SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o(Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time).
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 41,678,829 shares of the registrant's common stock outstanding on August 3, 2009.
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 income taxes
Income taxes—current
Income taxes—intangible-related deferred
Income taxes—other deferred
Net income
Net income (non-controlling interests)
Net (income) loss (non-controlling interests in partnerships)
Net Income (controlling interest)
Average shares outstanding—basic
Average shares outstanding—diluted
Earnings per share—basic
Earnings per share—diluted
Supplemental disclosure of total comprehensive income:
Other comprehensive income (loss)
Comprehensive income
Comprehensive income (non-controlling interests)
Comprehensive income (controlling interest)
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
Junior convertible trust preferred securities
Deferred income taxes
Other long-term liabilities
Total liabilities
Redeemable non-controlling interests
Equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Less: treasury stock, at cost
Total stockholders' equity
Non-controlling interests
Non-controlling interests in partnerships
Total equity
Total liabilities and equity
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AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (dollars in thousands) (unaudited)
December 31, 2008
Stock issued under option and other incentive plans
Tax benefit of option exercises
Issuance costs
Settlement of forward equity sale agreement
Share-based payment arrangements
Changes in Affiliate equity
Distributions to non-controlling interests
Redemptions of non-controlling interests in partnerships
Net Income
Other comprehensive income
June 30, 2009
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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
Affiliate equity 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
Decrease in other assets
Increase (decrease) in accounts payable, accrued liabilities and other long-term liabilities
Cash flow from operating activities
Cash flow used in investing activities:
Cost of new investments, net of cash acquired
Purchase of fixed assets
Purchase of investment securities
Sale of investment securities
Cash flow used in investing activities
Cash flow used in financing activities:
Borrowings of senior bank debt
Repayments of senior bank debt
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
Repurchases of Affiliate equity
Subscriptions (redemptions) of Non-controlling interests in partnerships
Cash flow used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) 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
Notes received for Affiliate equity sales
Payables recorded for Affiliate equity purchases
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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. In this Quarterly Report on Form 10-Q, the Company has included the current quarter operating results of one of its equity method Affiliates (formerly recorded one quarter in arrears, as permitted for equity method investments). This reporting change did not have a material effect on the Company's consolidated financial results. Operating results for interim periods are not necessarily indicative of the results that may be expected for any other period or for the full year. The Company's Annual Report on Form 10-K (as amended, the "Annual Report on Form 10-K") for the fiscal year ended December 31, 2008 includes additional information about AMG, its operations, its financial position and its accounting policies, and should be read in conjunction with this Quarterly Report on Form 10-Q.
2. Recently Adopted Accounting Standards
In 2009, the Company adopted several accounting standards that have been retrospectively applied to prior periods, including
APB 14-1 requires the Company to bifurcate certain of its convertible debt securities into their theoretical debt and equity components. The Company accretes (as interest expense) the debt components to their principal amounts over the expected life of the debt. As a result of APB 14-1, the Company has reported incremental non-cash interest of approximately $529 and $3,365 for the three months ended June 30, 2008 and 2009, respectively.
FAS 141R requires the Company to expense acquisition-related professional fees. The Company retrospectively applied FAS 141R to acquisition-related professional fees that were deferred as of December 31, 2008, and, accordingly, the Company's 2008 net income was reduced by $5,902 ($328 and
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AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$859 attributable to the three and six months ended June 30, 2008, respectively). The other provisions of FAS 141R will be applied to future acquisitions.
FAS 160 requires the Company to change the income statement, balance sheet and cash flow presentation of non-controlling interests (previously known as minority interests). Net income (non-controlling interest), which was previously reported as Minority interest (and reduced net income) on the Company's Consolidated Statements of Income, is now included in Net income. The accumulated capital of non-controlling interests, which was previously reported as Minority interest on the Company's Consolidated Balance Sheets, is now reported in Equity. Payments to non-controlling interests, profit distributions and repurchases of Affiliate equity, are now classified as financing activities on the Statements of Cash Flows (previously reported as operating and investing activities, respectively).
Topic D-98 provides guidance on the reporting of equity securities that are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. Topic D-98 requires the Company to present the redemption value of its Affiliate equity on its Consolidated Balance Sheets (referred to as "Redeemable non-controlling interests"). Adjustments to Redeemable non-controlling interests are recorded to stockholders' equity.
The Company adopted several other accounting standards that became effective in the second quarter of 2009, none of which had a material impact on its results of operations or financial position.
3. 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 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"). In the first quarter of 2009, the Company repaid the outstanding balance of the Term Loan ($233,514); the capacity under the Revolver remains at $770,000. The Company pays interest on any outstanding 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. 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 $233,514 at December 31, 2008 and no outstanding borrowings at June 30, 2009.
