SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10994
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For the quarterly period ended September 30, 1996
PHOENIX DUFF & PHELPS CORPORATION
DELAWARE 95-4191764
(State of Incorporation) (I.R.S. Employer Identification No.)
56 Prospect St.,
Hartford, Connecticut 06115-0480 (860) 403-5000
(Address of principal executive office) (Registrant's telephone number)
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.___
On October 31, 1996, the registrant had 44,037,416 shares of $.01 par value
common stock outstanding.
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION AND SUBSIDIARIES
Quarter Ended September 30, 1996
Index
PART I - FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements:
Consolidated Condensed Statements of Financial Condition. 3
September 30, 1996 and December 31, 1995
Consolidated Statements of Income ....................... 4
Three Months Ended September 30, 1996 and
Three Months Ended September 30, 1995
Consolidated Statements of Income........................ 5
Nine Months Ended September 30, 1996 and
Nine Months Ended September 30, 1995
Consolidated Condensed Statements of Cash Flows ......... 6
Nine Months Ended September 30, 1996 and
Nine Months Ended September 30, 1995
Notes to the Consolidated Financial Statements........... 7 - 9
Item 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition............ 10 - 13
PART II - OTHER INFORMATION:
Signatures....................................................... 14
<PAGE>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Condensed Statements of Financial Condition
(In thousands)
<TABLE>
(Unaudited)
September 30, December 31,
1996 1995
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 22,680 $ 16,306
Marketable securities, at market 3,984 3,473
Accounts receivable 26,673 32,024
Prepaid expenses and other assets 1,439 1,816
---------- ---------
Total current assets 54,776 53,619
Deferred commissions 17,313 13,139
Furniture, equipment and leasehold improvements, net 8,316 8,262
Goodwill and intangible assets, net 229,128 230,569
Investment in Beutel, Goodman & Company Ltd. 34,541 39,730
Long-term investments and other assets 13,863 11,300
---------- ----------
Total assets $ 357,937 $ 356,619
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 7,804 $ 12,317
Payables to related parties 3,069 11,833
Broker-dealer payable 7,436 8,520
--------- ----------
Total current liabilities 18,309 32,670
Deferred taxes 34,585 30,572
Long-term debt 23,100 23,500
Lease obligations and other long-term liabilities 8,173 10,358
--------- ----------
Total liabilities 84,167 97,100
--------- ----------
Contingent Liabilities
Series A Convertible Exchangeable Preferred Stock 78,512 78,029
--------- ----------
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares authorized,
43,934,499 and 43,563,521 shares issued and outstanding 440 436
Additional paid-in capital 185,305 181,700
Retained earnings 9,946
Net unrealized loss on securities available for sale ( 81) (192)
Foreign currency translation (352) (454)
----------- ----------
Total stockholders' equity 195,258 181,490
---------- ----------
Total liabilities and stockholders' equity $ 357,937 $ 356,619
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
<TABLE>
Three months ended September 30,
1996 1995
<S> <C> <C>
Revenues
Investment management fees $ 28,833 $ 20,313
Mutual funds - ancillary fees 5,660 4,240
Underwriting fees 450 265
Other income and fees 985 1,681
------------ -----------
Total revenues 35,928 26,499
---------- ----------
Operating Expenses
Employment expenses 12,694 7,787
Other operating expenses 8,319 9,305
Depreciation and amortization of
leasehold improvements 540 189
Amortization of goodwill and intangible assets 2,436 468
Amortization of deferred commissions 1,531 1,749
----------- -----------
Total operating expenses 25,520 19,498
---------- ----------
Operating Income 10,408 7,001
---------- -----------
Other Income - Net 912
----------- ----------
Interest Expense - Net
Interest expense 409 556
Interest income (475) (338)
----------- -----------
Total interest expense - net (66) 218
------------ ------------
Income before income taxes 11,386 6,783
Provision for income taxes 5,056 2,373
----------- -----------
Net Income 6,330 4,410
Series A preferred stock dividends 1,184
--------- ---------
Income available to common stockholders $ 5,146 $ 4,410
========== =========
Weighted average shares outstanding
Primary 44,088
Fully diluted 53,944
Earnings per share
Primary $ .12
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
<TABLE>
Nine months ended September 30,
1996 1995
<S> <C> <C>
Revenues
Investment management fees $ 89,132 $ 58,511
Mutual funds - ancillary fees 14,468 12,674
Financial consulting fees 5,050
