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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK ($.01 PAR VALUE) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
--------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. / /
Aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant, based upon the closing price of $45.80 on March 23, 2001 on the
New York Stock Exchange, was $993,941,890. Calculation of holdings by
non-affiliates is based upon the assumption, for these purposes only, that
executive officers, directors, and persons holding 10% or more of the
Registrant's Common Stock are affiliates. Number of shares of the Registrant's
Common Stock outstanding at March 23, 2001: 22,073,806.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this report on Form 10-K is
incorporated by reference from certain portions of the Proxy Statement of the
Registrant to be filed pursuant to Regulation 14A and sent to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 30, 2001.
Such Proxy Statement, except for the parts therein which have been specifically
incorporated herein by reference, shall not be deemed "filed" as part of this
report on Form 10-K.
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FORM 10-K
TABLE OF CONTENTS
PART I.......................................................................... 3
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II......................................................................... 21
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 21
Item 6. Selected Historical Financial Data.......................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 57
PART III........................................................................ 57
PART IV......................................................................... 57
Item 14. Exhibits, Financial Statement Schedule and Reports on 8-K... 57
2
PART I
ITEM 1. BUSINESS
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 $77.5 billion in
assets at December 31, 2000. Our most recent investment was in Frontier Capital
Management Company, LLC in January 2000.
We were founded in 1993 to address the succession and ownership transition
issues facing the founders and principal owners of many mid-sized investment
management firms. Based on our belief that many such owners wanted a new
alternative for shifting ownership to the next generation of management, we
developed an innovative transaction structure to serve as a succession-planning
alternative for these firms.
A key component of our transaction structure is our purchase of majority
interests in these firms, with certain exceptions described below. This
structure allows management to:
- retain a significant ownership interest in their firms, which they may
sell to us in the future;
- exercise autonomy over the day-to-day operations of their firm; and
- decide how to spend a fixed portion of revenues on salaries, bonuses and
other operating expenses.
A key element of our structure is the use of a revenue sharing arrangement
with each of our Affiliates. This arrangement allocates a specified percentage
of revenues, typically 50-70%, for use by the Affiliate's management in paying
the salaries, bonuses and other operating expenses of the Affiliate. We refer to
this percentage as the "Operating Allocation." The remaining portion of
revenues, typically 30-50%, is allocated to the owners of that Affiliate,
including us, generally in proportion to ownership of the Affiliate. We refer to
this percentage as the "Owners' Allocation." We believe that our structure is
particularly appealing to managers of firms who anticipate strong future growth
because it gives them the opportunity to profit from an Affiliate's growth
through this revenue sharing arrangement. Under the revenue sharing
arrangements, the managers of our Affiliates have incentives 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). Unlike all other
Affiliates, The Managers Funds LLC 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. Unlike other Affiliates, we own a minority interest in Paradigm Asset
Management Company, L.L.C.
We generally seek to acquire interests in investment management firms with
$500 million to $15 billion of assets under management. The growth in the
investment management industry has resulted in a significant increase in the
number of firms in this size range. We have identified over 1,300 of these firms
in the United States, Canada and the United Kingdom. We believe that a
substantial number of investment opportunities will continue to arise as
founders of these firms approach retirement age and begin to plan for
succession. We also anticipate significant additional investment opportunities
in firms that are currently wholly-owned by larger entities. We believe that we
can take advantage of these investment opportunities because our management team
has substantial industry experience and expertise in structuring and negotiating
transactions, and an organized process for identifying and contacting investment
prospects.
3
HOLDING COMPANY OPERATIONS
Our management performs two primary functions:
- supporting, enhancing, and monitoring the activities and development of
our existing Affiliates; and
- implementing our strategy of growth through acquisitions of interests in
prospective Affiliates.
AFFILIATE DEVELOPMENT
Supporting and enhancing the growth and operations of our Affiliates is a
primary element of our growth strategy. We believe that the management of each
Affiliate is in the best position to assess its firm's needs and opportunities,
and that the autonomy and culture of each Affiliate should be preserved.
However, we provide strategic, marketing and operational assistance to our
Affiliates, and believe that our Affiliates find these support services
attractive because the services otherwise may not be as accessible or affordable
to mid-sized investment management firms.
One way we support the growth and operations of our Affiliates is by
providing a cost-effective way to access the mutual fund marketplace through our
Affiliate, Managers. In November 1999, we launched Managers AMG Funds, a no-load
mutual fund family managed by Managers and distributed to retail and
institutional clients directly by Managers and through intermediaries. There are
currently four series in this family of funds: Essex Aggressive Growth Fund,
which is sub-advised by our Affiliate, Essex Investment Management Company, LLC;
Frontier Growth Fund and Frontier Small Company Value Fund, which are each
sub-advised by our Affiliate, Frontier; and First Quadrant Tax-Managed Equity
Fund, which is sub-advised by our Affiliate, First Quadrant, L.P.
Another way we seek to enhance the growth of our Affiliates is by helping
them acquire smaller investment management firms, teams or assets which are not
suitable as stand-alone investments for us. Mid-sized firms may have difficulty
finding and capitalizing on these opportunities on their own. For example, in
August 2000, we assisted Managers in the acquisition of the retail mutual fund
business of Smith Breeden Associates, Inc. Other initiatives to support our
Affiliates have included:
- new product development;
- marketing material development;
- institutional sales assistance;
- recruiting;
- compensation evaluation;
- development of client servicing technology;
- regulatory compliance audits; and
- client satisfaction surveys.
We also work to obtain discounts on some of the products and services that
our Affiliates need, such as:
- sales training seminars;
- public relations services;
- insurance; and
- retirement benefits.
4
ACQUISITION OF INTERESTS IN PROSPECTIVE AFFILIATES
The acquisition of interests in new Affiliates is also a primary element of
our growth strategy. Our management takes responsibility for each step in this
process, including identification and contact of potential Affiliates, and the
execution of transactions. While we try to initiate our discussions with
potential Affiliates on an exclusive basis, we have competed successfully in
cases where investment bankers have been involved.
Our management identifies and develops relationships with promising
potential Affiliates based on a thorough understanding of the universe of
mid-sized investment management firms derived from our proprietary database made
up of data from third party vendors, public and industry sources and our own
research.
Within our target universe, we are looking for the strongest firms with the
best growth prospects and stability, principally utilizing the following
criteria:
- a strong multi-generational management team;
- a focused investment discipline and strong long-term investment track
record;
- diverse products and distribution channels; and
- a culture of commitment to building the business for its longer term
success.
Once discussions with a target firm lead to transaction negotiations, our
management team performs all of the functions related to the valuation,
structuring and negotiation of the transaction. Our management team includes
professionals with substantial experience in mergers and acquisitions of
investment management firms.
Upon the negotiation and execution of definitive agreements, the target firm
contacts its clients to notify them and seek their consent to the transaction
(which constitutes an assignment of the firm's investment advisory contracts),
as required by the Investment Advisers Act of 1940, as amended. If the firm has
mutual fund clients, the firm seeks new contracts with those funds, as required
by the Investment Company Act of 1940, as amended. The new contracts must be
approved by the funds' shareholders through a proxy process.
Our most recent investment, completed in January 2000, was in Frontier
Capital Management Company, LLC. Frontier, a Boston-based investment adviser,
provides investment services to a diverse client base including corporate,
public and multi-employer pension and profit sharing plans, foundations,
endowment and high net worth individuals. Frontier employs a disciplined stock
selection process driven by internal research, which targets companies with
prospects for above-average earnings growth over extended time periods. The firm
offers a broad range of investment management products, including small-cap
growth equity, growth equity, capital appreciation, mid-cap growth equity,
large-cap growth equity, balanced and long/short investment partnerships.
Frontier was founded in 1980 by the firm's Chairman, J. David Wimberly, who,
along with President Thomas W. Duncan and Frontier's other management partners,
continues to lead the firm.
OUR STRUCTURE AND RELATIONSHIP WITH AFFILIATES
As part of our investment structure, each of our Affiliates is organized as
a separate and largely autonomous limited liability company or partnership. Each
Affiliate operates under its own organizational document, either a limited
liability company agreement or partnership agreement, which includes provisions
regarding the use of the Affiliate's revenues and the management of the
Affiliate. The organizational document also generally gives management owners
the ability to realize the value of their retained equity interests in the
future. While the organizational document of each Affiliate is
5
agreed upon at the time of our investment, from time to time we agree to
amendments to accommodate our business needs or those of our Affiliates.
OPERATIONAL AUTONOMY OF AFFILIATES
We develop the management provisions in each organizational document jointly
with the Affiliate's senior management at the time we make our investment. Each
organizational document has provisions that differ from the others. However, all
of them (with the exception of the organizational documents of Managers) give
the Affiliate's management team the power and authority to carry on the
day-to-day operations and management of the Affiliate, including matters
relating to:
- personnel;
- investment management;
- policies and fee structures;
- product development;
- client relationships; and
- employee compensation programs.
In the case of Managers, the organizational documents do not provide such
operational and management autonomy.
We also retain the authority to prevent specified types of actions that we
believe could adversely affect cash distributions to us, as well as the
authority to cause certain types of actions to protect our interests. For
example, none of the Affiliates may incur material indebtedness without our
consent.
REVENUE SHARING ARRANGEMENTS
In considering an investment in an Affiliate, we negotiate a revenue sharing
arrangement as part of its organizational documents. The revenue sharing
arrangement allocates a percentage of revenues (typically 50-70%) for use by
management of that Affiliate in paying operating expenses of the Affiliate,
including salaries and bonuses. We call this the "Operating Allocation." We
determine the percentage of revenues designated as Operating Allocation for each
Affiliate in consultation with senior management of the Affiliate at the time of
our investment based on the Affiliate's historical and projected operating
margins. The organizational document of each Affiliate allocates the remaining
portion of the Affiliate's revenues (typically 30-50%) to the owners of that
Affiliate (including us), generally in proportion to their ownership of the
Affiliate. We call this the "Owners' Allocation" because it is the portion of
revenues which the Affiliate's management is prohibited from spending on
operating expenses without our prior consent. Each Affiliate distributes its
Owners' Allocation to its management owners and us, generally in proportion to
our respective ownership interests in that Affiliate. In certain cases our
profit distribution is paid to us in the form of a guaranteed payment for the
use of our capital or a license fee, which in each case is paid from the 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.
Before agreeing to these allocations, we examine the revenue and expense
base of the firm. We only agree to a division of revenues if we believe that the
Operating Allocation will cover operating expenses of the Affiliate, including
cases involving a potential increase in expenses, or a decrease in revenues
without a corresponding decrease in operating expenses. While our management has
significant experience in the asset management industry, we cannot be certain
that we will successfully anticipate changes in the revenue and expense base of
any firm. Therefore, we cannot be certain that
6
the agreed-upon Operating Allocation will be large enough to pay for all
operating expenses, including salaries and bonuses of the Affiliate.
One of the purposes of our revenue sharing arrangements is to provide
ongoing incentives for Affiliate managers by allowing them:
- to participate in the growth of their firm's revenues, which may increase
their compensation from the Operating Allocation, and profit distributions
from the Owners' Allocation; and
- to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and
compensation.
The Affiliate managers therefore have incentives to increase revenues
(thereby increasing the Operating Allocation and their share of the Owners'
Allocation) and to control expenses (thereby increasing the amount of Operating
Allocation available for their compensation).
The revenue sharing arrangements allow us to participate in the revenue
growth of each Affiliate 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 the Affiliate because we do not share in
the growth of the Operating Allocation or any increases in profit margin.
Under the organizational documents of the Affiliate, the allocations and
distributions of cash to us generally take priority over the allocations and
distributions to the management owners of each Affiliate. This priority 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 the portion of
future Owners' Allocation allocated to the Affiliate's management owners. As
noted above, since we own substantially all of Managers we participate fully in
any increase or decrease in its revenues or expenses.
OUR PURCHASE OF ADDITIONAL INTERESTS IN OUR EXISTING AFFILIATES
Under our transaction structure, the management team at each Affiliate
retains an ownership interest in its own firm. We consider this a key way that
we provide management owners with incentives to grow their firms as well as
align their interests with ours. In order to provide as much incentive as we
can, we include in the organizational documents of each Affiliate (other than
Paradigm) "put" rights for its management owners. The put rights require us
periodically to buy part of the management owners' interests in the Affiliate
for cash, shares of our Common Stock or a combination of both. In this way, the
management owners can realize a portion of the equity value that they have
created in their firm. In addition, the organizational documents of some of our
Affiliates provide us with "call" rights that let us require the management
owners to sell us portions of their interests in the Affiliate. Finally, the
organizational documents of each Affiliate include provisions obligating each
such owner to sell his or her remaining interests at a point in the future,
generally after the termination of his or her employment with the Affiliate.
Underlying all of these provisions is our basic philosophy that management
owners of each Affiliate should maintain an ownership level in that Affiliate
within a range that offers them sufficient incentives to grow and improve their
business to create equity value for themselves.
PUT RIGHTS
The put rights are designed to let the management owners sell portions of
their retained ownership interest for cash, shares of our Common Stock or a
combination of both, prior to their retirement. In addition, as an alternative
to simply purchasing all of a management owner's interest in
7
the Affiliate following the termination of his or her employment, the put rights
enable us to purchase additional interests in the Affiliates at a more gradual
rate. We believe that a more gradual purchase of interests in Affiliates will
make it easier for us to keep our ownership of each Affiliate within a desired
range. We intend to continue providing equity participation opportunities in our
Affiliates to more junior members of their management as well as to key new
hires.
In most cases, the put rights do not become exercisable for a period of
several years from the date of our investment in an Affiliate. Once exercisable,
the put rights generally are limited in the aggregate to a percentage of the
management owner's ownership interest. The most common formulation among all the
Affiliates is that a management owner's put rights:
- do not commence for five years from the date of our investment (or, if
later, the date he or she purchased his or her interest in the Affiliate);
- are limited, in the aggregate, to fifty percent of the management owner's
interests in the Affiliate; and
- are limited, in any twelve-month period, to ten percent of the greatest
interest he or she held in the Affiliate. In addition, the organizational
documents of the Affiliates often contain a limitation on the maximum
total amount that management of any Affiliate may require us to purchase
pursuant to their put rights in any given twelve-month period.
The purchase price under the put rights is generally based on a multiple of
the Affiliate's Owners' Allocation at the time the right is exercised, with the
multiple generally having been determined at the time we made our initial
investment.
CALL RIGHTS
The call rights are designed to assure us and the management members of some
of our Affiliates that we can facilitate some transition within the senior
management team after an agreed-upon period of time. The call rights vary in
each specific instance, but in all cases the timing, mechanism and price are
agreed upon when we make our investment. The price is payable in cash, shares of
our Common Stock or a combination of both.
BUY-OUT RIGHTS
The organizational documents of each Affiliate provide that the management
owners will realize the remaining equity value they have created generally
following the termination of their employment with the Affiliate. In general,
upon a management owner's retirement after an agreed-upon number of years, or
upon his or her earlier death, permanent incapacity or termination without cause
(but with our consent), that management owner is required to sell to us (and we
are required to purchase from the management owner) his or her remaining
interests. The purchase price in these cases is payable either in cash, shares
of our Common Stock or a combination of both. The purchase price is generally
based on the same formulas that apply to put rights. In general, if a management
owner quits early or is terminated for cause, his or her interests will be
purchased by us for cash at a substantial discount to the price that he or she
would otherwise be paid. Also, if a management owner quits or is terminated for
cause within the first several years following our investment (or, if later, the
date the management owner purchased his or her interest in the Affiliate), the
management owner generally receives nothing for his or her retained interest.
