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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)  

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to            to            

Commission File Number 001-13459

Affiliated Managers Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)		   04-3218510
(IRS Employer Identification Number)

600 Hale Street, Prides Crossing, Massachusetts 01965
(Address of principal executive offices)

(617) 747-3300
(Registrant's telephone number, including area code)

        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 ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes ý    No o

        There were 29,649,546 shares of the Registrant's common stock outstanding as of November 5, 2004.


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

(unaudited)

 
   December 31,
2003
   September 30,
2004
  
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 253,334   $ 314,867  
  Investment advisory fees receivable     65,288     89,004  
  Prepaid expenses and other current assets     20,861     18,951  
   
 
 
    Total current assets     339,483     422,822  
Fixed assets, net     36,886     40,884  
Acquired client relationships, net     364,429     373,893  
Goodwill     751,607     814,379  
Other assets     26,800     33,950  
   
 
 
    Total assets   $ 1,519,205   $ 1,685,928  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable and accrued liabilities   $ 89,707   $ 128,037  
  Notes payable to related party     11,744     9,305  
   
 
 
    Total current liabilities     101,451     137,342  
Senior bank debt     —     51,000  
Senior convertible debt     423,340     423,803  
Mandatory convertible securities     230,000     375,750  
Deferred income taxes     92,707     115,308  
Other long-term liabilities     16,144     24,952  
   
 
 
    Total liabilities     863,642     1,128,155  
Commitments and contingencies     —     —  
Minority interest     40,794     66,668  
Stockholders' equity:              
  Common stock     235     353  
  Additional paid-in capital     408,449     381,252  
  Accumulated other comprehensive income     944     1,689  
  Retained earnings     306,972     360,861  
   
 
 
      716,600     744,155  
  Less: treasury stock, at cost     (101,831 )   (253,050 )
   
 
 
    Total stockholders' equity     614,769     491,105  
   
 
 
    Total liabilities and stockholders' equity   $ 1,519,205   $ 1,685,928  
   
 
 

The accompanying notes are an integral part of the Consolidated Financial Statements.

2


AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2003
   2004
   2003
   2004
  
Revenue   $ 128,465   $ 165,846   $ 355,413   $ 476,042  
Operating expenses:                          
  Compensation and related expenses     47,054     61,296     126,578     176,178  
  Selling, general and administrative     21,447     28,440     61,843     77,086  
  Amortization of intangible assets     4,065     4,950     12,112     13,214  
  Depreciation and other amortization     1,560     1,587     4,684     4,746  
  Other operating expenses     3,741     5,176     11,519     12,349  
   
 
 
 
 
      77,867     101,449     216,736     283,573  
   
 
 
 
 
Operating income     50,598     64,397     138,677     192,469  
Non-operating (income) and expenses:                          
  Investment and other (income) loss     (3,334 )   1,387     (6,293 )   (2,195 )
  Interest expense     5,901     8,193     17,323     24,318  
   
 
 
 
 
      2,567     9,580     11,030     22,123  
   
 
 
 
 
Income before minority interest and taxes     48,031     54,817     127,647     170,346  
Minority interest     (20,243 )   (26,819 )   (55,158 )   (80,017 )
   
 
 
 
 
Income before income taxes     27,788     27,998     72,489     90,329  
Income taxes—current     3,372     3,240     7,114     13,413  
Income taxes—intangible-related deferred     5,950     6,441     17,849     18,684  
Income taxes—other deferred     2,071     1,518     4,311     4,343  
   
 
 
 
 
Net Income   $ 16,395   $ 16,799   $ 43,215   $ 53,889  
   
 
 
 
 

Earnings per share—basic(1)
 
$
0.51
 
$
0.57
 
$
1.36
 
$
1.82
 
Earnings per share—diluted(1)   $ 0.50   $ 0.55   $ 1.33   $ 1.74  

Average shares outstanding—basic(1)
 
 
31,843,368
 
 
29,353,068
 
 
31,831,957
 
 
29,551,383
 
Average shares outstanding—diluted(1)     32,951,832     30,570,211     32,572,684     30,991,442  

Supplemental disclosure of total comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income   $ 16,395   $ 16,799   $ 43,215   $ 53,889  
Other comprehensive income (loss)     392     (74 )   714     745  
   
 
 
 
 
Total comprehensive income   $ 16,787   $ 16,725   $ 43,929   $ 54,634  
   
 
 
 
 
(1)
Earnings per share and average shares outstanding reflect a three-for-two stock split that occurred in March 2004.

The accompanying notes are an integral part of the Consolidated Financial Statements.