Underwriting fees 1,817 850
Investment research and securities revenue 2,649
Other income and fees 3,124 3,539
----------- ----------
Total revenues 116,240 75,574
----------- ----------
Operating Expenses
Employment expenses 44,882 21,937
Other operating expenses 28,332 25,154
Depreciation and amortization of
leasehold improvements 1,624 591
Amortization of goodwill and intangible assets 7,266 1,400
Amortization of deferred commissions 4,155 5,851
---------- ---------
Total operating expenses 86,259 54,933
---------- ---------
Operating Income 29,981 20,641
--------- ---------
Other Income - Net 4,425
--------- ---------
Interest Expense - Net
Interest expense 1,319 1,763
Interest income (1,456) (1,058)
----------- ----------
Total interest expense - net (137) 705
------------ -----------
Income before income taxes 34,543 19,936
Provision for income taxes 14,508 8,466
----------- ----------
Net Income 20,035 11,470
Series A preferred stock dividends 3,529
--------- ---------
Income available to common stockholders $ 16,506 $ 11,470
========== =========
Weighted average shares outstanding
Primary 44,004
Fully diluted 53,898
Earnings per share
Primary $ .38
Fully diluted $ .37
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
Nine months ended September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,035 $ 11,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,624 591
Amortization of goodwill and intangible assets 7,266 1,400
Amortization of deferred commissions 4,155 5,851
Payment of deferred commissions (8,329) (3,563)
Changes in other operating assets and liabilities (4,616) (3,248)
Unrealized (appreciation) depreciation on
mutual fund investments 27 (345)
--------- ---------
Net cash provided by operating activities 20,162 12,156
--------- ---------
Cash flows from investing activities:
Duff & Phelps Capital Markets transaction (5,228)
Purchase of marketable securities, net (538) (170)
Change in long-term investments, net 2,672
Capital expenditures, net (2,354) (579)
---------- -----------
Net cash used in investing activities (5,448) (749)
---------- -----------
Cash flows from financing activities:
Dividends paid (10,089) (6,000)
Repayment under note payable agreement (4,517)
Repayment of long-term debt, net (400)
Proceeds from issuance of stock 2,149
----------- ----------
Net cash used in financing activities (8,340) (10,517)
----------- ----------
Net increase in cash and cash equivalents 6,374 890
Cash and cash equivalents, beginning of period 16,306 11,433
---------- ---------
Cash and cash equivalents, end of period $ 22,680 $ 12,323
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Phoenix Duff & Phelps Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements of Phoenix Duff & Phelps
Corporation (PDP or the Company) included herein have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and notes
included in PDP's Annual Report incorporated by reference in PDP's Form 10-K
for the year ended December 31, 1995.
The accompanying consolidated financial statements for the third quarter and
nine months of 1995 include only the accounts of Phoenix Securities Group,
Inc. (PSG) and its wholly-owned subsidiaries.
2. Organization
As described more fully in Notes 1 and 3 to PDP's Annual Report for the year
ended December 31,1995,PDP was formed on November 1, 1995 when PSG merged
into Duff & Phelps Corporation (D&P) (the Merger). The transaction has been
accounted for as a purchase of D&P by PSG and these financial statements
reflect management's current estimate of the purchase price allocation which
is in the process of being finalized.
3. Dividends and Other Capital Transactions
For the three and nine month periods ended September 30, 1996, earnings per
share were computed using weighted average shares of common stock and common
stock equivalents outstanding. Common stock equivalents are based on
outstanding stock options under nonqualified stock option plans.
On November 7, 1996, the Company's Board of Directors approved quarterly
dividends of $.06 per common share and $.375 per preferred share, payable
December 10, 1996 to stockholders of record on November 29, 1996. In
addition, the Board of Directors approved the repurchase of up to 2 million
shares of outstanding common stock, effective immediately. Repurchases will
be made on the open market or through privately negotiated transactions at
market prices.
4. Investment in Beutel, Goodman & Company Ltd.
At September 30, 1996, PDP had a 49% interest in the outstanding common stock
of Beutel, Goodman & Company Ltd. (BG). BG is a Canadian-based investment
counseling firm with approximately $8.9 billion in assets under management at
September 30, 1996. In addition, PDP held approximately $3.0 million of 8.5%
BG debentures due 2003.
