<PAGE>
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, 1999
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 / /
Number of shares of the Registrant's Common Stock outstanding at May 14,
1999: 23,282,559 including 1,492,079 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.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 23,735 $ 40,838
Investment advisory fees receivable ....................... 66,939 38,892
Other current assets ...................................... 5,137 4,920
--------- ---------
Total current assets ................................ 95,811 84,650
Fixed assets, net ............................................ 8,001 10,035
Equity investment in Affiliate ............................... 1,340 1,486
Acquired client relationships, net of accumulated amortization
of $7,923 in 1998 and 10,192 in 1999 ...................... 169,065 186,851
Goodwill, net of accumulated amortization of $15,550 in 1998
and 18,536 in 1999 ........................................ 321,409 360,419
Notes receivable from employeees ............................. 1,700 2,898
Other assets ................................................. 8,008 9.009
--------- ---------
Total assets ......................................... $ 605,334 $ 655,348
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ..................... $ 42,617 $ 38,043
Notes payable to related parties ............................. 22,000 --
--------- ---------
Total current liabilities ............................ 64,617 38,043
Senior bank debt ............................................. 190,500 158,000
Other long-term liabilities .................................. 11,614 13,283
Subordinated debt ............................................ 800 800
--------- ---------
Total liabilities .................................... 267,531 210,126
Minority interest ............................................ 24,148 22,447
Stockholders' equity:
Convertible stock ............................................ 30,992 --
Common stock ................................................. 177 234
Additional paid-in capital on common stock ................... 273,413 405,989
Accumulated other comprehensive income ....................... 16 (49)
Accumulated earnings ......................................... 11,669 19,213
--------- ---------
316,267 425,387
Less treasury shares ......................................... (2,612) (2,612)
Total stockholders' equity .............................. 313,655 422,775
--------- ---------
Total liabilities and stockholders' equity .............. $ 605,334 $ 655,348
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
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AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues ....................................... $ 45,723 $ 68,127
Operating expenses:
Compensation and related expenses ........... 16,615 24,422
Amortization of intangible assets ........... 3,829 5,255
Depreciation and other amortization ......... 513 747
Selling, general and administrative ......... 6,783 9,857
Other operating expenses .................... 1,290 1,999
------------ ------------
29,030 42,280
------------ ------------
Operating income ..................... 16,693 25,847
Non-operating (income) and expenses:
Investment and other income ................. (311) (912)
Interest expense ............................ 3,074 3,445
------------ ------------
2,763 2,533
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Income before minority interest and income taxes 13,930 23,314
Minority interest .............................. (6,493) (10,528)
------------ ------------
Income before income taxes ..................... 7,437 12,786
Income taxes ................................... 2,975 5,242
------------ ------------
Net income ..................................... $ 4,462 $ 7,544
------------ ------------
------------ ------------
Net income per share - basic ................... $ 0.25 $ 0.40
Net income per share - diluted ................. $ 0.25 $ 0.36
Average shares outstanding - basic ............. 17,594,555 19,023,027
Average shares outstanding - diluted ........... 18,176,428 20,726,355
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1999
------- -------
<S> <C> <C>
Net income .......................................... $ 4,462 $ 7,544
Foreign currency translation adjustment, net of taxes 36 (65)
------- -------
------- -------
Comprehensive income ................................ $ 4,498 $ 7,479
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
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AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income ................................................................. $ 4,462 $ 7,544
Adjustments to reconcile net income to net cash flow from operating activities:
Amortization of intangible assets .......................................... 3,829 5,255
Depreciation and other amortization ........................................ 513 747
Deferred income tax provision .............................................. 2,423 2,287
Changes in assets and liabilities:
(Increase) decrease in investment advisory fees receivable ................. (5,056) 35,628
(Increase) decrease in other current assets ................................ (170) 450
Decrease in accounts payable, accrued expenses and other liabilities ....... (1,601) (13,276)
Minority interest .......................................................... 4,613 (1,700)
--------- ---------
Cash flow from operating activities ................................. 9,013 36,935
--------- ---------
Cash flow used in investing activities:
Purchase of fixed assets ................................................... (824) (1,045)
Costs of investments, net of cash acquired ................................. (64,173) (63,769)
Distribution received from Affiliate equity investment ..................... 107 --
