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
--------------
For the quarterly period ended September 30, 1997
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 offices)
(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, 1997, the registrant had 44,090,261 shares of $.01 par value
common stock outstanding.
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION AND SUBSIDIARIES
Quarter Ended September 30, 1997
Index
PART I - FINANCIAL INFORMATION:
Page
----
Item 1. Consolidated Financial Statements:
Consolidated Condensed Statements of Financial Condition. 3
September 30, 1997 and December 31, 1996
Consolidated Statements of Income ....................... 4
Three Months Ended September 30, 1997 and
Three Months Ended September 30, 1996
Consolidated Statements of Income ....................... 5
Nine Months Ended September 30, 1997 and
Nine Months Ended September 30, 1996
Consolidated Condensed Statements of Cash Flows ......... 6
Nine Months Ended September 30, 1997 and
Nine Months Ended September 30, 1996
Notes to the Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition............ 12
Liquidity and Capital Resources ......................... 16
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders...... 17
Item 6. Exhibits and Reports on Form 8-K......................... 17
Signatures...................................................... 18
2
<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>
<CAPTION>
(Unaudited)
September 30,December 31,
1997 1996
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 58,485 $ 22,466
Marketable securities, at market 12,932 4,070
Accounts receivable 29,997 25,668
Prepaid expenses and other current assets 1,865 4,287
--------- --------
Total current assets 103,279 56,491
Deferred commissions 3,601 17,749
Furniture, equipment and leasehold improvements, net 10,509 8,377
Goodwill and intangible assets, net 473,360 226,754
Investment in Beutel, Goodman & Company Ltd. 31,214 31,746
Long-term investments and other assets 28,106 24,567
--------- --------
Total assets $ 650,069 $365,684
========== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 25,623 $ 13,306
Due to seller 31,576
Short-term notes payable 9,497
Payables to related parties 5,286 3,874
Broker-dealer payable 7,664 8,487
Current portion of long-term debt 2,500
--------- --------
Total current liabilities 79,646 28,167
Deferred taxes, net 71,458 33,860
Long-term debt, net of current portion 191,938 14,000
Lease obligations and other long-term liabilities 9,288 7,884
--------- --------
Total liabilities 352,330 83,911
--------- --------
Minority Interest 552
Series A Convertible Exchangeable Preferred Stock 78,822 78,504
-------- --------
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares authorized,
44,290,261 and 44,037,416 shares issued, 44,090,261 and
44,037,416 shares outstanding and 200,000 and zero shares
held in treasury 443 440
Additional paid-in capital 188,532 185,415
Retained earnings 18,484 12,812
Net unrealized gain on securities available for sale 12,957 4,932
Foreign currency translation (501) (330)
Treasury stock (1,550)
--------- --------
Total stockholders' equity 218,365 203,269
--------- --------
Total liabilities and stockholders' equity $ 650,069 $365,684
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three months ended September 30,
1997 1996
<S> <C> <C>
Revenues
Investment management fees $ 36,565 $ 28,833
Mutual funds - ancillary fees 5,152 6,110
Other income and fees 532 985
--------- --------
Total revenues 42,249 35,928
--------- --------
Operating Expenses
Employment expenses 18,247 12,694
Other operating expenses 10,191 8,319
Depreciation and amortization of
leasehold improvements 697 540
Amortization of goodwill and intangible assets 3,672 2,436
Amortization of deferred commissions 1,531
--------- --------
Total operating expenses 32,807 25,520
--------- --------
Operating Income 9,442 10,408
--------- --------
Other Income - Net 1,335 912
--------- --------
Interest (Expense) Income - Net
Interest expense (1,505) (409)
Interest income 776 475
--------- --------
Total interest (expense) income - net (729) 66
--------- --------
Income to Minority Interest (290)
Income before income taxes 9,758 11,386
Provision for income taxes 3,676 5,056
--------- --------
Net Income 6,082 6,330
Series A preferred stock dividends 1,188 1,184
--------- --------
Income available to common stockholder $ 4,894 $ 5,146
========= ========
Weighted average shares outstanding
Primary 44,696 44,088
Fully diluted 54,599 53,944
Earnings per share
Primary $ .11 $ .12
Fully diluted $ .12
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended September 30,
