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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, 02116
MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (617) 578-3500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
UNITS OF LIMITED PARTNER INTEREST NEW YORK STOCK EXCHANGE
Securities registered pursuant to section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of units of limited partner interest held by
non-affiliates of the registrant at February 12, 1999 (based on the closing
price at which the units were sold on the New York Stock Exchange) was
approximately $141 million.
The issuer is a limited partnership. There were 6,285,448 units of limited
partner interest and 110,000 units of general partner interest outstanding at
February 15, 1999.
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PART I
ITEM 1. BUSINESS.
BACKGROUND
Nvest, L.P. ("Nvest") is a publicly-traded limited partnership. Its business
currently is to engage in the investment advisory business by acting as the
advising general partner of Nvest Companies, L.P. (the "Operating Partnership").
Nvest's main asset consists of units representing a general partner's interest
in the Operating Partnership. The Operating Partnership is a major investment
manager that offers a broad array of investment management products and styles
across a wide range of asset categories to institutions, mutual funds and
private clients. The business of the Operating Partnership is conducted through
affiliated investment management, distribution and consulting firms, all but one
of which are wholly owned by the Operating Partnership.
Nvest, the Operating Partnership and most of its affiliated firms are
organized as partnerships for tax purposes. Entities organized as partnerships
for tax purposes are not generally taxed at the federal level on their net
income, and the holders of the partnership interests are taxed on their
proportionate share of the taxable income of the partnership. The partnership
tax status differs from that of a corporation: a corporation is taxed on the
basis of its net taxable income and its stockholders are taxed only on the cash
dividends, if any, they receive from the corporation. The partnership tax status
thus allows the partnership to distribute part of the cash flow it earns to its
holders on a pre-tax basis. Holders of partnership interests are taxed only on
the taxable income from the partnership and not on the amount of cash they
receive as distributions, which may be more or less than the amount of taxable
income.
At the end of 1997, consistent with legislation passed that year, Nvest
elected to remain a publicly traded partnership for tax purposes by paying a
3.5% federal tax on gross income and to restructure its operations to create the
Operating Partnership. For further information on this restructuring, please
refer to the section entitled "1997 Restructuring of the Partnership," below.
Nvest derives its earnings and cash flow that it may distribute to
unitholders from Nvest's partnership interests in the Operating Partnership and
the business the Operating Partnership conducts through the affiliated
investment management and consulting and distribution firms. The Operating
Partnership's revenues derive primarily from management and advisory fees earned
from services provided by the investment management firms. The Operating
Partnership generally distributes to its unitholders, including Nvest, operating
cash flow not required for normal business operations and working capital needs,
including support of its growth strategy and the repurchase of units. Nvest
expects to distribute to its unitholders substantially all of the distributions
received from the Operating Partnership, after paying the 3.5% federal gross
income tax, any state tax, and any other miscellaneous expenses.
The following paragraphs describe aspects of the organizational history of
Nvest and the Operating Partnership.
THE 1993 COMBINATION. The business now conducted by the Operating
Partnership resulted from the combination (the "Combination"), on September 15,
1993, of the businesses of New England Investment Companies, Inc. ("Old NEIC"),
a wholly owned subsidiary of New England Mutual Life Insurance Company ("New
England Mutual"), and Reich & Tang L.P. ("Reich & Tang"), a publicly-traded
investment manager listed on the New York Stock Exchange. The Combination was
accomplished by the contribution by New England Mutual of the businesses and
substantially all of the assets of Old NEIC to Reich & Tang in exchange for
partnership units. Reich & Tang had, prior to the Combination, approximately 10
million units of partner interest outstanding, and issued 22 million units of
partner interest to New England Mutual in the Combination. At the time of the
Combination, Nvest adopted the name "New England Investment Companies, L.P."
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Old NEIC traced its origins to: the acquisition by New England Mutual of
Loomis, Sayles & Company, a major investment management firm, in 1968; the
organization by New England Mutual of specialized investment management
subsidiaries from its internal resources during the 1980's; the creation of
start-up asset management firms by the attraction of outside managers during the
early 1990's; and the formation of various marketing and other support
organizations. Reich & Tang had been organized as a Delaware limited partnership
in 1987 to succeed to substantially all the business of Reich & Tang, Inc.
("RTI"), which had originally been organized in 1970 as an investment management
firm.
At the time of the Combination, a new corporation named New England
Investment Companies, Inc. became the sole general partner of Nvest (the
"General Partner"), succeeding Reich & Tang, Inc. In August 1996, New England
Mutual merged with Metropolitan Life Insurance Company ("MetLife"), which
succeeded to the interests of New England Mutual in the Partnership and the
General Partner. The General Partner is a wholly owned subsidiary of MetLife.
Beginning in 1995, Nvest has made several major acquisitions of investment
advisory businesses as described under "Business--Acquisition Strategy" below.
THE 1997 RESTRUCTURING. In December 1997, the General Partner implemented a
Restructuring of Nvest that involved a determination to elect to maintain
Nvest's partnership tax status under terms provided in the Taxpayer Relief Act
of 1997 and the formation of the Operating Partnership. See "Business--1997
Restructuring of the Partnership" for more information regarding the
Restructuring.
THE 1998 NAME CHANGES. Effective March 31, 1998, Nvest changed its name
from "New England Investment Companies, L.P." to "Nvest, L.P." At the same time,
the name of the General Partner was changed to "Nvest Corporation" and the
Operating Partnership was renamed "Nvest Companies, L.P."
The General Partner of Nvest is also the managing general partner of the
Operating Partnership, and Nvest is the advising general partner of the
Operating Partnership. As of February 15, 1999, MetLife beneficially owned
(through the General Partner) all of Nvest's 110,000 units of general partner
interest ("GP units"), 347,900 of Nvest's units of limited partner interest
("units") and 20,994,076 of the Operating Partnership's units of partner
interest ("Operating Partnership units"). In the aggregate, MetLife owned
general partner and limited partner interests in Nvest and the Operating
Partnership representing 48% of the economic interests in the business of the
Operating Partnership.
GENERAL
Nvest's primary source of net income and cash flow available for
distribution consists of equity in earnings of and distributions paid by the
Operating Partnership. The following discussion therefore focuses primarily on
the activities of the Operating Partnership. Nvest and the Operating Partnership
are at times referred to herein together as the "Partnerships."
The business of the Operating Partnership is conducted through eleven
investment management firms (the "Investment Management Firms") and six
principal distribution and consulting firms (the "Distribution and Consulting
Firms" and, together with the Investment Management Firms, the "Firms" or
"Subsidiaries"), all but one of which are wholly owned by the Operating
Partnership. The Operating Partnership's assets under management include equity
securities, fixed income securities, money market funds and real estate.
The Operating Partnership's strategy is to capitalize on growth
opportunities for investment management services in the institutional, mutual
fund and private client markets. The Operating Partnership operates through a
decentralized organization that enables its Firms to implement their own
distinct investment specialties and philosophies. The Operating Partnership
believes this approach fosters an entrepreneurial environment that encourages
the development of new, innovative investment management products and services,
while maintaining access to the significant resources of the larger
organization. The Operating Partnership supports the Firms' existing businesses
and new initiatives that demonstrate
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substantial potential for growth in assets under management by allocating
capital and other resources to those businesses and initiatives. In addition,
the Operating Partnership and the Firms identify opportunities for joint
marketing efforts, enhanced distribution of investment products (such as mutual
funds) and operational efficiencies across the organization.
The Investment Management Firms are primarily responsible for developing and
implementing their own investment philosophy, business plans and management fee
schedules. Each Investment Management Firm manages its business independently on
a day-to-day basis and maintains an image and identity that is separate from
both the Operating Partnership and the other Investment Management Firms.
The Operating Partnership makes available distribution, consulting and
administrative services that the Investment Management Firms draw upon as
needed. These services include assistance in marketing and product development.
The Operating Partnership also provides several of the Firms with certain
financial, management information, employee benefits and administrative support
services.
The Operating Partnership seeks to grow by expanding the Investment
Management Firms' capabilities; selectively pursuing the acquisition of
investment management firms; increasing and focusing its marketing efforts; and
selectively expanding its distribution channels.
ACQUISITION STRATEGY
The Operating Partnership seeks to increase cash flow and unitholder
distributions through internal growth and the acquisition of investment
management firms serving institutions, mutual funds and private clients. The
Operating Partnership generally seeks acquisitions that, either on a current
basis or over time, would be expected to increase cash flow available for
distribution to unitholders.
The Partnerships have identified several key aspects of the general
acquisition strategy. In accordance with this strategy, the Partnerships expect
to preserve the independent identity of acquired firms, which (as in the case of
the current Investment Management Firms) would operate with substantial
autonomy, retaining control of investment decisions, investment philosophy and
day-to-day operations. The Operating Partnership would generally have minority
representation on the board managing the acquired firm, and the firm's executive
personnel would be responsible for reviewing their firm's results, plans and
budgets. Key employees would generally be expected to continue as active
participants in the acquired business under employment agreements executed at
the time of acquisition. The Partnerships may also use different structures in
negotiating their acquisitions.
Consideration for acquisitions is expected to include cash (including cash
from borrowings), Operating Partnership units, possibly Nvest units and future
contingent payments. Other employment incentives are frequently provided for.
The Partnerships are prepared to consider various types of financial
arrangements with the owners of an acquired firm depending on their
circumstances, including tailored incentive plans. Substantially all of these
plans result in the management of the acquired company participating in the
ongoing success of the business they manage. Such plans may mirror or present
equity-like participation in the particular firm. Under the Partnerships'
strategy for possible acquisitions, key employees of acquired firms may be
compensated through firm profit-sharing plans and bonus compensation plans.
These plans can be structured so that the next "generation" of management will
have the opportunity to participate in the growth of the firm, while the current
principals retain a portion of their cash flow interest directly in the firm.
The Operating Partnership will typically seek to obtain employment and
non-competition agreements from key managers.
The Operating Partnership may make support available to acquired firms in
appropriate situations, through capital advances (for internal growth, the
acquisition of compatible businesses or as seed capital for new product
launches) and through services, including mutual fund and institutional
marketing services.
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Nvest made its first major acquisition in September 1995, when it acquired
the business of Harris Associates L.P. ("Harris") with $7.1 billion of assets
under management at the time of acquisition. Nvest continued to implement its
acquisition strategy in 1996. In May 1996, Nvest acquired the business of
Vaughan, Nelson, Scarborough & McConnell ("VNSM"), an investment advisory firm
located in Houston, Texas, with $1.6 billion of assets under management at the
time of acquisition. In December 1996, Nvest completed the acquisition of the
business of Aldrich, Eastman & Waltch, L.P., a Boston-based real estate
investment advisory firm having $4 billion of assets under management at the
time of acquisition. The operations of Aldrich, Eastman & Waltch were combined
with those of Nvest's real estate advisory subsidiary, Copley Real Estate
Advisors, Inc. ("Copley"), to form a firm that operates under the name "AEW
Capital Management" ("AEW Capital"). At year-end 1996, Nvest acquired the
business of Jurika & Voyles, Inc., an Oakland, California-based investment
management company with approximately $5.6 billion in assets under management at
the time of acquisition.
In 1997, Nvest completed the acquisition of the businesses of Snyder Capital
Management ("Snyder Capital") and at year-end 1997 the Operating Partnership
completed the acquisition of Daniel Breen & Company ("Daniel Breen"). Snyder
Capital is a San Francisco-based value manager that managed approximately $1.2
billion of assets at the time of acquisition, primarily in small- to
mid-capitalization companies. The acquisition of Snyder Capital was completed in
July 1997. The operations of Daniel Breen, with approximately $2.2 billion under
management at the time of acquisition, were consolidated with those of Vaughan,
Nelson, Scarborough & McConnell in December 1997, which was renamed Vaughan,
Nelson, Scarborough & McCullough. VNSM also acquired Breen Trust Company
(subsequently renamed VNSM Trust Company), which provides trust services in
conjunction with VNSM investment management services.
The Operating Partnership continued to consider additional acquisitions and
strategic alliances in 1998. During 1998, the Operating Partnership completed
the acquisition of the business of H.A. Schupf & Co., Inc., a New York-based
investment management firm with $550 million in assets under management at the
time of acquisition, and combined its operations with those of Reich & Tang
Capital Management. H.A. Schupf & Co. uses a growth investment style to manage
assets, primarily for high net worth clients.
The market for investment management firms has continued to be active, with
many firms seeking to be acquired or forming strategic partnerships. At the same
time, the competition to acquire successful firms has increased significantly.
The success of the Partnerships' acquisition strategy will depend on their
ability to offer terms competitive in the marketplace. The Partnerships continue
to actively evaluate investment management firms for potential acquisition as
part of the growth strategy. However, there can be no assurance that suitable
acquisition candidates can be located or that appropriate agreements with them
can be reached or completed, or that any acquired business will perform as
expected following acquisition.
INVESTMENT MANAGEMENT FIRMS
The Operating Partnership currently has eleven Investment Management Firms,
each of which follows an independent investment strategy and philosophy. The
following is a brief description of their respective businesses.
LOOMIS, SAYLES & COMPANY, L.P. ("LOOMIS SAYLES"). Loomis Sayles was
established in 1926 and was acquired by New England Mutual in 1968. At December
31, 1998, Loomis Sayles managed approximately one-half of all assets managed by
the Investment Management Firms.
Loomis Sayles actively manages portfolios of publicly traded fixed-income
securities, equity securities and other financial instruments for a client base
consisting of institutional clients (with the largest client groups being
corporate, governmental and union pension funds), endowments and foundations,
and third-party corporate investment portfolios. Loomis Sayles also manages
assets for high net worth individuals and advises the Loomis Sayles Funds and
the Loomis Sayles Investment Trusts.
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Loomis Sayles has offices in eleven cities nationwide providing investment
management services to clients. The investment professionals in each office work
with others in the Loomis Sayles organization to develop investment strategies
and styles tailored to the particular investment expertise of their group and
client mix, subject to the requirement that portfolios generally be constructed
from securities which are followed by Loomis Sayles' centralized research group
and that they specifically be constructed to meet client objectives and
requirements. Loomis Sayles utilizes an internal national marketing group to
supplement and coordinate the marketing efforts of the professionals in the
various offices, to broaden the firm's geographic representation, and to better
focus on Loomis Sayles' relationships with major investment management
consultants.
HARRIS ASSOCIATES L.P. ("HARRIS"). Founded in 1976, Harris is a
Chicago-based investment advisory firm with institutional, private client and
multi-manager product offerings. Harris also serves as the investment advisor
for The Oakmark Family of Funds. Prior to its acquisition on September 29, 1995,
Harris was a privately held partnership. Harris primarily manages equity
securities and generally follows a value approach to investing.
AEW CAPITAL MANAGEMENT, L.P. ("AEW CAPITAL"). In December 1996, Nvest
completed the acquisition of Aldrich, Eastman & Waltch, L.P. ("Aldrich,
Eastman"), a Boston-based real estate investment advisory firm. These operations
were combined with those of Nvest's real estate advisory subsidiary, Copley Real
Estate Advisors, Inc., to form a firm that operates under the name "AEW Capital
Management." Utilizing the firm's combination of real estate, research and
capital markets expertise, AEW Capital focuses on high-yield equity and debt
strategies, real estate securities and directly held interests in property.
BACK BAY ADVISORS, L.P. ("BACK BAY"). Established in 1986 as a spin-off
from New England Mutual, Back Bay manages mutual funds in two mutual fund groups
sponsored by affiliates, as well as institutional funds for the pension and
foundation marketplace and a portion of MetLife's general account ("General
Account"). Back Bay's principal investment specialty is fixed-income management
with an emphasis on security selection, sector selection and yield curve
management.
JURIKA & VOYLES, L.P. ("JURIKA & VOYLES"). Effective January 1, 1997, Nvest
completed the acquisition of Jurika & Voyles, Inc., an Oakland, California-based
investment management firm founded in 1983. Jurika & Voyles provides investment
advisory services to institutions, individuals and mutual funds utilizing a
fundamental, research-driven investment approach which seeks to invest at
opportunistic prices in the stock of companies exhibiting growth in cash flow.
REICH & TANG FUNDS ("R&T FUNDS"). Established in 1974, R&T Funds, a
division of Reich & Tang Asset Management L.P., manages mutual funds that are
marketed primarily through brokerage houses and regional commercial banks, many
of which offer the funds to customers as their own "private label" products. In
addition, it acts as the administrator for mutual funds advised by others and
for the equity funds managed by Reich & Tang Capital Management. Reich & Tang
Funds specializes in providing cash management account services to shareholders
of proprietary and administered money market funds. Such services include draft
checking, debit cards and electronic banking.
REICH & TANG CAPITAL MANAGEMENT ("R&T CAPITAL MANAGEMENT"). Established in
1970, R&T Capital Management, a division of Reich & Tang Asset Management L.P.,
manages mutual funds, private investment partnerships and equity securities for
institutions and individuals. R&T Capital Management emphasizes fundamental
research and its philosophy is to seek investment opportunities in companies
with small to medium market capitalizations, strong management, significant
market share and relatively low risk. The Operating Partnership acquired and
consolidated the operations of H.A. Schupf & Co. into R&T Capital Management
effective October 1, 1998.
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SNYDER CAPITAL MANAGEMENT, L.P. ("SNYDER CAPITAL"). In July 1997, Nvest
completed the acquisition of Snyder Capital, a San Francisco, California-based
investment advisory firm. Snyder Capital provides investment advisory services
primarily to institutions and high net worth individuals and families, and
specializes in investing in small- to mid-capitalization equities.
VAUGHAN, NELSON, SCARBOROUGH & MCCULLOUGH, L.P. ("VNSM"). In May 1996,
Nvest acquired VNSM, a Houston, Texas-based investment advisory firm. VNSM
manages equity, fixed income and balanced portfolios for foundations,
endowments, institutions and high net worth individuals. The Operating
Partnership acquired and consolidated the operations of Daniel Breen & Company
into VNSM in December 1997. The acquisition expanded the professional investment
management personnel and the range of product offerings at VNSM, including the
provision of trust services through a subsidiary.
WESTPEAK INVESTMENT ADVISORS, L.P. ("WESTPEAK"). Established in 1991,
Westpeak provides customized equity management for institutional investors, such
as pension plans, foundations and endowments, and mutual funds, utilizing an
active, quantitative research capability. Investment management styles include
large and small capitalization equities, with optional value and growth biases.
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP ("CGM"). CGM provides
investment management services for mutual funds and for a limited number of
large institutions and individual clients. CGM follows primarily an aggressive,
growth-oriented strategy. CGM was established in 1990 through a spin-off of its
operations from Loomis Sayles. As of December 31, 1998, the Operating
Partnership held a 50% limited partnership interest in CGM. The remaining
interest is primarily held by its corporate general partner which is owned by
CGM's principals. The Operating Partnership regards its interest in CGM as a
passive investment and accounts for this interest using the equity method. All
assets under management of CGM are included in consolidated assets under
management.
DISTRIBUTION AND CONSULTING FIRMS
The Operating Partnership and its Distribution and Consulting Firms provide
the Investment Management Firms with a network of distribution, consulting and
administrative services. The compensation arrangements for the Distribution and
Consulting Firms generally are set out in written agreements, and provide for
compensation through commissions, trailing fees based on assets retained under
management, consulting fees, and fixed and transaction fees for administrative
and other services.
NEW ENGLAND FUNDS, L.P. ("NEF"). Established in 1993, NEF serves as a
distributor of the twenty-three mutual funds in the New England Funds Group. NEF
is responsible for all sales related activities of the New England Funds Group.
NEF distributes mutual funds through retail sales networks of regional and
national brokerage firms. The largest of its relationships is with New England
Securities Corporation ("NES"), a broker-dealer subsidiary of New England Life
Insurance Company ("New England Financial"), which is a subsidiary of MetLife.
In addition, NEF also has a significant relationship with MetLife Securities,
Inc., a broker-dealer subsidiary of MetLife.
NVEST ASSOCIATES, INC. ("NVEST ASSOCIATES"). Established in 1989 and
previously called "New England Investment Associates, Inc.," Nvest Associates
provides marketing and consulting services to the Operating Partnership and
certain of the Investment Management Firms in the institutional marketplace, and
focuses on specialized markets, such as union pension plans, insurance companies
and foreign firms. Nvest Associates also assists the Operating Partnership in
identifying and designing new product opportunities which may be offered through
existing subsidiaries, new ventures or acquired companies.
GRAYSTONE PARTNERS L.P. ("GRAYSTONE"). Graystone serves as a consultant and
marketing agent with respect to asset allocation and management services
provided to individuals and families of substantial wealth.