3


AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2003
   2004
   2003
   2004
  
Cash flow from operating activities:                          
  Net Income   $ 16,395   $ 16,799   $ 43,215   $ 53,889  
Adjustments to reconcile Net Income to net cash flow from operating activities:                          
  Amortization of intangible assets     4,065     4,950     12,112     13,214  
  Amortization of debt issuance costs     958     1,020     2,414     2,852  
  Depreciation and amortization of fixed assets     1,560     1,587     4,684     4,746  
  Deferred income tax provision     8,021     7,959     22,160     23,027  
  Accretion of interest     154     344     559     825  
  Tax benefit from exercise of stock options     1,506     16     2,420     5,525  
  Other adjustments     —     2,493     (555 )   2,493  
Changes in assets and liabilities:                          
  Increase in investment advisory fees receivable     (4,825 )   (9,109 )   (5,417 )   (23,716 )
  Decrease (increase) in other current assets     (2,360 )   (18 )   (3,065 )   6,847  
  Decrease (increase) in non-current other receivables     3,364     (4,127 )   2,664     (599 )
  Increase (decrease) in accounts payable, accrued expenses and other liabilities     13,996     15,121     (770 )   17,933  
  Increase in minority interest     6,514     14,098     2,613     21,499  
   
 
 
 
 
    Cash flow from operating activities     49,348     51,133     83,034     128,535  
   
 
 
 
 
Cash flow used in investing activities:                          
  Cost of investments, net of cash acquired     (1,750 )   (2,112 )   (7,868 )   (82,178 )
  Purchase of fixed assets     (20,352 )   (2,966 )   (23,211 )   (6,485 )
  Investment in marketable securities     —     —     (1,852 )   (2,592 )
  Increase in other assets     —     —     (12 )   (57 )
   
 
 
 
 
    Cash flow used in investing activities     (22,102 )   (5,078 )   (32,943 )   (91,312 )
   
 
 
 
 
Cash flow from (used in) financing activities:                          
  Borrowings of senior bank debt     —     51,000     85,000     51,000  
  Repayments of senior bank debt     —     —     (85,000 )   —  
  Issuances of convertible securities     —     —     300,000     300,000  
  Repurchases of convertible securities     —     (124,525 )   (105,841 )   (124,525 )
  Issuances of equity securities     4,199     145     8,972     11,559  
  Repurchases of common stock     —     —     (33,688 )   (194,420 )
  Issuance costs     (358 )   (2,521 )   (7,819 )   (12,365 )
  Repayments of notes payable     (506 )   —     (8,574 )   (7,041 )
   
 
 
 
 
    Cash flow from (used in) financing activities     3,335     (75,901 )   153,050     24,208  
   
 
 
 
 
Effect of foreign exchange rate changes on cash flow     —     41     244     102  
Net increase (decrease) in cash and cash equivalents     30,581     (29,805 )   203,385     61,533  
Cash and cash equivalents at beginning of period     200,512     344,672     27,708     253,334  
   
 
 
 
 
Cash and cash equivalents at end of period   $ 231,093   $ 314,867   $ 231,093   $ 314,867  
   
 
 
 
 
Supplemental disclosure of non-cash financing activities:                          
  Stock issued in settlement of indebtedness   $ —   $ 28,499   $ 465   $ 28,499  
  Gain realized from settlement of forward purchase contracts     —     3,719     —     3,719  
  Notes issued for Affiliate equity purchases     —     —     938     —  
  Notes received for Affiliate equity sales     260     —     520     —  

The accompanying notes are an integral part of the Consolidated Financial Statements.

4


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

        The consolidated financial statements of Affiliated Managers Group, Inc. (the "Company" or "AMG") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. All intercompany balances and transactions have been eliminated. All dollar amounts in these notes (except information that is presented on a per share, per note or per contract basis) are stated in thousands, unless otherwise indicated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 includes additional information about AMG, its operations and its financial position, and should be read in conjunction with this Quarterly Report on Form 10-Q.

2.     Stock Split

        In March 2004, the Company completed a three-for-two stock split. Corresponding with this split, the conversion and settlement rates of outstanding convertible securities and the number of shares of common stock subject to outstanding options were appropriately adjusted. As applicable, the information provided in this Quarterly Report on Form 10-Q reflects the stock split.