1997 1996
<S> <C> <C>
Revenues
Investment management fees $ 92,248 $ 89,132
Mutual funds - ancillary fees 16,304 16,285
Financial consulting and investment research fees 7,699
Other income and fees 2,758 3,124
--------- --------
Total revenues 111,310 116,240
--------- --------
Operating Expenses
Employment expenses 49,001 44,882
Other operating expenses 27,243 28,332
Depreciation and amortization of
leasehold improvements 1,944 1,624
Amortization of goodwill and intangible asset,net 8,403 7,266
Amortization of deferred commissions 2,836 4,155
--------- --------
Total operating expenses 89,427 86,259
--------- --------
Operating Income 21,883 29,981
--------- --------
Other Income - Net 764 4,425
--------- --------
Gain on Sale 6,907
Interest (Expense) Income - Net
Interest expense (1,954) (1,319)
Interest income 1,399 1,456
--------- --------
Total interest (expense) income - net (555) 137
--------- --------
Income to Minority Interest (290)
Income before income taxes 28,709 34,543
Provision for income taxes 11,541 14,508
--------- --------
Net Income 17,168 20,035
Series A preferred stock dividends 3,562 3,529
--------- --------
Income available to common stockholders $ 13,606 $ 16,506
========= ========
Weighted average shares outstanding
Primary 44,555 44,004
Fully diluted 54,488 53,898
Earnings per share
Primary $ .31 $ .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
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,168 $ 20,035
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of leasehold improvements 1,944 1,624
Amortization of goodwill and intangible assets 8,403 7,266
Amortization of deferred commissions 2,836 4,155
Income to minority interest 290
Equity earnings of unconsolidated affiliates (658) (4,675)
Payments of deferred commissions (4,444) (8,329)
Gain on sale of deferred commissions asset (6,907)
Changes in other operating assets and liabilities (488) (4,616)
Unrealized (appreciation) depreciation on mutual fund
investments (197) 27
-------- --------
Net cash provided by operating activities 17,947 15,487
-------- --------
Cash flows from investing activities:
Purchase of subsidiaries, net of cash acquired (179,075)
Duff & Phelps Capital Markets transaction (5,228)
Proceeds from the sale of deferred commissions asset 26,015
Proceeds from long-term investments 11,246 2,672
Purchase of partnership interest (2,220)
Other investing activities 6,532 4,137
Capital expenditures, net (1,726) (2,354)
-------- ---------
Net cash used in investing activities (139,228) (773)
-------- ---------
Cash flows from financing activities:
Borrowing (repayment) of long-term debt, net 168,833 (400)
Dividends paid (11,496) (10,089)
Stock repurchase (1,550)
Other financing activities (140)
Proceeds from issuance of stock 1,653 2,149
-------- --------
Net cash provided by (used in)financing activities 157,300 (8,340)
-------- --------
Net increase in cash and cash equivalents 36,019 6,374
Cash and cash equivalents, beginning of period 22,466 16,306
-------- --------
Cash and cash equivalents, end of period $ 58,485 $22,680
======== ========
</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 Form 10-K for the year ended December 31, 1996.
2. Organization
As described more fully in Notes 1 and 3 to PDP's Annual Report for the year
ended December 31, 1996, PDP was formed on November 1, 1995 when Phoenix
Securities Group Inc. (PSG), merged into Duff & Phelps Corporation (D&P). The
transaction was accounted for as a purchase of D&P by PSG.
3. Merger Related Activity
On September 3, 1997, PDP acquired Pasadena Capital Corporation ("Pasadena"),
the parent company of Roger Engemann & Associates, Inc. PDP paid an initial
purchase price of approximately $180 million. An additional payment will be
made based on the adjusted net tangible assets of Pasadena as of the closing
date. This additional purchase price, estimated at $31.6 million, has been
reflected in the September 30, 1997 financial statements. The merger
agreement further provides for an "earn-out", based on growth in management
fee revenues of up to a total of $66 million to be paid out on the third,
fourth and fifth anniversaries of the transaction. Pasadena, which operates
in southern California, manages approximately $6.3 billion in assets,
primarily individual accounts but also including The Pasadena Funds, a family
of six equity mutual funds with approximately $968 million in assets under
management at September 30, 1997.
On July 17, 1997, PDP acquired a majority interest in GMG/Seneca Capital
Management LLC ("GMG/Seneca"), a San Francisco based investment advisor.