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NVEST ADVISOR SERVICES ("NAS"). Established in 1997, NAS is a division of
the Operating Partnership that assists in the marketing and distribution of
mutual funds advised by various of the Investment Management Firms through
financial planners and advisors and through "wrap" programs offered by
broker-dealers.
NVEST RETIREMENT SERVICES ("NRS"). Established in 1998, NRS is a division
of the Operating Partnership that assists in the marketing and distribution of
mutual funds advised by various of the Investment Management Firms to retirement
plan sponsors, large 401(k) plan providers, multi-manager alliance platforms and
consultants.
NVEST SERVICES COMPANY, INC. ("NSC"). Also established in 1998, NSC serves
as the transfer agent to all of the mutual funds in the New England Funds Group.
NSC is responsible for shareholder services and relations for the New England
Funds Group, which had approximately 443,000 shareholder accounts on December
31, 1998. NSC also provides legal, compliance, human resources and training
services to NEF and also assists in the areas of product development, vendor
negotiations and purchasing. NSC offers its services, on a voluntary basis, to
the Operating Partnership's other affiliates and fund families and provides
legal and compliance services to NAS and NRS.
PRIMARY MARKETS
The two primary markets for the investment management services offered by
the Investment Management Firms are the institutional and mutual fund markets.
Several of the Investment Management Firms also actively participate in the
market for individually managed private accounts for high net worth individuals.
THE INSTITUTIONAL MARKET. The institutional market for investment
management services includes corporate, government and union pension plans,
endowments and foundations and corporations purchasing investment management
services for their own account. All of the Operating Partnership's Investment
Management Firms serve the institutional market.
The Investment Management Firms market their services to the institutional
market through a number of channels. Several of the Investment Management Firms
employ full-time marketing or client relations specialists to serve the
institutional market while others receive marketing assistance from the
Operating Partnership and Nvest Associates, one of the Distribution and
Consulting Firms. The Operating Partnership believes that significant
cross-marketing opportunities exist within each Investment Management Firm,
particularly with respect to the large client and consultant-driven markets. In
addition to the efforts of full-time marketing professionals, senior management
personnel and investment professionals at most of the Investment Management
Firms actively market their respective firm's services to institutional clients.
MUTUAL FUNDS. The Investment Management Firms advise or sub-advise a total
of approximately one hundred mutual funds, the great majority of which are
grouped into seven fund "families". These funds are marketed through a variety
of channels, as set out below. In addition, the Operating Partnership provides
marketing assistance to its subsidiaries through initiatives it has undertaken
in the financial advisor, broker-dealer wrap and large plan 401(k) channels.
THE OAKMARK FAMILY OF FUNDS consist of five equity funds and one balanced
fund managed by Harris Associates L.P. and marketed on a no-load basis. At
December 31, 1998, the total assets of The Oakmark Family of Funds, all of which
are managed by Harris, were approximately $10.3 billion. The fund family
includes the $7.3 billion Oakmark Fund and the $1.4 billion Oakmark Select Fund.
THE REICH & TANG FUNDS consist of one fixed income, two equity and fifteen
money market funds marketed on a no-load basis. The money market funds are
offered primarily on a "private label" basis through financial intermediaries to
their customers. At December 31, 1998, the total assets in the Reich &
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Tang Funds were approximately $8.6 billion, all of which are managed by Reich &
Tang Asset Management, L.P.
THE NEW ENGLAND FUNDS GROUP consists of ten fixed income, ten equity, and
two money market funds. These funds are marketed on a commission basis through
broker-dealers, including New England Securities, which serves as broker-dealer
for the insurance agent field force of New England Financial, and MetLife
Securities, Inc., which serves as broker-dealer for MetLife's insurance agent
field force. At December 31, 1998, the total assets in the New England Funds
that were advised or sub-advised by various Investment Management Firms were
approximately $7.4 billion.
THE LOOMIS SAYLES FUNDS consist of eleven fixed income funds and nine equity
funds managed by Loomis Sayles that are marketed in the United States on a
no-load basis primarily through financial intermediaries to their customers.
Loomis Sayles Funds also has a fixed income fund that has a sales charge and is
marketed solely to Japanese investors. At December 31, 1998, total assets were
approximately $2.5 billion.
THE LOOMIS SAYLES INVESTMENT TRUST offers six fixed income funds and one
equity fund managed by Loomis Sayles. Each fund is marketed on a no-load basis
to institutional investors. At December 31, 1998, total assets were
approximately $0.5 billion.
THE JURIKA & VOYLES FUNDS consist of one balanced and two equity funds
managed by Jurika & Voyles that are marketed on a no-load basis primarily
through financial intermediaries to their customers. At December 31, 1998, total
assets were approximately $140 million.
THE CGM FUNDS consist of two fixed income funds, three equity funds and one
balanced fund marketed on a no-load basis. At December 31, 1998, total assets in
the CGM Funds, all of which are managed by CGM, were approximately $2.2 billion.
A number of the Investment Management Firms advise or subadvise mutual funds
in the NEW ENGLAND ZENITH FUNDS, which consist of fourteen mutual funds
sponsored by New England Financial. These mutual funds serve as the underlying
investment vehicle for variable annuity and variable life insurance products
issued by New England Financial and MetLife and are sold through insurance agent
field forces of New England Financial and MetLife. Various of the Investment
Management Firms advise or subadvise eight of the funds in the New England
Zenith Funds, with total assets of $3.5 billion at December 31, 1998.
In addition, the Investment Management Firms advise or sub-advise nine funds
not included in the above groups with total assets of $0.8 billion at December
31, 1998.
INVESTMENT MANAGEMENT AGREEMENTS AND FEES
SERVICES TO CLIENTS. The investment management accounts of the Investment
Management Firms generally are managed pursuant to written investment management
agreements with clients which, with limited exceptions, are terminable at any
time or upon relatively short notice (typically 30-60 days) by either party.
Services generally are offered on a discretionary basis, where an Investment
Management Firm would make the investment decisions for the assets under
management, and in certain cases on an advisory basis, where the firm recommends
securities and investment policies and strategies to its clients. The Investment
Management Firms' contracts may not be assigned without the consent of the
client. Investment management agreements with mutual funds may be terminated at
any time by the fund upon 60 days' notice, and terminate automatically in the
event of their assignment. For purposes of all contracts entered into by those
Investment Management Firms which are investment advisors registered with the
Securities and Exchange Commission (the "SEC"), "assignment" of investment
management contracts includes certain changes in ownership of the Operating
Partnership (or its managing general partner), MetLife or the Investment
Management Firms themselves.
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In providing investment management services, the Investment Management Firms
are principally compensated on the basis of fees calculated as a percentage of
assets under management. For most of the Investment Management Firms, the fee
schedules typically provide lower incremental fees above certain levels of
managed assets. In some instances, the amount of the fee depends upon
performance, usually by reference to a pre-established benchmark.
Management fees for mutual funds are calculated based upon the fund's
average daily net assets. Fees paid by a fund are negotiated between the fund's
advisor and the fund's board of trustees or directors, including a majority of
those who are disinterested. Subsequent changes in the fees must generally be
approved by the fund's shareholders. As a practical matter, mutual fund fees are
revised infrequently, and fee negotiations are influenced by competitive forces
in the mutual fund industry.
SERVICES TO METLIFE GENERAL ACCOUNT. As of December 31, 1998, certain of
the Investment Management Firms managed approximately $4.2 billion of MetLife's
General Account assets. These services were provided principally under separate
investment management agreements with several of the Investment Management Firms
and contain market-based fees that vary depending upon the class of asset
advised and investment objectives. The Operating Partnership received a total of
$12.9 million in fees under these arrangements in 1998.
CERTAIN INVESTMENT MANAGEMENT RISK CONSIDERATIONS. Investment management
firms are from time to time subject to claims for client losses or other amounts
arising out of investment performance or other service that does not meet
clients' expectations, particularly with respect to use of more innovative
investment strategies.
In addition, as a real estate investment manager, one of the Operating
Partnership's investment management firms, AEW Capital, is subject to a number
of special considerations. Real estate investment portfolios are, by their
terms, generally liquidated over an investment period, creating a continual need
to attract new assets in order to achieve asset growth. In addition, real estate
investment managers may be subject to certain potential risks as a result of the
structures used for client investment that are not characteristic of the risks
for other investment managers, such as the possibility that such managers might
be responsible for tort and environmental claims.
COMPETITION
The investment management business is highly competitive. The Operating
Partnership and its Firms compete with a large number of investment management
firms, commercial banks, insurance companies and others, many of which are
larger and have access to greater resources. The Operating Partnership believes
that the most important factors affecting competition for clients are: the
abilities, performance records and reputations of investment managers; the
ability to hire and retain key investment managers; the effectiveness of
marketing programs; the development of new investment strategies and information
technologies; and competitiveness in fees and investor service. The Operating
Partnership's ability to increase assets under management and to retain such
assets could be adversely affected if client accounts underperform the market or
the Operating Partnership's competitors and if key investment managers leave the
Operating Partnership's investment management firms. The Operating Partnership's
competitive position also is dependent, in part, on the relative attractiveness
of the types of investment products offered and investment philosophies,
strategies and methods of the Operating Partnership's various Investment
Management Firms under prevailing market conditions.
REGULATION
The business of the Operating Partnership and the Firms is subject to
extensive governmental regulation and supervision in much of its operations by
the SEC and other federal, state and foreign regulatory bodies. The Investment
Management Firms are subject to the Investment Advisers Act of 1940, and the
mutual funds that they advise, distribute or administer are subject to the
Investment Company Act
10
<PAGE>
of 1940. Various Operating Partnership entities are also subject to: the net
capital and other requirements of broker-dealer registration under the
Securities Exchange Act of 1934; commodity trading advisor and commodity pool
operator regulation by the Commodity Futures Trading Commission; federal and
state laws regulating securities and insurance product offerings; and state laws
and regulations regarding investment advisors, broker-dealers and other
financial intermediaries.
In addition, the Investment Management Firms are subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"), insofar as they are
"fiduciaries" under ERISA with respect to their clients.
The laws and regulations relating to the business of the Operating
Partnership generally grant supervisory agencies and bodies broad administrative
powers, including the power to limit or restrict any of the firms or individuals
associated with such firms from conducting their business in the event that they
fail to comply with such laws and regulations. In addition, changes in these
laws or regulations could have a material adverse impact on the profitability
and mode of operations of the Operating Partnership and the Firms.
EMPLOYEES
As of January 1, 1999, the Operating Partnership and its Firms employed
approximately 1,550 persons. The Operating Partnership believes that, overall,
its relations with its employees are good. Employees are compensated with a
combination of salary, discretionary or performance-based bonus, profit sharing
and fringe benefits. The Operating Partnership has sought to retain its senior
employees through compensation arrangements which it believes are competitive in
the industry.
The ability of the Operating Partnership's Firms to attract and retain
clients is dependent to a large extent on their ability to attract and retain
key employees, including skilled portfolio managers. Certain of these employees
are responsible for significant client relationships. Many key employees are not
under non-competition or other restrictions as to their departure and may be
able to attract clients away upon their departure. Loss of key personnel could
have a material adverse effect on the Operating Partnership's, and consequently
Nvest's, results of operations.
1997 RESTRUCTURING OF THE PARTNERSHIP
Although publicly held partnerships are generally taxed as corporations,
Nvest believes it is eligible to be taxed as a partnership for federal income
tax purposes under a special provision grandfathering publicly traded
partnerships that were in existence in 1987. The Taxpayer Relief Act of 1997,
signed into law on August 5, 1997, permits certain publicly traded partnerships
to elect to extend their grandfathered partnership tax status from year-to-year
on an indefinite basis, which requires payment of an annual 3.5% federal tax on
gross income and satisfaction of certain other conditions. In 1997, the Board of
Directors approved a plan of Restructuring (as defined below) under which Nvest
has made such an election. Were Nvest not to make this election, fail to qualify
to make this election, or decide in the future not to pay the 3.5% gross income
tax, it would become subject to the regular federal corporate income tax, with a
maximum rate of 35% of taxable income, and to state corporate income taxes.
Pursuant to the plan of Restructuring approved by the Board of Directors, at
year-end 1997, Nvest contributed all of its business and assets (consisting
principally of the Firms owned by Nvest), subject to all of its liabilities, to
the Operating Partnership. In consideration of the asset contribution, Nvest
received a number of partnership units of the Operating Partnership equal to the
number of outstanding units of Nvest.
As contemplated by the partnership agreement, certain of Nvest's unitholders
(whose ownership derived from Nvest units received in exchange for contributions
of appreciated investment management businesses) were permitted to choose to
become partners in the Operating Partnership by exchanging
11
<PAGE>
Nvest units for an equal number of Operating Partnership units. Such unitholders
who did not transfer their ownership to the Operating Partnership and Nvest's
other unitholders (primarily persons who have acquired their Nvest units for
cash in the public market) remained partners in Nvest. The transactions
involving the creation of the Operating Partnership, the transfer of Nvest's
assets and liabilities to the Operating Partnership and the exchange of Nvest
units for Operating Partnership units, together with Nvest's election to retain
its tax status and pay the 3.5% federal gross income tax, are referred to herein
as the "Restructuring."
After the Restructuring, Nvest has remained publicly traded on the New York
Stock Exchange (under the symbol "NEW"), and continues to file public reports
with the SEC. Nvest's business currently is to engage in the investment advisory
business by acting as the advising general partner of the Operating Partnership.
In this regard, Nvest receives proportionate distributions from the Operating
Partnership. Nvest will pay the 3.5% federal tax on its gross income, including
its proportionate share of the Operating Partnership's gross income, in lieu of
corporate income tax, so long as Nvest maintains the applicable election and
satisfies certain other conditions.
Nvest currently expects that it will distribute to its unitholders
substantially all of the distributions received from the Operating Partnership
after payment of the 3.5% federal gross income tax, any state tax, and any other
miscellaneous expenses.
Nvest believes that the creation of a lower-tier partnership has significant
benefits. In particular, acquisition candidates of Nvest have expressed a desire
for a structure of the type that resulted from the Restructuring, and Nvest
therefore believes that the existence of a lower tier facilitates acquisitions.
Furthermore, Nvest believes that it is desirable to have key persons owning
equity interests in a separate legal structure with arrangements designed to
encourage long-term participation in Nvest's operations.
As a result of the unit exchange described above, the Operating Partnership
has a limited number of partners, including Nvest. See Item 12, "Security
Ownership of Certain Beneficial Owners and Management--Principal Holders of
Operating Partnership Units." The Operating Partnership units are not publicly
traded, and there is no market for such units. Subject to various limitations
under federal tax law and regulations and the terms of the partnership
agreements of Nvest and the Operating Partnership and an agreement entered into
by them at the time of the Restructuring, Operating Partnership unitholders will
from time to time be permitted to sell their Operating Partnership units to
Nvest for Nvest units or (at Nvest's option) cash. Any such exchange of units
would be on a one-for-one basis, subject to adjustment in the event of certain
changes in the capitalization of Nvest or the Operating Partnership, including
unit repurchases under certain circumstances, or the retention of assets or
incurrence of liabilities by Nvest in significant amounts. The Operating
Partnership is not expected to pay federal tax on its gross income.
The general partner of Nvest is also the managing general partner of the
Operating Partnership. Nvest is the advising general partner of the Operating
Partnership. The Board of Directors of the General Partner was not changed in
connection with the Restructuring.
In accordance with generally accepted accounting principles, Nvest accounts
for its investment in the Operating Partnership under the equity method of
accounting.
12
<PAGE>
The following diagram illustrates the current structure of Nvest, after the
Restructuring:
[AN ORGANIZATION CHART APPEARS HERE. THE ORGANIZATION
CHART SHOWS THAT NVEST IS THE PUBLIC COMPANY AND HAS
AN OWNERSHIP INTEREST IN THE OPERATING PARTNERSHIP,
WHICH IN TURN OWNS INVESTMENT MANAGEMENT, DISTRIBUTION
AND CONSULTING FIRMS. THE CHART SHOWS THAT BOTH NVEST
AND THE OPERATING PARTNERSHIP HAVE LIMITED PARTNERS.
IT ALSO SHOWS THAT NVEST CORPORATION, THE GENERAL
PARTNER OF NVEST, IS THE MANAGING GENERAL PARTNER OF
THE OPERATING PARTNERSHIP AND THAT NVEST IS THE
ADVISING GENERAL PARTNER OF THE OPERATING
PARTNERSHIP.]
The partnership agreements of Nvest and the Operating Partnership confer on
the General Partner broad authority to effect a further restructuring of Nvest
and/or the Operating Partnership in connection with, or in anticipation of, a
change in tax status (including a change in tax status resulting from a change
in the applicable tax rate), subject to a standard of good faith on the part of
the General Partner. The Restructuring which occurred at year-end 1997 was
undertaken pursuant to such authority granted to the General Partner in the
Nvest partnership agreement.
In determining the form of any future restructuring of the Partnerships, the
General Partner is obligated to seek to accomplish certain prioritized
objectives of MetLife, RTI and other non-Public Partners (as defined in the
Nvest partnership agreement) with respect to special considerations, including
avoidance of special and potentially significantly adverse tax treatment and
continued participation in a flow-through entity for this purpose. No assurances
can be given regarding the timing or form of any future restructuring, which may
be affected by changes in the tax laws (including the applicable tax rate), as
well as other factors beyond the control of Nvest, the Operating Partnership or
the General Partner. The General Partner expects that any future restructuring
would be intended to continue to provide holders of publicly traded Nvest LP
units with the ongoing benefit of public market liquidity for their interests in
the Operating Partnership's business.
While the Nvest partnership agreement provides that Nvest may impose
restrictions on transfer as part of a restructuring (which may have the effect
of preserving the Partnerships' tax status as partnerships), the General Partner
has no reason to believe that trading restrictions will be necessary to
accomplish the restructuring objectives outlined in the Nvest partnership
agreement, absent legal or other developments.
The partnership agreements of Nvest and the Operating Partnership relieve
the General Partner of all duties and liabilities to Nvest, the Operating
Partnership and unitholders thereof for actions taken in good faith by the
General Partner in connection with a restructuring. The General Partner,
MetLife, RTI and other non-Public Partners may each be deemed to have conflicts
of interest with respect to possible future restructurings insofar as they may
be treated differently than the holders of Nvest LP units, as noted above.
13
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
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 Nvest 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
Nvest and the Operating Partnership have been described in other portions of
this report, particularly in the following section, entitled,
"Business--Forward-Looking Statements" and include factors such as conditions
affecting fee revenues, reliance on key personnel, competition, regulatory and
legal matters, and tax considerations. Readers are encouraged to review these
factors carefully. The descriptions of the potential consequences of the
Restructuring (see Item 1, "Business--1997 Restructuring of the Partnership")
and the potential effects of the Year 2000 issue (see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000") constitute forward-looking statements.
FORWARD-LOOKING STATEMENTS
From time to time, management of Nvest or the Operating Partnership may make
written or oral statements that express views on the future performance of Nvest
and the Operating Partnership. As with any forward-looking statement, these
statements should be considered in light of certain risks and uncertainties that
may cause actual results to vary materially from what had been anticipated.
These important factors include the following:
CONDITIONS AFFECTING FEE REVENUES. The Operating Partnership's revenues,
cash flows and earnings may be adversely affected by shifts in client
preferences toward classes of assets that produce lower fees or by a decline
in assets under management resulting from changing economic conditions or
the performance of the capital markets generally. With relatively minor
exceptions, virtually all of the Operating Partnership's revenues are
derived from investment management agreements with clients that are
terminable at any time or upon 30 to 60 days' notice, as is the case
generally in the investment management industry. Any termination of
agreements representing a significant portion of assets under management
could have an adverse impact on the Operating Partnership's, and
consequently Nvest's, results of operations.
RELIANCE ON KEY PERSONNEL. The departure of key personnel, such as skilled
portfolio managers or employees responsible for significant client
relationships, could have a material adverse effect on the results of
operations of Nvest and the Operating Partnership.
COMPETITION. The Operating Partnership may experience losses in assets under
management due to the highly competitive nature of its business. The
performance of accounts managed by the Firms as compared to the performance
of competitors' accounts or the market generally, the abilities and
reputations of the Firms and the relative attractiveness of the types of
investment products, philosophies and strategies offered by the Firms impact
the Operating Partnership's ability to increase and retain assets under
management.
REGULATORY AND LEGAL FACTORS. The Operating Partnership's business may be
affected by developments or changes in the regulation of its Firms or its
Firms' clients, legal proceedings and claims arising in the conduct of the
investment business or other legal developments.