Decrease in other assets ................................................... (181) (723)
Loans to employees ......................................................... -- (1,198)
--------- ---------
Cash flow used in investing activities ............................... (65,071) (66,735)
--------- ---------
Cash flow from financing activities:
Borrowings of senior bank debt ............................................. 72,300 91,300
Repayments of senior bank debt ............................................. (9,500) (123,800)
Repayments of notes payable ................................................ -- (22,000)
Issuances of equity securities ............................................. -- 101,643
Debt issuance costs ........................................................ (40) (175)
--------- ---------
Cash flow from (used in) financing activities ........................ 62,760 46,968
Effect of foreign exchange rate changes on cash flow .......................... 36 (65)
Net increase in cash and cash equivalents ..................................... 6,738 17,103
Cash and cash equivalents at beginning of period ............................ 22,766 23,735
--------- ---------
Cash and cash equivalents at end of period .................................... $ 29,504 $ 40,838
--------- ---------
--------- ---------
Supplemental disclosure of non-cash financing activities:
Stock issued in acquisitions ............................................... $ 30,992 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
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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. Certain prior year amounts have been
reclassified to conform to the current year 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, 1998 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. ACQUISITIONS
On January 6, 1999 the Company completed its investment in Rorer
Asset Management. The total purchase price associated with this investment
was approximately $65 million. On April 1, 1999, the Company completed an
investment in substantially all of the partnership interests in The Managers
Funds, L.P., which serves as the adviser to a family of ten equity and fixed
income no-load mutual funds. These transactions will be accounted for under
the purchase method of accounting.
3. OFFERING
On March 3, 1999, the Company completed its second 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 and did not receive any proceeds from the sale of Common
Stock by the selling stockholders.
4. INCOME TAXES
A summary of the provision for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Federal: Current............................. $ --- $ 2,535
Deferred............................ 2,120 2,002
State: Current............................. 552 420
Deferred............................ 303 285
----------------- ----------------
Provision for income taxes......................... $ 2,975 $ 5,242
----------------- ----------------
----------------- ----------------
</TABLE>
5. 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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Numerator:
Net income................................................. $ 4,462,000 $ 7,544,000
Denominator:
Average shares outstanding - basic......................... 17,594,555 19,023,027
Convertible stock.......................................... 233,459 1,517,483
Stock options and unvested restricted stock................ 348,414 185,845
---------------- ----------------
Average shares outstanding - diluted....................... 18,176,428 20,726,355
---------------- ----------------
---------------- ----------------
Net income per share:
Basic...................................................... $ 0.25 $ 0.40
Diluted.................................................... $ 0.25 $ 0.36
</TABLE>
5
<PAGE>
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, 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
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, 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.
OVERVIEW
We acquire equity interests in mid-sized investment management firms
and currently derive all of our revenues from those firms. We refer to firms in
which we have purchased less than 100% (typically less than 80%) as our
"affiliates". We hold investments in 13 affiliates that managed $64.2 billion in
assets at March 31, 1999. Our most recent affiliate investments were in Davis
Hamilton Jackson & Associates, L.P. ("DHJA") in December 1998 and Rorer Asset
Management LLC ("Rorer") in January 1999. On April 1, 1999, we completed an
acquisition of substantially all of the partnership interests in the Managers
Funds, L.P. ("Managers"), which serves as the adviser to a family of ten equity
and fixed income no-load mutual funds.
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 (the "Operating Allocation"). The remaining portion of revenues of
the 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. One of the purposes of our revenue sharing
arrangements is to provide ongoing incentives for the managers of the affiliates
by allowing them:
o to participate in their firm's growth through their compensation from the
Operating Allocation,
o to receive a portion of the Owners' Allocation based on their ownership
interest in the affiliate, and
o to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and bonuses
for management of the affiliate.
6
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The managers of each affiliate, therefore, have an incentive to both
increase revenues (thereby increasing the Operating Allocation and their Owners'
Allocation) and to control expenses (thereby increasing the excess Operating
Allocation).
The revenue sharing arrangements allow us to participate in the revenue
growth of each affiliate 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 the affiliate, 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 management 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.
