<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 JUNE 30, 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)
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
August 10, 2000: including 22,116,051 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 June 30, 2000
------------------ --------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 53,879 $ 48,865
Investment advisory fees receivable ....................... 239,383 64,123
Other current assets ...................................... 6,705 10,893
--------- ---------
Total current assets ................................ 299,967 123,881
Fixed assets, net ............................................ 12,321 19,351
Equity investment in Affiliate ............................... 1,563 1,977
Acquired client relationships, net of accumulated amortization
of $23,202 in 1999 and $28,605 in 2000 .................... 186,499 204,040
Goodwill, net of accumulated amortization of $36,103 in 1999
and $43,753 in 2000 ....................................... 385,382 448,202
Other assets ................................................. 23,341 21,804
--------- ---------
Total assets ......................................... $ 909,073 $ 819,255
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................. $ 170,299 $ 68,569
--------- ---------
Total current liabilities ............................ 170,299 68,569
Senior bank debt ............................................. 174,500 223,000
Deferred taxes ............................................... 25,346 30,199
Other long-term liabilities .................................. 1,346 1,473
Subordinated debt ............................................ 800 800
--------- ---------
Total liabilities .................................... 372,291 324,041
Minority interest ............................................ 58,796 25,363
Commitments and contingencies ................................ -- --
Stockholders' equity:
Common stock ................................................. 235 235
Additional paid-in capital ................................... 405,883 407,373
Accumulated other comprehensive income ....................... (55) (203)
Accumulated earnings ......................................... 83,857 111,349
--------- ---------
489,920 518,754
Less treasury shares ......................................... (11,934) (48,903)
Total stockholders' equity .............................. 477,986 469,851
--------- ---------
Total liabilities and stockholders' equity .............. $ 909,073 $ 819,255
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ -----------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ........................................... $ 78,577 $ 110,895 $ 146,704 $ 225,693
Operating expenses:
Compensation and related expenses ................ 26,292 40,154 50,714 84,569
Amortization of intangible assets ................ 5,596 6,609 10,851 13,053
Depreciation and other amortization .............. 1,144 984 1,891 1,937
Selling, general and administrative .............. 13,312 18,759 23,169 35,387
Other operating expenses ......................... 1,995 2,409 3,994 4,832
------------ ------------ ------------ ----------
48,339 68,915 90,619 139,778
------------ ------------ ------------ ----------
Operating income ............................. 30,238 41,980 56,085 85,915
Non-operating (income) and expenses:
Investment and other income ...................... (746) (582) (1,658) (2,220)
Interest expense ................................. 2,811 4,142 6,256 7,989
------------ ------------ ------------ ----------
2,065 3,560 4,598 5,769
------------ ------------ ------------ ----------
Income before minority interest and
income taxes ..................................... 28,173 38,420 51,487 80,146
Minority interest ................................... (12,046) (15,240) (22,574) (33,551)
------------ ------------ ------------ ----------
Income before income taxes .......................... 16,127 23,180 28,913 46,595
Income taxes ........................................ 6,612 9,503 11,854 19,103
------------ ------------ ------------ ----------
Net income .......................................... $ 9,515 $ 13,677 $ 17,059 $ 27,492
============ ============ ============ ==========
Net income per share - basic ........................ $ 0.41 $ 0.62 $ 0.81 $ 1.22
Net income per share - diluted ...................... $ 0.41 $ 0.61 $ 0.77 $ 1.21
Average shares outstanding - basic .................. 23,278,438 22,187,587 21,162,488 22,455,041
Average shares outstanding - diluted ................ 23,427,243 22,507,064 22,068,094 22,803,699
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Net income $ 9,515 $ 13,677 $ 17,059 $ 27,492
Foreign currency translation
adjustment, net of taxes (50) (124) (115) (148)
------------ ------------- ---------- ----------
Comprehensive income $ 9,465 $ 13,553 $ 16,944 $ 27,344
=========== ============ ========== ==========
</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 Six Months
Ended June 30,
-------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income ................................................................. $ 17,059 $ 27,492
Adjustments to reconcile net income to net cash flow from operating activities:
Amortization of intangible assets .......................................... 10,851 13,053
Depreciation and other amortization ........................................ 1,891 1,937
Deferred income tax provision .............................................. 4,387 4,853
Changes in assets and liabilities:
Decrease in investment advisory fees receivable ............................ 33,644 184,243
Increase in other current assets ........................................... (342) (4,084)
Decrease in non-current other receivables .................................. -- 2,621
Decrease in accounts payable, accrued expenses and other liabilities ....... (10,863) (105,652)
Increase (decrease) in minority interest ................................... 138 (33,433)
