<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 September 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 6,433,047 units of limited
partner interest and 110,000 units of general partner interest outstanding on
October 31, 1998.
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<PAGE>
NVEST, L.P.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS.
FINANCIAL STATEMENTS OF NVEST, L.P. (THE "PARTNERSHIP")
Balance Sheet as of December 31, 1997 and September 30, 1998 3
Statement of Income for the three and nine months ended
September 30, 1997 and 1998 4
Statement of Cash Flows for the nine months ended
September 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
September 30, 1998 10
Consolidated Statement of Income for the three and nine
months ended September 30, 1997 and 1998 11
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1998 12
Notes to Consolidated Financial Statements 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
Nvest, L.P. 15
The Operating Partnership 17
PART II - Other Information
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 23
SIGNATURES 24
2 of 24
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NVEST, L.P.
BALANCE SHEET
(in thousands, except unit data)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1,823
Distribution receivable from Nvest Companies, L.P. 5,020 5,043
--------- --------
Total current assets 5,020 6,866
Investment in Nvest Companies, L.P. (Note 4) 71,008 73,833
--------- --------
Total assets $ 76,028 $ 80,699
========= ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Distribution payable $ 5,020 $ 4,126
Gross income tax payable and accrued expenses - 2,705
--------- --------
Total current liabilities 5,020 6,831
Contingent liabilities (Note 6 )
Partners' capital (6,274,980 units at December 31, 1997
and 6,549,898 units at September 30, 1998) 71,008 73,868
--------- --------
Total liabilities and partners' capital $ 76,028 $ 80,699
========= =========
</TABLE>
See Accompanying Notes to Financial Statements.
3 of 24
<PAGE>
NVEST, L.P.
STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Equity in earnings of Nvest Companies, L.P. $ - $ 4,240 $ - $ 12,418
Management and advisory fees 135,079 - 367,583 -
Other revenues and interest income 11,783 20 33,278 25
-------- ------- -------- --------
146,862 4,260 400,861 12,443
-------- ------- -------- --------
EXPENSES
Compensation and benefits 69,672 - 196,861 -
Restricted unit plan compensation 225 - 460 -
Amortization of intangibles 9,682 - 27,941 -
Depreciation and amortization 1,576 - 4,788 -
Occupancy, equipment and systems 6,053 - 17,178 -
Interest expense 5,181 - 14,001 -
Other 27,466 - 68,437 -
Gross income tax and other expenses - 950 - 2,705
-------- ------- -------- --------
119,855 950 329,666 2,705
-------- ------- -------- --------
Income before income taxes 27,007 3,310 71,195 9,738
Income tax expense 247 - 2,573 -
-------- ------- -------- --------
Net income $ 26,760 $ 3,310 $ 68,622 $ 9,738
======== ======= ======== ========
Net income per unit (Note 3):
Basic $ 0.61 $ 0.51 $ 1.59 $ 1.51
======== ======= ======== ========
Diluted $ 0.61 $ 0.50 $ 1.59 $ 1.49
======== ======= ======== ========
Distributions declared per unit:
Regular $ 0.53 $ 0.63 $ 1.59 $ 1.86
Special 0.17 - 0.30 -
-------- ------- -------- --------
Total $ 0.70 $ 0.63 $ 1.89 $ 1.86
======== ======= ======== ========
Weighted average units outstanding - diluted (Note 3) 44,479 6,873 43,552 7,044
======== ======= ======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
4 of 24
<PAGE>
NVEST, L.P.
STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,622 $ 9,738
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangibles 27,941 -
Restricted unit plan compensation 460 -
-------- -------
Subtotal 97,023 9,738
Equity in earnings of Nvest Companies - (12,418)
Distributions received from Nvest Companies - 14,721
Depreciation and amortization 4,788 -
Increase in accounts receivable and other assets (22,386) -
Increase in accounts payable and other liabilities 25,218 2,705
-------- -------
Net cash provided by operating activities 104,643 14,746
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of units of Nvest Companies - exercised options and other - (2,088)
Proceeds from sale of units of Nvest Companies 48
Capital expenditures (7,691) -
Acquisition payments, net of cash acquired (44,812) -
-------- -------
Net cash used in investing activities (52,503) (2,040)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders (69,835) (12,923)
Proceeds from issuance of units - exercised options and other 194 2,088
Payment for retirement of units - (48)
Proceeds from notes payable 159,950 -
Payment of deferred purchase consideration (79,635) -
-------- -------
Net cash provided by (used in) financing activities 10,674 (10,883)
-------- -------
Net increase in cash and cash equivalents 62,814 1,823
Cash and cash equivalents, beginning of period 49,914 -
-------- -------
Cash and cash equivalents, end of period $112,728 $ 1,823
======== =======
Cash paid during the period for interest $ 10,868 $ -
======== =======
Cash paid during the period for income taxes $ 2,176 $ -
======== =======
Supplemental disclosure of non-cash increase in partners' capital $150,400 $ 3,111
======== =======
</TABLE>
See Accompanying Notes to Financial Statements.
5 of 24
<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 currently 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 September 30, 1998 was 6,549,898 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.
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 fails to qualify for or revokes 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 September 30, 1998 and for the three
and nine month periods ended September 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.
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 of 24
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1997 1998 1997 1998
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
Net income $ 26,760 $ 3,310 $ 68,622 $ 9,738
Add restricted unit plan compensation 225 -- 460 --
-------- -------- -------- --------
Net income - for basic calculation 26,985 3,310 69,082 9,738
Additional equity in earnings of Nvest Companies
(net of gross income tax and other expenses) related
to incremental units assumed outstanding -- 136 -- 776
-------- -------- -------- --------
Net income - for diluted calculation $ 26,985 $ 3,446 $ 69,082 $ 10,514
======== ======== ======== ========
Weighted average units outstanding:
Basic 44,328 6,550 43,501 6,432
Incremental units assumed outstanding
from exercise of unit options 151 323 51 612
-------- -------- -------- --------
Diluted 44,479 6,873 43,552 7,044
======== ======== ======== ========
Net income per unit:
Basic $ 0.61 $ 0.51 $ 1.59 $ 1.51
======== ======== ======== ========
Diluted $ 0.61 $ 0.50 $ 1.59 $ 1.49
======== ======== ======== ========
</TABLE>
NOTE 4 - INVESTMENT IN NVEST COMPANIES, L.P.
Investment activity in Nvest Companies for the nine months ended September 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 2,088
Investment from unit exchanges (Note 7) 3,111
Sale of units of Nvest Companies (Note 8) (48)
Equity in earnings of Nvest Companies 12,418
Distributions declared by Nvest Companies ($2.28 per unit) (14,744)
--------
Investment in Nvest Companies at September 30, 1998 $ 73,833
========
</TABLE>
7 of 24
<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 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 any ultimate liability with respect to
currently pending actions will not materially adversely affect the results of
operations or financial condition of the Partnership.
NOTE 7 - 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. As of September 30, 1998, 213,012
Operating Partnership units had been exchanged for an equal number of Nvest,
L.P. units and Nvest had received 213,012 units of the Operating Partnership. On
October 1, 1998, 15,711 Operating Partnership units were exchanged for an equal
number of Nvest, L.P. units and Nvest received 15,711 units of the Operating
Partnership.
Nvest has received irrevocable elections from certain holders of Operating
Partnership units to exchange Operating Partnership units for units of Nvest,
L.P. or cash at the next quarterly exchange on January 1, 1999. Subject to the
terms of the partnership agreement of the Operating Partnership and to final
acceptance of such elections, holders making such elections would exchange
approximately 430,000 units for units of Nvest, L.P or cash.
In addition, consistent with federal tax law, the partnership agreement of the
Operating Partnership generally permits holders of units to exchange a "block"
of units at any time. A "block" for this purpose is at least equal to two
percent of the outstanding units of the Operating Partnership, reduced by the
units held by certain parties that are deemed to be affiliated with the
Operating Partnership, including units held by Nvest, L.P. A "block" for this
purpose is currently approximately 350,000 units.