Under the terms of the transaction, GMG/Seneca was renamed Seneca Capital
Management ("Seneca"). As consideration for the purchase of a majority
interest, PDP paid $36.2 million, $26.7 million in cash and $9.5 million in
short-term notes. Additional consideration of approximately $3.5 million,
dependent upon the retention of certain revenue earning accounts, may be paid
on January 1, 1999. The remaining interests in the Company continue to be
held by Seneca senior management. Seneca, founded by Gail Seneca in 1989,
managed $4.2 billion in assets at September 30, 1997.
The purchase price for Pasadena and Seneca represents the consideration paid
and the direct costs incurred by PDP to purchase Pasadena and a majority
interest in Seneca. Preliminary analyses have been performed in order to
identify intangible assets and to allocate purchase price to identifiable
assets. The excess of purchase price over the fair value of acquired net
tangible assets of Pasadena and Seneca totaled $218.4 million. Of this excess
purchase price, $110.2 million has been identified as identifiable intangible
assets, primarily associated with investment management contracts, which are
being amortized over their estimated useful lives, using the straight-line
method. The average estimated useful life of the identifiable intangible
assets is 13 years. The remaining fair value adjustments to assets and
liabilities totaled ($39.9) million. The remaining excess purchase price of
$148.1 million has been classified as goodwill and is being amortized over 40
years using the straight-line method. Related amortization expense of $1.1
million has been charged to expense for the period ended September 30, 1997.
7
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the calculation and allocation of purchase
price (in thousands):
<S> <C> <C> <C>
Purchase Price: Pasadena Seneca Total
Consideration paid or payable $ 211,576 $ 36,218 $ 247,794
Transaction costs 2,398 1,218 3,616
Total Purchase Price $ 213,974 $ 37,436 $ 251,410
========= ========= =========
Purchase Price Allocation:
Fair value of acquired net assets $ 30,720 $ 2,248 $ 32,968
Identified intangibles 97,404 12,833 110,237
Deferred taxes (39,935) (39,935)
Goodwill 125,785 22,355 148,140
-------- --------- ---------
Total Allocation of Purchase Price $213,974 $ 37,436 $ 251,410
======== ========= =========
</TABLE>
In separate transactions, Phoenix Duff & Phelps entered into agreements to
acquire Pasadena National Trust Company, for an estimated purchase price of
$1.2 million, and GMG/Seneca Capital Management L.P., for an estimated
purchase price of $.7 million.
The following pro forma financial information for the three and nine months
ended September 30, 1997 and 1996 is derived from the historical financial
statements of PDP, Pasadena and Seneca, and gives effect to the acquisitions
of Pasadena and a majority interest in Seneca by PDP. The pro forma financial
information has been prepared assuming these acquisitions were effected on
December 31, 1995.
<TABLE>
<CAPTION>
Three months ended Sept.30, Nine months ended Sept.30,
Pro Forma 1996 Pro Forma 1997 Pro Forma 1996 Pro Forma 1997
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 52,756 $ 50,724 $ 153,821 $ 158,947
-------- -------- --------- ---------
Expenses
Employment expenses 22,091 17,938 65,436 60,689
Other expenses 13,481 13,734 43,229 44,153
Amortization of
goodwill and
intangible assets 5,531 5,531 16,488 16,488
-------- -------- --------- ---------
Total Expenses 41,103 37,203 125,153 121,330
-------- -------- --------- ---------
Operating Income 11,653 13,521 28,668 37,617
Other Income - Net 2,034 836 13,399 4,484
Interest Expense-Net 2,686 2,784 8,043 8,699
Income to Minority
Interest (360) (225) (800) (674)
--------- -------- --------- ---------
Income before income
taxes 10,641 11,348 33,224 33,728
Provision for income
taxes 4,875 5,411 14,698 14,783
--------- -------- --------- ---------
Net Income $ 5,766 $ 5,937 $ 18,526 $ 17,945
========= ========= ========= =========
Earnings per share
Primary .10 .11 .32 .33
Fully Diluted -- -- -- --
</TABLE>
8
<PAGE>
4. Dividends and Other Capital Transactions
For the periods ended September 30, 1997 and 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 October 22, 1997, the Company's Board of Directors approved quarterly
dividends of $.06 per common share and $.375 per preferred share, payable
December 10, 1997 to stockholders of record on November 28, 1997.