The portion of each affiliate's revenues which is included in its
Operating Allocation and retained by it to pay salaries, bonuses and other
operating expenses, as well as the portion of each affiliate's revenues which is
included in its Owners' Allocation and distributed to us and the other owners of
the affiliate, are both included as "revenues" on our Consolidated Statements of
Operations. The expenses of each affiliate 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 each affiliate's Owners' Allocation 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 before interest, taxes,
depreciation and amortization of that affiliate. EBITDA Contribution does not
include our holding company expenses.
The affiliates' revenues are derived from the provision of investment
management services for fees. 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 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"). 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 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 affiliates 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) the receipt of
Owners' Allocation, which is dependent on the ability of the affiliates and
future affiliates to maintain certain levels of operating profit margins; (iii)
the availability and cost of the capital with which we finance our investments;
(iv) our success in attracting new investments and the terms upon which such
transactions are completed; (v) the level of intangible assets and the
associated amortization expense resulting from our investments; (vi) the level
of expenses incurred for holding company operations, including compensation for
its employees; and (vii) the level of taxation to which we are subject, all of
which are, to some extent, dependent on factors which are not in our control,
such as general securities market conditions.
Assets under management were $64.2 billion at March 31, 1999 versus
$57.7 billion at December 31, 1998. The increase in assets under management was
partially related to the closing of our investment in Rorer ($4.4
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billion). Aggregate net client cash flow for directly managed assets contributed
$381.0 million to the increase, while overlay assets (which generally carry
lower fees than directly managed assets) declined $1.1 billion. Positive
investment performance accounted for the remaining change in assets under
management.
Our investments have 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 of our investments, intangible assets,
consisting of acquired client relationships and goodwill, constitute a
substantial percentage of our consolidated assets and our results of operations
have included increased charges for amortization of those intangible assets. As
of March 31, 1999, our total assets were approximately $655.3 million, of which
approximately $186.9 million consisted of acquired client relationships and
$360.4 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 nine 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: the
firm's historical and potential future operating performance and rate 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. We perform a quarterly evaluation of intangible assets
on an affiliate-by-affiliate 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 our
operating expenses, management believes it is important to distinguish this
expense from other operating expenses since such amortization does not require
the use of cash. Because of this, and because our distributions from our
affiliates are based on their Owners' Allocation, management has 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, which we believe is useful to investors as an
indicator of our ability to service debt, to make new investments and meet
working capital requirements, and (ii) EBITDA as adjusted, which we believe is
useful to investors as another indicator of funds available which may be used to
make new investments, to repay debt obligations, to repurchase shares of our
Common Stock or pay dividends on our Common Stock.
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
The Company had net income of $7.5 million for the quarter ended
March 31, 1999 compared to net income of $4.5 million for the quarter ended
March 31, 1998. The increase in net income resulted primarily from income
from investments made during and subsequent to the first quarter of 1998. The
Company invested in Essex Investment Management, LLC on March 20, 1998 and
DHJA and Rorer on December 31, 1998 and January 6, 1999, respectively.
Total revenues for the quarter ended March 31, 1999 were $68.0 million,
an increase of $22.3 million over the quarter ended March 31, 1998, primarily as
a result of the new Affiliate investments.
Total operating expenses increased by $13.2 million to $42.0 million
for the quarter ended March 31, 1999 from $29.0 million for the quarter ended
March 31, 1998. Compensation and related expenses increased by $7.8 million,
amortization of intangible assets increased by $1.4 million, selling, general
and administrative expenses increased by $3.0 million, and other operating
expenses increased by $709,000. The increases in operating expenses are
primarily due to the inclusion of the new Affiliates described above.
Minority interest increased by $4.0 million to $10.5 million for the
quarter ended March 31, 1999 from $6.5 million for the quarter ended March 31,
1998. This increase is a result of the addition of new Affiliates as
8
<PAGE>
described above.
Interest expense increased by $371,000 to approximately $3.5 million
for the quarter ended March 31, 1999 from $3.1 million for the quarter ended
March 31, 1998 as a result of the increased indebtedness incurred in connection
with the investments described above.