3.     Senior Debt

        The components of senior debt are as follows:

 
   December 31,
2003
   September 30,
2004
Senior bank debt   $ —   $ 51,000
Zero coupon senior convertible notes     123,340     123,803
Floating rate senior convertible securities     300,000     300,000
   
 
  Total   $ 423,340   $ 474,803
   
 

        The Company has a senior revolving credit facility with a syndicate of major commercial banks, which previously allowed for borrowings of up to $250,000, and which was amended in August 2004. The amended credit facility (the "Facility") extends the maturity date to August 2007 and currently provides that the Company may borrow up to $405,000 at rates of interest (based either on the Eurodollar rate or the Prime rate as in effect from time to time) that vary depending on the Company's credit ratings. Subject to the agreement of the lenders (or prospective lenders) to increase their commitments, the Company has the option to increase the Facility up to $450,000. The Facility contains financial covenants with respect to net worth, leverage and interest coverage. The Facility also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash

5

dividends and fundamental corporate changes. Any borrowings under the Facility would be collateralized by pledges of all capital stock or other equity interests owned by the Company. At September 30, 2004, the Company had no borrowings under the Facility.

        In August 2004, the Company entered into a credit facility with a major commercial bank pursuant to which it borrowed $51,000. The Company used the proceeds to refinance the purchase of certain of its outstanding senior notes due 2006, which were originally issued as a component of its 2001 mandatory convertible securities (as discussed below). The effective interest rate on the outstanding borrowing was approximately 2.19% as of September 30, 2004. The facility is collateralized by a pledge of the Company's rights as a secured party with respect to U.S. Treasury securities pledged by holders of the 2001 mandatory convertible securities to secure their obligations under those securities. The loan matures in November 2004, and the Company intends to repay the outstanding balance through a borrowing under the Facility.

        In May 2001, the Company completed a private placement of zero coupon senior convertible notes. In this private placement, the Company sold an aggregate of $251,000 principal amount at maturity of zero coupon senior convertible notes due 2021, with each note issued at 90.50% of such principal amount and accreting at a rate of 0.50% per year. Each security is convertible into 17.429 shares of the Company's common stock upon the occurrence of certain events, including the following: (i) if the closing price of a share of the Company's common stock is more than a specified price over certain periods (initially $62.36 and increasing incrementally at the end of each calendar quarter to $63.08 on April 1, 2021); (ii) if the credit rating assigned by Standard & Poor's to the securities is below BB-; or (iii) if the Company calls the securities for redemption. The holders may require the Company to repurchase the securities at their accreted value on May 7 of 2006, 2011 and 2016. If the holders exercise this option in the future, the Company may elect to repurchase the securities with cash, shares of its common stock or some combination thereof. The Company has the option to redeem the securities for cash on or after May 7, 2006 at their accreted value. In the first nine months of 2003, the Company repurchased an aggregate $116,500 principal amount at maturity of zero coupon senior convertible notes in privately negotiated transactions and realized a gain of $555, which was reported in "Investment and other income (loss)."

        In February 2003, the Company completed a private placement of $300,000 of floating rate senior convertible securities due 2033 ("convertible securities"). The convertible securities bear interest at a rate equal to 3-month LIBOR minus 0.50%, payable in cash quarterly. Each security is convertible into shares of the Company's common stock upon the occurrence of certain events, including the following: (i) if the closing price of a share of the Company's common stock exceeds $65.00 over certain periods; (ii) if the credit rating assigned by Standard & Poor's is below BB-; or (iii) if the Company calls the securities for redemption. Upon conversion, holders of the securities will receive 18.462 shares of the Company's common stock for each convertible security. In addition, if the market price of the Company's common stock exceeds $54.17 per share at the time of conversion, holders will receive additional shares of common stock based on the stock price at that time. Based on the trading price of the Company's common stock on September 30, 2004, each security would have a settlement rate of 18.462 shares. The holders of the convertible securities may require the Company to repurchase such securities on February 25 of 2008, 2013, 2018, 2023 and 2028, at their principal amount. The Company may choose to pay the purchase price for such repurchases with cash, shares of its common stock or some combination thereof. The Company may redeem the convertible securities for cash at any time on or after February 25, 2008, at their principal amount.

6

        As further described in Note 14, the Company has entered into interest rate swap agreements of a notional amount of $150,000. For the period February 2005 through February 2008, the Company will pay a weighted average fixed rate of approximately 3.28% on that amount.