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4. Senior Convertible Securities
Following the Company's adoption of APB 14-1, the carrying values of the senior convertible securities are as follows:
2008 senior convertible notes
Zero coupon senior convertible notes
Total senior convertible securities
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. In accordance with APB 14-1, the Company is accreting the carrying value to the principal amount at maturity using an interest rate of 7.4% (over its expected life of five years), resulting in incremental interest expense for 2009 of approximately $11,205. Each security is convertible into 7.959 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 (subject to the holders right to convert) 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 $10,200. These deferred tax liabilities will be reclassified directly to stockholders' equity if the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.
Zero Coupon Senior Convertible Notes
In 2001, the Company issued $251,000 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 (the adoption of APB 14-1 did not affect these securities). As of June 30, 2009, $50,135 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 $54.09) upon the occurrence of certain events, including the following: (i) if the closing price of a share of the Company's common stock is more than a specified price over certain periods (initially $62.36 and increasing incrementally at the end of each calendar quarter to $63.08 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
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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.
5. Junior Convertible Trust Preferred Securities
Following the Company's adoption of APB 14-1, the carrying values of the junior convertible trust preferred securities are as follows:
2006 junior convertible trust preferred securities
2007 junior convertible trust preferred securities
Total junior convertible 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. In accordance with APB 14-1, the Company is accreting the carrying value to the principal amount at maturity using an interest rate of 7.5% (over its expected life of 30 years). The incremental interest expense for 2009 is expected to be $1,036. 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 junior 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. In the fourth quarter of 2008, the Company repurchased $69,180 aggregate principal amount of the 2007 junior convertible trust preferred securities. Following this repurchase, these securities were cancelled and retired.
The 2007 junior convertible trust preferred securities bear interest at 5.15% per annum, payable quarterly in cash. In accordance with APB 14-1, the Company is accreting the discounted amount to the principal amount at maturity using an interest rate of 8.0% (over its expected life of 30 years). The
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incremental interest expense for 2009 is expected to be $1,288. 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 available funds, the Company is 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 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 $8,800. These deferred tax liabilities will be reclassified directly to stockholders' equity if the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.
6. Forward Equity Sale Agreements
In May 2008, the Company entered into a forward equity sale agreement with a major securities firm to sell up to $200,000 of its common stock (the "May 2008 Agreement"), with the timing of sales in the Company's discretion. Under the terms of the May 2008 Agreement, the Company can settle forward sales at any time prior to March 31, 2010 by issuing shares in exchange for cash. Alternatively, the Company may choose to settle forward sales on a net basis. The Company has sold all $200,000 under the May 2008 Agreement at a weighted average exercise price of $65.41 and has settled approximately $144,000 of these forward sales through the issuance of approximately 1.8 million shares.
In May 2009, the Company entered into a second forward equity sale agreement to sell up to $200,000 of its common stock (the "May 2009 Agreement"). The Company has sold all $200,000 under the May 2009 Agreement at a weighted average exercise price of $57.27, but has not yet elected to settle the forward sales. As is the case in the May 2008 Agreement, the Company may choose to settle forward sales by issuing shares in exchange for cash or on a net basis (at any time prior to August 1, 2010). In July 2009, the Company entered into a third forward equity sale agreement to sell up to $200,000 of its common stock.
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7. Income Taxes
The Company's consolidated income taxes represent taxes on Net Income (controlling interest) as net income attributable to non-controlling interests is not taxed at the corporate level. A summary of the provision for income taxes is as follows:
Current:
Federal
State
Foreign
Total Current
Deferred:
Total Deferred
Provision for Income Taxes
Effective tax rate(1)
During the quarter ended June 30, 2009, the Company reversed $3,000 of its valuation allowance on state net operating losses upon the adoption by the Commonwealth of Massachusetts of favorable tax regulations. This adjustment reduced the Company's effective tax rate for the three and six months ended June 30, 2009, respectively.
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
Foreign tax credit 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 connection with the adoption of APB 14-1, the Company recorded approximately $110,000 of deferred tax liabilities related to convertible securities interest to account for the future deferred tax impact of non-cash interest accretion. The Company's junior convertible trust preferred securities and 2008 senior convertible notes also generate deferred taxes because the Company's tax deductions are higher than the interest expense recorded for financial statement purposes.
At June 30, 2009, the Company has state net operating loss carryforwards that expire over a 15-year period beginning in 2009. The valuation allowances at December 31, 2008 and June 30, 2009 were 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.
At June 30, 2009, the Company's liability for uncertain tax positions was $21,440, including interest and related charges of $4,282. The Company does not anticipate that this liability will change significantly over the next twelve months.
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 stockholders. Unlike all other dollar amounts in these Notes, the amounts in the numerator reconciliation are not presented in thousands.
