SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
For the transition period from to
Commission File Number 001-13459
Affiliated Managers Group, Inc. (Exact name of registrant as specified in its charter)
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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
There were 41,076,671 shares of the registrant's common stock outstanding on November 6, 2008.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) (unaudited)
Revenue
Operating expenses:
Compensation and related expenses
Selling, general and administrative
Amortization of intangible assets
Depreciation and other amortization
Other operating expenses
Operating income
Non-operating (income) and expenses:
Investment and other (income) loss
Income from equity method investments
Investment (income) loss from Affiliate
investments in partnerships
Interest expense
Income before minority interest and income taxes
Minority interest
Minority interest in Affiliate investments in partnerships
Income before income taxes
Income taxes—current
Income taxes—intangible-related deferred
Income taxes—other deferred
Net Income
Earnings per share—basic
Earnings per share—diluted(1)
Average shares outstanding—basic
Average shares outstanding—diluted(1)
Supplemental disclosure of total comprehensive income:
Other comprehensive income (loss)
Total comprehensive income
The accompanying notes are an integral part of the Consolidated Financial Statements.
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AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
Assets
Current assets:
Cash and cash equivalents
Investment advisory fees receivable
Affiliate investments in partnerships
Affiliate investments in marketable securities
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Equity investments in Affiliates
Acquired client relationships, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
Payables to related party
Total current liabilities
Senior bank debt
Senior convertible securities
Mandatory convertible securities
Junior convertible trust preferred securities
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Less: treasury stock, at cost
Total stockholders' equity
Total liabilities and stockholders' equity
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AFFILIATED MANAGERS GROUP, INC. CONS OLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (dollars in thousands) (unaudited)
December 31, 2007
Stock issued under option and other incentive plans
Tax benefit of option exercises
Issuance costs
Issuance of Affiliate equity interests
Settlement of mandatory convertible securities
Conversion of floating rate senior convertible securities
Tax benefit related to conversion of floating rate senior convertible securities
Conversion of zero coupon convertible notes
Repurchase of common shares
September 30, 2008
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AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Cash flow from operating activities:
Adjustments to reconcile Net Income to net cash flow from operating activities:
Amortization of issuance costs
Deferred income tax provision
Accretion of interest
Income from equity method investments, net of amortization
Distributions received from equity method investments
Tax benefit from exercise of stock options
Stock option expense
Other adjustments
Changes in assets and liabilities:
(Increase) decrease in investment advisory fees receivable
(Increase) decrease in Affiliate investments in partnerships
(Increase) decrease in prepaids and other current assets
(Increase) decrease in other assets
Increase (decrease) in accounts payable, accrued liabilities and other long-term liabilities
Increase (decrease) in minority interest
Cash flow from operating activities
Cash flow used in investing activities:
Cost of investments in Affiliates, net of cash acquired
Purchase of fixed assets
Purchase of investment securities
Sale of investment securities
Cash flow used in investing activities
Cash flow from (used in) financing activities:
Borrowings of senior bank debt
Repayments of senior bank debt
Issuance of senior convertible notes
Issuance of common stock
Settlement of convertible securities
Repurchase of common stock
Excess tax benefit from exercise of stock options
Settlement of derivative contracts
Note payments
Subscriptions (redemptions) of Minority interest—Affiliate investments in partnerships
Cash flow from (used in) financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of non-cash financing activities:
Stock issued for conversion of floating rate senior convertible securities
Stock issued in settlement of mandatory convertible securities
Stock issued for conversion of zero coupon senior convertible note
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AFFILIATED MANAGERS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Affiliated Managers Group, Inc. ("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 considered necessary for a fair statement of the results 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 security, per note or per contract basis) are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. 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, 2007 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. Senior Bank Debt
On November 27, 2007, the Company entered into an amended and restated senior credit facility (the "Facility"). During the third quarter of 2008, the Company increased its current borrowing capacity to $1,010,000, comprised of a $770,000 revolving credit facility (the "Revolver") and a $240,000 term loan (the "Term Loan"). All other terms of the Facility remain unchanged. The Company pays interest on these obligations at specified rates (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 rating. The Term Loan requires principal payments at specified dates until maturity. Subject to the agreement of lenders to provide additional commitments, the Company has the option to increase the Facility by up to an additional $175,000.
The Facility will mature in February 2012, and contains financial covenants with respect to leverage and interest coverage. The Facility also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Facility are collateralized by pledges of the substantial majority of capital stock or other equity interests owned by the Company. The Company had outstanding borrowings under the Facility of $519,500 and $240,000 at December 31, 2007 and September 30, 2008, respectively.
3. Senior Convertible Securities
The components of senior convertible securities are as follows:
Zero coupon senior convertible notes
Floating rate senior convertible securities
2008 senior convertible notes
Total senior convertible securities
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AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Zero Coupon Senior Convertible Notes
In 2001, the Company issued $251,000 of principal amount at maturity of zero coupon senior convertible notes due 2021 ("zero coupon convertible notes"), with each note issued at 90.50% of such principal amount and accreting at a rate of 0.50% per year. As of September 30, 2008, $50,835 principal amount at maturity remains outstanding. Each security is convertible into 17.429 shares of the Company's common stock (at a current base conversion price of $53.89) upon the occurrence of certain events, including the following: (i) if the closing price of a share of its 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 in April 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 in May 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 at their accreted value. Under the terms of the indenture governing the zero coupon convertible notes, a holder may convert such security into common stock by following the conversion procedures in the indenture. Subject to changes in the price of the Company's common stock, the zero coupon convertible notes may be convertible in certain future periods.
In 2006, the Company amended the zero coupon convertible notes. Under the terms of this amendment, the Company paid interest through May 7, 2008 at a rate of 0.375% per year on the principal amount at maturity of the notes in addition to the accrual of the original issue discount.
Floating Rate Senior Convertible Securities
In the first quarter of 2008, the Company called its floating rate senior convertible securities due 2033 ("floating rate convertible securities") for redemption at their principal amount plus accrued and unpaid interest. In lieu of redemption, substantially all of the holders elected to convert their securities. The Company issued approximately 7.0 million shares of common stock to settle these conversions and other privately negotiated exchanges. All of the Company's floating rate convertible securities have been cancelled and retired. In connection with these transactions, the Company incurred $1,151 of expenses, which were reported in "Investment and other (income) loss" and reclassified $18,291 of deferred tax liabilities to stockholders' equity.
2008 Senior Convertible Notes
In August 2008, the Company issued $460,000 of senior convertible notes due 2038 ("2008 senior convertible notes"). The 2008 senior convertible notes bear interest at 3.95%, payable semi-annually in cash. Each security is convertible into 7.9586 shares of the Company's common stock (at an initial conversion price of $125.65) upon the occurrence of certain events. Upon conversion, the Company may elect to pay or deliver cash, shares of its common stock, or some combination thereof. The holders of the 2008 senior convertible notes may require the Company to repurchase the notes in August of 2013, 2018, 2023, 2028 and 2033. The Company may redeem the notes for cash at any time on or after August 15, 2013.
The 2008 senior convertible notes are considered contingent payment debt instruments under federal income tax regulations. These regulations require the Company to deduct interest in an amount greater than its reported interest expense, which will result in annual deferred tax liabilities of approximately $9,600. These deferred tax liabilities will be reclassified directly to stockholders' equity if
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the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.
4. Mandatory Convertible Securities
In the first quarter of 2008, the Company repurchased the outstanding senior notes component of its mandatory convertible securities ("2004 PRIDES"). The repurchase proceeds were used by the original holders to fulfill their obligations under the related forward equity purchase contracts. Pursuant to the settlement of the forward equity purchase contracts and other privately negotiated exchanges, the Company issued approximately 3.8 million shares of common stock. All of the 2004 PRIDES have been cancelled and retired. In connection with these transactions, the Company incurred $825 of expenses which were reported in "Investment and other (income) loss" and reclassified $4,461 of deferred tax liabilities to current liabilities through the income tax provision.
