AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 June 30, 2003, Affiliates managed approximately $77.3 billion in assets across three distribution channels: High Net Worth, Mutual Fund, and Institutional.

Key Financial Metrics

Note: Debt figures reflect the balance sheet classification of Senior Convertible Debt ($423,032) and Mandatory Convertible Securities ($230,000) as of June 30, 2003.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 9% year-over-year for the six-month period, primarily due to a net decline in average assets under management (AUM) caused by equity market declines since early 2002. This was partially offset by the August 2002 investment in Third Avenue Management LLC.
• Segment Performance:
  • High Net Worth: Revenue down 11% due to lower average AUM.
  • Mutual Fund: Revenue up 8%, driven by increased AUM from the Third Avenue investment and higher transaction-based brokerage fees.
  • Institutional: Revenue down 21%, driven significantly by a decrease in performance fee revenue and lower average AUM.
• Operating Expenses: Total operating expenses decreased 3% to $138.9 million. Compensation expenses declined 5%, while amortization of intangible assets increased 21% due to the Third Avenue acquisition and additional purchases of Affiliate interests.
• Liquidity Position: Cash and cash equivalents increased significantly from $27.7 million at year-end 2002 to $200.5 million at June 30, 2003. This was driven by the issuance of $300 million in floating rate senior convertible securities in February 2003, proceeds of which were used to repurchase $116.5 million of zero-coupon senior convertible notes.

Guidance, Outlook, and Risks

• Market Sensitivity: AMG's performance is directly affected by financial market conditions. Declines in equity markets reduce AUM and advisory fees. The filing notes that while markets recovered in Q2 2003, the 12-month period ended June 30, 2003, saw net declines in major indices.
• Capital Needs: The company may need to raise capital through debt or equity to finance new investments, fund Affiliate equity purchase obligations (estimated at up to $597 million if all became due), and service existing debt.
• Debt Structure:
  • Zero Coupon Notes: $123 million remaining after repurchases; accreting at 0.50% annually.
  • Floating Rate Securities: $300 million issued in Feb 2003; interest rate is 3-month LIBOR minus 0.50%.
  • Mandatory Convertible Securities: $230 million outstanding; structured to generate additional proceeds in 2004 upon remarketing.
• Accounting Changes: AMG modified its definition of "Cash Net Income" (a non-GAAP measure) in February 2003 to exclude deferred taxes related to floating rate senior convertible securities and certain depreciation.
• Share Repurchases: The company repurchased 744,500 shares at an average price of $45.24 during the six months ended June 30, 2003. Approximately 1.34 million shares remained authorized for repurchase.

Investor Verification Checklist

• Debt Repayment Strategy: Verify the timeline and funding sources for the $230 million mandatory convertible securities remarketing scheduled for November 2004.
• Third Avenue Integration: Assess the long-term impact of the Third Avenue Management LLC acquisition on fee structures, specifically the mix of asset-based fees versus transaction-based brokerage fees.
• Performance Fee Volatility: Monitor the Institutional segment's exposure to performance fees, which caused a disproportionate revenue decline compared to AUM changes.
• Interest Rate Exposure: Evaluate the impact of rising LIBOR rates on the $300 million floating rate senior convertible securities issued in early 2003.
• Non-GAAP Reconciliation: Review the reconciliation of "Cash Net Income" and "EBITDA" to GAAP Net Income to understand the magnitude of non-cash adjustments (amortization and deferred taxes).