Numerator:
Convertible securities interest expense, net
Net Income (controlling interest), as adjusted
Denominator:
Effect of dilutive instruments:
Stock options
Forward sale
Mandatory convertible securities
As more fully discussed in Notes 4 and 5, the Company had certain convertible securities outstanding during the periods presented and is required to apply the if-converted method to these
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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 (controlling interest) (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 six months ended June 30, 2009 excludes the potential exercise of options to purchase approximately 2.1 million common shares and the assumed conversion of the junior convertible trust preferred securities and the 2008 senior convertible notes because the effect would be anti-dilutive.
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 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.
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 $698 and $362 for the six months ended June 30, 2008 and 2009, respectively.
As of December 31, 2008 and June 30, 2009, the Company's investments in partnerships that are not controlled by its Affiliates were $10,221 and $25,784, respectively. These assets are reported within "Other assets" in the Consolidated Balance Sheets. 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 FAS 157, "Fair Value Measurements" for all financial instruments and nonfinancial instruments that are measured at fair value on a quarterly basis. The Company adopted the provisions of FAS 157 for nonfinancial assets and nonfinancial liabilities, which were previously deferred, 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. The Company did not have any nonfinancial assets or nonfinancial liabilities which required remeasurement during the three months ended June 30, 2009.
Substantially all of the Company's Level 3 instruments consist of Affiliate investments in partnerships. Any change in the fair value of these investments is presented as "Net (income) loss (non-controlling interests 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 "Net (income) loss (non-controlling interests in partnerships)." The following table presents the changes in Level 3 assets or liabilities for the three and six months ended June 30, 2009:
Balance, beginning of period
Realized and unrealized gains (losses) included in net income
Realized and unrealized gains (losses) included in other comprehensive income
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Balance, June 30, 2009
Amount of total gains (losses) included in net income attributable to unrealized gains (losses) from assets still held at June 30, 2009
FSP FAS 107-1 and APB 28-1, "Disclosures about Fair Value of Financial Instruments" requires disclosures about the fair value of financial instruments whenever summarized financial information is reported in interim periods.
As of June 30, 2009, the carrying amount of the Company's cash, cash equivalents and short-term investments approximates fair value because of the short-term nature of these instruments. The carrying value of notes receivable approximates fair value because interest rates and other terms are at market rates. The carrying value of notes payable approximates fair value principally because of the short-term nature of the notes. The carrying value of senior bank debt approximates fair value because the debt is a credit facility with variable interest based on selected short-term rates. The fair market value of the zero coupon senior convertible notes, the 2008 senior convertible notes, and the 2006 and 2007 junior convertible trust preferred securities was $50,847, $397,302 and $383,131, respectively. The carrying value of the zero coupon senior convertible notes, the 2008 senior convertible notes, and the 2006 and 2007 junior convertible trust preferred securities was $47,263, $403,992 and $506,169, respectively.
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, 2008 and June 30, 2009, the total receivable (reported in "Other assets") was $42,808 and $35,538, respectively. The total payable as of December 31, 2008 was $28,241, of which $26,187 is included in current liabilities. The total payable as of June 30, 2009 was $3,202, of which $2,907 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.
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14. Stock Option and Incentive Plans
The following summarizes the transactions of the Company's stock option and incentive plans for the six months ended June 30, 2009:
Unexercised options outstanding—January 1, 2009
Options granted
Options exercised
Options expired
Options forfeited
Unexercised options outstanding—June 30, 2009
Exercisable at June 30, 2009
Under the Company's Long-Term Executive Incentive Plan, the Company granted incentive awards during the second quarter of 2009. The awards are denominated in the Company's common stock, with a fair value of $20,000. Consistent with the Company's retention and incentive objectives, the awards are subject to performance, vesting and forfeiture provisions. The Company will recognize expense for these awards ratably over the 4.5 year service period.
The Company's Net Income (controlling interest) for the three and six months ended June 30, 2009 includes compensation expense of $1,194 and $1,912, respectively (net of income tax benefits of $764 and $1,223, respectively, related to the Company's share-based compensation arrangements). As of June 30, 2009, the deferred compensation expense related to share-based compensation arrangements was $33,982, which is expected to be recognized over a weighted average period of approximately four years (assuming no forfeitures). As of June 30, 2009, 1.6 million options have expiration dates prior to the end of 2010.
15. Derivatives
During the first quarter of 2008, the Company entered into a series of treasury rate lock contracts with a notional value of $250,000. Each contract was designated and qualified as a cash flow hedge under FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." These contracts were settled in the second quarter of 2008, and the Company received $8,154. During the fourth quarter of 2008, the Company concluded that it was probable that the hedged transaction would not occur and the gain was reclassified from accumulated other comprehensive income to Net Income (controlling interest).
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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 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.