5. Junior Convertible Trust Preferred Securities
In 2006, the Company issued $300,000 of junior subordinated convertible debentures due 2036 to a wholly-owned trust simultaneous with the issuance, by the trust, of $291,000 of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2006 junior convertible trust preferred securities") have substantially the same terms.
The 2006 junior convertible trust preferred securities bear interest at a rate of 5.1% per annum, payable quarterly in cash. Each $50 security is convertible, at any time, into 0.333 shares of the Company's common stock, which represents a conversion price of $150 per share (or a 48% premium to the then prevailing share price of $101.45). Upon conversion, investors will receive cash or shares of the Company's common stock (or a combination of cash and common stock) at the election of the Company. The 2006 junior convertible trust preferred securities may not be redeemed by the Company prior to April 15, 2011. On or after April 15, 2011, they may be redeemed if the closing price of the Company's common stock exceeds $195 per share for a specified period of time. The trust's only assets are the junior convertible subordinated debentures. To the extent that the trust has available funds, the Company is obligated to ensure that holders of the 2006 convertible trust preferred securities receive all payments due from the trust.
In October 2007, the Company issued an additional $500,000 of junior subordinated convertible debentures which are due 2037 to a wholly-owned trust simultaneous with the issuance, by the trust, of $500,000 of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2007 junior convertible trust preferred securities") have substantially the same terms.
The 2007 junior convertible trust preferred securities bear interest at 5.15% per annum, payable quarterly in cash. Each $50 security is convertible, at any time, into 0.25 shares of the Company's common stock, which represents a conversion price of $200 per share (or a 53% premium to the then prevailing share price of $130.77). Upon conversion, investors will receive cash or shares of the Company's common stock (or a combination of cash and common stock) at the election of the Company. The 2007 junior convertible trust preferred securities may not be redeemed by the Company prior to October 15, 2012. On or after October 15, 2012, they may be redeemed if the closing price of the Company's common stock exceeds $260 per share for a specified period of time. The trust's only assets are the 2007 junior convertible subordinated debentures. To the extent that the trust has
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available funds, the Company is obligated to ensure that holders of the convertible trust preferred securities receive all payments due from the trust.
6. Forward Equity Sale Agreement
In May 2008, the Company entered into a forward equity sale agreement under which it may sell up to $200,000 of its common stock to a major securities firm, with the timing of sales at the Company's discretion. Through September 30, 2008, the Company has agreed to sell approximately $120,000 under this agreement at a weighted average price of $97.06. The Company can settle these forward sales at any time prior to December 19, 2009.
7. Income Taxes
A summary of the provision for income taxes is as follows:
Current:
Federal
State
Foreign
Total Current
Deferred:
Total Deferred
Provision for Income Taxes
The components of deferred tax assets and liabilities are as follows:
Deferred assets (liabilities):
Intangible asset amortization
Convertible securities interest
Non-deductible intangible amortization
State net operating loss carryforwards
Deferred compensation
Fixed asset depreciation
Accrued expenses
Capital loss carryforwards
Deferred income
Valuation allowance
Net deferred income taxes
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Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets and convertible securities. The Company amortizes most of its intangible assets for tax purposes only, reducing its tax basis below its carrying value for financial statement purposes and generating deferred taxes each reporting period. In contrast, the intangible assets associated with the Company's Canadian Affiliates are not deductible for tax purposes, but certain of these assets are amortized for book purposes. As such, at the time of its investment, the Company recorded a deferred tax liability that represents the tax effect of the future book amortization of these assets. The Company's junior convertible trust preferred securities and 2008 senior convertible notes also generate tax deductions that are higher than the interest expense recorded for financial statement purposes.
At September 30, 2008, the Company had state net operating loss carryforwards that expire over a 15-year period beginning in 2008. The valuation allowances at December 31, 2007 and September 30, 2008 are principally related to the uncertainty of the realization of the loss carryforwards, which realization depends upon the Company's generation of sufficient taxable income prior to their expiration. The change in the valuation allowance for the quarter ended September 30, 2008 is principally attributable to state net operating losses during this period and a provision for loss carryforwards that the Company does not expect to realize.
At September 30, 2008, the Company's liability for uncertain tax positions was $23,373, including interest and related charges of $4,561. The Company does not anticipate that this liability will change significantly over the next twelve months.
As more fully discussed in Notes 3 and 4 above, the Company retired its floating rate convertible securities and 2004 PRIDES in the first quarter of 2008. The retirement of these securities reduced the Company's deferred tax liabilities related to convertible securities interest. Deferred tax liabilities of $18,291 associated with the floating rate convertible securities were reclassified to stockholders' equity and deferred tax liabilities of $4,461 associated with the 2004 PRIDES were reversed through the income tax provision.
In July 2008, the state of Massachusetts enacted legislation that will require combined tax reporting for the Company and all its subsidiaries beginning in 2009. The tax provision for the quarter ended September 30, 2008 includes a deferred tax expense of $5,256 resulting from the one-time revaluation of the Company's deferred taxes under the new legislation.
8. Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the dilutive effect of the potential issuance of incremental shares of the Company's common stock. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share available to common
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stockholders. Unlike all other dollar amounts in these Notes, the amounts in the numerator reconciliation are not presented in thousands.
Numerator:
Interest expense on convertiblesecurities, net of taxes
Net Income, as adjusted
Denominator:
Effect of dilutive instruments:
Stock options
Average shares outstanding—diluted
As more fully discussed in Notes 3 and 5, the Company had certain convertible securities outstanding during the periods presented and is required to apply the if-converted method to these securities in its calculation of diluted earnings per share. Under the if-converted method, shares that are issuable upon conversion are deemed outstanding, regardless of whether the securities are contractually convertible into the Company's common stock at that time. For this calculation, the interest expense (net of tax) attributable to these dilutive securities is added back to Net Income (reflecting the assumption that the securities have been converted). Issuable shares for these securities and related interest expense are excluded from the calculation if an assumed conversion would be anti-dilutive to diluted earnings per share.
The calculation of diluted earnings per share for the three and nine months ended September 30, 2008 excludes the potential exercise of options to purchase approximately 2.4 million common shares and the assumed conversion of the junior convertible trust preferred securities and the 2008 senior convertible notes, because these conversions would be anti-dilutive to diluted earnings per share.
For periods from the second quarter of 2006 through the second quarter of 2008, the Company's quarterly and annual reports incorrectly included the anti-dilutive effect of certain convertible securities and thus overstated diluted earnings per share. Management has concluded that the anti-dilution resulting from this error, $0.02 or less per share per quarter in 2006 and 2007 and $0.07 or less per share per quarter in 2008, was not material. Revisions for the three and nine months ended September 30, 2007 decreased diluted earnings per share by $0.01 and $0.02, respectively. The Company will correct other amounts in future filings when it discloses them as comparable periods.
9. 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 in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals for matters for which the outcome is
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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.
Certain Affiliates operate under regulatory authorities which require that they maintain minimum financial or capital requirements. Management is not aware of any violations of such financial requirements occurring during the period.
Many of the Company's operating agreements provide Affiliate managers a conditional right to require the Company to purchase their retained equity interests at certain intervals. Certain agreements also provide the Company a conditional right to require Affiliate managers to sell their retained equity interests to the Company at certain intervals and upon their death, permanent incapacity or termination of employment and provide Affiliate managers a conditional right to require the Company to purchase such retained equity interests upon the occurrence of specified events. The purchase price of these conditional purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. As one measure of the potential magnitude of such purchases, in the event that a triggering event and resulting purchase occurred with respect to all such retained equity interests as of September 30, 2008, the aggregate amount of these payments would have totaled approximately $1,201,500. In the event that all such transactions were closed, the Company would own the prospective cash flow distributions of all equity interests that would be purchased from the Affiliate managers. As of September 30, 2008, this amount would represent approximately $167,500 on an annualized basis.