TAX CONSIDERATIONS. Tax benefits, if any, resulting from the classification
of Nvest or the Operating Partnership as a partnership depend on many
circumstances that are beyond Nvest's and the Operating Partnership's
control. Changes in the law, any change or termination of the tax status of
Nvest or the Operating Partnership (technical or otherwise), certain
transfers of units and certain
14
<PAGE>
changes in the market price of Nvest units all are occurrences, among
others, that may affect Nvest's results or taxable income reported to
unitholders.
ITEM 2. PROPERTIES.
The Operating Partnership and the Firms collectively occupy approximately
550,000 square feet of leased space in a number of locations in major U.S.
cities including Boston, Massachusetts, New York, New York and Chicago,
Illinois.
ITEM 3. LEGAL PROCEEDINGS.
As previously disclosed, on June 7, 1996, the California Ironworkers Field
Pension Trust, and several related trusts (the "Trusts"), filed suit against the
Operating Partnership's subsidiary, Loomis, Sayles & Company, L.P. ("Loomis
Sayles") in the U.S. District Court for the Central District of California
(Western Division) alleging violation of investment guidelines and breach of
fiduciary duty under ERISA with respect to the purchase of certain securities
for the account of the Trusts. The suit seeks money damages in excess of $20
million representing lost principal, together with amounts representing loss of
investment income. On March 3, 1997, the Court granted the motion of Loomis
Sayles to dismiss certain of the causes of action of the plaintiff and to strike
the plaintiff's request for punitive damages. Loomis Sayles believes that it has
meritorious defenses and has contested both allegations of liability and damages
at the trial which was completed in the summer of 1998. A decision is expected
soon. Management believes that resolution of this matter will not have a
material adverse effect on the results of operations or financial condition of
the Operating Partnership or Nvest.
The Operating Partnership's Firms are from time to time involved in various
legal proceedings and claims arising in the conduct of their investment
businesses. Management believes that any such claims and legal proceedings will
not have a material adverse effect on the results of operations or financial
condition of the Operating Partnership or Nvest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of unitholders during the fourth quarter
of 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
UNIT INFORMATION
Nvest's units are listed on the New York Stock Exchange under the symbol
"NEW." High and low sales prices for the units together with distributions
declared for the years ended December 31 follow:
<TABLE>
<CAPTION>
DISTRIBUTIONS DECLARED
-------------------------
1998 HIGH LOW REGULAR SPECIAL TOTAL
- ------------------------------------------------------------ ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter............................................... $36 13/16 $28 $0.60 N/A $0.60
Second Quarter.............................................. 35 5/16 31 5/8 0.63 N/A 0.63
Third Quarter............................................... 32 1/2 21 1/16 0.63 N/A 0.63
Fourth Quarter.............................................. 29 1/4 24 3/16 0.63 N/A 0.63
------- -----
$2.49 $2.49
------- -----
------- -----
<CAPTION>
DISTRIBUTIONS DECLARED
-------------------------
1997 HIGH LOW REGULAR SPECIAL TOTAL
- ------------------------------------------------------------ ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter............................................... $26 1/8 $22 5/8 $0.53 $0.05 $0.58
Second Quarter.............................................. 25 7/8 22 1/8 0.53 0.08 0.61
Third Quarter............................................... 30 3/4 25 5/16 0.53 0.17 0.70
Fourth Quarter.............................................. 30 1/2 27 15/16 0.55 0.25 0.80
------- ------- -----
$2.14 $0.55 $2.69
------- ------- -----
------- ------- -----
</TABLE>
On February 12, 1999, the closing price of the units on the New York Stock
Exchange was $24 3/8 per unit. As of such date, there were approximately 420
unitholders of record of Nvest; management estimates that there are over 4,500
beneficial owners, including those who hold their units in "street" name through
brokerage accounts or other nominees.
DISTRIBUTION POLICY
NVEST. Nvest 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 miscellaneous
expenses. For the year ended December 31, 1998, such expenses reduced the $3.05
per unit of total distributions received by Nvest by approximately $0.56 per
unit, resulting in distributions payable to unitholders of $2.49 per unit.
The Board of Directors of the General Partner typically declares
distributions at its meeting during the last month of the quarter to which the
distribution relates, payable to unitholders of record on the last business day
of the quarter. On December 17, 1998, the Board of Directors of the General
Partner of Nvest declared a distribution of $0.63 per unit, payable on February
16, 1999 to unitholders of record as of December 31, 1998.
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 the repurchase of units. Operating cash flow is defined as net income
adjusted for amortization of intangibles, restricted unit plan compensation and
non-recurring items. In 1998, operating cash flow per unit was $3.42 and the
Operating Partnership declared distributions of $3.05 per unit. The Operating
Partnership paid out approximately 89 percent of its operating cash flow in
distributions during 1998.
As a limited partnership, the Operating Partnership has different operating
characteristics than those of a typical corporation. The Operating Partnership's
stated distribution policy is to distribute currently to unitholders (which
includes Nvest) operating cash flow not required for normal business operations
and
16
<PAGE>
working capital needs, including support of the Operating Partnership's growth
strategy. As a result, Nvest believes that operating cash flow per unit is
important to help both existing and potential unitholders of Nvest understand
their potential return on an investment in Nvest. 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 included in Item 8. Operating cash flow, as
calculated by the Operating Partnership, may not be consistent with comparable
computations by other companies.
ITEM 6. SELECTED FINANCIAL DATA.
In connection with the Restructuring that was completed on December 31,
1997, Nvest, L.P. ("Nvest") contributed all of its operating assets and
liabilities to Nvest Companies, L.P. (the "Operating Partnership") in exchange
for Operating Partnership units. See Item 1, "Business--1997 Restructuring of
the Partnership."
At December 31, 1998, Nvest owned approximately 15% of the units of the
Operating Partnership. Selected financial data is presented below for Nvest,
L.P. through December 31, 1998 and for Nvest Companies, L.P. starting with its
formation on December 31, 1997. As of December 31, 1997, the results of Nvest
reflect its equity investment in the Operating Partnership and the results of
the Operating Partnership represent the results of Nvest prior to the
Restructuring.
The following selected financial data at or for the years ended December 31
should be read in conjunction with the Financial Statements included in Item 8.
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP
-----------------------------------------------------------
NVEST NVEST,
NVEST, L.P. COMPANIES, L.P. L.P.
------------------------------------------ --------------- ---------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------------- ---------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues....................................... $ 234,034 $ 280,258 $ 392,651 $ 561,469 $ 669,532 $ 16,672
--------- --------- --------- --------- --------------- ---------
--------- --------- --------- --------- --------------- ---------
Net income..................................... $ 28,925 $ 52,750 $ 70,224 $ 95,682 $ 110,782 $ 13,052
--------- --------- --------- --------- --------------- ---------
--------- --------- --------- --------- --------------- ---------
PER UNIT DATA
Net income:
Basic........................................ $ 1.13 $ 1.76 $ 1.96 $ 2.22 N/A $ 2.02
--------- --------- --------- --------- --------------- ---------
--------- --------- --------- --------- --------------- ---------
Diluted...................................... $ 1.13 $ 1.73 $ 1.85 $ 2.21 N/A $ 2.00
--------- --------- --------- --------- --------------- ---------
--------- --------- --------- --------- --------------- ---------
Distributions declared:
Regular...................................... $ 1.68 $ 1.78 $ 2.05 $ 2.14 $ 3.05 $ 2.49
Special...................................... -- -- -- 0.55 -- --
--------- --------- --------- --------- --------------- ---------
Total...................................... $ 1.68 $ 1.78 $ 2.05 $ 2.69 $ 3.05 $ 2.49
--------- --------- --------- --------- --------------- ---------
--------- --------- --------- --------- --------------- ---------
WEIGHTED AVERAGE UNITS
OUTSTANDING-DILUTED.......................... 31,992 33,824 42,076 43,881 45,074 6,963
--------- --------- --------- --------- --------------- ---------
--------- --------- --------- --------- --------------- ---------
<CAPTION>
THE OPERATING PARTNERSHIP
-----------------------------------------------------------
NVEST, L.P. NVEST COMPANIES, L.P. NVEST, L.P.
------------------------------- -------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Intangible assets.............................. $ 149,123 $ 355,122 $ 527,765 $ 660,394 $ 636,583 $ -- $ --
--------- --------- --------- --------- --------------- --------- ---------
--------- --------- --------- --------- --------------- --------- ---------
Total assets................................... $ 478,399 $ 520,873 $ 721,658 $ 944,568 $ 899,382 $ 76,028 $ 79,620
--------- --------- --------- --------- --------------- --------- ---------
--------- --------- --------- --------- --------------- --------- ---------
Notes payable-noncurrent....................... $ -- $ 80,919 $ 118,334 $ 271,667 $ 270,000 $ -- $ --
--------- --------- --------- --------- --------------- --------- ---------
--------- --------- --------- --------- --------------- --------- ---------
Deferred puchase consideration................. $ -- $ 41,000 $ 144,027 $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------------- --------- ---------
--------- --------- --------- --------- --------------- --------- ---------
ASSETS UNDER MANAGEMENT
(IN BILLIONS)................................ $ 57B $ 77B $ 100B $ 125B $ 135B $ -- $ --
--------- --------- --------- --------- --------------- --------- ---------
--------- --------- --------- --------- --------------- --------- ---------
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
At year-end 1997, Nvest completed a restructuring (the "Restructuring") that
included the transfer of its business, assets and liabilities to the Operating
Partnership. As a result of the Restructuring, Nvest's sole asset consists of
its economic interest in the Operating Partnership. Nvest 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 December 31,
1998, Nvest owned approximately 6.5 million units, or approximately 15% of the
economic interests in the Operating Partnership. As part of the Restructuring,
Nvest elected 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 discussion under Item 1, "Business--1997
Restructuring of the Partnership."
As a result of the Restructuring, Management's Discussion and Analysis
includes two sections. In the first section, the results of Nvest for the year
ended December 31, 1998 are compared to pro forma results for the year ended
December 31, 1997. The pro forma results for 1997 assume 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 the Operating Partnership
for the year ended December 31, 1998 are compared to the results of Nvest for
the year ended December 31, 1997, because the operations of the Operating
Partnership prior to the Restructuring were those of Nvest. A discussion of the
results of Nvest for the year ended December 31, 1998 compared to the year ended
December 31, 1997 is not considered meaningful due to the accounting changes
brought on by the Restructuring (equity method of accounting as compared to
consolidated operating results) and therefore has not been included.
NVEST, L.P. (NVEST)
Summary financial information of Nvest for the years ended December 31, 1997
and 1998 follows:
<TABLE>
<CAPTION>
1997 1998
PRO FORMA ACTUAL
----------- ---------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
<S> <C> <C>
Equity in earnings of the Operating Partnership........................ $ 14,100 $ 16,617
Gross income tax and other expenses, net............................... (3,119) (3,565)
----------- ---------
Net income............................................................. $ 10,981 $ 13,052
----------- ---------
----------- ---------
Net income per unit--diluted........................................... $ 1.72 $ 2.00
----------- ---------
----------- ---------
Regular distributions declared per unit................................ $ 2.14 $ 2.49
----------- ---------
----------- ---------
</TABLE>
Pro forma financial information for the year ended December 31, 1997 is
presented to provide a basis of comparison to the results of Nvest for the year
ended December 31, 1998, and gives effect to the Restructuring as if it occurred
on January 1, 1997. Pro forma financial information includes Nvest'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.
GENERAL
Nvest derives its net income and cash available for distribution from its
ownership of approximately 6.5 million units in the Operating Partnership
(representing an approximate 15% interest). Each quarter Nvest distributes to
its unitholders substantially all of the distributions received from the
Operating Partnership after meeting its federal and state tax obligations along
with some miscellaneous operating
18
<PAGE>
expenses (see Operating Partnership Distribution Policy, below). Nvest's major
expense is the 3.5% federal gross income tax that is payable on Nvest's
proportionate share of the Operating Partnership's gross income.
1998 DISTRIBUTIONS TO UNITHOLDERS
In 1998 Nvest received distributions from the Operating Partnership totaling
$3.05 per unit. Nvest in turn declared distributions of $2.49, with the $0.56
difference consisting primarily of the tax obligations discussed above. Changes
in operating cash flow per unit at the Operating Partnership will directly
impact the amount of future distributions at Nvest.
STATEMENT OF INCOME FOR 1998 COMPARED TO PRO FORMA 1997
Net income of Nvest of $13.1 million or $2.00 per unit (diluted) for 1998
increased $2.1 million or $0.28 per unit (diluted) from pro forma net income of
$11.0 million or $1.72 per unit (diluted) for 1997. The increase reflects higher
equity in earnings of the Operating Partnership, partially offset by a
proportionate increase in gross income tax and other expenses. The Operating
Partnership has significant non-cash expenses which allow it, and therefore
Nvest, to maintain a distribution level in excess of net income.
Equity in earnings of the Operating Partnership of $16.6 million for 1998
increased $2.5 million from pro forma equity in earnings of $14.1 million for
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. A discussion of the financial condition and results of
operations of the Operating Partnership follows.
Gross income tax and other expenses of $3.6 million for 1998 increased $0.5
million from pro forma $3.1 million for 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 December 31, 1998, Nvest had a distribution receivable from the Operating
Partnership of $5.0 million representing the $0.77 per unit fourth quarter
distribution declared by the Operating Partnership on December 17, 1998 and
payable on February 16, 1999. At December 31, 1998, Nvest owned 6,516,000 units
or approximately 15% of the Operating Partnership. For the fourth quarter of
1998, Nvest declared a quarterly distribution of $0.63 per unit payable to Nvest
unitholders on February 16, 1999. The $0.14 differential between the
distribution receivable from the Operating Partnership and the distribution
declared by Nvest consists primarily of Nvest's tax obligations discussed above.
The 1998 gross income tax is payable on or before March 15, 1999. Effective
for tax years ended after 1998, the gross income tax is required to be paid in
quarterly installments. To the extent there are temporary cash shortfalls due to
the timing of tax payments and the receipt of quarterly distributions,
short-term loans will be extended to Nvest by the Operating Partnership.
19
<PAGE>
THE OPERATING PARTNERSHIP
The following is an analysis of the financial condition and results of
operations of the Operating Partnership for the year ended December 31, 1998
compared to the years ended December 31, 1996 and 1997. The operations of the
Operating Partnership prior to the Restructuring were conducted by Nvest, L.P.,
and subsequent to the Restructuring, by Nvest Companies, L.P.
<TABLE>
<CAPTION>
NVEST
NVEST, NVEST, COMPANIES,
L.P. L.P. L.P.
1996 1997 1998
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C> <C> <C>
Revenues..................................................................... $ 392,651 $ 561,469 $ 669,532
---------- ---------- -----------
Expenses:
Restricted unit plan compensation.......................................... 7,598 1,209 3,898
Amortization of intangibles................................................ 25,277 37,789 39,528
Other expenses............................................................. 289,552 426,789 515,324
---------- ---------- -----------
322,427 465,787 558,750
---------- ---------- -----------
Net income................................................................... $ 70,224 $ 95,682 $ 110,782
---------- ---------- -----------
---------- ---------- -----------
Operating cash flow (1)...................................................... $ 98,111 $ 134,680 $ 154,208
---------- ---------- -----------
---------- ---------- -----------
Operating cash flow per unit--diluted (1).................................... $ 2.33 $ 3.07 $ 3.42
---------- ---------- -----------
---------- ---------- -----------
Distributions declared per unit:
Regular.................................................................... $ 2.05 $ 2.14 $ 3.05
Special.................................................................... -- 0.55 --
---------- ---------- -----------
Total.................................................................... $ 2.05 $ 2.69 $ 3.05
---------- ---------- -----------
---------- ---------- -----------
Weighted average units outstanding--diluted.................................. 42,076 43,881 45,074
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------
(1) Operating cash flow is defined as net income adjusted for amortization of
intangibles, restricted unit plan compensation and non-recurring items.
Operating cash flow per unit should not be construed as an alternative to
net income per unit of Nvest, L.P. 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.
GENERAL
The Operating Partnership is an investment management firm with
approximately $135 billion in assets under management at December 31, 1998. It
operates through eleven investment management firms and six principal
distribution and consulting firms to provide a wide array of investment styles
and products to institutional, mutual fund and private client markets. The
Operating Partnership's assets under management include equity securities, fixed
income securities, money market funds and real estate.
20
<PAGE>
The Operating Partnership seeks to grow by expanding the investment
management firms' capabilities, selectively pursuing the acquisition of
investment management firms, increasing and focusing its marketing efforts, and
selectively expanding its distribution channels. The Operating Partnership
supports the firms' existing businesses and new initiatives that demonstrate
substantial potential for growth in assets under management by allocating
capital and other resources to those businesses and initiatives. In addition,
the Operating Partnership and the investment management firms identify
opportunities for joint marketing efforts, enhanced distribution of investment
products (such as mutual funds) and operational efficiencies across the
organization.
The Operating Partnership's revenues derive primarily from management and
advisory fees earned from services provided by the investment management firms.
For institutional and private clients, fees are generally billed quarterly and
are calculated as a percentage of actual assets under management at the
beginning or end of the calendar quarter. For mutual fund clients, fees are
billed monthly and are calculated as a percentage of the fund's average daily
net assets. Any change in assets under management, which can result from market
action, net client inflows or outflows, and acquisitions, has a major impact on
revenues earned by the Operating Partnership.
The Operating Partnership can earn additional management and advisory fee
revenues as a result of performance fees and transaction fees. Such fees are
generally earned at the end of the performance contract period or upon
completion of specific transactions, sometimes resulting in periodic
fluctuations of such revenues.
In addition to management and advisory fees, the Operating Partnership earns
other revenues related to services provided to mutual funds and other clients,
distribution fees and sales fees.
DISTRIBUTION POLICY
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 the repurchase of units. Operating
cash flow is defined as net income adjusted for amortization of intangibles,
restricted unit plan compensation and non-recurring items. In 1998, the
Operating Partnership declared distributions of $3.05 per unit, compared to
$2.14 per unit in regular distributions declared in 1997. The Operating
Partnership paid out approximately 89 percent of its operating cash flow in
distributions during 1998.
ASSETS UNDER MANAGEMENT
Assets under management at December 31, follow:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CLIENT TYPE (IN BILLIONS):
Institutional....................................................... $ 66 $ 80 $ 87
Mutual Funds........................................................ 25 33 36
Private Accounts and Other.......................................... 9 12 12
--------- --------- ---------
$ 100 $ 125 $ 135
--------- --------- ---------
--------- --------- ---------
ASSET CLASS (PERCENTAGE):
Equity.............................................................. 42% 47% 45%
Fixed Income........................................................ 43 41 43
Money Market........................................................ 8 7 7
Real Estate......................................................... 7 5 5
--------- --------- ---------
100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>
21
<PAGE>
At December 31, 1998, assets under management of $135 billion had increased
$10 billion from $125 billion at December 31, 1997. In 1998, institutional fixed
income and risk-adjusted equity products made the major contributions to the
increase in assets under management. Net new business, including capital
additions and reinvestments, was strong particularly in the first half of 1998,
with more than $5 billion in net inflows from clients during the course of the
year. The Operating Partnership achieved these results despite the volatility in
the equity markets where a relatively few large capitalization growth stocks had
a disproportionate impact on the S&P 500. The Operating Partnership has a
greater weighting of equity assets in the value investment style across large,
mid and small capitalization issues which have historically produced very
competitive long-term returns but recently have resulted in the Operating
Partnership's overall equity performance trailing the S&P 500. A continuing
disparity in returns between value and large capitalization growth stocks in the
future, should it occur, could negatively impact the Operating Partnership's
ability to gather new equity assets under management.
STATEMENT OF INCOME FOR 1998 COMPARED TO 1997
Net income of $110.8 million for 1998 increased $15.1 million from $95.7
million for 1997. The increase resulted from higher average assets under
management and the resulting increase in revenues, somewhat tempered by
increased investment in distribution and marketing initiatives.
Management and advisory fees of $615.4 million for 1998 increased $99.8
million (or 19%) from total revenues of $515.6 million in 1997. The revenue
increase was especially concentrated in the first half of 1998, coinciding with
the Operating Partnership's higher average assets under management at that time
as compared to 1997. Institutional and private account revenues (excluding
acquisitions) increased $45 million in 1998 as compared to 1997, with growth
particularly strong in the fixed income and risk adjusted equity products.
Mutual fund revenues increased $41 million in 1998 as compared to 1997. This
growth was generated primarily by asset increases in equity funds during the
first half of 1998. For the full year, equity mutual funds had net client
outflows of $1.2 billion, which was more than offset by $1.8 billion of inflows
to money market funds and variable annuity products. Acquisitions completed in
the second half of 1997 contributed an incremental $14 million to institutional
and private account revenues in 1998.
