<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission File Number: 1-9468
Nvest, L.P.
-----------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3405992
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Boylston Street, Boston, Massachusetts 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 578-3500
----------------------------------------------------
(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.
[X] Yes [ ] No
The issuer is a limited partnership. There were 6,441,698 units of limited
partner interest and 110,000 units of general partner interest outstanding on
July 31, 1998.
1
<PAGE>
Nvest, L.P.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
FINANCIAL STATEMENTS OF NVEST, L.P. (THE "PARTNERSHIP")
------------------------------------------------------
Balance Sheet as of December 31, 1997 and June 30, 1998 3
Statement of Income for the three and six months ended June 30, 1997 and 1998 4
Statement of Cash Flows for the six months ended June 30, 1997 and 1998 5
Notes to Financial Statements 6
FINANCIAL STATEMENTS OF THE "OPERATING PARTNERSHIP"
---------------------------------------------------
(NVEST, L.P. IN 1997 AND NVEST COMPANIES, L.P IN 1998)
------------------------------------------------------
Consolidated Balance Sheet as of December 31, 1997 and June 30, 1998 9
Consolidated Statement of Income for the three and six months ended June 30, 1997 and 1998 10
Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1998 11
Notes to Consolidated Financial Statements 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 13
Nvest, L.P. 14
The Operating Partnership 16
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURES 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- -----------------------------
NVEST, L.P.
BALANCE SHEET
(in thousands, except unit data)
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ - $ 890
Distribution receivable from Nvest Companies, L.P. 5,020 5,022
--------- --------
Total current assets 5,020 5,912
Investment in Nvest Companies, L.P. (Note 4) 71,008 74,088
--------- --------
Total assets $ 76,028 $ 80,000
========= ========
Liabilities and Partners' Capital
- ---------------------------------
Current liabilities:
Distribution payable $ 5,020 $ 4,109
Gross income tax payable - 1,755
-------- --------
Total current liabilities 5,020 5,864
Contingent liabilities (Note 6 )
Partners' capital (6,274,980 units at December 31, 1997
and 6,522,082 units at June 30, 1998) 71,008 74,136
-------- --------
Total liabilities and partners' capital $ 76,028 $ 80,000
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE>
NVEST, L.P.
STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1997 1998 1997 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Equity in earnings of Nvest Companies, L.P. $ - $ 4,214 $ - $ 8,178
Management and advisory fees 116,395 - 232,504 -
Other revenues and interest income 10,807 5 21,495 5
-------- ------- -------- -------
127,202 4,219 253,999 8,183
-------- ------- -------- -------
Expenses
Compensation and benefits 62,190 - 127,189 -
Restricted unit plan compensation 102 - 235 -
Amortization of intangibles 8,991 - 18,259 -
Depreciation and amortization 1,656 - 3,212 -
Occupancy, equipment and systems 5,434 - 11,125 -
Interest expense 4,942 - 8,820 -
Other 21,267 - 40,971 -
Gross income tax - 874 - 1,755
-------- ------- -------- -------
104,582 874 209,811 1,755
-------- ------- -------- -------
Income before income taxes 22,620 3,345 44,188 6,428
Income tax expense 1,111 - 2,326 -
-------- ------- -------- -------
Net income $ 21,509 $ 3,345 $ 41,862 $ 6,428
======== ======= ======== =======
Net income per unit (Note 3):
Basic $ 0.50 $ 0.52 $ 0.98 $ 1.01
======== ======= ======== =======
Diluted $ 0.50 $ 0.51 $ 0.98 $ 0.99
======== ======= ======== =======
Distributions declared per unit:
Regular $ 0.53 $ 0.63 $ 1.06 $ 1.23
Special 0.08 - 0.13 -
-------- ------- -------- -------
Total $ 0.61 $ 0.63 $ 1.19 $ 1.23
======== ======= ======== =======
Weighted average units outstanding - diluted (Note 3) 43,088 7,242 43,088 7,130
======== ======= ======== =======
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE>
NVEST, L.P.
STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1997 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 41,862 $ 6,428
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangibles 18,259 -
Restricted unit plan compensation 235 -
--------- -------
Subtotal 60,356 6,428
Equity in earnings of Nvest Companies, L.P. - (8,178)
Distributions received from Nvest Companies, L.P. - 9,699
Depreciation and amortization 3,212 -
Increase in accounts receivable and other assets (12,246) -
Increase (decrease) in accounts payable and
other liabilities (2,793) 1,755
--------- -------
Net cash provided by operating activities 48,529 9,704
--------- -------
Cash flows from investing activities:
Purchase of Nvest Companies, L.P. units - (1,855)
Capital expenditures (5,441) -
Acquisition payments, net of cash acquired (41,238) -
--------- -------
Net cash used in investing activities (46,679) (1,855)
--------- -------
Cash flows from financing activities:
Distributions paid to unitholders (43,550) (8,814)
Proceeds from issuance of units 81 1,855
Proceeds from notes payable 159,950 -
Payment of deferred purchase consideration (79,635) -
--------- -------
Net cash provided by (used in) financing activities 36,846 (6,959)
--------- -------
Net increase in cash and cash equivalents 38,696 890
Cash and cash equivalents, beginning of period 49,914 -
--------- -------
Cash and cash equivalents, end of period $ 88,610 $ 890
========= =======
Cash paid during the period for interest $ 5,212 $ -
========= =======
Cash paid during the period for income taxes $ 2,157 $ -
========= =======
Supplemental disclosure of non-cash increase in partners' capital $ 118,750 $ 2,748
========= =======
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE>
Nvest, L.P.
Notes to Financial Statements
(unaudited)
NOTE 1 - ORGANIZATION
- ---------------------
Nvest, L.P. ("Nvest" or the "Partnership"), formerly named New England
Investment Companies, L.P., is a publicly traded limited partnership listed on
the New York Stock Exchange. Effective with a restructuring completed on
December 31, 1997 (the "Restructuring"), Nvest's sole business is to engage in
the investment advisory business by acting as advising general partner of Nvest
Companies, L.P. ("Nvest Companies" or the "Operating Partnership"), formerly
named NEIC Operating Partnership, L.P. Nvest Companies operates through
investment management firms that offer a broad array of investment management
products and styles across a wide range of asset categories to institutions and
individuals. Nvest's primary asset at June 30, 1998 was 6,522,082 units
representing a general partner's interest in the Operating Partnership.
Pursuant to the Restructuring, the Partnership elected to extend its
grandfathered partnership tax status for 1998. At year-end 1997, the Partnership
contributed all of its assets and liabilities to the Operating Partnership in
exchange for units representing a general partner's interest in the Operating
Partnership. Following this transaction, certain limited partners of the
Partnership exchanged their partnership units for limited partner units of the
Operating Partnership (see Note 2).
As a result of the Restructuring, the Partnership receives distributions from
the Operating Partnership and pays a 3.5% federal gross income tax on its
proportionate share of the gross income of the Operating Partnership. If the
Partnership does not make the applicable election, fails to qualify to make such
election, or decides in the future not to pay the 3.5% federal gross income tax,
it would become subject to the regular federal corporate income tax. The
Partnership expects to distribute to its unitholders substantially all of the
distributions received from the Operating Partnership after accruing the 3.5%
federal gross income tax, any state tax, and any other expenses of the
Partnership.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Basis of Presentation. The unaudited financial statements of Nvest, L.P. have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the annual report of the Partnership filed on Form 10-K for the year ended
December 31, 1997. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, have been made to present fairly the
financial statements of the Partnership at June 30, 1998 and for the three and
six month periods ended June 30, 1997 and 1998. The financial statements of
Nvest, L.P. should also be read in conjunction with the consolidated financial
statements of the Operating Partnership included herein.
Principles of Consolidation. The 1997 statements of income and cash flows of
Nvest, L.P. include the accounts of its wholly-owned subsidiaries prior to the
Restructuring (see Note 1). All material intercompany accounts and transactions
have been eliminated in consolidation.
Equity Method of Accounting. Subsequent to the Restructuring, Nvest, L.P.
records its investment in the Operating Partnership using the equity method of
accounting. Revenue is recorded based on its proportionate share of net income
of the Operating Partnership with a corresponding increase in its investment in
the Operating Partnership. Distributions from the Operating Partnership reduce
the investment in the Operating Partnership.
Exchange of Nvest Companies, L.P. Units for Nvest, L.P. Units. Each quarter,
Nvest provides holders of Operating Partnership units a limited opportunity to
exchange their units for Nvest, L.P. units at historical book value, subject to
applicable requirements intended to ensure that the Operating Partnership
remains a private partnership. On May 1, 1998, 190,962 Operating Partnership
units were exchanged for an equal number of Nvest, L.P. units and Nvest received
190,962 units of the Operating Partnership. On July 1, 1998, 22,050 Operating
Partnership units were exchanged for an equal number of Nvest, L.P. units and
Nvest received 22,050 units of the Operating Partnership.
Gross Income Tax. Effective January 1, 1998, a 3.5% federal gross income tax is
incurred on the Partnership's proportionate share of the gross income of the
Operating Partnership and any of its subsidiary partnerships.
Reclassifications. Certain amounts in prior period financial statements have
been reclassified to conform with the 1998 presentation.