10. Affiliate Investments in Partnerships
Purchases and sales of investments (principally equity securities) and gross client subscriptions and redemptions relating to Affiliate investments in partnerships were as follows:
Purchase of investments
Sale of investments
Gross subscriptions
Gross redemptions
Management fees earned by the Company on partnership assets were $947 and $989 for the nine months ended September 30, 2007 and 2008, respectively.
As of December 31, 2007 and September 30, 2008, the Company's investments in partnerships that are not controlled by its Affiliates were $19,799 and $20,215, respectively. These assets are reported within "Other assets" in the consolidated balance sheet. The income or loss related to these investments is classified within "Investment and other (income) loss" in the consolidated statement of income.
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11. Affiliate Investments in Marketable Securities
The cost of Affiliate investments in marketable securities, gross unrealized gains and losses were as follows:
Cost of Affiliate investments in marketable securities
Gross unrealized gains
Gross unrealized losses
12. Fair Value Measurements
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"), for all financial instruments and non-financial instruments that are measured at fair value on a quarterly basis. For all other non-financial assets and liabilities, FAS 157 is effective on January 1, 2009. FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires expanded disclosure about fair value measurements. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in the most advantageous market, utilizing a hierarchy of three different valuation techniques:
Level 1—Quoted market prices for identical instruments in active markets;
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs, or significant value drivers, are observable; and
Level 3—Prices reflecting the Company's own assumptions concerning unobservable inputs to the valuation model.
The following table summarizes the Company's financial assets that are measured at fair value on a quarterly basis:
Substantially all of the Company's Level 3 instruments consist of Affiliate investments in partnerships. Changes in the fair value of these investments are presented as "Investment (income) loss from Affiliate investments in partnerships" in the consolidated statements of income. However, the portion of this income or loss that is attributable to investors that are unrelated to the Company is
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reported as "Minority interest in Affiliate investments in partnerships." The following table presents the changes in Level 3 assets or liabilities for the three and nine months ended September 30, 2008:
Balance, beginning of period
Realized and unrealized gains (losses)
included in net income
included in other comprehensive income
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Balance, September 30, 2008
Amount of total gains (losses) included in net income attributable to unrealized gains (losses) from assets still held at September 30, 2008
13. Related Party Transactions
The Company periodically records amounts receivable and payable to Affiliate partners in connection with the transfer of Affiliate equity interests. As of December 31, 2007 and September 30, 2008, the total receivable (reported in "Other assets") was $35,510 and $49,823, respectively. The total payable as of December 31, 2007 was $70,915, of which $69,952 is included in current liabilities. The total payable as of September 30, 2008 was $14,402, of which $12,347 is included in current liabilities.
In certain cases, Affiliate management owners and Company officers may serve as trustees or directors of certain mutual funds from which the Affiliate earns advisory fee revenue.
14. Stock Option and Incentive Plans
The following table summarizes the transactions of the Company's stock option and incentive plans for the nine months ended September 30, 2008:
Unexercised options outstanding—January 1, 2008
Options granted
Options exercised
Options forfeited
Unexercised options outstanding—September 30, 2008
Exercisable at September 30, 2008
Exercisable and free from restrictions on transfer at September 30, 2008
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The Company's Net Income for the three and nine months ended September 30, 2008 includes compensation expense of $3,802 and $11,202, respectively, and income tax benefits of $1,445 and $4,183, respectively, related to the Company's equity-based compensation arrangements. As of September 30, 2008, the deferred compensation expense related to stock options was $44,151, which is expected to be recognized over a weighted average period of approximately three years (assuming no forfeitures).
15. Derivatives
In 2006, the Company entered into a series of contracts that provided the option, but not the obligation, to repurchase 0.9 million shares of its common stock. Upon exercise, the Company could elect to receive the intrinsic value of a contract in cash or common stock. During 2007, the Company exercised its options, which had an intrinsic value of $21,100. The Company elected to receive approximately 0.1 million shares of common stock and used the remaining proceeds, $6,800, to enter into a series of contracts to repurchase up to 0.8 million shares. These options expired during the first quarter of 2008.
During the first quarter of 2008, the Company entered into a series of treasury rate lock contracts with a notional value of $250,000. These contracts were settled in the second quarter of 2008, and the Company received $8,154. Each contract was designated and qualified as a cash flow hedge under Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). The Company believes the settlement amount, net of taxes, continues to qualify as a cash flow hedge and, accordingly, the gain remains in accumulated other comprehensive income.
16. Segment Information
Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), establishes disclosure requirements relating to operating segments in annual and interim financial statements. Management has assessed the requirements of FAS 131 and determined that the Company operates in three business segments representing the Company's three principal distribution channels: Mutual Fund, Institutional and High Net Worth, each of which has different client relationships.
Revenue in the Mutual Fund distribution channel is earned from advisory and sub-advisory relationships with all domestically-registered investment products as well as non-institutional investment products that are registered abroad. Revenue in the Institutional distribution channel is earned from relationships with foundations and endowments, defined benefit and defined contribution plans and Taft-Hartley plans. Revenue in the High Net Worth distribution channel is earned from relationships with wealthy individuals, family trusts and managed account programs.
Revenue earned from client relationships managed by Affiliates accounted for under the equity method is not consolidated with the Company's reported revenue but instead is included (net of operating expenses, including amortization) in "Income from equity method investments," and reported in the distribution channel in which the Affiliate operates. Income tax attributable to the profits of the Company's equity-method Affiliates is reported within the Company's consolidated income tax provision.
In firms with revenue sharing arrangements, a certain percentage of revenue is allocated for use by management of an Affiliate in paying operating expenses of that Affiliate, including salaries and bonuses, and is called an "Operating Allocation." In reporting segment operating expenses, Affiliate
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expenses are allocated to a particular segment on a pro rata basis with respect to the revenue generated by that Affiliate in such segment. Generally, as revenue increases, additional compensation is typically paid to Affiliate management partners from the Operating Allocation. As a result, the contractual expense allocation pursuant to a revenue sharing arrangement may result in the characterization of any growth in profit margin beyond the Company's Owners' Allocation as an operating expense. All other operating expenses (excluding intangible amortization) and interest expense have been allocated to segments based on the proportion of cash flow distributions reported by Affiliates in each segment.
Statements of Income
Investment and other income
Investment income from Affiliate investmentsin partnerships
Income taxes
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Investment loss from Affiliate investments in partnerships
17
Investment income from Affiliate investments in partnerships
18
Investment (income) loss from Affiliate investments in partnerships
Balance Sheet Information
Total assets as of December 31, 2007
Total assets as of September 30, 2008
17. Goodwill and Acquired Client Relationships
During the nine months ended September 30, 2008, the Company acquired interests from, made additional purchase payments to and transferred interests to Affiliate management partners. Most of the goodwill acquired during the nine months ended September 30, 2008 is deductible for tax purposes.
The following table presents the change in goodwill during the nine months ended September 30, 2008:
Balance, as of December 31, 2007
Goodwill acquired, net
Foreign currency translation
Balance, as of September 30, 2008
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The following table reflects the components of intangible assets of the Company's Affiliates that are consolidated as of December 31, 2007 and September 30, 2008:
Amortized intangible assets:
Acquired client relationships
Non-amortized intangible assets:
Acquired client relationships-mutual fund management contracts
For the Company's Affiliates that are consolidated, definite-lived acquired client relationships are amortized over their expected useful lives. As of September 30, 2008, these relationships were being amortized over a weighted average life of approximately 11 years. The Company estimates that its consolidated annual amortization expense will be approximately $35,000 for the next 5 years, assuming no additional investments in new or existing Affiliates.