Other revenues and interest income of $54.1 million for 1998 increased $8.2
million from $45.9 million for 1997. The increase resulted primarily from client
servicing fees, including trading commissions and transfer agency fees.
Compensation and benefits of $330.9 million for 1998 increased $54.5 million
from 1997 and consisted of 47% base compensation and 53% of variable
compensation. The increase in variable compensation of $33 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. Base compensation increased by $22 million as a result
of annual salary increases, increased staffing, and, to a much lesser extent, $2
million of incremental expense from acquisitions completed in the second half of
1997.
Restricted unit plan compensation of $3.9 million for 1998 increased $2.7
million from 1997 due to grants issued in the first quarter of 1998.
Occupancy, equipment and systems expense of $32.0 million for 1998 increased
$8.4 million from 1997 due to lease renewals, higher costs associated with
expanded business activities and system initiatives.
Interest expense of $21.5 million for 1998 increased $1.9 million from 1997,
primarily reflecting a full year's interest on the $160 million of senior notes
payable issued on April 1, 1997.
Other expense of $117.5 million for 1998 increased $19.0 million from 1997
due primarily to higher general and administrative expenses associated with
expanded business activities, including distribution and marketing initiatives.
22
<PAGE>
Income tax expense of $5.3 million for 1998 increased $3.4 million from
1997. The increase results from higher profits at the corporate subsidiaries in
1998.
STATEMENT OF INCOME FOR 1997 COMPARED TO 1996
Net income of $95.7 million for 1997 increased $25.5 million from $70.2
million for 1996. The increase primarily reflected higher revenues due to
increases in assets under management from both internal growth and acquisitions.
Management and advisory fees of $515.6 million for 1997 increased $170.8
million (or 50%) from $344.8 million for 1996. The increase primarily reflected
increases in assets under management from both acquisitions and internal growth.
Additionally, the increase in equity assets under management, with higher
investment management fees compared to fixed income assets, contributed to the
growth in revenues. Acquisitions, completed in May and December of 1996 and
January and July of 1997, represented $87 million of the total increase in
management and advisory fees. Excluding acquisitions, management and advisory
fees increased $84 million due to higher mutual fund revenues of $47 million and
higher institutional and private account revenues of $37 million.
Other revenues and interest income of $45.9 million for 1997 increased $3.0
million from $42.9 million for 1996. The increase results primarily from equity
in earnings of an affiliate.
A $5.0 million non-recurring gain on the partial sale of the Operating
Partnership's interest in its affiliate, Capital Growth Management Limited
Partnership ("CGM"), was realized during 1996, completing the agreement to
reduce the Operating Partnership's ownership interest to 50%.
Compensation and benefits of $276.4 million for 1997 increased $86.4 million
from 1996 and consisted of 48% base compensation and 52% variable compensation.
The increase in variable compensation of $52 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. Base compensation increased by $34 million of which $24 million
resulted from acquisitions.
Restricted unit plan compensation expense of $1.2 million for 1997 decreased
$6.4 million from 1996. Substantially all unvested units as of August 30, 1996
vested on that date in accordance with the terms of the plan.
Amortization of intangibles of $37.8 million for 1997 increased $12.5
million from 1996 due to acquisitions and a full year's amortization of the
deferred purchase payment made in connection with the 1995 acquisition of Harris
Associates.
Occupancy, equipment and systems expense of $23.6 million for 1997 increased
$6.2 million from 1996, of which $3.5 million was due to acquisitions.
Interest expense of $19.6 million for 1997 increased $10.9 million from 1996
primarily reflecting the $160 million senior notes payable issued on April 1,
1997 and other short-term acquisition financing.
Other expense of $98.5 million for 1997 increased $32.7 million from 1996.
The increase results primarily from expanded business activities, including
distribution and marketing initiatives, and acquisitions.
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 December 17, 1998, the Operating Partnership declared a
23
<PAGE>
distribution of $0.77 per unit compared to the $0.55 per unit regular
distribution declared in the fourth quarter of 1997. For the year ended December
31, 1998, total distributions paid to unitholders were $137 million compared to
$100.9 million for 1997. The Operating Partnership paid out approximately 89
percent of its operating cash flow in distributions during 1998.
Senior notes of $110 million and $160 million due in January 2003 and April
2007, respectively, are expected to be refinanced at maturity. The interest
rates of 6.54% and 7.15% on the $110 million and $160 million notes,
respectively, are fixed rates.
The Operating Partnership had lines of credit totaling $185 million which
were unused at December 31, 1998.
At December 31, 1998, the Operating Partnership had contingent payment
obligations through 2000 resulting from completed acquisitions of up to $49
million. 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.
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 or experience a variety of other date-related problems.
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.
The Operating Partnership 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
24
<PAGE>
to certain of the operating companies. Progress on Year 2000 initiatives is
monitored by the audit committee of the board of directors of the managing
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
(including varying levels of testing for Year 2000 compliance) 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.
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. Most of these projects are expected to be
completed by the end of 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 began internal and external testing
in the fourth quarter of last year and expect 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.
25
<PAGE>
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. Through
December 31, 1998, approximately $8 million has been spent on Year 2000
compliance efforts. 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 Nvest 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.
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, Nvest 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 Nvest.
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 Nvest.
26
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Neither Nvest nor the Operating Partnership were party to derivative
financial instruments or derivative commodity instruments at or during the year
ended December 31, 1998. The Operating Partnership's only significant financial
instruments (as defined by Financial Accounting Standards Board Statement No.
107) are its fixed rate senior notes of $110 million and $160 million which are
discussed above and in Note 6 of the Operating Partnership's December 31, 1998
Consolidated Financial Statements included herein.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS OF NVEST, L.P. ("NVEST")
Balance Sheet as of December 31, 1997 and 1998........................................................... 29
Consolidated Statement of Income for the three years ended December 31, 1996, 1997 and 1998.............. 30
Consolidated Statement of Cash Flows for the three years ended December 31, 1996, 1997 and 1998.......... 31
Consolidated Statement of Changes in Partners' Capital for the three years ended December 31, 1996, 1997
and 1998............................................................................................... 32
Notes to Consolidated Financial Statements............................................................... 33
Report of Independent Accountants........................................................................ 39
FINANCIAL STATEMENTS OF THE OPERATING PARTNERSHIP
(NVEST, L.P. IN 1996 AND 1997 AND NVEST COMPANIES, L.P. IN 1998)
Consolidated Balance Sheet as of December 31, 1997 and 1998.............................................. 40
Consolidated Statement of Income for the three years ended December 31, 1996, 1997 and 1998.............. 41
Consolidated Statement of Cash Flow for the three years ended December 31, 1996, 1997 and 1998........... 42
Consolidated Statement of Changes in Partners' Capital for the three years ended December 31, 1996, 1997
and 1998............................................................................................... 43
Notes to Consolidated Financial Statements............................................................... 44
Report of Independent Accountants........................................................................ 55
</TABLE>
28
<PAGE>
NVEST, L.P.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ -- $ 2,772
Distribution receivable from Nvest Companies, L.P......................................... 5,020 5,017
--------- ---------
Total current assets.................................................................... 5,020 7,789
Investment in Nvest Companies, L.P. (Note 4)................................................ 71,008 71,831
--------- ---------
Total assets............................................................................ $ 76,028 $ 79,620
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Distribution payable...................................................................... $ 5,020 $ 4,105
Gross income tax payable and accrued expenses............................................. -- 3,622
--------- ---------
Total current liabilities............................................................... 5,020 7,727
Contingent liabilities (Note 7)
Partners' capital (6,275,000 units at December 31, 1997 and 6,516,000 units at December 31,
1998)..................................................................................... 71,008 71,893
--------- ---------
Total liabilities and partners' capital................................................. $ 76,028 $ 79,620
--------- ---------
--------- ---------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
NVEST, L.P.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C> <C> <C>
REVENUES
Equity in earnings of Nvest Companies, L.P.............................. $ -- $ -- $ 16,617
Management and advisory fees............................................ 344,781 515,617 --
Other revenues and interest income...................................... 42,882 45,852 55
Gain on partial sale of affiliate....................................... 4,988 -- --
---------- ---------- ---------
392,651 561,469 16,672
---------- ---------- ---------
EXPENSES
Compensation and benefits............................................... 189,986 276,414 --
Restricted unit plan compensation....................................... 7,598 1,209 --
Amortization of intangibles............................................. 25,277 37,789 --
Depreciation and amortization........................................... 5,131 6,740 --
Occupancy, equipment and systems........................................ 17,461 23,629 --
Interest expense........................................................ 8,728 19,608 --
Other, including gross income tax....................................... 65,789 98,487 3,620
---------- ---------- ---------
319,970 463,876 3,620
---------- ---------- ---------
Income before income taxes................................................ 72,681 97,593 13,052
Income tax expense...................................................... 2,457 1,911 --
---------- ---------- ---------
Net income................................................................ $ 70,224 $ 95,682 $ 13,052
---------- ---------- ---------
---------- ---------- ---------
Net income per unit (Note 3):
Basic................................................................... $ 1.96 $ 2.22 $ 2.02
---------- ---------- ---------
---------- ---------- ---------
Diluted................................................................. $ 1.85 $ 2.21 $ 2.00
---------- ---------- ---------
---------- ---------- ---------
Weighted average units outstanding--diluted (Note 3)...................... 42,076 43,881 6,963
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
NVEST, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 70,224 $ 95,682 $ 13,052
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of intangibles.......................................... 25,277 37,789 --
Restricted unit plan compensation.................................... 7,598 1,209 --
Gain on partial sale of affiliate.................................... (4,988) -- --
--------- ------------- ---------
Subtotal........................................................... 98,111 134,680 13,052
Equity in earnings of partnerships................................... (11,252) (13,043) (16,617)
Distributions received from partnerships............................. 10,521 11,923 19,765
Depreciation and amortization........................................ 5,131 6,740 --
Increase in receivables and other assets............................. (7,665) (20,308) --
Increase in accounts payable and other liabilities................... 22,587 19,436 3,622
--------- ------------- ---------
Net cash provided by operating activities.............................. 117,433 139,428 19,822
--------- ------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of units of Nvest Companies, L.P.--exercised options and
other................................................................ -- -- (2,870)
Proceeds from sale of units of Nvest Companies, L.P.................... -- -- 2,205
Capital expenditures................................................... (5,748) (12,839) --
(Increase) decrease in investment securities........................... 5,938 (19,487) --
Proceeds from partial sale of affiliate................................ 4,988 -- --
Acquisition payments, net of cash acquired............................. (61,018) (58,581) --
--------- ------------- ---------
Net cash used in investing activities.................................. (55,840) (90,907) (665)
--------- ------------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders...................................... (75,145) (100,869) (17,050)
Proceeds from issuance of units--exercised options and other........... -- 272 2,870
Payment for retirement of units........................................ -- -- (2,205)
Proceeds from notes payable............................................ 110,000 175,500 --
Repayment of notes payable............................................. (80,919) (1,717) --
Payment of deferred purchase consideration............................. -- (79,635) --
--------- ------------- ---------
Net cash used in financing activities.................................. (46,064) (6,449) (16,385)
--------- ------------- ---------
Net increase in cash and cash equivalents before cash transferred to
Nvest Companies, L.P................................................... 15,529 42,072 2,772
Cash transferred to Nvest Companies, L.P. ............................... -- (91,986) --
--------- ------------- ---------
Net increase (decrease) in cash and cash equivalents................... 15,529 (49,914) 2,772
Cash and cash equivalents, beginning of period........................... 34,385 49,914 --
--------- ------------- ---------
Cash and cash equivalents, end of period................................. $ 49,914 $ -- $ 2,772
--------- ------------- ---------
--------- ------------- ---------
Cash paid during the period for interest................................. $ 6,937 $ 16,240 $ --
--------- ------------- ---------
--------- ------------- ---------
Cash paid during the period for income taxes............................. $ 2,873 $ 3,971 $ --
--------- ------------- ---------
--------- ------------- ---------
Supplemental disclosure of non-cash transactions:
Increase in intangible assets.......................................... $ 137,750 $ 112,936 $ --
Increase in notes payable.............................................. 10,000 22,650 --
Increase (decrease) in deferred purchase consideration................. 103,027 (64,489) --
Increase in partners' capital.......................................... 20,473 152,156 --
Transfer of partners' capital (to) from Nvest Companies, L.P........... -- (390,250) 3,303
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
NVEST, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
TOTAL
PARTNERS' LIMITED GENERAL
CAPITAL PARTNERS PARTNER
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1995 (37,286,000 Limited Partner units and 110,000
General Partner units)...................................................... $ 309,023 $ 308,288 $ 735
Net income................................................................ 70,224 69,997 227
Distributions declared.................................................... (77,279) (77,054) (225)
Units issued.............................................................. 20,608 20,608 --
Units retired............................................................. (1,910) (1,910) --
Restricted unit plan compensation......................................... 7,598 7,598 --
----------- ----------- -----
Balance at December 31, 1996 (38,082,000 Limited Partner units and 110,000
General Partner units)...................................................... 328,264 327,527 737
Net income................................................................ 95,682 95,435 247
Distributions declared.................................................... (116,324) (116,028) (296)
Units issued.............................................................. 152,427 152,427 --
Restricted unit plan compensation......................................... 1,209 1,209 --
Transfer of partners' capital to Nvest
Companies, L.P............................................................ (390,250) (390,250) --
----------- ----------- -----
Balance at December 31, 1997 (6,165,000 Limited Partner units and 110,000
General Partner units)...................................................... 71,008 70,320 688
Net income................................................................ 13,052 12,846 206
Distributions declared.................................................... (16,135) (15,861) (274)
Units issued--exercised options and other................................. 2,870 2,870 --
Units retired............................................................. (2,205) (2,205) --
Transfer of partners' capital from Nvest Companies, L.P................... 3,303 3,303 --
----------- ----------- -----
Balance at December 31, 1998 (6,406,000 Limited Partner units and 110,000
General Partner units)...................................................... $ 71,893 $ 71,273 $ 620
----------- ----------- -----
----------- ----------- -----
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
NVEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Nvest, L.P. ("Nvest"), 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 business currently is to engage in the investment
advisory business by acting as advising general partner of Nvest Companies, L.P.
(the "Operating Partnership"), formerly named NEIC Operating Partnership, L.P.
The Operating Partnership 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, mutual funds and private clients.
Nvest's primary asset at December 31, 1998 was 6,516,248 units of the Operating
Partnership, representing a general partner's interest in the Operating
Partnership. Nvest's financial statements should be read in conjunction with the
Consolidated Financial Statements of the Operating Partnership.
Pursuant to the Restructuring, Nvest elected to extend its grandfathered
partnership tax status for 1998 and following periods, which requires it to pay
an annual 3.5% federal gross income tax. At year-end 1997, Nvest 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 Nvest exchanged their
partnership units for limited partner units of the Operating Partnership.
As a result of the Restructuring, Nvest 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 Nvest
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. Nvest 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
miscellaneous expenses.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The 1996 and 1997 financial statements of
Nvest 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.
CASH EQUIVALENTS. Under a demand note agreement, Nvest deposits excess
funds with the Operating Partnership at money market rates. At December 31, 1998
the note balance was $2,770,000 and was included in cash and cash equivalents as
it is callable on demand.
EQUITY METHOD OF ACCOUNTING. Subsequent to the Restructuring, Nvest records
its investment in the Operating Partnership using the equity method of
accounting. Revenue is recorded based on Nvest's proportionate share of net
income of the Operating Partnership, after adjusting for restricted unit plan
compensation (which is fully allocated to certain limited partners of the
Operating Partnership), with a corresponding increase in its investment in the
Operating Partnership. Distributions from the Operating Partnership reduce
Nvest's investment in the Operating Partnership.
GROSS INCOME TAX. Effective January 1, 1998, a 3.5% federal gross income
tax is incurred on Nvest's proportionate share of the gross income of the
Operating Partnership and any of its subsidiary partnerships.
33
<PAGE>
NVEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent liabilities reported in the
accompanying financial statements.
SEGMENT DATA. Effective January 1, 1998, Nvest adopted Financial Accounting
Standards Board Statement No. 131, "Disclosures about Segments on an Enterprise
and Related Information" (FAS 131). Based on the criteria established in FAS
131, management has determined that Nvest has one operating segment which is
domiciled in the United States of America that offers a broad array of
investment management products and styles to institutions, mutual funds and
private clients.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedge Activities" (FAS 133) which establishes accounting and reporting
standards for derivative instruments and is effective in 1999. Management does
not believe the impact of FAS 133 adoption will be material to Nvest's financial
position or results of operations.
RECLASSIFICATIONS. Certain amounts in prior period financial statements
have been reclassified to conform with the 1998 presentation.
NOTE 3-- NET INCOME PER UNIT
The calculation of basic and diluted net income per unit and weighted
average units out standing at December 31 follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C> <C> <C>
Net income....................................................................... $ 70,224 $ 95,682 $ 13,052
Add restricted unit plan compensation.......................................... 7,598 1,209 --
--------- --------- ---------
Net income--for basic calculation................................................ 77,822 96,891 13,052
Additional equity in earnings of the Operating Partnership net of gross income
tax and other expenses related to incremental units assumed outstanding...... -- -- 860
--------- --------- ---------
Net income--for diluted calculation.............................................. $ 77,822 $ 96,891 $ 13,912
--------- --------- ---------
--------- --------- ---------
Weighted average units outstanding:
Actual......................................................................... 37,692 43,732 6,456
Assumed outstanding for deferred purchase consideration...................... 1,941 -- --
--------- --------- ---------
Basic.......................................................................... 39,633 43,732 6,456
Assumed outstanding for deferred purchase consideration...................... 2,443 -- --
Incremental units assumed outstanding from exercise of
unit options............................................................... -- 149 507
--------- --------- ---------
Diluted........................................................................ 42,076 43,881 6,963
--------- --------- ---------
--------- --------- ---------
Net income per unit:
Basic.......................................................................... $ 1.96 $ 2.22 $ 2.02
--------- --------- ---------
--------- --------- ---------
Diluted........................................................................ $ 1.85 $ 2.21 $ 2.00
--------- --------- ---------
--------- --------- ---------
</TABLE>
34
<PAGE>
NVEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INVESTMENT IN THE OPERATING PARTNERSHIP
Investment activity in the Operating Partnership for the year ended December
31, 1998 follows (in thousands):
<TABLE>
<S> <C>
Initial investment in the Operating Partnership at December 31,
1997............................................................... $ 71,008
Investment from exercise of options and other unit issuances..... 2,870
Investment from unit exchanges (Note 8).......................... 3,303
Sale of units of the Operating Partnership (Note 9).............. (2,205)
Equity in earnings of the Operating Partnership.................. 16,617
Distributions declared by the Operating Partnership.............. (19,762)
---------
Investment in the Operating Partnership at December 31, 1998....... $ 71,831
---------
---------
</TABLE>
NOTE 5--TAX CONSIDERATION FOR PUBLIC UNITHOLDERS (UNAUDITED)
As a result of the Omnibus Budget Reconciliation Act of 1993 and a special
tax election which Nvest 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. These amortization deductions
decrease the unitholder's tax basis and will be recaptured as ordinary income
upon a taxable disposition of the units. The following example of this benefit
assumes an individual purchased units during December 1997 and held them through
December 31, 1998. This unitholder would have a convention purchase price of
$27.94 per unit, of which $24.02 is allocated to Internal Revenue Code Section
197 assets. The estimated tax benefit of these amortization deductions for the
year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
PER
UNIT
---------
<S> <C> <C>
Total distributions declared for calendar year 1998.......................... $ 2.49
Allocation of estimated taxable income prior to tax amortization of the
purchase price............................................................. $ 3.22
Less estimated tax amortization allocation of the purchase
price ( 1/15 OF $24.02).................................................... (1.60)
---------
Net taxable income......................................................... $ 1.62
Estimated income tax (ASSUMED 40% PERSONAL INCOME TAX RATE).................. (.65)
---------
Total distributions declared for calendar year 1998, net of income taxes... $ 1.84
---------
---------
</TABLE>
1998 distributions declared of $2.49 exceed taxable income of $1.62 by
$0.87. The $0.87 differential is not subject to tax in 1998 but decreases a
unitholder's tax basis by a like amount.
