<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________to____________________________
Commission File Number: 1-9468
NVEST, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3405992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Boylston Street, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip Code)
(617) 578-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The issuer is a limited partnership. There were 6,203,832 units of limited
partner interest and 110,000 units of general partner interest outstanding at
October 31, 1999.
1 of 27
<PAGE>
NVEST, L.P.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF NVEST, L.P. (THE "PARTNERSHIP")
Balance Sheet as of December 31, 1998 and September 30, 1999 3
Statement of Income for the three and nine months ended September 30, 1998 and 1999 4
Statement of Cash Flows for the nine months ended September 30, 1998 and 1999 5
Notes to Financial Statements 6
FINANCIAL STATEMENTS OF NVEST COMPANIES, L.P. (THE "OPERATING PARTNERSHIP")
Consolidated Balance Sheet as of December 31, 1998 and September 30, 1999 10
Consolidated Statement of Income for the three and nine months ended September 30, 1998
and 1999 11
Consolidated Statement of Cash Flows for the nine months ended September 30, 1998 and 1999 12
Notes to Consolidated Financial Statements 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
Nvest, L.P. 15
The Operating Partnership 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
</TABLE>
2 of 27
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NVEST, L.P.
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,772 $ 3
Distribution receivable from the Operating Partnership 5,017 4,863
------------ -------------
Total current assets 7,789 4,866
Investment in the Operating Partnership (Note 5) 71,831 63,393
------------ -------------
Total assets $ 79,620 $ 68,259
============ =============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Distribution payable $ 4,105 $ 3,979
Gross income tax payable and accrued expenses 3,622 742
------------ -------------
Total current liabilities 7,727 4,721
Contingent liabilities (Note 7)
Partners' capital (6,516,248 units at December 31, 1998
and 6,315,905 at September 30, 1999) 71,893 63,538
------------ -------------
Total liabilities and partners' capital $ 79,620 $ 68,259
============ =============
</TABLE>
See Accompanying Notes to Financial Statements.
3 of 27
<PAGE>
NVEST, L.P.
STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Equity in earnings of the Operating Partnership $ 4,240 $ 4,038 $ 12,418 $ 11,755
Interest income 20 - 25 45
------------ ------------- ------------ -------------
4,260 4,038 12,443 11,800
EXPENSES
Gross income tax and other expenses 950 877 2,705 2,630
------------ ------------- ------------ -------------
Net income $ 3,310 $ 3,161 $ 9,738 $ 9,170
============ ============= ============ =============
Net income per unit (Note 4):
Basic $ 0.51 $ 0.50 $ 1.51 $ 1.44
============ ============= ============ =============
Diluted $ 0.50 $ 0.50 $ 1.49 $ 1.44
============ ============= ============ =============
Distributions declared per unit $ 0.63 $ 0.63 $ 1.86 $ 1.89
============ ============= ============ =============
Weighted average units outstanding - diluted (Note 4) 6,873 6,375 7,044 6,420
============ ============= ============ =============
</TABLE>
See Accompanying Notes to Financial Statements.
4 of 27
<PAGE>
NVEST, L.P.
STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,738 $ 9,170
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of the Operating Partnership (12,418) (11,755)
Distributions received from the Operating Partnership 14,721 14,825
Increase (decrease) in gross income tax payable and accrued expenses 2,705 (2,880)
---------------- ----------------
Net cash provided by operating activities 14,746 9,360
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of units of the Operating Partnership - exercised options and other (2,088) -
Proceeds from sale of units of the Operating Partnership (Note 6) 48 6,340
---------------- ----------------
Net cash provided by (used in) investing activities (2,040) 6,340
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders (12,923) (12,129)
Proceeds from issuance of units - exercised options and other 2,088 -
Payment for retirement of units (Note 6) (48) (6,340)
---------------- ----------------
Net cash used in financing activities (10,883) (18,469)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,823 (2,769)
Cash and cash equivalents, beginning of period - 2,772
---------------- ----------------
Cash and cash equivalents, end of period $ 1,823 $ 3
================ ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Transfer of partners' capital from the Operating Partnership (Note 3) $ 3,111 $ 817
================ ================
</TABLE>
See Accompanying Notes to Financial Statements.
5 of 27
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ORGANIZATION
Nvest, L.P. ("Nvest") 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"). 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 September 30, 1999 was 6,315,905 units of the Operating Partnership,
representing a general partner's interest in 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. 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 expenses of Nvest.
NOTE 2 - BASIS OF PRESENTATION
The unaudited financial statements of Nvest have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the annual report of
Nvest filed on Form 10-K for the year ended December 31, 1998. In the opinion of
management, all adjustments, consisting only of normal recurring accruals, have
been made to present fairly the financial statements of Nvest at September 30,
1999 and for the three and nine month periods ended September 30, 1998 and 1999.
The financial statements of Nvest should also be read in conjunction with the
consolidated financial statements of the Operating Partnership included herein.
