<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, 2000
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)
<TABLE>
<S> <C>
DELAWARE 04-3218510
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
</TABLE>
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 12,
2000: 22,185,889 including 1,192,079 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 31,1999 March 31, 2000
--------------------- ----------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 53,879 $ 35,880
Investment advisory fees receivable.......................... 239,383 73,284
Other current assets ........................................ 6,705 14,445
------------------- --------------------
Total current assets................................... 299,967 123,609
Fixed assets, net............................................... 12,321 13,624
Equity investment in Affiliate.................................. 1,563 1,778
Acquired client relationships, net of accumulated amortization
of $23,202 in 1999 and $25,871 in 2000....................... 186,499 206,795
Goodwill, net of accumulated amortization of $36,103 in 1999
and $39,878 in 2000.......................................... 385,382 451,304
Notes receivable from related parties........................... 5,411 5,461
Other assets.................................................... 17,930 19,766
------------------- --------------------
Total assets............................................ $ 909,073 $ 822,337
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................... $ 170,299 $ 68,895
------------------- --------------------
Total current liabilities............................... 170,299 68,895
Senior bank debt................................................ 174,500 227,500
Deferred taxes.................................................. 25,346 27,944
Other long-term liabilities..................................... 1,346 1,413
Subordinated debt............................................... 800 800
------------------- --------------------
Total liabilities....................................... 372,291 326,552
Minority interest............................................... 58,796 25,384
Commitments and contingencies................................... -- --
Stockholders' equity:
Preferred stock................................................. -- --
Convertible stock............................................... -- --
Common stock.................................................... 235 235
Additional paid-in capital...................................... 405,883 407,390
Accumulated other comprehensive income.......................... (55) (79)
Accumulated earnings............................................ 83,857 97,672
------------------- --------------------
489,920 505,218
Less treasury shares............................................ (11,934) (34,817)
Total stockholders' equity................................. 477,986 470,401
------------------- --------------------
Total liabilities and stockholders' equity................. $ 909,073 $ 822,337
=================== ====================
</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,
---------------------------------------
1999 2000
------------------ ---------------
<S> <C> <C>
Revenues.................................................... $ 68,127 $ 114,798
Operating expenses:
Compensation and related expenses........................ 24,422 44,415
Amortization of intangible assets........................ 5,255 6,444
Depreciation and other amortization...................... 747 953
Selling, general and administrative...................... 9,857 16,628
Other operating expenses................................. 1,999 2,423
---------------- --------------
42,280 70,863
---------------- --------------
Operating income.................................. 25,847 43,935
Non-operating (income) and expenses:
Investment and other income.............................. (912) (1,638)
Interest expense......................................... 3,445 3,847
---------------- --------------
2,533 2,209
---------------- --------------
Income before minority interest and income taxes............ 23,314 41,726
Minority interest........................................... (10,528) (18,311)
---------------- --------------
Income before income taxes.................................. 12,786 23,415
Income taxes................................................ 5,242 9,600
---------------- --------------
Net income.................................................. $ 7,544 $ 13,815
================ ==============
Earnings per share - basic.................................. $ 0.40 $ 0.61
Earnings per share - diluted................................ $ 0.36 $ 0.60
Average shares outstanding - basic.......................... 19,023,027 22,722,493
Average shares outstanding - diluted........................ 20,726,355 23,099,721
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------------------
1999 2000
---------------- ---------------
<S> <C> <C>
Net income.................................................. $ 7,544 $ 13,815
Foreign currency translation adjustment, net of taxes....... (65) (24)
---------------- ---------------
Comprehensive income........................................ $ 7,479 $ 13,791
================ ===============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income................................................................. $ 7,544 $ 13,815
Adjustments to reconcile net income to net cash flow from operating activities:
Amortization of intangible assets.......................................... 5,255 6,444
Depreciation and other amortization........................................ 747 953