The estimated tax basis of unitholders purchasing units in December 1997
follows:
<TABLE>
<CAPTION>
PER
UNIT
---------
<S> <C>
Tax basis at December 31, 1997 (ASSUMED CONVENTION PURCHASE PRICE)................... $ 27.94
Add 1998 net taxable income (SEE ABOVE).............................................. 1.62
Less non-deductible expenses, principally the gross income tax....................... (.55)
Less 1998 total distributions declared............................................... (2.49)
---------
Tax basis at December 31, 1998..................................................... $ 26.52
---------
---------
</TABLE>
35
<PAGE>
NVEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--TAX CONSIDERATION FOR PUBLIC UNITHOLDERS (UNAUDITED) (CONTINUED)
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 Nvest's income
regardless of the amount of distributions made by Nvest. As individual tax
situations may vary, holders and prospective purchasers of units are urged to
consult their tax advisors.
NOTE 6--GROSS INCOME TAX EXPENSE
As described in Note 1, Nvest elected to extend its grandfathered
partnership tax status for 1998 and following periods upon payment of a 3.5%
federal gross income tax on its proportionate share of the Operating
Partnership's gross income. The 1998 gross income tax of $3.4 million is payable
on or before April 15, 1999. Effective for tax years ended after 1998 the gross
income tax is required to be paid in quarterly installments.
NOTE 7--CONTINGENT LIABILITIES
On June 7, 1996, the California Ironworkers Field Pension Trust, and several
related trusts (the "Trusts"), filed suit against the Operating Partnership's
subsidiary, Loomis, Sayles & Company, L.P. ("Loomis Sayles") in the U.S.
District Court for the Central District of California (Western Division)
alleging violation of investment guidelines and breach of fiduciary duty under
ERISA with respect to the purchase of certain securities for the account of the
Trusts. The suit seeks money damages in excess of $20 million representing lost
principal, together with amounts representing loss of investment income. On
March 3, 1997, the Court granted the motion of Loomis Sayles to dismiss certain
of the causes of action of the plaintiff and to strike the plaintiff's request
for punitive damages. Loomis Sayles believes that it has meritorious defenses
and has contested both allegations of liability and damages at the trial, which
was completed in the summer of 1998. A decision is expected soon. Management
believes that resolution of this matter will not have a material adverse effect
on Nvest's or the Operating Partnership's results of operations or financial
condition.
The business units of the Operating Partnership are from time to time
subject to other 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 Nvest.
NOTE 8--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. During 1998, 228,723
Operating Partnership units were exchanged for an equal number of Nvest, L.P.
units and Nvest received 228,723 units of the Operating Partnership. On January
4, 1999, 25,000 Operating Partnership units were exchanged for an equal number
of Nvest, L.P. units and Nvest received 25,000 units of the Operating
Partnership.
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
36
<PAGE>
NVEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EXCHANGE OF NVEST COMPANIES, L.P. UNITS FOR NVEST, L.P. UNITS
(CONTINUED)
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 340,000 units.
NOTE 9--UNIT REPURCHASE PLAN
On September 15, 1998, the Board of Directors of the general partner of
Nvest and the Operating Partnership approved a plan to repurchase up to one
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 at the same cost 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 on trade date at cost.
Through December 31, 1998, Nvest had repurchased 80,062 units at a cost of
$2,205,000.
NOTE 10--EQUITY INCENTIVE PLANS
As discussed in Note 8 of the Operating Partnership's consolidated financial
statements, the Operating Partnership has two equity incentive plans. Under
these plans, options on Nvest L.P. units are granted to employees of the
Operating Partnership. Upon exercise of the options, the Operating Partnership
purchases Nvest, L.P. units at the current market price and Nvest, L.P., in
turn, purchases a corresponding amount of units from the Operating Partnership.
At December 31, 1998, 4,571,722 options were outstanding, of which 196,820 were
exercisable. During the year ended December 31, 1998, 83,967 options were
exercised. Equity based compensation is accounted for under the intrinsic value
method and, as such, no compensation expense has been recognized in the
financial statements of the Operating Partnership. If the fair value method had
been used, the pro forma net income of Nvest would have been $70,129,000 (or
$1.85 per unit--diluted), $95,132,000 (or $2.20 per unit--diluted) and
$12,767,000 (or $1.95 per unit-- diluted) for the years ended December 31, 1996,
1997 and 1998, respectively.
37
<PAGE>
NVEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues
Equity in earnings of Nvest Companies, L.P............................ $ 3,964 $ 4,214 $ 4,240 $ 4,199
Interest income....................................................... -- 5 20 30
--------- --------- --------- ---------
3,964 4,219 4,260 4,229
Gross income tax and other expenses..................................... 881 874 950 915
--------- --------- --------- ---------
Net income.............................................................. $ 3,083 $ 3,345 $ 3,310 $ 3,314
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per unit:
Basic................................................................. $ 0.49 $ 0.52 $ 0.51 $ 0.51
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................... $ 0.48 $ 0.51 $ 0.50 $ 0.51
--------- --------- --------- ---------
--------- --------- --------- ---------
Distributions declared per unit......................................... $ 0.60 $ 0.63 $ 0.63 $ 0.63
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average units outstanding--diluted............................. 7,017 7,242 6,873 6,720
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues................................................................ $ 126,797 $ 127,202 $ 146,862 $ 160,608
--------- --------- --------- ---------
Expenses
Compensation and benefits............................................. 64,999 62,190 69,672 79,553
Other expenses........................................................ 40,230 42,392 50,183 54,657
--------- --------- --------- ---------
105,229 104,582 119,855 134,210
--------- --------- --------- ---------
Income before income taxes.............................................. 21,568 22,620 27,007 26,398
Income tax expense...................................................... 1,215 1,111 247 (662)
--------- --------- --------- ---------
Net income.............................................................. $ 20,353 $ 21,509 $ 26,760 $ 27,060
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per unit:
Basic................................................................. $ 0.48 $ 0.50 $ 0.61 $ 0.63
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................... $ 0.48 $ 0.50 $ 0.61 $ 0.62
--------- --------- --------- ---------
--------- --------- --------- ---------
Distributions declared per unit:
Regular............................................................... $ 0.53 $ 0.53 $ 0.53 $ 0.55
Special............................................................... 0.05 0.08 0.17 0.25
--------- --------- --------- ---------
Total............................................................... $ 0.58 $ 0.61 $ 0.70 $ 0.80
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average units outstanding--diluted............................. 43,087 43,088 44,479 44,867
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Nvest, L.P.
In our opinion, the financial statements of Nvest, L.P. ("Nvest") listed in
the index on page 28 of this Form 10-K present fairly, in all material respects,
the financial position of Nvest at December 31, 1998 and 1997, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Nvest's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 1999
39
<PAGE>
THE OPERATING PARTNERSHIP*
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 91,986 $ 52,135
Management and advisory fees receivable....................................... 90,796 98,914
Investment securities......................................................... 5,130 18,715
Other......................................................................... 6,145 7,057
---------- ----------
Total current assets...................................................... 194,057 176,821
Intangible assets:
Investment advisory contracts................................................. 534,848 505,292
Goodwill...................................................................... 125,546 131,291
Fixed assets...................................................................... 26,434 34,708
Other assets...................................................................... 63,683 51,270
---------- ----------
Total assets.............................................................. $ 944,568 $ 899,382
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses......................................... $ 109,776 $ 124,317
Distribution payable.......................................................... 35,539 34,439
Notes payable................................................................. 44,767 4,437
---------- ----------
Total current liabilities................................................. 190,082 163,193
Deferred compensation, benefits and other......................................... 21,561 19,307
Notes payable..................................................................... 271,667 270,000
---------- ----------
Total liabilities......................................................... 483,310 452,500
Contingent liabilities (Note 7)
Partners' capital (44,467,000 units at December 31, 1997 and 44,726,000 units at
December 31, 1998).............................................................. 461,258 446,882
---------- ----------
Total liabilities and partners' capital................................... $ 944,568 $ 899,382
---------- ----------
---------- ----------
</TABLE>
- ------------------------
* As discussed in Note 1, the financial information above reflects the
operations of Nvest Companies, L.P. effective with the Restructuring
completed on December 31, 1997.
See Accompanying Notes to Consolidated Financial Statements.
40
<PAGE>
THE OPERATING PARTNERSHIP*
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
NVEST, NVEST, NVEST
L.P. L.P. COMPANIES, L.P.
1996 1997 1998
---------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Management and advisory fees........................................... $ 344,781 $ 515,617 $ 615,422
Other revenues and interest income..................................... 42,882 45,852 54,110
Gain on partial sale of affiliate...................................... 4,988 -- --
---------- ---------- ---------------
392,651 561,469 669,532
---------- ---------- ---------------
EXPENSES
Compensation and benefits.............................................. 189,986 276,414 330,923
Restricted unit plan compensation...................................... 7,598 1,209 3,898
Amortization of intangibles............................................ 25,277 37,789 39,528
Depreciation and amortization.......................................... 5,131 6,740 8,127
Occupancy, equipment and systems....................................... 17,461 23,629 32,023
Interest expense....................................................... 8,728 19,608 21,516
Other.................................................................. 65,789 98,487 117,472
---------- ---------- ---------------
319,970 463,876 553,487
---------- ---------- ---------------
Income before income taxes............................................... 72,681 97,593 116,045
Income tax expense..................................................... 2,457 1,911 5,263
---------- ---------- ---------------
Net income............................................................... $ 70,224 $ 95,682 $ 110,782
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
- ------------------------
* As discussed in Note 1, the financial information above reflects the
operations of 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.
41
<PAGE>
THE OPERATING PARTNERSHIP*
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
NVEST, NVEST, NVEST
L.P. L.P. COMPANIES, L.P.
1996 1997 1998
----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 70,224 $ 95,682 $ 110,782
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of intangibles...................................... 25,277 37,789 39,528
Restricted unit plan compensation................................ 7,598 1,209 3,898
Gain on partial sale of affiliate................................ (4,988) -- --
----------- ----------- ---------------
Subtotal..................................................... 98,111 134,680 154,208
Depreciation and amortization.................................... 5,131 6,740 8,127
Equity in earnings of partnerships............................... (11,252) (13,043) (13,684)
Distributions received from partnerships......................... 10,521 11,923 14,588
Increase in receivables and other assets......................... (7,665) (20,308) (14,248)
Increase in accounts payable and other liabilities............... 22,587 19,436 15,487
----------- ----------- ---------------
Net cash provided by operating activities............................ 117,433 139,428 164,478
----------- ----------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (5,748) (12,839) (16,401)
(Increase) decrease in investment securities......................... 5,938 (19,487) 3,199
Proceeds from partial sale of affiliate.............................. 4,988 -- --
Acquisition payments, net of cash acquired........................... (61,018) (58,581) (11,667)
----------- ----------- ---------------
Net cash used in investing activities................................ (55,840) (90,907) (24,869)
----------- ----------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders.................................... (75,145) (100,869) (137,047)
Proceeds from issuance of units--exercised options................... -- 272 1,789
Payment for retirement of units...................................... -- -- (2,205)
Proceeds from notes payable.......................................... 110,000 175,500 2,770
Repayment of notes payable........................................... (80,919) (1,717) (44,767)
Payment of deferred purchase consideration........................... -- (79,635) --
----------- ----------- ---------------
Net cash used in financing activities................................ (46,064) (6,449) (179,460)
----------- ----------- ---------------
Net increase (decrease) in cash and cash equivalents................. 15,529 42,072 (39,851)
Cash and cash equivalents, beginning of period......................... 34,385 49,914 91,986
----------- ----------- ---------------
Cash and cash equivalents, end of period............................... $ 49,914 $ 91,986 $ 52,135
----------- ----------- ---------------
----------- ----------- ---------------
Cash paid during the period for interest............................... $ 6,937 $ 16,240 $ 21,594
----------- ----------- ---------------
----------- ----------- ---------------
Cash paid during the period for income taxes........................... $ 2,873 $ 3,971 $ 2,055
----------- ----------- ---------------
----------- ----------- ---------------
Supplemental disclosure of non-cash transactions:
Increase in intangible assets........................................ $ 137,750 $ 112,936 $ 11,344
Increase in notes payable............................................ 10,000 22,650 --
Increase (decrease) in deferred purchase consideration............... 103,027 (64,489) --
Increase in partners' capital........................................ 20,473 152,156 7,250
Transfer of partners' capital to Nvest Companies, L.P................ -- 390,250 --
</TABLE>
- ------------------------
* As discussed in Note 1, the financial information above reflects the
operations of 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.
42
<PAGE>
THE OPERATING PARTNERSHIP *
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
TOTAL
PARTNERS' LIMITED GENERAL
CAPITAL PARTNERS PARTNERS
----------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1995 (37,286,000 Limited Partner units and
110,000 General Partner units)......................................... $ 309,023 $ 308,288 $ 735
Net income........................................................... 70,224 69,997 227
Distributions declared............................................... (77,279) (77,054) (225)
Units issued......................................................... 20,608 20,608 --
Units retired........................................................ (1,910) (1,910) --
Restricted unit plan compensation.................................... 7,598 7,598 --
----------- ------------- ----------
Balance at December 31, 1996 (38,082,000 Limited Partner units and
110,000 General Partner units)......................................... 328,264 327,527 737
Net income........................................................... 95,682 95,435 247
Distributions declared............................................... (116,324) (116,028) (296)
Units issued......................................................... 152,427 152,427 --
Restricted unit plan compensation.................................... 1,209 1,209 --
Restructuring of Nvest, L.P. (Note 1)................................ -- (70,320) 70,320
----------- ------------- ----------
Balance at December 31, 1997 (38,192,000 Limited Partner units and
6,275,000 General Partner units)....................................... 461,258 390,250 71,008
Net income........................................................... 110,782 94,165 16,617
Distributions declared............................................... (135,947) (116,185) (19,762)
Units issued--exercised options and other............................ 2,096 57 2,039
Units issued--acquisitions........................................... 7,000 7,000 --
Units retired........................................................ (2,205) -- (2,205)
Restricted unit plan compensation.................................... 3,898 3,898 --
Unit exchanges....................................................... -- (3,303) 3,303
----------- ------------- ----------
Balance at December 31, 1998 (38,210,000 Limited Partner units and
6,516,000 General Partner units)....................................... $ 446,882 $ 375,882 $ 71,000
----------- ------------- ----------
----------- ------------- ----------
</TABLE>
- ------------------------
* As discussed in Note 1, the financial information above reflects the
operations of 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.
43
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Nvest Companies, L.P. ("the Operating Partnership"), 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 business of the Operating Partnership was conducted by Nvest,
L.P. prior to the Restructuring completed on December 31, 1997 and by Nvest
Companies, L.P. thereafter, as described more fully in Note 1 of the financial
statements of Nvest, L.P.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Operating Partnership include the accounts of its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS. Cash equivalents include financial instruments purchased
with an original maturity of three months or less.
INTANGIBLE ASSETS. Intangible assets include both the portion of the
purchase price of acquisitions accounted for under the purchase method allocated
to investment advisory contracts and the portion in excess of the fair value of
net assets acquired which is recorded as goodwill. Investment advisory contracts
are amortized over periods ranging from 7 to 24 years. Goodwill is amortized
over 30 years. Intangible assets are presented net of accumulated amortization
of $91.3 million and $130.8 million at December 31, 1997 and 1998, respectively.
The carrying value and amortization period of intangible assets are
evaluated periodically to determine whether current events and circumstances
warrant adjustment. At December 31, 1998, there was no impairment of intangible
assets. If impairment of intangible assets had occurred, the carrying value of
the underlying assets would be reduced to fair market value.
DEPRECIATION AND AMORTIZATION. Fixed assets are stated at cost and are
depreciated or amortized over 3 to 10 years using straight-line and accelerated
methods. Leasehold improvements are amortized using the straight-line method
over the shorter of the life of the respective lease or the amortization period.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair value of the Operating
Partnership's cash and cash equivalents at December 31, 1998 approximates the
carrying value due to the short-term nature of these investments. The Operating
Partnership's investment securities are recorded at fair value. The fair value
of the Operating Partnership's senior notes payable is discussed in Note 6.
NET CAPITAL REQUIREMENTS. Certain subsidiaries are subject to broker dealer
net capital requirements. At December 31, 1998, each subsidiary was in
compliance with its net capital requirement.
ESCROW BALANCES. At December 31, 1998, the Operating Partnership held $17
million in escrow on behalf of clients. As the Operating Partnership does not
have an economic interest in these funds, they are excluded from the
Consolidated Balance Sheet.
MANAGEMENT AND ADVISORY FEES. Management and advisory fees are recognized
as services are rendered and are based primarily on a percentage of assets under
management. Mutual fund sales commissions are recognized as income on the trade
date. Transaction based fees are recognized as income upon satisfaction of
contractual obligations. Fees collected in advance are deferred and recognized
as income when earned.
44
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT DATA. Effective January 1, 1998, the Operating Partnership adopted
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments on an Enterprise and Related Information" (FAS 131). Based on the
criteria established in FAS 131, management has determined that the Operating
Partnership's business units aggregate to one operating segment which is
domiciled in the United States of America that offers a broad array of
investment management products and styles to institutions, mutual funds and
private clients.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedge Activities" (FAS 133) which establishes accounting and reporting
standards for derivative instruments and is effective in 1999. Management does
not believe the impact of FAS 133 adoption will be material to the Operating
Partnership's financial position or results of operations.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent liabilities reported in the
accompanying financial statements.
RECLASSIFICATIONS. Certain amounts in prior year financial statements have
been reclassified to conform with the 1998 presentation.
NOTE 3--INCOME TAXES
The Operating Partnership's corporate subsidiaries account for income taxes
using the liability method. No provision for federal income taxes is necessary
for the Operating Partnership and the majority of its subsidiaries because the
tax effect of its operations accrues to and is reportable by the respective
partners of the Operating Partnership. The Operating Partnership and some of its
subsidiaries are subject to state and city taxes in various jurisdictions.
Income tax expense includes $1,278,000, $1,316,000 and $1,738,000 of
partnership income tax expense, consisting primarily of state and local income
taxes, and $1,179,000, $595,000 and $3,525,000 of corporate subsidiary income
tax expense for the years ended December 31, 1996, 1997 and 1998, respectively.
The effective income tax rates of 3%, 2% and 5% for the years ended December 31,
1996, 1997 and 1998, respectively, are low primarily due to the majority of the
Operating Partnership's income not being subject to income taxes. The net
deferred tax asset of $1,672,000 and $1,132,000 at December 31, 1997 and 1998,
respectively, is included in other assets.
NOTE 4--UNIT REPURCHASE PLAN
On September 15, 1998, the Board of Directors of the general partner of
Nvest, L.P. and the Operating Partnership approved a plan to repurchase up to
one 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 December
31, 1998, 80,062 units had been repurchased at a cost of $2,205,000.
45
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS
The Operating Partnership acquired certain assets and assumed certain
liabilities of five investment management firms and one real estate advisory
firm during 1996, 1997 and 1998. Each acquisition was accounted for under the
purchase method of accounting and is included in the financial statements as of
the effective date of the transaction. In addition to the initial purchase
price, some of the acquisition agreements also include contingent payment
arrangements.
1998 ACQUISITION
H.A Schupf & Co., Inc, was acquired effective October 1, 1998, and its
operations were combined with those of Reich & Tang Capital Management. Included
in the 1998 purchase consideration information below are 1998 payments and
contingent payments earned in 1998 on previous acquisitions.
1997 ACQUISITIONS
Jurika & Voyles, Inc. was acquired effective January 1, 1997. Snyder Capital
Management, Inc. was acquired July 9, 1997. Daniel Breen & Company was acquired
on December 31, 1997, and its operations were combined with those of Vaughan,
Nelson, Scarborough & McConnell to form Vaughan, Nelson, Scarborough &
McCullough ("VNSM"). Included in the 1997 purchase consideration information
below are 1997 payments and contingent payments earned in 1997 on previous
acquisitions.
1996 ACQUISITIONS
Aldrich, Eastman & Waltch, L.P. was acquired effective December 10, 1996.
Its operations were combined with those of the Operating Partnership's real
estate advisory subsidiary, Copley Real Estate Advisors, Inc., to form a new
firm named AEW Capital Management, L.P. Vaughan, Nelson, Scarborough & McConnell
was acquired effective May 1, 1996.
PURCHASE CONSIDERATION
Purchase consideration information for the 1996, 1997 and 1998 acquisitions
follows. The amounts include direct acquisition costs and contingent payments
earned to date for these acquisitions.
