AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: AMG is an asset management company with equity investments in a diverse group of mid-sized investment management firms ("Affiliates"). As of September 30, 2003, Affiliates managed approximately $81.9 billion in assets across three distribution channels: High Net Worth, Mutual Fund, and Institutional.

Key Financial Metrics

Note: Total debt consists of $123,186 in zero coupon senior convertible notes, $300,000 in floating rate senior convertible securities, and $230,000 in mandatory convertible securities.

Material Changes vs. Prior Period

• Revenue: Increased 11% for the three months ended September 30, 2003, compared to the same period in 2002, driven by higher average assets under management (AUM) due to equity market recovery and the acquisition of Third Avenue Management. For the nine-month period, revenue decreased 2% primarily due to a net decline in average AUM compared to the start of 2002, partially offset by the Third Avenue investment.
• Net Income: Increased 28% for the quarter and 1% for the nine-month period compared to 2002. The nine-month increase was driven by decreases in minority interest and interest expenses.
• Assets Under Management: Total AUM grew from $70.8 billion at year-end 2002 to $81.9 billion at September 30, 2003. Growth was driven by investment performance ($9.8 billion) and net client cash flows ($1.3 billion) over the nine-month period.
• Operating Expenses: Increased 11% for the quarter and 1% for the nine months. Compensation expenses rose due to revenue sharing arrangements and the Third Avenue acquisition.
• Debt Structure: The company issued $300 million in floating rate senior convertible securities in February 2003 and used proceeds to repurchase $116.5 million of zero coupon senior convertible notes.

Guidance, Outlook, and Risks

• Outlook: Management expects principal uses of cash to include investments in new Affiliates, distributions to Affiliate managers, debt service, and share repurchases. The company maintains a $250 million senior revolving credit facility (mature August 2005) with an option to increase to $350 million.
• Share Repurchases: During the nine months ended September 30, 2003, the company repurchased 744,500 shares at an average price of $45.24. Approximately 1.34 million shares remained authorized for repurchase as of November 11, 2003.
• Key Risks:
  • Market Dependency: Performance is directly affected by financial market conditions; declines in equity markets reduce advisory fees and AUM.
  • Capital Availability: Future growth depends on the ability to raise capital on acceptable terms for new investments.
  • Contingent Obligations: Affiliate agreements provide managers the right to require AMG to purchase their retained equity interests. If triggered for all interests as of September 30, 2003, the aggregate payment would be approximately $596.5 million.
  • Accounting Changes: Adoption of FIN 46 (Variable Interest Entities) in Q4 2003 may require consolidation of approximately $75 billion in assets held by clients in investment vehicles, though this is not expected to impact net income.

Investor Verification Checklist

• Debt Maturities and Convertibility: Verify the terms of the $300 million floating rate convertible securities and the $230 million mandatory convertible securities ("FELINE PRIDES"), including conversion triggers and remarketing dates in 2004.
• Contingent Purchase Obligations: Assess the liquidity impact of the potential $596.5 million obligation to purchase Affiliate manager equity interests if triggering events occur.
• Revenue Quality: Analyze the mix of asset-based fees versus performance fees, noting that performance fees in the Institutional channel declined in the nine-month period.
• Third Avenue Integration: Review the specific contribution of the Third Avenue Management acquisition to revenue growth and expense increases.
• FIN 46 Impact: Monitor the Q4 2003 financial statements for the impact of consolidating Variable Interest Entities on the balance sheet.