NOTE 3 - 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 units, subject to applicable
requirements intended to ensure that the Operating Partnership remains a private
partnership. During the nine months ended September 30, 1999, 50,230 Operating
Partnership units had been exchanged for an equal number of Nvest units and
Nvest had received 50,230 units of the Operating Partnership. On October 1,
1999, an additional 19,227 Operating Partnership units were exchanged for an
equal number of Nvest units and Nvest received 19,227 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 held by certain parties that are deemed to be affiliated with the
Operating Partnership, including units held by Nvest. Currently, a "block" for
this purpose is approximately 340,000 units.
6 of 27
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 4 - NET INCOME PER UNIT
The calculation of basic and diluted net income per unit and weighted average
units outstanding follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
Net income - for basic calculation $ 3,310 $ 3,161 $ 9,738 $ 9,170
Additional equity in earnings of the Operating
Partnership, net of gross income tax and
other expenses, related to incremental
units assumed outstanding * 136 15 776 46
------------- ------------- ------------- -------------
Net income - for diluted calculation $ 3,446 $ 3,176 $10,514 $ 9,216
============= ============= ============= =============
Weighted average units outstanding:
Basic 6,550 6,341 6,432 6,383
Incremental units assumed outstanding
from exercise of unit options * 323 34 612 37
------------- ------------- ------------- -------------
Diluted 6,873 6,375 7,044 6,420
============= ============= ============= =============
Net income per unit:
Basic $ 0.51 $ 0.50 $ 1.51 $ 1.44
============= ============= ============= =============
Diluted $ 0.50 $ 0.50 $ 1.49 $ 1.44
============= ============= ============= =============
</TABLE>
* When an option for a unit of Nvest is exercised, the Operating
Partnership issues a unit to Nvest. This increases Nvest's relative
ownership interest in the Operating Partnership. Dilution due to option
exercises occurs at the Operating Partnership and affects Nvest
proportionately.
NOTE 5 - INVESTMENT IN THE OPERATING PARTNERSHIP
Investment activity in the Operating Partnership for the nine months ended
September 30, 1999 follows (in thousands):
<TABLE>
<S> <C>
Investment in the Operating Partnership at December 31, 1998 $ 71,831
Investment from exercise of options and other unit issuances -
Investment from unit exchanges (Note 3) 817
Sale of units of the Operating Partnership (Note 6) (6,340)
Equity in earnings of the Operating Partnership 11,755
Distributions declared by the Operating Partnership ($2.31 per unit) (14,670)
-------------
Investment in the Operating Partnership at September 30, 1999 $ 63,393
=============
</TABLE>
7 of 27
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 6 - UNIT REPURCHASE PLAN
On September 16, 1999, the Board of Directors of the general partner of Nvest
and the Operating Partnership extended a plan to repurchase up to one million
limited partnership units of the partnerships through September 30, 2000. The
repurchase plan, which was initiated on September 15, 1998, authorizes the
purchase of units in either the open market or privately negotiated
transactions. In the case of purchases of Nvest 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. As of September 30, 1998,
1,800 units had been repurchased at a cost of $48,000. During the three and nine
month periods ended September 30, 1999, the Operating Partnership repurchased
48,300 and 250,573 units at a cost of $1,120,000 and $6,340,000, respectively.
NOTE 7 - CONTINGENT LIABILITIES
The business units of the Operating Partnership are from time to time subject to
legal proceedings and claims that arise in the course of their businesses. In
the opinion of management, the amount of any ultimate liability with respect to
currently pending actions will not have a material adverse effect on the results
of operations or financial condition of Nvest.
NOTE 8 - TAX CONSIDERATIONS FOR PUBLIC UNITHOLDERS
Unitholders of Nvest have two principal tax advantages compared to shareholders
of corporations. First, limited partnerships, such as Nvest and the Operating
Partnership, do not pay federal corporate income taxes. As a publicly traded
partnership, Nvest is, however, subject to a 3.5% federal tax on its gross
income. This results in an overall tax expense that is roughly one-half of what
Nvest would pay if it were taxed as a corporation. The partnership structure
permits Nvest to retain a significantly higher percentage of its cash flow, and
thereby to pay higher distributions to Nvest unitholders, than if it were taxed
as a corporation.
The second principal tax benefit is that purchasers of Nvest units after August
10, 1993, are allowed an additional deduction that reduces the amount of income
on which they pay taxes. This deduction permits such unitholders to amortize a
substantial portion of the price paid for Nvest units over 15 years and
significantly reduces the current effective tax rate on distributions paid by
Nvest to unitholders. Due to this amortization benefit, the cash distributions
that Nvest pays to unitholders are likely to continue to exceed the amount of
taxable income on which unitholders must pay taxes. Amortization deductions
decrease the tax basis of units held and will likely be recaptured as ordinary
income if and when the units are sold.