If an Affiliate collects any key-man life insurance or lump-sum disability
insurance proceeds upon the death or permanent incapacity of a management owner,
the Affiliate must use that money to purchase his or her interests. A purchase
by an Affiliate would have the effect of ratably increasing our ownership
percentage as well as each of the remaining management owners. By contrast, the
purchase of interests by us only increases our ownership percentage. The
organizational documents of most of
8
the Affiliates provide for the purchase of such insurance, to the extent we have
requested it. The premium costs are subtracted from the Owners' Allocation of
the Affiliate, so all of the Affiliate's owners (including AMG and management)
bear this cost.
THE AFFILIATES
In general, our Affiliates derive revenues by charging fees to their clients
that are typically based on the market value of assets under management. In some
instances, however, the Affiliates may derive revenues from fees based on
investment performance.
Our Affiliates are listed below in alphabetical order. We own a majority
interest of each of our Affiliates other than Paradigm, and as described above,
we own substantially all interests in Managers.
PRINCIPAL DATE OF
AFFILIATE LOCATION(S) INVESTMENT
- ----------------------------------------------------- ---------------- --------------
The Burridge Group LLC Chicago; Seattle December 1996
Davis Hamilton Jackson & Associates, L.P. Houston December 1998
Essex Investment Management Company, LLC Boston March 1998
First Quadrant, L.P.; First Quadrant Limited Pasadena, CA; March 1996
London
Frontier Capital Management Company, LLC Boston January 2000
GeoCapital, LLC New York September 1997
Gofen and Glossberg, L.L.C. Chicago May 1997
J.M. Hartwell Limited Partnership New York May 1994
The Managers Funds LLC Norwalk, CT April 1999
Paradigm Asset Management Company, L.L.C. New York May 1995
Renaissance Investment Management Cincinnati November 1995
Rorer Asset Management, LLC Philadelphia January 1999
Skyline Asset Management, L.P. Chicago August 1995
Systematic Financial Management, L.P. Teaneck, NJ May 1995
Tweedy, Browne Company LLC New York; London October 1997
9
The following table provides the composition of our assets under management
and EBITDA Contribution of our Affiliates for the year ended December 31, 2000.
EBITDA Contribution amounts are pro forma for the inclusion of our investment in
Frontier as if it occurred on January 1, 2000. Our investment in Frontier closed
January 18, 2000.
ASSETS UNDER MANAGEMENT AND PRO FORMA EBITDA CONTRIBUTION(1)
YEAR ENDED DECEMBER 31, 2000
------------------------------------------------------
ASSETS UNDER PERCENTAGE EBITDA PERCENTAGE
MANAGEMENT OF TOTAL CONTRIBUTION OF TOTAL
------------- ---------- ------------ ----------
(IN MILLIONS)
(IN THOUSANDS)
CLIENT TYPE:
Institutional.................................... $45,990 59% $ 81,748 50%
Mutual fund...................................... 9,284 12% 38,547 23%
High net worth................................... 22,249 29% 44,823 27%
------- --- -------- ---
Total.......................................... $77,523 100% $165,118 100%
======= === ======== ===
ASSET CLASS:
Equity........................................... $57,446 74% $151,587 92%
Fixed income..................................... 4,976 6% 7,240 4%
Other............................................ 15,101 20% 6,291 4%
------- --- -------- ---
Total.......................................... $77,523 100% $165,118 100%
======= === ======== ===
GEOGRAPHY:
Domestic investments............................. $60,730 78% $127,811 77%
Global investments............................... 16,793 22% 37,307 23%
------- --- -------- ---
Total.......................................... $77,523 100% $165,118 100%
======= === ======== ===
OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA:
Total EBITDA Contribution (as above)....................................... $165,118
Less holding company expenses.............................................. (22,352)
--------
EBITDA(2).................................................................. $142,766
========
Cash Net Income(3)......................................................... $ 88,848
========
REPORTED FINANCIAL DATA:
Cash flow from operating activities........................................ $153,711
Cash flow used in investing activities..................................... (111,730)
Cash flow used in financing activities..................................... (63,961)
EBITDA..................................................................... 142,378
Cash Net Income............................................................ 87,676
- ------------------------
(1) EBITDA Contribution represents the portion of an Affiliate's revenues that
is allocated to us, after amounts retained by the Affiliate for compensation
and day-to-day operating and overhead expenses, but before the interest,
tax, depreciation and amortization expenses of the Affiliate. EBITDA
Contribution does not include holding company expenses. We believe that
EBITDA Contribution may be useful to investors as an indicator of our
Affiliate's contribution to our ability to service debt, make new
investments and meet working capital requirements. EBITDA Contribution is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flow from operating activities
as a measure of liquidity. EBITDA
10
Contribution, as calculated by us, may not be consistent with comparable
computations by other companies.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and extraordinary items. We believe EBITDA may
be useful to investors as an indicator of our ability to service debt, make
new investments and meet working capital requirements. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating activities
as a measure of liquidity. EBITDA, as calculated by us, may not be
consistent with computations of EBITDA by other companies.
(3) Cash Net Income represents net income plus depreciation and amortization and
extraordinary items. We believe that this measure may be useful to investors
as another indicator of funds available to the Company, which may be used to
make new investments, repay debt obligations, repurchase shares of Common
Stock or pay dividends on Common Stock. Cash Net Income is not a measure of
financial performance under generally accepting accounting principles and
should not be considered an alternative to net income as a measure of
operating performance or to cash flows from operating activities as a
measure of liquidity. Cash Net Income, as calculated by us, may not be
consistent with computations of Cash Net Income by other companies. Cash Net
Income as defined herein has historically been referred to by us as "EBITDA
as Adjusted."
INDUSTRY
ASSETS UNDER MANAGEMENT
Prior to the year 2000, the investment management sector had been one of the
fastest growing sectors in the financial services industry. As one example of
this growth, the assets under management of mutual funds increased at a compound
annual growth rate of 25% from 1995 to the end of 1999, to a total of $6.8
trillion at the end of 1999, according to the Investment Company Institute.
Mutual fund assets represent only a portion of the funds available for
investment management, as substantial assets are managed for individuals in
separate accounts, and for foundations, endowments, pension funds, corporations
and other financial intermediaries.
In 2000 and in the first quarter of 2001, however, the investment management
sector (like the financial services industry more broadly) experienced
extraordinary volatility, as equity markets declined significantly. Despite this
volatility, assets continue to be contributed to the investment management
sector. According to the Investment Company Institute, in 2000 net new assets
contributed to mutual funds totaled $388 billion. We believe that the investment
management sector will continue to benefit from demographic trends encouraging
investing for retirement and the ongoing disintermediation of bank deposits and
life insurance reserves.
INVESTMENT ADVISERS
There has been a significant increase in the number of investment management
firms within our principal targeted size range of $500 million to $15 billion of
assets under management. Within this size range, we have identified over 1,300
investment management firms in the United States, Canada and the United Kingdom.
We believe that, in the coming years, a substantial number of investment
opportunities will arise as founders of such firms approach retirement age and
begin to plan for succession. We also anticipate that there will be significant
additional investment opportunities among firms that are currently wholly-owned
by larger entities. We believe that we are well positioned to take advantage of
these investment opportunities because we have a management team with
substantial industry experience and expertise in structuring and negotiating
transactions, and an organized process for identifying and contacting investment
prospects.
11
COMPETITION
We operate as an asset management holding company organized to acquire and
hold equity interests in mid-sized investment management firms. We believe that
the market for investments in asset management companies is and will continue to
remain highly competitive. We compete with many purchasers of investment
management firms, including other investment management holding companies,
insurance companies, broker-dealers, banks and private equity firms. Many of
these companies, both privately and publicly held, have longer operating
histories and greater resources than we do, which may make them more attractive
to the owners of firms in which we are considering an investment and may enable
them to offer greater consideration to such owners. We believe that important
factors affecting our ability to compete for future investments are:
- the degree to which target firms view our investment structure as
preferable, financially and operationally, to acquisition or investment
arrangements offered by other potential purchasers; and
- the reputation and performance of the existing and future Affiliates, by
which target firms will judge us and our future prospects.
Our Affiliates compete with a large number of domestic and foreign
investment management firms, including public companies, subsidiaries of
commercial banks, and insurance companies. In comparison to any of our
Affiliates these firms may have greater resources and assets under management,
and offer a broader array of investment products and services. From time to
time, our Affiliates may also compete with each other for clients. In addition,
there are relatively few barriers to entry by new investment management firms,
especially in the institutional managed accounts business. We believe that the
most important factors affecting our Affiliates' ability to compete for clients
are:
- the products offered;
- the abilities, performance records and reputation of the particular
Affiliate and its management team;
- the management fees charged;
- the level of client service offered; and
- the development of new investment strategies and marketing.
The relative importance of each of these factors can vary depending on the
type of investment management service involved. Each Affiliate's ability to
retain and increase assets under management would be adversely affected if
client accounts underperform in comparison to relevant benchmarks, or if key
management or employees leave the Affiliate. The ability of each Affiliate to
compete with other investment management firms is also dependent, in part, on
the relative attractiveness of its investment philosophies and methods under
then prevailing market conditions.
GOVERNMENT REGULATION
Our Affiliates' businesses are highly regulated, primarily by U.S. federal
authorities and to a lesser extent by other authorities including non-U.S.
authorities. The failure of our Affiliates to comply with laws or regulations
could result in fines, suspensions of individual employees or other sanctions,
including revocation of an Affiliate's registration as an investment adviser,
commodity-trading advisor or broker/dealer. Each of our Affiliates (other than
First Quadrant Limited) is registered as an investment adviser with the
Securities and Exchange Commission under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and is subject to the provisions of the
Investment Advisers Act and related regulations. The Investment Advisers Act
requires registered investment advisers to comply with numerous obligations,
including record keeping requirements, operational procedures and disclosure
obligations. We do not directly engage in the business of providing
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investment advice and therefore are not registered as an investment adviser.
Each of our Affiliates (other than First Quadrant Limited) is also subject to
regulation under the securities laws and fiduciary laws of several states.
Moreover, many of our Affiliates act as advisers or sub-advisers to mutual
funds, which are registered with the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940, as amended (the "1940 Act"). As an
adviser or sub-adviser to a registered investment company, each of these
Affiliates must comply with the requirements of the 1940 Act and related
regulations. In addition, an adviser or subadviser to a registered investment
company generally has obligations with respect to the qualification of the
registered investment company under the Internal Revenue Code of 1986, as
amended.
Our Affiliates are also subject to the Employee Retirement Income Security
Act of 1974 ("ERISA"), and related regulations, to the extent they are
"fiduciaries" under ERISA with respect to some of their clients. ERISA and
related provisions of the Internal Revenue Code of 1986, as amended, impose
duties on persons who are fiduciaries under ERISA, and prohibit some
transactions involving the assets of each ERISA plan which is a client of an
Affiliate, as well as some transactions by the fiduciaries (and several other
related parties) to such plans. Two of our Affiliates, First Quadrant, L.P. and
Renaissance Investment Management, are also registered with the Commodity
Futures Trading Commission as commodity trading advisers and are members of the
National Futures Association. Finally, Tweedy, Browne Company LLC and a
subsidiary of The Managers Funds LLC are registered under the Securities
Exchange Act of 1934, as amended, as broker-dealers and, therefore, are subject
to extensive regulation relating to sales methods, trading practices, the use
and safekeeping of customers' funds and securities, capital structure, record
keeping and the conduct of directors, officers and employees.
Furthermore, the Investment Advisers Act and the 1940 Act provide that each
investment management contract under which our Affiliates manage assets for
other parties either terminates automatically if assigned, or must state that it
is not assignable without consent. In general, the term "assignment" includes
not only direct assignments, but also indirect assignments which may be deemed
to occur upon the direct or indirect transfer of a "controlling block" of our
voting securities or the voting securities of one of our Affiliates. The 1940
Act provides that all investment contracts with mutual fund clients may be
terminated by such clients, without penalty, upon no later than 60 days' notice.
Several of our Affiliates are also subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies. For example, First Quadrant
Limited, located in London, is a member of the Investment Management Regulatory
Organization of the United Kingdom, and some of our other Affiliates are
investment advisers to funds which are organized under non-U.S. jurisdictions,
including Luxembourg (where the funds are regulated by the Institute Monetaire
Luxembourgeois) and Bermuda (where the funds are regulated by the Bermuda
Monetary Authority). In addition, we may invest in one or more entities that
sponsor and distribute funds (which may be managed by our Affiliates) in non-
U.S. jurisdictions. In that event, such entity or entities and any Affiliate
that may manage such funds would be subject to the securities laws governing the
investment management and distribution of such funds in the applicable
jurisdictions.
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict any
of the Affiliates from conducting their business in the event that they fail to
comply with such laws and regulations. Possible sanctions that may be imposed in
the event of such noncompliance include the suspension of individual employees,
limitations on the Affiliate's business activities for specified periods of
time, revocation of the Affiliate's registration as an investment adviser,
commodity trading adviser and/or other registrations, and other censures and
fines. Changes in these laws or regulations could have a material adverse impact
on our profitability and mode of operations.
13
Our officers, directors and employees and the officers and employees of each
of the Affiliates may own securities that are also owned by one or more of the
Affiliates' clients. We and each Affiliate have internal policies with respect
to individual investments and require reports of securities transactions and
restrict certain transactions so as to minimize possible conflicts of interest.
EMPLOYEES
As of December 31, 2000, we had 29 employees and our Affiliates employed
approximately 637 persons. Approximately 628 of these 666 employees were
full-time employees. Neither we nor any of our Affiliates is subject to any
collective bargaining agreements and we believe that our labor relations are
good.
CORPORATE LIABILITY AND INSURANCE
Our Affiliates' operations entail the inherent risk of liability related to
litigation from clients and actions taken by regulatory agencies. In addition,
we face liability both directly as a control person of our Affiliates, and
indirectly as a general partner of certain of our Affiliates. To protect our
overall operations from such liability, we maintain errors and omissions and
general liability insurance in amounts that we and our Affiliates consider
appropriate. There can be no assurance, however, that a claim or claims will not
exceed the limits of available insurance coverage, that any insurer will remain
solvent and will meet its obligations to provide coverage, or that such coverage
will continue to be available with sufficient limits or at a reasonable cost. A
judgment against one of our Affiliates in excess of available coverage could
have a material adverse effect on us.
CAUTIONARY STATEMENTS
OUR GROWTH STRATEGY DEPENDS UPON THE CONTINUED INVESTMENT IN MID-SIZED ASSET
MANAGEMENT FIRMS AS WELL AS CONTINUED GROWTH FROM OUR EXISTING AFFILIATES
Our growth strategy includes acquiring ownership interests in mid-sized
investment management firms. To date, we have invested in 15 such firms. We
intend to continue this investment program in the future, assuming that we can
find suitable firms to invest in and that we can negotiate agreements on
acceptable terms. We cannot be certain that we will be successful in finding or
investing in such firms or that they will have favorable operating results.
We have been in operation for seven years and had net losses in the first
four years. While historically our growth has come largely from making new
investments, in recent periods the performance of our existing Affiliates has
become increasingly important to our growth. We may not be successful in making
new investments and the firms we invest in may fail to carry out their growth or
management succession plans. As we continue to execute our business strategy, we
may experience net losses in the future, which could have an adverse effect on
our financial condition and prospects.
WE EXPECT THAT WE WILL NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE TO FUND
NEW INVESTMENTS
The acquisition of interests in new Affiliates is a primary element of our
growth strategy; accordingly, we are in discussions and negotiations with
prospective Affiliates on an ongoing basis. A large part of the purchase price
we pay for the firms in which we invest usually consists of cash. We believe
that our existing cash resources and cash flow from operations will be
sufficient to meet our working capital needs for normal operations for the
foreseeable future. However, we expect that our sources of capital will not be
sufficient to fund anticipated investments in firms. Therefore, we will need to
raise capital by making additional long-term or short-term borrowings, or by
selling shares of our stock or other equity or debt securities (including
convertible securities), either publicly or privately, in order to complete
further investments. This could increase our interest expense, decrease our net
income or dilute the interests of our existing shareholders. Moreover, we may
not be able to obtain financing for future investments on acceptable terms, if
at all.