As of September 30, 1997, the Company, in accordance with the previously
announced stock repurchase program, had purchased 200,000 shares of PDP
common stock at a total cost of $1.6 million.
5. Investment in Beutel, Goodman & Company Ltd.
At September 30, 1997, PDP had a 49% interest in the outstanding common stock
of Beutel, Goodman & Company Ltd. (BG). In 1997, BG's Shareholders' Agreement
was amended allowing PDP to recognize up to 100% of BG's earnings. BG is a
Canadian-based investment counseling firm with approximately $10.5 billion in
assets under management at September 30, 1997.
PDP's consolidated condensed statements of financial condition and
consolidated income statements contain the following components related to
the BG investment:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(in thousands)
<S> <C> <C>
Statements of Financial Condition:
Acquisition costs of investment in BG's
common stock $ 30,045 $ 30,045
Equity in BG net income 7,287 4,021
Dividends received (2,870) (285)
Amortization of BG acquisition costs over
proportional net equity in BG's assets (2,387) (1,476)
Deferred tax on translation adjustments (360) (229)
Currency translation adjustments (501) (330)
-------- --------
Total BG investment $ 31,214 $ 31,746
======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
(in thousands)
<S> <C> <C>
Statements of Income:
Equity in BG net income $ 3,266 $ 2,744
Amortization (911) (1,119)
Interest income - BG debentures 404
-------- --------
$ 2,355 $ 2,029
======== ========
</TABLE>
The PDP consolidated condensed statements of financial condition contain
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.
9
<PAGE>
The following reflects summarized BG financial information for the nine
months ended September 30,:
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <C> <C>
Total revenues $ 24,176 $21,716
Net income $ 3,108 $ 5,165
</TABLE>
6. Other Investments
In the first quarter of 1997, D&P CBO Partners, LP (D&P CBO) and Windy City
CBO Partners, LP (WCCBO) were liquidated. In accordance with the respective
partnership agreements, the remaining assets of the partnerships were sold,
obligations were settled and all remaining cash was distributed to the
partners. PDP received cash proceeds of zero and $11.2 million from the
liquidation of D&P CBO and WCCBO, respectively. As a result of the
liquidation of the partnerships, PDP recognized losses of zero and $1.5
million, respectively, from D&P CBO and WCCBO representing its share of
partnership losses up to the date of liquidation.
7. Capital Markets
On May 14, 1996 the Company announced that it was exiting the fee based
investment research and financial consulting businesses. 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
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 relating to the Merger.
8. Sale of Deferred Commissions
On June 26, 1997, PDP sold its title and interest in the balance of its
deferred commissions asset to an unrelated third party. PDP recognized a gain
of $6.9 million based on cash proceeds of $26.0 million and a book value of
$19.1 million at the time of the sale. As part of the transaction, the third
party is entitled to receive the distributor fees and contingent deferred
sales charges related to the Company's outstanding "B" share mutual funds.
PDP has a three year commitment, expiring June 26, 2000, from the unrelated
third party to purchase all commissions, excluding those of Pasadena,
incurred by the Company upon the sale of "B" share mutual funds.
9. Long-term Debt
At September 30, 1997, PDP had outstanding borrowings of $190 million under a
new $200 million Credit Agreement with a consortium of banks. Borrowings
under this agreement are unsecured, mature in five years and bear interest
at variable rates. Interest rates on such borrowings for the period ended
September 30, 1997 were 6.0%. The outstanding balance is due in 2002. Phoenix
Duff & Phelps' majority shareholder, Phoenix Home Life Mutual Insurance
Company, has guaranteed the obligation.
The Credit Agreement contains financial and operating covenants including,
among other provisions, requirements that PDP maintain certain financial
ratios and satisfy certain financial tests, including restrictions on the
ability to incur indebtedness and limitations on PDP's capital expenditures.
As of September 30, 1997, PDP was in compliance with these covenants.
PDP financed the acquisitions of Pasadena and Seneca through existing
resources and borrowings under the new Credit Agreement.