6
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - NET INCOME PER UNIT
- ----------------------------
The calculation of basic and diluted net income per unit and weighted average
units outstanding follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
------------------ ---------------
1997 1998 1997 1998
------ ------ ------ ------
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
Net income $21,509 $ 3,345 $41,862 $ 6,428
Add restricted unit plan compensation 102 - 235 -
------- ------- ------- -------
Net income - for basic calculation 21,611 3,345 42,097 6,428
Additional equity in earnings of Nvest Companies
(net of gross income tax expense) related
to incremental units assumed outstanding - 341 - 640
------- ------- ------- -------
Net income - for diluted calculation $21,611 $ 3,686 $42,097 $ 7,068
======= ======= ======= =======
Weighted average units outstanding:
Basic 43,088 6,452 43,088 6,373
Incremental units assumed outstanding from
exercise of unit options - 790 - 757
------- ------- ------- -------
Diluted 43,088 7,242 43,088 7,130
======= ======= ======= =======
Net income per unit:
Basic $ 0.50 $ 0.52 $ 0.98 $ 1.01
======= ======= ======= =======
Diluted $ 0.50 $ 0.51 $ 0.98 $ 0.99
======= ======= ======= =======
</TABLE>
NOTE 4 - INVESTMENT IN NVEST COMPANIES, L.P.
- --------------------------------------------
Investment activity in Nvest Companies for the six months ended June 30, 1998
follows (in thousands):
<TABLE>
<S> <C>
Initial investment in Nvest Companies at December 31, 1997 $ 71,008
Investment from exercise of options and other unit issuances 1,855
Investment from unit exchanges (Note 2) 2,748
Equity in earnings of Nvest Companies 8,178
Distribution declared by Nvest Companies ($1.51 per unit) (9,701)
--------
Investment in Nvest Companies at June 30, 1998 $ 74,088
========
</TABLE>
7
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - TAX CONSIDERATIONS FOR PUBLIC UNITHOLDERS
- --------------------------------------------------
As a result of the Omnibus Budget Reconciliation Act of 1993 and a special tax
election which the Partnership has made, units purchased in the open market
after August 10, 1993 are allocated a substantial portion of the purchase price
of the units as amortization over a fifteen year period. Taking into account
such amortization tax benefits (which depend in part on the particular
unitholder's purchase price), Partnership distributions are expected to
significantly exceed net taxable income for units purchased after August 10,
1993. Amortization deductions will decrease the unitholder's tax basis of such
units, and will likely be recaptured as ordinary income upon disposition of the
units. Assuming a unit was purchased during December 1997 and is held through
December 31, 1998, this unit would have a convention purchase price, as defined
in the Partnership Agreement of the Partnership, of $27.94 of which
approximately $24.94 is allocated to Section 197 assets. Accordingly, the
estimated annual tax amortization deduction which benefits the unitholder would
be $1.66 per unit (1/15 of $24.94).
Each year, a Schedule K-1 is sent to each unitholder identifying the holder's
amortization tax benefit, if applicable. Under federal tax law, unitholders are
required to pay tax on their allocable share of the Partnership's income
regardless of the amount of distributions made by the Partnership. As individual
tax situations may vary, each prospective purchaser of units is urged to consult
their tax advisor.
NOTE 6 - CONTINGENT LIABILITIES
- -------------------------------
The business units of Nvest Companies are from time to time subject to legal
proceedings and claims which arise in the ordinary course of their business. In
the opinion of management, the amount of ultimate liability with respect to
currently pending actions, if any, will not materially adversely affect the
results of operations or financial condition of the Partnership.
8
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 91,986 $ 49,115
Management and advisory fees receivable 90,796 105,540
Other 11,275 25,142
--------- ---------
Total current assets 194,057 179,797
Intangible assets:
Investment advisory contracts 534,848 516,265
Goodwill 125,546 129,881
Fixed assets 26,434 31,017
Other assets 63,683 49,155
--------- ---------
Total assets $ 944,568 $ 906,115
========= =========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 109,776 $ 127,018
Distribution payable 35,539 34,283
Notes payable 44,767 2,336
--------- ---------
Total current liabilities 190,082 163,637
Deferred compensation, benefits and other 21,561 18,416
Notes payable 271,667 271,667
--------- ---------
Total liabilities 483,310 453,720
Contingent liabilities (Note 3)
Partners' capital (44,467,000 units at December 31,
1997 and 44,523,000 units at June 30, 1998) 461,258 452,395
--------- ---------
Total liabilities and partners' capital $ 944,568 $ 906,115
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
9
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
NVEST, NVEST NVEST, NVEST
L.P. COMPANIES, L.P. L.P. COMPANIES, L.P.
