Crate) (and also as Principal Financial and
Principal Accounting Officer)
15