8 of 24
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 8 - UNIT REPURCHASE PLAN
On September 15, 1998, the Board of Directors of the general partner of Nvest,
L.P. and Nvest Companies, L.P. approved a plan to repurchase up to 1 million
limited partnership units of the partnerships. The repurchase plan authorizes
the purchase of units over a twelve-month period in either the open market or
privately negotiated transactions. In the case of purchases of Nvest, L.P.
units, the Operating Partnership has made and is expected to continue to make a
corresponding purchase of Operating Partnership units from Nvest, L.P. The
timing and amount of the unit purchases will be determined at management's
discretion. Repurchased units are retired at cost on trade date. As of September
30, 1998, 1,800 units had been repurchased at a cost of $48,000. As of October
31, 1998, a total of 30,462 units had been repurchased at a cost of $798,000.
9 of 24
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 * SEPTEMBER 30, 1998 *
------------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 91,986 $ 75,695
Management and advisory fees receivable 90,796 97,032
Other 11,275 24,995
--------- ----------
Total current assets 194,057 197,722
Intangible assets:
Investment advisory contracts 534,848 507,572
Goodwill 125,546 128,708
Fixed assets 26,434 32,376
Other assets 63,683 50,313
---------- -----------
Total assets $ 944,568 $ 916,691
========== ===========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable and accrued expenses $ 109,776 $ 140,915
Distribution payable 35,539 34,285
Notes payable 44,767 3,490
---------- -----------
Total current liabilities 190,082 178,690
Deferred compensation, benefits and other 21,561 19,245
Notes payable 271,667 271,667
---------- -----------
Total liabilities 483,310 469,602
Contingent liabilities (Note 3)
Partners' capital (44,467,000 units at December 31,
1997 and 44,527,000 units at September 30, 1998) 461,258 447,089
---------- -----------
Total liabilities and partners' capital $ 944,568 $ 916,691
========== ===========
</TABLE>
* As discussed in Note 1, the Operating Partnership was Nvest Companies, L.P.
effective with the Restructuring completed on December 31, 1997.
See Accompanying Notes to Consolidated Financial Statements.
10 of 24
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
<TABLE>
<CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $ 135,079 $ 150,762 $ 367,583 $ 459,914
Other revenues and interest income 11,783 13,484 33,278 40,052
-------------- -------------- -------------- --------------
146,862 164,246 400,861 499,966
-------------- -------------- -------------- --------------
EXPENSES
Compensation and benefits 69,672 81,466 196,861 249,035
Restricted unit plan compensation 225 951 460 2,877
Amortization of intangibles 9,682 9,867 27,941 29,602
Depreciation and amortization 1,576 2,166 4,788 6,190
Occupancy, equipment and systems 6,053 7,915 17,178 23,589
Interest expense 5,181 5,184 14,001 15,867
Other 27,466 27,727 68,437 85,710
-------------- -------------- -------------- --------------
119,855 135,276 329,666 412,870
-------------- -------------- -------------- --------------
Income before income taxes 27,007 28,970 71,195 87,096
Income tax expense 247 1,100 2,573 4,064
-------------- -------------- -------------- --------------
Net income $ 26,760 $ 27,870 $ 68,622 $ 83,032
============== ============== ============== ==============
Distributions declared per unit:
Regular $ 0.53 $ 0.77 $ 1.59 $ 2.28
Special 0.17 - 0.30 -
-------------- -------------- -------------- --------------
Total $ 0.70 $ 0.77 $ 1.89 $ 2.28
============== ============== ============== ==============
Weighted average units outstanding - diluted 44,479 44,851 43,552 45,122
============== ============== ============== ==============
</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 of 24
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
NVEST, NVEST
L.P. COMPANIES, L.P.