The September 30, 1996 consolidated condensed statement of financial
condition and income statement contain the following components related to
the BG investment (in thousands):
<TABLE>
Statement of Financial Condition:
<S> <C> <C>
Acquisition costs of investment in BG's
common stock and debentures $ 33,404
Equity in BG net income 3,228
Dividends received (228)
Amortization of BG acquisition costs (1,267)
Currency translation adjustments (352)
Deferred taxes on translation adjustments (244)
-----------
Total BG investment $ 34,541
---------
Three months Nine months
ended ended
September 30, 1996
Statement of Income:
Equity in BG net income $ 934 $ 2,744
Amortization (344) (1,119)
Interest income - BG debentures 106 404
--------- ---------
Total BG income $ 696 $ 2,029
========= ==========
</TABLE>
7
<PAGE>
The PDP consolidated condensed statement of financial condition contains
currency translation adjustments, related to the investment in BG, as a
component of stockholders' equity. These losses, resulting from the
translation of foreign currency, are deferred and accumulated in
stockholders' equity until the investment in BG is sold or substantially
liquidated.
The following reflects summarized BG financial information for the nine
months ended September 30, 1996 (in thousands):
Total revenues $ 21,716
Net income 5,165
5. CBO Investments
For the nine months ended September 30, 1996, the Company's equity interests,
in the earnings of D&P CBO Partners, L.P. and Windy City CBO Partners, L.P.
(WCCBO), inclusive of zero and $81,000 of unrealized losses on securities
included in stockholder's equity, were zero and $1.4 million,
respectively. The Company's undistributed earnings in investments at
September 30, 1996 in D&P CBO Partners, L.P. and Windy City CBO Partners,
L.P. were zero and $8.9 million, respectively. In addition, the Company
received management fees of approximately $358,000 from Windy City CBO
Partners, L.P. for the nine month period ended September 30, 1996.
6. Capital Markets
On May 14, 1996 the Company announced that it was exiting the fee based
investment research and financial consulting businesses which were
acquired in the Merger. Substantially all of the fee based investment
research activities were immediately closed and on July 1, 1996 the
Company completed the sale of certain assets of the financial consulting
and underwriting businesses to several former key executives. These
divestitures were contemplated at the time of the Merger. The financial
effects of these divestitures were treated as adjustments to the purchase
price of D&P.
7. Third Quarter 1996 Compared to Pro Forma Third Quarter 1995
PDP results from the Merger on November 1, 1995 of the businesses of PSG and
D&P. The Merger was accomplished by the contribution by PM Holdings, Inc.
(PSG's parent) of the businesses and substantially all of the assets of PSG
to D&P in exchange for an approximately 60% interest in the combined entity.
The Merger was accounted for as an acquisition of D&P by PSG using the
purchase accounting method (a "reverse acquisition"). Under this accounting
treatment, the 1995 financial statements include only the operations of
PSG prior to the Merger and the combined operations of PSG and D&P from
the date of the Merger. Because this accounting treatment makes it
difficult to analyze and compare the historical financial statements,
management believes the most meaningful financial presentation for the
third quarter and first nine months of 1995 is on a pro forma basis.
The following pro forma financial information for the three and nine months
ended September 30, 1995 is derived from the historical financial statements
of PSG and D&P, and gives effect to the Merger of PSG and D&P and certain
transactions effected by PSG and D&P in connection with the Merger. The pro
forma financial information has been prepared assuming these transactions and
arrangements were effected on January 1, 1995.
8
<PAGE>
The financial information for the three and nine months ended September 30,
1996 reflects actual results for the periods. The 1995 pro forma information
does not necessarily reflect the actual results that would have been obtained
had the Merger taken effect on the aforementioned assumed date.