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Statements of Income
Investment (income) loss from Affiliate investments in partnerships
Income taxes
Net loss (non-controlling interests in partnerships)
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Total assets as of December 31, 2008
Total assets as of June 30, 2009
17. Goodwill and Acquired Client Relationships
The following table presents the change in goodwill during the six months ended June 30, 2009:
Balance, as of December 31, 2008
Goodwill acquired, net
Foreign currency translation
Balance, as of June 30, 2009
The following table reflects the components of intangible assets of the Company's Affiliates that are consolidated as of December 31, 2008 and June 30, 2009:
Amortized intangible assets:
Acquired client relationships
Non-amortized intangible assets:
Acquired client relationships-mutual fund management contracts
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For the Company's Affiliates that are consolidated, definite-lived acquired client relationships are amortized over their expected useful lives. As of June 30, 2009, these relationships were being amortized over a weighted average life of approximately 10 years. The Company estimates that its consolidated annual amortization expense will be approximately $32,500 for the next five 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 June 30, 2009, these relationships were being amortized over approximately seven years. Amortization expense for these relationships was $15,862 for the six months ended June 30, 2009. The Company estimates that the annual amortization expense attributable to its current equity-method Affiliates will be approximately $31,500 for the next five years.
18. Recent Accounting Developments
In June 2009, the FASB issued FAS No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140" ("FAS 166"). FAS 166 establishes new criteria that must be met before transfers of financial assets are eligible for sale accounting and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Disclosures are also required to provide information about transfers of financial assets and a transferor's continuing involvement with transferred financial assets. The Company will adopt FAS 166 in the first quarter of 2010 and does not expect this standard to have a material effect on the consolidated financial statements.
In June 2009, the FASB issued FAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("FAS 167"). FAS 167 amends FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46(R)") to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity ("VIE") based on whether the entity has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. FAS 167 also requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Disclosures are also required to provide information about an enterprise's involvement in a VIE. The Company will adopt FAS 167 in the first quarter of 2010 and is currently evaluating the potential impact of this new standard.
In June 2009, the FASB issued FAS No. 168, "The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162" ("FAS 168"). FAS 168 replaces all previously issued accounting standards and establishes the "FASB Accounting Standards Codification™" ("Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. The Company will adopt FAS 168 in the third quarter of 2009.
19. Affiliate Equity
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 upon their death, permanent incapacity or termination of employment and
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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. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to the Company's approval or other restrictions.
The Company may pay for Affiliate equity purchases in cash, shares of its common stock or other forms of consideration and can consent to the transfer of these interests to other individuals or entities. The Company's cumulative redemption obligation for these interests has been presented as "Redeemable non-controlling interests" on the Company's Consolidated Balance Sheets. Changes in redeemable non-controlling interests for the six months ended June 30, 2009 are principally the result of changes to the value of these interests. Although the timing and amounts of these purchases are difficult to predict, the Company expects to repurchase approximately $50,000 of Affiliate equity during the next twelve months, and, in such event, will own the cash flow associated with any equity repurchased.
During the six months ended June 30, 2008 and 2009, the Company acquired interests from and transferred interests to Affiliate management partners. The following schedule discloses the effect of changes in the Company's ownership interest in its Affiliates on the controlling interest's equity:
Increase in controlling interest paid-in capital from the sale of Affiliate equity
Change from Net Income (controlling interest) and net transfers with non-controlling interests
20. 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) on investment securities
Change in net unrealized loss on derivative securities
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The components of accumulated other comprehensive income, net of applicable taxes, are as follows:
Foreign currency translation adjustments
Unrealized gain (loss) on investment securities
21. Subsequent Event
On July 29, 2009 the Company announced an agreement to acquire a majority interest in Harding Loevner LLC ("Harding Loevner"). Harding Loevner manages approximately $5 billion in assets under management in a range of investment strategies including emerging markets, global and international products. The transaction is expected to close during the third quarter of 2009.
Subsequent events and transactions have been evaluated for potential recognition or disclosure through August 6, 2009, the day the financial statements were issued.
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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.
Through our Affiliates, we manage approximately $173.8 billion in assets (as of June 30, 2009) in more than 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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including independent investment advisors, retirement plan sponsors, broker/dealers, major fund marketplaces and bank trust departments.
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 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 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
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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 to us. 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 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 $29.0 billion of assets under management (as of June 30, 2009), 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 inherently depend on investment results and will vary from period to period, we anticipate performance fees to be a recurring component of our revenue. We also anticipate that, within any calendar year, the majority of any performance fees will typically be realized in the fourth quarter.
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For certain of our Affiliates, generally where we own a non-controlling 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 (controlling interest) and EBITDA. As a consequence, increases or decreases in these firms' assets under management (which totaled $45.8 billion as of June 30, 2009) will not affect reported revenue in the same manner as changes in assets under management at our other Affiliates.