1997 * 1998 *
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,622 $ 83,032
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangibles 27,941 29,602
Restricted unit plan compensation 460 2,877
----------- ---------
Subtotal 97,023 115,511
Depreciation and amortization 4,788 6,190
Increase in accounts receivable and other assets (22,386) (6,586)
Increase in accounts payable and other liabilities 25,218 35,250
----------- ---------
Net cash provided by operating activities 104,643 150,365
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,691) (12,132)
Acquisition payments, net of cash acquired (44,812) (11,667)
----------- ---------
Net cash used in investing activities (52,503) (23,799)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) notes payable 159,950 (41,277)
Payment of deferred purchase consideration (79,635) -
Proceeds from issuance of units - exercised options 194 1,287
Payment for units retired - (104)
Distributions paid to unitholders (69,835) (102,763)
----------- ---------
Net cash provided by (used in) financing activities 10,674 (142,857)
----------- ---------
Net increase (decrease) in cash and cash equivalents 62,814 (16,291)
Cash and cash equivalents, beginning of period 49,914 91,986
----------- ---------
Cash and cash equivalents, end of period $ 112,728 $ 75,695
=========== =========
Cash paid during the period for interest $ 10,868 $ 16,320
=========== =========
Cash paid during the period for income taxes $ 2,176 $ 1,895
=========== =========
Supplemental disclosure of non-cash increase in partners' capital $ 150,400 $ 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.
12 of 24
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 September 30, 1998 and for the three and nine month periods ended
September 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 any ultimate liability with respect to
currently pending actions will not materially adversely affect the results of
operations or financial condition of the Operating Partnership.
NOTE 4 - UNIT REPURCHASE PLAN
On September 15, 1998, the Board of Directors of the general partner of Nvest,
L.P. and Nvest Companies, L.P. approved a plan to repurchase up to 1 million
limited partnership units of the partnerships. The repurchase plan authorizes
the purchase of units over a twelve-month period in either the open market or
privately negotiated transactions. In the case of purchases of Nvest, L.P.
units, the Operating Partnership has made and is expected to continue to make a
corresponding purchase of Operating Partnership units from Nvest, L.P. The
timing and amount of the unit purchases will be determined at management's
discretion. Repurchased units are retired at cost on trade date. As of September
30, 1998, 1,800 units had been repurchased at a total cost of $48,000. As of
October 31, 1998, a total of 30,462 units had been repurchased at a cost of
$798,000.
13 of 24
<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. These statements may be identified by
such forward-looking terminology as "expect", "look", "believe", "anticipate",
"may", "will", or similar statements or variations of such terms. 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 September 30, 1998, the Partnership owned
approximately 6.5 million units, or 14.7% of the economic interest in the
Operating Partnership. 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 nine months ended September 30, 1998 are compared to pro forma
results for the three and nine months ended September 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 nine months ended September 30, 1998 are
compared to the results of Nvest, L.P. for the three and nine months ended
September 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 nine months ended September 30, 1998 compared to
the three and nine months ended September 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.
14 of 24
<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 nine months
ended September 30 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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. $ 3,945 $ 4,240 $ 9,993 $ 12,418
Gross income tax and other expenses, net (848) (930) (2,205) (2,680)
-------------- -------------- -------------- --------------
Net income $ 3,097 $ 3,310 $ 7,788 $ 9,738
============== ============== ============== ==============
Net income per unit - diluted $ 0.47 $ 0.50 $ 1.24 $ 1.49
============== ============== ============== ==============
Regular distributions declared per unit $ 0.53 $ 0.63 $ 1.59 $ 1.86
============== ============== ============== ==============
Weighted average units outstanding - diluted 6,672 6,873 6,338 7,044
============== ============== ============== ==============
</TABLE>
Pro forma financial information for the three and nine months ended September
30, 1997 is presented to provide a basis of comparison to the results of Nvest,
L.P. for the three and nine months ended September 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.
15 of 24
<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 SEPTEMBER 30, 1998 COMPARED TO
PRO FORMA FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net income of Nvest, L.P. of $3.3 million or $0.50 per unit (diluted) for the
three months ended September 30, 1998 increased $0.2 million or $0.03 per unit
(diluted) from pro forma net income of $3.1 million or $0.47 per unit (diluted)
for the three months ended September 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
September 30, 1998 increased $0.3 million from pro forma equity in earnings of
Nvest Companies of $3.9 million for the three months ended September 30, 1997.
The increase reflects the higher net income of the Operating Partnership as
Nvest's revenue is primarily derived from its interest in the Operating
Partnership. The increase reflects growth in assets under management of the
Operating Partnership.
Gross income tax and other expenses of $0.9 million for the three months ended
September 30, 1998 increased $0.1 million from $0.8 million for the three months
ended September 30, 1997. Gross income tax and other expenses include a 3.5% tax
on Nvest's proportionate share of the gross income of the Operating Partnership,
as well as other miscellaneous expenses.