10
<PAGE>
10.Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
This statement simplifies the standards for computing earnings per share
("EPS"). Basic EPS will replace primary EPS. Basic EPS will be computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS will be
computed similarly to the present fully diluted EPS. Dual presentation of the
basic and fully diluted EPS will be required on the face of the income
statement. A reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation
will be required. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997. Restatement of all prior period
EPS data will be required. Had EPS calculations for the Company been computed
for the three and nine months ended September 30, 1997 using the SFAS No. 128
methodology, basic EPS would have been $.11 and $.31 per share, respectively,
and diluted EPS would have been $.11 and $.31 per share, respectively. EPS
calculations for the same periods in 1996 using the SFAS No. 128 methodology
would not have been materially different from the reported amounts.
11.Subsequent Event
On October 24, 1997, the Company received a distribution of $5.4 million from
its equity investment in Financial Alliance Investors I, L.P. representing
the Company's share of the proceeds realized by the partnership upon the sale
of its interest in Financial Alliance Processing Services, Inc. In 1996, the
Company had invested $2.0 million in Financial Alliance Investors I, L.P.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Assets Under Management
At September 30, 1997, PDP had $45.2 billion of assets under management, an
increase of $10.8 billion from June 30, 1997, and $11.7 billion from September
30, 1996. This increase is primarily the result of the acquisitions of Pasadena
Capital Corporation, on September 3, 1997, and a majority interest in Seneca
Capital Management, on July 17, 1997, which increased assets under management by
$10.2 billion. Since the revenues of the Company are substantially earned based
upon assets under management, this information is important to an understanding
of the business.
<TABLE>
<CAPTION>
(In millions)
September 30, June 30, December 31, September 30,
1997 1997 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Open-end Mutual Funds $ 13,371 $ 11,727 $ 11,532 $ 11,511
Managed Accounts * 5,545 242
Closed-end Mutual Funds 3,106 3,015 2,984 2,867
Institutional ** 15,969 12,367 12,276 12,387
PHL General Account 7,171 7,046 6,857 6,743
--------- --------- --------- ---------
$ 45,162 $ 34,397 $ 33,649 $ 33,508
========= ========= ========= =========
</TABLE>
* Managed Accounts represent assets which are individually managed for retail
clients through broker-dealer sponsored programs.
** Institutional includes 100% of the assets managed by Seneca Capital
Management.
Three Months Ended September 30, 1997 Compared with Three Months Ended
September 30, 1996
Investment management fees of $36.6 million for the three months ended September
30, 1997, which includes $7.5 million for Pasadena and Seneca, increased $7.8
million (27%) as compared to $28.8 million for the same period in 1996.
Management fees earned from institutional accounts decreased $.5 million due to
the loss of certain accounts. Management fees earned from open-end mutual funds,
including institutional mutual funds, increased $.8 million as a result of an
increase in average assets. Fees earned managing Phoenix Home Life Mutual
Insurance Company's (PHL) sponsored variable products decreased $.2 million as a
result of a change in the fee structure (which increased fund accounting fees)
offset, in part, by an increase in assets under management.
Mutual funds - ancillary fees of $5.2 million for the three months ended
September 30, 1997, which includes $.7 million for Pasadena, decreased $.9
million (16%) as compared to $6.1 million for the same period in 1996. Fund
accounting fees increased $.7 million primarily as a result of a change in the
fee structures for the open-end mutual funds and PHL sponsored variable
products. Net distributor fees decreased $2.2 million due to a decrease in
distributor fees of $1.2 million, primarily due to the sale of the deferred
commissions asset and the related distributor fees, and an increase in trailing
commissions expense of $1.0 million. Shareholder service agent fees decreased
$.2 million as a result of a decline in mutual fund shareholder accounts.
Other income and fees of $.5 million for the three months ended September 30,
1997 decreased $.5 million (46%) as compared to $1.0 million for the same period
in 1996, due to reduced contingent deferred sales charge income resulting from
the sale of the Company's deferred commissions asset in the second quarter of
1997.
Employment expenses of $18.2 million for the three months ended September 30,
1997, which includes $3.4 million for Pasadena and Seneca, increased $5.5
million (44%) as compared to $12.7 million for the same period in 1996. In the
third quarter of 1997, the Company incurred approximately $.3 million in fees
for placement services associated with hiring additional investment
professionals. The remaining increase was primarily the result of annual salary
adjustments, incentives and increases in the workforce.
12
<PAGE>
Other operating expenses of $10.2 million for the three months ended September
30, 1997, which includes $1.7 million for Pasadena and Seneca, increased $1.9
million (23%) as compared to $8.3 million for the same period in 1996.