4.     Mandatory Convertible Securities

        The components of the Company's mandatory convertible securities are as follows:

 
   December 31,
2003
   September 30,
2004
2001 mandatory convertible securities   $ 230,000   $ 75,750
2004 mandatory convertible securities     —     300,000
   
 
  Total   $ 230,000   $ 375,750
   
 

        In December 2001, the Company completed a public offering of mandatory convertible securities ("2001 PRIDES"). A sale of an over-allotment of the securities was completed in January 2002, increasing the aggregate amount outstanding to $230,000. Each unit of the 2001 PRIDES initially consisted of (i) a senior note due November 17, 2006 with a principal amount of $25 per note, on which the Company pays quarterly interest, and (ii) a forward purchase contract pursuant to which the holder has agreed to purchase shares of the Company's common stock on November 17, 2004, with the number of shares to be determined based upon the average trading price of the Company's common stock for a period preceding that date. Depending on the average trading price in that period, the settlement rate will range from 0.4461 to 0.5130 shares per $25 purchase contract. Based on the trading price of the Company's common stock on September 30, 2004, the purchase contracts would have a settlement rate of 0.4669.

        In August 2004, the Company repurchased $154,250 in aggregate principal amount of the senior notes component of the 2001 PRIDES. The Company repurchased the notes through a tender offer, a privately negotiated purchase and certain repurchases in the August 2004 remarketing of the notes. The Company reported a loss of $2,493 on the purchase of these notes, which was reported in "Investment and other income (loss)." Following these transactions, $75,750 in aggregate principal amount of the notes component of the 2001 PRIDES (with a maturity date of November 2006) remains outstanding, with an interest rate of approximately 5.41%.

        In August 2004, the Company settled $39,250 of the 2001 PRIDES forward purchase contracts and realized a gain of $3,719, which was recorded directly to equity. In November 2004, the Company will receive $190,750 in gross proceeds upon settlement of the remaining forward purchase contracts associated with the 2001 PRIDES.

        In connection with the issuance of the 2004 PRIDES (as described below), the Company repurchased an aggregate of approximately 3.5 million shares of its common stock during the nine months ended September 30, 2004. The share repurchases were intended to offset the Company's obligation to issue shares of its common stock in November 2004 under the terms of the forward purchase contracts component of the 2001 PRIDES.

        In February 2004, the Company completed a private placement of $300,000 of mandatory convertible securities ("2004 PRIDES"). As described below, these securities are also structured to provide $300,000 of additional proceeds to the Company following a successful remarketing and the exercise of forward purchase contracts in February 2008.

7

        Each unit of the 2004 PRIDES initially consists of (i) a senior note due February 17, 2010 with a principal amount of $1,000 per note, on which the Company pays interest quarterly at the annual rate of 4.125%, and (ii) a forward purchase contract pursuant to which the holder has agreed to purchase shares of the Company's common stock on February 17, 2008. Holders of the purchase contracts receive a quarterly contract adjustment payment at the annual rate of 2.525% per $1,000 purchase contract. The current portion of the contract adjustment payments, approximately $7,000, is recorded in current liabilities. The number of shares to be issued on February 17, 2008 will be determined based upon the average trading price of the Company's common stock for a period preceding that date. Depending on the average trading price in that period, the settlement rate will range from 11.7851 to 18.0311 shares per $1,000 purchase contract. Based on the trading price of the Company's common stock as of September 30, 2004, the purchase contracts would have a settlement rate of 18.0311.

        Each of the senior notes is pledged to the Company to collateralize the holder's obligations under the forward purchase contracts. Beginning in August 2007, under the terms of the 2004 PRIDES, the senior notes are expected to be remarketed to new investors. A successful remarketing will generate $300,000 of gross proceeds to be used by the original holders of the 2004 PRIDES to honor their obligations on the forward purchase contracts. In exchange for the additional $300,000 in payment on the forward purchase contracts, the Company will issue shares of its common stock to the original holders of the senior notes. As referenced above, the number of shares of common stock to be issued will be determined by the market price of the Company's common stock at that time. Assuming a successful remarketing, the senior notes will remain outstanding until at least February 2010.

5.     Income Taxes

        A summary of the provision for income taxes is as follows:

 
   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
   2003
   2004
   2003
   2004
Federal:                        
  Current   $ 2,951   $ 2,835   $ 6,226   $ 11,739
  Deferred     7,018     6,964     19,389     20,148
State:                        
  Current     421     405     888     1,674
  Deferred     1,003     995     2,771     2,879
   
 
 
 
Provision for income taxes   $ 11,393   $ 11,199   $ 29,274   $ 36,440
   
 
 
 

        The components of deferred tax assets and liabilities are as follows:

 
   December 31,
2003
   September 30,
2004
  
Deferred assets (liabilities):              
  State net operating loss and credit carryforwards   $ 7,696   $ 9,071  
  Intangible asset amortization     (90,626 )   (109,310 )
  Deferred compensation     452     452  
  Convertible securities interest     (5,097 )   (7,658 )
  Accruals     1,483     844  
   
 
 
      (86,092 )   (106,601 )
Valuation allowance     (6,615 )   (8,707 )