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO PRO
FORMA FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Net income of Nvest, L.P. of $9.7 million or $1.49 per unit (diluted) for the
nine months ended September 30, 1998 increased $1.9 million or $0.25 per unit
(diluted) from pro forma net income of $7.8 million or $1.24 per unit (diluted)
for the nine months ended September 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 $12.4 million for the nine months
ended September 30, 1998 increased $2.4 million from pro forma equity in
earnings of Nvest Companies of $10.0 million for the nine months ended September
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.
Gross income tax and other expenses of $2.7 million for the nine months ended
September 30, 1998 increased $0.5 million from $2.2 million for the nine months
ended September 30, 1997. Gross income tax and other expenses include a 3.5% tax
on Nvest's proportionate share of the gross income of the Operating Partnership,
as well as other miscellaneous expenses.
CAPITAL RESOURCES AND LIQUIDITY
On September 30, 1998, the Partnership had a distribution receivable from the
Operating Partnership of $5.0 million representing its ownership of 6,549,898
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 third quarter
of 1998, the Partnership declared a quarterly distribution of $0.63 per unit
payable to Nvest unitholders on November 16, 1998, the same amount as the second
quarter of 1998.
16 of 24
<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 nine months ended
September 30, 1998 compared to Nvest, L.P. for the three and nine months ended
September 30, 1997. The operations of the Operating Partnership in 1997 prior to
the Restructuring were those of the Partnership.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $ 146,862 $ 164,246 $ 400,861 $ 499,966
-------------- --------------- ---------------- --------------
Expenses:
Restricted unit plan compensation 225 951 460 2,877
Amortization of intangibles 9,682 9,867 27,941 29,602
Other expenses 110,195 125,558 303,838 384,455
-------------- --------------- ---------------- --------------
120,102 136,376 332,239 416,934
-------------- --------------- ---------------- --------------
Net income $ 26,760 $ 27,870 $ 68,622 $ 83,032
============== =============== ================ ==============
Distributions declared per unit:
Regular $ 0.53 $ 0.77 $ 1.59 $ 2.28
Special 0.17 - 0.30 -
-------------- --------------- ---------------- --------------
Total $ 0.70 $ 0.77 $ 1.89 $ 2.28
============== =============== ================ ==============
Operating cash flow (1) $ 36,667 $ 38,688 $ 97,023 $ 115,511
============== =============== ================ ==============
Operating cash flow per unit - diluted (1) $ 0.82 $ 0.86 $ 2.23 $ 2.56
============== =============== ================ ==============
Weighted average units outstanding - diluted 44,479 44,851 43,552 45,122
============== =============== ================ ==============
</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.
17 of 24
<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>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1997 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLIENT TYPE (IN BILLIONS):
Institutional $ 66 $ 77 $ 80 $ 80
Mutual Funds 25 32 33 33
Private Accounts and Other 9 12 12 12
---- ---- ---- ----
$100 $121 $125 $125
==== ==== ==== ====
ASSET CLASS (PERCENTAGE):
Equity 42% 48% 47% 45%
Fixed Income 43 41 41 43
Money Market 8 6 7 7
Real Estate 7 5 5 5
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
At September 30, 1998, assets under management of $125 billion were unchanged
from December 31, 1997, and down $11.0 billion from June 30, 1998. The decrease
in assets under management during the third quarter of 1998 primarily reflects
the general decline in the equity markets. During the third quarter of 1998, net
new business, including capital additions and reinvestments, was slightly
positive, as net inflows into institutional accounts offset net outflows from
mutual funds.
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net income of $27.9 million for the three months ended September 30, 1998
increased $1.1 million from $26.8 million for the three months ended September
30, 1997. The increase of 4% primarily reflects higher revenues. Total revenues
of $164.2 million for the three months ended September 30, 1998 increased $17.3
million (or 12%) from total revenues of $146.9 million for the same quarter last
year, reflecting the increase in average assets under management. Total revenues
of $164.2 million for the three months ended September 30, 1998 decreased $8.1
million from $172.3 million for the three months ended June 30, 1998, reflecting
the decline in the equity markets and the resulting decrease in assets under
management during the third quarter of 1998 as compared to the second quarter of
1998.