Depreciation and amortization of leasehold improvements of $.7 million for the
three months ended September 30, 1997, increased $.2 million (29%) from $.5
million for the same period in 1996 reflecting the inclusion of the depreciation
and amortization of leasehold improvements expense of Pasadena and Seneca.
Amortization of goodwill and intangible assets of $3.7 million for the three
months ended September 30, 1997 increased $1.3 million (51%) primarily as a
result of the amortization of the intangible assets and goodwill identified in
the preliminary purchase price allocation of Pasadena and Seneca. Amortization
of deferred commissions decreased $1.5 million (100%) for the three months
ended September 30, 1997 compared to the same period in 1996 as a result of the
sale of the deferred commissions asset in the second quarter of 1997, which
eliminated the amortization charge.
Operating income of $9.4 million for the three months ended September 30, 1997
decreased $1.0 million (9%) as compared to $10.4 million for the same period in
1996 as a result of the changes discussed above.
Other income - net of $1.3 million for the three months ended September 30,
1997, which includes $.2 million for Pasadena and Seneca, increased $.4 million
(46%) as compared to $.9 million for the same period in 1996. PDP's share of
equity earnings from WCCBO was zero in the third quarter of 1997 compared to $.6
million for the third quarter of 1996, due to the liquidation of WCCBO in early
1997. In addition, PDP recorded $.1 million of losses in the third quarter of
1997 from its investment in Greystone Financial Group, representing its share of
equity earnings in the company, compared to a $.5 million loss in the third
quarter of 1996. PDP recorded income of $.3 million from its investment in Duff
& Phelps/Inverness LLC as a result of a third quarter 1997 transaction as
compared to zero in the third quarter of 1996. PDP's share of equity earnings
from the DPIM/Nuveen joint venture was zero in the third quarter of 1997
compared to $.2 million for the third quarter of 1996. On January 1, 1997, the
Company purchased the remaining interest in the DPIM/Nuveen joint venture and
consolidated operations. The Company's share of the equity earnings of its
investment in BG of $.8 million increased $.2 million for the three months ended
September 30, 1997 as compared to $.6 million for the same period in 1996.
Interest expense of $1.5 million increased $1.1 million primarily as a result of
interest charges resulting from the financing of the Pasadena and Seneca
acquisitions. Interest income of $.8 million increased $.3 million primarily as
a result of maintaining higher average cash balances prior to the Pasadena and
Seneca acquisitions.
Income to minority interest of $.3 million for the three months ended September
30, 1997 represents the minority shareholders' interest in the equity earnings
of Seneca, which is fully consolidated in the Company's financial statements.
The effective tax rate of 37.7% for the three months ended September 30,
1997decreased from 44.4% for the same period in 1996. The decrease in the
effective tax rate represents the benefits resulting from settlements with
federal and state tax authorities for the tax years 1990 to 1993, offset, in
part, by the effect of goodwill amortization resulting from the Pasadena
acquisition. In addition, in the third quarter of 1996, certain changes
in expense sharing arrangements between subsidiaries increased the rate.
As a result of the effects discussed above, net income for the three months
ended September 30, 1997 of $6.1 million represents a decrease of $.2 million
(4%) compared to the $6.3 million for the third quarter of 1996.
13
<PAGE>
Nine Months Ended September 30, 1997 Compared with Nine Months Ended September
30, 1996
Investment management fees of $92.2 million for the nine months ended September
30, 1997, which includes $7.5 million for Pasadena and Seneca, increased $3.1
million (3%) as compared to $89.1 million for the same period in 1996.
Management fees earned from institutional accounts decreased $3.1 million as a
result of the loss of certain accounts. Fees earned managing the open-end mutual
funds increased $.1 million due to an increase in average assets. Management
fees for institutional mutual funds, which were pooled separate accounts for two
months of 1996, decreased $.7 million as a result of lost accounts and lower
fees earned on institutional mutual funds as compared to pooled separate
accounts. Fees earned managing PHL sponsored variable products decreased $.8
million as a result of a change in the fee structure (which increased fund
accounting fees), which decreased investment management fees, offset, in part,
by an increase in assets under management. Fees earned from Managed Accounts,
excluding those managed by Pasadena, increased $.4 million as a result of
increased accounts and positive performance. Fees earned from WCCBO, which
ceased operations in early 1997, decreased $.3 million.