1997 * 1998 * 1997 * 1998 *
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Management and advisory fees $116,395 $158,753 $232,504 $309,152
Other revenues and interest income 10,807 13,513 21,495 26,568
-------- -------- -------- --------
127,202 172,266 253,999 335,720
-------- -------- -------- --------
EXPENSES
Compensation and benefits 62,190 86,315 127,189 167,569
Restricted unit plan compensation 102 955 235 1,926
Amortization of intangibles 8,991 9,901 18,259 19,735
Depreciation and amortization 1,656 2,090 3,212 4,024
Occupancy, equipment and systems 5,434 7,788 11,125 15,674
Interest expense 4,942 5,265 8,820 10,683
Other 21,267 29,897 40,971 57,983
-------- -------- -------- --------
104,582 142,211 209,811 277,594
-------- -------- -------- --------
Income before income taxes 22,620 30,055 44,188 58,126
Income tax expense 1,111 1,940 2,326 2,964
-------- -------- -------- --------
Net income $ 21,509 $ 28,115 $ 41,862 $ 55,162
======== ======== ======== ========
Distributions declared per unit:
Regular $ 0.53 $ 0.77 $ 1.06 $ 1.51
Special 0.08 - 0.13 -
-------- -------- -------- --------
Total $ 0.61 $ 0.77 $ 1.19 $ 1.51
======== ======== ======== ========
Weighted average units outstanding - diluted 43,088 45,307 43,088 45,258
======== ======== ======== ========
</TABLE>
* As discussed in Note 1, the Operating Partnership was Nvest, L.P. prior to the
Restructuring completed on December 31, 1997 and Nvest Companies, L.P.
thereafter.
See Accompanying Notes to Consolidated Financial Statements.
10
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
NVEST, NVEST
L.P. COMPANIES, L.P.
1997 * 1998 *
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,862 $ 55,162
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangibles 18,259 19,735
Restricted unit plan compensation 235 1,926
--------- ---------
Subtotal 60,356 76,823
Depreciation and amortization 3,212 4,024
Increase in accounts receivable and other assets (12,246) (14,083)
Increase (decrease) in accounts payable and
other liabilities (2,793) 20,528
--------- ---------
Net cash provided by operating activities 48,529 87,292
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,441) (8,607)
Acquisition payments, net of cash acquired (41,238) (11,667)
--------- ---------
Net cash used in investing activities (46,679) (20,274)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVIIES:
Proceeds from (repayment of) notes payable 159,950 (42,431)
Payment of deferred purchase consideration (79,635) -
Proceeds from issuance of units 81 1,022
Distributions paid to unitholders (43,550) (68,480)
--------- ---------
Net cash provided by (used in) financing activities 36,846 (109,889)
--------- ---------
Net increase (decrease) in cash and cash equivalents 38,696 (42,871)
Cash and cash equivalents, beginning of period 49,914 91,986
--------- ---------
Cash and cash equivalents, end of period $ 88,610 $ 49,115
========= =========
Cash paid during the period for interest $ 5,212 $ 11,161
========= =========
Cash paid during period for income taxes $ 2,157 $ 1,176
========= =========
Supplemental disclosure of non-cash increase in
partners' capital $ 118,750 $ 250
========= =========
</TABLE>
* As discussed in Note 1, the Operating Partnership was Nvest, L.P. prior to the
Restructuring completed on December 31, 1997 and Nvest Companies, L.P.
thereafter.
See Accompanying Notes to Consolidated Financial Statements.
11
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
- ---------------------
Nvest Companies, L.P. ("Nvest Companies" or the "Operating Partnership"),
formerly named NEIC Operating Partnership, L.P., operates through investment
management firms that offer a broad array of investment management products and
styles across a wide range of asset categories to institutions and individuals.
The Operating Partnership began operations effective with the Restructuring of
Nvest, L.P. at year-end 1997, as described more fully in Note 1 of the financial
statements of Nvest, L.P. included herein.
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------
Basis of Presentation. The unaudited consolidated financial statements of Nvest
Companies, L.P. should be read in conjunction with the annual report of Nvest,
L.P. filed on Form 10-K for the year ended December 31, 1997. In the opinion of
management, all adjustments, consisting only of normal recurring accruals, have
been made to present fairly the financial statements of the Operating
Partnership at June 30, 1998 and for the three and six month periods ended June
30, 1997 and 1998.
Principles of Consolidation. The consolidated financial statements of Nvest
Companies, L.P., include the accounts of its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications. Certain amounts in prior period financial statements have
been reclassified to conform with the 1998 presentation.
