<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
_____________
Date of Report: November 13, 1997
Date of Earliest Event Reported: September 3, 1997
Commission file number 1-10994
______________
PHOENIX DUFF & PHELPS CORPORATION
(Exact name of registrant as specified in its charter)
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)
================================================================================
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 3, 1997, pursuant to an Agreement and Plan of Merger dated June 9,
1997 ("Merger Agreement"), Phoenix Duff & Phelps Corporation ("Phoenix Duff &
Phelps") acquired 100% of Pasadena Capital Corporation ("Pasadena"), the parent
company of Roger Engemann & Associates, Inc. Pursuant to the Merger Agreement,
Phoenix Duff & Phelps paid an initial purchase price of $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 is estimated to
be $31.6 million. The 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, currently manages approximately $6
billion in assets, primarily individual accounts but also including The Pasadena
Funds, a family of six equity mutual funds.
Pursuant to the Merger Agreement, the merger with Pasadena was effected through
the merger of Phoenix Apollo Corporation, a newly formed subsidiary of Phoenix
Duff & Phelps, into Pasadena. Pasadena was the surviving corporation in the
merger and became a wholly owned subsidiary of Phoenix Duff & Phelps.
Phoenix Duff & Phelps has entered into a separate agreement to acquire Pasadena
National Trust Company for an estimated purchase price of $1.2 million,
approximating the net tangible asset value of the company.
Phoenix Duff & Phelps and Pasadena entered into long-term employment and
noncompete agreements with J. Roger Engemann and other principals of Pasadena.
These agreements were filed as exhibits to Phoenix Duff & Phelps Corporation's
Form 8-K dated July 1, 1997. Approval for the merger was obtained from the
shareholders of Pasadena and the three largest Pasadena Funds.
ITEM 5. OTHER EVENTS
On July 17, 1997, pursuant to a Purchase Agreement dated June 18th, 1997
("Purchase Agreement"), Phoenix Duff & Phelps acquired a majority interest in
GMG/Seneca Capital Management LLC, a San Francisco based investment advisor,
which was then renamed Seneca Capital Management ("Seneca"). The remaining
interests continue to be held by Seneca senior management. Seneca, founded by
Gail Seneca in 1989, manages approximately $4 billion in assets, primarily
institutional accounts. As consideration for the purchase, Phoenix Duff &
Phelps 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.
At closing, an amended Operating Agreement was executed providing, in part, for
the continuation of current management's control over investment management and
day-to-day operations. Gail Seneca and all other members of senior management
entered into long-term employment and noncompete agreements. Those management
members continuing to hold equity interests entered into agreements with Phoenix
Duff & Phelps by which the members may "put" their interests to Phoenix Duff &
Phelps and Phoenix Duff & Phelps, alternatively, can "call" those interests.
The exercise prices of both puts and calls will be based on the rate of annual
management fee revenues of Seneca at the time of each such exercise. Subject to
acceleration under certain circumstances, the put and call rights will be
exercisable only in stages between three and five years after closing.
Phoenix Duff & Phelps financed the acquisitions of Pasadena and Seneca through
existing resources and borrowings under a new $200 million bank credit
facility. Borrowings under this facility are unsecured, mature in five years and
bear interest at variable rates. Phoenix Duff & Phelps' majority shareholder,
Phoenix Home Life Mutual Insurance Company, has guaranteed the obligation.
Phoenix Duff & Phelps has entered into a separate agreement to acquire
GMG/Seneca Capital Management L.P. for an estimated purchase price of $.7
million.
The foregoing summary of the terms of the Merger Agreement with Pasadena and the
Purchase Agreement with Seneca are qualified in their entirety by reference to
the provisions of the Agreements, copies of which were filed as exhibits to
Phoenix Duff & Phelps' Current Report on Form 8-K dated July 1, 1997, and are
hereby incorporated herein by reference.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND OTHER EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Audited Consolidated Financial Statements of Pasadena Capital
Corporation and Subsidiaries for 1996:
Report of Independent Accountants
Consolidated Balance Sheet - December 31, 1996
Consolidated Statement of Operations - For the Year Ended December
31, 1996
Consolidated Statement of Changes in Stockholders' Equity - For the
Year Ended December 31, 1996
Consolidated Statement of Cash Flows - For the Year Ended December
31, 1996
Notes to Consolidated Financial Statements
Audited Consolidated Financial Statements of Pasadena Capital
Corporation and Subsidiaries for 1995:
Report of Independent Accountants
Consolidated Balance Sheet - December 31, 1995
Consolidated Statement of Operations - For the Year Ended December
31, 1995
Consolidated Statement of Changes in Stockholders' Equity - For the
Year Ended December 31, 1995
Consolidated Statement of Cash Flows - For the Year Ended December
31, 1995
Notes to Consolidated Financial Statements
Unaudited Condensed Consolidated Financial Statements of Pasadena
Capital Corporation and Subsidiaries for 1997:
Condensed Consolidated Balance Sheet - June 30, 1997
Condensed Consolidated Statement of Operations - For the Six Months
Ended June 30, 1997
Condensed Consolidated Statement of Cash Flows - For the Six Months
Ended June 30, 1997
Notes to Condensed Consolidated Financial Statements
(B) PRO FORMA FINANCIAL INFORMATION.
Unaudited Pro Forma Combined Financial Statements of Phoenix Duff &
Phelps Corporation, Pasadena Capital Corporation and GMG/Seneca
Capital Management LLC:
Unaudited Pro Forma Combined Statement of Financial Condition - June
30, 1997
Unaudited Pro Forma Combined Statement of Income - For the Six Months
Ended June 30, 1997
Unaudited Pro Forma Combined Statement of Income - For the Year Ended
December 31, 1996
Notes to Unaudited Pro Forma Combined Financial Statements
(C) EXHIBITS.