Deferred income tax provision.............................................. 2,287 2,598
Changes in assets and liabilities:
Decrease in investment advisory fees receivable............................ 35,628 175,082
(Increase) decrease in other current assets................................. 450 (7,635)
Increase in non-current other receivables.................................. -- (822)
Decrease in accounts payable, accrued expenses and other liabilities....... (13,276) (105,388)
Minority interest.......................................................... (1,700) (33,411)
------------- -------------
Cash flow from operating activities................................. 36,935 51,636
------------- -------------
Cash flow used in investing activities:
Purchase of fixed assets................................................... (1,045) (1,842)
Costs of investments, net of cash acquired................................. (63,769) (99,101)
Increase in other assets................................................... (723) (212)
Loans to employees......................................................... (1,198) (65)
------------- -------------
Cash flow used in investing activities............................... (66,735) (101,220)
------------- -------------
Cash flow from financing activities:
Borrowings of senior bank debt............................................. 91,300 146,000
Repayments of senior bank debt............................................. (123,800) (93,000)
Repayments of notes payable................................................ (22,000) --
Issuances of equity securities............................................. 101,643 4,173
Repurchase of stock........................................................ -- (25,549)
Debt issuance costs........................................................ (175) (15)
------------- -------------
Cash flow from financing activities.................................. 46,968 31,609
Effect of foreign exchange rate changes on cash flow.......................... (65) (24)
Net increase (decrease) in cash and cash equivalents.......................... 17,103 (17,999)
Cash and cash equivalents at beginning of period.............................. 23,735 53,879
------------- -------------
Cash and cash equivalents at end of period.................................... $ 40,838 $ 35,880
============= =============
Supplemental disclosure of non-cash financing activities:
Conversion of convertible stock to common stock......................... $ 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,
1999 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 18, 2000, the Company completed its investment in Frontier
Capital Management, LLC. This transaction was accounted for under the purchase
method of accounting.
3. SUBSEQUENT EVENTS
On April 20, 2000, the Company announced that its Board of Directors had
authorized a share repurchase program (the "2000 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 (the
"1999 Share Repurchase Program"). As of May 12, 2000, the Company has
repurchased 232,000 shares of Common Stock since March 31, 2000 under the 1999
Share Repurchase Program.
On May 8, 2000, the Company acquired property in Prides Crossing,
Massachusetts and intends to develop this site as its future corporate
headquarters over the next twenty-four months.
4. INCOME TAXES
A summary of the provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1999 2000
---------------- ----------------
<S> <C> <C>
Federal: Current............................. $ 2,535 $ 5,969
Deferred............................ 2,002 2,218
State: Current............................. 420 1,033
Deferred............................ 285 380
---------------- ----------------
Provision for income taxes........................... $ 5,242 $ 9,600
================= ================
</TABLE>
5. 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 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
earnings per share computations.
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 2000
---------------- ----------------
<S> <C> <C>
Numerator:
Net income................................................. $ 7,544,000 $ 13,815,000
Denominator:
Average shares outstanding - basic......................... 19,023,027 22,722,493
Convertible stock.......................................... 1,517,483 --
Stock options and unvested restricted stock................ 185,845 377,228
---------------- ----------------
Average shares outstanding - diluted....................... 20,726,355 23,099,721
================ ================
Earnings per share:
Basic...................................................... $ 0.40 $ 0.61
Diluted.................................................... $ 0.36 $ 0.60
</TABLE>
In March 1998, the Company issued 1,750,942 shares of Series C
Convertible Stock in completing its investment in Essex. Each of these shares
converted into one share of Common Stock in March 1999. In March 1999, the
Company sold 4,000,000 shares of Common Stock in a public offering. All of
the Common Stock issued in the March 1999 public offering and in the above
described conversion is included in the basic and diluted average shares
outstanding for the three month period ended March 31, 2000, while for the
three month period ended March 31, 1999 such shares were included in the
calculations on a weighted basis for the portion of the period for which they
were outstanding. In the twelve month period ending March 31, 2000, the
Company repurchased 1,028,500 shares of Common Stock under the 1999 Share
Repurchase Program. Shares of Common Stock purchased by AMG after March 31,
2000 are not reflected in the calculation above.