8 of 27
<PAGE>
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 8 - TAX CONSIDERATIONS FOR PUBLIC UNITHOLDERS (CONTINUED)
A hypothetical example of the amount of the amortization tax benefit for 1998 is
explained in detail in Note 5 to the financial statements of Nvest contained in
Nvest's annual report on form 10-K for the year ended December 31, 1998. For the
nine months ended September 30, 1999, Nvest estimates that taxable income to the
public unitholder before the amortization deduction was approximately $2.40 per
unit. The amount of the amortization deduction varies depending on the purchase
price and other factors. However, using a purchase price in December 1998 of
$26.75 per unit (of which approximately $23 would represent amortizable assets),
the amortization deduction would reduce net taxable income by $1.15 per unit,
resulting in a deferral of nearly 50% of estimated taxable income until the
units are sold. The relative value of this tax benefit will vary depending on a
number of factors, including the unit purchase price and the amount of taxable
income allocable to unitholders. For the nine months ended September 30, 1999,
Nvest declared distributions of $1.89 per unit. Under this illustration, the
effective tax rate to the unitholder on the distributions for this quarter would
be approximately 26%. Based on the assumptions above, the tax benefit for the
nine months ended September 30, 1999 is shown in tabular form as follows:
<TABLE>
<CAPTION>
Per
Unit
---------
<S> <C>
Distributions declared for the nine months ended September 30, 1999 $ 1.89
Allocation of estimated taxable income prior to tax amortization of the purchase price $ 2.40
Less estimated tax amortization allocation of the purchase price (1/15 OF $23.00
FOR THREE QUARTERS) (1.15)
------
Net taxable income $ 1.25
Estimated income tax (ASSUMED 40% PERSONAL INCOME TAX RATE) (0.50)
Total distributions declared for the nine months ended September 30, 1999,
net of income taxes $ 1.39
=======
</TABLE>
This example is based solely on estimates of taxable income for the nine months
ended September 30, 1999. Under Federal law, unitholders are required to pay tax
on their allocable share of Nvest's taxable income regardless of the amount of
distributions paid. Distributions in excess of net taxable income are not
subject to tax in 1999 but decrease a unitholder's tax basis by a like amount.
As individual tax situations may vary, each prospective purchaser is urged to
consult with his or her tax advisor. The statements herein may constitute
forward-looking statements within the meaning of the federal securities laws.
The accuracy of these forward-looking statements depends in large part on the
interpretation and application of tax laws and regulations, which are subject to
change, and estimates made by Nvest based on such interpretations.
9 of 27
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 52,135 $ 25,007
Management and advisory fees receivable 98,914 108,178
Investment securities 18,715 11,929
Other 7,057 11,090
------------- --------------
Total current assets 176,821 156,204
Intangible assets:
Investment advisory contracts 505,292 478,680
Goodwill 131,291 128,245
Fixed assets 34,708 42,636
Other assets 51,270 59,854
------------- --------------
Total assets $ 899,382 $ 865,619
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses $ 124,317 $ 121,211
Distribution payable 34,439 34,243
Notes payable 4,437 1,667
------------- --------------
Total current liabilities 163,193 157,121
Deferred compensation, benefits and other 19,307 19,047
Notes payable 270,000 270,000
------------- --------------
Total liabilities 452,500 446,168
Contingent liabilities (Note 3)
Partners' capital (44,725,799 units at December 31,
1998 and 44,471,686 units at September 30, 1999) 446,882 419,451
------------- --------------
Total liabilities and partners' capital $ 899,382 $ 865,619
============= ==============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
10 of 27
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Management and advisory fees $ 150,762 $ 150,835 $ 460,427 $ 444,430
Other revenues and interest income 13,484 13,735 39,539 42,601
------------ ------------- ------------ -------------
164,246 164,570 499,966 487,031
------------ ------------- ------------ -------------
EXPENSES
Compensation and benefits 81,466 82,608 249,035 243,775
Restricted unit plan compensation 951 917 2,877 2,729
Amortization of intangibles 9,867 10,118 29,602 30,357
Depreciation and amortization 2,166 2,542 6,190 7,177
Occupancy, equipment and systems 7,915 8,929 23,589 25,954
Interest expense 5,184 5,233 15,867 15,928
Other 27,727 25,833 85,710 78,265
------------ ------------- ------------ -------------
135,276 136,180 412,870 404,185
------------ ------------- ------------ -------------
Income before income taxes 28,970 28,390 87,096 82,846
Income tax expense 1,100 969 4,064 3,521
------------ ------------- ------------ -------------
Net income $ 27,870 $ 27,421 $ 83,032 $ 79,325
============ ============= ============ =============
Distributions declared per unit $ 0.77 $ 0.77 $ 2.28 $ 2.31
============ ============= ============ =============
Weighted average units outstanding - diluted 44,851 44,534 45,122 44,593
============ ============= ============ =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
11 of 27
<PAGE>
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 83,032 $ 79,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangibles 29,602 30,357
Restricted unit plan compensation 2,877 2,729
---------------- ---------------
Subtotal 115,511 112,411
Depreciation and amortization 6,190 7,177
Increase in accounts receivable and other assets (6,586) (15,394)
Increase in accounts payable and other liabilities 35,250 1,587
---------------- ---------------
Net cash provided by operating activities 150,365 105,781
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,132) (15,105)
Acquisition payments (11,667) (5,652)
---------------- ---------------
Net cash used in investing activities (23,799) (20,757)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders (102,763) (103,042)
Proceeds from issuance of units - exercised options 1,287 -
Payment for retirement of units (104) (6,340)
Repayment of notes payable (41,277) (2,770)
---------------- ---------------
Net cash used in financing activities (142,857) (112,152)
---------------- ---------------
Net decrease in cash and cash equivalents (16,291) (27,128)
Cash and cash equivalents, beginning of period 91,986 52,135
---------------- ---------------
Cash and cash equivalents, end of period $ 75,695 $ 25,007
================ ===============
Cash paid during the period for interest $ 16,320 $ 16,339
================ ===============
Cash paid during the period for income taxes $ 1,895 $ 6,182
================ ===============
Supplemental disclosure of non-cash increase in partners' capital $ 250 $ -
================ ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
12 of 27
<PAGE>
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, mutual funds and
private clients. The business of the Operating Partnership was conducted by
Nvest, L.P. ("Nvest") prior to the Restructuring completed on December 31, 1997.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Operating Partnership
should be read in conjunction with the annual report of Nvest filed on Form 10-K
for the year ended December 31, 1998. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, have been made to
present fairly the financial statements of the Operating Partnership at
September 30, 1999 and for the three and nine month periods ended September 30,
1998 and 1999.