23(a) Consent of Coopers & Lybrand L.L.P.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX DUFF & PHELPS CORPORATION
November 13, 1997 /s/ William R. Moyer
---------------------
William R. Moyer, Chief Financial Officer
4
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements of Pasadena Capital Corporation and
Subsidiaries:
Report of Independent Accountants..................................................................... 6
Consolidated Balance Sheet - December 31, 1996........................................................ 7
Consolidated Statement of Operations - For the Year Ended December 31, 1996........................... 8
Consolidated Statement of Changes in Stockholders' Equity - For the Year Ended
December 31, 1996................................................................................... 9
Consolidated Statement of Cash Flows - For the Year Ended December 31, 1996........................... 10
Notes to Consolidated Financial Statements............................................................ 11
Report of Independent Accountants.................................................................... 18
Consolidated Balance Sheet - December 31, 1995........................................................ 19
Consolidated Statement of Operations - For the Year Ended December 31, 1995........................... 20
Consolidated Statement of Changes in Stockholders' Equity - For the Year Ended
December 31, 1995................................................................................... 21
Consolidated Statement of Cash Flows - For the Year Ended December 31, 1995........................... 22
Notes to Consolidated Financial Statements............................................................ 23
Unaudited Condensed Consolidated Financial Statements of Pasadena Capital Corporation and Subsidiaries:
Condensed Consolidated Balance Sheet - June 30, 1997.................................................. 29
Condensed Consolidated Statement of Operations - For the Six Months Ended June 30, 1997............... 30
Condensed Consolidated Statement of Cash Flows - For the Six Months Ended June 30, 1997............... 31
Notes to Condensed Consolidated Financial Statements.................................................. 32
Unaudited Pro Forma Combined Financial Statements of Phoenix Duff & Phelps, Pasadena Capital
Corporation and GMG/Seneca Capital Management LLC:
Unaudited Pro Forma Combined Statement of Financial Condition - June 30, 1997......................... 34
Unaudited Pro Forma Combined Statement of Operations - For the Six Months Ended
June 30, 1997....................................................................................... 36
Unaudited Pro Forma Combined Statement of Operations - For the Year Ended
December 31, 1996................................................................................... 37
Notes to Unaudited Pro Forma Combined Financial Statements............................................... 39
</TABLE>
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pasadena Capital Corporation
We have audited the accompanying consolidated balance sheet of Pasadena Capital
Corporation and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in note 16 to the consolidated financial statements, the Company is
a defendant in various legal and regulatory proceedings. While the Company
believes that the ultimate disposition of these proceedings will not have a
material adverse effect on the Company's consolidated financial position or
results of operations and, accordingly, no provision for any liability that may
result has been made in the consolidated financial statements, the ultimate
outcome of these proceedings cannot presently be determined and such outcome
could be material.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pasadena Capital Corporation and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Los Angeles, California
April 3, 1997
6
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 6,568,961
Receivable for investment sold 2,500,000
Accounts receivable 1,468,587
Due from affiliate 546,488
Prepaid income taxes 307,354
Deferred tax asset, net 627,182
Other current assets 112,324
-----------
Total current assets 12,130,896
Investments available-for-sale 24,127,500
Deferred dealer allowance, net 2,662,329
Notes receivable from related parties 1,405,593
Property and equipment, net 1,934,498
Intangibles, net 7,501,358
Other assets 232,482
-----------
Total assets $49,994,656
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current contract payable $ 4,665,000
Accounts payable and accrued expenses 2,736,413
Current portion of note payable 552,072
Unearned revenue 92,706
-----------
Total current liabilities 8,046,191
-----------
Contract payable 2,662,000
Note payable 2,386,886
Deferred tax liability, net 1,475,960
-----------
Total liabilities 6,524,846
-----------
Minority interest 11,510
-----------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
1,434,200 issued and outstanding 4,284,440
Notes receivable from stockholders (1,163,758)
Retained earnings 30,403,442
Net unrealized gain on investments
available-for-sale, net of tax 2,327,569
Unearned compensation (439,584)
-----------
Total stockholders' equity 35,412,109
-----------
Total liabilities and stockholders' equity $49,994,656
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues:
Investment advisory fees $35,079,210
Administration fees 5,363,697
Dividend income 2,167,802
Broker-dealer fees 892,411
Interest income 695,265
Other income 724,288
-----------
Total revenues 44,922,673
-----------
Expenses:
Salaries and other employee benefits 13,263,032
Legal, accounting and consulting 1,728,567
Computer service 1,380,392
Rent 1,183,013
Transfer agent 964,266
Depreciation and amortization 900,786
Travel and entertainment 868,698
Dealer allowance 810,360
Office expenses 783,995
Printing 525,825
Property and equipment written off 503,539
Distribution of printed materials 326,930
Other 1,810,654
-----------
Total expenses 25,050,057
-----------
Income before provision for income taxes 19,872,616
Provision for income taxes 8,279,212
-----------
Net income $11,593,404
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NOTES
RECEIVABLE NET UNREALIZED TOTAL
COMMON FROM RETAINED GAIN ON UNEARNED STOCKHOLDERS'
STOCK STOCKHOLDERS EARNINGS INVESTMENTS COMPENSATION EQUITY__
------------ ------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning $ 5,792,225 ($1,461,509) $24,088,418 $1,049,038 $29,468,172
of year
Issuance of 9,200 599,832 (599,832)
shares of common
stock
Issuance of 23,500 514,035 ($514,035)
stock options
Amortization of 74,451 74,451
unearned compen-
sation
Repurchase of (2,621,652) (5,278,380) (7,900,032)
115,484 shares of
common stock
Principal reductions 897,583 897,583
on notes receivable
from stockholders
Increase in net 1,278,531 1,278,531
unrealized gain,
less tax
provision of
$813,337
Net Income 11,593,404 11,593,404
--------- ---------- ---------- --------- --------- ----------
Balance, end of year $ 4,284,440 ($1,163,758) $30,403,442 $2,327,569 ($439,584) $35,412,109
========= ========== ========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
9
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $11,593,404
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 900,786
Property and equipment written off 503,539
Amortization of deferred dealer allowance 595,391
Gain on sale of available-for-sale securities (179,822)
Interest receivable offset in acquisition of PFSI (177,063)
Compensation recognized under equity incentive plan 74,451
Loss on sale of property and equipment 26,634
Changes in assets and liabilities net of effects
of purchase of PFS and sale of PNTC:
Accounts receivable (335,003)
Due from affiliate 122,440
Prepaid income taxes 84,502
Current deferred tax asset, net (238,424)
Other current assets 19,442
Deferred dealer allowance (1,108,730)
Other assets (36,154)
Accounts payable and accrued expenses 775,369
Unearned revenue 5,233
Deferred tax liability, net (13,035)
----------
Net cash provided by operating activities 12,612,960
----------
Cash flows from investing activities:
Cash given in sale of PNTC (955,313)
Cash acquired in purchase of PFS 193,320
Proceeds from maturity of held-to-maturity investment 3,537,325
Purchase of investments available-for-sale (12,680,014)
Proceeds from sale of investments available-for-sale 1,142,000
Payment for business acquired (250,000)
Purchase of property and equipment (901,961)
Payments on notes receivable 2,547
Proceeds from sale of property and equipment 3,300
----------
Net cash used in investing activities (9,908,796)
----------
Cash flows from financing activities:
Payments on notes receivable from stockholders 799,285
Payments on note payable (130,250)
Repurchase of common stock (4,732,520)
----------
Net cash used in financing activities (4,063,485)
----------
Net decrease in cash and cash equivalents (1,359,321)
Cash and cash equivalents, beginning of year 7,928,282
----------
Cash and cash equivalents, end of year $6,568,961
----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
10
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Pasadena
Capital Corporation ("PCC") and its subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been
eliminated.
Operations
----------
Roger Engemann & Associates, Inc. ("REA") is a registered investment
adviser. REA's fees for managing its clients' investments are based upon a
percentage of the market value of the assets in each client's portfolio.
Roger Engemann Management Co., Inc. ("REMC") is also a registered
investment adviser and furnishes management advice and administrative
services to The Pasadena Group of Mutual Funds (the "Funds"). For these
services, REMC receives advisory and administration fees both based upon
the daily net assets of each of the Funds. For the year ended December 31,
1996, 27% of the Company's total revenues were derived from the Funds.
Pasadena National Trust Company ("PNTC"), a former majority-owned
subsidiary which was sold on March 31, 1996, operates as a National
Banking Association providing custodial services via sub-custodial
arrangements for clients of REA. PNTC also serves as the transfer agent
for the Funds.
Pasadena Fund Services, Inc. ("PFS") is a registered broker-dealer. PFS is
the principal underwriter and distributor for the Funds. The Company
acquired 100% of the outstanding common stock of PFS on March 31, 1996.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term, highly liquid investments which are
readily convertible to cash as cash equivalents.
Investments
-----------
The Company's investment in equity securities are classified as available-
for-sale securities and are reported at fair value, with unrealized gains
and losses excluded from earnings and reported in a separate component of
stockholders' equity.
Income Taxes
------------
The Company follows the liability method of accounting for income taxes.
Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets or the unexpired term of the lease
plus an additional period for constructive ownership. The Company utilizes
both straight-line and accelerated methods of depreciation.
11
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Property and Equipment
----------------------
The estimated useful lives of the various asset classes used in the
computation of depreciation are as follows:
Office equipment and furnishings 5 to 7 years
Leasehold improvements 2 to 31.5 years
Automobiles 3 years
Unearned Revenue
----------------
Clients of REA are billed their quarterly investment advisory fees in
advance. Accordingly, the portion of these billings which obligates REA to
provide services beyond the current year has been deferred.
Intangibles
-----------
Intangibles, which consist of investment advisory contracts and
intellectual property, are stated at cost and are being amortized on a
straight line basis over 10 and 5 years, respectively.