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Cash............................................................... $ 62.4 $ 61.3 $ 6.0
Notes payable and accrued contingent payments...................... 10.0 27.8 2.7
Partnership units (836,000, 3,609,000 and 249,000 units for 1996,
1997 and 1998, respectively)..................................... 19.7 87.2 7.0
--------- --------- ---------
Total.......................................................... $ 92.1 $ 176.3 $ 15.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- ----------------------- -------------------------
AMORTIZATION AMORTIZATION AMORTIZATION
PERIOD AMOUNT PERIOD AMOUNT PERIOD AMOUNT
------------- ----------- ------------ --------- ------------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Contracts acquired... 15-22 years $ 90.9 7-23 years $ 157.2 8 years $ 7.2
Goodwill............. 30 years 4.0 30 years 13.2 30 years 8.4
Net tangible assets
(liabilities)...... (2.8) 5.9 0.1
----- --------- -----
Total........................... $ 92.1 $ 176.3 $ 15.7
----- --------- -----
----- --------- -----
</TABLE>
46
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS (CONTINUED)
CONTINGENT CONSIDERATION
As of December 31, 1998, a total of up to $49 million in cash and/or units
may be paid to the sellers of certain of the firms acquired over a three-year
period following the respective closing dates through December 31, 2000,
depending upon attainment of certain post-closing revenue levels. A significant
portion of the contingent consideration, if paid, is expected to be accounted
for as additional purchase price.
PRO FORMA IMPACT OF 1997 ACQUISITIONS
The 1997 pro forma, unaudited financial data shown below gives effect to the
1997 acquisitions as if they had occurred on January 1, 1997. Pro forma
adjustments include the amortization of the intangible assets, financing costs
and compensation expense. The pro forma financial data does not necessarily
reflect the results of operations that would have been obtained (excluding the
impact of any contingent consideration payments) had the foregoing acquisitions
occurred on the assumed date, nor is the financial data necessarily indicative
of the results of the combined entities that may be achieved for any future
period. Pro forma results for 1998 are not presented as the impact of the 1998
acquisition is not considered material to the consolidated results of
operations.
<TABLE>
<CAPTION>
1997 1998
PRO FORMA ACTUAL
----------- ----------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
<S> <C> <C>
Revenues.............................................................. $ 573,094 $ 669,532
----------- ----------
----------- ----------
Net income............................................................ $ 96,424 $ 110,782
----------- ----------
----------- ----------
</TABLE>
HARRIS ASSOCIATES
On September 29, 1995, the Operating Partnership acquired certain assets and
assumed certain liabilities of Harris Associates L.P. ("Harris"), an investment
management company. On April 2, 1997, deferred purchase consideration of $144.1
million recorded as goodwill on December 31, 1996, was settled by the issuance
of 2.6 million units valued at $64.5 million and $79.6 million in cash.
NOTE 6--NOTES PAYABLE
On April 1, 1997, the Operating Partnership completed a private placement of
$160 million of 7.15% senior notes due April 2007. The senior notes have an
effective interest rate of 7.29%, including deferred debt issuance costs which
are amortized to interest expense over the term of the senior notes. On January
9, 1996, the Operating Partnership completed a private placement of $110 million
of 6.54% senior notes due January 2003. These notes have an effective interest
rate of 7.06% including deferred debt issuance costs. Based on the borrowing
rates currently available to the Operating Partnership for notes with similar
terms and average maturities, the fair value of the senior notes is estimated to
be $281 million at December 31, 1998.
At December 31, 1998, the Operating Partnership had a $165 million revolving
credit agreement, which expires October 2001. Additionally, there is a $20
million line of credit with a commercial bank at LIBOR plus 27 basis points. The
annual commitment fee on unused credit lines is 12.5 basis points. There were no
balances outstanding under these agreements at December 31, 1998.
47
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--NOTES PAYABLE (CONTINUED)
COVENANTS
Under the terms of the senior notes and credit agreements, certain covenants
are required to be met, including the maintenance of cash flow ratios,
distributions and partners' capital. At December 31, 1998 the Operating
Partnership was in compliance with these covenants.
NOTE 7--CONTINGENT LIABILITIES
On June 7, 1996, the California Ironworkers Field Pension Trust, and several
related trusts (the "Trusts"), filed suit against the Operating Partnership's
subsidiary, Loomis, Sayles & Company, L.P. ("Loomis Sayles") in the U.S.
District Court for the Central District of California (Western Division)
alleging violation of investment guidelines and breach of fiduciary duty under
ERISA with respect to the purchase of certain securities for the account of the
Trusts. The suit seeks money damages in excess of $20 million representing lost
principal, together with amounts representing loss of investment income. On
March 3, 1997, the Court granted the motion of Loomis Sayles to dismiss certain
of the causes of action of the plaintiff and to strike the plaintiff's request
for punitive damages. Loomis Sayles believes that it has meritorious defenses
and has contested both allegations of liability and damages at the trial, which
was completed in the summer of 1998. A decision is expected soon. Management
believes that resolution of this matter will not have a material adverse effect
on the Operating Partnership's results of operations or financial condition.
The business units of the Operating Partnership are from time to time
subject to other 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 8--INCENTIVE COMPENSATION
INCENTIVE COMPENSATION
The Operating Partnership and each of its principal subsidiaries have
incentive compensation plans which are generally dependent upon earnings, cash
flow, individual performance and profit margins. In certain business units, the
payments are deferred and dependent on continued employment. In addition,
special compensation programs for portfolio managers are based on the
performance of the funds managed. Incentive compensation plan expense was
$90,777,000, $142,838,000 and $175,510,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
RESTRICTED UNIT PLAN
Restricted unit plan awards are made from units contributed by MetLife and
Reich & Tang, Inc. This non-cash compensation expense is fully allocated to
MetLife and Reich & Tang, Inc. Awards under the plan provide for vesting of
units to participants over various vesting schedules. Units awarded under the
plan were 31,000, 51,200 and 166,000 for the years ended December 31, 1996, 1997
and 1998, respectively, at a weighted average per unit fair value at grant date
of $23.34, $26.04 and $35.46, respectively. Compensation expense is recognized
over the vesting period based on the market value of the units on the date
awarded and was $7,598,000, $1,209,000 and $3,898,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. Substantially all unvested units
as of August 30, 1996 vested immediately on that date due to a change in control
of the Operating Partnership. Distributions paid on unvested units are included
in compensation expense. At December 31, 1998, there were 58,100 units available
for grant under the plan.
48
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCENTIVE COMPENSATION (CONTINUED)
EQUITY INCENTIVE PLANS
Under the 1993 Equity Incentive Plan (the "1993 Plan"), a total of 1,774,000
units were initially made available for issuance. At December 31, 1998,
1,531,722 options were outstanding under the 1993 Plan. These options vest
ratably over three, four or five years, and expire in ten years from the date of
grant. On August 25, 1997, the unitholders approved 6,000,000 units for issuance
under the 1997 Equity Incentive Plan (the "1997 Plan"). In addition to options
to acquire units, any of the following incentives may be awarded to participants
under the 1997 Plan: unit appreciation rights; restricted units; unrestricted
units; awards entitling the recipient to delivery in the future of units or
other securities; securities which are convertible into or exchangeable for
units and cash bonuses. These awards may be conditioned in whole or in part on
the satisfaction of specified performance criteria. No awards can be granted
under the 1997 Plan after June 16, 2007 (although awards granted prior to that
day may continue thereafter). Options granted under the 1997 Plan through
December 31, 1998 vest January 1, 2004, or beginning January 1, 2000, depending
upon the attainment of certain public market prices for units of Nvest, L.P., or
ratably over a five year period ending September 9, 2002 and expire in ten years
from the date of grant. The exercise price of options granted under the 1993 or
1997 Plans may not be less than the fair market value of the underlying units on
the date of grant.
Equity based compensation is accounted for under the intrinsic value method
and, as such, no compensation expense has been recognized in the financial
statements. If the fair value method had been used, the pro forma net income
would have been $70,129,000, $95,132,000 and $108,810,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. The fair value of each option
granted is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions for 1996, 1997 and 1998,
respectively: a risk free interest rate of 6.64%, 6.20% and 4.66%; a weighted
average expected life of 4.5 years, 6.7 years and 5.0 years; a volatility of
20%, 20% and 21%; and a distribution yield for each year of 8%.
A summary of options outstanding under the 1993 and 1997 Equity Incentive
Plans at December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
UNITS PRICE UNITS PRICE UNITS PRICE
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...................... 278,500 $ 20.57 405,986 $ 21.36 3,792,436 $ 26.14
Granted............................................. 139,820 22.63 3,477,783 26.56 889,853 31.37
Exercised........................................... (8,334) 16.13 (14,167) 19.18 (83,967) 21.30
Forfeited........................................... (4,000) 21.25 (77,166) 21.42 (26,600) 25.80
--------- ----------- ---------- ----------- ---------- -----------
Outstanding at end of year............................ 405,986 $ 21.36 3,792,436 $ 26.14 4,571,722 $ 27.25
--------- ----------- ---------- ----------- ---------- -----------
--------- ----------- ---------- ----------- ---------- -----------
Options exercisable at end of year.................... 94,500 124,264 196,820
--------- ---------- ----------
--------- ---------- ----------
Weighted average fair value of options granted Per
unit during the year................................ $ 2.28 $ 2.52 $ 2.63
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
49
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCENTIVE COMPENSATION (CONTINUED)
A summary of options outstanding and exercisable at December 31, 1998
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
LIFE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES UNITS IN YEARS PRICE UNITS PRICE
- -------------------------------------------------------- ---------- ----------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$20.00-$26.00........................................... 734,369 8 $ 23.53 180,485 $ 22.66
$26.00-$29.00........................................... 3,223,000 9 26.88 16,335 27.74
$29.00-$37.00........................................... 614,353 9 33.59 -- --
---------- ----------- --------- -----------
$20.00-$37.00........................................... 4,571,722 9 $ 27.25 196,820 $ 23.08
---------- ----------- --------- -----------
---------- ----------- --------- -----------
</TABLE>
NOTE 9--PENSION AND RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
Certain subsidiaries provide defined contribution plans. Defined
contribution plan expense was $4,204,000, $6,656,000 and $7,520,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
POST-RETIREMENT BENEFITS
Post-retirement benefits expense includes contributory medical and dental
coverage and life insurance coverage. Post-retirement benefits expense was
$450,000, $406,000 and $469,000 for the years ended December 31, 1996, 1997 and
1998, respectively. Accrued post-retirement benefits expense was $7,155,000 and
$7,281,000 at December 31, 1997 and 1998, respectively. Costs are funded as
incurred.
DEFINED BENEFIT PLAN
Loomis Sayles, a wholly owned subsidiary of the Operating Partnership,
sponsors a defined benefit funded pension plan covering substantially all of its
employees and a defined benefit unfunded (non-qualified) supplemental pension
plan for certain employees who meet service, age, and base compensation
requirements and who are elected into the plan. The following tables provide a
reconciliation of the changes in the plans' benefit obligations and the fair
value of the assets of the funded plan over the two-
50
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND RETIREMENT PLANS (CONTINUED)
year period ending December 31, 1998, and a statement of the funded status as of
December 31 for both years:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............................... $ 45,208 $ 48,728
Service cost.......................................................... 1,352 1,849
Interest cost......................................................... 3,177 3,429
Actuarial gain........................................................ 1,517 7,460
Benefits paid......................................................... (2,526) (2,541)
--------- ---------
Benefit obligation at end of year..................................... 48,728 58,925
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........................ 66,330 73,307
Actual return on plan assets.......................................... 9,655 9,318
Employer contribution................................................. 376 376
Benefits paid......................................................... (3,054) (2,541)
--------- ---------
Fair value of plan assets at end of year.............................. 73,307 80,460
--------- ---------
FUNDED STATUS
Funded status at December 31.......................................... 24,579 21,535
Unrecognized net gain................................................. (1,970) 2,897
Unrecognized plan amendments.......................................... 1,523 1,276
Unrecognized net overfunding at transition............................ (4,845) (4,361)
--------- ---------
Prepaid pension asset, net............................................ $ 19,287 $ 21,347
--------- ---------
--------- ---------
</TABLE>
The net prepaid pension asset shown in the funded status table above
includes an accrued pension liability for the unfunded plan of $2,928,000 and
$2,066,000 at December 31, 1997 and 1998, respectively, and a prepaid pension
benefit for the funded plan of $22,215,000 and $23,413,000 at December 31, 1997
and 1998, respectively. The unfunded plan had an accumulated benefit obligation
of $2,335,000 and $2,105,000 at December 31, 1997 and 1998, respectively. There
are no plan assets in the unfunded plan due
51
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND RETIREMENT PLANS (CONTINUED)
to the nature of the plan. Plan assets are invested primarily in Loomis Sayles
mutual funds and affiliated investment funds.
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate................................................. 7.25% 7.25% 6.50%
Rate of compensation increase................................. 5.00% 5.00% 5.00%
Expected return on plan assets................................ 10.50% 10.50% 10.50%
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Expected return on plan assets.............................. $ 5,686 $ 6,230 $ 6,876
Service cost................................................ (1,279) (1,352) (1,849)
Interest cost............................................... (2,972) (3,177) (3,429)
Amortization of unrecognized net surplus at transition and
plan amendments........................................... 360 341 238
Amortization of excess cumulative difference................ (351) (388) (151)
--------- --------- ---------
Net periodic pension income................................. $ 1,444 $ 1,654 $ 1,685
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 10--INVESTMENT IN AFFILIATE
The Operating Partnership held a 50% limited partner interest in Capital
Growth Management Limited Partnership ("CGM") at December 31, 1997 and 1998,
respectively, accounted for using the equity method, as the Operating
Partnership does not have the ability to control CGM. Equity in earnings of CGM
was $8,660,000, $11,517,000 and $12,330,000 for the years ended December 31,
1996, 1997 and 1998, respectively. The summarized balance sheet and income
statement of CGM at December 31, follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Current assets........................................................... $ 8,721 $ 8,837
Non-current assets....................................................... 552 447
--------- ---------
$ 9,273 $ 9,284
--------- ---------
--------- ---------
Liabilities and Partners' Capital:
Accrued expenses......................................................... $ 2,426 $ 2,782
Loan payable to Nvest Companies, L.P..................................... 558 405
Partners' capital........................................................ 6,289 6,097
--------- ---------
$ 9,273 $ 9,284
--------- ---------
--------- ---------
</TABLE>
52
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INVESTMENT IN AFFILIATE (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues..................................................... $ 38,524 $ 51,097 $ 54,775
Expenses:
Compensation and benefits.................................. 13,260 17,474 18,704
Mutual fund expenses....................................... 6,010 8,968 9,644
Other...................................................... 1,918 1,662 1,778
--------- --------- ---------
Net income................................................... $ 17,336 $ 22,993 $ 24,649
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 11--FIXED ASSETS
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Property, equipment and leasehold improvements.......................... $ 57,176 $ 69,886
Less accumulated depreciation and amortization.......................... (30,742) (35,178)
--------- ---------
$ 26,434 $ 34,708
--------- ---------
--------- ---------
</TABLE>
Rent expense was $10,494,000, $13,221,000 and $17,096,000 for the years
ended December 31, 1996, 1997 and 1998, respectively. Annual minimum lease
commitments under non-cancelable operating leases are $18,376,000 in 1999,
$16,676,000 in 2000, $14,598,000 in 2001, $14,385,000 in 2002, $14,075,000 in
2003 and $41,615,000 thereafter.
NOTE 12--RELATED PARTY TRANSACTIONS
The general partner of Nvest and the managing general partner of the
Operating Partnership is a wholly owned subsidiary of Metropolitan Life
Insurance Company which, at December 31, 1998, owned approximately 47% of the
partnership units of the Operating Partnership (including those owned indirectly
through ownership of Nvest units).
The Operating Partnership and its investment management firms provide
MetLife with investment management advisory services for its general account
portfolio and for segregated asset accounts established for the benefit of third
party clients. Segregated asset account fees of $16,173,000, $16,348,000 and
$18,829,000 were earned for the years ended December 31, 1996, 1997 and 1998
respectively. General account fees of $15,156,000, $16,051,000 and $12,891,000
were earned for the years ended December 31, 1996, 1997 and 1998, respectively.
53
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues......................................................... $ 163,454 $ 172,266 $ 164,246 $ 169,566
---------- ---------- ---------- ----------
Expenses
Compensation and benefits...................................... 81,254 86,315 81,466 81,888
Other expenses................................................. 54,129 55,896 53,810 58,729
---------- ---------- ---------- ----------
135,383 142,211 135,276 140,617
---------- ---------- ---------- ----------
Income before income taxes....................................... 28,071 30,055 28,970 28,949
Income tax expense............................................... 1,024 1,940 1,100 1,199
---------- ---------- ---------- ----------
Net income....................................................... $ 27,047 $ 28,115 $ 27,870 $ 27,750
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Operating cash flow (1).......................................... $ 37,852 $ 38,971 $ 38,688 $ 38,697
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Distributions declared per unit.................................. $ 0.74 $ 0.77 $ 0.77 $ 0.77
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average units outstanding--diluted...................... 45,209 45,307 44,851 44,929
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues......................................................... $ 126,797 $ 127,202 $ 146,862 $ 160,608
---------- ---------- ---------- ----------
Expenses
Compensation and benefits...................................... 64,999 62,190 69,672 79,553
Other expenses................................................. 40,230 42,392 50,183 54,657
---------- ---------- ---------- ----------
105,229 104,582 119,855 134,210
---------- ---------- ---------- ----------
Income before income taxes....................................... 21,568 22,620 27,007 26,398
Income tax expense............................................... 1,215 1,111 247 (662)
---------- ---------- ---------- ----------
Net income....................................................... $ 20,353 $ 21,509 $ 26,760 $ 27,060
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Operating cash flow (1).......................................... $ 29,754 $ 30,602 $ 36,667 $ 37,657
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Distributions declared per unit:
Regular........................................................ $ 0.53 $ 0.53 $ 0.53 $ 0.55
Special........................................................ 0.05 0.08 0.17 0.25
---------- ---------- ---------- ----------
Total........................................................ $ 0.58 $ 0.61 $ 0.70 $ 0.80
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average units outstanding--diluted...................... 43,087 43,088 44,479 44,867
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Operating cash flow is defined as net income adjusted for amortization of
intangibles, restricted unit plan compensation and non-recurring items.
Operating cash flow should not be construed as an alternative to net income
or as an alternative to cash flow from operating activities as reported in
the Consolidated Statement of Cash Flows.
54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Nvest Companies, L.P.
In our opinion, the consolidated financial statements of Nvest Companies,
L.P. listed in the index on page 28 of this Form 10-K present fairly, in all
material respects, the financial position of Nvest Companies, L.P. and its
subsidiaries (the "Operating Partnership") at December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Operating Partnership's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 1999
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Under the Nvest partnership agreement and Delaware law, Nvest's activities
are managed by the General Partner. The General Partner also serves as managing
general partner of the Operating Partnership. The General Partner has agreed
that it will conduct no businesses other than managing Nvest and the Operating
Partnership, except the management of its own passive investments. The General
Partner is a wholly owned subsidiary of MetLife, which has the right to elect
all directors of the General Partner, subject to its obligation to elect one
designee of RTI.
The following table sets forth the name, age and positions of each of the
General Partner's directors and executive officers at January 1, 1999. The
executive officers of the General Partner hold comparable posts with Nvest and
the Operating Partnership, in which they act pursuant to delegated authority
from the General Partner.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Peter S. Voss...................... 52 Chairman of the Board, Chief Executive Officer and President; Chairman
of Executive Committee
William S. Antle III............... 54 Director; Chairman of Audit Committee
Robert J. Blanding................. 51 Director
Paul E. Gray....................... 66 Director; member of Compensation Committee
Jeffrey J. Hodgman................. 55 Director
Harry P. Kamen..................... 65 Director
Charles M. Leighton................ 63 Director; member of Audit Committee and Chairman of Compensation
Committee
Victor A. Morgenstern.............. 56 Director
Oscar L. Tang...................... 60 Director; member of Compensation Committee
G. Neal Ryland..................... 57 Executive Vice President and Chief Financial Officer
Sherry A. Umberfield............... 44 Executive Vice President, Corporate Development
Edward N. Wadsworth................ 61 Executive Vice President, General Counsel and Secretary
</TABLE>
For purposes of the following description, references to the General Partner
include all predecessor organizations.
The directors of the General Partner generally do not serve set terms, but
rather serve until their successors are duly elected and qualified. The board of
directors of the General Partner has established a program pursuant to which two
chief executive officers of operating subsidiaries of the Operating Partnership
serve as directors of the General Partner, generally for two-year terms that may
be extended. These directors are elected by the directors of the General Partner
after recommendation of management. This arrangement may be changed by the board
of directors of the General Partner at any time.