--------- ---------
Cash flow from operating activities ................................. 56,765 91,030
--------- ---------
Cash flow used in investing activities:
Purchase of fixed assets ................................................... (3,906) (8,493)
Costs of investments, net of cash acquired ................................. (104,068) (99,853)
Increase in other assets ................................................... (903) (426)
Loans to related parties ................................................... (2,328) (130)
--------- ---------
Cash flow used in investing activities ............................... (111,205) (108,902)
--------- ---------
Cash flow from financing activities:
Borrowings of senior bank debt ............................................. 130,300 165,500
Repayments of senior bank debt ............................................. (146,800) (117,000)
Repayments of notes payable ................................................ (22,000) --
Issuance or reissuance of equity securities ................................ 101,649 4,156
Repurchase of stock ........................................................ -- (39,635)
Debt issuance costs ........................................................ (180) (15)
--------- ---------
Cash flow from financing activities .................................. 62,969 13,006
Effect of foreign exchange rate changes on cash flow .......................... (115) (148)
Net increase (decrease) in cash and cash equivalents .......................... 8,414 (5,014)
Cash and cash equivalents at beginning of period ............................ 23,735 53,879
========= =========
Cash and cash equivalents at end of period .................................... $ 32,149 $ 48,865
========= =========
Supplemental disclosure of non-cash financing activities:
Conversion of convertible stock to common stock ......................... $ 30,992 $ --
Common stock received for the exercise of stock options ................. $ -- $ 643
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
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. 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. SUBSEQUENT EVENT
On August 1, 2000, the Company's Affiliate, The Managers Funds LLC
("Managers"), completed the acquisition of the retail business of Smith
Breeden Associates, Inc. This investment was funded through a borrowing under
AMG's revolving Credit Facility.
3. INCOME TAXES
A summary of the provision for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------
1999 2000
---------------- ----------------
<S> <C> <C> <C>
Federal: Current............................. $ 3,814 $ 6,213
Deferred............................ 1,725 1,908
State: Current............................. 701 1,035
Deferred............................ 372 347
------ ------
Provision for income taxes......................... $ 6,612 $ 9,503
================= ================
</TABLE>
4. 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.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------
1999 2000
---------------- -----------------
<S> <C> <C>
Numerator:
Net income................................................. $ 9,515,000 $ 13,677,000
Denominator:
Average shares outstanding - basic......................... 23,278,438 22,187,587
Effect of potential dilution from stock options............ 148,805 319,477
----------- ----------
Average shares outstanding - diluted....................... 23,427,243 22,507,064
================ ================
Earnings per share:
Basic...................................................... $ 0.41 $ 0.62
Diluted.................................................... $ 0.41 $ 0.61
</TABLE>
5
<PAGE>
On May 25, 2000, the Company's stockholders approved an increase in
the number of authorized shares of Common Stock (other than Class B
Non-Voting Common Stock) from 40,000,000 to 80,000,000.
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"). In the three month period ended
June 30, 2000, the Company repurchased 135,600 and 249,100 shares of
Common Stock under the 1999 Share Repurchase Program and the 2000 Share
Repurchase Program, respectively, which are excluded from basic and diluted
average shares outstanding for the three month period ended June 30, 2000 on a
weighted basis for the portion of the period from which they had been
repurchased. For the twelve month period ended June 30, 2000, the Company has
repurchased a total of 1,413,200 shares of Common Stock.
From June 30, 2000 through August 10, 2000, the Company repurchased
no shares of Common Stock.
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;
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, 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 $89.3
billion in assets at June 30, 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:
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 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.
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
7
<PAGE>
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 were $89.3 billion at
June 30, 2000 versus $91.6 billion at March 31, 2000 and $82.0 billion at
December 31, 1999. The decrease in assets under management during the quarter
was primarily due to negative investment performance of $3.4 billion, which was
partially offset by positive net client cash flows for directly managed assets
of $1.2 billion. Overlay assets (which generally carry lower fees than directly
managed assets) experienced negative client cash flows of $60 million. The year
to date increase in assets under management was primarily based on our
investment in Frontier ($5.0 billion of assets at the time of investment) and
internal growth from existing Affiliates (including Frontier following the date
of our investment) of $2.3 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 June 30, 2000, our total assets were approximately
$819.3 million, of which approximately $204.0 million consisted of acquired
client relationships and $448.2 million consisted of goodwill.