The definite-lived acquired client relationships attributable to the Company's equity method investments are amortized over their expected useful lives. As of September 30, 2008, these relationships were being amortized over approximately 13 years. Amortization expense for these relationships was $6,979 and $14,838 for the nine months ended September 30, 2007 and 2008, respectively. The Company estimates that the annual amortization expense attributable to its current equity-method Affiliates will be approximately $20,000 for the next 5 years.
In connection with certain investments in Affiliates, the Company is contingently liable, upon achievement of specified financial targets, to make additional purchase payments. During the nine months ended September 30, 2008, the Company made payments of $60,500 under these agreements. During the three months ended September 30, 2008, the Company made no such payments.
18. Recent Accounting Developments
In September 2006, the FASB issued FAS 157, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires expanded disclosure about fair value measurements. As described in Note 12, the Company adopted this standard in the first quarter of 2008 for its financial assets and liabilities that are measured at fair value on a quarterly basis. For all other nonfinancial assets and liabilities, FAS 157 is effective in the first quarter of 2009, and the Company is currently evaluating the impact such adoption may have on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("FAS 159"). FAS 159 permits companies to measure many financial instruments and certain other items at fair value. The Company adopted FAS 159 in the first quarter of 2008; as the Company did not apply the fair value option to any of its outstanding instruments, FAS 159 did not have an impact on the Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations" ("FAS 141R"). FAS 141R will change the accounting for business combinations by requiring acquirors to measure identifiable assets and liabilities at their full fair values
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on the acquisition date. FAS 141R will also change the treatment of contingent consideration, contingencies, acquisition costs, and restructuring costs. FAS 141R will be applied prospectively to acquisitions completed after December 31, 2008. The Company will adopt FAS 141R in the first quarter of 2009 and is currently evaluating the impact that this standard may have on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("FAS 160"). FAS 160 will change the accounting and reporting for minority or noncontrolling interests. Upon adoption, these interests and transactions between controlling interest and minority interest holders may be accounted for within stockholders' equity. The Company will adopt FAS 160 in the first quarter of 2009 and is currently evaluating the impact that this standard may have on its financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133" ("FAS 161"). FAS 161 requires enhanced disclosures regarding the impact of derivatives on the Company's financial position, financial performance, and cash flows. The Company will adopt FAS 161 in the first quarter of 2009 and is currently evaluating the impact that this standard may have on the consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"), which applies to all convertible debt instruments that may be settled either wholly or partially in cash upon conversion. FSP APB 14-1 requires issuers to separately account for the liability and equity components of convertible debt instruments in a manner reflective of the issuer's nonconvertible debt borrowing rate. Previous guidance required these types of convertible debt instruments to be accounted for entirely as debt. FSP APB 14-1 will be effective in the first quarter of 2009, and the Company is currently evaluating the impact that this guidance will have on the consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active" ("FSP FAS 157-3"), which applies to financial assets that are required or permitted to be measured at fair value in accordance with FAS 157. FSP FAS 157-3 clarifies the application of FAS 157 and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The adoption did not have a significant impact on the Company's financial position or results of operations, nor did it have a significant impact on the valuation techniques used by the Company in measuring the fair value of its financial assets.
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19. Comprehensive Income
A summary of comprehensive income, net of applicable taxes, is as follows:
Foreign currency translation adjustment(1)
Change in net unrealized gain (loss) oninvestment securities
Change in net unrealized gain (loss) onderivative securities
Comprehensive income
The components of accumulated other comprehensive income, net of applicable taxes, are as follows:
Foreign currency translation adjustments
Unrealized gain on investment securities
Unrealized gain on derivative securities
20. Subsequent Event
In October 2008, the Company completed its previously announced investment in Gannett Welsh & Kotler, LLC.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, in our other filings with the United States Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "may," "intends," "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, among others, the following:
These factors (among others) could affect our financial performance and cause actual results to differ materially from historical earnings and those presently anticipated and projected. We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
Overview
We are an asset management company with equity investments in a diverse group of boutique investment management firms (our "Affiliates"). We pursue a growth strategy designed to generate shareholder value through the internal growth of our existing business, additional investments in investment management firms and strategic transactions and relationships designed to enhance our Affiliates' businesses and growth prospects.
We manage assets in approximately 300 investment products across a broad range of asset classes and investment styles in three principal distribution channels: Mutual Fund, Institutional and High Net Worth. We believe that our diversification across asset classes, investment styles and distribution channels helps to mitigate our exposure to the risks created by changing market environments. The following summarizes our operations in our three principal distribution channels.
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In the fourth quarter of 2007, we acquired minority interests in ValueAct Capital ("ValueAct") and BlueMountain Capital Management ("BlueMountain"). ValueAct is a San Francisco-based alternative investment firm that establishes ownership interests in undervalued companies and works with each company's management and Board of Directors to implement business strategies that enhance shareholder value. BlueMountain is a leading global credit alternatives manager specializing in relative value strategies in the corporate loan, bond, credit and equity derivatives markets and has offices in New York and London.
In October 2008, we completed our previously announced investment in Gannett Welsh & Kotler, LLC ("GW&K"), an investment management unit of The Bank of New York Mellon specializing in intermediate duration municipal bonds, multi-cap and small-cap equities, and core taxable fixed income investments.
We operate our business through our Affiliates in our three principal distribution channels, maintaining each Affiliate's distinct entrepreneurial culture and independence through our investment structure. In each case, our Affiliates are organized as separate firms, and their operating or shareholder agreements are tailored to provide appropriate incentives for our Affiliate management owners and to address the particular characteristics of that Affiliate while enabling us to protect our interests.
In making investments in boutique asset management firms, we seek to partner with the highest quality firms in the industry, with outstanding management teams, strong long-term performance records and a demonstrated commitment to continued growth and success. Fundamental to our investment approach is the belief that Affiliate management equity ownership (along with AMG's ownership) aligns our interests and provides Affiliate managers with a powerful incentive to continue to grow their business. Our investment structure provides a degree of liquidity and diversification to principal owners of boutique investment management firms, while at the same time expanding equity ownership opportunities among the firm's management and allowing management to continue to participate in the firm's future growth. Our partnership approach also ensures that Affiliates maintain operational autonomy in managing their business, thereby preserving their firm's entrepreneurial culture and independence.
Although the specific structure of each investment is highly tailored to meet the needs of a particular Affiliate, in all cases, AMG establishes a meaningful equity interest in the firm, with the remaining equity interests retained by the management of the Affiliate. Each Affiliate is organized as a separate firm, and its operating or shareholder agreement is structured to provide appropriate incentives for Affiliate management owners and to address the Affiliate's particular characteristics while
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also enabling us to protect our interests, including through arrangements such as long-term employment agreements with key members of the firm's management team.
In most cases, we own a majority of the equity interests of a firm and structure a revenue sharing arrangement, in which a percentage of revenue is allocated for use by management of that Affiliate in paying operating expenses of the Affiliate, including salaries and bonuses. We call this the "Operating Allocation." The portion of the Affiliate's revenue that is allocated to the owners of that Affiliate (including us) is called the "Owners' Allocation." Each Affiliate allocates its Owners' Allocation to its managers and to us generally in proportion to their and our respective ownership interests in that 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 revenue, which may increase their compensation from both the Operating Allocation and the Owners' Allocation. These arrangements also provide incentives to control operating expenses, thereby increasing the portion of the Operating Allocation that is available for growth initiatives and compensation.
An Affiliate's Operating Allocation is structured to cover its operating expenses. However, should actual operating expenses exceed the Operating Allocation, our contractual share of cash under the Owners' Allocation generally has priority over the allocations and distributions to the Affiliate's managers. As a result, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's managers until that portion is eliminated, before reducing 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 managers.
