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, 1998
PHOENIX INVESTMENT PARTNERS, LTD.
DELAWARE 95-4191764
(State of Incorporation) (I.R.S. Employer Identification No.)
56 Prospect St., Hartford, Connecticut 06115-0480 (860) 403-7667
(Address of principal executive offices) (Registrant's telephone number)
PHOENIX DUFF & PHELPS CORPORATION
(Former name)
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, 1998, the registrant had 43,457,971 shares of $.01 par value
common stock outstanding.
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD. AND SUBSIDIARIES
Quarter Ended September 30, 1998
Index
PART I - FINANCIAL INFORMATION:
Page
Item 1. Consolidated Financial Statements:
Consolidated Condensed Statements of Financial Condition. 3
September 30, 1998 and December 31, 1997
Consolidated Statements of Income ....................... 4
Three Months Ended September 30, 1998 and
Three Months Ended September 30, 1997
Consolidated Statements of Income ....................... 5
Nine Months Ended September 30, 1998 and
Nine Months Ended September 30, 1997
Consolidated Condensed Statements of Cash Flows ......... 6
Nine Months Ended September 30, 1998 and
Nine Months Ended September 30, 1997
Notes to the Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition............ 13
Liquidity and Capital Resources.......................... 22
Impact of the Year 2000 Issue............................ 22
Cautionary Statement Under Section 21E of the Securities Exchange
Act of 1934.............................................. 23
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders...... 24
Item 6. Exhibits and Reports on Form 8-K......................... 24
Signatures........................................................ 25
2
<PAGE>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Phoenix Investment Partners, Ltd. and Subsidiaries
Consolidated Condensed Statements of Financial Condition
(in thousands)
(Unaudited)
September 30, December 31,
1998 1997
Assets
Current Assets
Cash and cash equivalents $ 23,121 $ 21,872
Marketable securities, at market 16,531 12,000
Accounts receivable 33,627 31,537
Prepaid expenses and other current assets 2,992 2,712
--------- --------
Total current assets 76,271 68,121
Deferred commissions 3,183 3,998
Furniture, equipment and leasehold improvements, net 9,062 10,071
Goodwill and intangible assets, net 452,376 468,117
Investment in Beutel, Goodman & Company Ltd. 26,752 29,884
Long-term investments and other assets 13,098 24,758
--------- --------
Total assets $ 580,742 $604,949
========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and other accrued liabilities $ 31,056 $ 25,742
Payables to related parties 2,025 3,135
Broker-dealer payable 8,173 9,157
Short-term notes payable 5,853
Current portion of long-term debt 2,196 2,241
--------- --------
Total current liabilities 43,450 46,128
Deferred taxes, net 58,114 66,020
Long-term debt, net of current portion 2,054 2,682
Convertible subordinated debentures 76,359
Credit facility 180,000 185,000
Lease obligations and other long-term liabilities 5,058 6,617
--------- --------
Total liabilities 365,035 306,447
--------- --------
Minority Interest 1,942 976
--------- --------
Series A Convertible Exchangeable Preferred Stock 78,827
--------- --------
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares
authorized, 44,892,833 and 44,295,261 shares issued,
and 43,645,633 and 43,950,261 shares outstanding 449 444
Additional paid-in capital 192,070 188,566
Retained earnings 28,731 21,624
Accumulated other comprehensive income 1,665 10,674
Treasury stock, at cost, 1,247,200 and 345,000 shares (9,150) (2,609)
--------- --------
Total stockholders' equity 213,765 218,699
--------- --------
Total liabilities and stockholders' equity $ 580,742 $604,949
========= ========
The accompanying notes are an integral part of these statements.