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WE RELY, IN PART, ON OUR CREDIT FACILITY TO FUND INVESTMENTS, WHICH IS
SUBJECT TO RISKS ASSOCIATED WITH DEBT FINANCING
After borrowing and repayment activity after December 31, 2000, we had
$170.5 million of outstanding debt and $159.5 million available to borrow under
our credit facility at March 23, 2001. We can use borrowings under our credit
facility for future investments and for our working capital needs only if we
continue to meet the financial tests under the terms of our credit facility. We
may also expand our credit facility by an additional $70 million with the
consent of our lenders. We anticipate that we will borrow more in the future
when we invest in additional investment management firms. This will subject us
to the risks normally associated with debt financing.
Our credit facility contains provisions for the benefit of our lenders which
could operate in ways that restrict the manner in which we can conduct our
business or may have an adverse impact on the interests of our stockholders. For
example:
- Our borrowings under the credit facility are collateralized by pledges of
all of our interests in our Affiliates (including all interests indirectly
held through wholly-owned subsidiaries).
- Our credit facility contains, and future debt instruments may contain,
restrictive covenants that could limit our ability to obtain additional
debt financing and could adversely affect our ability to make future
investments in investment management firms.
- Our credit facility prohibits us from paying dividends and other
distributions to our stockholders and restricts us, our Affiliates and any
other subsidiaries we may have from incurring indebtedness, incurring
liens, disposing of assets and engaging in extraordinary transactions. We
are also required to comply with the credit facility's financial covenants
on an ongoing basis.
- We cannot borrow under our credit facility unless we comply with its
requirements.
Because indebtedness under our credit facility bears interest at variable
rates, interest rate increases will increase our interest expense, which could
adversely affect our cash flow and ability to meet our debt service obligations.
Although we are currently a party to interest rate "hedging" contracts designed
to offset a portion of our exposure to interest rate fluctuations, we cannot be
certain that this strategy will be effective. Our credit facility matures in
December 2002. We may not be able to obtain new financing at terms similar to
our current facility, which may have the effect of increasing our interest
expense, decreasing our net income or diluting the interests of our existing
shareholders.
WE HAVE SUBSTANTIAL INTANGIBLES ON OUR BALANCE SHEET; ANY RE-EVALUATION OF
OUR INTANGIBLES COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND
FINANCIAL POSITION
At December 31, 2000, our total assets were $793.7 million, of which
$643.5 million were intangible assets consisting of acquired client
relationships and goodwill. We cannot be certain that we will ever realize the
value of such intangible assets. We are amortizing (writing off) these
intangible assets on a straight-line basis over periods ranging from seven to
28 years in the case of acquired client relationships and 15 to 35 years in the
case of goodwill. We evaluate each investment and establish appropriate
amortization periods based on 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.
15
After making each investment, we reevaluate these and other factors on a
regular basis to determine if the related intangible assets continue to be
realizable and if the amortization period continues to be appropriate. Any
future determination requiring the write-off of a significant portion of
unamortized intangible assets could adversely affect our results of operations
and financial position. In addition, we intend to invest in additional
investment management firms in the future. While these firms may contribute
additional revenue to us, they will also result in the recognition of additional
intangible assets, some of which will cause further increases in amortization
expense.
In February 2001, the Financial Accounting Standards Board released a
proposed accounting standard on the accounting for business combinations. The
standard is anticipated to be finalized in the near term and may discontinue the
requirement to amortize goodwill and change our method for evaluating goodwill
impairment. There can be no assurance that this standard will be adopted in its
proposed form, or at all.
WE AND OUR AFFILIATES RELY ON CERTAIN KEY PERSONNEL AND CANNOT GUARANTEE
THEIR CONTINUED SERVICE
We depend on the efforts of William J. Nutt, our Chairman and Chief
Executive Officer, Sean M. Healey, our President and Chief Operating Officer,
and our other officers. Messrs. Nutt and Healey, in particular, play an
important role in identifying suitable investment opportunities for us.
Messrs. Nutt and Healey do not have employment agreements with us, although each
of them has a significant equity interest in us (including options subject to
vesting provisions).
In addition, Essex Investment Management Company, LLC and Tweedy, Browne
Company LLC, our largest two Affiliates based on revenue and EBITDA
Contribution, depend heavily on the services of key principals, who have managed
their firms for over 20 years and are primarily responsible for all investment
decisions. Although each of the principals has a significant equity interest in
their firm and has entered into an employment agreement with their respective
firm providing for continued employment until October 2007 (in the case of
Tweedy, Browne) and March 2008 (in the case of Essex), these arrangements are
not a guarantee that such principals will remain with their firms until that
date.
Our loss of key management personnel or our inability to attract, retain and
motivate sufficient numbers of qualified management personnel may adversely
affect our business. The market for investment managers is extremely competitive
and is increasingly characterized by frequent movement by investment managers
among different firms. In addition, because individual investment managers at
our Affiliates often maintain a strong, personal relationship with their clients
based on the clients' trust in individual managers, the loss of a key investment
manager at an Affiliate could jeopardize the Affiliate's relationships with its
clients and lead to the loss of client accounts. Losing client accounts in these
circumstances could have a material adverse effect on the results of our
operations and our financial condition and that of our Affiliates. Although we
use a combination of economic incentives, vesting provisions, and, in some
instances, non-solicitation agreements and employment agreements in an attempt
to retain key management personnel, we cannot guarantee that key managers will
remain with us.
BECAUSE OUR AFFILIATES OFFER A BROAD RANGE OF INVESTMENT MANAGEMENT SERVICES
AND UTILIZE A NUMBER OF DISTRIBUTION CHANNELS, CHANGING CONDITIONS IN THE
FINANCIAL AND SECURITIES MARKETS DIRECTLY AFFECT OUR PERFORMANCE
Prior to the year 2000, the investment management sector had been one of the
fastest growing sectors in the financial services industry. As one example of
this growth, the assets under management of mutual funds increased at a compound
annual growth rate of 25% from 1995 to the end of 1999, to a total of $6.8
trillion at the end of 1999, according to the Investment Company Institute. In
2000, however, the investment management sector (like the financial services
industry more broadly) experienced extraordinary volatility, as equity markets
declined significantly. In 2000, the Dow Jones
16
Industrial Average declined 4.71% and the NASDAQ Composite Index declined
39.18%. This volatility has continued in 2001--from the beginning of the year to
March 23, 2001, the Dow Jones Industrial Average has declined 11.9% and the
NASDAQ Composite Index has declined 21.9%.
Domestic and foreign economic conditions and general trends in business and
finance, among other factors, affect the financial markets and businesses
operating in the securities industry. Broader market performance may continue to
be unfavorable in the future. A continued decline in the financial markets or a
lack of sustained growth may result in a corresponding decline in our
Affiliates' performance and may cause our Affiliates to experience declining
assets under management and/or fees, which would reduce cash flow distributable
to us.
Our Affiliates' investment management contracts provide for payment based on
the market value of assets under management, although a portion also provide for
payment based on investment performance. Because most of these contracts provide
for payments based on market values of securities, fluctuations in securities
prices will directly affect our consolidated results of operations and financial
condition. Changes in our Affiliates' clients' investment patterns will also
affect the total assets under management.
Investment management contracts at certain of our Affiliates provide that
fees are paid on the basis of investment performance. 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 were
of an unusual magnitude in 1998 and 1999, but were not as significant in 2000,
and may not recur to even the same magnitude as 2000 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, but declined
significantly since that time. 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.
OUR AFFILIATES' INVESTMENT MANAGEMENT CONTRACTS ARE SUBJECT TO TERMINATION ON
SHORT NOTICES
Our Affiliates derive almost all of their revenues from investment
management contracts. These contracts are typically terminable without penalty
upon 60 days' notice in the case of mutual fund clients or upon 30 days' notice
in the case of individual and institutional clients. As a result, our
Affiliates' clients may withdraw funds from accounts managed by the Affiliates
at their election. Moreover, some of our Affiliates' fees are higher than those
of other investment managers for similar types of investment services. The
ability of each of our Affiliates to maintain its fee levels in a competitive
environment depends on its ability to provide clients with investment returns
and services that are satisfactory to its clients. We cannot be certain that our
Affiliates will be able to retain their existing clients or to attract new
clients at their current fee levels.
THE FAILURE TO RECEIVE REGULAR DISTRIBUTIONS FROM OUR AFFILIATES WOULD
ADVERSELY AFFECT US
Because we are a holding company, we receive all of our cash from
distributions made to us by our Affiliates. All of our Affiliates (other than
The Managers Funds LLC) have entered into agreements with us pursuant to which
they have agreed to pay to us a specified percentage of their gross revenues. In
our agreements with our Affiliates, the distributions made to us by our
Affiliates represent only a portion of our Affiliates' gross revenues. Our
Affiliates use the portion of their revenues not required to be distributed to
us to pay their operating expenses and distributions to their management teams.
The payment of distributions to us by our Affiliates may be subject to the
claims of our Affiliates' creditors and to limitations applicable to our
Affiliates under state laws governing corporations, partnerships and limited
liability companies, state and federal regulatory requirements for the
securities industry and bankruptcy and insolvency laws. As a result, we cannot
guarantee that our Affiliates will always make these distributions.
17
OUR OBLIGATIONS TO PURCHASE ADDITIONAL EQUITY IN OUR AFFILIATES MAY
ADVERSELY AFFECT US
When we made our original investments in our Affiliates, we agreed to
purchase the additional ownership interests in each Affiliate from the owners of
these interests on pre-negotiated terms, which are subject to several conditions
and limitations. Consequently, we may have to purchase some of these interests
from time to time for cash (which we may have to borrow) or in exchange for
newly issued shares of our Common Stock. These purchases may result in us having
more interest expense and less net income or in our existing stockholders
experiencing a dilution of their ownership of us. In addition, because these
pre-negotiated terms are generally based on trailing revenues, there can be no
assurance that the value of the equity we purchase is equal to the purchase
price we pay. In addition, these purchases will result in our ownership of
larger portions of our Affiliates, which may have an adverse effect on our cash
flow and liquidity.
AFFILIATES' AUTONOMY EFFECTIVELY LIMITS OUR ABILITY TO ALTER THEIR
MANAGEMENT PRACTICES AND POLICIES
Although our agreements with our Affiliates give us the authority to control
some types of business activities undertaken by them and we have voting rights
with respect to significant decisions, our Affiliates manage their own
day-to-day operations, including all investment management policies and fee
levels, product development, client relationships, compensation programs and
compliance activities. As a result, we may not become aware, for example, of one
of our Affiliates' non-compliance with a regulatory requirement as quickly as if
we were involved in the day-to-day business of the Affiliate or we may not
become aware of such non-compliance at all. In such situations, our financial
condition and results of operations may be adversely affected by problems
stemming from the day-to-day operations of our Affiliates. See
"Business--Government Regulation."
WE MAY BE RESPONSIBLE FOR LIABILITIES INCURRED BY OUR AFFILIATES
Some of our existing Affiliates are partnerships of which we are the general
partner. Consequently, to the extent any of these Affiliates incurs liabilities
or expenses, which exceed its ability to pay for them, we are liable for their
payment. In addition, with respect to all of our Affiliates we may be held
liable in some circumstances as a control person for their acts as well as those
of their employees. We and our Affiliates maintain errors and omissions and
general liability insurance in amounts that we and they believe to be adequate
to cover many potential liabilities. We cannot be certain, however, that we will
not have claims which exceed the limits of our available insurance coverage,
that our insurers will remain solvent and will meet their obligations to provide
coverage, or that insurance coverage will continue to be available to us with
sufficient limits or at a reasonable cost. A judgment against us or any of our
Affiliates in excess of our available coverage could have a material adverse
effect on us.
OUR INDUSTRY AND OUR AFFILIATES' INDUSTRY ARE HIGHLY COMPETITIVE
We are an asset management holding company which acquires and holds
mid-sized investment management firms. The market for partial or total
acquisitions of interests in investment management firms is highly competitive.
Many other public and private financial services companies, including commercial
and investment banks, insurance companies and investment management firms, have
significantly greater resources than us, and invest in or buy investment
management firms. We cannot guarantee that we will be able to compete
effectively with such competitors, that new competitors will not enter the
market or that such competition will not make it more difficult or impracticable
for us to make new investments in investment management firms.
Our Affiliates compete with a broad range of investment managers, including
public and private investment advisers as well as firms associated with
securities broker-dealers, banks, insurance companies and other entities. From
time to time, our Affiliates may also compete with each other for clients. Many
of our Affiliates' competitors have greater resources than do we and our
Affiliates. In addition to competing directly for clients, competition may
reduce the fees that our Affiliates can
18
obtain for their services. We believe that each Affiliate's ability to compete
effectively with other firms is dependent upon the Affiliate's products, level
of investment performance and client service, as well as the marketing and
distribution of its investment products. We cannot be certain that our
Affiliates will be able to achieve favorable investment performance and retain
their existing clients.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO POLITICAL, REGULATORY, ECONOMIC
AND CURRENCY RISKS
Some of our Affiliates operate or advise clients outside of the United
States. Furthermore, in the future we may invest in investment management firms
that operate or advise clients outside of the United States and our existing
Affiliates may expand their non-U.S. operations. Our Affiliates take risks
inherent in doing business internationally, such as changes in applicable laws
and regulatory requirements, difficulties in staffing and managing foreign
operations, longer payment cycles, difficulties in collecting investment
advisory fees receivable, political instability, fluctuations in currency
exchange rates, expatriation controls and potential adverse tax consequences. We
cannot be certain that one or more of these risks will not have an adverse
effect on our Affiliates, including investment management firms in which we may
invest in the future, and, consequently, on our consolidated business, financial
condition and results of operations.
OUR AFFILIATES' BUSINESSES ARE HIGHLY REGULATED
Many aspects of our Affiliates' businesses are subject to extensive
regulation by various U.S. federal regulatory authorities, certain state
regulatory authorities, and non-U.S. regulatory authorities. There is no
assurance that our Affiliates will fulfill all applicable regulatory
requirements. The failure of any Affiliate to meet regulatory requirements could
subject such Affiliate to sanctions, which might materially impact the
Affiliate's business and our business. For further information concerning the
regulations to which we and our Affiliates are subject, see
"Business--Government Regulation."
WE MAY BE PROHIBITED FROM ENTERING INTO POTENTIALLY BENEFICIAL TRANSACTIONS
Several provisions of our Amended and Restated Certificate of Incorporation,
our Amended and Restated By-laws and Delaware law may, together or separately,
prevent a transaction which is beneficial to our stockholders from occurring.
These provisions may discourage potential purchasers from presenting acquisition
proposals, delay or prevent potential purchasers from acquiring a controlling
interest in us, block the removal of incumbent directors or limit the price that
potential purchasers might be willing to pay in the future for shares of our
Common Stock. These provisions include the issuance, without further stockholder
approval, of preferred stock with rights and privileges, which could be senior
to the Common Stock. We are also subject to Section 203 of the Delaware General
Corporation Law which, subject to a few exceptions, prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any "interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder.
THE PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE; WE HAVE NOT
PAID DIVIDENDS ON OUR COMMON STOCK
The market price of our Common Stock has historically experienced and may
continue to experience high volatility. Our quarterly operating results, changes
in general conditions in the economy or the financial markets and other
developments affecting us or our competitors could cause the market price of our
Common Stock to fluctuate substantially. In addition, in recent years, the stock
market has experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by many companies
for reasons unrelated to their operating performance and may adversely affect
the price of our Common Stock. We have never declared or paid a cash dividend on
our Common Stock. We intend to retain earnings to repay debt and to finance the
growth and development of our business and do not anticipate paying cash
dividends on our Common Stock in the foreseeable future. Any declaration of cash
dividends in the future will depend, among other things,
19
upon our results of operations, financial condition and capital requirements as
well as general business conditions. Our credit facility also contains
restrictions which prohibit us from making dividend payments to our
stockholders.