Income tax expense was $5.2 million for the quarter ended March 31,
1999 compared to $3.0 million for the quarter ended March 31, 1998. The change
in tax expense was mostly related to an increase in income before taxes.
EBITDA increased by $7.4 million to $22.2 million for the quarter ended
March 31, 1999 from $14.9 million for the quarter ended March 31, 1998,
primarily as a result of the inclusion of new Affiliates as described above.
EBITDA as adjusted increased by $4.7 million to $13.5 million for the
quarter ended March 31, 1999 from $8.8 million for the quarter ended March 31,
1998 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
$6.0 million for the quarter ended March 31, 1999 and $4.3 million for the
quarter ended March 31, 1998.
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. 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 affiliate investments. Our principal uses of cash
have been to make investments in affiliates, to retire indebtedness, repurchase
shares and to support our and our affiliates' operating activities. We expect
that our principal use of funds for the foreseeable future will be for
investments in additional affiliates, repayments of debt, including interest
payments on outstanding debt, distributions of the Owners' Allocation to owners
of affiliates other than us, additional investments in existing affiliates,
including upon management owners' sales of their retained equity to us, and for
working capital purposes. We do not expect to make commitments for material
capital expenditures.
At March 31, 1999, we had outstanding borrowings of senior debt
under our credit facility of $158.0 million. On January 29, 1999 we exercised
our option to expand the credit facility from $300 to $330 million and added
another major commercial bank to our group of lenders. 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 bears interest at
either LIBOR plus a margin ranging from .50% to 2.25% or the Prime Rate plus
a margin ranging up to 1.25% and matures during December 2002. In order to
offset our exposure to changing interest rates we enter into interest rate
hedging contracts. We pay a commitment fee of up to 1/2 of 1% on the daily
unused portion of the facility.
Our borrowings under the credit facility are collateralized by pledges
of all of our interests in affiliates (including all interests in affiliates
which are directly held by us, as well as all interests in affiliates 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 affiliate, and (iv) declaring or paying dividends on our Common
Stock.
In order to provide the funds necessary for us to continue to acquire
interests in investment management firms, including our existing affiliates upon
the management owners' sales 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 or become available on terms acceptable to us.
9
<PAGE>
On December 31, 1998, we acquired a 65% interest in DHJA. DHJA is a
Houston based asset management firm with approximately $3.5 billion of assets
under management at December 31, 1998. On January 6, 1999, we acquired an
approximately 65% interest in Rorer. Rorer is a Philadelphia based investment
adviser with approximately $4.4 billion of assets under management at December
31, 1998. We paid $65 million in cash for our investment in Rorer. We financed
these two investments with borrowings under our credit facility.
On March 3, 1999, we completed a public offering of 5,529,954 shares of
Common Stock, of which 4,000,000 shares were sold by us and 1,529,954 shares
were sold by selling stockholders. We used the net proceeds from the 4,000,000
shares sold by us to reduce indebtedness and did not receive any proceeds from
the sale of Common Stock by the selling stockholders.
On April 1, 1999, we acquired substantially all of the partnership
interests in The Managers Funds, L.P., which serves as the adviser to a family
of ten equity and fixed income no-load mutual funds. We financed the investment
with a borrowing under our credit facility.
YEAR 2000
The "Year 2000" poses a concern to our business as a result of the fact
that computer applications have historically used the last two digits, rather
than all four digits, to store year data. If left unmodified, these applications
would misinterpret the Year 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 our ability to prepare 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 issue 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 READINESS
In anticipation of this problem, we have identified all of the
significant computers, software applications and related equipment used at our
holding company that need to be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business based on the advent of the
Year 2000. We anticipate completing our Year 2000 preparations at the holding
company by the end of the second quarter of 1999. We estimate our total cost
will be less than $800,000 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.
OUR AFFILIATES' READINESS
We have also established a time line with each of our affiliates to
complete their Year 2000 preparations and have received estimates from each
of them of the costs required to complete their preparations. As part of our
general preparedness program, each of our affiliates has assigned
responsibility for preparing for the Year 2000 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. Each of our affiliates has completed
its assessment and plans are in place for the renovation or replacement of
all non-compatible systems. We anticipate that most of the affiliates will
complete the renovation or replacement of all non-compatible systems and the
subsequent testing of all systems by the end of the second quarter of 1999
with the remainder completing those activities during the third quarter of
1999. Most of our affiliates pay for the costs of their Year 2000
preparations out of their Operating Allocation, which is the 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 the portion of revenues allocated to the
management owners.