3
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Phoenix Investment Partners, Ltd. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(Unaudited)
Three months ended September 30,
1998 1997
Revenues
Investment management fees $ 49,907 $ 36,565
Mutual funds - ancillary fees 6,779 5,152
Other income and fees 689 532
--------- --------
Total revenues 57,375 42,249
--------- --------
Operating Expenses
Employment expenses 22,239 18,730
Other operating expenses 14,026 9,708
Depreciation and amortization of
leasehold improvements 976 697
Amortization of goodwill and intangible assets 5,523 3,672
Amortization of deferred commissions 390
--------- --------
Total operating expenses 43,154 32,807
--------- --------
Operating Income 14,221 9,442
--------- --------
Equity in Earnings of Unconsolidated Affiliates 622 1,011
--------- --------
Other (Expense) Income - Net (308) 324
--------- --------
Interest (Expense) Income - Net
Interest expense (3,978) (1,505)
Interest income 361 776
--------- --------
Total interest expense - net (3,617) (729)
--------- --------
Income to Minority Interest (655) (290)
--------- --------
Income Before Income Taxes 10,263 9,758
Provision for income taxes 4,517 3,676
--------- --------
Net Income 5,746 6,082
Other Comprehensive (Loss) Income, Net of Tax
Foreign currency translation adjustment (658) (40)
Unrealized (losses)gains on securities available-for-sale (5,275) 3,041
Total other comprehensive (loss) income (5,933) 3,001
--------- --------
Comprehensive (Loss) Income $ (187) $ 9,083
========= ========
Net Income $ 5,746 $ 6,082
Series A preferred stock dividends 1,188
--------- --------
Income available to common stockholders $ 5,746 $ 4,894
========= ========
Weighted average shares outstanding
Basic 44,164 44,090
Diluted 54,000 44,696
Earnings per share
Basic $ .13 $ .11
Diluted $ .12 $ .11
The accompanying notes are an integral part of these statements.
4
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Phoenix Investment Partners, Ltd. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(Unaudited)
Nine months ended September 30,
1998 1997
Revenues
Investment management fees $ 144,345 $ 92,248
Mutual funds - ancillary fees 19,401 16,304
Other income and fees 2,068 2,758
--------- --------
Total revenues 165,814 111,310
--------- --------
Operating Expenses
Employment expenses 67,259 49,484
Other operating expenses 40,409 26,760
Restructuring charges 366
Depreciation and amortization of
leasehold improvements 2,849 1,944
Amortization of goodwill and intangible assets 16,536 8,403
Amortization of deferred commissions 995 2,836
--------- --------
Total operating expenses 128,414 89,427
--------- --------
Operating Income 37,400 21,883
--------- --------
Equity in Earnings of Unconsolidated Affiliates 2,677 657
--------- --------
Other Income - Net 290 107
--------- --------
Gain on Sale 6,907
Interest (Expense) Income - Net
Interest expense (10,876) (1,954)
Interest income 1,228 1,399
--------- --------
Total interest expense - net (9,648) (555)
--------- --------
Income to Minority Interest (1,608) (290)
--------- --------
Income Before Income Taxes 29,111 28,709
Provision for income taxes 12,809 11,541
--------- --------
Net Income 16,302 17,168
Other Comprehensive Income, Net of Tax
Foreign currency translation adjustment (1,169) (171)
Unrealized (losses) gains on securities available-for-sale (7,840) 8,025
Total other comprehensive (loss) income (9,009) 7,854
--------- --------
Comprehensive Income $ 7,293 $ 25,022
========= ========
Net Income $ 16,302 $ 17,168
Series A preferred stock dividends 1,223 3,562
--------- --------
Income available to common stockholders $ 15,079 $ 13,606
========= ========
Weighted average shares outstanding
Basic 44,142 44,076
Diluted 54,116 44,555
Earnings per share
Basic $ .34 $ .31
Diluted $ .33 $ .31
The accompanying notes are an integral part of these statements.