Deferred Dealer Allowance
-------------------------
On Class B and C share sales of the Funds, PFS pays an up front dealer
allowance to designated broker-dealers. The dealer allowance attributable
to Class B share sales is deferred and amortized on a straight-line basis
over a six year period ("the Class B holding period"). At the end of the
Class B holding period, the Class B shares will convert to Class A shares
and will no longer be subject to the 12b-1 distribution fee which
compensates the Company for having incurred the initial distribution
expenses related to Class B shares. The dealer allowance attributable to
Class C share sales is immediately expensed.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
-----------------------------------
Quoted market prices have been used to derive the fair values of
investments disclosed in these financial statements. The carrying amounts
reported in the balance sheet for notes receivable are a reasonable
estimate of their fair values.
2. ACQUISITIONS:
On November 29, 1996, the Company acquired certain assets from an
investment adviser doing business in Northern California. The assets
purchased consist of investment advisory contracts together with all
technology and intellectual property ("intellectual property") associated
with the business, including certain proprietary investment advisory
concepts and techniques which the Company is utilizing in the investment
management of a mutual fund. The acquisition has been accounted for under
the purchase method and the results of operations of the acquired
investment advisory business have been included in the consolidated
financial statements since the date of acquisition.
12
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS, CONTINUED:
The investment advisory business was purchased for an initial cash amount
of $3.1 million of which $2.9 million was paid after December 31, 1996. The
acquisition agreement also provides for two additional cash payments of up
to $1.5 million each, which depend on retention of the acquired investment
advisory business, payable in December 1997 and December 1998. The
intellectual property was purchased for $1.5 million, payable $75,000
quarterly during the five year period ending December 31, 2001. The total
purchase price of the assets acquired, of approximately $7.6 million net of
amortization of $75,642, is included as intangibles in the consolidated
financial statements.
On March 31, 1996 the Company acquired 100% of the outstanding common stock
of PFS. The purchase price was $2,627,063 which was $177,063 in excess of
the book value of PFS's net assets at the date of sale. The price was
settled by the cancellation of notes receivable, and accrued interest, from
PFS's former owner. PFS's assets and liabilities were recorded at their
preexisting book values which were considered to approximate fair value on
date of sale. The excess of purchase price over book value of $177,063 was
immediately expensed. If PFS had been a subsidiary for the entire year,
consolidated revenues would have been $45,197,585 while consolidated net
income would have remained unchanged at $11,593,404.
3. SALE OF PNTC:
On March 31, 1996 the Company sold its majority interest in PNTC to Roger
Engemann, Chairman of the Board of Directors and Chief Executive Officer of
PCC. The sale proceeds of $1,202,574 represented the book value of the
Company interest in PNTC's net assets at the date of sale which resulted in
no gain or loss to the Company. The proceeds were settled through the
issuance of a note receivable. During the three months PNTC was a
subsidiary no income or loss was recognized by PNTC and the impact of the
activity in PNTC was immaterial to the consolidated revenues and expenses
of the Company. Accordingly, the discontinued operations of PNTC have not
been separated from continuing operations in the financial statements.
4. RELATED-PARTY TRANSACTIONS:
The Company has an informal agreement with PNTC to provide personnel,
office space and other support services to PNTC. The management fees for
these support services were $199,488. An amount of $546,488 was due from
PNTC to the Company at December 31, 1996. See also Note 3 concerning a note
receivable from Roger Engemann established upon the sale of PNTC.
The Company leases the majority of its office facilities from Roger
Engemann. Payments under these leases for the year ended December 31, 1996
totaled $509,016. The future minimum lease commitments under these leases
at December 31, 1996 are $10,367,280 extending through the year 2011.
5. INVESTMENTS:
At December 31, 1996, the Company had available-for-sale equity securities
reported at their aggregate fair value, with an aggregate cost of
$20,182,467. Gross unrealized holding gains of $3,945,033 are included in
stockholders' equity net of deferred tax liabilities of $1,617,464.
Available-for-sale securities comprise investments in the Funds.
13
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES RECEIVABLE:
The Company has notes receivable from employees in addition to those
relating to purchases of shares of the Company's common stock as discussed
in Note 8. Notes receivable consist of two notes; a collateralized note
bearing a variable interest rate of prime plus 1% and an uncollateralized
note bearing a fixed interest rate of 6%. Both notes mature in March of
1998.
7. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996, consisted of the following:
<TABLE>
<S> <C>
Office equipment and furnishings $5,004,570
Leasehold improvements 1,784,775
Automobiles 69,021
Construction in progress 77,430
----------
6,935,796
Less accumulated depreciation 5,001,298
----------
Property and equipment, net $1,934,498
==========
</TABLE>
8. NOTE PAYABLE:
During October of 1996, the Company repurchased 40,500 shares of its stock
from a former employee. The repurchase was settled by cancellation of a
note receivable, and issuance of a note payable in the amount of
$3,069,208. The note bears interest at 9.25% with equal monthly payments
through June 2001. The outstanding balance of the note at December 31, 1996
was $2,938,958. Future payments are as follows:
<TABLE>
<S> <C>
1997 $ 552,072
1998 605,360
1999 663,792
2000 727,865
2001 389,869
----------
$2,938,958
==========
</TABLE>
9. COMMON STOCK:
The Company has various stock ownership programs for the benefit of its
employees. The Company has a stock purchase plan covering certain of its
key employees (the "Plan"). Under the Plan, 75% of the shares issued are
granted to the employees and represent an award for past service. Such
amounts are included in salary expense in the year of the award. The
remaining 25% of the shares are issued to the employees in exchange for
notes receivable from the employees with maturities ranging from 5 to 10
years. Interest accrues on these notes at prime plus 1% and the notes are
collateralized by shares issued to the employees. The unpaid balance of the
notes receivable is reflected as a reduction in stockholders' equity. In
the event that one of these key employees terminates employment with the
Company, he or she forfeits a portion of the shares granted. The amount of
the forfeiture depends upon when the termination occurs within a six-year
period from the date of the award. No additional shares were issued under
this plan during 1996.
14
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMON STOCK, CONTINUED:
The Company issued stock to certain employees for cash or in exchange for
notes receivable from the employees, payable over five years at a fixed
interest rate of prime plus 1% on the date of issuance. The notes are
secured by the shares issued to the employees. The unpaid balance of the
notes receivable is reflected as a reduction in stockholders' equity.
During 1996, 9,200 shares were issued under this plan.
On occasion, the Company will repurchase and retire shares of its common
stock. Upon repurchase, common stock is reduced, on a specific
identification basis, by the stockholders' cost basis in the repurchased
shares, with any difference between the stockholders' cost basis and the
repurchase price being recorded as an increase or decrease to retained
earnings. During 1996, 74,984 shares were repurchased for cash of
$4,732,520 and 40,500 shares were repurchased in exchange for the
retirement of a note receivable of $98,298 and a promissory note of
$3,069,208.
10. STOCK OPTIONS:
On March 19, 1996, the Company's shareholders adopted an equity incentive
plan which permits the granting of stock options, stock appreciation rights
and restricted stock. Options to purchase shares of the Company's common
stock have been granted to executive and key employees. These options were
granted with exercise prices at or below the fair value of the underlying
stock at the date of grant. These options vest over five years in equal
installments and expire ten years after the date of grant. Transactions
during 1996 were as follows:
<TABLE>
<CAPTION>
Weighted Average
Fixed Options Exercise Price
------------- --------------
<S> <C> <C>
Balance, beginning of year - -
Granted 23,500 $45.87
Exercised - -
Canceled - -
Balance, end of year 23,500 $45.87
</TABLE>
At December 31, 1996, none of the options granted had vested, the exercise
price for options outstanding ranged from $40.00 to $78.21, and the
weighted average remaining contractual life was 9.33 years.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its equity
incentive plan. Accordingly, unearned compensation represents the
difference between fair value of the underlying stock and exercise price at
the date of grant which is amortized over the five year vesting period. For
the year ended December 31, 1996, the Company recognized compensation costs
of $74,451 related to the options granted. There are no significant
differences between these amounts and pro forma amounts calculated in
accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
15
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS:
The Company sponsors an Employee Stock Ownership Plan ("ESOP") which covers
all full-time employees of the Company with six months of service or more.