A SUBSTANTIAL PORTION OF OUR COMMON STOCK IS HELD BY A SMALL NUMBER OF
INVESTORS AND CAN BE RESOLD OR IS SUBJECT TO REGISTRATION RIGHTS
If our stockholders sell substantial amounts of our Common Stock (including
shares issued upon the exercise of outstanding options) in the public market,
the market price of our Common Stock could fall. Such sales may also make it
more difficult for us to sell equity or equity-related securities in the public
market in the future at a time and at a price that we deem appropriate.
In addition, we have registered for resale the 3,250,000 shares of our
Common Stock reserved for issuance under our stock option plan. At our 2001
Annual Meeting we intend to ask our stockholders to amend our stock option plan
to increase the shares reserved for issuance to 4,550,000. If such amendment is
approved, we intend to register for resale the additional shares. As of
December 31, 2000, options to purchase 2,459,150 shares of our Common Stock were
outstanding and, upon exercise of these options, the underlying shares will be
eligible for sale in the public market from time to time subject to vesting. The
possible sale of a significant number of these shares may cause the price of our
Common Stock to fall.
In addition, the holders of certain shares of our Common Stock have the
right in some circumstances to require us to register their shares under the
Securities Act of 1933, as amended (the "Securities Act") for resale to the
public, while those holders as well as others have the right to include their
shares in any registration statement filed by us.
In addition, some of the managers of our Affiliates have the right under
some circumstances to exchange portions of their interests in our Affiliates for
shares of our Common Stock. Some of these managers also have the right to
include these shares in a registration statement filed by us under the
Securities Act. By exercising their registration rights and causing a large
number of shares to be sold in the public market, these holders may cause the
price of our Common Stock to fall. In addition, any demand to include shares in
our registration statements could have an adverse effect on our ability to raise
needed capital.
ITEM 2. PROPERTIES
Our executive offices are located at Two International Place, 23rd Floor,
Boston, Massachusetts 02110. In Boston, we occupy 10,569 square feet under a
lease, and each of our Affiliates also leases office space in the city or cities
in which it conducts business.
In 2000, we purchased property located at 620 Hale Street and Greenwood
Avenue in Pride's Crossing, Massachusetts for the development of our future
executive offices. In connection with the development of the site and the
financing of development costs, we subsequently transferred the property to an
entity held jointly with the financing underwriter. We intend to transition from
our Boston site to the Pride's Crossing site in the third and fourth quarters of
2001. We believe that the property, once developed, will be suitable for our use
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we and our Affiliates may be parties to various claims,
suits and complaints. Currently, there are no such claims, suits or complaints
that, in our opinion, would have a material adverse effect on our financial
position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the New York Stock Exchange (symbol: AMG). The
following table sets forth the high and low closing prices as reported on the
New York Stock Exchange composite tape during the last two years.
HIGH LOW
-------- --------
2000
First Quarter............................................. $50 $33
Second Quarter............................................ 45 1/2 31 3/8
Third Quarter............................................. 64 1/4 42 1/2
Fourth Quarter............................................ 63 5/8 44 3/16
1999
First Quarter............................................. $33 1/16 $24
Second Quarter............................................ 32 1/4 25
Third Quarter............................................. 31 3/8 24 7/8
Fourth Quarter............................................ 40 7/16 23
The closing price for the shares on the New York Stock Exchange on
March 23, 2001 was $45.80.
From December 31, 2000 to March 23, 2001, we repurchased 14,000 shares of
Common Stock at an average price per share of $49.85 under a share repurchase
program authorized by our Board of Directors in April 2000.
As of December 31, 2000 there were 57 stockholders of record. As of
March 23, 2001 there were 46 stockholders of record.
We have not declared a dividend with respect to the periods presented. We
intend to retain earnings to finance investments in new Affiliates, repay
indebtedness, pay interest and income taxes, repurchase our Common Stock when
appropriate, and develop our existing business. We do not anticipate paying cash
dividends on our Common Stock in the foreseeable future. Our credit facility
also prohibits us from making dividend payments to our stockholders.
21
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected financial data for the last five years. This
data should be read in conjunction with, and is qualified in its entirety by
reference to, the financial statements and accompanying notes included elsewhere
in this Form 10-K.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT AS INDICATED AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues................................... $50,384 $ 95,287 $238,494 $518,726 $458,708
Net income (loss).......................... (2,372) (8,368) 25,551 72,188 56,656
Earnings per share -- diluted.............. (5.49) (1.02) 1.33 3.18 2.49
Average shares outstanding -- diluted(1)... 432 8,236 19,223 22,693 22,749
OTHER FINANCIAL DATA
Assets under management (at period end, in
millions)................................ $19,051 $ 45,673 $ 57,731 $ 82,041 $ 77,523
EBITDA(2).................................. 10,524 20,044 76,312 166,801 142,378
Cash Net Income(3)......................... 7,596 10,201 45,675 98,318 87,676
Cash earnings per share -- diluted(4)...... 17.58 1.24 2.38 4.33 3.85
BALANCE SHEET DATA
Intangible assets(5)....................... $71,472 $392,573 $490,949 $571,881 $643,470
Total assets............................... 101,335 456,990 605,334 909,073 793,730
Senior debt................................ 33,400 159,500 212,500 174,500 151,000
Stockholders' equity(1).................... 36,989 259,740 313,655 477,986 493,910
- ------------------------
(1) In connection with our initial public offering in November 1997, we raised
$189 million from the sale of 8.7 million shares of Common Stock and
8.0 million shares of preferred stock converted to shares of Common Stock.
In March 1999, we raised $102.3 million from our sale of an additional
4.0 million shares of Common Stock.
(2) As defined by Note (2) on page 11.
(3) As defined by Note (3) on page 11.
(4) Cash earnings per share represents Cash Net Income divided by average shares
outstanding. Cash earnings per share for 1996 and 1997 shown above are
before extraordinary items related to the replacement of AMG's previous
credit facilities with new facilities.
(5) Intangible assets have increased with each new investment in an Affiliate.
From our inception through December 31, 2000, we made investments in fifteen
Affiliates.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-K 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 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 THOSE DISCUSSED UNDER THE CAPTION "BUSINESS--CAUTIONARY
STATEMENTS" THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. WE WISH TO CAUTION
READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THE DATE MADE. WE WISH TO ADVISE READERS THAT THE FACTORS
UNDER THE CAPTION "BUSINESS--
22
CAUTIONARY STATEMENTS" COULD AFFECT OUR FINANCIAL PERFORMANCE AND COULD CAUSE
OUR ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR
STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT STATEMENTS.
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 $77.5 billion in
assets at December 31, 2000. Our most recent investment was in Frontier Capital
Management Company, LLC in January 2000.
We have a revenue sharing arrangement with each of our Affiliates 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, which we refer to as the "Operating Allocation." The remaining
portion of revenues of each such Affiliate, typically 30-50%, is referred to as
the "Owners' Allocation," and is allocated to the owners of that Affiliate
(including AMG), generally in proportion to their ownership of the Affiliate. In
certain cases our profit distribution is paid to us in the form of a guaranteed
payment for the use of our capital or a license fee, which in each case is paid
from the 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:
- to participate in the growth of their firm's revenues, which may increase
their compensation from the Operating Allocation, and profit distributions
from the Owners' Allocation; and
- to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and
compensation.
Under the revenue sharing arrangements, the managers of our Affiliates have
incentives 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, 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, The Managers Funds LLC 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 are 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
23
Operations. The portion of our Affiliates' revenues which is allocated to owners
of the Affiliates other than us through their share of Owners' Allocation 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 (or
"asset-based 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 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 we call "overlay assets"), 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:
- 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;
- 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;
- 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;
- the availability and cost of the capital with which we finance our
existing and new investments;
- our success in attracting new investments and the terms upon which such
transactions are completed;
- the level of intangible assets and the associated amortization expense
resulting from our investments;
- the level of expenses incurred for holding company operations, including
compensation for its employees; and
- 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 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 were
of an unusual magnitude in 1998 and 1999, but were not as significant in 2000,
and may not recur even to the same magnitude as 2000 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 but have
declined significantly since that time. To the extent
24
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.
As described above, our revenue is largely from fees based upon our
Affiliates' assets under management, and as of the end of 2000 in excess of 90%
of that revenue was derived from the equity asset class. As a result, our
revenue is impacted by the performance of the equity markets as a whole. Through
the end of the first quarter of 2001, market indices such as the Dow Jones
Industrial Average and the NASDAQ Composite Index had declined significantly. As
with many financial services firms, our results in the first quarter of 2001
will be affected adversely by these broad market declines, and our results in
the future would be affected adversely by further market declines.
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
December 31, 2000, our total assets were approximately $793.7 million, of which
approximately $199.4 million consisted of acquired client relationships and
$444.1 million consisted of goodwill.
The amortization period for intangible assets for each investment is
assessed individually, with amortization periods for our investments to date
ranging from seven 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 regularly perform an 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.
25
As a result of our investments, amortization expense, which is a non-cash
charge, has historically represented a significant percentage of our expenses.
In February 2001, the Financial Accounting Standards Board released a proposed
accounting standard that, if adopted, would change the accounting for goodwill.
If the standard is adopted, goodwill would no longer be amortized. Since
goodwill amortization represented 60% of total intangible amortization expense
in the year ended December 31, 2000, under similar circumstances in the future
our net income and earnings per share may be higher for this reason. There can
be no assurance that this standard will be adopted in its proposed form, or at
all.
Even if the pending accounting changes occur, intangible amortization
(related to acquired client relationships) will continue to be a material
component of our operating expenses. Accordingly, we believe it is significant
to distinguish amortization expense and other non-cash expenses (principally
depreciation) from other operating expenses since these expenses do not require
the use of cash. We have provided additional supplemental information in this
report for "cash" related earnings as an addition to, but not a substitute, for
measures of financial performance under generally accepted accounting
principles. Our additional measures of "cash" related earnings are:
- Cash Net Income (net income plus depreciation and amortization), which we
believe is useful to investors as an indicator of funds available to the
Company, which may be used to make new investments, repay debt
obligations, repurchase shares of Common Stock or pay dividends on our
Common Stock (although the Company has no current plans to pay dividends);
- 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, make new investments and meet working capital
requirements; and
- 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 to service debt, make new investments and
meet working capital requirements.
Assets under management were $77.5 billion at December 31, 2000 versus
$82.0 billion at December 31, 1999. The decrease in assets under management
during the year resulted from the net loss of low-fee overlay assets of
$7.4 billion, principally from the loss of two passive overlay asset accounts.
Negative investment performance of $2.6 billion also contributed to the
decrease. These decreases were partially offset by our new investments
($5.2 billion of assets under management at the time of investment), including
our investment in Frontier Capital Management Company, LLC, and positive net
client cash flows of directly managed assets of $238.7 million.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
We had net income of $56.7 million for the year ended December 31, 2000
compared to net income of $72.2 million for the year ended December 31, 1999.
The decrease in net income resulted primarily from lower performance-based fees,
partially offset by internal growth of existing Affiliates and our investment in
Frontier.
Total revenues for the year ended December 31, 2000 were $458.7 million, a
decrease of $60.0 million from the year ended December 31, 1999. Revenues
(excluding performance-based fees) grew 38% for the year ended December 31, 2000
as compared to the year ended December 31, 1999. The decrease in total revenues
resulted from an unusual magnitude of performance-based fees realized in 1999
which did not recur at this level in 2000. Revenues from performance-based fees
represented approximately 5% of total revenues for the year ended December 31,
2000 compared to approximately 39% of total revenues for the year ended
December 31, 1999. The decrease in performance-based fees
26
in 2000 when compared to 1999 was partially offset by the growth in asset-based
fees at our existing Affiliates and from revenues from our investment in
Frontier.
Total operating expenses decreased by $21.8 million to $284.3 million for
the year ended December 31, 2000 over the year ended December 31, 1999.
Compensation and related expenses decreased by $43.1 million to $174.7 million.
Amortization of intangible assets increased by $4.2 million to $26.4 million,
selling, general and administrative expenses increased by $15.0 million to
$68.2 million, and other operating expenses increased by $1.4 million to
$10.3 million. The decrease in operating expenses was principally a result of
the net decrease in Affiliates' Operating Allocation due to the decrease in
performance-based fees, partially offset by the increase in mutual fund
distribution expenses resulting from the acquisition of The Managers Funds LLC
in 1999 and the subsequent growth in Managers' revenues and related distribution
expenses in 2000. The increase in amortization expense was principally the
result of our investment in Frontier.
Investment and other income decreased by $12.0 million to $2.3 million for
the year ended December 31, 2000 over the year ended December 31, 1999, as a
result of the significant levels of income recognized from our interests in
Affiliate investment partnerships in 1999 that did not recur in 2000.
Minority interest decreased by $20.9 million to $65.3 million for the year
ended December 31, 2000 over the year ended December 31, 1999, primarily as a
result of the decrease in performance-based fees earned in 2000, partially
offset by the growth in asset-based fees and our investment in Frontier.
Interest expense increased by $4.0 million to $15.8 million for the year
ended December 31, 2000 over the year ended December 31, 1999. The increase in
interest expense was the result of an increase in the weighted average debt
outstanding under our credit facility and increases in LIBOR interest rates. The
increase in weighted average debt outstanding was attributable to our investment
in Frontier and the repurchase of Common Stock, partially offset by debt
repayments from cash flows from operations.
Income tax expense was $39.0 million for the year ended December 31, 2000
compared to $56.7 million for the year ended December 31, 1999. The change in
income tax expense was related principally to the decrease in income before
taxes in the year ended December 31, 2000, as well as a decrease in our
effective tax rate from 44% to 41%. The effective tax rate decreased in 2000 as
a result of stockholder approval of an incentive compensation plan which
increased allowable compensation deductions, among other initiatives.
EBITDA decreased by $24.4 million to $142.4 million for the year ended
December 31, 2000 over the year ended December 31, 1999, resulting from the
decrease in performance-based fees, partially offset by the growth in
asset-based fees at our existing Affiliates and our investment in Frontier.
Cash Net Income decreased by $10.6 million to $87.7 million for the year
ended December 31, 2000 over the year ended December 31, 1999 as a result of the
factors affecting net income as described above, excluding the changes in
depreciation and amortization during the year.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
We had net income of $72.2 million for the year ended December 31, 1999
compared to net income of $25.6 million for the year ended December 31, 1998.
The increase in net income resulted primarily from a substantial increase in
performance-based fees earned by several Affiliates (principally Essex
Investment Management Company, LLC), as well as growth in asset-based fees
resulting from positive investment performance. In addition, the investments we
made in 1998 and 1999 contributed significantly to our growth. We invested in
Essex in March 1998, Davis Hamilton Jackson & Associates,
27
L.P. in December 1998, Rorer Asset Management, LLC in January 1999 and Managers
in April 1999 and included their results from the respective dates of
investment.
Total revenues for the year ended December 31, 1999 were $518.7 million, an
increase of $280.2 million over the year ended December 31, 1998. The increase
in revenues resulted from a substantial increase in performance-based fees
earned by several Affiliates, as well as growth in asset-based fees resulting
from positive investment performance and investments in new Affiliates. Revenues
from performance-based fees increased from approximately 18% of total revenues
for the year ended December 31, 1998 to approximately 39% of total revenues for
the year ended December 31, 1999. The increase in performance-based fees was
primarily the result of performance-based fee contracts in place at Essex.
Total operating expenses increased by $160.4 million to $306.1 million for
the year ended December 31, 1999 over the year ended December 31, 1998.