5
<PAGE>
Phoenix Investment Partners, Ltd. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended September 30,
1998 1997
Cash Flows from Operating Activities:
Net income $ 16,302 $17,168
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of
leasehold improvements 2,849 1,944
Amortization of goodwill and intangible assets 16,536 8,403
Amortization of deferred commissions asset 995 2,836
Income to minority interest 1,608 290
Equity in earnings of unconsolidated
affiliates, net of dividends 1,075 1,928
Payments of deferred commissions (180) (4,444)
Gain on sale of deferred commissions asset (6,907)
Changes in other operating assets (1,330) (552)
Changes in other operating liabilities 510 (133)
-------- -------
Net cash provided by operating activities 38,365 20,533
-------- -------
Cash Flows from Investing Activities:
Purchase of subsidiaries, net of cash acquired (6,647) (179,075)
Capital expenditures, net (1,841) (1,726)
Purchase of long-term investments (2,335) (2,220)
Other investing activities (4,840) 3,946
Distributions to minority interests (643)
Proceeds from sale of deferred commissions asset 26,015
Proceeds from long-term investments 11,246
-------- -------
Net cash used in investing activities (16,306) (141,814)
-------- --------
Cash Flows from Financing Activities:
(Repayment) borrowing of debt, net (5,674) 168,833
Dividends paid (9,472) (11,496)
Stock repurchases (6,541) (1,550)
Proceeds from issuance of stock 877 1,653
Other financing activities (140)
--------- -------
Net cash (used in) provided by financing activities (20,810) 157,300
-------- -------
Net increase in cash and cash equivalents 1,249 36,019
Cash and cash equivalents, beginning of period 21,872 22,466
-------- -------
Cash and Cash Equivalents, End of Period $ 23,121 $58,485
======== =======
Supplemental Cash Flow Information:
Interest paid $ 10,896 $ 933
Income taxes paid $ 15,565 $ 5,370
The accompanying notes are an integral part of these statements.
6
<PAGE>
Phoenix Investment Partners, Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements of Phoenix Investment
Partners, Ltd. and subsidiaries (PXP or the Company), formerly Phoenix Duff &
Phelps Corporation, included herein have been prepared in accordance with the
instructions to the Quarterly Report on 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. Reclassifications have been made, when necessary, to
conform the prior period presentation to the current period presentation.
2. Recent Accounting Pronouncements
PXP adopted Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting Comprehensive Income," as of January 1, 1998. This statement
establishes standards for the reporting and display of comprehensive income
and its components in a full set of financial statements. This statement
defines the components of comprehensive income as those items that were
previously reported only as components of equity and were excluded from the
Statement of Income. (See Note 6.)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15,
1997. This statement requires the disclosure of different types of business
activities and economic environments of an enterprise, as they relate to a
specific segment. These disclosures are not required for interim periods in
the initial year.
As the above statements only address financial statement disclosure, they
have no impact on PXP's financial results.
3. Acquisitions
On July 27, 1998, PXP completed its purchase of a 74.9% interest in
GMG/Seneca Capital Management L.P. for $.7 million, a transaction that was
contemplated at the time of the GMG/Seneca Capital Management LLC (Seneca)
acquisition.
4. Pro Forma Results
On July 17, 1997, PXP acquired a 74.9% interest in Seneca, a San
Francisco-based investment advisor, for approximately $37.5 million. On
September 3, 1997, PXP acquired Pasadena Capital Corporation (PCC), the
parent company of Roger Engemann & Associates, Inc., for approximately $214.0
million. Since PXP's third quarter 1997 financial statements do not reflect
the operations of PCC and Seneca for the full quarter, management believes
that, for comparative purposes, the most meaningful presentation of 1997
financial results is on a pro forma basis.
The following financial information for the three and nine months ended
September 30, 1998 reflects actual results. The following pro forma financial
information for the three and nine months ended September 30, 1997 is derived
from the historical financial statements of PXP, PCC and Seneca, and gives
effect to the acquisitions of PCC and a majority interest in Seneca by PXP.
The pro forma financial information has been prepared assuming these
acquisitions were effected on January 1, 1997 and does not include the actual
results that would have been obtained had the acquisitions actually taken
effect on the aforementioned assumed date.