The ESOP expense is calculated by utilizing a percentage, determined
annually by the Board of Directors, of each participant's compensation.
The contribution for the year ended December 31, 1996 was $650,246 which is
included in salaries and other employee benefits.
The Company also sponsors a defined contribution plan, Pasadena Capital
Corporation 401(k) Plan and Trust (The "Plan"), which is available to all
full-time employees with six months of service or more. The Plan does not
require an annual employer contribution and none was made in 1996.
12. COMMITMENTS:
The Company has a standby letter of credit for $250,120, which is held as a
reserve for additional insurance requirements. At December 31, 1996 there
was no outstanding balance on the letter of credit. The letter of credit,
which matures on each January 31, is renewed annually.
The future minimum lease commitment under all of the Company's non-
cancelable leases at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 1,156,852
1998 752,983
1999 618,360
2000 618,360
2001 618,360
Thereafter 7,275,480
-----------
Total $11,040,395
===========
</TABLE>
13. INCOME TAXES:
The components of the provision (benefit) for income taxes for the year
ended are as follows:
<TABLE>
<S> <C>
Current:
Federal $6,626,760
State 1,903,904
----------
Total current 8,530,664
Deferred (251,452)
----------
Provision for income taxes $8,279,212
==========
</TABLE>
16
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES, CONTINUED:
At December 31, 1996, the Company had a net current deferred tax asset of
$627,182 and a net non-current deferred tax liability of $1,475,960.
Current deferred tax assets are comprised of a deferred tax asset of
$658,469, from temporary differences in state taxes, and a deferred tax
liability of $31,287 from a temporary difference between net book and tax
values of property and equipment and accounts receivable write-off. Non-
current deferred tax liabilities are comprised of a deferred tax asset of
$141,504, from a temporary difference between the net book and tax values
of property and equipment and intangible assets, and a deferred tax
liability of $1,617,464 from unrealized holding gains on investments
available-for-sale. The Company has no valuation allowance for the
deferred tax asset.
A reconciliation of differences between the statutory U.S. federal income
tax rate and the Company's effective tax rate follows:
<TABLE>
<S> <C>
U.S. statutory rate 35%
State tax, net of
federal benefit 6
Other, net 1
====
Effective tax rate 42%
====
</TABLE>
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1996, cash payments for income taxes and interest were as follows:
<TABLE>
<S> <C>
Income taxes $8,446,162
Interest 142,529
</TABLE>
15. CONCENTRATION OF CREDIT RISK:
At December 31, 1996, the Company had $205,587 on deposit with financial
institutions in excess of amounts federally insured.
16. CONTINGENT LIABILITIES:
The Company has received notice from the Internal Revenue Service proposing
adjustments to federal corporate income taxes for the Company's taxable
years 1992 through 1995. The proposed adjustments, which relate to
accumulated earnings tax, indicate an increase in taxes for these years of
approximately $11 million, excluding any penalties or interest. The
Company has analyzed these matters with tax counsel and believes the
adjustments proposed by the Internal Revenue Service are without merit.
The Company will contest the asserted adjustments through the
administrative appeals process and, if necessary, litigation. The Company
also has been named in two lawsuits brought by former employees alleging
wrongful termination and related claims. The lawsuit in which material
damages are being sought consists of several allegations seeking $10
million in damages for each allegation. The Company believes that these
claims are without merit and intends to defend them vigorously and,
accordingly, no provision for loss has been made in these financial
statements. The Company believes that the ultimate disposition of these
proceedings will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company has guaranteed a former employee's loan with a financial
institution with a balance outstanding at December 31, 1996 of $128,203.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pasadena Capital Corporation
We have audited the accompanying consolidated balance sheet of Pasadena Capital
Corporation and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pasadena Capital Corporation and Subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
Los Angeles, California
March 8, 1996, except as to
the information presented in Note 13
for which the date is March 31, 1996
18
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS:
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 7,928,282
Investment held-to-maturity 3,537,325
Accounts receivable 1,054,391
Notes receivable 2,452,547
Prepaid income taxes 391,856
Deferred tax asset 388,758
Other current assets 157,981
-----------
Total current assets 15,911,140
Investments available-for-sale 12,817,796
Investment held-to-maturity 633,033
Restricted deposits 240,204
Notes receivable 200,000
Property and equipment, net 2,210,179
Other assets 199,643
-----------
Total assets $32,211,995
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 1,967,214
Unearned revenue 87,473
-----------
Total current liabilities 2,054,687
-----------
Deferred tax liability 675,619
-----------
Total liabilities 2,730,306
-----------
Minority interest 13,517
-----------
Commitments
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
1,540,4874 issued and outstanding 5,792,225
Less notes receivable from stockholders (1,461,509)
Retained earnings 24,088,418
Unrealized holding gain on investments
available-for-sale, net of deferred taxes 1,049,038
-----------
Total stockholders' equity 29,468,172
-----------
Total liabilities and stockholders' equity $32,211,995
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Investment advisory fees $30,627,393
Administration fees 4,955,858
Interest income 712,799
Custodian and Trustee fees 348,876
Management fees 234,344
Dividend income 177,852
Other income 43,342
-----------
Total revenues 37,100,464
-----------
Operating expenses:
Salaries and other employee benefits 15,053,093
Rent 1,372,489
Computer service 1,234,000
Transfer agent 1,108,896
Depreciation and amortization 991,802
Legal, accounting and consulting 963,453
Travel and entertainment 928,503
Office expenses 841,906
Design and printing 449,364
Distribution of printed materials 372,813
Other 1,735,559
-----------
Total operating expenses 25,051,878
-----------
Income before provision for income taxes 12,048,586
Provision for income taxes 4,882,508
-----------
Net income $ 7,166,078
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NOTES UNREALIZED
RECEIVABLE HOLDING GAIN TOTAL
COMMON FROM RETAINED ON INVESTMENTS, STOCKHOLDERS'
STOCK STOCKHOLDERS EARNINGS NET OF DEFERRED TAXES EQUITY
------------ ------------- ----------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, beginning $6,192,502 ($2,047,519) $16,910,811 $ 107,569 $21,163,363
of year
Issuance of 500 19,385 19,385
shares of common
stock
Repurchase of 7,587 (419,662) 11,529 (408,133)
shares of common
stock
Principal reductions 586,010 586,010
on notes receivable
from stockholders
Increase in unrealized 941,469 941,469
holding gain, net of
deferred taxes of
$719,226
7,166,078 7,166,078
Net Income ----------- ------------ ----------- ---------- ------------
Balance, end of year $5,792,225 ($1,461,509) $24,088,418 $1,049,038 $29,468,172
=========== ============ =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 7,166,078
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 991,802
Gain on disposal of property and equipment (4,037)
Changes in assets and liabilities:
Accounts receivable 561,668
Prepaid income taxes 148,463
Current deferred tax asset (222,500)
Prepaid expenses 98,550
Other current assets (83,616)
Restricted deposits 162,763
Deferred tax asset 18,882
Other assets (11,685)
Accounts payable and accrued expenses 991,584
Unearned revenue 3,916
-----------
Net cash provided by operating activities 9,821,868
-----------
Cash flows from investing activities:
Purchase of investments available-for-sale (5,927,853)
Purchase of investment held-to-maturity (3,537,325)
Issuance of notes receivable (1,200,000)
Payments of notes receivable 7,691
Purchase of property and equipment (435,556)
Proceeds from disposition of property and equipment 12,567
------------
Net cash used in investing activities (11,080,476)
------------
Cash flows from financing activities:
Payments on notes receivable from stockholders 336,450
Repurchase of common stock (158,573)
Issuance of common stock 19,385
Sale of minority interest 1,000
------------
Net cash provided by financing activities 198,262
------------
Net decrease in cash and cash equivalents (1,060,346)
Cash and cash equivalents, beginning of year 8,988,628
------------
Cash and cash equivalents, end of year $ 7,928,282
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Pasadena
Capital Corporation ("PCC") , Roger Engemann & Associates, Inc. ("REA") and
its majority owned subsidiary, Roger Engemann Management Co., Inc. ("REMC")
and Pasadena National Trust Company ("PNTC") (collectively, the
"Company"). All significant intercompany transactions have been
eliminated.