Compensation and related expenses increased by $130.1 million to
$217.8 million, amortization of intangible assets increased by $4.8 million to
$22.2 million, selling, general and administrative expenses increased by
$21.6 million to $53.3 million, and other operating expenses increased by
$2.6 million to $8.9 million. The growth in operating expenses was principally a
result of an increase in Affiliates' Operating Allocation due to a substantial
increase in performance-based fees earned by several Affiliates, growth in
asset-based fees resulting from positive investment performance and investments
in new Affiliates.
Investment and other income increased by $12.0 million to $14.2 million for
the year ended December 31, 1999 over the year ended December 31, 1998,
substantially from the significant levels of income recognized from our
interests in Affiliate investment partnerships in 1999.
Minority interest increased by $47.4 million to $86.2 million for the year
ended December 31, 1999 over the year ended December 31, 1998, primarily as a
result of the increase in Affiliates' Owners' Allocation due to a substantial
increase in performance-based fees earned by several Affiliates, growth in
asset-based fees resulting from positive investment performance and investments
in new Affiliates.
Interest expense decreased by $1.8 million to $11.8 million for the year
ended December 31, 1999 over the year ended December 31, 1998. The reduction in
interest expense resulted from repayments of senior bank debt with the net
proceeds from our public offering of Common Stock in March 1999 and cash flow
from ongoing operations, and was partially offset by borrowings related to new
investments. In addition, interest expense decreased due to the favorable impact
of the public offering on our LIBOR margin as well as a favorable interest rate
environment.
Income tax expense was $56.7 million for the year ended December 31, 1999
compared to $17.0 million for the year ended December 31, 1998. The change in
income tax expense was related principally to the increase in income before
taxes in the year ended December 31, 1999.
EBITDA increased by $90.5 million to $166.8 million for the year ended
December 31, 1999 over the year ended December 31, 1998, resulting from a
substantial increase in performance-based fees earned by several Affiliates,
growth in asset-based fees resulting from positive investment performance and
investments in new Affiliates.
Cash Net Income increased by $52.6 million to $98.3 million for the year
ended December 31, 1999 over the year ended December 31, 1998 as a result of the
factors affecting net income as described above, excluding the changes in
depreciation and amortization during the year.
LIQUIDITY AND CAPITAL RESOURCES
We have met our cash requirements primarily through borrowings from our
banks, 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
28
our and 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 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.
At December 31, 2000, we had outstanding borrowings of senior debt under our
credit facility of $151 million and the ability to borrow an additional
$179 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 outstanding
senior debt balance as of December 31, 2000 decreased by 13% as compared to
December 31, 1999 as a result of repayments from cash flow from ongoing
operations, partially offset by borrowings for our investment in Frontier
Capital Management Company, LLC in January 2000 and repurchases of shares of our
Common Stock. During 2000, we began a cash management program with our
Affiliates that enabled us to access their excess cash through intercompany
loans. At December 31, 2000, we had $52.8 million in such loans. Because these
loans are intercompany balances, they are eliminated for accounting purposes and
are not reflected on our Consolidated Balance Sheet.
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, as discussed below in "Market Risk." 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 in our existing Affiliates
upon the sale by our Affiliates' management owners 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 on terms acceptable to us, if at all.
Net cash flow from operating activities was $153.7 million, $89.1 million
and $45.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The increase in net cash flow from operating activities from 1999
to 2000 resulted principally from the operating cash flows received in 2000 from
performance-based fees earned in the fourth quarter of 1999, and the internal
growth of our existing Affiliates. The increase in net cash flow from operating
activities from 1998 to 1999 resulted principally from the internal growth of
our existing Affiliates.
Net cash flow used in investing activities was $111.7 million,
$112.9 million and $72.7 million for the years ended December 31, 2000, 1999 and
1998, respectively. Of these amounts, $104.4 million, $103.5 million and
$66.6 million, respectively, were used to make investments in Affiliates.
In January 2000, we acquired our ownership interest in Frontier. In 1999, we
acquired our ownership interests in Rorer and Managers and repaid a note issued
in the fourth quarter of 1998 in connection with our Davis Hamilton investment.
In 1998, we acquired a portion of our ownership
29
interest in Essex with cash. All of these investments were financed with
borrowings under our credit facility.
Net cash flow used in financing activities was $64.0 million in the year
ended December 31, 2000 versus net cash flow from financing activities of
$54.0 million and $28.2 million for the years ended December 31, 1999 and 1998,
respectively. The principal sources of cash from financing activities over the
last three years have been borrowings under our credit facility and the public
offering of our Common Stock. The uses of cash from financing activities during
this period were for the repayment of debt and for the repurchase of Common
Stock.
During the year ended December 31, 2000, we repurchased 1,261,800 shares of
Common Stock at an average price of $38.68, with borrowings under our credit
facility. The repurchases were pursuant to two share repurchase programs
authorized by our Board of Directors in October 1999 and April 2000. Each
program authorized us to repurchase up to five percent of our issued and
outstanding shares of Common Stock in open market transactions, with the timing
of purchases and the amount of stock purchased determined at our discretion.
INTEREST RATE SENSITIVITY
Our revenues are derived primarily from fees that are based on the values of
assets managed. Such values are affected by changes in the broader financial
markets which are, in part, affected by changing interest rates. We cannot
predict the effects that interest rates or changes in interest rates may have on
either the broader financial markets or our Affiliates' assets under management
and associated fees.
With respect to our debt financing, we are exposed to potential fluctuations
in the amount of interest expense resulting from changing interest rates. We
seek to offset such exposure in part by entering into interest rate hedging
contracts. See "Market Risk."
MARKET RISK
We use interest rate hedging contracts 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 non-financial or
non-quantifiable. Such risks principally include country risk, credit risk and
legal risk, and are not represented in the analysis that follows.
As of December 31, 2000, we were a party, with two major commercial banks as
counterparties, to $185 million notional amount of interest rate hedging
contracts which were linked to the three-month LIBOR rate. We closed these
contracts in January 2001 in conjunction with the implementation of the new
derivative accounting standard, Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133").
During February 2001, we became a party, with two major commercial banks as
counterparties, to $50 million notional amount of interest rate hedging
contracts that are linked to the three-month LIBOR rate. Under these contracts,
we have agreed to exchange the difference between fixed-rate and floating rate
interest amounts calculated by reference to the $50 million notional amount.
These contracts cap LIBOR rates on the notional amounts at rates ranging between
4.95% and 5.14%.
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in the three-month LIBOR rates, sustained for three months. As of
March 23, 2001, this analysis indicated that this hypothetical movement in
three-month LIBOR rates would have resulted in no loss in earnings.
There can be no assurance that we will continue to maintain such hedging
contracts at their existing levels of coverage or that the amount of coverage
maintained will cover all of our indebtedness
30
outstanding at any such time. Therefore, there can be no assurance that the
hedging contracts will meet their overall objective of reducing our interest
expense. In addition, there can be no assurance that we will be successful in
obtaining hedging contracts in the future on our existing or any new
indebtedness.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued FAS 133, which standardizes the accounting for
derivative instruments by requiring that all derivatives be recognized as assets
and liabilities and be measured at fair value. In June 1999, Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of Effective Date of FASB Statement No. 133--an
amendment to FASB Statement 133" deferred the effective date of FAS 133 to
financial statements for fiscal years beginning after June 15, 2000.
We adopted the standard on January 1, 2001, and the adoption did not
materially impact our consolidated financial statements.
In February 2001, the FASB released a proposed accounting standard that, if
adopted, would change the accounting for goodwill. If the standard is adopted,
goodwill would no longer be amortized. Since goodwill represented 60% of total
intangible amortization expense in the year ended December 31, 2000, under
similar circumstances in the future, our net income and earnings per share may
be higher for this reason. There can be no assurance that this standard will be
adopted in its proposed form, or at all.
ECONOMIC AND MARKET CONDITIONS
Prior to the year 2000, the investment management sector has been one of the
fastest growing sectors in the financial services industry. As one example of
this growth, the assets under management of mutual funds increased at a compound
annual growth rate of 25% from 1995 to the end of 1999, to a total of $6.8
trillion at the end of 1999, according to the Investment Company Institute. In
2000 and in the first quarter of 2001, however, the investment management sector
(like the financial services industry more broadly) experienced extraordinary
volatility, as equity markets declined significantly.
Domestic and foreign economic conditions and general trends in business and
finance, among other factors, affect the financial markets and businesses
operating in the securities industry. We cannot guarantee that broader market
performance will be favorable in the future. A continued decline in the
financial markets or a lack of sustained growth may result in a corresponding
decline in our Affiliates' performance and may cause our Affiliates to
experience declining assets under management and/or fees, which would reduce
cash flow distributable to us.
INTERNATIONAL OPERATIONS
First Quadrant Limited, a sister company to First Quadrant, L.P., is
organized and headquartered in London, England. Tweedy, Browne Company LLC,
based in New York, also maintains a research office in London. In the future, we
may seek to invest in other investment management firms which are located and/or
conduct a significant part of their operations outside of the United States.
There are certain risks inherent in doing business internationally, such as
changes in applicable laws and regulatory requirements, difficulties in staffing
and managing foreign operations, longer payment cycles, difficulties in
collecting investment advisory fees receivable, political instability,
fluctuations in currency exchange rates, expatriation controls and potential
adverse tax consequences. There can be no assurance that one or more of such
factors will not have a material adverse effect on First Quadrant Limited or
other non-U.S. investment management firms in which we may invest in the future
and, consequently, on our business, financial condition and results of
operations.
31
INFLATION
We do not believe that inflation or changing prices have had a material
impact on our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting us,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk" in Item 7 above, which is incorporated herein by
reference.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
AFFILIATED MANAGERS GROUP, INC.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Affiliated Managers Group, Inc. at December 31, 1999
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2001
33
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 53,879 $ 31,612
Investment advisory fees receivable....................... 239,383 66,126
Other current assets...................................... 6,705 15,448
-------- --------
Total current assets.................................. 299,967 113,186
Fixed assets, net........................................... 12,321 15,346
Equity investment in Affiliate.............................. 1,563 1,816
Acquired client relationships, net of accumulated
amortization of $23,202 in 1999 and $33,775 in 2000....... 186,499 199,354
Goodwill, net of accumulated amortization of $36,103
in 1999 and $51,939 in 2000............................... 385,382 444,116
Other assets................................................ 23,341 19,912
-------- --------
Total assets.......................................... $909,073 $793,730
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $170,299 $ 86,800
-------- --------
Total current liabilities............................. 170,299 86,800
Senior bank debt............................................ 174,500 151,000
Deferred taxes.............................................. 25,346 31,907
Other long-term liabilities................................. 1,346 2,636
Subordinated debt........................................... 800 800
-------- --------
Total liabilities..................................... 372,291 273,143
Minority interest........................................... 58,796 26,677
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock................................................ 235 235
Additional paid-in capital.................................. 405,883 407,057
Accumulated other comprehensive income...................... (55) (342)
Retained earnings........................................... 83,857 140,513
-------- --------
489,920 547,463
Less treasury shares........................................ (11,934) (53,553)
-------- --------
Total stockholders' equity............................ 477,986 493,910
-------- --------
Total liabilities and stockholders' equity............ $909,073 $793,730
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
34
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Revenues.............................................. $ 238,494 $ 518,726 $ 458,708
Operating expenses:
Compensation and related expenses................... 87,669 217,780 174,710
Amortization of intangible assets................... 17,417 22,229 26,409
Depreciation and other amortization................. 2,707 3,901 4,611
Selling, general and administrative................. 31,643 53,251 68,216
Other operating expenses............................ 6,278 8,906 10,327
----------- ----------- -----------
145,714 306,067 284,273
----------- ----------- -----------
Operating income...................................... 92,780 212,659 174,435
Non-operating (income) and expenses:
Investment and other income......................... (2,251) (14,237) (2,264)
Interest expense.................................... 13,603 11,764 15,750
----------- ----------- -----------
11,352 (2,473) 13,486
----------- ----------- -----------
Income before minority interest and income taxes...... 81,428 215,132 160,949
----------- ----------- -----------
Minority interest..................................... (38,843) (86,225) (65,341)
----------- ----------- -----------
Income before income taxes............................ 42,585 128,907 95,608
Income taxes.......................................... 17,034 56,719 38,952
----------- ----------- -----------
Net income............................................ $ 25,551 $ 72,188 $ 56,656
=========== =========== ===========
Earnings per share -- basic........................... $ 1.45 $ 3.25 $ 2.54
=========== =========== ===========
Earnings per share -- diluted......................... $ 1.33 $ 3.18 $ 2.49
=========== =========== ===========
Average shares outstanding -- basic................... 17,582,900 22,180,112 22,307,476
Average shares outstanding -- diluted................. 19,222,831 22,693,016 22,748,595
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Net income............................................ $ 25,551 $ 72,188 $ 56,656
Foreign currency translation adjustment, net of
taxes............................................... 46 (71) (287)
----------- ----------- -----------
Comprehensive income.................................. $ 25,597 $ 72,117 $ 56,369
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
35
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Cash flow from operating activities:
Net income................................................ $ 25,551 $ 72,188 $ 56,656
Adjustments to reconcile net income to net cash flow from
operating activities:
Amortization of intangible assets......................... 17,417 22,229 26,409
Depreciation and other amortization....................... 2,707 3,901 4,611
Deferred income tax provision............................. 10,410 14,936 6,561
Changes in assets and liabilities:
Decrease (increase) in investment advisory fees
receivable.............................................. (38,053) (163,262) 182,241
Increase in other current assets.......................... (2,766) (1,260) (8,639)
Decrease (increase) in non-current other receivables...... -- (10,779) 5,064
Increase (decrease) in accounts payable, accrued expenses
and other liabilities................................... 22,489 116,518 (87,073)
Increase (decrease) in minority interest.................. 7,669 34,648 (32,119)
--------- --------- ---------
Cash flow from operating activities................... 45,424 89,119 153,711
--------- --------- ---------
Cash flow used in investing activities:
Purchase of fixed assets.................................. (4,313) (6,050) (6,235)
Costs of investments, net of cash acquired................ (66,577) (103,500) (104,438)
Distributions received from Affiliate equity investment... 675 550 428
Increase in other assets.................................. (750) (486) (699)
Loans to employees........................................ (1,700) (3,453) (786)
--------- --------- ---------
Cash flow used in investing activities................ (72,665) (112,939) (111,730)
--------- --------- ---------
Cash flow from (used in) financing activities:
Borrowings of senior bank debt............................ 78,800 155,800 193,500
Repayments of senior bank debt............................ (47,800) (171,800) (217,000)
Repayments of notes payable to related parties............ -- (22,000) --
Issuances of equity securities............................ (62) 101,536 8,412
Repurchase of stock....................................... (2,612) (9,322) (48,858)
Debt issuance costs....................................... (163) (179) (15)
--------- --------- ---------
Cash flow from (used in) financing activities......... 28,163 54,035 (63,961)
Effect of foreign exchange rate changes on cash flow........ 47 (71) (287)
Net increase (decrease) in cash and cash equivalents........ 969 30,144 (22,267)
Cash and cash equivalents at beginning of year.............. 22,766 23,735 53,879
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 23,735 $ 53,879 $ 31,612
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 11,780 $ 11,654 $ 17,025
Income taxes paid......................................... 3,358 20,576 52,415
Supplemental disclosure of non-cash financing activities:
Stock issued in acquisitions.............................. 30,992 -- --
Notes issued in acquisitions.............................. 22,000 -- --
Conversion of convertible stock to common stock........... -- 30,992 --
Common stock received for the exercise of stock options... -- -- 1,027
Capital lease obligations for fixed assets................ -- -- 816
The accompanying notes are an integral part of the consolidated financial
statements.
