| AFFILIATED MANAGERS GROUP INC Item 1A Risk Factors We face a variety of risk factors that are substantial and inherent in our business, including market, liquidity, credit, operational, legal and regulatory risks |
| The following are some of the more important factors that could affect our business |
| Declines in the equity markets adversely affect our performance |
| The investment management contracts of our Affiliates typically provide for payment based on the market value of assets under management, and payments will be adversely affected by declines in the equity markets |
| In addition, certain of our Affiliates &apos investment management contracts include fees based on investment performance, which are directly dependent upon investment results and thus often vary substantially from year to year |
| Unfavorable market performance, fluctuations in the prices of specific securities, asset withdrawals or other changes in the investment patterns of our Affiliates &apos clients may reduce our Affiliates &apos assets under management, which in turn may adversely affect the fees payable to our Affiliates and, ultimately, our consolidated results of operations and financial condition |
| Our growth strategy depends upon continued growth from our existing Affiliates and upon our making new investments in mid-sized investment management firms |
| Our Affiliates may not be able to maintain their respective levels of performance or contribute to our growth at their historical levels or at currently anticipated levels |
| Also, our Affiliates may be unable to carry out their management succession plans, which may adversely affect their operations and revenue streams |
| 11 _________________________________________________________________ The success of our investment program will depend upon our ability to find suitable firms in which to invest and our ability to negotiate agreements with such firms on acceptable terms |
| We cannot be certain that we will be successful in finding or investing in such firms or that they will have favorable operating results following our investment, which could have an adverse effect on our business, financial condition and results of operations |
| Our Affiliates &apos businesses are highly regulated |
| Many aspects of our Affiliates &apos businesses are subject to extensive regulation by various US federal regulatory authorities, certain state regulatory authorities and non-US regulatory authorities |
| We cannot ensure that our Affiliates will fulfill all applicable regulatory requirements |
| The failure of any Affiliate to satisfy regulatory requirements could subject that Affiliate to sanctions that might materially impact the Affiliateapstas business and our business |
| Moreover, any changes in laws or regulatory requirements, or the interpretation or application of such laws and regulatory requirements by regulatory authorities, could have a material adverse impact on our profitability and mode of operations |
| Additionally, certain of our Affiliates &apos businesses include the management of mutual funds, an industry that has become the subject of heightened regulatory scrutiny |
| If we or any of our Affiliates were to be named as a subject of an investigation, the publicity of such investigation could have a material adverse effect on our stock price and financial condition even if we (or our Affiliates) were found not to have committed any violation of the securities laws or other misconduct |
| Our Affiliates &apos international operations are subject to foreign risks, including political, regulatory, economic and currency risks |
| Some of our Affiliates operate or advise clients outside of the United States, and several affiliated investment management firms, are based outside the United States |
| Accordingly, we and our current and any prospective affiliated investment management firms that have foreign operations are subject to risks inherent in doing business internationally, in addition to the risks our business faces more generally |
| These risks may include changes in applicable laws and regulatory requirements, difficulties in staffing and managing foreign operations, longer payment cycles, difficulties in collecting investment advisory fees receivable, less stringent legal, regulatory and accounting regimes, political instability, fluctuations in currency exchange rates, expatriation controls, expropriation risks and potential adverse tax consequences |
| These or other foreign risks may have an adverse effect both on our Affiliates and on our consolidated business, financial condition and results of operations |
| Our Affiliates &apos autonomy limits our ability to alter their management practices and policies, and we may be held responsible for liabilities incurred by them |
| Although our agreements with our Affiliates typically give us the authority to control and/or vote with respect to certain of their business activities, we generally are not directly involved in managing our Affiliates &apos day-to-day activities, including investment management policies and fee levels, product development, client relationships, compensation programs and compliance activities |
| As a consequence, our financial condition and results of operations may be adversely affected by problems stemming from the day-to-day operations of our Affiliates |
| Some of our Affiliates are partnerships or limited liability companies of which we are, or an entity controlled by us is, the general partner or manager member |
| Consequently, to the extent that any of these Affiliates incur liabilities or expenses that exceed its ability to pay for them, we may be directly or indirectly liable for their payment |
| In addition, with respect to each of our Affiliates, we may be held liable in some circumstances as a control person for the acts of the Affiliate or its employees |
| While we and our Affiliates maintain errors and omissions and general liability insurance in amounts believed to 12 _________________________________________________________________ be adequate to cover certain potential liabilities, we cannot be certain that we will not have claims that exceed the limits of available insurance coverage, that the insurers will remain solvent and will meet their obligations to provide coverage or that insurance coverage will continue to be available to us and our Affiliates with sufficient limits and at a reasonable cost |