Operations
----------
REA is a registered investment adviser under the Investment Company Act of
1940 (the "Act"). REA receives advisory fees for managing its clients'
investments, based upon a percentage of the market value of the net assets
in each client's portfolio.
REMC is also a registered investment adviser under the Act and furnishes
investment management advice and administrative services to The Pasadena
Group of Mutual Funds (the "Funds"). For these services, REMC receives
advisory and administration fees both based upon the daily net assets of
each of the Funds. For the year ended December 31, 1995, approximately 27%
of the Company's total revenues were derived from the Funds.
PNTC operates as a National Banking Association providing custodial
services via sub-custodial arrangements for clients of REA. PNTC also
serves as the transfer agent for the Funds.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a remaining
maturity of three months or less at the date of acquisition as cash
equivalents.
Investments
-----------
The Company's investment in equity securities are classified as available-
for-sale securities and are reported at fair value, with unrealized gains
and losses excluded from earnings and reported in a separate component of
stockholders' equity. The Company's investments in debt securities are
classified as held-to-maturity securities and are reported at amortized
cost.
Income Taxes
------------
The Company follows the liability method of accounting for income taxes.
Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets or the unexpired term of the lease.
The Company utilizes both straight-line and accelerated methods of
depreciation.
23
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Property and Equipment, Continued
---------------------------------
The estimated useful lives of the various asset classes used in the
computation of depreciation are as follows:
<TABLE>
<S> <C>
Office equipment and furnishings 5 to 7 years
Leasehold improvements 2 to 31.5 years
Automobiles 3 years
</TABLE>
Unearned Revenue
----------------
Clients of REA are billed their quarterly investment advisory fees in
advance. Accordingly, the portion of these billings which obligates REA to
provide services beyond the current year has been deferred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
-----------------------------------
Quoted market prices have been used to derive the fair values of
investments disclosed in these financial statements. The carrying amounts
reported in the balance sheet for notes receivable are a reasonable
estimate of their fair values.
2. RELATED-PARTY TRANSACTIONS:
PCC has an agreement with Pasadena Fund Services, Inc. ("PFSI") to provide
personnel, office space and other support services to PFSI. The management
fees for these support services were $234,344 during the year of which $16,
586 was outstanding at December 31, 1995. PFSI is the underwriter and
distributor for the Funds. The owner of PFSI is employed by, and a
stockholder of, PCC. Pursuant to an agreement between the parties, PCC
reimburses PFSI for an up-front dealer expense incurred in connection with
Class C share sales. The up-front dealer expense for the year ended
December 31, 1995 was $287,752.
The Company has guaranteed an employee loan with a financial institution in
the amount of $561,466.
The Company leases the majority of its office facilities from Roger
Engemann, Chairman of the Board of Directors and Chief Executive Officer of
PCC. Payments under these leases for the year ended December 31, 1995
totaled $388,844. The future minimum lease commitments under these leases
at December 31, 1995 are $10,623,000 extending through the year 2011.
3. INVESTMENTS:
At December 31, 1995, the Company has available-for-sale equity securities
reported at their aggregate fair value, with an aggregate cost of
$10,964,633. Gross unrealized holding gains of $1,853,163 are included in
stockholders' equity net of deferred tax liabilities of $804,125.
Available-for-sale securities comprise investments in the Funds.
At December 31, 1995, the Company has short-term and long-term held-to-
maturity debt securities, maturing in March 1996 and August 1998,
respectively, reported at amortized cost with an aggregate fair value of
$4,436,506. Of the long-term held-to-maturity securities, $204,204 are
reported as restricted deposits.
24
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995, consisted of the following:
<TABLE>
<S> <C>
Office equipment and furnishings $ 5,418,987
Leasehold improvements 1,687,225
Automobiles 69,021
Construction in progress 196,545
-----------
7,371,778
Less accumulated depreciation (5,161,599)
-----------
Property and equipment, net $ 2,210,179
===========
</TABLE>
5. RESTRICTED DEPOSITS:
The Company is in compliance with minimum regulatory investment
requirements relating to its PNTC subsidiary operations and maintains
deposits of $200,000 of government obligations at face value. The Company
also maintains a deposit in the Federal Reserve Bank.
6. COMMON STOCK:
The Company has various stock ownership programs for the benefit of its
employees. The Company has a stock purchase plan covering certain of its
key employees (the "Plan"). Under the Plan, 75% of the shares issued are
granted to the employees and represent an award for past service. Such
amounts are included in salary expense in the year of the award. The
remaining 25% of the shares are issued to the employees in exchange for
notes receivable from the employees with maturities ranging from 5 to 10
years. Interest accrues on these notes at prime plus 1% and the notes are
collateralized by shares issued to the employees. The unpaid balance of the
notes receivable is reflected as a reduction in stockholders' equity. In
the event that one of these key employees terminates employment with the
Company, he or she forfeits a portion of the shares granted. The amount of
the forfeiture depends upon when the termination occurs within a six-year
period from the date of the award. No additional shares were issued under
this plan during 1995.
The Company also issues stock to certain employees for cash or in exchange
for notes receivable from the employees, payable over five years at a fixed
interest rate of prime plus 1% on the date of issuance. The notes are
secured by the shares issued to the employees. The unpaid balance of the
notes receivable is reflected as a reduction in stockholders' equity. No
additional shares were issued for notes receivable under this plan in 1995.
25
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMON STOCK, CONTINUED:
On occasion, the Company will repurchase and retire shares of its common
stock. Upon repurchase, common stock is reduced, on a specific
identification basis, by the stockholders' cost basis in the repurchased
shares, with any difference between the stockholders' cost basis and the
repurchase price being recorded as an increase or decrease to retained
earnings.
7. EMPLOYEE BENEFIT PLANS:
The Company has various employee benefit plans The principal plan is the
Employee Stock Ownership Plan ("ESOP") which covers all full-time employees
of the Company with six months of service or more. ESOP expense is funded
currently, based on the lesser of 11% of the participant's compensation or
$16,500. The contribution for the year ended December 31, 1995 was
$551,069.
The Company has a defined contribution plan, Pasadena Capital Corporation
401(k) Plan and Trust (The "401(k) Plan"), which is available to all full-
time employees with six months of service or more. The Plan does not
require an annual employer contribution and none was made in 1995.
The Company also has a frozen Employee's Money Purchase Pension Plan and
Trust which covers certain employees. No contributions have been made
since 1989.
8. NOTES RECEIVABLE:
The Company has notes receivable from employees in addition to those
discussed in Note 6. The long-term note represents a note from an employee
maturing in March 1998. Interest accrues at prime plus 1% and the note is
collateralized by shares issued to the employee. The short-term notes
include uncollateralized notes from an employee maturing within one year
with interest accruing at 6%.
9. COMMITMENTS:
The Company has a standby letter of credit for $250,120, which is held as a
reserve for additional insurance requirements. At December 31, 1995, there
was no outstanding balance on the letter of credit. The letter of credit
is renewed annually and matures on each January 31.