<TABLE>
Three months ended Nine months ended
September 30, September 30,
1996-Actual 1995-Pro Forma 1996-Actual 1995-Pro Forma
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 35,928 $ 42,837 $ 116,240 $ 123,253
--------- --------- --------- ---------
Expenses
Employment expenses 12,694 14,617 44,882 42,530
Other expenses 10,390 13,910 34,111 40,469
Amortization of goodwill
and intangible assets 2,436 2,436 7,266 7,266
---------- -------- ---------- ----------
25,520 30,963 86,259 90,265
----------- -------- ---------- ----------
Operating Income 10,408 11,874 29,981 32,988
Other Income - Net 912 (157) 4,425 1,195
Interest Income - Net 66 127 137 258
---------- ---------- ---------- -----------
Income before income taxes 11,386 11,844 34,543 34,441
Provision for income taxes 5,056 5,105 14,508 15,036
--------- --------- --------- ----------
Net Income $ 6,330 $ 6,739 $ 20,035 $ 19,405
========= ========== ========== ==========
Earnings per common and
common equivalent share
Primary $ .12 $ .13 $ .38 $ .36
Assuming full dilution $ .13 $ .37 $ .36
</TABLE>
8. Recent Accounting Pronouncement
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," was adopted by PDP in 1996. SFAS No. 121 mandates specific methodologies
to be used for identifying and measuring the impairment of long-lived assets.
Management has determined that the adoption of SFAS No. 121 did not
materially impact the consolidated financial statements.
9. Subsequent Event
PDP, through its investments in two limited partnerships, has a beneficial
ownership interest in approximately 270,000 shares of the common stock of
National-Oilwell, Inc. On October 28, 1996 National-Oilwell, Inc.
successfully completed an initial offering of 4 million shares which are
traded on the New York Stock Exchange (Symbol: NOI).
9
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Assets Under Management
- -----------------------
At September 30, 1996, Phoenix Duff & Phelps had $33.5 billion of assets under
management, down $3.6 billion (9.7%) from September 30, 1995, on a pro forma
basis and $560 million (1.6%) from June 30, 1996. Since the revenues of the
Company are substantially based upon assets under management this information is
important to an understanding of the business.
<TABLE>
Pro Forma Actual Actual Actual
September 30, December 31, June 30, September 30,
1995 1995 1996 1996
------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Open-end mutual funds $ 11,037 $ 11,141 $ 11,664 $ 11,511
Closed-end funds 2,894 3,056 2,949 2,867
Institutional 17,042 14,626 12,860 12,387
General account 6,142 6,223 6,595 6,743
--------- --------- --------- ---------
$ 37,115 $ 35,046 $ 34,068 $ 33,508
========= ========= ========= =========
</TABLE>
Three Months Ended September 30, 1996 Compared With Three Months Ended
September 30, 1995 - Historical
- ----------------------------------------------------------------------
The historical financial statements reflect the results of operations of
only PSG for the third quarter of 1995 and the consolidated results of the
Company for the third quarter of 1996.
Revenues for the three months ended September 30, 1996 were $35.9 million, a
$9.4 million (36%) increase from the $26.5 million in revenues for the
corresponding period in 1995 reflecting the inclusion of $10.7 million of D&P's
revenues in 1996. The remaining decrease of $1.3 million is attributable to a
decrease in management fees, particularly related to the decrease in
institutional assets under management, and B share redemption fee income
offset in part by an increase in net distributor fees paid resulting from
increased sales of B shares in 1996.
Operating expenses for the three months ended September 30, 1996 of $25.5
million increased by $6.0 million (31%) from $19.5 million for the corresponding
period in 1995 reflecting the inclusion of $6.8 million of D&P's operating
expenses in 1996. PSG's operating expenses decreased $797,000 for the three
months ended September 30, 1996 compared to the same period in 1995. PSG's
employment expenses increased $806,000 principally due to increased sales
based and performance based compensation and annual salary adjustments.
Amortization of goodwill and intangible assets, a non-cash expense, increased
$1.6 million in the third quarter of 1996 reflecting amortization of
goodwill and intangible assets resulting from the Merger. These increases were
offset principally by decreases in PSG's other operating expenses ($3.2
million) reflecting the reduction in PSG's share of PHL's corporate expenses as
agreed to at the time of the Merger and reduced amortization of deferred
commissions ($218,000).
Operating income increased $3.4 million (49%) to $10.4 million for the three
months ended September 30, 1996 compared to the same period in 1995 as a result
of the changes discussed above.