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:
- 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;
- 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;
- 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
- 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, 1999.
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.
6
<PAGE>
OVERVIEW
We buy and hold equity interests in mid-sized investment management firms
(our "Affiliates") and currently derive all of our revenues from those firms. We
hold investments in 15 Affiliates that in aggregate managed $91.6 billion in
assets at March 31, 2000. Our most recent investments were in Rorer Asset
Management, LLC ("Rorer") in January 1999, The Managers Funds LLC ("Managers")
in April 1999 and Frontier Capital Management Company, LLC ("Frontier") in
January 2000.
We have a revenue sharing arrangement with each of our Affiliates (other
than Managers) 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 each such Affiliate, typically 30-50% (the "Owners'
Allocation"), is allocated to the owners of that Affiliate (including AMG),
generally in proportion to their ownership of the Affiliate. At some
Affiliates, we receive a guaranteed payment for the use of our capital or a
license fee which in each case is paid from that portion which is deemed to
be our 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:
- - to participate in their firm's growth through their compensation from the
Operating Allocation,
- - to receive a portion of the Owners' Allocation based on their ownership
interest in the Affiliate, and
- - to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and bonuses
for management of such Affiliate.
Under the revenue sharing arrangements, the managers of our Affiliates
have an incentive 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 (other than Managers),
the allocations and distributions of cash to us generally take priority over the
allocations and distributions to the other owners of the Affiliates. This
further protects us if there are any expenses in excess of the Operating
Allocation of an Affiliate. Thus, if an Affiliate's expenses exceed its
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, Managers 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.
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
is 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. Since Managers is not subject to a revenue sharing
arrangement, all revenues and expenses of Managers are consolidated into the
revenues and operating expenses in our Consolidated Statements of Operations.
The portion of our Affiliates' revenues which is allocated to owners of the
Affiliates other than us is included in "minority interest" on our
Consolidated Statements of Operations.
7
<PAGE>
Our revenues are generally derived from the provision of investment
management services for fees by our Affiliates. Investment management fees are
usually determined as a percentage fee charged on periodic values of a client's
assets under management. Certain of the Affiliates bill advisory fees for all or
a portion of their clients based 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 have 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
employ futures, options or other derivative securities to achieve a particular
investment objective.
Our level of profitability will depend on a variety of factors including
principally: (i) the level of Affiliate revenues, which is dependent on the
ability of our existing and future Affiliates to maintain or increase assets
under management by maintaining their existing investment advisory relationships
and fee structures, marketing their services successfully to new clients, and
obtaining favorable investment results; (ii) a variety of factors affecting the
securities markets generally, which could potentially result in considerable
increases or decreases in the assets under management at our Affiliates; (iii)
the receipt of Owners' Allocation, which is dependent on the ability of our
existing and future Affiliates to maintain certain levels of operating profit
margins; (iv) the availability and cost of the capital with which we finance our
existing and new investments; (v) our success in attracting new investments and
the terms upon which such transactions are completed; (vi) the level of
intangible assets and the associated amortization expense resulting from our
investments; (vii) the level of expenses incurred for holding company
operations, including compensation for its employees; and (viii) the level of
taxation to which we are subject.
In addition, our profitability will depend upon fees paid on the basis of
investment performance at certain of our 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
have been of an unusual magnitude in recent years, and may not recur to the
same magnitude 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. To the
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.
Assets under management on a historical basis increased by $9.6 billion
to $91.6 billion at March 31, 2000 from $82.0 billion at December 31, 1999.
Assets under management during the quarter increased due to investment
performance of $6.5 billion and the closing of our investment in Frontier
($5.0 billion of assets at the time of investment). This increase was
partially offset by negative net client cash flows from directly managed
assets of $1.0 billion and from overlay assets (which generally carry lower
fees than directly managed assets) of $0.9 billion.