The future minimum lease commitments under all of the Company's non-
cancelable leases at December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996 $ 1,157,000
1997 661,000
1998 618,000
1999 618,000
2000 618,000
2001 and Thereafter 7,586,000
-----------
Total $11,258,000
===========
</TABLE>
The Company also conducts its operations from other leased facilities.
Under the terms of one of the leases, the Company is responsible for
maintenance and certain other operating expenses.
26
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS, CONTINUED:
The Company has guaranteed the lease payments of an operating lease for
PFSI's Connecticut facility. The lease has an initial term of five years
ands a renewal option of five additional years. For the year ended December
31, 1995, the Company paid $132,500 in rent expense on this lease as part
of its management agreement with PFSI.
10. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<S> <C>
Current:
Federal $3,943,775
State 1,142,358
----------
Total current 5,086,133
Deferred (203,625)
----------
Provision for income taxes $4,882,508
==========
</TABLE>
At December 31, 1995, the Company had a net current deferred tax asset of
$388,758 and a net non-current deferred tax liability of $675,619. Current
deferred tax assets are comprised of $384,920 from temporary differences in
state taxes and $3,838 from a temporary difference between the net book and
tax values of property and equipment. Non-current deferred tax liabilities
are comprised of the net of a deferred tax asset of $128,506 from a
temporary difference between the net book and tax values of property and
equipment and a deferred tax liability of $804,125 from unrealized holding
gains on investments available-for-sale. The Company has no valuation
allowance for the deferred tax assets.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1995, the Company exchanged $249,560 of promissory notes from
employees for common stock, and experienced a non-cash increase in
investments of $1,660,773 resulting from an increase in the unrealized
holding gains.
During 1995, cash payments for interest and income taxes were as follows:
<TABLE>
<S> <C>
Income taxes $4,951,000
Interest 528
</TABLE>
12. CONCENTRATION OF CREDIT RISK:
At December 31, 1995, the Company had $2,112,747 on deposit with financial
institutions in excess of amounts either federally insured or insured by a
federally sponsored corporation.
27
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS:
On March, 19, 1996, the Company's shareholders adopted an equity incentive
plan which permits the issuance of stock options, stock appreciation rights
and restricted stock. The plan reserves 100,000 shares for grant.
In March 1996, the Company repurchased approximately 63,000 shares of
common stock from former employees for $4,091,000, which was settled by
cash payments totaling $3,654,000 and cancellation of related notes
receivable totaling $437,000. This repurchase included all of the shares
of the owner of PFSI.
On March 31, 1996, the Company purchased PFSI for approximately $2,600,000,
canceling notes receivable from PFSI's owner in approximately the same
amount. Also on March 31, 1996, the Company sold PNTC to Roger Engemann
for approximately $1,200,000 in exchange for a note receivable. The sale
proceeds equaled PNTC's net book value at the date of sale.
28
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,127,775
Investments available for sale 33,791,967
Accounts receivable 2,270,269
Deferred tax asset 799,971
Other current assets 130,577
-----------
Total current assets 39,120,559
Deferred dealer allowance, net 3,275,590
Intangibles, net 7,047,506
Property and equipment, net 1,885,569
Other assets 1,270,541
-----------
Total assets $52,599,765
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 4,202,241
Current contract payable 1,722,723
Current portion of note payable 578,102
-----------
Total current liabilities 6,503,066
-----------
Contract Payable 2,537,000
Note Payable 2,091,177
-----------
Total liabilities 11,131,243
-----------
Minority interest 13,524
-----------
Commitments
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
1,433,600 issued and outstanding 4,232,775
Less notes receivable from stockholders (1,011,467)
Retained earnings 38,587,989
Unearned compensation (354,299)
-----------
Total stockholders' equity 41,454,998
-----------
Total liabilities and stockholders' equity $52,599,765
===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
29
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
Revenues:
Investment advisory fees $18,815,297
Administration fees 2,676,463
Interest income 417,644
Custodian and Trustee fees 248,834
Realized gain/Dividend income 5,027,801
Broker-dealer fees 903,970
Other 1,286
-----------
Total revenues 28,091,295
-----------
Expenses:
Salaries and other employee benefits 7,363,012
Legal, accounting and consulting 1,133,568
Rent 572,126
Computer service 727,638
Transfer agent 304,253
Depreciation and amortization 282,109
Amortization of intangibles 453,852
Travel and entertainment 463,513
Dealer allowance 774,634
Office expenses 360,217
Design and printing 209,462
Distribution of printed materials 203,157
Other 1,249,615
-----------
Total operating expenses 14,097,156
-----------
Income before provision for income taxes 13,994,139
Provision for income taxes 5,784,898
-----------
Net income $ 8,209,241
===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
30
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 8,209,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 282,109
Amortization of deferred dealer allowance 453,852
Changes in assets and liabilities
Accounts receivable 2,391,998
Due from affiliate 1,495,978
Current deferred tax asset, net (172,789)
Deferred dealer allowance (613,261)
Other assets 289,103
Accounts payable and accrued expenses (2,945,483)
Deferred tax liability net (1,444,673)
Current tax liability 1,195,344
-----------
Net cash provided by operating activities 9,141,419
-----------
Cash flows from investing activities:
Investment activity, net (13,028,081)
Property and equipment activity, net (233,180)
-----------
Net cash used in investing activities (13,261,261)
-----------
Cash flows from financing activities:
-
Payments on note payable (269,679)
Repurchase of common stock (51,665)
-----------
Net cash used in financing activities (321,344)
-----------
Net decrease in cash and cash equivalents (4,441,186)
-----------
Cash and cash equivalents, beginning of year (6,658,961)
-----------
Cash and cash equivalents, end of year $ 2,127,775
===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
31
<PAGE>
PASADENA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements have been prepared by
Pasadena Capital Corporation without audit, 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 pursuant to such rules and regulations. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of Pasadena
Capital Corporation as of June 30,1997 have been included. The results of
operations for such interim period are not necessarily indicative of the
results for a full year.
2. On September 3, 1997, Pasadena Capital Corporation was acquired by Phoenix
Duff & Phelps, a Delaware Corporation with shares traded on the New York
Stock Exchange.
32
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
PHOENIX DUFF & PHELPS, PASADENA CAPITAL CORPORATION AND
GMG/SENECA CAPITAL MANAGEMENT LLC
The following unaudited pro forma combined information as of and for the six
months ended June 30, 1997, and for the year ended December 31, 1996, is based
on the historical financial statements of Pasadena Capital Corporation
("Pasadena"), included elsewhere in this Form 8-K/A, GMG/Seneca Capital
Management LLC ("Seneca") and the historical financial statements of Phoenix
Duff & Phelps Corporation ("Phoenix Duff & Phelps") included in its Annual
Report on Form 10-K for the year ended December 31, 1996 and the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997. The pro forma financial
information gives effect to the transactions consummated by the Merger Agreement
with Pasadena and the Purchase Agreement with Seneca.
The pro forma statements of operations were prepared assuming the transactions
consummated by the Merger and Purchase Agreements were effected as of January 1,
1996, and the pro forma statement of financial condition was prepared assuming
the transactions consummated by the Merger and Purchase Agreements were effected
on June 30, 1997. The purchase price allocation given effect to in the pro
forma financial statements is preliminary as additional information is necessary
to complete the purchase price allocation. The unaudited pro forma information
should be read in conjunction with the related notes thereto and the historical
financial statements of Phoenix Duff & Phelps Corporation and Pasadena Capital
Corporation.
The pro forma information does not purport to be indicative of the results of
operations that would have occurred had the transactions been consummated on the
assumed dates, nor is the information intended to be a projection for any future
period.
33
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PHOENIX DUFF PASADENA PRO FORMA
-------------------------------
& PHELPS CAPITAL SENECA LLC ADJUSTMENTS COMBINED
CORP.