Certain amounts in prior period financial statements have been reclassified to
conform with the 1999 presentation.
NOTE 3 - CONTINGENT LIABILITIES
The business units of the Operating Partnership are from time to time subject to
legal proceedings and claims which arise in the course of their businesses. In
the opinion of management, the amount of any ultimate liability with respect to
currently pending actions will not have a material adverse effect on the results
of operations or financial condition of the Operating Partnership.
NOTE 4 - UNIT REPURCHASE PLAN
On September 16, 1999, the Board of Directors of the general partner of Nvest
and the Operating Partnership extended a plan to repurchase up to one million
limited partnership units of the partnerships through September 30, 2000. The
repurchase plan, which was initiated on September 15, 1998, authorizes the
purchase of units in either the open market or privately negotiated
transactions. In the case of purchases of Nvest 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. As of September 30, 1998,
1,800 units had been repurchased at a cost of $48,000. During the three and nine
month periods ended September 30, 1999, the Operating Partnership repurchased
48,300 and 250,573 units at a cost of $1,120,000 and $6,340,000, respectively.
13 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Nvest's Annual Report
on Form 10-K for the year ended December 31, 1998, particularly under Item 1,
"Business--Forward-Looking Statements" and include factors such as conditions
affecting fee revenues, reliance on key personnel, competition, regulatory and
legal matters, and tax considerations. Readers are encouraged to review these
factors carefully. The description of the potential effects of the Year 2000
issue includes forward-looking statements.
General
At year-end 1997, Nvest completed a restructuring (the "Restructuring") that
included the transfer of its business, assets and liabilities to a newly formed
operating partnership, Nvest Companies, L.P. (the "Operating Partnership"). As a
result of the Restructuring, Nvest's primary 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 September 30,
1999, Nvest owned approximately 6.3 million units, or approximately 14% 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 Nvest's Annual Report on Form 10-K for the year
ended December 31, 1998, particularly 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 three and nine
months ended September 30, 1999 are compared to the results for the three and
nine months ended September 30, 1998. In the second section, the results of the
Operating Partnership for the three and nine months ended September 30, 1999 are
compared to the results for the three and nine months ended September 30, 1998.
14 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NVEST, L.P.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1999 1998 1999
------------- ------------- ------------ -------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
THE OPERATING PARTNERSHIP
Net income $ 27,870 $ 27,421 $ 83,032 $ 79,325
Add back restricted unit plan compensation * 951 917 2,877 2,729
------------- ------------- ------------ -------------
Net income available for allocation $ 28,821 $ 28,338 $ 85,909 $ 82,054
============= ============= ============ =============
NVEST, L.P.
Percentage ownership of the Operating Partnership
on a weighted average basis - basic 14.710% 14.249% 14.450% 14.327%
============= ============= ============ =============
Equity in earnings of the Operating Partnership $ 4,240 $ 4,038 $ 12,418 $ 11,755
Gross income tax and other expenses, net 930 877 2,680 2,585
------------- ------------- ------------ -------------
Net income $ 3,310 $ 3,161 $ 9,738 $ 9,170
============= ============= ============ =============
Net income per unit - diluted ** $ 0.50 $ 0.50 $ 1.49 $ 1.44
============= ============= ============ =============
Distributions declared per unit $ 0.63 $ 0.63 $ 1.86 $ 1.89
============= ============= ============ =============
Weighted average units outstanding - diluted 6,873 6,375 7,044 6,420
============= ============= ============ =============
</TABLE>
* Restricted unit plan compensation is fully allocated to certain limited
partners of the Operating Partnership, and is added back to net income to
determine net income available for allocation.
** Net income per unit - diluted is calculated based on Nvest's percentage
ownership of the Operating Partnership on a diluted basis, which was 15.324%
and 14.315% for the three months ended September 30, 1998 and 1999,
respectively, and 15.611% and 14.397% for the nine months ended September 30,
1998 and 1999, respectively (see Note 4 of the Notes to Financial Statements
of Nvest, L.P. for the calculation of net income per unit).