36
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL
PREFERRED COMMON CONVERTIBLE PREFERRED COMMON CONVERTIBLE PAID-IN RETAINED
SHARES SHARES SHARES STOCK STOCK STOCK CAPITAL EARNINGS
--------- ---------- ----------- --------- -------- ----------- ---------- --------
December 31, 1997........ -- 17,703,617 -- $ -- $177 $ -- $273,475 $(13,912)
Issuance of common
stock.................. -- -- -- -- -- -- (62) --
Issuance of convertible
stock.................. -- -- 1,750,942 -- -- 30,992 -- --
Purchase of common
stock.................. -- -- -- -- -- -- -- --
Net income............... -- -- -- -- -- -- -- 25,551
Other comprehensive
income................. -- -- -- -- -- -- -- 46
--- ---------- ---------- ---- ---- -------- -------- --------
December 31, 1998........ -- 17,703,617 1,750,942 -- 177 30,992 273,413 11,685
Issuance of common
stock.................. -- 4,000,938 -- -- 40 -- 101,496 --
Conversion of convertible
stock.................. -- 1,750,942 (1,750,942) -- 18 (30,992) 30,974 --
Purchase of common
stock.................. -- -- -- -- -- -- -- --
Net income............... -- -- -- -- -- -- -- 72,188
Other comprehensive
income................. -- -- -- -- -- -- -- (71)
--- ---------- ---------- ---- ---- -------- -------- --------
December 31, 1999........ -- 23,455,497 -- -- 235 -- 405,883 83,802
Issuance of common
stock.................. -- 63,547 -- -- -- -- 1,227 --
Purchase of common
stock.................. -- -- -- -- -- -- (53) --
Net income............... -- -- -- -- -- -- -- 56,656
Other comprehensive
income................. -- -- -- -- -- -- -- (287)
--- ---------- ---------- ---- ---- -------- -------- --------
December 31, 2000........ -- 23,519,044 -- $ -- $235 $ -- $407,057 $140,171
=== ========== ========== ==== ==== ======== ======== ========
TREASURY
TREASURY SHARES
SHARES AT COST
---------- --------
December 31, 1997........ -- $ --
Issuance of common
stock.................. -- --
Issuance of convertible
stock.................. -- --
Purchase of common
stock.................. (172,000) (2,612)
Net income............... -- --
Other comprehensive
income................. -- --
---------- --------
December 31, 1998........ (172,000) (2,612)
Issuance of common
stock.................. -- --
Conversion of convertible
stock.................. -- --
Purchase of common
stock.................. (346,900) (9,322)
Net income............... -- --
Other comprehensive
income................. -- --
---------- --------
December 31, 1999........ (518,900) (11,934)
Issuance of common
stock.................. 328,938 8,266
Purchase of common
stock.................. (1,287,401) (49,885)
Net income............... -- --
Other comprehensive
income................. -- --
---------- --------
December 31, 2000........ (1,477,363) $(53,553)
========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
37
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
The principal business activity of Affiliated Managers Group, Inc. ("AMG" or
the "Company") is to acquire and hold principally majority equity interests in
mid-sized investment management firms ("Affiliates"). AMG's Affiliates operate
in one industry segment, that of providing investment management services,
primarily in the United States and Europe, to mutual funds, partnerships and
institutional and individual clients.
Affiliates are either organized as limited partnerships, general
partnerships or limited liability companies. AMG has contractual arrangements
with each Affiliate (other than The Managers Funds LLC) whereby a percentage of
revenues is allocable to fund Affiliate operating expenses, including
compensation (the Operating Allocation), while the remaining portion of revenues
(the Owners' Allocation) is allocable to AMG and the other partners or members,
generally with a priority to AMG. Unlike all other Affiliates, Managers is not
subject to a revenue sharing arrangement since AMG owns substantially all of the
firm. As a result, the Company participates fully in any increase or decrease in
the revenues or expenses of Managers.
ACCOUNTING FOR INVESTMENTS
These consolidated financial statements include the accounts of AMG and each
Affiliate in which AMG has a controlling interest. In each such instance, AMG
is, directly or indirectly, the sole general partner (in the case of Affiliates
which are limited partnerships), sole managing general partner (in the case of
the Affiliate which is a general partnership) or sole manager member (in the
case of Affiliates which are limited liability companies). For Affiliate
operations consolidated into these financial statements, the portion of the
Owners' Allocation allocated to owners other than AMG is included in minority
interest in the Consolidated Statement of Operations. Minority interest on the
Consolidated Balance Sheet includes capital and undistributed Owners' Allocation
owned by the owners of consolidated Affiliates.
Investments where AMG or an Affiliate does not hold a controlling interest
are currently accounted for under the equity method of accounting and AMG's
portion of net income is included in investment and other income. In the future,
new investments may be accounted for under the cost method if AMG or the
Affiliate owns less than a 20% interest and does not exercise significant
influence. Under the cost method, AMG's portion of net income is not included in
the Consolidated Statement of Operations and dividends are recorded when, and
if, declared. However, charges are recognized in the Consolidated Statement of
Operations if events or circumstances indicate a permanent impairment of the
carrying value.
All material intercompany balances and transactions have been eliminated.
All dollar amounts except per share data in the text and tables herein are
stated in thousands unless otherwise indicated. Certain reclassifications have
been made to prior years' financial statements to conform with the current
year's presentation.
SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standards (FAS)
131, "Disclosures about Segments of an Enterprise and Related Information."
FAS 131 superseded FAS 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the
38
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
FAS 131 also requires disclosures about products and services, geographic areas,
and major customers. The adoption of FAS 131 did not affect results of
operations or financial position (see Note 15).
REVENUE RECOGNITION
The Company's consolidated revenues represent advisory fees billed monthly,
quarterly and annually by Affiliates for managing the assets of clients.
Asset-based advisory fees are recognized monthly as services are rendered and
are based upon a percentage of the market value of client assets managed. Any
fees collected in advance are deferred and recognized as income over the period
earned. Performance-based advisory fees are recognized when earned based upon
either the positive difference between the investment returns on a client's
portfolio compared to a benchmark index or indices, or an absolute percentage of
gain in the client's account.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value due to the short-term maturity of these
investments.
FIXED ASSETS
Equipment and other fixed assets are recorded at cost and depreciated using
the straight-line method over their estimated useful lives ranging from three to
five years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease.
ACQUIRED CLIENT RELATIONSHIPS AND GOODWILL
The purchase price for the acquisition of interests in Affiliates is
allocated based on the fair value of assets acquired, primarily acquired client
relationships. In determining the allocation of purchase price to acquired
client relationships, the Company analyzes the net present value of each
acquired Affiliate's existing client relationships based on a number of factors
including: the Affiliate's historical and potential future operating
performance; the Affiliate's historical and potential future rates of attrition
among existing clients; the stability and longevity of existing client
relationships; the Affiliate'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 Affiliate's management team and the Affiliate's
history and perceived franchise or brand value. The cost assigned to acquired
client relationships is amortized using the straight-line method over periods
ranging from seven to 28 years. The expected useful lives of acquired client
relationships are analyzed separately for each acquired Affiliate and determined
based on an analysis of the historical and potential future attrition rates of
each Affiliate's existing clients, as well as a consideration of the specific
attributes of the business of each Affiliate.
The excess of purchase price for the acquisition of interests in Affiliates
over the fair value of net assets acquired, including acquired client
relationships, is classified as goodwill. Goodwill is amortized using the
straight-line method over periods ranging from 15 to 35 years. In determining
the amortization period for goodwill, the Company considers a number of factors
including: the firm's
39
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
historical and potential future operating performance; the characteristics of
the firm's clients, products and investment styles; as well as the firm's
history and perceived franchise or brand value.
Unamortized intangible assets, including acquired client relationships and
goodwill, are periodically re-evaluated and if experience subsequent to the
acquisition indicates that there has been an impairment in value, other than
temporary fluctuations, an impairment loss is recognized. Management evaluates
the recoverability of unamortized intangible assets quarterly for each
acquisition using estimates of undiscounted cash flows factoring in known or
expected trends, future prospects and other relevant information. If impairment
is indicated, the Company measures its loss as the excess of the carrying value
of the intangible assets for each Affiliate over its fair value determined using
valuation models such as discounted cash flows and market comparables. Fair
value in such cases was determined using market comparables based on revenues,
cash flow and assets under management. No impairment loss was recorded for any
of the three years ended December 31, 2000.
As further described in Note 9, the Company periodically purchases
additional equity interests in Affiliates from minority interest owners.
Resulting payments made to such owners are generally considered purchase price
for such acquired interests. The estimated cost of purchases from equity holders
who have been awarded equity interests in connection with their employment is
accrued, net of estimated forfeitures, over the service period as equity-based
compensation.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in securing credit facility financing are
capitalized and subsequently amortized over the term of the credit facility
using the effective interest method.
INTEREST RATE HEDGING AGREEMENTS
The Company periodically enters into interest rate hedging agreements to
hedge against potential increases in interest rates on the Company's outstanding
borrowings. The Company's policy is to accrue amounts receivable or payable
under such agreements as reductions or increases in interest expense,
respectively.
INCOME TAXES
In accordance with FAS 109, the Company recognizes deferred tax assets and
liabilities for the expected consequences of temporary differences between the
financial statement basis and tax basis of the Company's assets and liabilities.
A deferred tax valuation allowance is established if, in management's opinion,
it is more likely than not that all or a portion of the Company's deferred tax
assets will not be realized.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of non-U.S. based Affiliates are translated into
U.S. dollars at the exchange rates in effect as of the balance sheet date.
Revenues and expenses are translated at the average monthly exchange rates then
in effect.
40
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUITY-BASED COMPENSATION PLANS
FAS 123, "Accounting for Stock-Based Compensation," encourages but does not
require adoption of a fair value-based accounting method for stock-based
compensation arrangements which include stock option grants and grants of equity
based interests in Affiliates to certain limited partners or members. An entity
may continue to apply Accounting Principles Board Opinion No. 25 ("APB 25") and
related interpretations, provided the entity discloses its pro forma net income
and earnings per share as if the fair-value based method had been applied in
measuring compensation cost. The Company continues to apply APB 25 and related
interpretations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts included in the financial
statements and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities" for derivative instruments which requires
that all derivatives be recognized as assets and liabilities and be measured at
fair value. In June 1999, FAS 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of Effective Date of FASB Statement No. 133--an
amendment to FASB Statement 133" deferred the effective date of FAS 133 to
financial statements for fiscal years beginning after June 15, 2000. The Company
adopted this standard on January 1, 2001, and the adoption did not materially
impact its consolidated financial statements.
2. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
investment advisory fees receivable. The Company maintains cash and cash
equivalents, short-term investments and certain off-balance sheet financial
instruments with various financial institutions. These financial institutions
are located in cities in which AMG and its Affiliates operate. For AMG and
certain Affiliates, cash deposits at a financial institution may exceed FDIC
insurance limits.
41
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FIXED ASSETS AND LEASE COMMITMENTS
Fixed assets consist of the following:
AT DECEMBER 31,
-------------------
1999 2000
-------- --------
Office equipment.......................................... $10,735 $12,910
Furniture and fixtures.................................... 7,804 8,128
Leasehold improvements.................................... 3,872 6,091
Computer software......................................... 2,169 3,699
------- -------
Total fixed assets...................................... 24,580 30,828
------- -------
Accumulated depreciation.................................. (12,259) (15,482)
------- -------
Fixed assets, net....................................... $12,321 $15,346
======= =======
The Company and its Affiliates lease computer equipment and office space for
their operations. At December 31, 2000, the Company's aggregate future minimum
payments for operating leases having initial or noncancelable lease terms
greater than one year are payable as follows:
REQUIRED MINIMUM
YEAR ENDING DECEMBER 31, PAYMENTS
- ------------------------ ----------------
2001........................................................ $7,506
2002........................................................ 7,045
2003........................................................ 6,152
2004........................................................ 4,878
2005........................................................ 3,456
Thereafter.................................................. 9,783
Consolidated rent expense for 1998, 1999 and 2000 was $6,278, $8,906 and
$10,327, respectively.
In 2000, the Company purchased property in Pride's Crossing, Massachusetts
in contemplation of the development of its new corporate headquarters. In
connection with the development of the site and the financing of development
costs, the Company subsequently transferred the property to an entity held
jointly with the financing underwriter. The Company has since entered into a
lease agreement with a third party lessor, who has agreed to build the property,
arrange financing for the project's costs and lease the completed facility back
to the Company. The construction phase is expected to continue through the end
of the third quarter of 2001. Lease payments will commence once the construction
is complete.
42
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
AT DECEMBER 31,
-------------------
1999 2000
-------- --------
Accounts payable......................................... $ 2,538 $ 1,309
Accrued compensation..................................... 126,461 62,992
Accrued income taxes..................................... 24,964 2,683
Accrued rent............................................. 2,196 2,001
Accrued interest......................................... 1,731 369
Deferred revenue......................................... 1,774 1,633
Accrued professional services............................ 1,291 1,241
Other.................................................... 9,344 14,572
-------- -------
$170,299 $86,800
======== =======
5. BENEFIT PLANS
The Company has two defined contribution plans consisting of a qualified
employee profit-sharing plan covering substantially all of its full-time
employees and five of its Affiliates, and a non-qualified plan for certain
senior employees. Ten of AMG's other Affiliates have separate defined
contribution retirement plans. Under each of the qualified plans, AMG and each
Affiliate are able to make discretionary contributions to qualified plan
participants up to IRS limits. Consolidated expenses related to both the
qualified and non-qualified plans in 1998, 1999 and 2000 were $2,589, $8,728 and
$10,759, respectively.
The Company's contribution to the non-qualified plan (the "Plan") was $5,000
and $6,225 for the years ended December 31, 1999 and 2000, respectively. Plan
balances are invested equally between the Company's Common Stock and Affiliate
investment products. These irrevocable contributions were expensed when
contributed and will be distributable to each participant beginning in 2001,
with full vesting occurring in 2004. Realized gains on undistributed balances
are paid currently to participants. Plan balances that become forfeited upon
employee termination are reallocated to the remaining participants in accordance
with the terms of the Plan.
6. SENIOR BANK DEBT AND SUBORDINATED DEBT
The Company has a $330 million revolving Credit Facility ("Credit
Facility"), which matures in December 2002. The Company has the option, with the
consent of its lenders, to increase the facility by another $70 million to a
total of $400 million. Interest is payable at rates up to 1.25% over the Prime
Rate or up to 2.25% over LIBOR on amounts borrowed. The Company pays a
commitment fee of up to 1/2 of 1% on the daily unused portion of the facility,
which amounted to $341, $297 and $252 for the years ended December 31, 1998,
1999 and 2000, respectively. The Company had $151 million outstanding on the
Credit Facility at December 31, 2000.
The effective interest rates on the outstanding borrowings were 6.7% and
7.2% at December 31, 1999 and 2000, respectively. All borrowings under the
Credit Facility are collateralized by pledges of all capital stock or other
equity interests in each AMG Affiliate owned and to be acquired. The credit
agreement contains certain financial covenants which require the Company to
maintain specified
43
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SENIOR BANK DEBT AND SUBORDINATED DEBT (CONTINUED)
minimum levels of net worth and interest coverage ratios and maximum levels of
indebtedness, all as defined in the credit agreement. The credit agreement also
limits the Company's ability to pay dividends and incur additional indebtedness.
As of December 31, 2000, the Company was a party, with two major commercial
banks as counterparties, to $185 million notional amount of derivative
contracts. These contracts were closed in January 2001 in conjunction with the
adoption of FAS 133.
During February 2001, the Company became a party with two major commercial
banks as counterparties, to $50 million notional amount of swap contracts that
are linked to the three-month LIBOR. Under these swaps, the Company has agreed
to exchange the difference between fixed-rate and floating rate interest amounts
calculated by reference to the $50 million notional amount. These contracts cap
interest rates on the notional amounts at rates ranging between 4.95% and 5.14%.
Two of the Company's Affiliates also operate as broker-dealers and must
maintain specified minimum amounts of "net capital" as defined in SEC
Rule 15c3-1. In connection with this requirement, one Affiliate has $800 of
subordinated indebtedness, which qualifies as net capital under the net capital
rule, while the second Affiliate maintains no such indebtedness. The
subordinated indebtedness is subordinated to claims of general creditors and is
secured by notes and marketable securities of certain of this Affiliate's
members other than AMG.