----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 40,021 $ 2,128 $3,586 $(18,121) a,e $ 27,614
Marketable securities, at market 4,174 33,792 138 (33,792) a 4,312
Accounts receivable 25,495 2,270 1,484 (694) f 28,555
Prepaid expenses and other assets 1,890 131 96 4,600 i 6,717
---------- -------- -------- ---------- --------
TOTAL CURRENT ASSETS 71,580 38,321 5,304 (48,007) 67,198
---------- -------- -------- ---------- --------
Deferred commissions 3,275 3,275
Furniture, equipment and leasehold improvements 8,342 1,886 678 10,906
Intangible assets, net 54,830 7,048 92 103,188 a,b 165,158
Goodwill, net 169,413 148,141 a 317,554
Investment in Beutel Goodman & Company Ltd. 32,016 32,016
Long-term investments and other assets 20,008 1,270 88 21,366
---------- -------- -------- ---------- --------
TOTAL ASSETS $ 356,189 $ 51,800 $ 6,162 $ 203,322 $617,473
========== ======== ======== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 16,203 5,925 3,160 6,598 f 31,886
Payables to related parties 2,647 2,647
Broker-dealer payable 7,417 7,417
Short-term debt 578 9,497 e 10,075
---------- -------- -------- ---------- --------
TOTAL CURRENT LIABILITIES 26,267 6,503 3,160 16,095 52,025
---------- -------- -------- ---------- --------
Deferred taxes, net 31,147 (800) 40,944 d 71,291
Long-term debt 2,091 190,000 e 192,091
Lease obligations and other long-term liabilities 6,837 2,537 9,374
---------- -------- -------- ---------- --------
TOTAL LIABILITIES 64,251 10,331 3,160 247,039 324,781
---------- -------- -------- ---------- --------
SERIES A PREFERRED STOCK 78,822 78,822
MINORITY INTEREST 14 740 h 754
COMMON STOCKHOLDERS' EQUITY 213,116 41,455 3,002 (44,457) a,b,d,h 213,116
---------- -------- -------- ---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 356,189 $ 51,800 $ 6,162 $ 203,322 $617,473
========== ======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
combined financial statements.
34
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
SUMMARY OF PRO FORMA ADJUSTMENTS - STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
BALANCE SHEET ACCOUNT NOTE ADJUSTMENT JUNE 30, 1997
- --------------------------------- ---- ------------------------------------------------ -------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents e Financing proceeds from Credit Facility $ 190,000
a Payment of Pasadena purchase price (180,182)
a Payment of Seneca purchase price (27,939)
---------
(18,121)
---------
Marketable securities a Payment of Pasadena purchase price (33,792)
---------
Accounts receivable f Adjustment to Pasadena assets (694)
---------
Prepaid expenses and other assets i Retention bonuses 4,600
---------
Intangible assets, net b Fair value adjustment (7,049)
a Intangible assets 110,237
---------
103,188
---------
Goodwill, net a Excess purchase price 148,141
---------
EFFECT ON TOTAL ASSETS $ 203,322
=========
Accounts payable and
accrued liabilities f Adjustment to Pasadena liabilities 6,598
---------
Short-term debt e Payment of Seneca purchase price $ 9,497
---------
Deferred taxes d Deferred taxes on identified intangible assets 39,934
Deferred taxes on adjustments to Pasadena assets
and liabilities 1,009
---------
40,944
---------
Long-term debt e Obligations under Credit Facility 190,000
---------
EFFECT ON TOTAL LIABILITIES 247,039
---------
Minority interest h Minority interest in Seneca 740
---------
Stockholders' equity h Minority interest in Seneca (740)
a,b Intangible assets 103,188
f Adjustment to Pasadena assets and liabilities (2,693)
d Deferred taxes on identified intangible assets (39,934)
d Deferred taxes on adjustments to Pasadena assets
and liabilities (1,009)
a Excess purchase price 148,141
a Payment of purchase price (251,410)
---------
EFFECT ON STOCKHOLDERS' EQUITY (44,457)
---------
EFFECT ON TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 203,322
=========
</TABLE>
35
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------
PHOENIX DUFF PASADENA
& PHELPS CAPITAL CORP. SENECA LLC ADJUSTMENTS COMBINED
----------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Investment management fees $ 55,683 $ 18,815 $ 9,121 $ $ 83,619
Mutual funds - ancillary fees 11,152 11,152
Other income and fees 2,226 3,829 239 6,294
----------- ----------- ---------- ---------- ------------
TOTAL REVENUES 69,061 22,644 9,360 101,065
----------- ----------- ---------- ---------- ------------
OPERATING EXPENSES
Employment expenses 30,754 7,363 4,768 460 i 43,345
Other operating expenses 17,052 5,998 2,820 (545) 25,325
Depreciation and amortization 1,247 282 58 1,587
Amortization of goodwill and intangibles 4,731 453 5,773 c 10,957
Amortization of deferred commissions 2,836 2,836
----------- ----------- ---------- ---------- ------------
TOTAL OPERATING EXPENSES 56,620 14,096 7,646 5,688 84,050
----------- ----------- ---------- ---------- ------------
OPERATING INCOME 12,441 8,548 1,714 (5,688) 17,015
----------- ----------- ---------- ---------- ------------
OTHER INCOME - NET 6,336 5,028 11,364
----------- ----------- ---------- ---------- ------------
INTEREST (EXPENSE) INCOME - NET
Interest expense (449) (131) (5,985) e (6,565)
Interest income 623 549 37 1,209
----------- ----------- ---------- ---------- ------------
TOTAL INTEREST (EXPENSE) INCOME- NET 174 418 37 (5,985) (5,356)
----------- ----------- ---------- ---------- ------------
MINORITY INTEREST (440) h (440)
PRETAX INCOME FROM CONTINUING OPERATIONS 18,951 13,994 1,751 (12,113) 22,583
Provision for Income Taxes 7,865 5,785 (3,827) j 9,823
----------- ----------- ---------- ---------- ------------
NET INCOME FROM CONTINUING OPERATIONS 11,086 8,209 1,751 (8,286) 12,760
Series A Preferred Stock Dividends 2,374 2,374
----------- ----------- ---------- ---------- ------------
INCOME FROM CONTINUING OPERATIONS AVAILABLE
TO COMMON STOCKHOLDERS $ 8,712 $ 8,209 $ 1,751 $ (8,286) $ 10,386
=========== =========== ========== ========== ============
Earnings per Common and Common Equivalent Share:
Primary $ .20 $ .23
Assuming Full Dilution $ -- --
Weighted Average Number of Shares Outsanding:
Primary 44,479 44,501
Assuming Full Dilution 54,369 54,391
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
combined financial statements.