Our Net Income attributable to controlling interest 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' non-controlling 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
March 31, 2009
Client cash inflows
Client cash outflows
Net client cash flows
Investment performance
Other(1)
Statement of Changes—Year to Date
As shown in the assets under management table above, client cash inflows totaled $21.2 billion while client cash outflows totaled $27.2 billion for the six months ended June 30, 2009. The net flows for the six months ended June 30, 2009 occurred across a broad range of product offerings in each of our distribution channels, with no individual cash inflow or outflow having a material impact on our revenue or expenses.
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)
As a result of the strong investment performance across global equity markets during the second quarter, ending assets under management were 5% higher than average assets under management for the six months ended June 30, 2009. This variance between ending assets under management and average assets under management is unlikely to meaningfully affect future operating results.
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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. As described in the "Overview" section above, performance fees are generally measured on absolute or relative investment performance against a benchmark. As a result, the level of performance fees earned can vary significantly from period to period and these fees may not necessarily be correlated to changes in assets under management.
Our total revenue decreased $107.8 million (or 35%) in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily from a 33% decrease in average assets under management. This decrease in average assets under management resulted principally from the decline in global equity markets and negative net client cash flows. Unrelated to the change in assets under management, performance fees in the three months ended June 30, 2009 increased as compared to the three months ended June 30, 2008 (5% of revenue for the three months ended June 30, 2009 and 3% of revenue for the three months ended June 30, 2008).
Our total revenue decreased $264.3 million (or 41%) in the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily from a 35% decrease in average assets under management. This decrease in average assets under management resulted principally from the decline in global equity markets and negative net client cash flows. Unrelated to the change in assets under management, performance fees in the six months ended June 30, 2009 decreased as compared to the six months ended June 30, 2008 (3% of revenue for the six months ended June 30, 2009 and 6% of revenue for the six months ended June 30, 2008).
The following discusses the changes in our revenue by operating segments.
Mutual Fund Distribution Channel
Our revenue in the Mutual Fund distribution channel decreased $53.7 million (or 43%) in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, while average assets under management decreased 42%, and decreased $120.1 million (or 46%) in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, while average assets under management decreased 43%. These decreases in average assets under management resulted principally from the decline in global equity markets and negative net client cash flows. Unrelated to the change in assets under management, our performance fees in the six months ended June 30, 2009 declined as compared to the six months ended June 30, 2008.
Institutional Distribution Channel
Our revenue in the Institutional distribution channel decreased $45.9 million (or 31%) in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, while average assets under management decreased 34%, and decreased $123.8 million (or 40%) in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, while average assets under management decreased 36%. These decreases in average assets under management resulted principally from the decline in global equity markets and negative net client cash flows. Unrelated to the change in assets under management, our performance fees in the six months ended June 30, 2009 declined as compared to the six months ended June 30, 2008.
High Net Worth Distribution Channel
Our revenue in the High Net Worth distribution channel decreased $8.2 million (or 23%) in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, while average assets under management decreased 11%, and decreased $20.4 million (or 27%) in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, while average assets under management decreased 14%. These decreases in average assets under management resulted principally from the decline in global equity markets, partially offset by our 2008 investment in a new Affiliate.
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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 Allocation. During the three and six months ended June 30, 2009, approximately $46.4 million and $73.1 million (or 45% and 39%), 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 27% and 36% in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, 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 share-based compensation of $1.7 million and $4.3 million in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively. These decreases were partially offset by increases in aggregate Affiliate expenses resulting from our new Affiliate investment in 2008 of $4.3 million and $8.6 million in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively.
Selling, general and administrative expenses decreased 33% and 36% in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively. These decreases resulted from decreases in sub-advisory and distribution expenses attributable to a decline in assets under management at our Affiliates in the Mutual Fund distribution channel, as well as Affiliate and holding company cost-cutting initiatives. The decrease in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 was also attributable to a decrease of $5.1 million in sub-advisory and administrative costs related to performance fees. In each period, these decreases were partially offset by increases in aggregate Affiliate expenses from our new Affiliate investment in 2008 of $1.0 million and $2.0 million, respectively.
Amortization of intangible assets decreased 6% and 5% in the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008, respectively. These increases were principally attributable to a decrease in definite-lived intangible assets.
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Depreciation and other amortization increased 10% and 14% in the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008, principally attributable to an increase in aggregate Affiliate expenses from our new Affiliate investment in 2008.
Other operating expenses decreased 6% in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, as a result of Affiliate cost-cutting initiatives. This decrease was partially offset by a $0.3 million increase in aggregate Affiliate expenses from our new Affiliate investment in 2008. Other operating expenses were essentially flat in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, as the Affiliate and holding company cost-cutting initiatives were offset by a $0.6 million increase in aggregate Affiliate expenses from our new Affiliate investment in 2008.