NOTE 3 - CONTINGENT LIABILITIES
- -------------------------------
The business units of Nvest Companies are from time to time subject to legal
proceedings and claims which arise in the ordinary course of their business. In
the opinion of management, the amount of ultimate liability with respect to
currently pending actions, if any, will not materially adversely affect the
results of operations or financial condition of the Operating Partnership.
12
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ---------------------
GENERAL
- -------
Any statements in this report that are not historical facts are intended to fall
within the safe harbor for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995. Any forward-looking statements should
be considered in light of the risks and uncertainties associated with the
Partnership and the Operating Partnership and their businesses, economic and
market conditions prevailing from time to time, and the application and
interpretation of federal and state tax laws and regulations, all of which are
subject to material changes and which may cause actual results to vary
materially from what had been anticipated. Certain factors that affect the
Partnership and Operating Partnership have been described in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1997, particularly
under Item 1, "Business-Forward-Looking Statements" and include factors such as
conditions affecting fee revenues, reliance on key personnel, competition,
regulatory and legal factors, and tax considerations. Readers are encouraged to
review these factors carefully.
1997 RESTRUCTURING OF THE PARTNERSHIP
- -------------------------------------
At year-end 1997, Nvest, L.P. ("Nvest" or the "Partnership") completed a
restructuring (the "Restructuring") that included the transfer of its business,
assets and liabilities to a newly formed operating partnership, Nvest Companies,
L.P. ("Nvest Companies" or the "Operating Partnership"). As a result of the
Restructuring, the Partnership's primary asset consists of units representing a
general partner's interest in the Operating Partnership, and its sole business
currently is to engage in the investment advisory business by acting as the
advising general partner of the Operating Partnership. The Partnership records
its investment in the Operating Partnership under the equity method of
accounting based on its proportionate share of net income of the Operating
Partnership. At June 30, 1998, the Partnership owned approximately 6.5 million
units, or 14.6% of the economic interests in the Operating Partnership (16% on a
diluted basis). As part of the Restructuring, Nvest, L.P. determined to retain
its partnership tax status in return for paying an annual 3.5% federal gross
income tax on its proportionate share of the gross income of the Operating
Partnership. For further information regarding the Restructuring, please refer
to the Partnership's Annual Report on Form 10-K for the year ended December 31,
1997, particularly the discussion under Item 1, "Business-1997 Restructuring of
the Partnership."
As a result of the Restructuring, Management's Discussion and Analysis includes
the following two sections. In the first section, the results of Nvest, L.P. for
the three and six months ended June 30, 1998 are compared to pro forma results
for the three and six months ended June 30, 1997 as if the Restructuring had
occurred on January 1, 1997, to show comparative results under the equity method
of accounting. In the second section, the results of Nvest Companies, L.P. for
the three and six months ended June 30, 1998 are compared to the results of
Nvest, L.P. for the three and six months ended June 30, 1997, because the
operations of the Operating Partnership prior to the Restructuring were those of
the Partnership. A discussion of the results of Nvest, L.P. for the three and
six months ended June 30, 1998 compared to the three and six months ended June
30, 1997 is not considered meaningful due to the accounting changes brought on
by the change in structure (equity method of accounting as compared to
consolidated operating results) and therefore has not been included.
13
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Nvest, L.P.
Summary financial information of the Partnership for the three and six months
ended June 30 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1998 1997 1998
PRO FORMA ACTUAL PRO FORMA ACTUAL
-------------- -------------- --------------- ---------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
Equity in earnings of Nvest Companies, L.P. $ 3,130 $ 4,214 $ 6,048 $ 8,178
Interest income - 5 - 5
Gross income tax (689) (874) (1,357) (1,755)
------- ------- ------- -------
Net income $ 2,441 $ 3,345 $ 4,691 $ 6,428
======= ======= ======= =======
Net income per unit - diluted $ 0.39 $ 0.51 $ 0.76 $ 0.99
======= ======= ======= =======
Regular distributions declared per unit $ 0.53 $ 0.63 $ 1.06 $ 1.23
======= ======= ======= =======
Weighted average units outstanding - diluted 6,260 7,242 6,170 7,130
======= ======= ======= =======
</TABLE>
Pro forma financial information for the three and six months ended June 30, 1997
is presented to provide a basis of comparison to the results of Nvest, L.P. for
the three and six months ended June 30, 1998, and gives effect to the
Restructuring as if it occurred on January 1, 1997. Pro forma financial
information includes the Partnership's equity in earnings of the Operating
Partnership as if it had been formed on January 1, 1997 and the 3.5% federal
gross income tax was in effect. The pro forma financial information does not
necessarily reflect the results of operations that would have been obtained had
the Restructuring occurred on the assumed date, nor is the pro forma financial
information necessarily indicative of the results of operations that may be
achieved for any future period.