Our minority investments are also structured to align our interests with those of the Affiliate's management through shared equity ownership, as well as to preserve the Affiliate's entrepreneurial culture and independence by maintaining the Affiliate's operational autonomy. In cases where we hold a minority interest, the revenue sharing arrangement generally allocates a percentage of the Affiliate's revenue. The remaining revenue is used to pay operating expenses and profit distributions to the other owners.
Certain of our Affiliates operate under profit-based arrangements through which we own a majority of the equity in the firm and receive a share of profits as cash flow, rather than a percentage of revenue through a typical revenue sharing agreement. As a result, we participate fully in any increase or decrease in the revenue or expenses of such firms. In these cases, we participate in a budgeting process and generally provide incentives to management through compensation arrangements based on the performance of the Affiliate.
We are focused on establishing and maintaining long-term partnerships with our Affiliates. Our shared equity ownership gives both AMG and our Affiliate partners meaningful incentives to manage their businesses for strong future growth. From time to time, we may consider changes to the structure of our relationship with an Affiliate in order to better support the firm's growth strategy.
Through our affiliated investment management firms, we derive most of our revenue from the provision of investment management services. Investment management fees ("asset-based fees") are usually determined as a percentage fee charged on periodic values of a client's assets under management; most asset-based advisory fees are billed by our Affiliates quarterly. Certain clients are billed for all or a portion of their accounts based upon assets under management valued at the beginning of a billing period ("in advance"). Other clients are billed for all or a portion of their accounts based upon assets under management valued at the end of the billing period ("in arrears"). Most client accounts in the High Net Worth distribution channel are billed in advance, and most client accounts in the Institutional distribution channel are billed in arrears. Clients in the Mutual Fund distribution channel are billed based upon average daily assets under management. Advisory fees billed
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in advance will not reflect subsequent changes in the market value of assets under management for that period but may reflect changes due to client withdrawals. Conversely, advisory fees billed in arrears will reflect changes in the market value of assets under management for that period.
In addition, over 50 Affiliate alternative investment and equity products, representing approximately $35 billion of assets under management, also bill on the basis of absolute or relative investment performance ("performance fees"). These products, which are primarily in the Institutional distribution channel, are often structured to have returns that are not directly correlated to changes in broader equity indices and, if earned, the performance fee component is typically billed less frequently than an asset-based fee. Although performance fees vary each period and depend on investment results realized in each product, and for individual clients, we anticipate these fees will be a recurring component of our revenue. We also anticipate that, within any calendar year, the majority of performance fees will typically be realized in the fourth quarter.
For certain of our Affiliates, generally where we own a minority interest, we are required to use the equity method of accounting. Consistent with this method, we have not consolidated the operating results of these firms (including their revenue) in our Consolidated Statements of Income. Our share of these firms' profits (net of intangible amortization) is reported in "Income from equity method investments," and is therefore reflected in our Net Income and EBITDA. As a consequence, increases or decreases in these firms' assets under management (which totaled $50 billion as of September 30, 2008) will not affect reported revenue in the same manner as changes in assets under management at our other Affiliates.
Our Net Income reflects the revenue of our consolidated Affiliates and our share of income from Affiliates which we account for under the equity method, reduced by:
As discussed above, for consolidated Affiliates with revenue sharing arrangements, the operating expenses of the Affiliate as well as its managers' minority interest generally increase (or decrease) as the Affiliate's revenue increases (or decreases) because of the direct relationship established in many of our agreements between the Affiliate's revenue and its Operating Allocation and Owners' Allocation. At our consolidated profit-based Affiliates, expenses may or may not correspond to increases or decreases in the Affiliates' revenues.
Our level of profitability will depend on a variety of factors, including:
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Results of Operations
The following table presents our Affiliates' reported assets under management by operating segment (which are also referred to as distribution channels in this Quarterly Report on Form 10-Q).
Assets under Management
Statement of Changes—Quarter to Date
June 30, 2008
Net client cash flows
Investment performance
Other(1)
Statement of Changes—Year to Date
The operating segment analysis presented in the following table is based on average assets under management. For the Mutual Fund distribution channel, average assets under management represent an average of the daily net assets under management. For the Institutional and High Net Worth distribution channels, average assets under management represent an average of the assets at the beginning and end of each calendar quarter during the applicable period. We believe that this analysis
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more closely correlates to the billing cycle of each distribution channel and, as such, provides a more meaningful relationship to revenue.
Average assets under management (in billions)(1)
Mutual Fund
Institutional
High Net Worth
Total
EBITDA(2)
Our revenue is generally determined by the level of our assets under management, the portion of our assets across our products and three operating segments, which realize different fee rates, and the recognition of any performance fees.
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Our revenue decreased $54.8 million (or 16%) in the quarter ended September 30, 2008, as compared to the quarter ended September 30, 2007, while average assets under management decreased 17%, and decreased $52.1 million (or 5%) in the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, while average assets under management decreased 6%. These decreases in average assets under management resulted principally from investment performance and negative net client cash flows.
The following discusses the changes in our revenue by operating segments.
Mutual Fund Distribution Channel
Our revenue in the Mutual Fund distribution channel decreased $27.6 million (or 19%) in the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007, while average assets under management decreased 18%, and decreased $39.7 million (or 10%) for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, while average assets under management decreased 10%. These decreases in average assets under management resulted principally from investment performance.
Institutional Distribution Channel
Our revenue in the Institutional distribution channel decreased $18.0 million (or 11%) in the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007, while average assets under management decreased 17%. This decrease in average assets under management resulted principally from investment performance and negative net client cash flows. Our revenue in the Institutional distribution channel increased $1.9 million (or 0%) in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, while average assets under management decreased 5%. The increase in revenue was primarily the result of a higher level of performance fees in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007.
High Net Worth Distribution Channel
Our revenue in the High Net Worth distribution channel decreased $9.2 million (or 21%) in the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007, while average assets under management decreased 15%, and decreased $14.3 million (or 12%) in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, while average assets under management decreased 5%. The decreases in revenue were proportionately greater than the changes in average assets under management as a result of our 2007 investments in ValueAct and BlueMountain, which did not affect reported revenue since these investments are accounted for under the equity method of accounting.
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Operating Expenses
The following table summarizes our consolidated operating expenses:
Total operating expenses
The substantial portion of our operating expenses is incurred by our Affiliates, the majority of which is incurred by Affiliates with revenue sharing arrangements. For Affiliates with revenue sharing arrangements, an Affiliate's Operating Allocation percentage generally determines its operating expenses. Accordingly, our compensation expense is impacted by increases or decreases in each Affiliate's revenue and the corresponding increases or decreases in each Affiliate's respective Operating Allocations. During the three and nine months ended September 30, 2008, approximately $58.2 million and $202.5 million (or 47% and 49%), respectively, of our consolidated compensation expense was attributable to our Affiliate management partners. The percentage of revenue allocated to operating expenses varies from one Affiliate to another and may also vary within an Affiliate depending on the source or amount of revenue. As a result, changes in our aggregate revenue may not impact our consolidated operating expenses to the same degree.
Compensation and related expenses decreased 17% and 4% in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively, primarily as a result of the relationship between revenue and operating expenses at Affiliates, which experienced decreases in revenue, and accordingly, reported lower compensation expenses. These decreases were also attributable to decreases in holding company incentive compensation of $1.9 million and $2.5 million in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively. These decreases were partially offset by increases in share-based compensation of $1.7 million and $5.1 million in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively.