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
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 decreased 45% and 50% in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively. These decreases were principally the result of decreases in revenue resulting from declines in assets under management at Affiliates that we account for under the equity method of accounting. These decreases also resulted from increases in intangible amortization expense of $3.0 million and $6.0 million in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively.
Investment and other income increased in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, principally as a result of an increase in Affiliate investment earnings. Investment and other income also improved in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 because of $2.0 million of expenses incurred on the settlement of our 2004 mandatory convertible securities and the conversion of our floating rate senior convertible securities in the first quarter of 2008, which did not recur in the first quarter of 2009.
Investment income (loss) from Affiliate investments in partnerships relates to the consolidation of certain investment partnerships in which our Affiliates are the general partner. For the three months ended June 30, 2008 and 2009, the income from Affiliate investments in partnerships was $5.4 million and $14.9 million, respectively. For the six months ended June 30, 2008 and 2009, the income from Affiliate investments in partnerships was $(8.9) million and $11.2 million, respectively. This income (loss) was principally attributable to investors who are unrelated to us.
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Interest expense increased 14% in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. This increase was principally attributable to an increase of $8.4 million attributable to the issuance of our 2008 senior convertible notes, partially offset by a $5.2 million decrease in the cost of our senior bank debt resulting from a decline in borrowings. Interest expense decreased 2% in the six months ended June 30, 2009, as compared to the six months ended June 30, 2008. The decrease was principally attributable to an $11.2 million decrease in the cost of our senior bank debt resulting from a decline in borrowings and a $4.9 million decrease from the conversion of our floating rate senior convertible securities and the settlement of our mandatory convertible securities in 2008. These decreases were partially offset by an increase of $16.8 million attributable to the issuance of our 2008 senior convertible notes.
Income taxes decreased 82% in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, principally as a result of the decrease in Net Income (controlling interest), as well as a decrease in the effective tax rate from 37.0% to 25.4%. Income taxes decreased 80% in the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, principally as a result of the decrease in Net Income (controlling interest), as well as a decrease in the effective tax rate from 37.0% to 30.9%. The effective tax rate for the three and six month periods ending June 30, 2009 decreased as a result of new Commonwealth of Massachusetts tax regulations, which enabled us to reverse $3.0 million of valuation allowance related to state net operating losses.
The following table summarizes Net Income:
Net income (loss) (non-controlling interests in partnerships)
Net income attributable to non-controlling interests decreased 33% and 48% in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively, principally as a result of the previously discussed changes in revenue.
Net income (loss) (non-controlling interest in partnerships) relates to the consolidation of certain investment partnerships in which our Affiliates are the general partner. For the three months ended June 30, 2008 and 2009, the net income from Affiliate investment partnerships attributable to the non-controlling interests was $5.2 million and $14.6 million, respectively. For the six months ended June 30, 2008 and 2009, the net income (loss) from Affiliate investment partnerships attributable to the non-controlling interests was $(8.2) million and $10.8 million, respectively.
The decrease in Net Income (controlling interest) in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, resulted principally from decreases in revenue and income from equity method investments, partially offset by decreases in reported operating, minority interest and income tax expenses, as described above.
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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 (controlling interest). Under our Cash Net Income definition, we add to Net Income (controlling interest) amortization (including equity method amortization) and deferred taxes related to intangible assets and Affiliate depreciation and equity expenses, and exclude the effect of APB 14-1. 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 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 (controlling interest) 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 we believe it is unlikely these accruals will be used to settle material tax obligations. We add back non-cash expenses relating to certain transfers of equity between Affiliate management partners when these transfers have no dilutive effect to our shareholders. 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.
In connection with recent accounting changes (see Note 2 to the consolidated financial statements), we modified our Cash Net Income definition to add back non-cash charges related to certain Affiliate equity transfers (referred to as Affiliate equity expense) and APB 14-1 (both net of tax). In prior periods, Cash Net Income was defined as "Net Income plus amortization and deferred taxes relating to intangible assets plus Affiliate depreciation." Under this prior definition, Cash Net Income reported for the three and six months ended June 30, 2008 was $59.5 million and $116.2 million, respectively.
The following table provides a reconciliation of Net Income (controlling interest) to Cash Net Income:
Intangible amortization
Intangible-related deferred taxes
APB 14-1 expense
Affiliate depreciation
Cash Net Income
Cash Net Income decreased 32% and 33% in the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008, respectively, primarily as a result of the previously-described factors that caused a decrease in Net Income, partially offset by increases in amortization and intangible-related deferred tax expenses.
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Liquidity and Capital Resources
The following table summarizes certain key financial data relating to our liquidity and capital resources:
Balance Sheet Data
Senior debt
Cash Flow Data
Operating cash flow
Investing cash flow
Financing cash flow
EBITDA(1)
We view our ratio of debt to EBITDA (our "internal leverage ratio") as an important gauge of our ability to service debt, make new investments and access additional capital. Consistent with industry practice, we do not consider junior trust preferred securities as debt for the purpose of determining our internal leverage ratio. We also view our leverage on a "net debt" basis by deducting from our debt balance holding company cash (including prospective proceeds from the settlement of our forward equity sale agreements). At June 30, 2009, our internal leverage ratio was 0.5:1.