Net income of $6.3 million in the third quarter of 1996 reflects an increase of
$1.9 million (44%) over the same period in 1995 resulting from the effects of
the increased operating income and expenses, as discussed above, and a decrease
in interest expense of $147,000 reflecting the difference in interest charged in
1995 on PSG's note payable, which was converted to stock at the time of the
Merger, and that charged in 1996 on the revolving credit facility. The effective
tax rate was 44% in the third quarter of 1996 as a result of changes in the
expense sharing arrangements among certain subsidiaries offset in part by a
decrease in the rate resulting from a change enacted by the state of
Connecticut. The change, enacted in May of 1996 and retroactive to
January 1, 1996, modified the method of apportioning income for investment
advisors.
10
<PAGE>
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
September 30, 1995 - Historical
- ----------------------------------------------------------------------
The historical financial statements reflect the results of operations of
only PSG for the nine months ended September 30, 1995 and the consolidated
results of the Company for the same period in 1996.
Revenues for the nine months ended September 30, 1996 were $116.2 million, a
$40.6 million (54%) increase from the $75.6 million for the corresponding period
in 1995 reflecting the inclusion of $40.7 million of D&P's revenues in 1996.
PSG's revenues for the nine months ended September 30, 1996 were consistent with
1995. PSG's investment management fees were down $266,000, the net effect of a
$2.2 million decrease from the loss of certain institutional accounts, offset
by a $2.0 million increase in fees earned managing Phoenix Home Life Mutual
Insurance Company's (PHL) general account and PHL sponsored variable
products. PSG's redemption fee income decreased by $1.7 million, while
underwriting and distributor fees increased by $1.9 million.
Operating expenses for the nine months ended September 30, 1996 of $86.3 million
increased by $31.4 million (57%) from $54.9 million from the corresponding
period in 1995 reflecting the inclusion of $29.0 million of D&P's operating
expenses in 1996. PSG's expenses increased by $2.3 million in 1996 over the same
period in 1995. PSG had increased employment expenses of $2.5 million related to
an expansion of the sales force, an increase in sales based and performance
based incentive compensation and annual salary adjustments. Amortization of
goodwill and intangible assets, a non-cash expense, increased $4.8 million as a
result of the Merger. These increases were offset, in part, by reductions in
other operating expenses ($5.2 million) primarily relating to cost savings
achieved by the Merger and reduced amortization of deferred commissions
($1.7 million).
Operating income increased $9.3 million (45%) to $30.0 million for the nine
months ended September 30, 1996 compared to the same period in 1995 as a result
of the changes discussed above.
Net income for the nine months ended September 30, 1996 of $20.0 million
reflects an increase of $8.6 million (75%) over the $11.5 million for the same
period in 1995 resulting from the effects of the increased operating income and
expenses, as discussed above. In addition, interest expense decreased $444,000
in 1996 reflecting the difference in interest charged on PSG's note payable,
which was converted to preferred stock at the time of the Merger, and that
charged in 1996 on the revolving credit facility. The effective tax rate
remained flat at 42% for the first nine months of 1996, as compared to the same
period in 1995, as increases resulting from changes in the expense sharing
arrangements among certain subsidiaries were offset by a decrease resulting from
a change enacted by the state of Connecticut. The change, enacted in May of 1996
and retroactive to January 1, 1996, modified the method of apportioning income
for investment advisors.
Three Months Ended September 30, 1996 Compared With Three Months Ended
September 30, 1995 - Pro Forma (See Note 7)
- -----------------------------------------------------------------------
Investment management fees of $28.8 million for the three months ended September
30, 1996 were down $3.1 million (10%) as compared to the pro forma results of
$31.9 million for the same period a year ago as a result of lower overall assets
under management due principally to the loss of certain institutional accounts.
The most significant account loss (and one that was known at the time of the
Merger) was the AAL Mutual Funds account which generated fees for the Company of
approximately $1.1 million in the third quarter of 1995.
For the three months ended September 30, 1996, no financial consulting fees were
earned, due to the July 1, 1996 closure of Duff & Phelps Capital Markets Co.,
compared to $3.1 million in 1995. This sale was contemplated at the time of the
Merger. (See Note 6 to the consolidated financial statements.)
No investment research and securities revenues were earned for the three months
ended September 30, 1996, as these businesses closed down in May of 1996.
Revenues of $1.1 million were earned in the prior year.
Underwriting fees of $450,000 for the third quarter of 1996 were up by $161,000
from $289,000 for the same period in 1995 principally as a result of
increased sales of retail mutual funds.