Selling, general and administrative expenses decreased 7% in the three months ended September 30, 2008, as compared to the three months ended September 30, 2007, principally as a result of decreases in administrative expenses at Affiliates, particularly related to mutual fund expenses. Selling, general and administrative expenses increased 1% in the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. This increase was attributable to $5.9 million of administrative and other expenses related to performance fees and $2.0 million of professional transaction-related fees that were recognized as a result of our mutual agreement with Cooke & Bieler to not proceed with a prospective new investment in the first quarter of 2008. These increases were partially offset by a $2.6 million recovery of a past receivable from an Affiliate product, as well as the decrease in administrative expenses at Affiliates.
Amortization of intangible assets increased 9% and 7% in the three and nine months ended September 30, 2008 as compared to the three and nine months ended September 30, 2007, respectively. These increases were principally attributable to an increase in definite-lived intangible assets resulting from our investments in existing Affiliates during 2007 and 2008.
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Depreciation and other amortization increased 7% and 14% in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively, principally attributable to spending on depreciable assets during 2007 and 2008.
Other operating expenses decreased 17% in the three months ended September 30, 2008, as compared to the three months ended September 30, 2007, principally as a result of an increase in income from Affiliate investments in marketable securities. Other operating expenses increased 12% in the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, principally as a result of benefits realized upon the transfer of Affiliate interests during the nine months ended September 30, 2007 that did not recur in 2008. This increase was partially offset by an increase in income from Affiliate investments in marketable securities.
Other Income Statement Data
The following table summarizes other income statement data:
Investment and other income (loss)
Investment income (loss) from Affiliate investments in partnerships
Minority interest in Affiliateinvestments in partnerships
Income tax expense
Income from equity method investments consists of our share of income from Affiliates that are accounted for under the equity method of accounting, net of any related intangible amortization. Income from equity method investments increased 25% and 48% in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively, principally as a result of our investments in new Affiliates during the fourth quarter of 2007.
Investment and other income (loss) primarily consists of earnings on cash and cash equivalent balances and earnings that Affiliates realize on investments. Investment and other income (loss) decreased 263% in the three months ended September 30, 2008, as compared to the three months ended September 30, 2007, and decreased 140% in the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, primarily as a result of decreases in Affiliate investment earnings. During the nine months ended September 30, 2008, the decrease was also attributable to $2.0 million of expenses incurred from the settlement of our 2004 mandatory convertible securities and floating rate senior convertible securities.
Investment income (loss) from Affiliate investments in partnerships and Minority interest in Affiliate investments in partnerships relate to the consolidation of certain investment partnerships in which our Affiliates are the general partner. For the three months ended September 30, 2008 and 2007, the income (loss) from Affiliate investments in partnerships was $(22.8) million and $17.0 million, respectively, and for the nine months ended September 30, 2008 and 2007, the income (loss) from
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Affiliate investments in partnerships was $(31.8) million and $38.2 million, respectively, which was principally attributable to investors who are unrelated to us.
Minority interest decreased 19% and 10% in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively, principally as a result of the previously discussed changes in revenue. These decreases were proportionately greater than the percentage decreases in revenue primarily as a result of our purchases of additional interests in existing Affiliates, which had the effect of decreasing Minority interest.
Interest expense was essentially flat (decreased 1%) in the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. This decrease was principally attributable to a $7.8 million decrease from the conversion of our floating rate senior convertible securities and the settlement of our mandatory convertible securities and a $3.1 million decrease in the cost our senior bank debt resulting from a decline in LIBOR interest rates. These decreases were partially offset by increases of $6.6 million attributable to the issuance of our junior convertible trust preferred securities in 2007 and $3.5 million attributable to the issuance of our 2008 senior convertible notes. Interest expense was also essentially flat (increased 1%) in the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. This increase was principally attributable to a $19.7 million increase from the issuance of our junior convertible trust preferred securities in 2007, and a $3.5 million increase from the issuance of our 2008 senior convertible notes. These increases were partially offset by a $19.5 million decrease from the conversion of our floating rate senior convertible securities and the settlement of our mandatory convertible securities and a $4.5 million decrease in the cost of our senior bank debt resulting from a decline in LIBOR interest rates.
Income taxes decreased 5% and 10% in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively, principally as a result of the decreases in income before taxes. These decreases were partially offset by an increase in income taxes of $5.3 million in the three months September 30, 2008 related to the one-time revaluation of our deferred tax liabilities as a result of new Massachusetts tax legislation.
The following table summarizes Net Income:
The decreases in Net Income in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, resulted principally from decreases in revenue and investment and other income, partially offset by increases in income from equity method investments and decreases in reported operating, minority interest and income tax expenses, as described above.
Supplemental Performance Measure
As supplemental information, we provide a non-GAAP performance measure that we refer to as Cash Net Income. This measure is provided in addition to, but not as a substitute for, Net Income. Cash Net Income is defined as Net Income plus amortization and deferred taxes related to intangible assets plus Affiliate depreciation. We consider Cash Net Income an important measure of our financial performance, as we believe it best represents operating performance before non-cash expenses relating to our acquisition of interests in our Affiliates. Cash Net Income is used by our management and
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Board of Directors as a principal performance benchmark, including as a measure for aligning executive compensation with stockholder value.
Since our acquired assets do not generally depreciate or require replacement by us, and since they generate deferred tax expenses that are unlikely to reverse, we add back these non-cash expenses to Net Income to measure operating performance. We add back amortization attributable to acquired client relationships because this expense does not correspond to the changes in value of these assets, which do not diminish predictably over time. The portion of deferred taxes generally attributable to intangible assets (including goodwill) that we no longer amortize but which continues to generate tax deductions is added back, because these accruals would be used only in the event of a future sale of an Affiliate or an impairment charge, which we consider unlikely. We add back the portion of consolidated depreciation expense incurred by our Affiliates because under our Affiliates' operating agreements we are generally not required to replenish these depreciating assets. Conversely, we do not add back the deferred taxes relating to our floating rate convertible securities or other depreciation expenses.
The following table provides a reconciliation of Net Income to Cash Net Income:
Intangible amortization
Intangible amortization-equity method investments
Intangible-related deferred taxes
Affiliate depreciation
Cash Net Income
Cash Net Income decreased 12% and 4% in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, respectively, primarily as a result of the previously-described factors that decreased Net Income, partially offset by increases in amortization and intangible-related deferred tax expenses.
Liquidity and Capital Resources
The following table summarizes certain key financial data relating to our liquidity and capital resources:
Balance Sheet Data
Zero coupon convertible notes
Floating rate convertible securities
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Cash Flow Data
Operating cash flow
Investing cash flow
Financing cash flow
EBITDA(1)
We view our ratio of debt to EBITDA (our "leverage ratio") as an important gauge of our ability to service debt, make new investments and access capital. Consistent with industry practice, we do not consider our junior convertible trust preferred securities as debt for the purpose of determining our leverage ratio. We also view our leverage on a "net debt" basis by deducting our cash and cash equivalents from our debt balance. The leverage covenant of our senior credit facility is generally consistent with our treatment of our junior convertible trust preferred securities and our net debt approach. At September 30, 2008, our leverage ratio was 0.9:1.
Supplemental Liquidity Measure
As supplemental information in this Quarterly Report on Form 10-Q, we have provided information regarding our EBITDA, a non-GAAP liquidity measure. This measure is provided in addition to, but not as a substitute for, cash flow from operations. EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies. As a measure of liquidity, we believe that EBITDA is useful as an indicator of our ability to service debt, make new investments and meet working capital requirements. We further believe that many investors use this information when analyzing the financial position of companies in the investment management industry.
The following table provides a reconciliation of cash flow from operations to EBITDA:
Cash flow from operations
Interest expense, net of non-cash items(1)
Current tax provision
Income from equity method investments, net of distributions(2)
Changes in assets and liabilities and other adjustments(3)
EBITDA(4)
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We meet our cash requirements through cash generated by operating and financing activities. Our principal uses of cash in the nine months ended September 30, 2008 were to make distributions to Affiliate managers and repurchase shares of our common stock. We expect that our principal uses of cash for the foreseeable future will be for investments in new and existing Affiliates, distributions to Affiliate managers, payment of principal and interest on outstanding debt, the repurchase of debt securities, and the repurchase of shares of our common stock and for working capital purposes.