Under the terms of our credit facility we are required to meet two financial ratio covenants. The first of these covenants is a maximum ratio of debt to EBITDA (the "bank leverage ratio") of 3.50. The calculation of our bank leverage ratio is generally consistent with our internal leverage ratio approach. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.00 (our "bank interest coverage ratio"). For the purposes of calculating these ratios, share-based compensation expense is added back to EBITDA. As of June 30, 2009, our actual bank leverage and bank interest coverage ratios were 1.86 and 5.23, respectively, and we were in full compliance with all terms of our credit facility.
We are rated BBB- by Standard & Poor's. A downgrade of our credit rating, either as a result of industry or company-specific considerations, would not have a material financial effect on any of our agreements or securities (or otherwise trigger a default).
In addition to borrowings available under our $770 million revolving credit facility, our current liquidity is augmented by approximately $375 million of holding company cash (including prospective proceeds from the forward equity settlements) and the free cash flow generated by our business. We have no near-term debt maturities.
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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
In the six months ended June 30, 2009, we met our cash requirements primarily through cash generated by operating activities. Our principal uses of cash in the six months ended June 30, 2009 were to make distributions to Affiliate managers and repay our Senior debt. 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 interest on outstanding debt, the repurchase of debt securities, and the repurchase of shares of our common stock and for working capital purposes.
The following table summarizes the principal amount due at maturity of our debt obligations and convertible securities as of June 30, 2009:
Senior Bank Debt
2008 Senior Convertibles Notes
Junior Convertible Trust Preferred Securities
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On November 27, 2007, we entered into an amended and restated senior credit facility (the "Facility"). During the third quarter of 2008, we increased our borrowing capacity to $1.01 billion, comprised of a $770 million revolving credit facility (the "Revolver") and a $240 million term loan (the "Term Loan"). In the first quarter of 2009, we repaid the outstanding balance of the Term Loan ($233.5 million); the capacity under the Revolver remains at $770 million. 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. Subject to the agreement of lenders to provide additional commitments, we have the option to increase the Facility by up to an additional $175 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 $233.5 million at December 31, 2008 and no outstanding borrowings at June 30, 2009.
In 2001, we issued $251 million 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 (the adoption of APB 14-1 did not affect these securities). As of June 30, 2009, $50.1 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 $54.09) 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 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 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. In accordance with APB 14-1, we are accreting the carrying value to the principal amount at maturity using an interest rate of 7.4% (over its expected life of five years), resulting in incremental interest expense for 2009 of approximately $11.2 million. Each security is convertible into 7.959 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 common stock, or some combination
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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 (subject to the holders right to convert) 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 our reported interest expense, which will result in annual deferred tax liabilities of approximately $10.2 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.
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.
The 2006 junior convertible trust preferred securities bear interest at a rate of 5.1% per annum, payable quarterly in cash. In accordance with APB 14-1, we are accreting the carrying value to the principal amount at maturity using an interest rate of 7.5% (over the expected life of 30 years). The incremental interest expense for 2009 is expected to be $1.0 million. 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 which are 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. In the fourth quarter of 2008, we repurchased $69.2 million aggregate principal amount of the 2007 junior convertible trust preferred securities. Following this repurchase, these securities were cancelled and retired.
The 2007 junior convertible trust preferred securities bear interest at 5.15% per annum, payable quarterly in cash. In accordance with APB 14-1, we are accreting the discounted amount to the principal amount at maturity. The incremental interest expense for 2009 is expected to be $1.3 million. 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
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amount greater than our reported interest expense. In 2009, these deductions will generate deferred taxes of approximately $8.8 million.
Forward Equity Sale Agreement
In May 2008, we entered into a forward equity sale agreement with a major securities firm to sell up to $200 million of our common stock (the "May 2008 Agreement"), with the timing of sales in our discretion. Under the terms of the May 2008 Agreement, we can settle forward sales at any time prior to March 31, 2010 by issuing shares in exchange for cash. Alternatively, we may choose to settle forward sales on a net basis. We have sold all $200 million under the May 2008 Agreement at a weighted average exercise price of $65.41 and have settled approximately $144.0 million of these forward sales through the issuance of approximately 1.8 million shares.
In May 2009, we entered into a second forward equity sale agreement to sell up to $200 million of our common stock (the "May 2009 Agreement"). We have sold all $200 million under the May 2009 Agreement at a weighted average exercise price of $57.27, but have not yet elected to settle the forward sales. As is the case in the May 2008 Agreement, we may choose to settle forward sales by issuing shares in exchange for cash or on a net basis (at any time prior to August 1, 2010). In July 2009, we entered into a third forward equity sale agreement to sell up to $200 million of our common stock.