Compensation and benefits of $81.5 million for the three months ended September
30, 1998 increased $11.8 million compared to the same quarter last year and
consisted of 48% base compensation and 52% of variable compensation. The
increase in variable compensation of $7 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. Compensation and benefits for the third quarter of 1998 decreased $4.8
million from $86.3 million for the second quarter of 1998. This decrease
reflects primarily the decline in variable compensation, which partially offset
the revenue decrease in the third quarter of 1998 as compared to the second
quarter of 1998.
Restricted unit plan compensation of $1.0 million for the three months ended
September 30, 1998 increased $0.7 million from the same quarter last year due to
grants in the first quarter of 1998.
18 of 24
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
Occupancy, equipment and systems expense of $7.9 million for the three months
ended September 30, 1998 increased $1.9 million from the same quarter last year
due to systems initiatives and higher costs associated with expanded business
activities.
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
Net income of $83.0 million for the nine months ended September 30, 1998
increased $14.4 million from $68.6 million for the nine months ended September
30, 1997. The increase primarily reflects higher revenues. Total revenues of
$500.0 million for the nine months ended September 30, 1998 increased $99.1
million (or 25%) from total revenues of $400.9 million for the same period last
year, reflecting the increase in average assets under management.
Compensation and benefits of $249.0 million for the nine months ended September
30, 1998 increased $52.2 million compared to the same period last year and
consisted of 46% base compensation and 54% of variable compensation. The
increase in variable compensation of $36 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 $2.9 million for the nine months ended
September 30, 1998 increased $2.4 million from the same period last year due to
grants in the first quarter of 1998.
Occupancy, equipment and systems expense of $23.6 million for the nine months
ended September 30, 1998 increased $6.4 million from the same period last year
due to systems initiatives and higher costs associated with expanded business
activities.
Interest expense of $15.9 million for the nine months ended September 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 $85.7 million for the nine months ended September 30, 1998
increased $17.3 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
and repurchase of units, 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 September 15, 1998, the Operating Partnership declared a distribution of
$0.77 per unit compared to the $0.53 per unit regular distribution declared in
the third quarter of 1997. The quarterly distribution for the second quarter of
1998 was also $0.77 per unit. For the nine months ended September 30, 1998,
total distributions paid to unitholders were $102.8 million compared to $69.8
million for the same period last year.
The Operating Partnership had lines of credit totaling $185 million, which were
unused at September 30, 1998.
At September 30, 1998, the Operating Partnership had contingent payment
obligations 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.
19 of 24
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000
The statements in this section include "Year 2000 readiness disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
The "Year 2000" issue refers to problems that may result from computer programs
that were written using two digits rather than four to define the applicable
calendar year. Any computer programs that have date-sensitive software or
hardware may recognize a date using "00" as the year 1900 rather than the year
2000. Systems and programs that are not capable of handling Year 2000 date
issues could result in system failures or miscalculations that could cause
disruptions of operations, including, among other things, an inability to
process transactions, send invoices, or engage in similar normal business
activities.
Year 2000 issues arise in a number of different contexts in which the Operating
Partnership and its affiliated operating companies use computer programming. The
operating companies generally rely heavily upon data processing and other
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. In their
operations, the companies also use both third party and internally developed
software programs and rely on customary telecommunications services and building
and property logistical services, including embedded computer-controlled
systems.
Nvest Companies operates through separate, affiliated operating companies
that provide investment management, distribution and consulting services. Each
operating company has its own independent internal local access network (LAN)
computer system. All of the operating companies lease their office space from
third parties and certain of the operating companies conduct business through
multiple locations in major cities. Although each operating company conducts
business independently, many of the companies use similar third party software
and have common relationships and dependencies with third party service
providers.