We have a cash management program that enables our Affiliates to invest their excess cash with us to achieve a competitive rate of return. At September 30, 2008, our Affiliates had invested approximately $74.4 million with us in this program. These investments are eliminated for accounting purposes and are not reflected on our Consolidated Balance Sheet.
Senior Bank Debt
On November 27, 2007, we entered into an amended and restated senior credit facility (the "Facility"). During the third quarter of 2008, we increased its current borrowing capacity to $1.0 billion, comprised of a $770.0 million revolving credit facility (the "Revolver") and a $240.0 million term loan (the "Term Loan"). All other terms of the Facility remain unchanged. We pay interest on these obligations at specified rates (based either on the Eurodollar rate or the prime rate as in effect from time to time) that vary depending on our credit rating. The Term Loan requires principal payments at specified dates until maturity. Subject to the agreement of lenders to provide additional commitments, we have the option to increase the Facility by up to an additional $175.0 million.
The Facility will mature in February 2012, and contains financial covenants with respect to leverage and interest coverage. The Facility also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Facility are collateralized by pledges of the substantial majority of capital stock or other equity interests owned by us. We had outstanding borrowings under the Facility of $519.5 million and $240.0 million at December 31, 2007 and September 30, 2008, respectively.
In 2001, we issued $251 million of principal amount at maturity of zero coupon senior convertible notes due 2021 ("zero coupon convertible notes"), with each note issued at 90.50% of such principal amount and accreting at a rate of 0.50% per year. As of September 30, 2008, $50.8 million principal amount at maturity remains outstanding. Each security is convertible into 17.429 shares of our common stock (at a current base conversion price of $53.89) upon the occurrence of certain events, including the following: (i) if the closing price of a share of our 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 in April 2021); (ii) if the credit rating assigned by Standard & Poor's to the securities is below BB-; or (iii) if we call the securities for redemption. The holders may require us to repurchase the securities at their accreted value in May 2011 and 2016. If the holders exercise this option in the future, we may elect to repurchase the securities with cash, shares of our common stock or some combination thereof. We have the option to redeem the securities for cash at their accreted value. Under the terms of the indenture governing the zero coupon convertible notes, a holder may convert
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such security into common stock by following the conversion procedures in the indenture. Subject to changes in the price of our common stock, the zero coupon convertible notes may be convertible in certain future periods.
In 2006, we amended the zero coupon convertible notes. Under the terms of this amendment, we paid interest through May 7, 2008 at a rate of 0.375% per year on the principal amount at maturity of the notes in addition to the accrual of the original issue discount.
In the first quarter of 2008, we called our floating rate senior convertible securities due 2033 ("floating rate convertible securities") for redemption at their principal amount plus accrued and unpaid interest. In lieu of redemption, substantially all of the holders elected to convert their securities. We issued approximately 7.0 million shares of common stock to settle these conversions and other privately negotiated exchanges. All of our floating rate convertible securities have been cancelled and retired. In connection with these transactions, we incurred $1.1 million of expenses in the first quarter of 2008 which were reported in "Investment and other (income) loss" and reclassified $18.3 million of deferred tax liabilities to stockholders' equity.
In August 2008, we issued $460 million of senior convertible notes due 2038 ("2008 senior convertible notes"). The 2008 senior convertible notes bear interest at 3.95%, payable semi-annually in cash. Each security is convertible into 7.9586 shares of our common stock (at an initial conversion price of $125.65) upon the occurrence of certain events. Upon conversion, we may elect to pay or deliver cash, shares of its common stock, or some combination thereof. The holders of the 2008 senior convertible notes may require us to repurchase the notes in August of 2013, 2018, 2023, 2028 and 2033. We may redeem the notes for cash at any time on or after August 15, 2013.
The 2008 senior convertible notes are considered contingent payment debt instruments under federal income tax regulations. These regulations require us to deduct interest in an amount greater than its reported interest expense, which will result in annual deferred tax liabilities of approximately $9.6 million. These deferred tax liabilities will be reclassified directly to stockholders' equity if our common stock is trading above certain thresholds at the time of the conversion of the notes.
2004 Mandatory Convertible Securities
In the first quarter of 2008, we repurchased the outstanding senior notes component of our mandatory convertible securities ("2004 PRIDES"). The repurchase proceeds were used by the original holders to fulfill their obligations under the related forward equity purchase contracts. Pursuant to the settlement of the forward equity purchase contracts and other privately negotiated exchanges, we issued approximately 3.8 million shares of common stock. All of the 2004 PRIDES have been cancelled and retired. In connection with these transactions, we incurred $0.8 million of expenses which were reported in "Investment and other (income) loss" and reclassified $4.5 million of deferred tax liabilities to current liabilities through the income tax provision.
Junior Convertible Trust Preferred Securities
In 2006, we issued $300 million of junior subordinated convertible debentures due 2036 to a wholly-owned trust simultaneous with the issuance, by the trust, of $291 million of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2006 junior convertible trust preferred securities") have substantially the same terms.
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The 2006 junior convertible trust preferred securities bear interest at 5.1% per annum, payable quarterly in cash. Each $50 security is convertible, at any time, into 0.333 shares of our common stock, which represents a conversion price of $150 per share (or a 48% premium to the then prevailing share price of $101.45). Upon conversion, investors will receive cash or shares of our common stock (or a combination of cash and common stock) at our election. The 2006 junior convertible trust preferred securities may not be redeemed by us prior to April 15, 2011. On or after April 15, 2011, they may be redeemed if the closing price of our common stock exceeds $195 per share for a specified period of time. The trust's only assets are the junior convertible subordinated debentures. To the extent that the trust has available funds, we are obligated to ensure that holders of the 2006 junior convertible trust preferred securities receive all payments due from the trust.
In October 2007, we issued an additional $500 million of junior subordinated convertible debentures due 2037 to a wholly-owned trust simultaneous with the issuance, by the trust, of $500 million of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2007 junior convertible trust preferred securities") have substantially the same terms.
The 2007 junior convertible trust preferred securities bear interest at 5.15% per annum, payable quarterly in cash. Each $50 security is convertible, at any time, into 0.25 shares of our common stock, which represents a conversion price of $200 per share (or a 53% premium to the then prevailing share price of $130.77). Upon conversion, investors will receive cash or shares of our common stock (or a combination of cash and common stock) at our election. The 2007 junior convertible trust preferred securities may not be redeemed by us prior to October 15, 2012. On or after October 15, 2012, they may be redeemed if the closing price of our common stock exceeds $260 per share for a specified period of time. The trust's only assets are the 2007 junior convertible subordinated debentures. To the extent that the trust has available funds, we are obligated to ensure that holders of the 2007 junior convertible trust preferred securities receive all payments due from the trust.
The 2006 and 2007 junior convertible trust preferred securities are considered contingent payment debt instruments under the federal income tax regulations. We are required to deduct interest in an amount greater than our reported interest expense. In 2008, these deductions will generate deferred taxes of approximately $8.5 million.
Forward Equity Sale Agreement
In May 2008, we entered into a forward equity sale agreement under which we may sell up to $200 million of our common stock to a major securities firm, with the timing of sales at our discretion. Through September 30, 2008, we have agreed to sell approximately $120 million under this agreement at a weighted average price of $97.06. We can settle these forward sales at any time prior to December 19, 2009.