7. INCOME TAXES
A summary of the provision for income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Federal:
Current................................................ $ -- $35,658 $27,854
Deferred............................................... 10,238 12,762 5,606
State:
Current................................................ 6,624 6,125 4,537
Deferred............................................... 172 2,174 955
------- ------- -------
Provision for income taxes............................... $17,034 $56,719 $38,952
======= ======= =======
The effective income tax rate differs from the amount computed on income
before income taxes by applying the U.S. federal income tax rate because of the
effect of the following items:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Tax at U.S. federal income tax rate.................... 35% 35% 35%
Nondeductible expenses................................. 2 3 2
State income taxes, net of federal benefit............. 5 7 4
Valuation allowance.................................... (2) (1) --
------- ------- -------
40% 44% 41%
======= ======= =======
44
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Deferred assets (liabilities):
State net operating loss carryforwards................ $ 1,326 $ 1,281
Intangible amortization............................... (26,770) (35,089)
Deferred compensation................................. -- 1,934
Accruals.............................................. 1,271 1,248
-------- --------
(24,173) (30,626)
-------- --------
Valuation allowance..................................... (1,173) (1,281)
-------- --------
Net deferred income taxes............................... $(25,346) $(31,907)
======== ========
At December 31, 2000, the Company had state net operating loss carryforwards
of $31,741 which expire over a period of 15 years beginning in the year 2001.
The realization of these carryforwards is dependent on generating sufficient
taxable income prior to their expiration. The valuation allowance at
December 31, 1999 and 2000 is related to the uncertainty of the realization of
these loss carryforwards.
8. COMMITMENTS AND CONTINGENCIES
The Company and its Affiliates are subject to claims, legal proceedings and
other contingencies in the ordinary course of their business activities. Each of
these matters is subject to various uncertainties, and it is possible that some
of these matters may be resolved unfavorably to the Company or its Affiliates.
The Company and its Affiliates establish accruals for matters that are probable
and can be reasonably estimated. Management believes that any liability in
excess of these accruals upon the ultimate resolution of these matters will not
have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
45
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS
2000
On January 18, 2000, the Company acquired an equity interest in Frontier
Capital Management Company, LLC, a Boston-based investment manager. AMG financed
this investment with a borrowing under its credit facility. The results of
Frontier's operations are included in the consolidated results of operations of
the Company from its date of acquisition, January 18, 2000.
1999
On January 6, 1999, the Company acquired an equity interest in Rorer Asset
Management, LLC, a Philadelphia-based investment advisor. On April 1, 1999, the
Company acquired substantially all of the equity interests in The Managers Funds
LLC, which then served as the adviser to a family of equity and fixed income
no-load mutual funds. AMG financed these two investments with borrowings under
its credit facility.
The results of operations of Rorer and Managers are included in the
consolidated results of operations of the Company from their respective dates of
acquisition, January 6, 1999 and April 1, 1999.
1998
On March 20, 1998, the Company acquired an equity interest in Essex
Investment Management Company, LLC. Essex is a Boston-based manager which
specializes in investing in growth equities, using a fundamental research driven
approach. AMG financed this investment through borrowings under its credit
facility and through issuance of shares of its Series C Convertible Non-Voting
Stock, for an equity interest in Essex. The Series C Stock is non-voting stock
and carries no preferences with respect to dividends or liquidation. Each share
of Series C Stock converted into one share of Common Stock on March 20, 1999.
On December 31, 1998, AMG acquired an equity interest in Davis Hamilton.
Davis Hamilton is a Houston-based asset management firm with approximately
$3.5 billion of assets under management at December 31, 1998. The Company issued
notes to close the transaction which were settled on January 4, 1999. AMG
financed these two investments with borrowings under its credit facility.
The results of operations of Essex and Davis Hamilton are included in the
consolidated results of operations of the Company from their respective dates of
acquisition, March 20, 1998 and December 31, 1998.
46
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS (CONTINUED)
PURCHASE PRICE OF INVESTMENTS
The total purchase price, including cash, notes, common stock and
capitalized transaction costs, associated with these investments is allocated as
follows:
DECEMBER 31,
--------------------------------
1998 1999 2000
-------- ---------- --------
Allocation of Purchase Price:
Tangible equity, net of cash acquired............. $ 3,776 $ 340 $ 6,439
Intangible assets................................. 115,793 103,160 97,999
-------- -------- --------
Total purchase price.......................... $119,569 $103,500 $104,438
======== ======== ========
Unaudited pro forma data for the years ended December 31, 1999 and 2000 are
set forth below, giving consideration to the acquisitions occurring in the
respective two-year period as if such transactions occurred as of the beginning
of 1999, assuming revenue sharing arrangements had been in effect for the entire
period and after making certain other pro forma adjustments.
YEAR ENDED DECEMBER 31,
-------------------------
1999 2000
--------- ---------
Revenues............................................. $550,139 $459,816
Net income........................................... 75,465 57,654
Earnings per share -- basic.......................... $ 3.40 $ 2.58
Earnings per share -- diluted........................ 3.33 2.53
In conjunction with certain acquisitions, the Company has entered into
agreements and is contingently liable, upon achievement of specified revenue
targets over a five-year period, to make additional purchase payments of up to
$25 million plus interest as applicable. These contingent payments, if achieved,
will be settled for cash with most coming due beginning January 1, 2002 and will
be accounted for as an adjustment to the purchase price of the Affiliate. In
addition, subject to achievement of performance goals, certain key Affiliate
employees have options to receive additional equity interests in their
Affiliates.
As part of all of the Company's operating agreements (except that of
Paradigm Asset Management Company, L.L.C.) Affiliate management owners have
rights ("Puts"), which require the Company to purchase their retained equity
interests at staged intervals. The Company is also obligated to purchase all
remaining management owners' interests (each, a "Purchase," and collectively,
the "Purchases") in Affiliates upon death, disability or termination of
employment. All of the Puts and Purchases would take place based on a multiple
of the respective Affiliate's Owners' Allocation but using reduced multiples for
terminations for cause or for voluntary terminations occurring prior to agreed
upon dates, all as defined in the general partnership, limited partnership or
limited liability company agreements of the Affiliates. In addition, to ensure
the availability of continued ownership participation to future key employees,
the Company has options to repurchase ("Calls") certain retained equity
interests in Affiliates owned by partners or members.
The Company's contingent obligations under the Put and Purchase arrangements
at December 31, 2000 ranged from $93 million if it is assumed that all such
obligations occur due to early resignations
47
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS (CONTINUED)
or terminations for cause, to $485 million if it is assumed that all such
obligations occur due to death, disability or terminations without cause.
Assuming the closing of all such Put and Purchase transactions, AMG would own
the prospective Owners' Allocation of all interests owned by Affiliate
management described above, an amount which totaled approximately $65.3 million
in the year ended December 31, 2000.
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred Stock
in classes or series and to fix the designations, powers, preferences and the
relative, participating, optional or other special rights of the shares of each
series and any qualifications, limitations and restrictions thereon as set forth
in the Certificate. Any such Preferred Stock issued by the Company may rank
prior to the Common Stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
Common Stock.
COMMON STOCK
The Company has 80,000,000 authorized shares of Common Stock with a par
value of $0.01 per share. Shares issued and outstanding at December 31, 1999 and
2000, were 22,936,597 and 22,041,681, respectively.
On March 3, 1999, the Company completed a public offering of 5,529,954
shares of Common Stock, of which 4,000,000 shares were sold by the Company and
1,529,954 shares were sold by selling stockholders. AMG used the net proceeds
from the offering to reduce indebtedness and did not receive any proceeds from
the sale of Common Stock by the selling stockholders.
On April 20, 2000, the Company announced that its Board of Directors had
authorized a share repurchase program pursuant to which AMG can repurchase up to
five percent of its issued and outstanding shares of Common Stock in open market
transactions, 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. In the year ended December 31,
2000, the Company repurchased 1,261,800 shares of Common Stock at an average
price of $38.68. In the year ended December 31, 1999, AMG had repurchased
346,900 shares of Common Stock at an average price of $26.83.
STOCK INCENTIVE PLANS
The Company has established the 1997 Stock Option and Incentive Plan, under
which it is authorized to grant stock options and to grant or sell shares of
restricted stock to employees and directors. In 1999, stockholders approved an
amendment to increase to 3,250,000 the shares available to be issued under this
plan.
The plans are administered by a committee of the Board of Directors. The
exercise price of stock options is the fair market value of the Common Stock on
the date of grant. The stock options generally vest over periods ranging up to
four years and expire ten years after the grant date. In connection with the
Company's initial public offering in 1997, the Company granted stock options
which were
48
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
exercisable over seven years, subject to acceleration if the Company achieved
certain financial goals. These options became fully vested on December 31, 1999
when the Company achieved these goals.
The following table summarizes the transactions of the Company's stock
option plans for the two-year period ended December 31, 2000.
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Unexercised options outstanding--
December 31, 1998................................ 1,171,750 $26.34
Options granted.................................... 845,000 28.86
Options exercised.................................. (938) 21.65
Options forfeited.................................. (562) 14.25
--------- ------
Unexercised options outstanding --
December 31, 1999................................ 2,015,250 $27.40
Options granted.................................... 869,000 49.86
Options exercised.................................. (324,225) 21.46
Options forfeited.................................. (100,875) 29.80
--------- ------
Unexercised options outstanding --
December 31, 2000................................ 2,459,150 $36.02
--------- ------
Exercisable options --
December 31, 1999................................ 887,750 $24.62
December 31, 2000................................ 1,011,460 $30.84
The following table summarizes information about the Company's stock options
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED AVG.
NUMBER REMAINING NUMBER
RANGE OF EXERCISE OUTSTANDING AS OF CONTRACTUAL LIFE WEIGHTED AVG. EXERCISABLE AS OF WEIGHTED AVG.
PRICES 12/31/00 (YEARS) EXERCISE PRICE 12/31/00 EXERCISE PRICE
- --------------------- ----------------- ---------------- -------------- ----------------- --------------
$10-20............... 2,950 7.8 $14.25 1,825 $14.25
20-30............... 1,291,700 8.0 27.09 662,075 25.56
30-40............... 335,500 7.5 34.69 222,560 34.64
40-50............... 409,000 10.0 47.94 20,000 47.94
50-60............... 420,000 9.6 53.13 105,000 53.13
--------- ---- ------ --------- ------
2,459,150 8.6 $36.02 1,011,460 $30.84
--------- ---- ------ --------- ------
SUPPLEMENTAL DISCLOSURE FOR EQUITY-BASED COMPENSATION
The Company continues to apply APB 25 and related interpretations in
accounting for its sales of Restricted Stock, grants of stock options and
equity-based interests in Affiliates. FAS 123 defines a fair value method of
accounting for the above arrangements whose impact requires disclosure. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the
49
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
award and is recognized over the expected service period. The required
disclosures under FAS 123 as if the Company had applied the new method of
accounting are made below.
Had compensation costs for the Company's equity-based compensation
arrangements been determined based on the fair value at grant date for awards
consistent with the requirements of FAS 123, the Company's net income and net
income per share would have been as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net income -- as reported................................ $25,551 $72,188 $56,656
Net income -- FAS 123 pro forma.......................... 24,408 68,463 48,962
Net income per share -- basic -- as reported............. 1.45 3.25 2.54
Net income per share -- basic -- FAS 123 pro forma....... 1.39 3.09 2.19
Net income per share -- diluted -- as reported........... 1.33 3.18 2.49
Net income per share -- diluted -- FAS 123 pro forma..... 1.27 3.02 2.15
The weighted average fair value of options granted in the years ended
December 31, 1998, 1999 and 2000 were estimated at $14.24, $15.62 and $26.11 per
option, respectively, using the Black-Scholes option pricing model. The
following weighted average assumptions were used for the option valuations.
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
-------- -------- --------
Dividend yield............................................. 0% 0% 0%
Stock price volatility..................................... 60.0% 50.8% 53.3%
Risk-free interest rate.................................... 5.38% 5.49% 5.72%
Expected life of options (in years)........................ 7.0 8.4 7.2
11. EARNINGS PER SHARE
The calculation for basic earnings per share is based on the weighted
average of common shares outstanding during the period. The following is a
reconciliation of the numerators and denominators of
50
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE (CONTINUED)
the basic and diluted earnings per share computations. Unlike all other dollar
amounts in these footnotes, net income in this table is not presented in
thousands.
1998 1999 2000
----------- ----------- -----------
Numerator:
Net Income.......................................... $25,551,000 $72,188,000 $56,656,000
=========== =========== ===========
Denominator:
Average shares outstanding -- basic................. 17,582,900 22,180,112 22,307,476
Incremental shares for convertible preferred
stock............................................. 1,376,768 374,174 --
Incremental shares for stock options and unvested
restricted stock.................................. 263,163 138,730 441,119
----------- ----------- -----------
Average shares outstanding -- diluted........... 19,222,831 22,693,016 22,748,595
=========== =========== ===========
Earnings per share:
Basic............................................... $ 1.45 $ 3.25 $ 2.54
Diluted............................................. $ 1.33 $ 3.18 $ 2.49
In March 1998, the Company issued 1,750,942 shares of Series C Convertible
Stock in completing its investment in Essex Investment Management Company, LLC.
Each share converted into one share of Common Stock in March 1999. In
March 1999, the Company sold 4,000,000 shares of Common Stock in a public
offering.
On May 25, 2000, the Company's shareholders approved an increase in the
number of authorized shares of voting Common Stock from 40,000,000 to
80,000,000.
For the years ended December 31, 1998, 1999 and 2000, the Company
repurchased a total of 147,000, 346,900 and 1,261,800 shares of Common Stock
under various stock repurchase programs.
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to market risks brought on by changes in interest
rates. Derivative financial instruments are used by the Company to reduce those
risks, as explained in this note.
(A) NOTIONAL AMOUNTS AND CREDIT EXPOSURES OF DERIVATIVES
The notional amount of derivatives do not represent amounts that are
exchanged by the parties, and thus are not a measure of the Company's exposure.
The amounts exchanged are calculated on the basis of the notional or contract
amounts, as well as on other terms of the interest rate swap derivatives, and
the volatility of these rates and prices.
The Company would be exposed to credit-related losses in the event of
nonperformance by the counterparties that issued the financial instruments. The
Company does not expect that the counterparties to interest rate swaps will fail
to meet their obligations, given their high credit ratings. The credit exposure
of derivative contracts is represented by the positive fair value of contracts
at the reporting date, reduced by the effects of master netting agreements. The
Company generally does not give or receive collateral on interest rate swaps due
to its own credit rating and that of its counterparties.
51
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
(B) INTEREST RATE RISK MANAGEMENT
The Company enters into interest rate swaps to reduce exposure to interest
rate risk connected to existing liabilities. The Company does not hold or issue
derivative financial instruments for trading purposes. Interest rate swaps allow
the Company to achieve a level of variable-rate and fixed-rate debt that is
acceptable to management, and to cap interest rate exposure. The Company agrees
with another party to exchange the difference between fixed-rate and floating
rate interest amounts calculated by reference to an agreed notional principal
amount.
(C) FAIR VALUE
FAS 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the estimated fair values for certain of its financial
instruments. Financial instruments include items such as loans, interest rate
contracts, notes payable and other items as defined in FAS 107.
Fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
Quoted market prices are used when available, otherwise, management
estimates fair value based on prices of financial instruments with similar
characteristics or using valuation techniques such as discounted cash flow
models. Valuation techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates. Changes in
these assumptions will result in different valuation estimates. The fair value
presented would not necessarily be realized in an immediate sale; nor are there
plans to settle liabilities prior to contractual maturity. Additionally,
FAS 107 allows companies to use a wide range of valuation techniques; therefore,
it may be difficult to compare the Company's fair value information to other
companies' fair value information.