| A judgment against any of our Affiliates and/or us in excess of available insurance coverage could have a material adverse effect on the Affiliate and/or us |
| Historically, equity markets and our common stock have been volatile |
| The market price of our common stock historically has experienced and may continue to experience high volatility, and the broader equity markets have experienced and may again experience significant price and volume fluctuations |
| This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock |
| In addition, our announcements of our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us, our Affiliates or our competitors could cause the market price of our common stock to fluctuate substantially |
| The sale or issue of substantial amounts of our common stock could adversely impact the price of our common stock |
| The sale of substantial amounts of our common stock in the public market could adversely impact its price |
| In connection with our financing activities, we issued securities that are convertible into shares of our common stock either upon the occurrence of certain events or, in the case of our mandatory convertible securities, upon the passage of time |
| The number of shares of our common stock to be issued will primarily be determined by the price of our common stock at the time of conversion or settlement of an underlying forward purchase contract |
| Upon the conversion of the securities, and especially if we were required to issue the maximum number of shares of common stock issuable under our outstanding convertible securities, a significant number of additional shares of our common stock would be sold in the public market |
| As of December 31, 2005, if the aggregate number of shares issuable under the convertible securities were issued, an additional 12dtta7 million shares of our common stock would be outstanding |
| Moreover, in connection with future financing activities, we may issue additional convertible securities or shares of our common stock |
| Also, as of December 31, 2005, options to purchase 7dtta8 million shares of our common stock were outstanding and exercisable, although 2dtta3 million of the shares that may be purchased pursuant to such exercises would be subject to restrictions on transferability for specified periods |
| Consequently, any such issuance of shares of our common stock could have the effect of substantially diluting the interests of our current equity holders |
| In the event that a large number of shares of our common stock are sold in the public market, the price of our common stock may fall |
| The failure to consummate announced investments in new investment management firms could have an adverse effect on our operating results and financial condition |
| Consummation of our acquisition transactions is generally subject to a number of closing conditions, contingencies and approvals, including but not limited to obtaining certain consents of the investment management firms &apos clients |
| In the event that an announced transaction is not consummated, we may experience a decline in the price of our common stock to the extent that the then-current market price reflects a market assumption that we will complete the announced transaction |
| In addition, the fact that a transaction did not close after we announced it publicly may negatively affect our ability and prospects to consummate transactions in the future |
| Finally, we must pay costs related to these transactions, including legal and accounting fees, even if the transactions are not completed, which may have an adverse effect on our results of operations and financial condition |
| 13 _________________________________________________________________ The failure to receive regular distributions from our Affiliates would adversely affect us, and our holding company structure results in substantial structural subordination that may affect our ability to make payments on our obligations |
| Because we are a holding company, we receive substantially all of our cash from distributions made to us by our Affiliates |
| An Affiliateapstas payment of distributions to us may be subject to claims by the Affiliateapstas creditors and to limitations applicable to the Affiliate under federal and state laws, including securities and bankruptcy laws, and any applicable non-US laws |
| Additionally, an Affiliate may default on some or all of the distributions that are payable to us |
| As a result, we cannot guarantee that we will always receive these distributions from our Affiliates |
| The failure to receive the distributions to which we are entitled under our agreements with our Affiliates would adversely affect us, and may affect our ability to make payments on our obligations |
| Our right to receive any assets of our Affiliates or subsidiaries upon their liquidation or reorganization, and thus the right of the holders of securities issued by us to participate in those assets, typically would be subordinated to the claims of that entityapstas creditors |
| In addition, even if we were a creditor of any of our Affiliates or subsidiaries, our rights as a creditor would be subordinate to any security interest and indebtedness that is senior to us |
| The agreed-upon expense allocation under our revenue sharing arrangements with our Affiliates may not be large enough to pay for all of the respective Affiliateapstas operating expenses |
| Our Affiliates have generally entered into agreements with us under which they have agreed to pay us a specified percentage of their respective gross revenue, while retaining a percentage of revenue for use in paying that Affiliateapstas operating expenses |
| We may not anticipate and reflect in those agreements possible changes in the revenue and expense base of any Affiliate, and the agreed-upon expense allocation may not be large enough to pay for all of an Affiliateapstas operating expenses |