7
<PAGE>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Actual Pro Forma Actual Pro Forma
(in thousands, except per share amounts)
Revenues $57,375 $ 52,756 $165,814 $153,821
------- -------- -------- --------
Employment expenses 22,239 22,574 67,259 65,919
Other operating expenses 15,392 13,006 44,619 42,698
Amortization of goodwill
and intangible assets 5,523 5,523 16,536 16,536
------- -------- ------- -------
Operating income 14,221 11,653 37,400 28,668
Other income - net 314 1,284 2,967 13,399
Interest expense - net (3,617) (1,936) (9,648) (8,043)
Income to minority interest (655) (360) (1,608) (800)
------- -------- ------- -------
Income before income taxes 10,263 10,641 29,111 33,224
Provision for income taxes 4,517 4,875 12,809 14,698
------- -------- ------- -------
Net income $ 5,746 $ 5,766 $16,302 $18,526
======= ======== ======= =======
Earnings per share
Basic $ .13 $ .10 $ .34 $ .34
Diluted $ .12 $ .10 $ .33 $ .34
5. Dividends and Other Capital Transactions
On October 30, 1998, the Company's Board of Directors approved a quarterly
dividend of $.06 per common share, payable December 10, 1998, to stockholders
of record on November 27, 1998.
On April 3, 1998, PXP exchanged 3.2 million shares of Series A Convertible
Exchangeable Preferred Stock (Preferred Stock) for 6% Convertible
Subordinated Debentures (Debentures), due 2015. Holders of outstanding
Preferred Stock as of the exchange date received the $25.00 principal amount
of the Debentures in exchange for each share of Preferred Stock, including
unpaid and accrued dividends. Interest on the Debentures for the period from
September 10, 1998 through December 9, 1998 will be payable on December 10,
1998 to registered holders as of November 20, 1998.
As of September 30, 1998, the Company, in accordance with the previously
announced stock repurchase program, had purchased 1,247,200 shares of PXP
common stock for a total cost of $9.2 million.
8
<PAGE>
6. Comprehensive Income
The components of, and related tax effects for, other comprehensive income
are as follows(in thousands):
Three Months Ended September 30, 1998 Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
Foreign currency translation adjustment $ (1,115) $ 457 $ (658)
Unrealized losses on securities
available-for-sale:
Unrealized holding losses arising
during period (8,941) 3,666 (5,275)
-------- ------- --------
Other comprehensive loss $(10,056) $ 4,123 $ (5,933)
======== ======= ========
Nine Months Ended September 30, 1998 Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
Foreign currency translation adjustment $ (1,981) $ 812 $ (1,169)
Unrealized losses on securities
available-for-sale:
Unrealized holding losses arising
during period (13,288) 5,448 (7,840)
-------- ------- --------
Other comprehensive loss $(15,269) $ 6,260 $ (9,009)
======== ======= ========
Three Months Ended September 30, 1997 Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
Foreign currency translation adjustment $ (68) $ 28 $ (40)
Unrealized gains on securities
available-for-sale:
Unrealized holding gains arising
during period 5,154 (2,113) 3,041
-------- -------- -------
Other comprehensive income $ 5,086 $ (2,085) $ 3,001
======== ======== ========
Nine Months Ended September 30, 1997 Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
Foreign currency translation adjustment $ (290) $ 119 $ (171)
-------- ------- --------
Unrealized gains on securities
available-for-sale:
Unrealized holding gains arising
during period 13,175 (5,402) 7,773
Plus: reclassification adjustment for
losses realized in net income 427 (175) 252
-------- ------- ------
Net unrealized gains 13,602 (5,577) 8,025
--------- -------- ------
Other comprehensive income $ 13,312 $ (5,458) $ 7,854
========= ======== =======
9
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The following tables summarize accumulated other comprehensive income
balances (in thousands):
As of September 30, 1998: Accumulated
Foreign Unrealized Other
Currency Gains on Comprehensive
Items Securities Income
Balance as of December 31, 1997 $ (1,171) $ 11,845 $ 10,674
Current period change (1,169) (7,840) (9,009)
---------- ----------- ----------
Balance as of September 30, 1998 $ (2,340) $ 4,005 $ 1,665
========== ========== ==========
As of December 31, 1997: Accumulated
Foreign Unrealized Other
Currency Gains on Comprehensive
Items Securities Income
Balance as of December 31, 1996 $ (330) $ 4,932 $ 4,602
Current period change (841) 6,913 6,072
---------- ---------- ----------
Balance as of December 31, 1997 $ (1,171) $ 11,845 $ 10,674
========== ========== ==========
7. Earnings Per Share
For the periods ended September 30, 1998 and September 30, 1997, basic and
diluted earnings per share (EPS) were computed in accordance with SFAS No.