8
<PAGE>
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 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:
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, to make
new investments and to meet working capital requirements;
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 (before giving
effect to holding company expenses) to service debt, to make new
investments and to meet working capital requirements; and
o 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 JUNE 30, 2000 AS COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1999
We had net income of $13.7 million for the quarter ended June 30, 2000
compared to net income of $9.5 million for the quarter ended June 30, 1999. The
increase in net income resulted from the growth in EBITDA Contribution (from
$28.2 million for the quarter ended June 30, 1999 to $40.3 million for the
quarter ended June 30, 2000) which was offset by increases in our interest, tax
and operating expenses, including amortization. The growth in EBITDA
Contribution resulted from the internal growth of our existing Affiliates and,
to a lesser extent, the new investment in Frontier (in January 2000). Frontier's
results have been included in our results from its date of investment.
Total revenues for the quarter ended June 30, 2000 were $110.9 million,
an increase of $32.3 million over the quarter ended June 30, 1999, as a result
of the internal growth in our existing Affiliates and, to a lesser extent, our
investment in Frontier.
Total operating expenses increased by $20.6 million to $68.9 million
for the quarter ended June 30, 2000 from $48.3 million for the quarter ended
June 30, 1999. Compensation and related expenses increased by $13.9 million,
amortization of intangible assets increased by $1.0 million, selling, general
and administrative expenses increased by $5.4 million, and other operating
expenses increased by $0.4 million. The increase in operating expenses was
due principally to an increase in our Affiliates' Operating Allocation, which
was a result of the growth in revenues.
9
<PAGE>
Minority interest increased by $3.2 million to $15.2 million for the
quarter ended June 30, 2000 from $12.0 million for the quarter ended June 30,
1999, primarily as a result of the increase in our Affiliates' Owners'
Allocation due to the growth in revenues.
Interest expense increased by $1.3 million to $4.1 million for the
quarter ended June 30, 2000 from $2.8 million for the quarter ended June 30,
1999. The increase in interest expense resulted from an increase in LIBOR
rates and an increase in the weighted average debt outstanding under our
credit facility. The increase in the weighted average debt outstanding under
our credit facility is attributable to borrowings related to new investments
and, to a lesser extent, the repurchase of shares of Common Stock during the
twelve month period ended June 30, 2000, partially offset by repayments of
our senior bank debt from cash flows from ongoing operations.
Income tax expense was $9.5 million for the quarter ended June 30, 2000
compared to $6.6 million for the quarter ended June 30, 1999. The change in tax
expense was principally related to an increase in income before taxes.
EBITDA increased by $9.2 million to $34.9 million for the quarter ended
June 30, 2000 from $25.7 million for the quarter ended June 30, 1999, primarily
as a result of the growth in revenues.
Cash Net Income increased by $5.0 million to $21.3 million for the
quarter ended June 30, 2000 from $16.3 million for the quarter ended June 30,
1999 as a result of the factors affecting net income as described above, with
the exception of amortization of intangible assets.
THE SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1999
We had net income of $27.5 million for the six months ended June 30,
2000 compared to net income of $17.1 million for the six months ended June
30, 1999. The increase in net income resulted from growth in EBITDA
Contribution (from $52.9 billion for the six months ended June 30, 1999 to
$79.1 million for the six months ended June 30, 2000), which was offset by
increases in our interest, tax and operating expenses, including
amortization. The growth in EBITDA Contribution resulted from the internal
growth in our existing Affiliates and, to a lesser extent, our new
investments made during and subsequent to the first six months of 1999. We
invested in Managers and Frontier in April 1999 and January 2000,
respectively.
Total revenues for the six months ended June 30, 2000 were $225.7
million, an increase of $79.0 million over the six months ended June 30,
1999, due to the internal growth in our existing Affiliates and, to a lesser
extent, our investments in new Affiliates.
Total operating expenses increased by $49.2 million to $139.8
million for the six months ended June 30, 2000 from $90.6 million for the six
months ended June 30, 1999. Compensation and related expenses increased by
$33.9 million, selling, general and administrative expenses increased by
$12.2 million, amortization of intangible assets increased by $2.3 million,
and other operating expenses increased by $0.8. The increase in operating
expenses was due principally to an increase in our Affiliates' Operating
Allocation, which was the result of the growth in revenues.
Minority interest increased by $11.0 million to $33.6 million for
the six months ended June 30, 2000 from $22.6 million for the six months
ended June 30, 1999. This increase is primarily a result of the increase in
our Affiliates' Owners' Allocation due to the growth in revenues.