10
<PAGE>
OUTSIDE SERVICE PROVIDERS
Outside service providers perform several processes which are critical
to our affiliates' business operations, including transfer agency and custody
functions. Our affiliates have surveyed these parties and are monitoring their
progress. However, our affiliates have limited control, if any, over the actions
of these outside parties and in some instances have no alternative vendors. If
outside service providers fail to resolve their Year 2000 issues, we anticipate
that our affiliates' operations will experience material disruptions caused by
the inability to process trades and access client and investment research data
files and, accordingly, our and our affiliates' businesses would be 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 March 31, 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 March 31, 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 $390,000. 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
ITEM 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 2. CHANGES IN SECURITIES
On March 3, 1999, we completed a public offering of 5,529,954 shares of
Common Stock, of which 4,000,000 shares were sold by us and 1,529,954 shares
were sold by selling stockholders. In connection with the offering 555,555
shares of Class B Common Stock were converted into common stock.
In March 1998, the Company issued 1,750,942 shares of Series C
Convertible Stock in completing its investment in Essex Investment Management
Company, LLC. Each share converted into one share of Common Stock on March 20,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by AMG during the quarter
ended March 31, 1999:
1. Current Report on Form 8-K dated January 6, 1999 (filed January 21,
1999), reporting the consummation of the investment in Rorer.
2. Current Report on Form 8-K dated February 1, 1999 (filed February 1,
1999), containing the following financial statements for indicated
affiliates:
GEOCAPITAL CORPORATION
Report of Independent Accountants
Statement of Financial Condition as of September 30, 1997
Statement of Operations for the Year Ended September 30, 1997
Statement of Changes in Stockholders' Equity for the Year Ended
September 30, 1997
Statement of Cash Flows for the Year Ended September 30, 1997
Notes to Financial Statements
TWEEDY, BROWNE COMPANY L.P.
Report of Independent Accountants
Statement of Financial Condition as of October 8, 1997
Statement of Operations for the Period January 1, 1997 through
October 8, 1997
Statement of Changes in Partners' Capital for the Period
January 1, 1997 through October 8, 1997
Statement of Cash Flows for the Period January 1, 1997 through
October 8, 1997
Notes to Financial Statements
GOFEN AND GLOSSBERG, INC.
Report of Independent Accountants
Statement of Financial Condition as of May 6, 1997
Statement of Operations for the Period January 1, 1997 to May 6, 1997
Statement of Changes in Shareholders' Equity for the Period January 1,
1997 to May 6, 1997
Statement of Cash Flows for the Period January 1, 1997 to May 6, 1997
Notes to Financial Statements
3. Current Report on Form 8-K dated February 1, 1999 (filed February 1,
1999) containing the press release disclosing the Company's operating
results for the year ended December 31, 1998
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 May 14, 1999
- -------------------- Vice President, Chief Financial Officer
(Darrell W. Crate) and Treasurer (and also as Principal Financial
and Principal Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 40,838
<SECURITIES> 0
<RECEIVABLES> 38,892
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,650
<PP&E> 10,035
<DEPRECIATION> 0
<TOTAL-ASSETS> 655,348
<CURRENT-LIABILITIES> 38,043
<BONDS> 158,000
0
0
<COMMON> 406,223
<OTHER-SE> 19,164
<TOTAL-LIABILITY-AND-EQUITY> 655,348
<SALES> 0
<TOTAL-REVENUES> 68,127
<CGS> 0
<TOTAL-COSTS> 42,280
<OTHER-EXPENSES> 10,528<F1>
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<INTEREST-EXPENSE> 3,445
<INCOME-PRETAX> 12,786
<INCOME-TAX> 5,242
<INCOME-CONTINUING> 7,544
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<NET-INCOME> 7,544
<EPS-PRIMARY> .40
<EPS-DILUTED> .36
<FN>
<F1>MINORITY INTEREST
</FN>
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