Mutual funds - ancillary fees of $5.7 million increased $1.4 million (33%),
compared to the same period of 1995, primarily due to an increase in net
distributor fees in the third quarter of 1996 in part as a result of
increased sales of B share mutual funds.
Other income and fees of $985,000 in the third quarter of 1996 were down $1.2
million (55%) from $2.1 million for the same period in 1995 primarily as a
result of a reduction in redemption fee income.
11
<PAGE>
Employment expenses of $12.7 million for the third quarter of 1996 were down
$1.9 million (13%) as compared to the third quarter of 1995 primarily due to the
elimination of commissions, payroll and incentive based compensation for the
employees of Duff & Phelps Capital Markets Co., Duff & Phelps Securities Co. and
Duff & Phelps Investment Research. As discussed previously, the financial
consulting and underwriting businesses of Duff & Phelps Capital Markets Co. were
sold to former key executives and the fee based research operations were
discontinued on May 14, 1996. The decrease in employment expenses was offset, in
part, by increased sales based incentive compensation due to the aforementioned
increased sales of mutual funds, the expansion of the sales force and the effect
of annual salary adjustments. In addition, certain costs associated with data
processing activities previously performed by PHL personnel, which were charged
to the Company as an administrative cost and included in other operating
expenses, are included in employment expenses in 1996 as these activities are
now performed by Company personnel. The costs associated with these data
processing activities were approximately $500,000 in the third quarter of 1996.
Other operating expenses decreased $3.4 million (29%) to $8.3 million in the
third quarter of 1996 from $11.7 million for the third quarter of 1995. The
decrease is attributable, in part, to approximately $500,000 less in data
processing costs in the third quarter of 1996 as compared to the same period in
1995 due to the change discussed above. The remaining reduction can be
attributed to costs savings of approximately $700,000 achieved by the
divestiture of Duff & Phelps Capital Markets Co. and the presence in 1995 of
$700,000 of transaction costs relating to a merger which was never completed as
well as reductions in various operating expenses. Amortization of deferred
commissions of $1.5 million for the third quarter of 1996 was down $218,000
from the third quarter of 1995.
Other Income - Net of $912,000 for the third quarter of 1996 increased $1.1
million as compared to the same period in 1995 due in large part to a net
increase of $600,000 in the equity income earned by the Company on its
investments in WCCBO offset by the Company's $500,000 share of losses
attributable to an investment in a start-up enterprise. In addition, the third
quarter of 1995 included an $800,000 loss reflecting the Company's share of the
Duff & Phelps/Inverness LLC joint venture's losses.
The provision for income taxes of $5.1 million for the third quarter of 1996
decreased by $49,000 from the third quarter of 1995 while the Company's
effective tax rate increased from 43% to 44%. This increase is attributable to
changes in the expense sharing arrangements among certain subsidiaries offset in
part by a change enacted by the state of Connecticut, in May of 1996, in the
method of apportioning income for investment advisors. This change was
retroactive to January 1, 1996. Additionally, the third quarter of 1996 income
tax expense, includes certain provisions to actual adjustments resulting from
the final tax filings for 1995.
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
September 30, 1995 - Pro Forma (See Note 7)
- ---------------------------------------------------------------------
Investment management fees of $89.1 million for the nine months ended September
30, 1996 were down $3.1 million (3%) as compared to the pro forma results of
$92.2 million for the same period in 1995, primarily due to reduced fees related
to the loss of certain institutional accounts, the most significant being the
AAL Mutual Funds account which generated $3.0 million in fees in the first nine
months of 1995. The remaining institutional account losses were offset by
increased fees earned for managing Phoenix Home Life Mutual Insurance Company's
(PHL) general account and PHL sponsored variable products, as compared to the
same period in 1995.
Financial consulting fees of $5.1 million earned by Duff & Phelps Capital
Markets Co. for the nine months ended September 30, 1996 decreased $3.0 million
compared to the fees earned during the same period a year ago as a result of
Duff & Phelps Capital Markets Co. ceasing operations July 1, 1996.
Investment research and securities revenues of $2.6 million decreased $1.6
million (38%) for the nine months ended September 30, 1996 as compared to $4.2
million for the same period in the prior year primarily as a result of the
closure, in May of 1996, of the fee based investment research and securities
businesses.