| We may elect to defer the receipt of our share of an Affiliateapstas revenue to permit the Affiliate to fund such operating expenses, or we may restructure our relationship with an Affiliate with the aim of maximizing the long-term benefits to us, but we cannot be certain that any such deferral or restructured relationship would be of any greater benefit to us |
| Such a deferral or restructured relationship might have an adverse effect on our near-term or long-term profitability and financial condition |
| We expect that we will need to raise additional capital in the future, and existing or future resources may not be available to us in sufficient amounts or on acceptable terms |
| While we believe that our existing cash resources and cash flow from operations will be sufficient to meet our working capital needs for normal operations for the foreseeable future, our continuing acquisitions of interests in new affiliated investment management firms will require additional capital |
| We may also need to repurchase some or all of our outstanding zero coupon senior convertible notes and floating rate senior convertible securities on various dates, the next of which is in May 2006, and we have obligations to purchase additional equity in existing Affiliates, which obligations will be triggered from time to time |
| These obligations may require more cash than is then available from operations |
| Thus, we may need to raise capital by making additional borrowings or by selling shares of our common stock or other equity or debt securities, or to otherwise refinance a portion of these obligations |
| These financing activities could increase our interest expense, decrease our net income and dilute the interests of our existing stockholders |
| Moreover, we may not be able to obtain such financing on acceptable terms, if at all |
| Repurchase Obligations under Zero Coupon Senior Convertible Notes and under Floating Rate Convertible Senior Debentures |
| In May 2001, we issued dlra251 million aggregate principal amount at maturity of zero coupon senior convertible notes due 2021 |
| In 2003, we repurchased dlra116dtta5 million principal amount at maturity of the zero coupon senior convertible notes in privately negotiated 14 _________________________________________________________________ transactions |
| In May 2006, 2011 and 2016, the remaining holders may require us to repurchase all or a portion of the outstanding zero coupon senior convertible notes at their accreted value |
| In February 2003, we issued dlra300 million of floating rate senior convertible debentures due February 2033 |
| The holders of the convertible debentures may require us to repurchase such securities in February 2008, 2013, 2018, 2023 and 2028, at their principal amount |
| While we cannot predict whether or when holders of the notes or the convertible debentures will choose to exercise their repurchase rights, we believe that they would become more likely to do so in the event that the price of our common stock is not greater than certain levels or if interest rates increase, or both |
| We may choose to pay the purchase price in cash or in shares of our common stock, or in a combination of both |
| We may wish to avoid paying the purchase price in common stock if we believe that doing so would be unfavorable to existing shareholders |
| Therefore, if a substantial portion of the notes or the convertible debentures were to be submitted for repurchase on any of the repurchase dates, we might need to use a substantial amount of our available sources of liquidity for this purpose |
| Consequently, such repurchase could have the effect of restricting our ability to fund new acquisitions or to meet other future working capital needs, as well as increasing our costs of borrowing |
| We may seek other means of refinancing or restructuring our obligations under the notes or the convertible debentures, but this may result in terms less favorable than those under the existing notes or convertible debentures |
| Senior Revolving Credit Facility |
| We entered into an amended and restated senior revolving credit facility in December 2005, which allows us to borrow up to dlra550 million |
| Subject to the agreement of the lenders to increase their commitments, we have the option to borrow up to an aggregate of dlra650 million under this facility |
| We have used our credit facility in the past, and we may do so again in the future, to fund investments in new and existing Affiliates, refinance other indebtedness, repurchase stock and fund working capital |
| As of December 31, 2005, we had dlra175dtta5 million outstanding under our credit facility |
| We expect that our credit facility will mature in December 2010 |
| While we intend to obtain a new credit facility prior to that time, we may not be able to obtain financing on terms comparable to our current credit facility |
| Our failure to do so could increase our interest expense, decrease our net income and adversely affect our ability to fund new investments and otherwise use our credit facility as described above |
| We may borrow under our credit facility only if we continue to meet certain financial tests, including interest and leverage ratios |
| In addition, our credit facility contains provisions for the benefit of our lenders that restrict the manner in which we can conduct our business, that may adversely affect our ability to make investments in new and existing Affiliates and that may have an adverse impact on the interests of our stockholders |
| Because indebtedness under our credit facility bears interest at variable rates, in the event we have indebtedness outstanding under our credit facility, increases in interest rates may increase our interest expense, which could adversely affect our cash flow, our ability to meet our debt service obligations and our ability to fund future investments |
| Although from time to time we are party to interest rate hedging contracts designed to offset a portion of our exposure to interest rate fluctuations, we cannot be certain that this strategy will be effective |
| Under our agreements with our majority-owned Affiliates, Affiliate managers have a conditional right that enables them to require us to purchase additional ownership interests in our Affiliates in certain circumstances and from time to time |