General
Nvest derives its net income and cash available for distribution from its
ownership of units in the Operating Partnership. At September 30, 1999, Nvest
owned approximately 6.3 million units of the Operating Partnership, representing
an approximate 14% interest. Each quarter, Nvest distributes to its unitholders
substantially all of the distributions received from the Operating Partnership
after accruing its federal and state tax obligations and miscellaneous operating
expenses. 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.
15 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NVEST, L.P. (CONTINUED)
DISTRIBUTIONS TO UNITHOLDERS
On September 16, 1999, the Operating Partnership declared a quarterly
distribution of $0.77 per unit, payable on November 15, 1999. Nvest, in turn,
declared a distribution of $0.63 per unit, with the $0.14 difference consisting
primarily of the tax obligations discussed above. The Operating Partnership has
significant non-cash expenses which allow both it and, therefore, Nvest to
maintain a distribution level in excess of net income. Changes in operating cash
flow of the Operating Partnership directly impact the amount of distributions
that Nvest may pay.
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Nvest's net income of $0.50 per unit (diluted) for the three months ended
September 30, 1999 was unchanged from the three months ended September 30, 1998.
The results reflect slightly lower net income at the Operating Partnership,
offset by lower gross income taxes and other expenses at Nvest.
Equity in earnings of the Operating Partnership of $4.0 million for the three
months ended September 30, 1999 was down $0.2 million from $4.2 million for the
three months ended September 30, 1998. Nvest receives a pro rata share of the
Operating Partnership's net income available for allocation based on its equity
interest in the Operating Partnership. The decrease was due to lower net income
at the Operating Partnership combined with a lower equity interest in the
Operating Partnership. Nvest's ownership of the Operating Partnership on a
weighted average basis (basic) declined from 14.710% for the three months ended
September 30, 1998 to 14.249% for the three months ended September 30, 1999,
mostly as a result of the unit repurchase plan (Note 6 - Nvest, LP). See also
Management's Discussion and Analysis of the Operating Partnership's results
beginning on page 18.
Gross income tax and other expenses of $0.9 million for the three months ended
September 30, 1999 decreased $0.1 million from the same period last year. Gross
income tax and other expenses consist primarily of a 3.5% federal tax on Nvest's
proportionate share of the gross income of the Operating Partnership.
Weighted average units outstanding (diluted) declined from 6.9 million for the
three months ended September 30, 1998 to 6.4 million for the three months ended
September 30, 1999. The decrease resulted from lower dilution from fewer
incremental units assumed outstanding for the exercise of unit options and unit
repurchases under the unit repurchase plan. This decline resulted in Nvest's
share of the Operating Partnership's earnings declining on a weighted average
diluted basis from 15.324% in the third quarter of 1998 to 14.315% in the third
quarter of 1999.
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
Nvest's net income of $1.44 per unit (diluted) for the nine months ended
September 30, 1999 was down $0.05 from net income per unit (diluted) of $1.49
for the nine months ended September 30, 1998. The results reflect lower net
income at the Operating Partnership.
Equity in earnings of the Operating Partnership of $11.8 million for the nine
months ended September 30, 1999 was down $0.6 million from $12.4 million for the
nine months ended September 30, 1998. Nvest receives a pro rata share of the
Operating Partnership's net income available for allocation based on its equity
interest in the Operating Partnership. The decrease was due to lower net income
at the Operating Partnership combined with a slightly lower equity interest in
the Operating Partnership. Nvest's ownership of the Operating Partnership on a
weighted average basis (basic) declined from 14.450% for the nine months ended
September 30, 1998 to 14.327% for the nine months ended September 30, 1999. See
also Management's Discussion and Analysis of the Operating Partnership's results
beginning on page 18.
16 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTINUED)
NVEST, L.P. (CONTINUED)
Gross income tax and other expenses of $2.6 million for the nine months ended
September 30, 1999 decreased $0.1 million from the same period last year. Gross
income tax and other expenses consist primarily of a 3.5% federal tax on Nvest's
proportionate share of the gross income of the Operating Partnership.
Weighted average units outstanding (diluted) declined from 7.0 million for the
nine months ended September 30, 1998 to 6.4 million for the nine months ended
September 30, 1999. The decrease resulted from lower dilution from fewer
incremental units assumed outstanding for the exercise of unit options and unit
repurchases under the unit repurchase plan. This decline resulted in Nvest's
share of the Operating Partnership's earnings declining on a weighted average
diluted basis from 15.611% for the first nine months of 1998 to 14.397% for the
first nine months of 1999.
CAPITAL RESOURCES AND LIQUIDITY
Nvest distributes to its unitholders substantially all of the distributions
received from the Operating Partnership, after accruing its tax obligations and
miscellaneous operating expenses. To the extent that there are any temporary
cash shortfalls due to the timing of tax payments and the receipt of quarterly
distributions, the Operating Partnership makes short-term loans available to
Nvest.