14
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
NVEST, L.P. (CONTINUED)
-----------------------
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO PRO
- ----------------------------------------------------------------------------
FORMA FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------
Net income of Nvest, L.P. of $3.3 million or $0.51 per unit (diluted) for the
three months ended June 30, 1998 increased $0.9 million or $0.12 per unit
(diluted) from pro forma net income of $2.4 million or $0.39 per unit (diluted)
for the three months ended June 30, 1997. The increase reflects higher equity in
earnings of the Operating Partnership, partially offset by a proportionate
increase in the gross income tax expense.
Equity in earnings of Nvest Companies of $4.2 million for the three months ended
June 30, 1998 increased $1.1 million from pro forma equity in earnings of Nvest
Companies of $3.1 million for the three months ended June 30, 1997. The increase
reflects the higher net income of the Operating Partnership as Nvest's revenue
is primarily derived from its equity interest in the Operating Partnership. The
increase reflects growth in assets under management of the Operating
Partnership, which increased from $110 billion at June 30, 1997 to $136 billion
at June 30, 1998.
Gross income tax expense of $0.9 million for the three months ended June 30,
1998 increased $0.2 million from the pro forma gross income tax expense of $0.7
million for the three months ended June 30, 1997. The gross income tax expense
represents 3.5% of Nvest's proportionate share of the gross income of the
Operating Partnership.
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO PRO FORMA
- --------------------------------------------------------------------------------
FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997
- ------------------------------------------------------------
Net income of Nvest, L.P. of $6.4 million or $0.99 per unit (diluted) for the
six months ended June 30, 1998 increased $1.7 million or $0.23 per unit
(diluted) from pro forma net income of $4.7 million or $0.76 per unit (diluted)
for the six months ended June 30, 1997. The increase reflects higher equity in
earnings of the Operating Partnership, partially offset by a proportionate
increase in the gross income tax expense.
Equity in earnings of Nvest Companies, L.P. of $8.2 million for the six months
ended June 30, 1998 increased $2.2 million from pro forma equity in earnings of
Nvest Companies of $6.0 million for the six months ended June 30, 1997. The
increase reflects the higher net income of the Operating Partnership as Nvest's
revenue is primarily derived from its equity interest in the Operating
Partnership. The increase reflects growth in assets under management of the
Operating Partnership, which increased from $110 billion at June 30, 1997 to
$136 billion at June 30, 1998.
Gross income tax expense of $1.8 million for the six months ended June 30, 1998
increased $0.4 million from the pro forma gross income tax expense of $1.4
million for the six months ended June 30, 1997. The gross income tax expense
represents 3.5% of Nvest's proportionate share of the gross income of the
Operating Partnership.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
On June 30, 1998, the Partnership had a distribution receivable from the
Operating Partnership of $5.0 million representing its ownership of 6,522,082
units of Nvest Companies at $0.77 per unit. The Partnership expects to
distribute to its unitholders substantially all of the distributions received
from the Operating Partnership after accruing the 3.5% federal gross income tax,
any state tax, and any other expense of the Partnership. For the second quarter
of 1998, the Partnership declared a quarterly distribution of $0.63 per unit
payable to Nvest unitholders on August 17, 1998.
15
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
The Operating Partnership
The following is an analysis of the financial condition and results of
operations of Nvest Companies, L.P. for the three and six months ended June 30,
1998 compared to Nvest, L.P. for the three and six months ended June 30, 1997.
The operations of the Operating Partnership in 1997 prior to the Restructuring
were those of the Partnership.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
NVEST NVEST
NVEST COMPANIES, NVEST COMPANIES,
L.P. L.P. L.P. L.P.
1997 1998 1997 1998
----------- -------------- ------------ ------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
Revenues $ 127,202 $ 172,266 $ 253,999 $ 335,720
--------- --------- --------- ---------
Expenses:
Restricted unit plan compensation 102 955 235 1,926
Amortization of intangibles 8,991 9,901 18,259 19,735
Other expenses 96,600 133,295 193,643 258,897
--------- --------- --------- ---------
105,693 144,151 212,137 280,558
--------- --------- --------- ---------
Net income $ 21,509 $ 28,115 $ 41,862 $ 55,162
========= ========= ========= =========
Distributions declared per unit:
Regular $ 0.53 $ 0.77 $ 1.06 $ 1.51
Special 0.08 - 0.13 -
--------- --------- --------- ---------
Total $ 0.61 $ 0.77 $ 1.19 $ 1.51
========= ========= ========= =========
Operating cash flow (1) $ 30,602 $ 38,971 $ 60,356 $ 76,823
========= ========= ========= =========
Operating cash flow per unit - diluted (1) $ 0.71 $ 0.86 $ 1.40 $ 1.70
========= ========= ========= =========
Weighted average units outstanding - diluted 43,088 45,307 43,088 45,258
========= ========= ========= =========
</TABLE>
Note:
- -----
(1) Operating cash flow is defined as net income plus non-cash charges for
amortization of intangibles and restricted unit plan compensation. Operating
cash flow per unit should not be construed as an alternative to net income per
unit or as an alternative to cash flow from operating activities as reported in
the consolidated statement of cash flows. Operating cash flow, as calculated
above, may not be consistent with comparable computations by other companies.