Mutual funds - ancillary fees remained unchanged at $16.3 million for the nine
months ended September 30, 1997 and 1996, including $.7 million for Pasadena and
Seneca in 1997. Fund accounting fees increased $1.9 million primarily as a
result of a change in the fee structures for the open-end mutual funds and PHL
sponsored variable products on which no fees were earned prior to January 1997.
Net distributor fees decreased $1.4 million from the prior year primarily due to
the sale of the deferred commissions asset and related distributor fees in the
second quarter of 1997, offset by increased sales of B share mutual funds prior
to the sale. Underwriter fees decreased $.4 million (19%) as a result of the
closure of Capital Markets in 1996 and decreased sales of mutual funds, offset
by underwriter fees received from certain PHL sponsored variable products.
Shareholder service agent fees decreased $.7 million as a result of a decline in
shareholder accounts.
Financial consulting and investment research services were not offered by PDP in
1997 as the operations of Duff & Phelps Capital Markets Co. and the fee-based
investment research and securities businesses were divested and closed,
respectively, in 1996.
Other income and fees of $2.8 million for the nine months ended September 30,
1997 decreased $.3 million (12%) as compared to $3.1 million for the same period
in 1996, primarily as a result of reduced contingent deferred sales charge
income resulting from the sale of the Company's deferred commissions asset in
the second quarter of 1997, partially offset by increased redemptions in 1997
prior to the sale.
Employment expenses of $49.0 million for the nine months ended September 30,
1997, which includes $3.4 million for Pasadena and Seneca, increased $4.1
million (9%) as compared to $44.9 million for the same period in 1996.
Employment expenses decreased $8.2 million due to the divestiture of Duff &
Phelps Capital Markets Co. Non-recurring charges resulting from a senior
executive exercising certain rights under his employment agreement resulted in
an additional $1.6 million of employment expense being recognized in the first
quarter of 1997. In addition, in 1997, the Company incurred approximately $1.0
million in fees for placement services associated with hiring additional
investment professionals. The remaining increase was primarily the result of
annual salary adjustments, incentives and increases in the workforce.
Other operating expenses of $27.2 million for the nine months ended September
30, 1997, which includes $1.7 million for Pasadena and Seneca, decreased $1.1
million (4%) from $28.3 million for the same period in 1996. Other operating
expenses decreased $3.1 million due to the July 1996 divestiture of Duff &
Phelps Capital Markets Co. In addition, a one-time loss of $.6 million was
recognized in the second quarter of 1997 relating to the sublease of certain
office space.
Depreciation and amortization of leasehold improvements of $1.9 million
increased $.3 million (20%) from $1.6 million for the same period in 1996
primarily reflecting the inclusion of the depreciation and amortization expense
of Pasadena and Seneca. Amortization of goodwill and intangible assets of $8.4
million for the nine months ended September 30, 1997 increased $1.1 million
(16%) from $7.3 million for the same period in 1996 as a result of the
amortization of the intangible assets and goodwill identified in the preliminary
purchase price allocation of Pasadena and Seneca. Amortization of deferred
commissions decreased $1.3 million (32%) for
14
<PAGE>
the nine months ended September 30, 1997 compared to the same period in 1996 as
a result of the sale of the deferred commissions asset in the second quarter of
1997, which eliminated the amortization charge.
Operating income of $21.9 million for the nine months ended September 30, 1997
decreased $8.1 million (27%), as compared to $30.0 million for the same period
in 1996, as a result of the changes discussed above.
Other income - net of $.8 million for the nine months ended September 30, 1997
decreased $3.6 million (83%) as compared to $4.4 million for the same period in
1996. PDP's share of losses from WCCBO was $1.5 million for the period from
January 1, 1997 until operations were terminated in March, a decrease of $2.9
million from the $1.4 million earned in the first nine months of 1996. The
Company's share of the Duff & Phelps/Inverness LLC joint venture income was $1.5
million for the nine months ended September 30, 1996, as a result of the joint
venture's recognition of an advisory fee from a significant first quarter 1996
transaction, compared to $.3 million in equity earnings for the same period in
1997. The Company's share of the equity earnings of its investment in BG of $2.4
million increased $.7 million for the nine months ended September 30, 1997 as
compared to $1.7 million for the same period in 1996. The Company's share of the
equity earnings from its investment in DPIM/Nuveen was $.5 million for the first
nine months of 1996. On January 1, 1997, the Company purchased the remaining
interest in the joint venture and consolidated operations. In addition, PDP
recorded $.6 million in losses for the nine months ended September 30, 1997 from
its investment in Greystone Financial Group representing its share of equity
earnings in the company, an increase of $.1 million as compared to the same
period in 1996.