17 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
1998 1999 1998 1999
--------------- --------------- -------------- --------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C>
Revenues $ 164,246 $ 164,570 $ 499,966 $ 487,031
--------------- --------------- -------------- --------------
Expenses:
Restricted unit plan compensation 951 917 2,877 2,729
Amortization of intangibles 9,867 10,118 29,602 30,357
Compensation and other expenses 125,558 126,114 384,455 374,620
--------------- --------------- -------------- --------------
136,376 137,149 416,934 407,706
--------------- --------------- -------------- --------------
Net income $ 27,870 $ 27,421 $ 83,032 $ 79,325
=============== =============== ============== ==============
Operating cash flow (1) $ 38,688 $ 38,456 $ 115,511 $ 112,411
=============== =============== ============== ==============
Operating cash flow per unit - diluted (1) $ 0.86 $ 0.86 $ 2.56 $ 2.52
=============== =============== ============== ==============
Distributions declared per unit $ 0.77 $ 0.77 $ 2.28 $ 2.31
=============== =============== ============== ==============
Weighted average units outstanding - diluted 44,851 44,534 45,122 44,593
=============== =============== ============== ==============
</TABLE>
Note:
(1) Operating cash flow, as defined by Nvest, is equal to net income plus
non-cash charges for amortization of intangibles and restricted unit plan
compensation. Operating cash flow per unit should not be construed as an
alternative to net income per unit 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.
18 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
GENERAL
The Operating Partnership is an investment management firm with approximately
$127 billion in assets under management at September 30, 1999. It operates
through twelve investment management firms and six 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 and fixed income
securities, money market funds and real estate.
The Operating Partnership seeks to grow by expanding the investment management
firms' capabilities, pursuing the acquisition of investment management firms,
and expanding marketing efforts and distribution channels. The Operating
Partnership supports its 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.
Several new ventures have been initiated by the Operating Partnership during
the first nine months of 1999. The first is a joint venture with Asahi Life
Asset Management Company, an affiliate of Asahi Mutual Life Insurance Company
of Tokyo. The joint venture will provide investment management services to
Japanese institutions and individuals. During the third quarter of 1999, the
joint venture received $400 million in assets to be managed. Additionally,
$200 million in assets were received from Japanese investors as a result of
subadvisory relationships between Loomis, Sayles & Company and Japanese firms
that market investment products to individual investors.
A second venture was the acquisition in July 1999 of Kobrick Funds, a growth
equity investment manager. Kobrick Funds manages three equity mutual funds with
$200 million in assets under management, with strong records since their
inception in 1998, and the potential for substantial growth. During the third
quarter of 1999, the fund trustees approved the restructuring of the funds'
share classes, enabling them to be distributed under the Kobrick name through
the New England Funds family and other centralized marketing groups of the
Operating Partnership. In addition, the Kobrick group assumed management of one
of the four segments of the New England Star Advisors Fund that was formerly
managed by an unaffiliated third party. The segment has $325 million in assets
and more than doubles the Kobrick group's assets under management.
Additionally, Nvest Services Company reached an agreement to operate as the
transfer agent for the Operating Partnership's largest mutual fund complex, The
Oakmark Family of Funds, including the new Oakmark Global Fund. Nvest Services
Company now acts as the transfer agent for four of the Operating Partnership's
mutual fund families, servicing approximately one million mutual fund accounts
and handling two million transactions annually.
REVENUES
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. Changes in assets under management, which can result from changes in
market values of securities, net client inflows or outflows, and acquisitions,
have a major impact on revenues earned by the Operating
19 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
Partnership. The Operating Partnership can also 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 in the recognition 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 plus non-cash charges for amortization of
intangibles and restricted unit plan compensation. During the first nine months
of 1999, the Operating Partnership declared distributions of $2.31 per unit,
compared to $2.28 per unit declared during the first nine months of 1998.
Distributions declared per unit represented approximately 92 percent of the
Operating Partnership's operating cash flow per unit for the first nine months
of 1999.
ASSETS UNDER MANAGEMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1999 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CLIENT TYPE (IN BILLIONS):
Institutional $ 80 $ 87 $ 87 $ 89 $ 82
Mutual Funds 33 36 35 36 35
Private Accounts and Other 12 12 11 11 10
---- ---- ---- ---- ----
$125 $135 $133 $136 $127
==== ==== ==== ==== ====
ASSET CLASS (IN BILLIONS):
Equity $ 55 $ 61 $ 58 $ 61 $ 54
Fixed Income 55 58 59 59 56
Money Market 9 10 10 10 11
Real Estate 6 6 6 6 6
---- ---- ---- ---- ----
$125 $135 $133 $136 $127
==== ==== ==== ==== ====
</TABLE>
Assets under management were $127 billion as of September 30, 1999. This
compares to $125 billion at September 30, 1998 and $136 billion at June 30,
1999. The $9 billion decline in assets under management during the third quarter
was due primarily to two factors: Nvest's asset concentration in equity assets
in value style portfolios and a loss of fixed income assets related to the
restructuring of Metropolitan Life Insurance Company of New York's ("MetLife")
General Account assets in anticipation of its planned demutualization.
20 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
Approximately 60% of Nvest's $61 billion of equity assets as of June 30, 1999
resided in value equity style portfolios that underperformed the broader
indices. For example, the Russell 1000 value index declined in the third quarter
by just under 10% as compared to the S&P 500, which was down 6.25%. Roughly $5
billion of the $7 billion decline in equity assets under management resulted
from negative market action. The remaining decline resulted from client net
outflows attributable to the relative underperformance of this asset class on
both a quarterly and longer term basis.
