AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: AMG is an asset management company holding equity investments in a diverse group of mid-sized investment management firms ("Affiliates"). As of June 30, 2002, Affiliates managed approximately $74.1 billion in assets across three distribution channels: High Net Worth, Mutual Fund, and Institutional.

Key Financial Metrics

Note: Debt figures represent the balance at June 30, 2002, consisting of $228,461 in zero coupon convertible debt, $230,000 in mandatory convertible debt, and $25,000 in senior bank debt.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 29% for the quarter and 24% for the six months ended June 30, 2002, compared to the same periods in 2001. This was driven by increased average assets under management (AUM) and higher performance fees, partially offset by market declines.
• Net Income: Net income rose 18% for the quarter and 20% for the six-month period year-over-year. A significant factor was the adoption of FAS 142, which eliminated the amortization of goodwill and certain intangible assets, reducing expenses.
• Amortization Expense: Amortization of intangible assets decreased 51% year-over-year due to the FAS 142 adoption.
• Interest Expense: Interest expense increased 106% for the quarter and 109% for the six months, primarily due to higher weighted average debt outstanding from convertible note issuances in 2001 and 2002.
• Assets Under Management: Total AUM declined from $81.0 billion at year-end 2001 to $74.1 billion at June 30, 2002, primarily due to broad declines in equity markets and the sale of Paradigm Asset Management Company.

Guidance, Outlook, and Risks

Management Commentary: Management anticipates that revenue and financial measures (Cash Net Income, EBITDA, Net Income) will be lower in the current quarter due to continued broad declines in equity markets observed from June 30, 2002, through August 9, 2002. The company expects these market declines to reduce average AUM.

Recent Transactions: On August 8, 2002, AMG completed the acquisition of a majority equity interest in Third Avenue Management. Pro forma for this transaction, AUM at June 30, 2002, would have been $79.4 billion.

Liquidity and Capital: In August 2002, the company replaced its revolving credit facility with a new $235 million facility (expandable to $350 million). As of August 9, 2002, $130 million was outstanding with $105 million available.

Risks and Contingencies:

• Market Risk: Performance is directly tied to financial market conditions; declines reduce advisory fees and AUM.
• Debt Obligations: The company has obligations to purchase additional equity in Affiliates totaling approximately $628 million over the next 15 years, which may require additional capital raising.
• Interest Rate Risk: The company uses interest rate swaps to hedge variable rate debt exposures.

Investor Verification Checklist

• FAS 142 Impact: Verify the non-GAAP "Adjusted Net Income" figures provided in Note 2 to understand earnings quality excluding the accounting change for goodwill amortization.
• Debt Structure: Review the terms of the "FELINE PRIDES" mandatory convertible securities and zero coupon notes, specifically the repurchase options and conversion mechanics.
• Third Avenue Acquisition: Confirm the financial impact and integration status of the Third Avenue Management acquisition closed in August 2002.
• Market Sensitivity: Assess the correlation between recent equity market declines (Dow -5.4%, NASDAQ -10.7% post-period) and projected revenue for the third quarter.
• Share Repurchases: Note the Board's July 2002 approval to increase the share repurchase program by an additional 5% of outstanding shares.