Derivatives
In 2006, we entered into a series of contracts that provided the option, but not the obligation, to repurchase 0.9 million shares of our common stock. Upon exercise, we could elect to receive the intrinsic value of a contract in cash or common stock. During 2007, we exercised our options, which had an intrinsic value of $21.1 million. We elected to receive approximately 0.1 million shares of common stock and used the remaining proceeds, $6.8 million, to enter into a series of contracts to repurchase up to 0.8 million shares. These options expired during the first quarter of 2008.
During the first quarter of 2008, we entered into a series of treasury rate lock contracts with a notional value of $250 million. These contracts were settled in the second quarter of 2008, and we received $8.2 million. Each contract was designated and qualified as a cash flow hedge under Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
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Activities" ("FAS 133"). We believe the settlement amount, net of taxes, continues to qualify as a cash flow hedge and, accordingly, the gain remains in accumulated other comprehensive income.
Purchases of Affiliate Equity
Many of our Affiliate operating agreements provide our Affiliate managers the conditional right to require us to purchase their retained equity interests at certain intervals. These agreements also provide us a conditional right to require Affiliate managers to sell their retained equity interests to us upon their death, permanent incapacity or termination of employment and provide Affiliate managers a conditional right to require us to purchase such retained equity interests upon the occurrence of specified events. These purchases may occur in varying amounts over a period of approximately 15 years (or longer), and the actual timing and amounts of such purchases (or the actual occurrence of such purchases) generally cannot be predicted with any certainty. These purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions at the time the right is exercised, which is intended to represent fair value. As one measure of the potential magnitude of such purchases, in the event that a triggering event and resulting purchase occurred with respect to all such retained equity interests as of September 30, 2008, the aggregate amount of these payments would have totaled approximately $1,201.5 million. In the event that all such transactions were consummated, we would own the cash flow distributions attributable to the additional equity interests purchased from our Affiliate managers. As of September 30, 2008, this amount would represent approximately $167.5 million on an annualized basis. We may pay for these purchases in cash, shares of our common stock or other forms of consideration. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions. These potential purchases, combined with our other cash needs, may require more cash than is available from operations, and therefore, we may need to raise capital by making borrowings under our Facility, by selling shares of our common stock or other equity or debt securities, or to otherwise refinance a portion of these purchases.
Operating Cash Flow
Cash flow from operating activities generally represents net income plus non-cash charges for amortization, deferred taxes, equity-based compensation and depreciation, as well as increases and decreases in our consolidated working capital. The decrease for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, resulted principally from increased settlements of minority interest and accrued liabilities, of $79.9 and $38.3 million, respectively, partially offset by an increase in collections of investment advisory fees receivables of $63.3 million.
Investing Cash Flow
The net cash flow used in investing activities increased $82.9 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. This was primarily the result of an increase of $86.8 million related to investments in Affiliates, partially offset by a decrease of $3.3 million in the purchases of fixed assets.
We may make payments in connection with our future investments. We are also contingently liable, upon achievement of specified financial targets, to make additional purchase payments. While no such payments were made during the third quarter of 2008, we made such payments of $60,500 during the nine months ended September 30, 2008.
Financing Cash Flow
Net cash flows from financing activities increased $291.4 million for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. This was primarily as
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a result of our $460 million issuance of senior convertible notes, partially offset a net decrease of $268.5 million of borrowings under out credit facility.
During the first quarter of 2008, the outstanding floating rate convertible securities were converted and approximately 7.0 million shares of common stock were issued. Additionally, we repurchased the outstanding senior notes component of our 2004 PRIDES. The repurchase proceeds were used by the original holders to fulfill their obligations under the related forward equity purchase contracts. The settlement of the forward equity purchase contracts resulted in the issuance of approximately 3.8 million shares of common stock.
During the second quarter, we entered into a forward equity sale agreement under which may sell up to $200 million of our common stock to a major securities firm, with the timing of sales at our discretion. Through September 30, 2008, we have agreed to sell approximately $120 million under this agreement at a weighted average price of $97.06 per share. We can settle these forward sales at any time prior to December 19, 2009.
In August 2008, we issued $460 million of senior convertible notes. The senior convertible notes bear interest at 3.95%, payable semi-annually in cash. Each security is convertible into 7.9586 shares of our common stock (at an initial conversion price of $125.65) upon the occurrence of certain events. Upon conversion, we may elect to pay or deliver cash, shares of our common stock, or some combination thereof. The holders of the senior convertible notes may require us to repurchase the notes in August of 2013, 2018, 2023, 2028 and 2033. We may redeem the notes for cash at any time on or after August 15, 2013.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2008:
Junior convertible trust preferred securities(1)
Purchase of Affiliate equity(2)
Leases
Other liabilities(3)
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purchases had been effected as of September 30, 2008, the aggregate purchase amount would have totaled approximately $1,201.5 million. Assuming the closing of such additional purchases, we would own the cash flow distributions attributable to the additional equity purchased, estimated to be approximately $167.5 million on an annualized basis as of September 30, 2008.
Recent Accounting Developments
In September 2006, the FASB issued FAS 157, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires expanded disclosure about fair value measurements. As described in Note 12 to the Consolidated Financial Statements, we adopted this standard in the first quarter of 2008 for our financial assets and liabilities that are measured at fair value on a quarterly basis. For all other nonfinancial assets and liabilities, FAS 157 is effective in the first quarter of 2009, and we are currently evaluating the impact such adoption may have on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("FAS 159"). FAS 159 permits companies to measure many financial instruments and certain other items at fair value. We adopted FAS 159 in the first quarter of 2008; as we did not apply the fair value option to any of our outstanding instruments, FAS 159 did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations" ("FAS 141R"). FAS 141R will change the accounting for business combinations by requiring acquirors to measure identifiable assets and liabilities at their full fair values on the acquisition date. FAS 141R will also change the treatment of contingent consideration, contingencies, acquisition costs, and restructuring costs. FAS 141R will be applied prospectively to acquisitions completed after December 31, 2008. We will adopt FAS 141R in the first quarter of 2009 and are currently evaluating the impact that this standard may have on our financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("FAS 160"). FAS 160 will change the accounting and reporting for minority or noncontrolling interests. Upon adoption, these interests, and transactions between controlling interest and minority interest holders may be accounted for within stockholders' equity. We will adopt FAS 160 in the first quarter of 2009 and are currently evaluating the impact that this standard may have on our financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133" ("FAS 161"). FAS 161 requires enhanced disclosures regarding the impact of derivatives on our financial position, financial performance, and cash flows. We will adopt FAS 161 in the first quarter of 2009 and are currently evaluating the impact that this standard may have on our consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"), which applies to all convertible debt instruments that may be settled either wholly or partially in cash upon conversion. FSP APB 14-1 requires issuers to separately account for the liability and equity components of convertible debt instruments in a manner reflective of the issuer's
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nonconvertible debt borrowing rate. Previous guidance required these types of convertible debt instruments to be accounted for entirely as debt. FSP APB 14-1 will be effective in the first quarter of 2009, and we are currently evaluating the impact that this guidance will have on our consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active" ("FSP FAS 157-3"), which applies to financial assets that are required or permitted to be measured at fair value in accordance with FAS 157. FSP FAS 157-3 clarifies the application of FAS 157 and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The adoption did not have a significant impact on our financial position or results of operations, nor did it have a significant impact on the valuation techniques we use in measuring the fair value of our financial assets.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our Quantitative and Qualitative Disclosures About Market Risk in the nine months ended September 30, 2008. Please refer to Item 7A in our 2007 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures during the quarter covered by this Quarterly Report on Form 10-Q. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2008, our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. We continue to review and document our disclosure controls and procedures and may, from time to time, make changes aimed at enhancing their effectiveness and ensuring that our systems evolve with our business.
There was no change in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
July 1-31, 2008
August 1-31, 2008
September 1-30, 2008
Item 6. Exhibits
The exhibits are listed on the Exhibit Index and are included elsewhere in this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements 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.
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EXHIBIT INDEX
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