| The price for these purchases may, in certain cases, be substantial and may result in us having more interest expense and less net income |
| These purchases will also result in our ownership of larger portions of our Affiliates, which may have an adverse effect on our cash flow and liquidity |
| In addition, in connection with these purchases, we may face the financing risks described above |
| 15 _________________________________________________________________ We have substantial intangibles on our balance sheet, and any impairment of our intangibles could adversely affect our results of operations and financial position |
| At December 31, 2005, our total assets were approximately dlra2dtta3 billion, of which approximately dlra1dtta6 billion were intangible assets, and approximately dlra300 million were equity investments in Affiliates, an amount comprised primarily of intangible assets |
| We cannot be certain that we will ever realize the value of such intangible assets |
| Acquired client relationships with definite lives are being amortized, or written off, over a weighted average period of 12 years |
| If we were to record an intangible impairment charge, our results of operations and financial position could be adversely affected |
| We and our Affiliates rely on certain key personnel and cannot guarantee their continued service |
| We depend on the efforts of our executive officers and our other officers and employees |
| Our executive officers, in particular, play an important role in the stability and growth of our existing Affiliates and in identifying potential investment opportunities for us |
| Our officers do not have employment agreements with us, although each of them has a significant equity interest in us, including stock options |
| In addition, our Affiliates depend heavily on the services of key principals, who in many cases have managed their firms for many years |
| These principals often are primarily responsible for their firmapstas investment decisions |
| Although we use a combination of economic incentives, transfer restrictions and, in some instances, non-solicitation agreements and employment agreements in an effort to retain key management personnel, there is no guarantee that these principals will remain with their firms |
| Moreover, since certain Affiliates contribute significantly to our revenue, the loss of key management personnel at these Affiliates could have a disproportionate adverse impact on our business |
| The loss of key management personnel or an inability to attract, retain and motivate sufficient numbers of qualified management personnel may adversely affect our business and our Affiliates &apos businesses |
| The market for investment managers is extremely competitive and is increasingly characterized by the frequent movement of investment managers among different firms |
| In addition, since individual investment managers at our Affiliates often maintain a strong, personal relationship with their clients that is based on their clients &apos trust in the manager, the departure of a manager could cause the Affiliate to lose client accounts, which could have a material adverse effect on the results of operations and financial condition of both the Affiliate and us |
| Our Affiliates &apos investment management contracts are subject to termination on short notice |
| Our Affiliates derive almost all of their revenue from their clients based upon their investment management contracts with those clients |
| These contracts are typically terminable by the client without penalty upon relatively short notice (typically not longer than 60 days) |
| We cannot be certain that our Affiliates will be able to retain their existing clients or to attract new clients |
| If our Affiliates &apos clients withdraw a substantial amount of funds, it is likely to harm our results |
| Our industry is highly competitive |
| Through our Affiliates, we compete with a broad range of investment managers, including public and private investment advisors, firms associated with securities broker/dealers, financial institutions, insurance companies and other entities that serve our three principal distribution channels, many of whom have greater resources |
| This competition may reduce the fees that our Affiliates can obtain for their services |
| We believe that our Affiliates &apos ability to compete effectively with other firms in our three distribution channels depends upon our Affiliates &apos products, investment performance and client-servicing capabilities, and the marketing and distribution of their investment products |
| Our Affiliates may not compare favorably with their competitors in any or all of these categories |
| From time to time, our Affiliates also compete with each other for clients |
| 16 _________________________________________________________________ The market for acquisitions of interests in investment management firms is highly competitive |
| Many other public and private financial services companies, including commercial and investment banks, insurance companies and investment management firms, which may have significantly greater resources than we do, also invest in or buy investment management firms |
| We cannot guarantee that we will be able to compete effectively with such companies, that new competitors will not enter the market or that such competition will not make it more difficult or not feasible for us to make new investments in investment management firms |
| It provides information about us, as well as a link in the "e Investor Information "e section of our web site to another web site where you can obtain, free of charge, a copy of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and any amendments to those reports filed or furnished with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended |
| We make these reports available through our web site as soon as reasonably practicable after our electronic filing of such materials with, or the furnishing of them to, the Securities and Exchange Commission |
| The information contained or incorporated on our web site is not a part of this Annual Report on Form 10-K |