36
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Phoenix Duff Pasadena ------------------------------
& Phelps Capital Corp. Seneca, LLC Adjustments Combined
--------------- -------------- --------------- ------------ -------------
REVENUES
<S> <C> <C> <C> <C> <C>
Investment management fees $118,160 $35,212 $15,172 $ $168,544
Mutual Funds - ancillary fees 22,030 130 22,160
Consulting and investment research fees 7,699 11 7,710
Other income and fees 4,615 9,199 413 14.227
---------------------------- --------- ------------ ------------
TOTAL REVENUES 152,504 44,552 15,585 212,641
-------------- -------- --------- ------------ ------------
OPERATING EXPENSES
Employment expenses 58,805 13,263 8,183 920 i 81,171
Other operating expenses 36,523 11,210 3,027 50,760
Depreciation and amortization 2,212 827 3,039
Amortization of goodwill & intangibles 9,623 76 12,377 c 22,075
Amortization of deferred commissions 6,052 6,052
-------------- -------- --------- ------------- ------------
TOTAL OPERATING EXPENSES 113,215 25,375 11,210 13,297 163,097
-------------- -------- --------- ------------- ------------
OPERATING INCOME 39,289 19,177 4,375 (13,297) 49,544
-------------- -------- --------- ------------- ------------
OTHER INCOME -NET 5,213 (794) 4,419
-------------- -------- --------- ------------- ------------
INTEREST INCOME (EXPENSE) - NET
Interest expense (1,640) (11,685) e (13,325)
Interest income 2,044 696 2,740
-------------- -------- --------- ------------- ------------
TOTAL INTEREST INCOME (EXPENSE) - NET 404 696 (11,685) (10,585)
-------------- -------- --------- ------------- ------------
MINORITY INTEREST (899) h (899)
PRETAX INCOME FROM CONTINUING OPERATIONS 44,906 19,873 3,581 (25,881) 42,479
Provision for Income Taxes 18,187 8,280 (7,853) j 18,614
-------------- -------- --------- ------------- ------------
NET INCOME FROM CONTINUING OPERATIONS 26,719 11,593 3,581 (18,028) 23,865
Series A Preferred Stock Dividends 4,713 4,713
-------------- -------- --------- ------------- ------------
INCOME FROM CONTINUING OPERATIONS AVAILABLE
TO COMMON STOCKHOLDERS $ 22,006 $11,593 $ 3,581 $ (18,028) $ 19,152
============== ======== ========= ============= ============
Earnings per Common and Common Equivalent
Share:
Primary $ .50 $ .43
Assuming Full Dilution $ .49 --
Weighted Average Number of Shares
Outstanding:
Primary 44,215 44,232
Assuming Full Dilution 54,093 54,110
</TABLE>
The accompanying notes are an integral part of the unaudited combined
financial statements.
37
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
SUMMARY OF PRO FORMA ADJUSTMENTS - STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
INCOME STATEMENT ITEM NOTE ADJUSTMENT JUNE 30, 1997 DECEMBER 31, 1996
- ---------------------------- ---- ------------------------------------------- -------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Employment expenses i Amortization of retention bonus $ 460 $ 920
------- --------
Other operating expenses k Transaction costs incurred by
Pasadena (545)
------- --------
Amortization of goodwill c Amortization of goodwill 1,399 3,628
and intangible assets c Amortization of intangible assets 4,374 8,749
------- --------
5,773 12,377
------- --------
Interest expense e Interest expense on Credit Facility (5,700) (11,685)
e Interest expense on short-term notes (285) (570)
------- --------
(5,985) (11,115)
Minority interest h Minority interest in Seneca's earnings (440) (899)
------- --------
Provision for income taxes j Income tax on majority interest in Seneca's
net earnings 538 1,100
j Tax effect of pro forma adjustments (4,365) (8,953)
------- --------
(3,827) (7,853)
------- --------
EFFECT ON INCOME FROM
CONTINUING OPERATIONS $(8,286) $(18,028)
======== =========
</TABLE>
38
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The pro forma financial statements include the historical results of Phoenix
Duff & Phelps, Pasadena and Seneca. The following pro forma adjustments, which
are necessary to reflect the acquisition of Pasadena and a majority interest in
Seneca, are included:
(a) The acquisitions of Pasadena and a majority interest in Seneca have
been accounted for as business combinations using the purchase method.
The purchase price for these acquisitions is the sum of the
consideration paid and the transaction costs incurred by Phoenix Duff
& Phelps. Under the purchase method of accounting for business
combinations, the purchase price is allocated to the assets and
liabilities based on their relative fair values with the excess of the
acquisition cost over the fair value of the net assets recorded as
excess of cost over book value acquired. Preliminary analyses have
been performed in order to identify intangible assets and to allocate
purchase price to identifiable assets with the excess of purchase
price over net tangible and intangible assets recorded as goodwill.
The following table summarizes the calculation and allocation of
purchase price (in thousands):
<TABLE>
<CAPTION>
PURCHASE PRICE: PASADENA SENECA TOTAL
-------- ------ -----
<S> <C> <C> <C>
Consideration paid or payable $211,576 $ 36,218 $247,794
Transaction costs 2,398 1,219 3,617
-------- -------- --------
Total Purchase Price $213,974 $ 37,437 $251,411
======== ======== ========
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 22,356 148,141
-------- -------- --------
Total Allocation of Purchase Price $213,974 $ 37,437 $251,411
======== ======== ========
</TABLE>
(b) Pro forma adjustments have been included to reflect the fair value
adjustments made to the historical cost basis of certain Pasadena
assets.
(c) Intangible assets identified (primarily investment management
contracts) in the amount of $110.2 million have an average estimated
useful life of 13 years. Pro forma adjustments have been made to
amortize identified intangible assets over their estimated useful
lives. The remaining goodwill of $148.1 million will be amortized
over 40 years.
(d) In connection with the Pasadena acquisition, identified intangibles
with an estimated fair value of $97.4 million have been created for
book purposes. These intangible assets have not been stepped up to
fair value for tax purposes. A deferred tax liability of $39.9
million has been established for the book/tax basis difference of the
Pasadena identified intangible assets using the expected effective tax
rate. No deferred tax provision is provided for the book/tax basis
difference of the goodwill resulting from the Pasadena acquisition.
In connection with the Seneca acquisition, identified intangibles with
an estimated fair value of $12.8 million and goodwill of $22.4 million
have been created for book purposes. These assets have been stepped up
to fair value for tax purposes.
39
<PAGE>
PHOENIX DUFF & PHELPS CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(e) The acquisitions of Pasadena and a majority interest in Seneca were
financed with existing resources and borrowings of $190 million under
a $200 million bank Credit Facility. Borrowings under this facility
are unsecured, mature in five years and bear interest at variable
rates. A pro forma adjustment has been included to reflect the
interest expense at the initial rate of 6.0%. A .125% change in the
interest rate would increase or decrease interest expense by
approximately $238,000. In addition, $9.5 million of the Seneca
purchase price was paid by issuing short-term notes and the resulting
interest expense at 6.125% has been reflected in the pro forma
adjustments.
(f) Certain assets and liabilities of Pasadena have been adjusted, net of
tax, to approximate the net tangible asset value of Pasadena which
affects total purchase price.
(g) Phoenix Duff & Phelps acquired a majority interest in Seneca with the
minority interest held by Seneca's senior management. The financial
position and results of operations of Seneca are presented as fully
consolidated with the minority interest shown separately.
(h) Income to minority interest represents the minority shareholders'
interest in Seneca which is fully consolidated in the pro forma
combined financial statements.
(i) Other assets include retention bonuses paid to key management, subject
to repayment in the event employment is terminated within five years.
(j) The pro forma adjustments have been tax effected at an estimated rate
of 41%. A pro forma adjustment has been made to tax effect the
earnings of Seneca, a Limited Liability Company, which were not tax
effected in the historical financial statements.
(k) Other operating expenses includes transaction costs incurred by
Pasadena. A pro forma adjustment has been included to remove these
costs as it is assumed that these costs would have been incurred prior
to the date of acquisition.
(l) For the periods ended June 30, 1997 and December 31, 1996, Phoenix
Duff & Phelps historical earnings per share were computed using
weighted average shares of Phoenix Duff & Phelps Common Stock and
common stock equivalents. Common stock equivalents are based on
outstanding stock options under nonqualified stock option plans.
The pro forma combined primary and fully diluted earnings per share
were computed giving consideration to stock option grants resulting
from the acquisitions.
40
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ------------------------------------- ----
23(a) Consent of Coopers & Lybrand, L.L.P. 42
41
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-48338, 33-46359, 33-92412, 33-99414, and 333-19073) of
Phoenix Duff & Phelps Corporation of our reports, with which respect to the year
ended December 31, 1996 includes an explanatory paragraph related to various
legal and regulatory proceedings and is dated April 3, 1997, and with respect to
December 31, 1995 is dated March 8, 1996 relating to our audits of the
consolidated financial statement of Pasadena Capital Corporation and
Subsidiaries, which appears in the Current Report on Form 8K/A of Phoenix Duff &
Phelps Corporation dated November 13, 1997.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Los Angeles, California
November 13, 1997
42