Underwriting fees of $1.8 million for the nine months ended September 30, 1996
were up $863,000 (90%) from $954,000 in the first nine months of 1995 due to
increased sales of retail mutual funds and securities underwriting.
Mutual funds - ancillary fees of $14.5 million increased $1.8 million (14%),
compared to the same period of 1995, primarily due to an increase of $1.5
million in net distributor fees in the third quarter of 1996 resulting from
increased sales of B share mutual funds.
Other income and fees of $3.1 million in the first nine months of 1996 were down
$1.9 million (38%) from $5.0 million for the same period in 1995 primarily as a
result of a $1.7 million reduction in redemption fee income due to a decline
in B share redemptions.
12
<PAGE>
Employment expenses of $44.9 million for the nine months ended September 30,
1996 were up $2.4 million (6%) over the first nine months of 1995. This increase
resulted from the previously discussed inclusion of $1.5 million in payroll
costs associated with data processing activities and increased sales based and
performance based incentive compensation of approximately $2.4 million resulting
from increased sales of mutual funds, the expansion of the sales force as well
as annual salary adjustments for the Company's employees. These increases were,
in part, offset by a decrease of $2.8 million in employment expenses related to
Duff & Phelps Capital Markets Co. which, as previously mentioned, ceased
operations on July 1, 1996.
Other operating expenses decreased $5.0 million (15%) from $33.3 million for the
first nine months of 1995 to $28.3 million in 1996. This expense reduction was
due to the previously discussed closure of Duff & Phelps Capital Markets Co.
and a decrease in administrative costs related to data processing of
approximately $1.5 million. Other operating expenses in 1995 included
$1.3 million associated with an uncompleted merger and a nonrecurring bad
debt expense of $419,000.
Depreciation, a non-cash expense, increased by $352,000 from $1.3 million for
the period ended September 30, 1995 compared to $1.6 million in the first nine
months of 1996 due to the Company's January 1, 1996 purchase of certain assets,
previously leased from PHL.
Amortization of deferred commissions of $4.2 million for the nine months ended
September 30, 1996 was down $1.7 million from the same period in 1995.
Other Income - Net of $4.4 million for the nine months ended September 30, 1996
increased $3.0 million as compared to the same period in 1995 due to an increase
in equity income of $1.5 million from WCCBO. In addition, the Company's share of
the Duff & Phelps/Inverness LLC joint venture income increased $1.5 million
in the first quarter of 1996 as a result of the joint venture's advisory fee
income recognition on a significant first quarter transaction. A $500,000 loss
was recognized in the third quarter of 1996 representing the Company's share of
losses attributable to an investment in a start-up enterprise.
The provision for income taxes of $14.5 million for the nine months ended
September 30, 1996 declined $528,000 from the same period in 1995. This
reduction is attributable to the change in Connecticut tax law (previously
discussed), partly offset by changes in expense sharing arrangements.
Liquidity and Capital Resources
- -------------------------------
PDP has $22.7 million of cash and cash equivalents at September 30, 1996. The
cash is available for general corporate purposes including the financing of
brokers' commissions with respect to sales of mutual funds distributed without a
front-end load.
The Company's bank credit agreement provides for a $33.5 million, three year
revolving credit facility. As of September 30, 1996, $23.1 million was
outstanding. The credit agreement contains financial and operating covenants,
with which the Company is in compliance, including, among other provisions,
requirements that the Company maintain certain financial ratios and satisfy
certain financial tests, restrictions on the ability to incur indebtedness, and
limitations on the amount of the Company's capital expenditures. Commitment fees
are accrued on the unused facility at a rate of .25% per annum and are paid
quarterly.
The Company believes that funds from operations and amounts available under the
credit agreement will provide adequate liquidity for the foreseeable future.
13
<PAGE>
PART II. Other Information
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.
Phoenix Duff & Phelps Corporation
November 14, 1996 /s/ Francis E. Jeffries
------------------------
Francis E. Jeffries, Chairman
November 14, 1996 /s/ Philip R. McLoughlin
-------------------------
Philip R. McLoughlin, Vice Chairman and CEO
November 14, 1996 /s/ William R. Moyer
---------------------
William R. Moyer, Chief Financial Officer
14
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