A gain on the sale of the Company's deferred commissions asset of $6.9 million
was recognized in the second quarter of 1997. The sale, which was to an
unrelated third party, resulted in proceeds of $26 million. As part of the
transaction, the purchaser will fund future B share commissions and be entitled
to distributor fees from the Company's outstanding B share mutual funds as well
as any contingent deferred sales charges.
Interest expense of $2.0 million for the nine months ended September 30, 1997
increased $.6 million (48%) as a result of interest charges resulting from the
financing of the Pasadena and Seneca acquisitions offset, in part, by a decrease
in interest expense of $.5 million due to a decrease in outstanding debt on a
previous credit facility. Interest income decreased $.1 million due to a
decrease of $.4 million from the BG debentures, which were fully redeemed in
December 1996, offset by increased interest income as a result of maintaining
higher cash balances prior to the Pasadena and Seneca acquisitions.
Income to minority interest of $.3 million for the nine months ended September
30, 1997 represents the minority shareholders' interest in the equity earnings
of Seneca, which is fully consolidated in the Company's financial statements.
The effective tax rate of 40.2% for the nine months ended September 30, 1997
decreased from 41.9% for the same period in 1996. The decrease in the effective
tax rate represents the benefits resulting from settlements with federal and
state tax authorities for the tax years 1990 to 1993, offset by the effect of
goodwill amortization resulting from the Pasadena acquisition. In addition, in
the third quarter of 1996, certain changes in expense sharing arrangements
between subsidiaries increased the rate.
As a result of the effects discussed above, net income for the nine months ended
September 30, 1997 of $17.2 million decreased $2.8 million (14%) compared to
$20.0 million for the first nine months of 1996.
15
<PAGE>
Liquidity and Capital Resources
The Company's business is not considered to be capital intensive. Working
capital requirements for the Company have historically been provided by
operating cash flow. It is expected that such cash flows will continue to serve
as the principal source of working capital for the Company for the near future.
The Company's current capital structure includes 3.2 million shares of Series A
Preferred Stock with a stated value of $25.00 per share and 44.1 million shares
of common stock. Dividends on the preferred stock would total $4.8 million per
annum based on preferred shares outstanding at September 30, 1997. The current
dividend rate on common stock is $.06 per share per quarter. If the dividend
rate remains constant for 1997, the total dividend on common stock would be
approximately $10.6 million based upon shares outstanding at September 30, 1997.
The Company has a bank credit agreement in place providing for a $200 million
five year credit facility. The outstanding obligation under the credit agreement
at September 30, 1997 was $190 million. An interest rate of approximately 6.0%
was in effect on this borrowing as of September 30, 1997. The credit agreement
contains financial and operating covenants 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. At September
30, 1997, the Company was in compliance with all covenants contained in the
credit agreement. The Company believes that funds from operations and amounts
available under the credit agreement will provide adequate liquidity for the
foreseeable future.
Management considers the liquidity of the Company to be adequate to meet present
and anticipated needs.
16
<PAGE>
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
No items submitted.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of these reports:
No items filed.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed on July 1, 1997 describing the
agreements to acquire Pasadena Capital Corporation and a majority interest
in GMG/Seneca Capital Management LLC.
A Current Report on Form 8-K was filed on September 18, 1997 describing
the acquisitions of Pasadena Capital Corporation on September 3, 1997 and
a majority interest in GMG/Seneca Capital Management LLC on July 17, 1997.
A Current Report on Form 8-K/A was filed on November 13, 1997 which
incorporated historical financial statements for Pasadena Capital
Corporation and pro forma financial statements for the Pasadena and Seneca
acquisitions.
.
17
<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.
Phoenix Duff & Phelps Corporation
November 14, 1997 /s/ Philip R.
McLoughlin
Philip R. McLoughlin, Chairman and
Chief Executive Officer
November 14, 1997 /s/ William R.
Moyer
William R. Moyer, Chief Financial Officer
18
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