Management at each of the affiliated operating companies has responsibility for
ensuring that Year 2000 issues are addressed at the individual firm. Each
operating company has identified a Year 2000 project manager responsible for the
company's Year 2000 compliance effort. In addition to existing technical and
other personnel, certain of the operating companies have hired consultants to
assist them in various aspects of the process of identifying, assessing,
remediating and testing for their Year 2000 projects. The Operating Partnership
provides coordination and assistance to the operating companies and has
implemented regular meetings of the Year 2000 project managers at the operating
companies to enable them to share information and ideas and develop and
coordinate strategies. The Operating Partnership has also provided enhanced
access to industry-sponsored programs and testing initiatives and other
assistance to certain of the operating companies. Progress on Year 2000
initiatives is monitored by the audit committee of the board of directors of the
general partner of the Operating Partnership and by the audit committees of each
affiliated operating company.
The Operating Partnership and its affiliated operating companies have identified
three principal stages of their Year 2000 project management process:
. ASSESSMENT, including identification and inventory of: information
technology (IT) programs, systems and equipment; non-IT systems,
principally in buildings and offices; and external relationships and
dependencies with third parties. The assessment process includes a
determination of whether the identified elements are Year 2000
compliant and, if necessary, the measures needed to be taken to make
them compliant;
. IMPLEMENTATION of repair, replacement and retirement projects
necessary for programs and systems that are not Year 2000 compliant;
and
. TESTING of programs, systems, equipment and third party relationships
and dependencies.
20 of 24
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
Assessment. The Operating Partnership and its affiliated operating companies
believe that they have identified all material programs, systems, equipment and
external relationships and dependencies. The key systems and processes involving
Year 2000 issues for the operating companies generally include computer hardware
and software relating to portfolio accounting systems and local area networks
(LANs); the securities transaction settlement process and transfer agency
functions; and customary logistical services associated with occupying buildings
and property, including management of real estate for client portfolios.
The companies also believe that they have substantially completed the initial
process of assessing Year 2000 issues in their operations, including
identification of the material projects necessary to allow the firms to operate
and process data into the next century. These projects are currently underway.
As these and other projects are completed, the key systems and processes will be
tested for compliance with the Year 2000. Depending on the results of testing,
additional projects may become necessary.
The companies have also made significant progress in obtaining information,
including representations and/or certifications in many cases, regarding the
status of Year 2000 compliance projects at third parties with whom they have
relationships or dependencies, including firms providing broker-dealer,
securities custody, transfer agency, pricing and other services. The operating
companies will continue to seek information from third parties regarding their
Year 2000 readiness.
Implementation. The operating companies have already begun implementing steps
required for their Year 2000 projects, including repairing, replacing or
modifying material programs and systems in order to be Year 2000 compliant. At
certain operating companies, this process includes purchasing or developing new
software systems that are Year 2000 compliant, and the acceleration of planned
replacement of systems, such as portfolio accounting systems, in conjunction
with achieving Year 2000 compliance. Certain of these projects are expected to
continue through the second quarter of 1999.
Testing. The operating companies are establishing testing schedules for
different aspects of their operations. The scope of testing will vary from firm
to firm depending on the nature of the firm's business and the need for testing.
The testing process is expected to include generally each operating company's
internal hardware and software systems and, in certain cases, participation in
individual, point-to-point testing with critical third party service providers
and in industry-wide testing. The companies expect to begin internal and
external testing in the fourth quarter of this year and to complete a
substantial portion of planned testing by the end of the first quarter of 1999.
This process will also involve examining the results of testing of internal
systems and external relationships and dependencies, as appropriate, and review
of information regarding the status of Year 2000 compliance programs of third
parties with which the firms have relationships and dependencies.
The Operating Partnership and the affiliated operating companies anticipate that
the aggregate cost of their efforts to achieve Year 2000 compliance will be
between $10-15 million. These amounts represent the historical amounts spent and
estimated future cost of purchasing replacement software and hardware, and
modifying existing hardware and software for Year 2000 compliance. They include
the cost of purchasing and implementing planned replacement of software (such as
portfolio accounting software) that was accelerated, at least in part, due to
Year 2000 issues. The estimated aggregate expense amount includes the cost of
outside consultants engaged on Year 2000 issues, but does not include salary and
benefit expense of technical or other operating personnel at the firms.
Approximately $8 million has been spent to date. The cost of Year 2000 planning
and implementation is paid out of operating cash flow. The Operating Partnership
does not currently believe that such costs will, in the aggregate, cause the
deferral of other material IT projects at the operating companies as a group.