The carrying amount of cash and cash equivalents approximates fair value
because of the short-term nature of these instruments. The carrying value of
notes receivable approximate fair value because interest rates and other terms
are at market rates. The carrying value of notes payable approximates fair value
principally because of the short-term nature of the note. The carrying value of
senior bank debt approximates fair value because the debt is a revolving credit
facility with variable interest based on three-month LIBOR rates. The fair
values of interest rate hedging agreements are quoted market prices based on the
estimated amount necessary to terminate the agreements. The fair market values
of interest rate hedging agreements were $1,218 and ($1,105) at December 31,
1999 and 2000.
52
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
of the Company for 1999 and 2000.
1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenues............................................ $ 68,127 $ 78,577 $ 85,395 $286,627
Operating income.................................... 25,847 30,238 32,254 124,320
Income before income taxes.......................... 12,786 16,127 17,722 82,272
Net income.......................................... 7,544 9,515 10,456 44,673
Earnings per share -- diluted....................... $ 0.36 $ 0.41 $ 0.45 $ 1.92
2000
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenues............................................ $114,798 $110,895 $118,205 $114,810
Operating income.................................... 43,935 41,980 43,841 44,679
Income before income taxes.......................... 23,415 23,180 24,369 24,644
Net income.......................................... 13,815 13,677 14,378 14,786
Earnings per share -- diluted....................... $ 0.60 $ 0.61 $ 0.64 $ 0.65
During the fourth quarter of 2000, the Company experienced decreases in
revenues, operating income and income before income taxes from the same period
in 1999 due to a substantial decrease in performance-based fees earned by
several Affiliates. These fees are earned by the Affiliates when their
performance exceeds certain measurements set forth in the advisory agreements
with their clients. The substantial decrease was offset somewhat by the growth
in asset-based fees resulting from positive net client cash flows.
14. RELATED PARTY TRANSACTIONS
During 1998, the Company initiated an employee loan program. Loans to
employees accrue interest at the lower of 6.25% or the Applicable Federal Rate,
have a stated 30-year maturity date and are collateralized by real property.
Outstanding balances are payable in full generally one year after termination of
employment with the Company. At December 31, 1999 and 2000, loans outstanding,
including accrued interest, totaled $5.4 million and $5.9 million, respectively.
15. SEGMENT INFORMATION
The Company and its Affiliates provide investment advisory services to
mutual funds and individual and institutional accounts. The Company's revenues
are generated substantially from providing these investment advisory services to
domestic customers.
The Affiliates are all managed by separate Affiliate management teams in
accordance with the respective agreements between the Company and each
Affiliate. While the Company has determined that each of its Affiliates
represents a separate reportable operating segment, because the Affiliates offer
comparable investment products and services, have similar customers and
distribution channels
53
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION (CONTINUED)
and operate in a similar regulatory environment, the Affiliates have been
aggregated into one reportable segment for financial statement disclosure
purposes.
16. EVENTS SUBSEQUENT TO DECEMBER 31, 2000 (UNAUDITED)
As of March 23, 2001, AMG had repurchased 14,000 shares of Common Stock
since December 31, 2000 at an average price of $49.85.
54
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS
BEGINNING COSTS AND AND BALANCE END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
--------- ----------- ---------- -----------
(IN THOUSANDS)
Income Tax Valuation Allowance
Year Ended December 31,
2000....................................... $1,173 $108 $ -- $1,281
1999....................................... 1,404 1 (231) 1,173
1998....................................... 1,989 -- (585) 1,404
55
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Affiliated Managers Group, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 28, 2001 of Affiliated Managers Group, Inc. (which report and
consolidated financial statements are included in this Annual Report on
Form 10-K) also included an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2001
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information in Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive Proxy Statement, which will be filed not
later than 120 days after the end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON 8-K
(a) (1) Financial Statements: See Item 8
(2) Financial Statement Schedules: See Item 8
(3) Exhibits
2.1 Purchase Agreement dated August 15, 1997 by and among the
Registrant, Tweedy, Browne Company L.P. and the partners of
Tweedy, Browne Company L.P. (excluding schedules and
exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
2.2 Agreement and Plan of Reorganization dated August 15, 1997
by and among the Registrant, AMG Merger Sub, Inc.,
GeoCapital Corporation, GeoCapital, LLC and the stockholders
of GeoCapital Corporation (excluding schedules and exhibits,
which the Registrant agrees to furnish supplementally to the
Commission upon request) (2)
2.3 Stock Purchase Agreement dated as of January 17, 1996 by and
among the Registrant, First Quadrant Holdings, Inc., Talegen
Holdings, Inc., certain employees of First Quadrant Corp.
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (2)
2.4 Amendment to Stock Purchase Agreement by and among the
Registrant, First Quadrant Holdings, Inc., Talegen Holdings,
Inc., certain managers of First Quadrant Corp. and the
Management Corporations identified therein, effective as of
March 28, 1996 (2)
2.5 Partnership Interest Purchase Agreement dated as of June 6,
1995 by and among the Registrant, Mesirow Asset Management,
Inc., Mesirow Financial Holdings, Inc., Skyline Asset
Management, L.P., certain managers of Mesirow Asset
Management, Inc. and the Management Corporations identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request) (2)
2.6 Amendment, made by and among Mesirow Financial Holdings,
Inc. and the Registrant, to Partnership Interest Purchase
Agreement by and among the Registrant, Mesirow Asset
Management, Inc., Mesirow Financial Holdings, Inc., Skyline
Asset Management, L.P., certain managers of Mesirow Asset
Management, Inc. and the Management Corporations identified
therein, effective as of August 30, 1995 (2)
2.7 Agreement and Plan of Reorganization dated January 15, 1998
by and among the Registrant, Constitution Merger Sub, Inc.,
Essex Investment Management Company, Inc. and certain of the
stockholders of Essex Investment Management Company, Inc.
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request)(3)
57
2.8 Amendment to Agreement and Plan of Reorganization dated
March 19, 1998 by and among the Registrant, Constitution
Merger Sub, Inc., Essex Investment Management Company, Inc.
and certain of the stockholders of Essex Investment
Management Company, Inc. (excluding schedules and exhibits,
which the Registrant agrees to furnish supplementally to the
Commission upon request) (3)
2.9 Stock Purchase Agreement dated November 9, 1998 by and among
the Registrant, Edward C. Rorer & Co., Inc. and the
stockholders of Edward C. Rorer & Co., Inc. (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (4)
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amended and Restated By-laws (2)
3.3 Certificate of Designations, Preferences and Rights of a
Series of Stock (5)
4.1 Specimen certificate for shares of Common Stock of the
Registrant (2)
4.2 Credit Agreement dated as of December 22, 1997 by and among
Chase Manhattan Bank, Nations Bank N.A. and the other
lenders identified therein and the Registrant (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (3)
4.3 Stock Purchase Agreement dated November 7, 1995 by and among
the Registrant, TA Associates, NationsBank, The Hartford,
and the additional parties listed on the signature pages
thereto (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request) (2)
4.4 Preferred Stock and Warrant Purchase Agreement dated August
15, 1997 between the Registrant and Chase Equity Associates
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request) (2)
4.5 Amendment No. 1 to Preferred Stock and Warrant Purchase
Agreement dated as of October 9, 1997 between the Registrant
and Chase Equity Associates (2)
4.6 Securities Purchase Agreement dated August 15, 1997 between
the Registrant and Chase Equity Associates (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (2)
4.7 Securities Purchase Agreement Amendment No. 1 dated as of
October 9, 1997 between the Registrant and Chase Equity
Associates (2)
10.1 Amended and Restated Stockholders' Agreement dated October
9, 1997 by and among the Registrant and TA Associates,
NationsBank, The Hartford, Chase Capital and the additional
parties listed on the signature pages thereto (2)
10.2 Tweedy, Browne Company LLC Limited Liability Company
Agreement dated October 9, 1997 by and among the Registrant
and the other members identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (2)
10.3 GeoCapital, LLC Amended and Restated Limited Liability
Company Agreement dated September 30, 1997 by and among the
Registrant and the members identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (2)
58
10.4 First Quadrant, L.P. Amended and Restated Limited
Partnership Agreement dated March 28, 1996 by and among the
Registrant and the partners identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (2)
10.5 Amendment to First Quadrant, L.P. Amended and Restated
Limited Partnership Agreement by and among the Registrant
and the partners identified therein, effective as of October
1, 1996 (2)
10.6 Second Amendment to First Quadrant, L.P. Amended and
Restated Limited Partnership Agreement by and among the
Registrant and the partners identified therein, effective as
of December 31, 1996 (2)
10.7 First Quadrant U.K., L.P. Limited Partnership Agreement
dated March 28, 1996 by and among the Registrant and the
partners identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.8 Skyline Asset Management, L.P. Amended and Restated Limited
Partnership Agreement dated August 31, 1995 by and among the
Registrant and the partners identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (2)
10.9 Amendment to Skyline Asset Management, L.P. Amended and
Restated Limited Partnership Agreement by and among the
Registrant and the partners identified therein, effective as
of August 1, 1996 (2)
10.10 Second Amendment to Skyline Asset Management, L.P. Amended
and Restated Limited Partnership Agreement by and among the
Registrant and the partners identified therein, effective as
of December 31, 1996 (2)
10.11 Affiliated Managers Group, Inc. 1997 Stock Option and
Incentive Plan (2)
10.13 Affiliated Managers Group. Inc. 1995 Incentive Stock Plan
(2)
10.14 Form of Tweedy, Browne Employment Agreement (2)
10.15 Essex Investment Management Company, LLC Amended and
Restated Limited Liability Company Agreement dated March 20,
1998 by and among the Registrant and the members identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request) (3)
10.16 Form of Essex Employment Agreement (3)
10.17 Rorer Asset Management, LLC Amended and Restated Limited
Liability Company Agreement dated January 6, 1999 by and
among the Registrant and the members identified therein
(excluded schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request) (6)
10.18 Form of Rorer Employment Agreement (6)
10.19 Affiliated Managers Group, Inc. Amended and Restated 1997
Stock Option and Incentive Plan (7)
10.20 Affiliated Managers Group, Inc. Defined Contribution Plan
(8)
21.1 Schedule of Subsidiaries (1)
59
23.2 Consent of PricewaterhouseCoopers LLP (1)
- ------------------------
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 333-34679), filed August 29, 1997, as amended
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the three months ended September 30, 1998
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-71561), filed February 1, 1999, as amended
(6) Incorporated by reference to the Company's Current Report on Form 8-K filed
January 21, 1999
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1999
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999
(b) Reports on 8-K
We did not file any Reports on Form 8-K during the quarter ended
December 31, 2000.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
BY /S/ WILLIAM J. NUTT
-----------------------------------------
William J. Nutt
Chief Executive Officer and Chairman of
DATE: MARCH 29, 2001 the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Chief Executive Officer and
/s/ WILLIAM J. NUTT Chairman of the Board of
------------------------------------------- Directors (Principal March 29, 2001
(William J. Nutt) Executive Officer)
Senior Vice President, Chief
/s/ DARRELL W. CRATE Financial Officer and
------------------------------------------- Treasurer (Principal March 29, 2001
(Darrell W. Crate) Financial and Principal
Accounting Officer)
/s/ RICHARD E. FLOOR
------------------------------------------- Director March 29, 2001
(Richard E. Floor)
/s/ STEPHEN J. LOCKWOOD
------------------------------------------- Director March 29, 2001
(Stephen J. Lockwood)
/s/ HAROLD J. MEYERMAN
------------------------------------------- Director March 29, 2001
(Harold J. Meyerman)
/s/ RITA M. RODRIGUEZ
------------------------------------------- Director March 29, 2001
(Rita M. Rodriguez)
/s/ WILLIAM F. WELD
------------------------------------------- Director March 29, 2001
(William F. Weld)
61
EXHIBIT 21.1
LIST OF SUBSIDIARIES
(in alphabetical order)
WHOLLY OWNED SUBSIDIARIES OF THE REGISTRANT
AMG/Midwest Holdings, Inc., a Delaware corporation
AMG/Midwest Holdings, LLC, a Delaware limited liability company (through
AMG/Midwest Holdings, Inc. and AMG Service Corp.)
AMG New York Holdings Corp., a Delaware corporation
AMG Properties LLC, a Delaware limited liability company
AMG/SouthwestGP Holdings, Inc., a Delaware corporation
AMG/TBC Holdings, Inc., a Delaware corporation
AMG Service Corp., a Delaware corporation
AMG Finance Trust, a Massachusetts business trust (through AMG Service Corp.)
The Burridge Group Inc., an Illinois corporation
E.C. Rorer II, Inc., a Delaware corporation (through Edward C. Rorer &
Co., Inc.)
E.C. Rorer, L.P., a Delaware limited partnership (through E. C. Rorer II, Inc.
and Edward C. Rorer & Co., Inc.)
Edward C. Rorer & Co., Inc., a Delaware corporation
FCMC Holdings, Inc., a Delaware corporation
First Quadrant Corp., a New Jersey corporation (through First Quadrant
Holdings, Inc.)
First Quadrant Holdings, Inc., a Delaware corporation
GeoCapital Corporation, a Delaware corporation
J M H Management Corporation, a Delaware corporation
Prides Crossing Holdings LLC, a Delaware limited liability company
Suite 3000 Holdings, Inc., a Delaware corporation
TMF Corp., a Delaware corporation
ENTITIES IN WHICH THE REGISTRANT HAS A MAJORITY INTEREST (DIRECT AND INDIRECT)
Davis Hamilton Jackson & Associates, L.P., a Delaware limited partnership
(through AMG/SouthwestGP Holdings, Inc. and AMG/TBC Holdings, Inc.)
Essex Investment Management Company, LLC, a Delaware limited liability company
First Quadrant, L.P., a Delaware limited partnership (through First Quadrant
Corp.)
First Quadrant U.K., L.P., a Delaware limited partnership (through First
Quadrant Corp.)
First Quadrant Limited, a U.K. corporation (through First Quadrant U.K., L.P.)
Frontier Capital Management Company, LLC, a Delaware limited liability company
(through FCMC Holdings, Inc.)
GeoCapital, LLC, a Delaware limited liability company (through GeoCapital
Corporation)
LIST OF SUBSIDIARIES (CONTINUED)
(in alphabetical order)
Gofen and Glossberg, L.L.C., a Delaware limited liability company
Joint Venture Partners LLC, a Delaware limited liability company (through AMG
Properties LLC)
J.M. Hartwell Limited Partnership, a Delaware limited partnership (through J M H
Management Corporation and AMG New York Holdings Corp.)
Managers Distributors, Inc., a Delaware corporation (through The Managers Funds
LLC)
The Managers Funds LLC, a Delaware limited liability company (through TMF Corp.)
Renaissance Investment Management, a Delaware partnership
Rorer Asset Management, LLC, a Delaware limited liability company (through E.C.
Rorer, L.P.)
Skyline Asset Management, L.P., a Delaware limited partnership
Systematic Financial Management, L.P., a Delaware limited partnership
The Burridge Group LLC, a Delaware limited liability company (through The
Burridge Group Inc.)
Tweedy, Browne Company LLC, a Delaware limited liability company (through
AMG/TBC Holdings, Inc.)
ENTITIES IN WHICH THE REGISTRANT HAS A MINORITY INTEREST
Paradigm Asset Management Company, L.L.C., a Delaware limited liability company
(through AMG New York Holdings Corp.)
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Affiliated Managers Group, Inc. on Form S-3 (File No. 333-71561) and
Form S-8 (File No. 333-72967 and File No. 333-84485) of our reports dated
March 28, 2001, on our audits of the consolidated financial statements and
financial statement schedule of Affiliated Managers Group, Inc. as of
December 31, 1999 and 2000, and for the years ended December 31, 1998, 1999, and
2000, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2001