16
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
THE OPERATING PARTNERSHIP (CONTINUED)
-------------------------------------
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
- ----------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1997
- --------------------------------
Net income of $28.1 million for the three months ended June 30, 1998 increased
$6.6 million from $21.5 million for the three months ended June 30, 1997. The
increase primarily reflects higher revenues due to the increase in assets under
management, which increased from $110 billion at June 30, 1997 to $136 billion
at June 30, 1998.
Total revenues of $172.3 million for the three months ended June 30, 1998
increased $45.1 million (or 35%) from total revenues of $127.2 million for the
same quarter last year, reflecting the increase in assets under management.
Additionally, the increase in equity assets under management, with higher
investment management fees compared to fixed income assets, contributed to the
growth in revenues.
Compensation and benefits of $86.3 million for the three months ended June 30,
1998 increased $24.1 million compared to the same quarter last year and
consisted of 43% base compensation and 57% of variable compensation. The
increase in variable compensation of $18 million resulted from subsidiary
incentive payments based on profitability, investment portfolio performance, new
business sales, and participation in the subsidiaries' growth in revenues and
profits.
Restricted unit plan compensation of $1.0 million for the three months ended
June 30, 1998 increased $0.9 million from the same quarter last year due to
grants in the first quarter of 1998.
Occupancy, equipment and systems of $7.8 million for the three months ended June
30, 1998 increased $2.4 million from the same quarter last year due to systems
initiatives and higher costs associated with expanded business activities.
Other expense of $29.9 million for the three months ended June 30, 1998
increased $8.6 million from the same quarter last year, due primarily to higher
general and administrative expenses associated with expanded business
activities, including distribution and marketing initiatives.
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX
- ------------------------------------------------------------------------------
MONTHS ENDED JUNE 30, 1997
- --------------------------
Net income of $55.2 million for the six months ended June 30, 1998 increased
$13.3 million from $41.9 million for the six months ended June 30, 1997. The
increase primarily reflects higher revenues due to the increase in assets under
management, which increased from $110 billion at June 30, 1997 to $136 billion
at June 30, 1998.
Total revenues of $335.7 million for the six months ended June 30, 1998
increased $81.7 million (or 32%) from total revenues of $254.0 million for the
same period last year, reflecting increases in assets under management.
Additionally, the increase in equity assets under management, with higher
investment management fees compared to fixed income assets, contributed to the
growth in revenues.
Compensation and benefits of $167.6 million for the six months ended June 30,
1998 increased $40.4 million compared to the same period last year and consisted
of 45% base compensation and 55% of variable compensation. The increase in
variable compensation of $29 million resulted from subsidiary incentive payments
based on profitability, investment portfolio performance, new business sales,
and participation in the subsidiaries' growth in revenues and profits.
Restricted unit plan compensation of $1.9 million for the six months ended June
30, 1998 increased $1.7 million from the same period last year due to grants in
the first quarter of 1998.
Occupancy, equipment and systems of $15.7 million for the six months ended June
30, 1998 increased $4.5 million from the same period last year due to systems
initiatives and higher costs associated with expanded business activities.
17
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
THE OPERATING PARTNERSHIP (CONTINUED)
-------------------------------------
Interest expense of $10.7 million for the six months ended June 30, 1998
increased $1.9 million from the same period last year, primarily reflecting
interest on the $160 million of senior notes payable issued on April 1, 1997.
Other expense of $58.0 million for the six months ended June 30, 1998 increased
$17.0 million from the same period last year due primarily to higher general and
administrative expenses associated with expanded business activities, including
distribution and marketing initiatives.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Operating cash flow not required for normal business operations and working
capital needs, including support of the Operating Partnership's growth strategy,
is generally distributed to unitholders each quarter. Distributions to
unitholders are typically declared during the last month of calendar quarters.
The Operating Partnership has the ability to make distributions in excess of net
income due to its non-cash amortization expense. On June 18, 1998, the Operating
Partnership declared a distribution of $0.77 per unit compared to the $0.53 per
unit regular distribution declared in the second quarter of 1997. For the six
months ended June 30, 1998, total distributions paid to unitholders were $68.5
million compared to $43.6 million for the same period last year.