In addition, MetLife reassigned $3 billion of fixed income assets managed by
the Operating Partnership for structural, and not performance, reasons. As
part of MetLife's demutualization plan, these assets were assigned to a
"closed block" which is a less actively managed Treasury portfolio. MetLife
will manage this portfolio in house. The Operating Partnership continues to
work closely with MetLife to develop and distribute a number of products
through its institutional, agent and variable annuity channels, and currently
manages approximately $8.0 billion for these channels.
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Net income of $27.4 million for the three months ended September 30, 1999 was
slightly lower than $27.9 million for the three months ended September 30, 1998.
Higher compensation and occupancy expenses were mostly offset by decreases in
other expenses.
Management and advisory fees of $150.8 million for the three months ended
September 30, 1999 were basically flat compared to the three months ended
September 30, 1998. Average assets under management of $131.5 billion for the
third quarter of 1999 were up from $130.5 billion for the third quarter of 1998,
resulting in modest growth in asset based fees. In particular, growth in
revenues in risk-adjusted equity products, fixed income and money market
accounts more than offset the decline in revenues from value style equity
products.
Compensation and benefits of $82.6 million for the three months ended September
30, 1999 were up $1.1 million from $81.5 million for the three months ended
September 30, 1998. Base compensation increased $1.9 million as a result of
annual salary increases and increased staffing. Variable compensation, which
results from subsidiary incentive payments based on profitability, investment
portfolio performance, new business sales, and participation in the
subsidiaries' growth in revenues and profits, declined $0.7 million. Variable
compensation as a percentage of total compensation declined from 52% for the
third quarter of 1998 to 50% for the third quarter of 1999. The variable
compensation plans reward the subsidiaries for growth in their business, but
also require them to share in the impact of declines. In this way, the variable
compensation plans act to reduce fluctuations in the Operating Partnership's
profitability.
Occupancy, equipment and systems expense of $8.9 million for the three months
ended September 30, 1999 increased $1.0 million from $7.9 million for the three
months ended September 30, 1998 due to lease renewals at higher rates and costs
associated with expanded business activities.
Other expense of $25.8 million for the three months ended September 30, 1999
decreased $1.9 million from $27.7 million for the three months ended September
30, 1998. Increases in third party distribution expenses were more than offset
by decreases in discretionary expenses for marketing and advertising and other
subsidiary expenses.
21 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net income of $79.3 million for the nine months ended September 30, 1999
decreased $3.7 million from $83.0 million for the nine months ended September
30, 1998, primarily as a result of lower management and advisory fee revenues,
partially offset by expense savings in variable compensation and other expenses.
Management and advisory fees of $444.4 million for the nine months ended
September 30, 1999 decreased $16.0 million from $460.4 million for the nine
months ended September 30, 1998. Real estate transaction fees, the timing of
which is subject to the completion of specific transactions, declined
compared to the prior year, due to less activity by real estate investors,
including real estate investment trusts. Recurring asset based fees also
declined, due to the shift in the mix of the Operating Partnership's assets
under management from higher fee equity accounts to lower fee fixed income
accounts. Growth in revenues in risk-adjusted equity products and lower fee
fixed income and money market products only partially offset the decline in
revenues resulting from value style equity products.
Other revenues and interest income of $42.6 million for the nine months ended
September 30, 1999 increased $3.1 million from $39.5 million for the nine months
ended September 30, 1998. The increase resulted primarily from client servicing
fees, including transfer agency fees and trading commissions.
Compensation and benefits of $243.8 million for the nine months ended September
30, 1999 were down $5.2 million from $249.0 million for the nine months ended
September 30, 1998. Base compensation increased $8.8 million as a result of
annual salary increases and increased staffing. Variable compensation, which
results from subsidiary incentive payments based on profitability, investment
portfolio performance, new business sales, and participation in the
subsidiaries' growth in revenues and profits, declined $14.0 million. Variable
compensation as a percentage of total compensation declined from 54% for the
nine months ended September 30, 1998 to 49% for the nine months ended September
30, 1999. The variable compensation plans reward the subsidiaries for growth in
their business, but also require them to share in the impact of declines. In
this way, the variable compensation plans act to reduce fluctuations in the
Operating Partnership's profitability.
Occupancy, equipment and systems expense of $26.0 million for the nine months
ended September 30, 1999 increased $2.4 million from $23.6 million for the nine
months ended September 30, 1998 due to lease renewals at higher rates and costs
associated with expanded business activities.
Other expense of $78.3 million for the nine months ended September 30, 1999
decreased $7.4 million from $85.7 million for the nine months ended September
30, 1998. Increases in third party distribution expenses were more than offset
by decreases in discretionary expenses for marketing and advertising and other
subsidiary expenses.
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 the repurchase of units, is generally distributed to unitholders each
quarter. Distributions to unitholders are typically declared during the last
month of calendar quarters. The Operating Partnership has the ability to make
distributions in excess of net income due to its non-cash amortization expense.