Year 2000 costs are expected to constitute approximately one-third of the
aggregate IT budget of the companies as a group for 1998 and 1999. Management
believes the cost of implementing the action plans for Year 2000 compliance will
not materially adversely affect the operating results or financial condition of
the Partnership or the Operating Partnership.
Each of the operating companies is considering the extent to which it is
appropriate to develop contingency plans to address a failure of either internal
or external systems due to Year 2000 issues. The operating companies expect to
develop appropriate Year 2000 contingency plans to address potential problems
associated with critical internal systems and third party relationships and
dependencies.
21 of 24
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
Notwithstanding the Year 2000 efforts undertaken and planned, one or more of the
operating companies, and third parties with whom they have material
relationships, may not achieve Year 2000 compliance in a timely manner. The
Operating Partnership has not undertaken a comprehensive analysis of the
operational problems (or the related costs, including potential lost revenues)
that are reasonably likely to impact the Operating Partnership and its
affiliated operating companies if this occurs. Given the different systems and
business relationships of the operating companies, such an analysis on an
aggregate basis for the Operating Partnership as a whole may not be practical in
the short term. However, as a general matter, taking into account the level of
effort undertaken to date and planned to be taken, the Operating Partnership
believes that the most reasonably likely worst case scenario is that,
notwithstanding the Year 2000 efforts of the Operating Partnership and the
operating companies, one or more of the companies may experience difficulties in
conducting all or a portion of normal business operations on behalf of clients
for a period of time due to one or more mission-critical system failures. Such
difficulties could arise out of Year 2000 problems experienced by one or more of
the companies in their own IT systems (or in non-IT, embedded computer-
controlled systems in buildings in which they operate), such as a temporary
inability to process or track trades and other transactions on behalf of clients
in a timely manner. Difficulties experienced by essential third party service
providers could also hinder, or in some cases, prevent, the companies from
conducting normal business operations. Due to the inherent uncertainty involved
in evaluating at this time the extent to which such disruptions may occur
despite the efforts to address Year 2000 problems or the extent to which such
disruptions could affect normal business operations, the Partnership is not able
to estimate the amount of potential lost revenues or other losses that might
result if such disruptions were in fact to occur. However, if normal business
operations were materially disrupted, it could have a material adverse impact on
the results of operations of the Operating Partnership and the Partnership.
The businesses of the operating companies of the Operating Partnership are
substantially dependent upon their ability to execute securities transactions
and track changes in client portfolios. If one or more of the operating
companies experienced material difficulties due to Year 2000 issues, or if the
third parties with which the operating companies do business experienced such
difficulties, it could have a materially adverse effect on the results of
operations and business of the Operating Partnership as a whole. This could, in
turn, have a materially adverse effect on the results of operations of the
Partnership.
The foregoing discussion includes statements that are not historical and are
forward-looking. These statements involve risks and uncertainties that could
cause actual results to differ materially from what was anticipated in the
forward-looking statements. For example, the costs and projected completion
dates for Year 2000 compliance of the Operating Partnership and its affiliated
operating companies are estimates. Factors relating to Year 2000 issues that may
cause material differences in actual results include the availability and cost
of systems and personnel, non-compliance of third party service providers, and
similar uncertainties.
22 of 24
<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 September 30, 1998, such
expenses reduced the amount of the $0.77 per unit distribution received by the
Partnership that is available for distribution 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 and
repurchase of units. Operating cash flow is defined as net income plus non-cash
charges for amortization of intangibles and restricted unit plan compensation.
On September 15, 1998, the Operating Partnership declared a distribution of
$0.77 per unit compared to the $0.53 per unit regular distribution declared in
the third 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.
23 of 24
<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 November 12, 1998
- --------------------------------- ----------------------
G. Neal Ryland Date
Executive Vice President and
Chief Financial Officer
24 of 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,823
<SECURITIES> 0
<RECEIVABLES> 5,043
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,866
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,699
<CURRENT-LIABILITIES> 6,831
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 73,868
<TOTAL-LIABILITY-AND-EQUITY> 80,699
<SALES> 0
<TOTAL-REVENUES> 12,443
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,738
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,738
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.49
</TABLE>