Derivatives
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 Activities" ("FAS 133"). During the fourth quarter of 2008, we concluded that it was probable that the hedged transaction would not occur and the gain was reclassified from accumulated other comprehensive income to Net Income (controlling interest).
Affiliate Equity
Many of our operating agreements provide Affiliate managers a conditional right to require us to purchase their retained equity interests at certain intervals. Certain 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. 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. 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.
We may pay for Affiliate equity purchases in cash, shares of our common stock or other forms of consideration and can consent to the transfer of these interests to other individuals or entities. Our cumulative redemption obligation for these interests has been presented as "Redeemable non-controlling interests" on our Consolidated Balance Sheets. Changes in redeemable non-controlling interests for the three months ended June 30, 2009 are principally the result of changes to the value of these interests. Although the timing and amounts of these purchases are difficult to predict, we expect to repurchase approximately $50.0 million of Affiliate equity during the next twelve months, and, in such event, will own the cash flow associated with any equity repurchased.
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Operating Cash Flow
Cash flow from operations 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 in cash flows from operations for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, resulted principally from decreased Net Income of $77.0 million, and a decrease in the settlement of investment advisory fees receivable of $41.0 million, partially offset by a decrease in settlements of liabilities of $17.7 million.
In accordance with EITF 04-05, we consolidated $68.8 million and $78.6 million of client assets held in partnerships controlled by our Affiliates as of December 31, 2008 and June 30, 2009 respectively. Purchases of $6.7 million reduced operating cash flow in the first six months ended June 30, 2008. Sales of client assets generated $0.3 million of operating cash flow in the six months ended June 30, 2009.
Investing Cash Flow
The net cash flow used in investing activities decreased $65.8 million for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008. This was primarily the result of a decrease of $59.5 million in investments in new Affiliates in the current period, a decrease of $11.7 in the purchase of investment securities and a decrease of sale of investment securities of $9.3 million.
On July 29, 2009, we announced an agreement to acquire a majority interest in Harding Loevner LLC. The transaction is expected to close during the third quarter of 2009.
Under past acquisition agreements, we are contingently liable, upon achievement of specified financial targets, to make payments of up to $234.0 million through 2012. In 2009, we expect to make total payments of approximately $150.0 million to settle portions of these contingent obligations and our investment in Harding Loevner.
Financing Cash Flow
Net cash flows used in financing activities increased $4.9 million for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008. This was primarily as a result of an increase in net senior bank debt repayments of $287.0 million, and a decrease in net proceeds from the settlement of convertible securities and issuance of common stock of $12.5 million, partially offset by the $144.3 million received from settlements under our forward equity sale agreement (as discussed above) and a decrease in distributions to non-controlling interests and repurchases of Affiliate equity of $151.8 million.
During 2008, we retired the outstanding floating rate convertible securities and issued approximately 7.0 million shares of common stock. 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. We issued approximately 3.8 million shares of common stock to settle the forward equity purchase contracts.
Proceeds available under our Facility and forward equity sale agreements are sufficient to support our cash flow needs for the foreseeable future.
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Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2009:
Junior convertible trust preferred
securities(1)
Leases
Other liabilities(2)
Recent Accounting Developments
In June 2009, the FASB issued FAS No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140" ("FAS 166"). FAS 166 establishes new criteria that must be met before transfers of financial assets are eligible for sale accounting and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Disclosures are also required to provide information about transfers of financial assets and a transferor's continuing involvement with transferred financial assets. We will adopt FAS 166 in the first quarter of 2010 and we do not expect this standard to have a material effect on our consolidated financial statements.
In June 2009, the FASB issued FAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("FAS 167"). FAS 167 amends FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46(R)") to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity ("VIE") based on whether the entity has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. FAS 167 also requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Disclosures are also required to provide information about an enterprise's involvement in a VIE. We will adopt FAS 167 in the first quarter of 2010 and we are currently evaluating the potential impact of this new standard.
In June 2009, the FASB issued FAS No. 168, "The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162" ("FAS 168"). FAS 168 replaces all previously issued accounting standards and establishes the "FASB Accounting Standards Codification™" ("Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
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financial statements in conformity with generally accepted accounting principles in the United States. We will adopt FAS 168 in the third quarter of 2009.
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 three months ended June 30, 2009. Please refer to Item 7A in our 2008 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 June 30, 2009, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our 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 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held in Prides Crossing, Massachusetts on June 9, 2009. At that meeting, the stockholders considered and acted upon the following proposals:
Richard E. Floor
Sean M. Healey
Harold J. Meyerman
William J. Nutt
Rita M. Rodriguez
Patrick T. Ryan
Jide J. Zeitlin
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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