Mr. Voss is Chairman of the Board of Directors and Chief Executive Officer
of Nvest, the Operating Partnership and the General Partner. He was Chief
Executive Officer and Chairman of the Board of a predecessor organization from
1992 until the combination with Reich & Tang in 1993. Mr. Voss was Group
Executive Vice President, Bank of America, responsible for its global asset
management and private banking business, from April 1992 to October 1992. Mr.
Voss was Executive Vice President of Security Pacific National Bank and Chief
Executive Officer of Security Pacific Hoare Govett Companies, a wholly owned
subsidiary of Security Pacific Corporation, from April 1988 to April 1992. Mr.
Voss serves as Chairman or a member of the Board of Directors of each of Nvest's
corporate subsidiaries and the general
56
<PAGE>
partners of the Operating Partnership's partnership subsidiaries, as well as
serving as Chairman of the Board of Trustees of all the mutual funds in the New
England Funds Group and serving as a trustee of Harris Associates Investment
Trust. Mr. Voss serves as a member of the Listed Company Advisory Committee of
the New York Stock Exchange.
Mr. Antle became a director of the General Partner in January 1996. He has
been Chairman of Oak Industries Inc., a manufacturer of components for
telecommunications companies, since May 1996 and has served as its President and
Chief Executive Officer since December 1989. Mr. Antle is also a director of
ESCO Electronics Corporation and GenRad, Inc.
Mr. Blanding became director of the General Partner in January 1996. Since
April 1995, Mr. Blanding has served as President, Chief Executive Officer and a
director of Loomis Sayles. He was President, Chief Operating Officer and a
director of Loomis Sayles from August 1992 until April 1995, and an Executive
Vice President and director of Loomis Sayles from September 1991 to August 1992.
References to Loomis Sayles include the general partner of Loomis Sayles as well
as a predecessor organization.
Dr. Gray became a director of the General Partner in March of 1996. He was
Chairman of the Corporation at the Massachusetts Institute of Technology from
1990 to 1997, and has been a member of the faculty since 1960. Dr. Gray also
serves as a director of The Boeing Company and Eastman Kodak Company.
Mr. Hodgman was elected a director of the General Partner in September 1998.
Mr. Hodgman has been the Executive Vice President in charge of General Account
Portfolio Management and Corporate Equity Investments at Metropolitan Life
Insurance Company since 1994. Prior to such time, he served in other senior
positions at MetLife, becoming a Senior Vice President in 1986.
Mr. Kamen was elected as a director of the General Partner in December of
1996. Mr. Kamen was Chairman of the Board and Chief Executive Officer of
Metropolitan Life Insurance Company from April of 1993 through June 1998, and
also held the position of President from December 1995 to November 1997. Prior
to such times, he served in other senior positions at MetLife, becoming an
Executive Vice President in 1989 and Senior Executive Vice President in 1991.
Mr. Kamen remains a director of MetLife and a consultant to the company. He also
serves as a director of Banco Santandar, S.A., Bethlehem Steel Corporation, the
National Association of Securities Dealers and Pfizer, Inc.
Mr. Leighton became a director of a predecessor organization in May 1990 and
serves as director of the General Partner. Mr. Leighton has served as a director
of MetLife since 1996 and was a director of New England Mutual from 1980 to
1996. Mr. Leighton was Chairman of the Board and Chief Executive Officer of CML
Group, Inc., a specialty consumer products company, from 1969 to March 1998. CML
Group, Inc. filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code in December 1998.
Mr. Morgenstern became a director of the General Partner in January 1996.
From January 1992 to July 1996, Mr. Morgenstern was President, Chief Executive
Officer and a director of Harris, and remains Chairman. Prior to such time, he
was a Vice President and director of Harris. Mr. Morgenstern also serves as
Chairman and a trustee of Harris Associates Investment Trust. References to
Harris include the general partner of Harris as well as a predecessor
organization.
Mr. Tang became a director of the General Partner in September 1993 at the
time of the acquisition of Reich & Tang. Mr. Tang, a founder of RTI and Reich &
Tang, has been an officer and director of RTI since its organization in 1970,
and was Chairman of the Board of Directors and Chief Executive Officer of RTI
from 1981 until 1987 when he became President and Chief Executive Officer. He
served as a consultant to the Partnership until December 31, 1996. He also
serves as a director of IFR Systems, Inc.
Certain background information is provided below with respect to the
executive officers of the General Partner in addition to Mr. Voss. The executive
officers of the General Partner hold comparable
57
<PAGE>
posts with Nvest and the Operating Partnership, in which they act pursuant to
delegated authority from the General Partner.
Mr. Ryland is Executive Vice President and Chief Financial Officer of the
General Partner. He assumed comparable posts with a predecessor company in July
1993. Mr. Ryland was Executive Vice President and Chief Financial Officer of The
Boston Company, a diversified financial services company, from March 1989 until
July 1993.
Ms. Umberfield is Executive Vice President, Corporate Development of the
General Partner. She held a comparable position with a predecessor company from
December 1989 until September 1993. Ms. Umberfield was Vice President of New
England Mutual from December 1988 to December 1992. She is a Chartered Financial
Analyst.
Mr. Wadsworth is Executive Vice President, General Counsel and Secretary of
the General Partner. He held comparable posts with a predecessor company from
December 1989 to September 1993. Mr. Wadsworth was Senior Vice President and
Associate General Counsel of New England Mutual from 1981 until December 1992.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the General
Partner's directors and executive officers, and persons who own more than 10% of
the units, to file with the SEC and the New York Stock Exchange initial reports
of ownership and reports of changes in ownership of units. To Nvest's knowledge,
during the year ended December 31, 1998, all Section 16(a) filing requirements
applicable to its executive officers, directors and 10% beneficial owners were
complied with, except as described below. Snyder Holdings, Inc., which was a 10%
beneficial owner, inadvertently did not file in a timely manner two monthly
reports covering a total of twenty-two transactions in LP units of Nvest. The
required reports were subsequently filed.
58
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all plan and non-plan compensation paid
during the last three years to the chief executive officer and to all persons
who served as executive officers of Nvest in 1998 (such persons being
hereinafter collectively referred to as the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION SECURITIES
NAME AND ------------------------------------------------ RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER UNIT AWARD($) OPTIONS(#) COMPENSATION(1)
- ------------------------------- --------- ---------- ------------ ----------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter S. Voss.................. 1998 $ 527,500 $ 1,828,500 -- -- -- $ 58,010
Chairman and Chief 1997 497,500 2,000,000 -- -- 1,200,000 54,957
Executive Officer 1996 467,500 1,357,125 -- -- -- 51,621
G. Neal Ryland................. 1998 279,667 484,725 -- -- -- 32,155
Executive Vice 1997 263,750 530,000 -- -- 600,000 30,579
President and Chief 1996 248,750 288,750 -- -- -- 28,812
Financial Office
Sherry A. Umberfield........... 1998 241,458 305,550 -- -- -- 28,175
Executive Vice 1997 228,750 332,074 -- -- 400,000 26,919
President, Corporate 1996 214,167 186,244 -- -- -- 25,217
Development
Edward N. Wadsworth............ 1998 246,458 311,850 -- -- -- 37,018
Executive Vice 1997 233,750 347,213 -- $ 536,250(2) -- 35,762
President, General 1996 219,375 190,575 -- -- -- 33,572
Counsel and Secretary
</TABLE>
- ------------------------
(1) With respect to 1998, consists of insurance payments for term life (in each
case less than $2,300) and contributions under defined contribution plans as
follows: $55,730 for the benefit of Mr. Voss; $30,947 for the benefit of Mr.
Ryland; $27,126 for the benefit of Ms. Umberfield; and $35,946 for the
benefit of Mr. Wadsworth.
(2) The restricted unit valuation set out in the table above was calculated
using $26 13/16 per unit, which was the closing sale price of a unit on the
NYSE on the date of grant, September 9, 1997. Calculated using the December
31, 1998 closing sale price of a unit on the NYSE of $27.8125 the ownership
and valuation of the remaining unvested units by the Named Executive Officer
was 10,000 units valued at $278,125. These units are scheduled to vest on
September 9, 1999. In connection with the 1997 Restructuring, these units
were converted into units of the Operating Partnership.
59
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No grants of options to purchase unit or units appreciation rights were made
in 1998 to Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of options
to purchase units held by Named Executive Officers and the value of unexercised
options at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF UNITS UNDERLYING
UNEXERCISED OPTIONS
AT DECEMBER 31, 1998 (#)
UNITS VALUE EXERCISABLE/UNEXERCISABLE
ACQUIRED ON REALIZED ---------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Peter S. Voss................................ -0- -0- -0- 1,200,000
G. Neal Ryland............................... -0- -0- -0- 600,000
Sherry A. Umberfield......................... -0- -0- -0- 400,000
Edward N. Wadsworth.......................... -0- -0- -0- -0-
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 ($)
EXERCISABLE/
UNEXERCISABLE(1)
---------------------------
NAME EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- -------------
<S> <C> <C>
Peter S. Voss................................ -0- $1,200,000
G. Neal Ryland............................... -0- $ 600,000
Sherry A. Umberfield......................... -0- $ 400,000
Edward N. Wadsworth.......................... -0- $ -0-
</TABLE>
- ------------------------
(1) The value of unexercised options at December 31, 1998, is based on the
difference between the closing price of Nvest LP units on the New York Stock
Exchange on such date ($27.8125) and the exercise price of the options
($26.8125), multiplied by the number of unexercised options.
EMPLOYMENT AGREEMENTS
The Operating Partnership (as successor to Nvest) and the General Partner
are party to an employment agreement ("the Employment Agreement") dated as of
August 16, 1995 (the "Effective Date") with Peter S. Voss providing for the
employment of Mr. Voss as Chairman of the Board, Chief Executive Officer and
President of the Operating Partnership and the General Partner for an initial
term of three years, which was automatically extended for an additional two-year
period. During the term of the Employment Agreement, Mr. Voss will receive an
annual salary established from time to time by the Board of Directors of the
General Partner. In addition, Mr. Voss will be entitled to receive an annual
bonus determined by the Board. In the event that Mr. Voss is terminated by the
Operating Partnership without Cause or Mr. Voss elects to terminate his
employment as a result of a Constructive Discharge Event (as defined in the
Employment Agreement), Mr. Voss shall be entitled to lump sum payment equal to
three times his Salary (as then in effect) and three times his Bonus Amount (as
defined in the Employment Agreement). In addition, in the event of such a
termination, Mr. Voss shall be deemed to be fully vested in any restricted units
or other equity incentives held by him on the date of such termination.
COMPENSATION OF DIRECTORS
Directors of the General Partner who are not employees of Nvest, the
Operating Partnership, or the Operating Partnership's subsidiary firms ("Outside
Directors") receive a retainer of $20,000 annually. In addition, the General
Partner pays each Outside Director fees of $2,000 per meeting of the Board of
Directors attended and $1,000 per meeting of a Board Committee attended.
Chairmen of Committees of the Board of Directors who are Outside Directors are
paid an additional annual retainer of $2,500. Directors may defer payment of
retainer and meeting fees under a directors deferred compensation plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee in 1998 were Charles M. Leighton,
Paul E. Gray and Oscar L. Tang. Mr. Leighton serves on the board of directors of
MetLife. See Item 13, "Certain
60
<PAGE>
Relationships and Related Transactions," for a discussion of the relationship
between the Operating Partnership, the General Partner and MetLife.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
At February 15, 1999, there were 110,000 GP units of Nvest outstanding,
owned by one holder of GP units (Nvest Corporation, the General Partner), and
6,285,448 LP units of Nvest outstanding, owned by approximately 4,500 beneficial
owners (including those who hold in "street" name through brokerage accounts)
and 420 holders of record of LP units. Also at February 15, 1999, there were
44,579,999 units of the Operating Partnership outstanding, owned by two holders
of Operating Partnership GP units (the General Partner and Nvest) and
approximately 85 holders of record and beneficial owners of Operating
Partnership LP units. Nvest held 6,395,448 Operating Partnership units at
February 15, 1999.
The tables that follow set forth certain information regarding certain
holders of units of Nvest and Operating Partnership.
PRINCIPAL HOLDERS OF NVEST LP UNITS
The following table sets out information as of February 15, 1999, as to (i)
each person known by Nvest to hold 5% or more of the outstanding Nvest units (or
who would own 5% or more of the outstanding Nvest LP units assuming such person
exchanged all Operating Partnership LP units for Partnership LP units in "block
transfers" as described below), (ii) each director of the General Partner, (iii)
each officer of the General Partner who is a "Named Executed Officer" in this
annual report on Form 10-K, and (iv) all directors and executive officers of the
General Partner as a group. The table indicates both (i) the number of Nvest LP
units owned by each such person, and (ii) for each such person who owns at least
2% of the total Operating Partnership units outstanding (in general not
including those Operating Partnership units held by the General Partner, Nvest
or their respective affiliates), and is therefore able to exchange its Operating
Partnership LP units for Nvest LP units in "block transfers" under the
regulations promulgated pursuant to Internal Revenue Code Section 7704, the
number of Nvest LP units that such person would own assuming it exchanged all of
its Operating Partnership LP units for Nvest LP units. However, since Operating
Partnership LP units may only be exchanged for Nvest LP units with the consent
of the General Partner, who will not consent to any transfer that creates a risk
that such transfers will not fit into the safe harbors described in the Treasury
Regulations under Internal Revenue Code Section 7704 or that the Operating
Partnership will be required to register any class of its securities under the
Exchange Act, the Nvest LP units to be received in such exchange may not in fact
be beneficially owned within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934. The total of the percentages in the fifth column of the
following table exceeds 100% because, as required by Rule 13d-3 under the
Securities Exchange Act of 1934, the percentage ownership of each person
reflected in such column assumes that (i) such person exchanged all of his
Operating Partnership LP units for Nvest LP units, and (ii) no other person
exchanged any Operating Partnership LP units for Nvest LP units. Nvest believes
that, except as otherwise indicated in the footnotes to this table, the persons
named in this table have sole voting and investment power with respect to all of
Nvest LP units indicated.
61
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
OF NVEST LP UNITS
AMOUNT AND (INCLUDING BLOCK
NATURE TRANSFERS OF
OF BENEFICIAL PERCENT OPERATING
OWNERSHIP OF OF PARTNERSHIP LP PERCENT
BENEFICIAL OWNER NVEST LP UNITS CLASS UNITS OWNED) OF CLASS
- ------------------------------ -------------- ------- -------------------- --------
<S> <C> <C> <C> <C>
Metropolitan Life Insurance
Company..................... 457,900(1) 7.16% 21,452,076(1) 78.32%
Reich & Tang, Inc............. 110,300(2) 1.75% 6,049,000(2) 49.48%
JV Investments, Inc........... 0(3) -- 690,632(3) 9.90%
Peter B. Foreman.............. 0(4) -- 690,632(4) 9.90%
Myron R. Szold................ 0(5) -- 690,632(5) 9.90%
Roger O. Brown................ 27,499(6) ** 690,632(6) 9.90%
Snyder Holdings, Inc.......... 355,606(7) 5.53% 355,606(7) 5.66%
Earl J. Rusnak, Jr............ 750(8) ** 690,632(8) 9.90%
Sherwin A. Zuckerman.......... 0(9) -- 566,710(9) 8.27%
Robert H. Harper.............. 0(10) -- 692,392(10) 9.92%
Robert J. Sanborn............. 0(11) -- 528,010(11) 7.75%
Oscar L. Tang+................ 52,271(12) ** 2,866,594(12) 31.50%
William S. Antle III+......... 0(13) -- 0(13) --
Robert J. Blanding+........... 3,125(14) ** 3,125(14) **
Paul E. Gray+................. 500 ** 500 **
Jeffrey J. Hodgman+........... 1,000 ** 1,000 **
Harry P. Kamen+............... 5,000 ** 5,000 **
Charles M. Leighton+.......... 5,262(13)(15) ** 5,262(13)(15) **
Victor A. Morgenstern+........ 25,000(16) ** 799,682(16) 11.33%
Peter S. Voss+*............... 0(17) ** 350,000(17) 5.27%
G. Neal Ryland*............... 1,700(18) ** 1,700(18) **
Sherry A. Umberfield*......... 0 -- 0 --
Edward N. Wadsworth*.......... 4,000(19) ** 4,000(19) --
All directors and Named
Executive Officers of the
General Partner as a group
(12 persons)................ 97,858 1.56% 4,036,863 39.48%
</TABLE>
- ------------------------
+ Director
* Named Executive Officer
** Less than 1%
The footnotes to this table appear after the table entitled "Principal
Holders of Operating Partnership Units," below.
Substantially all of the Nvest LP units outstanding may be traded in the
public market without the need to register such units for sale under the
Securities Act of 1933. In addition, most of the approximately 38 million
Operating Partnership units outstanding may, subject to certain significant
limitations, be sold to Nvest for Nvest LP units or (at Nvest's option) cash.
The limitations on the ability of a holder of Operating Partnership units to
sell such units (for cash or Nvest LP units) include the requirement that no
transfer may be made without the consent of the General Partner, which will not
consent to any transfer that creates a risk that such transfer will not fit into
certain safe harbors provided under the Internal Revenue Code. For further
information on the ability of holders of Operating Partnership units to exchange
such units for Nvest LP units, please see the discussion above before the table
entitled "Principal Holders of Nvest LP Units" and also the discussion in Item
1, "Business--1997 Restructuring of the Partnership." If holders of Operating
Partnership units elect and are permitted to sell such units to Nvest in
exchange for Nvest LP units, they generally would either receive Nvest LP units
that would be freely tradable in the public market without registration or would
have the right to exercise registration rights that would require Nvest to
register such units for resale. In addition, Nvest maintains a registration
statement that permits the public sale of Nvest LP units that may be issued on
the exercise of options that have been granted under the equity incentive plans
maintained by Nvest and the Operating Partnership.
62
<PAGE>
PRINCIPAL HOLDERS OF OPERATING PARTNERSHIP UNITS
As of February 15, 1999, there were 44,579,999 Operating Partnership units
outstanding, owned by two holders of Operating Partnership GP units (the General
Partner and Nvest) and approximately 85 holders of record and beneficial owners
of Operating Partnership LP units. The following table sets out information as
of February 15, 1999, as to (i) each person known by Operating Partnership to
hold 5% or more of the outstanding Operating Partnership units, (ii) each
director of the General Partner, (iii) each officer of the General Partner who
is a "Named Executed Officer" in this annual report on Form 10-K, and (iv) all
directors and executive officers of the General Partner as a group. The number
of Operating Partnership Units shown in the table represents the sum of (1) the
number of Operating Partnership units, if any, owned indirectly through
ownership of Nvest units (shown in the table of "Principal Holders of Nvest LP
Units," above) plus (2) the number of Operating Partnership Units owned
directly. The Operating Partnership believes that, except as otherwise indicated
in the footnotes to this table, the persons named in this table have sole voting
and investment power with respect to all of the Operating Partnership units
indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Metropolitan Life Insurance Company.............................. 21,452,076(1) 48.12%
Nvest, L.P....................................................... 6,395,448 14.35%
Reich & Tang, Inc................................................ 6,049,000(2) 13.57%
JV Investments, Inc.............................................. 2,260,900(3) 5.07%
Oscar L. Tang+................................................... 2,866,594(12) 6.43%
William S. Antle III+............................................ 0(13) --
Robert J. Blanding+.............................................. 23,125(14) **
Paul E. Gray+.................................................... 500 **
Jeffrey J. Hodgman+.............................................. 1,000 **
Harry P. Kamen+.................................................. 5,000 **
Charles M. Leighton+............................................. 5,262(13) 15) **
Victor A. Morgenstern+........................................... 799,682(16) 1.79%
Peter S. Voss+*.................................................. 350,000(17) **
G. Neal Ryland*.................................................. 31,044(18) **
Sherry A. Umberfield*............................................ 50,310 **
Edward N. Wadsworth*............................................. 56,765(19) **
All directors and Named Executive Officers of the General Partner
as a group (12 persons)........................................ 4,036,863 9.40%
</TABLE>
+ Director
* Named Executive Officer
** Less than 1%
(1) The ownership of MetLife shown includes 110,000 LP units of Nvest issuable
upon conversion of an equal number of units of general partner interest ("GP
units") owned by the Nvest's general partner, which represent all GP units
of Nvest outstanding. Such 110,000 units are also included in the number of
units of the Operating Partnership held by Nvest. The holder's address is
One Madison Avenue, New York, NY 10010.