Interest expense increased by $1.7 to $8.0 million for the six
months ended June 30, 2000 from $6.3 million for the six months ended June
30, 1999. The increase in interest expense resulted from an increase in LIBOR
rates and an increase in weighted average debt outstanding under our credit
facility. The increase in weighted average debt outstanding under the credit
facility is attributable to borrowings related to new investments and, to a
lesser extent, the repurchase of shares of Common Stock during the twelve
month period ended June 30, 2000, offset by repayments of our senior bank
debt from cash flows from the proceeds of a public offering of our Common
Stock in March 1999 and ongoing operations.
10
<PAGE>
Income tax expense was $19.1 million for the six months ended June 30,
2000 compared to $11.9 million for the six months ended June 30, 1999. The
change in tax expense was related to an increase in income before taxes.
EBITDA increased by $21.7 million to $69.6 million for the six months
ended June 30, 2000 from $47.9 million for the six months ended June 30, 1999,
due to the growth in revenues.
Cash Net Income increased by $12.7 million to $42.5 million for the six
months ended June 30, 2000 from $29.8 million for the six months ended June 30,
1999 as a result of the factors affecting net income, with the exception of
amortization of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
We have met our cash requirements primarily through bank borrowings,
cash generated by operating activities, and the issuance of equity securities
in public transactions. Our principal uses of cash have been to make
investments, repay indebtedness, pay income taxes, repurchase shares, support
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 payments on outstanding debt, payment
of income taxes, repurchase of shares, capital expenditures, additional
investments in existing Affiliates, including our purchase of management
owners' retained equity, and for working capital purposes.
During the three and six month periods ended June 30, 2000, we
repurchased 384,700 and 1,066,300 shares of Common Stock, respectively, with
borrowings of senior debt under our credit facility. At June 30, 2000, we had
outstanding borrowings of senior debt under our credit facility of $223 million
and the ability to borrow an additional $107 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 have begun developing this site as our future corporate headquarters. We
currently intend to finance this development through a borrowing under our
revolving Credit Facility.
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 June 30, 2000, $185 million was subject to interest rate swaps and
our exposure was to changes in three-month LIBOR rates. Interest rate swaps
allow us to achieve a level of variable-rate and fixed-rate debt that is
11
<PAGE>
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. 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 following analysis presents the hypothetical loss in earnings of
the derivative instruments we held at June 30, 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 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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Affiliated Managers Group, Inc.
was held in Boston, Massachusetts on May 25, 2000. At that meeting, the
stockholders considered and acted upon the following proposals:
A. THE ELECTION OF DIRECTORS. By the vote reflected below, the stockholders
elected the following individuals to serve as directors until the 2001
Annual Meeting of Stockholders and until their respective successors are
duly elected and qualified:
DIRECTOR SHARES VOTED FOR SHARES WITHHELD
William J. Nutt 17,453,466 444,460
Richard E. Floor 17,310,821 587,105
Stephen J. Lockwood 17,628,966 268,960
Harold J. Meyerman 17,508,266 389,660
John M.B. O'Connor 17,507,266 390,660
Rita M. Rodriguez 17,628,966 268,960
William F. Weld 17,628,366 269,560
B. THE APPROVAL OF A LONG-TERM EXECUTIVE INCENTIVE PLAN. The stockholders
voted to approve a Long-Term Executive Incentive Plan (the "Plan"),
permitting incentive compensation awarded to certain executive officers
of the Company to be deductible by the Company under the Internal
Revenue Code of 1986, as amended. 16,536,229 shares voted for the
proposal, 896,642 shares voted against the proposal, and 465,055 shares
abstained from voting on the proposal.
12
<PAGE>
C. THE APPROVAL OF AN AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY. The stockholders voted to approve an
amendment of the Amended and Restated Certificate of Incorporation of the
Company (the "Certificate") to increase the authorized shares of
Common Stock (other than Class B Non-Voting Common Stock) from 40,000,000
shares to 80,000,000 shares. 16,520,300 shares voted for the proposal,
1,068,678 shares voted against the proposal, and 308,948 shares abstained
from voting on the proposal.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
There have been no reports on Form 8-K filed by the Company during the
quarter ended June 30, 2000.
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>
<CAPTION>
<S> <C> <C>
/s/ DARRELL W. CRATE on behalf of the Registrant as Senior Vice President, August 11, 2000
-------------------- Chief Financial Officer and Treasurer
(Darrell W. Crate) (and also as Principal Financial and
Principal Accounting Officer)
</TABLE>
13