On September 16, 1999, the Operating Partnership declared a distribution of
$0.77 per unit. On a per unit basis, the Operating Partnership paid out
approximately 92% of its operating cash flow in distributions during the first
nine months of 1999.
At September 30, 1999, the Operating Partnership had available $185 million in
credit lines.
22 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) YEAR 2000
The statements in this section include "Year 2000 readiness disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
The "Year 2000" issue refers to problems that may result from computer programs
that were written using two digits rather than four to define the applicable
calendar year. Any computer programs that have date-sensitive software or
hardware may recognize a date using "00" as the year 1900 rather than the year
2000 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 area
network (LAN) computer system. All of the operating companies lease their office
space from third parties and certain of the operating companies conduct business
through multiple locations in major cities. Although each operating company
conducts business independently, many of the companies use similar third party
software and have common relationships and dependencies with third party service
providers.
Management at each of the affiliated operating companies has responsibility for
ensuring that Year 2000 issues are addressed at the individual firm. Each
operating company has identified a Year 2000 project manager responsible for the
company's Year 2000 compliance effort. In addition to existing technical and
other personnel, certain of the operating companies have hired consultants to
assist them in various aspects of the process of identifying, assessing,
remediating and testing for their Year 2000 projects. The Operating Partnership
provides coordination and assistance to the operating companies and has
implemented regular meetings of the Year 2000 project managers at the operating
companies to enable them to share information and ideas and develop and
coordinate strategies. The Operating Partnership has also provided enhanced
access to industry-sponsored programs and testing initiatives and other
assistance to certain of the operating companies. Progress on Year 2000
initiatives is monitored by the audit committee of the board of directors of the
general partner of the Operating Partnership and by the audit committees of each
affiliated operating company.
The Operating Partnership and its affiliated operating companies have identified
three principal stages of their Year 2000 project management process:
- ASSESSMENT, including identification and inventory of: information
technology (IT) programs, systems and equipment; non-IT systems,
principally in buildings and offices; and external relationships
and dependencies with third parties. The assessment process
includes a determination of whether the identified elements are
Year 2000 compliant and, if necessary, the measures needed to be
taken to make them compliant;
- IMPLEMENTATION of repair, replacement and retirement projects
necessary for programs and systems that are not Year 2000
compliant; and
- TESTING of programs, systems, equipment and third party
relationships and dependencies.
23 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 (CONTINUED)
ASSESSMENT. The Operating Partnership and its affiliated operating companies
believe that they have identified all material programs, systems, equipment and
external relationships and dependencies. The key systems and processes involving
Year 2000 issues for the operating companies generally include computer hardware
and software relating to portfolio accounting systems and 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 completed the 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.
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 made significant progress in
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. All material
projects have been completed.
TESTING. The operating companies have also completed nearly all testing of
systems used in their operations. The scope of testing varies from firm to firm
depending on the nature of the firm's business and the need for testing. The
testing process has generally included 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 have completed all planned testing of
mission critical systems. Additional testing is expected to continue through the
remainder of the year. This process also involves examining the results of
testing of internal systems and external relationships and dependencies, as
appropriate, and review of information regarding the status of Year 2000
compliance programs of third parties with which the firms have relationships and
dependencies.
The Operating Partnership and the affiliated operating companies anticipate that
the aggregate cost to achieve Year 2000 compliance will total approximately $12
million. Most of these costs are capital expenditures for the replacement or
modification of hardware and software for Year 2000 compliance. This cost
estimate includes the actual amounts spent in 1997, 1998 and through September
30, 1999, and any remaining costs necessary to achieve Year 2000 compliance. It
includes 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 September 30, 1999, approximately $11 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 1999. Management believes the remaining cost of
implementing the action plans for Year 2000 compliance will not have a material
adverse effect on the operating results or financial condition of Nvest or the
Operating Partnership.
24 of 27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 (CONTINUED)
Each of the operating companies is developing contingency plans to address
potential Year 2000 problems associated with mission-critical internal systems
and third party relationships and dependencies. These plans will vary depending
on each company's business needs. All of the companies have made substantial
progress in developing contingency plans.
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.
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 material adverse effect on the results of
operations and business of the Operating Partnership as a whole. This could, in
turn, have a material adverse effect on the results of operations of Nvest.
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.
25 of 27
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
26 of 27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nvest, L.P.
Registrant
/s/ G. Neal Ryland November 15, 1999
- ------------------------------------- -------------------
G. Neal Ryland Date
Executive Vice President and
Chief Financial Officer
/s/ Kevin P. Charleston November 15, 1999
- ------------------------------------- --------------------
Kevin P. Charleston Date
Senior Vice President
(Principal Accounting Officer)
27 of 27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 FORM 10-Q OF NVEST, L.P.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 4,863
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,866
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,259
<CURRENT-LIABILITIES> 4,721
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 63,538
<TOTAL-LIABILITY-AND-EQUITY> 68,259
<SALES> 0
<TOTAL-REVENUES> 11,800
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,170
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,170
<EPS-BASIC> 1.44
<EPS-DILUTED> 1.44
</TABLE>