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, 2000, our total assets were approximately $822.3 million, of which
approximately $206.8 million consisted of acquired client relationships and
$451.3 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 eight 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 investment-by-investment basis to
determine whether there
8
<PAGE>
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, we have provided additional
supplemental information in this report for "cash" related earnings, as an
addition to, but not as a substitute for, measures related to net income. Our
additional measures of "cash" related earnings are:
- 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, to make new investments and
to meet working capital requirements;
- 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 (before giving effect
to holding company expenses) to service debt, to make new investments
and to meet working capital requirements; and
- Cash Net Income (earnings plus depreciation and amortization), which we
believe is useful to investors as another indicator of funds available
to make new investments, to repay debt obligations, to repurchase shares
of our Common Stock or to pay dividends on our Common Stock (although
the Company has no current plans to pay dividends). We have in the past
referred to Cash Net Income as "EBITDA as adjusted."
THE THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999
We had net income of $13.8 million for the quarter ended March 31, 2000
compared to net income of $7.5 million for the quarter ended March 31, 1999.
The increase in net income resulted primarily from the growth in EBITDA
Contribution from $24.7 million for the quarter ended March 31, 1999 to $38.9
million for the quarter ended March 31, 2000. This growth resulted
principally from an increase in investment management fees resulting from
positive investment performance. In addition, the new investments we made
subsequent to the first quarter of 1999 contributed to the growth in EBITDA
Contribution. We invested in Managers and Frontier in April 1999 and January
2000, respectively, and have included their results from their respective
dates of investment.
Total revenues for the quarter ended March 31, 2000 were $114.8 million,
an increase of $46.7 million over the quarter ended March 31, 1999, primarily
as a result of the growth in investment management fees resulting from
positive investment performance and investments made in new Affiliates.
Total operating expenses increased by $28.6 million to $70.9 million for
the quarter ended March 31, 2000 from $42.3 million for the quarter ended
March 31, 1999. Compensation and related expenses increased by $20.0 million,
amortization of intangible assets increased by $1.2 million, selling, general
and administrative expenses increased by $6.8 million, and other operating
expenses increased by $0.4 million. The increase in operating expenses was
due to an increase in Affiliates' Operating Allocation, which was a result of
growth in investment management fees resulting from positive investment
performance and investments in new Affiliates.
Minority interest increased by $7.8 million to $18.3 million for the
quarter ended March 31, 2000 from $10.5 million for the quarter ended March
31, 1999, primarily as a result of the increase in Affiliates' Owners'
Allocation due to growth in investment management fees resulting from
positive investment performance and investments in new Affiliates. Minority
interest represents profit distributions to Affiliate management which
generally increase or decrease in a direct relationship to the change in
the specific Affiliate's revenues.
Interest expense increased by $0.4 million to $3.8 million for the quarter
ended March 31, 2000 from $3.4 million for the quarter ended March 31, 1999.
The increase in interest expense resulted from an increase in LIBOR rates,
partially offset by a decrease in the weighted average debt outstanding under
our credit facility. The decrease in the weighted average debt outstanding
under our credit facility is attributable to repayments of our senior bank
debt from the proceeds of a public offering of our Common Stock in March 1999
and cash flows from ongoing operations, partially offset by borrowings
related to new investments during the twelve month period ended March 31,
2000.
Income tax expense was $9.6 million for the quarter ended March 31, 2000
compared to $5.2 million for the quarter ended March 31, 1999. The change in tax
expense was principally related to an increase in income before taxes.
EBITDA increased by $12.5 million to $34.7 million for the quarter ended
March 31, 2000 from $22.2 million for the quarter ended March 31, 1999,
primarily as a result of the growth in investment management fees resulting
from positive investment performance and investment in new Affiliates.