Cash and cash equivalents at June 30, 1998 of $49.1 million decreased $42.9
million from December 31, 1997 due to the repayment of short-term notes payable.
The Operating Partnership had lines of credit totaling $185 million, which were
unused at June 30, 1998.
At June 30, 1998, the Operating Partnership had contingent payment obligations
of up to $50 million through 2000, resulting from completed acquisitions.
Payment depends upon attainment of certain revenue targets by the businesses
acquired. Such obligations are not expected to have a material impact on capital
resources.
18
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------
THE OPERATING PARTNERSHIP (CONTINUED)
-------------------------------------
ASSETS UNDER MANAGEMENT
- -----------------------
A summary of assets under management follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1997 1997 1998
---------- -------------- ----------
<S> <C> <C> <C>
CLIENT TYPE (IN BILLIONS):
--------------------------
Institutional $ 70 $ 80 $ 85
Mutual Funds 30 33 38
Private Accounts and Other 10 12 13
---------- -------------- ----------
$ 110 $ 125 $ 136
========== ============== ==========
ASSET CLASS (PERCENTAGE):
--------------------------
Equity 46% 47% 49%
Fixed Income 41 41 40
Money Market 8 7 6
Real Estate 5 5 5
========== ============== ==========
100% 100% 100%
========== ============== ==========
</TABLE>
At June 30, 1998, assets under management of $136 billion increased $11 billion
(or 9%) as compared to $125 billion at December 31, 1997. The increase results
primarily from growth in fixed income institutional accounts and equity mutual
funds.
YEAR 2000 COMPLIANCE
- --------------------
The "Year 2000 Issue" refers to problems that may result from computer programs
being written using two digits rather than four to define the applicable year.
Any computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. The Year 2000 Issue could
result in system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Year 2000
Issue arises in a number of different contexts in which the Operating
Partnership and its subsidiaries use computer programming. The subsidiaries rely
heavily upon data processing services provided by third party service providers,
including securities custody, transfer agency, trading and pricing services, and
on a daily basis, trade through security exchanges which are highly automated.
The subsidiaries also have internally developed software programs and use third
party software programs in their operations.
The Operating Partnership and its subsidiaries have completed a number of the
phases in the process of assessing the impact of the Year 2000 Issue on their
operations and believe they have identified the material remediation projects.
The assessment process is designed to ensure that necessary technology changes
are identified, and involves review of Year 2000 compliance of software and
communications dependencies with third parties and clients, as well as of
internal systems. The assessment process will continue even as problems that
have been identified are remediated and tested.
As part of the process of addressing the Year 2000 Issue, the Operating
Partnership and its subsidiaries are developing and implementing action plans
that include purchasing or developing new software systems which are Year 2000
compatible, obtaining representations relating to Year 2000 systems compliance
from third party vendors, and testing. Progress on Year 2000 initiatives is
being monitored by the Operating Partnership's audit committee and the audit
committees of each subsidiary. Management believes the cost of implementing
these actions plans will not materially adversely affect the operating
results or financial condition of the Partnership or the Operating Partnership.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
- ---------------------------
CERTAIN OPERATING POLICIES
THE PARTNERSHIP. The Partnership expects to distribute to its unitholders
substantially all of the distributions received from the Operating Partnership
after accruing the 3.5% federal gross income tax, any state tax, and any other
expenses of the Partnership. For the three months ended June 30, 1998, the 3.5%
federal gross income tax reduced the $0.77 per unit distribution received by the
Partnership by approximately $0.14 per unit, resulting in the $0.63 per unit
distribution payable to unitholders.
THE OPERATING PARTNERSHIP. The Operating Partnership generally distributes to
its unitholders operating cash flow not required for normal business operations
and working capital needs, including support of its growth strategy. Operating
cash flow is defined as net income plus non-cash charges for amortization of
intangibles and restricted unit plan compensation. On June 18, 1998, the
Operating Partnership declared a distribution of $0.77 per unit compared to the
$0.53 per unit regular distribution declared in the second quarter of 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
(a) Exhibits
- ------------
27. Financial Data Schedule.
(b) Reports on Form 8-K
- -----------------------
None.
20
<PAGE>
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.
Nvest, L.P.
- -----------
Registrant
/s/ G. Neal Ryland August 14, 1998
- ----------------------------------------- ---------------
G. Neal Ryland Date
Executive Vice President and
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 890
<SECURITIES> 0
<RECEIVABLES> 5,022
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,912
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,000
<CURRENT-LIABILITIES> 5,864
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 74,136
<TOTAL-LIABILITY-AND-EQUITY> 80,000
<SALES> 0
<TOTAL-REVENUES> 8,183
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,755
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,428
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,428
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.99
</TABLE>
