AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: AMG is an asset management company with equity investments in a diverse group of mid-sized investment management firms ("Affiliates"). As of March 31, 2002, Affiliates managed approximately $81.4 billion in assets across three distribution channels: High Net Worth, Mutual Fund, and Institutional.

Key Financial Metrics

Note: Debt figures include $228.2 million in zero coupon convertible debt, $230.0 million in mandatory convertible debt, and $25.0 million in senior bank debt as of March 31, 2002.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 19% year-over-year, driven by a 10% increase in average assets under management (AUM). This growth was fueled by investments in two new Affiliates (Friess Associates and Welch & Forbes) and positive net client cash flows in directly managed assets.
• Expense Reduction: Amortization of intangible assets decreased 52% to $3.3 million due to the adoption of FAS 142, which eliminated the amortization of goodwill and certain indefinite-life intangible assets.
• Interest Expense: Interest expense more than doubled (103% increase) to $6.5 million, primarily due to higher weighted average debt outstanding following the issuance of convertible notes in late 2001 and early 2002.
• Minority Interest: Minority interest increased 32% to $19.6 million, reflecting the inclusion of new Affiliates where AMG holds a majority but not 100% equity interest.
• Liquidity: Cash and cash equivalents increased by $37.0 million to $110.4 million, supported by strong operating cash flows and net proceeds from debt issuances.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the increase in net income to improved EBITDA contribution from Affiliates and reduced amortization expenses. The company continues to pursue a growth strategy through internal growth of existing Affiliates and strategic investments in new firms.

Capital Resources: AMG has $305 million of additional capacity under its senior revolving credit facility, which matures in December 2002. The company intends to obtain new financing prior to maturity but notes uncertainty regarding terms.

Risks and Contingencies:

• Market Risk: Performance is directly tied to financial market conditions; declines in equity markets can reduce AUM and advisory fees.
• Interest Rate Risk: AMG utilizes interest rate swaps to hedge variable rate debt. A hypothetical 10% adverse movement in LIBOR rates could result in a quarterly loss of approximately $114,600 (hedged) or $112,500 (unhedged).
• Future Obligations: Obligations to purchase additional equity in Affiliates extend over the next 15 years, with potential aggregate obligations of approximately $661 million if all became due immediately.
• Legal Proceedings: No material legal proceedings are currently pending.

Investor Verification Checklist

• Debt Structure: Verify the terms and maturity dates of the $230 million mandatory convertible debt ("FELINE PRIDES") and $228 million zero coupon convertible notes.
• FAS 142 Impact: Confirm the long-term impact of the cessation of goodwill amortization on future earnings and the status of the required impairment review.
• Asset Flows: Monitor net client cash flows, particularly the distinction between directly managed assets (higher fee) and overlay assets (lower fee).
• Minority Interest: Review the specific ownership percentages in new Affiliates (e.g., Friess at 51%) to understand the dilution of AMG's share of profits.
• Credit Facility Renewal: Assess the company's ability to refinance the $25 million senior bank debt and the revolving credit facility maturing in December 2002.