Cash Net Income increased by $7.7 million to $21.2 million for the quarter
ended March 31, 2000 from $13.5 million for the quarter ended March 31, 1999 as
a result of the factors affecting net income as described above, with the
exception of amortization of intangible assets.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have met our cash requirements primarily through cash generated by
operating activities, bank borrowings, and the issuance of equity securities
in public transactions. Our principal uses of cash have been to make
investments, retire indebtedness, pay income taxes, repurchase shares,
support our Affiliates' operating activities and for working capital
purposes. We expect that our principal use of funds (cash generated from
operating activities, bank borrowings and issuance of equity securities in
public transactions) for the foreseeable future will be for additional
investments, repayments of debt, including interest payments on outstanding
debt, payment of income taxes, repurchase of shares, capital expenditures,
distributions to management owners of Affiliates, additional investments in
existing Affiliates, including our purchase of management owners' retained
equity, and for working capital purposes.
During the period ended March 31, 2000, we acquired an approximately 70%
interest in Frontier and repurchased 681,600 shares of Common Stock with
borrowings of senior debt under our credit facility. At March 31, 2000, we
had outstanding borrowings of senior debt under our credit facility of $227.5
million and the ability to borrow an additional $102.5 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 borrowings under the credit facility are collateralized by pledges of
all of our interests in Affiliates (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. The credit facility matures during December
2002.
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.
In May 2000, we acquired property in Prides Crossing, Massachusetts and
intend to develop this site as our future corporate headquarters over the
next twenty-four months.
10
<PAGE>
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.
At March 31, 2000, $185 million was subject to interest rate swaps (the
"Original Swaps"), and our exposure was to changes in three-month LIBOR rates.
In January 1999, we became a party to additional contracts with a $75 million
notional amount (the "Subsequent Swaps"). The Subsequent Swaps expired on
January 15, 2000.
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 the
Original Swaps, our 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. The Subsequent Swaps were designed
to limit interest rate increases to 5.99% on $75 million of the original $185
million notional amount if three-month LIBOR rates fell below 5%.
The following analysis presents the hypothetical loss in earnings of the
derivative instruments we held at March 31, 2000 that are sensitive to changes
in interest rates. Under these derivative instruments, a hypothetical change of
10 percent in three-month LIBOR rates, sustained for three months, would have
resulted in no loss in earnings. Because our net-earnings exposure under the
combined debt and interest rate swap was to three-month LIBOR rates, any
hypothetical loss would be calculated as follows: multiplying the notional
amount of the swap by the effect of a 10% reduction in LIBOR under the Original
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
During the three months ended March 31, 2000, we repurchased 681,600
shares of Common Stock under the 1999 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
11
<PAGE>
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, 2000:
1. Current Report on Form 8-K dated February 2, 2000 (filed February 2,
2000), containing the press release disclosing the Company's operating
results for the year ended December 31, 1999.
2. Current Report on Form 8-K dated January 18, 2000 (filed February 2,
2000), reporting the consummation of the investment in Frontier.
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)
<TABLE>
<S> <C> <C>
/s/ Darrell W. Crate
- -------------------- on behalf of the Registrant as Senior Vice President, May 15, 2000
(Darrell W. Crate) Chief Financial Officer and Treasurer
(and also as Principal Financial and
Principal Accounting Officer)
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 35,880
<SECURITIES> 0
<RECEIVABLES> 73,284
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 123,609
<PP&E> 13,624
<DEPRECIATION> 0
<TOTAL-ASSETS> 822,337
<CURRENT-LIABILITIES> 68,895
<BONDS> 227,500
0
0
<COMMON> 407,625
<OTHER-SE> 62,776
<TOTAL-LIABILITY-AND-EQUITY> 822,337
<SALES> 0
<TOTAL-REVENUES> 114,798
<CGS> 0
<TOTAL-COSTS> 70,863
<OTHER-EXPENSES> 18,311<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,847
<INCOME-PRETAX> 23,415
<INCOME-TAX> 9,600
<INCOME-CONTINUING> 13,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,815
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.60
<FN>
<F1>Minority Interest
</FN>
</TABLE>