(2) Includes 58,100 Operating Partnership LP units contributed to the Restricted
Unit Plan (the "RUP") of the Operating Partnership by RTI as to which the
contributing organization retains certain income and reversionary rights,
and that have not been awarded. All stockholders of RTI are parties to a
stockholders' agreement relating to the maintenance of such corporation's
status as an "S" corporation under the Internal Revenue Code and which
creates numerous reciprocal and other rights
63
<PAGE>
relating to the disposition of stock in RTI by the stockholders. The
holder's address is P.O. Box 36, Armonk, NY 10504.
(3) The number of Nvest LP units shown excludes 1,570,265 Nvest LP units that
may be acquired upon the permitted exercise of exchange rights with respect
to Operating Partnership LP units that may not be exercised within 60 days.
The holder's address is 1999 Harrison, Suite 700, Oakland, CA 94612-3517.
(4) The number of Nvest LP units shown excludes 756,422 Nvest LP units that may
be acquired upon the permitted exercise of exchange rights with respect to
Operating Partnership units that may not be exercised within 60 days. The
number reflected in the tables represents Operating Partnership LP units
held by trusts for the benefit of Mr. Foreman and family members, with
respect to which Mr. Foreman has sole discretionary authority as to voting
and disposition. The holder's address is 225 W. Washington St., Suite 1650,
Chicago, IL 60611.
(5) The number of Nvest LP units shown excludes 243,920 Nvest LP units that may
be acquired upon the permitted exercise of exchange rights with respect to
Operating Partnership LP units that may not be exercised within 60 days. All
of such units are held by a trust for the benefit of Mr. Szold and family
members, with respect to which Mr. Szold has sole discretionary authority as
to voting and disposition. The holder's address is c/o Talon Asset
Management, Inc., One North Franklin, Suite 450, Chicago, IL 60606.
(6) The number of Nvest LP units shown excludes 181,472 Nvest LP units that may
be acquired upon the permitted exercise of exchange rights with respect to
Operating Partnership LP units that may not be exercised within 60 days. The
number reflected in the tables represent Nvest LP Units and Operating
Partnership LP Units held by trusts and partnerships for the benefit of Mr.
Brown and family members, with respect to which Mr. Brown has sole
discretionary authority as to voting and disposition. The holder's address
is 225 W. Washington St., Suite 1650, Chicago, IL 60611.
(7) Alan B. Snyder is the President and controlling shareholder of the holder.
The holder's address is 350 California Street, Suite 1460, San Francisco, CA
94104.
(8) The number of Nvest LP units shown excludes 106,407 Nvest LP units that may
be acquired upon the permitted exercise of exchange rights with respect to
Operating Partnership LP units that may not be exercised within 60 days. The
holder's address is c/o Harris Associates, Two N. LaSalle St., Suite 500,
Chicago, IL 60602.
(9) The number reflected in the table includes 104,936 Operating Partnership LP
units held by a limited partnership of which Mr. Zuckerman serves as general
partner. The holder's address is c/o Harris Associates, Two N. LaSalle St.,
Suite 1650, Chicago, IL 60602.
(10) The holder's address is c/o Harris Associates, Two N. LaSalle St., Suite
500, Chicago, IL 60602.
(11) The number reflected in the table includes 300,000 Operating Partnership LP
units held by a limited partnership of which Mr. Sanborn serves as general
partner. The holder's address is c/o Harris Associates, Two N. LaSalle St.,
Suite 500, Chicago, IL 60602.
(12) All Mr. Tang's units are beneficially owned indirectly through stock
ownership in RTI, and such units are included in the ownership attributed to
RTI set out in the above tables. Included are (i) 609 Nvest LP units and
32,794 Operating Partnership LP units indirectly held by a trust for the
lifetime benefit of Mr. Tang of which Mr. Tang is one of two trustees, and
(ii) 14,840 Nvest LP units and 798,981 Operating Partnership LP units
indirectly held by trusts for Mr. Tang's children (of which Mr. Tang is the
sole trustee), as to which Mr. Tang disclaims beneficial ownership, and
(iii) 11,628 Nvest LP units and 626,068 Operating Partnership LP units
indirectly held by a trust for the benefit Mr. Tang's descendants, as to
which Mr. Tang disclaims all beneficial ownership. The holder's address is
P.O. Box 36, Armonk, NY 10504.
64
<PAGE>
(13) Does not include accounts holding values equal to 1,392 Nvest LP units and
14,783 Nvest LP units for Messrs. Antle and Leighton, respectively, under a
plan whereby directors of the General Partner can defer some or all of their
Board retainer and meeting fees.
(14) Includes 3,125 Nvest LP units that may be acquired upon the exercise of
options that are exercisable within 60 days. Also includes 11,000 Operating
Partnership LP units granted under the RUP which, assuming continuation of
employment, will vest over the next two years.
(15) Includes 785 Nvest LP units owned by Mr. Leighton's spouse as to which he
disclaims beneficial ownership.
(16) Includes 204,936 Operating Partnership LP units held by a limited
partnership of which Mr. Morgenstern serves as general partner. The holder's
address is c/o Harris Associates, Two N. LaSalle St., Suite 500, Chicago, IL
60602.
(17) The holder's address is c/o Nvest Companies, L.P., 399 Boylston St.,
Boston, MA 02116.
(18) Includes 1,700 Nvest LP units and 1,800 Operating Partnership LP units held
by Mr. Ryland's children, as to which he disclaims beneficial ownership.
(19) Includes 10,000 Operating Partnership LP units granted under the RUP which,
assuming continuation of employment, will vest over the next year. Also
includes 400 Operating Partnership LP units held by Mr. Wadsworth's
children, as to which he disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIPS WITH METLIFE
At December 31, 1998, MetLife owned approximately 47% of the Operating
Partnership units outstanding (including units held indirectly through ownership
of Partnership units), and three of its directors and/or officers served as
directors of the General Partner. In addition, the General Partner is an
indirect wholly owned subsidiary of MetLife. Nvest, the Operating Partnership
and MetLife maintain several important business relationships as summarized
below.
ASSET MANAGEMENT AND RELATED MATTERS. As of December 31, 1998 certain of
the Investment Management Firms managed approximately $4.2 billion of MetLife's
General Account assets. These services were provided principally under separate
investment management agreements (the "Management Agreements") with several of
the Investment Management Firms and contain market-based fees that vary
depending upon the class of asset advised and investment objectives. The
Operating Partnership received a total of $12.9 million in fees under these
arrangements in 1998.
In addition, as of December 31, 1998, certain Investment Management Firms
managed approximately $3.4 billion of assets held directly or indirectly in
segregated asset accounts of MetLife for the benefit of third party clients. For
such services, the Firms received directly from MetLife approximately $18.8
million in 1998. The Firms also managed approximately $3.5 billion in mutual
fund assets for the New England Zenith Funds, which contain assets segregated to
meet obligations under variable life insurance and variable annuity products
issued by MetLife and New England Life, as well as investments backing certain
other insurance products issued by MetLife.
MetLife holds mortgage loans to several real estate projects owned by joint
ventures in which a fund sponsored by AEW Capital participates. Also, MetLife
serves as sole or joint guarantor of joint venture-related indebtedness and is a
coinvestor in investment funds sponsored by the Investment Management Firms in
certain instances.
SERVICES AND OFFICE SPACE. MetLife provides various services to Nvest, the
Operating Partnership and the Firms pursuant to a services agreement. These
services include certain data processing, telecommunications, internal audit and
various other administrative support services. All such services are provided at
65
<PAGE>
competitive rates established from time to time by negotiation. In 1998, the
Operating Partnership paid MetLife approximately $3.4 million for such services.
MetLife can discontinue providing, and the Operating Partnership and the Firms
can discontinue receiving, any or all of these services at any time on 60 days'
notice.
The Operating Partnership and certain subsidiaries lease office space in a
building owned by MetLife, for which MetLife received $2.6 million in 1998. The
rates are at current market rates.
RETAIL MUTUAL FUND DISTRIBUTION. Certain mutual funds sponsored by the
Operating Partnership are sold in the retail market through broker-dealers
including NES, which is owned by New England Financial, and MetLife Securities,
which is owned by MetLife. NES's and MetLife's retail sales forces consist of
registered securities representatives who are part of their insurance field
forces. New England Funds paid $22.7 million to NES and $2.3 million to MetLife
Securities in 1998, including commissions on the sales of load mutual funds,
12b-1 distribution fees, and servicing fees on no-load mutual funds.
TAX INDEMNIFICATION. For periods prior to the combination with Reich &
Tang, Old NEIC and its subsidiaries filed consolidated returns for federal and
certain state income taxes together with certain companies which became
subsidiaries of MetLife at the time of the Merger of MetLife and New England
Mutual. In connection with the acquisition of Reich & Tang, all liabilities for
taxes owed by Old NEIC under these agreements were canceled and were not
transferred to Nvest. MetLife, as successor to New England Mutual, will
indemnify and hold harmless the Partnerships for any additional federal income
taxes for Old NEIC imposed for periods prior to the acquisition of Reich & Tang,
offset by any tax benefit for periods prior to the combination with of Reich &
Tang.
PURCHASE OF EMPLOYEE BENEFITS. Employees of the Operating Partnership and
certain subsidiaries participated in 1998 in certain employee benefits purchased
from MetLife, including dental, life and disability insurance. The Operating
Partnership paid approximately $1.0 million for these benefits in 1998. In
addition, Loomis Sayles purchased cash value life insurance policies from
MetLife to satisfy Loomis Sayles' obligations under a death benefit plan for
senior executives. Premiums paid on these policies were $1.9 million in 1998.
Loomis Sayles has a $11.0 million revolving line of credit from MetLife secured
with an interest in these life insurance policies. The total principal and
interest outstanding under this agreement was $11.2 million at December 31,
1998. Interest expense was $0.8 million during 1998.
MetLife is obligated to advance funds to an affiliate of AEW Capital to meet
such firm's contribution obligation, if it should arise, with respect to one
investment partnership where such affiliate has a less than 1% general
partnership interest. This obligation arose in 1992 incident to the contribution
by such affiliate of various real estate interests to a subsidiary of New
England Mutual in exchange for preferred stock.
The Operating Partnership and MetLife expect to maintain a number of these
relationships for the foreseeable future. Transactions between MetLife and the
Operating Partnership entered into in the future, including changes to the
investment management fees the Operating Partnership charges MetLife and service
fees MetLife charges the Operating Partnership, will be determined by
negotiation from time to time. The Operating Partnership believes that the
financial aspects of these relationships are no less favorable to the Operating
Partnership than those available from unaffiliated third parties.
Incident to New England Mutual's merger into MetLife, New England Mutual's
ownership interests in Nvest and the General Partner were transferred to
MetLife, and MetLife succeeded to the various arrangements of New England Mutual
with Nvest and the Operating Partnership.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS
Financial statements of the registrant are listed in the "Index to the
Financial Statements" on page 28 and are filed as part of this report.
(2) FINANCIAL STATEMENT SCHEDULES
There are no Financial Statement schedules of the registrant required to
be filed as part of this report.
(3) EXHIBITS
The following exhibits required to be filed by Item 601 of Regulation S-K
are filed herewith or incorporated herein by reference, as indicated.
<TABLE>
<S> <C>
2.1 Partnership Admission Agreement dated October 14, 1996 (relating to the acquisition
of assets of Aldrich, Eastman & Waltch, L.P.)(1)
2.2 Form of Agreement Amending Partnership Admission Agreement dated December 10, 1996,
amending the Partnership Admission Agreement dated October 14, 1996 (relating to the
acquisition of assets of Aldrich, Eastman & Waltch, L.P.)(2)
2.3 Partnership Admission Agreement dated September 23, 1996 (relating to the
acquisition of assets of Jurika & Voyles, Inc.)(3)
2.4 Amendment No. 1 dated as of January 1, 1997, to the Partnership Admission Agreement
dated September 23, 1996 (relating to the acquisition of assets of Jurika & Voyles,
Inc.)(4)
3.1 Articles of Organization of New England Investment Companies, Inc.(5)
3.1(a) Amended and Restated Articles of Organization of New England Investment Companies,
Inc., reflecting change of name to Nvest Corporation (14)
3.2 By-Laws of New England Investment Companies, Inc.(5)
3.2(a) Amendment to Certificate of Limited Partnership of New England Investment Companies,
L.P., reflecting change of name to Nvest, L.P (14)
3.3 Certificate of Limited Partnership of New England Investment Companies, L.P.,
together with all amendments thereto(5)
3.3(a) Amendment to Second Amended and Restated Agreement of Limited Partnership of New
England Investment Companies, L.P., reflecting change of name to Nvest, L.P. (14)
3.4 Second Amended and Restated Agreement of Limited Partnership of New England
Investment Companies, L.P.(9)
3.4(a) Amendment to Certificate of Limited Partnership of NEIC Operating Partnership, L.P.,
reflecting change of name to Nvest Companies, L.P. (14)
3.5 Amended and Restated Agreement of Limited Partnership of NEIC Operating Partnership,
L.P.(10)
3.5(a) Amendment to Amended and Restated Agreement of Limited Partnership of NEIC Operating
Partnership, L.P., reflecting change of name to Nvest Companies, L.P. (14)
</TABLE>
67
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(CONTINUED)
<TABLE>
<S> <C>
4.1 Form of Certificate Evidencing Units Representing Limited Partner Interests(9)
9. Voting Agreement by and among New England Investment Companies, Inc., Reich & Tang,
Inc. and New England Mutual Life Insurance Company(5)
10.1 1993 Equity Incentive Plan, as amended(12)
10.2 Restricted Unit Plan(5)
10.3 1997 Equity Incentive Plan, as amended(12)
10.4 Employment Agreement with Peter S. Voss(7)
10.5 Defined Contribution Retirement Plan of the Operating Partnership(6)
10.6 401(k) Savings Plan of the Operating Partnership(6)
10.7 Directors Deferred Compensation Plan(6)
10.8 Second Amended and Restated Limited Partnership Agreement of Capital Growth
Management Limited Partnership(5)
10.9 Registration Rights Agreement by and among Reich & Tang, Inc., New England Mutual
Life Insurance Company and New England Investment Companies, L.P.(5)
10.10 Registration Rights Agreement between Nvest and Harris Associates L.P.(6)
10.11 Credit Agreement, dated as of October 28, 1996, among the Partnership, as Borrower,
the banks named therein as Banks, Citibank N.A. as Administrative Agent, and The
First National Bank of Boston, as Co-Agent(8)
10.12 Waiver and Amendment Agreement dated as of December 29, 1997, relating to Credit
Agreement dated as of October 28, 1996(13)
10.13 Form of Note Purchase Agreement relating to 6.54% Notes due 2003(6)
10.14 Amendment and Assumption Agreement dated as of December 29, 1997, relating to Note
Purchase Agreements relating to 6.54% Notes due 2003(13)
10.15 Form of Note Purchase Agreement relating to 7.15% Senior Notes due 2007(11)
10.16 Amendment and Assumption Agreement dated as of December 29, 1997, relating to Note
Purchase Agreements relating to 7.15% Notes due 2007(13)
10.17 Intercompany Agreement dated as of December 29, 1997, between the Registrant and
NEIC Operating Partnership, L.P.(9)
21. Subsidiaries of the Registrant or Nvest Companies, L.P.
23. Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
</TABLE>
- ------------------------
NOTES
(1) Filed as an Exhibit to Registrant's Current Report on Form 8-K (File No.
1-9468) dated September 23, 1996.
(2) Filed as an Exhibit to Registrant's Current Report on Form 8-K (File No.
1-9468) dated January 3, 1997.
(3) Filed as an Exhibit to Registrant's Current Report on Form 8-K (File No.
1-9468) dated October 15, 1996.
68
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(CONTINUED)
(4) Filed as an Exhibit to Registrant's Current Report on Form 8-K (File No.
1-9468) dated December 10, 1996.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-K (File No.
1-9468) for the year ended December 31, 1993.
(6) Filed as an Exhibit to Registrant's Annual Report on Form 10-K (File No.
1-9468) for the year ended December 31, 1995.
(7) Filed as an Exhibit to Registrant's Current Report on Form 8-K (File No.
1-9468) dated November 8, 1995.
(8) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q (File No.
1-9468) for the quarter ended September 30, 1996.
(9) Filed as an Exhibit to the Registrant's Form 8-A/A dated December 29, 1997.
(10) Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File
No. 1-9468) dated December 31, 1997.
(11) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (File
No. 1-9468) for the quarter ended March 31, 1997.
(12) Filed as an Exhibit to the Registrant's Registration Statement on Form S-3
(No. 333-43407).
(13) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K (File
No. 1-9468) for the year ended December 31, 1997.
(14) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (File
No. 1-9468) for the quarter ended March 31, 1998.
(b) Form 8-K filings: None in the quarter ended December 31, 1998.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
NVEST, L.P.
By NVEST CORPORATION,
its General Partner
Date: February 25, 1999 By: /s/ G. NEAL RYLAND
-----------------------------------------
G. Neal Ryland
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated below, on February 25, 1999.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ PETER S. VOSS Chairman, Chief Executive
- ------------------------------ Officer and President
Peter S. Voss
/s/ G. NEAL RYLAND Executive Vice President
- ------------------------------ and Chief Financial
G. Neal Ryland Officer
/s/ KEVIN P. CHARLESTON Senior Vice President and
- ------------------------------ Treasurer (Principal
Kevin P. Charleston Accounting Officer)
/s/ WILLIAM S. ANTLE III Director
- ------------------------------
William S. Antle III
/s/ ROBERT J. BLANDING Director
- ------------------------------
Robert J. Blanding
/s/ PAUL E. GRAY Director
- ------------------------------
Paul E. Gray
/s/ JEFFREY J. HODGMAN Director
- ------------------------------
Jeffrey J. Hodgman
/s/ HARRY P. KAMEN Director
- ------------------------------
Harry P. Kamen
/s/ CHARLES M. LEIGHTON Director
- ------------------------------
Charles M. Leighton
/s/ VICTOR A. MORGENSTERN Director
- ------------------------------
Victor A. Morgenstern
/s/ OSCAR L. TANG Director
- ------------------------------
Oscar L. Tang
70
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF NVEST COMPANIES, L.P.
<TABLE>
<CAPTION>
State of
Incorporation
SUBSIDIARY or Organization
---------- ---------------
<S> <C>
AEW Capital Management, Inc. Massachusetts
AEW Capital Management, L.P. Delaware
AEW Securities Limited Partnership Massachusetts
AEW Hotel Investment Corporation Massachusetts
AEW II Corporation Massachusetts
AEW Investment Group, Inc. Massachusetts
(includes approximately 23 real estate investment
subsidiaries, all of which operate in the United States)
Back Bay Advisors, Inc. Massachusetts
Back Bay Advisors, L.P. Delaware
Graystone Partners, Inc. Massachusetts
Graystone Partners, L.P. Delaware
Harris Associates, Inc. Delaware
Harris Associates L.P. Delaware
Harris Partners L.L.C. Delaware
Harris Partners, Inc. Delaware
Harris Associates Securities L.P. Delaware
Jurika & Voyles, Inc. Delaware
Jurika & Voyles, L.P. Delaware
Loomis, Sayles & Company, Inc. Massachusetts
Loomis, Sayles & Company, L.P. Delaware
Loomis, Sayles Distributors, L.P. Delaware
Loomis, Sayles Distributors, Inc. Massachusetts
MC Management, Inc. Massachusetts
MC Management, L.P. Delaware
NEF Corporation Massachusetts
New England Funds, L.P. Delaware
New England Funds Management, L.P. Delaware
Nvest Services Co., Inc. Delaware
Nvest Associates, Inc. Delaware
Nvest Holdings, Inc. Massachusetts
Reich & Tang Distributors, Inc. Delaware
Reich & Tang Services, L.P. Delaware
Reich & Tang Asset Management, Inc. Massachusetts
Reich & Tang Asset Management, L.P. Delaware
Vaughan, Nelson, Scarborough & McCullough, Inc. Delaware
Vaughan, Nelson, Scarborough & McCullough, L.P. Delaware
VNSM Trust Company Texas
Westpeak Investment Advisors, Inc. Massachusetts
Westpeak Investment Advisors, L.P. Delaware
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No. 333-43407,
No. 333-18911 and No. 33-77904) and in the Prospectus constituting part of the
Registration Statement on Form S-4 (No. 333-43397) of Nvest, L.P. of our reports
dated January 29, 1999 appearing on pages 39 and 55 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,772
<SECURITIES> 0
<RECEIVABLES> 5,017
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,789
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,620
<CURRENT-LIABILITIES> 7,727
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 71,893
<TOTAL-LIABILITY-AND-EQUITY> 79,620
<SALES> 0
<TOTAL-REVENUES> 16,672
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,052
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,052
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.00
</TABLE>