128, "Earnings per Share." Basic EPS is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income,
adjusted for debenture interest, net of tax, by the weighted average number
of common stock equivalent shares outstanding for the period, with the
exception that common stock equivalents, and the related earnings effect, are
ignored in the event of anti-dilution. Common stock equivalents are computed
based on outstanding stock options under the non-qualified stock option
plans, the conversion of the subordinated debentures to common stock, in 1998
only, and the conversion of preferred stock to common stock.
The following tables reconcile PXP's basic earnings per share to diluted
earnings per share (in thousands, except per-share amounts):
Three Months Ended September 30, 1998
Per-Share
Income Shares Amount
Net income $ 5,746
Less: preferred stock dividends --
Basic EPS
Income available to common
stockholders 5,746 44,164 $ .13
======
Effect of Dilutive Securities
Stock options 337
6% convertible debentures 681 9,499
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 6,427 54,000 $ .12
======= ====== ======
10
<PAGE>
Nine Months Ended September 30, 1998
Per-Share
Income Shares Amount
Net income $16,302
Less: preferred stock dividends 1,223
Basic EPS
Income available to common
stockholders 15,079 44,142 $ .34
======
Effect of Dilutive Securities
Stock options -- 475
6% convertible debentures 1,333 9,499
Convertible preferred stock 1,223 --
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $17,635 54,116 $ .33
======= ====== ======
Three Months Ended September 30, 1997
Per-Share
Income Shares Amount
Net income $ 6,082
Less: preferred stock dividends 1,188
Basic EPS
Income available to common
stockholders 4,894 44,090 $ .11
======
Effect of Dilutive Securities
Stock options -- 606
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 4,894 44,696 $ .11
======= ====== ======
11
<PAGE>
Nine Months Ended September 30, 1997
Per-Share
Income Shares Amount
Net income $ 17,168
Less: preferred stock dividends 3,562
Basic EPS
Income available to common
stockholders 13,606 44,076 $ .31
======
Effect of Dilutive Securities
Stock options -- 479
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 13,606 44,555 $ .31
======== ====== ======
In accordance with SFAS No. 128, the computation of diluted earnings per
share and the respective weighted average diluted shares for the three and
nine months ended September 30, 1997, excludes the effect of the conversion
of the Preferred Stock since these securities were anti-dilutive. Had the
Preferred Stock not been anti-dilutive, the weighted average number of
diluted shares for the three and nine months ended September 30, 1997 would
have been 54.6 million and 54.4 million, respectively.
8. Subsequent Events
On July 30, 1998, PXP entered into a definitive agreement with Toronto-based
First International Asset Management, Inc. to sell PXP's investment in
Beutel, Goodman & Company Ltd. (BG) for US$57.5 million. The transaction is
expected to close by December 31, 1998, with the purchase price partially
reduced due to third quarter financial market events that affected certain
closing conditions in the sales agreement. Available cash from the sale of BG
will be used to reduce outstanding debt.
12
<PAGE>
Phoenix Investment Partners, Ltd. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Business Description
Phoenix Investment Partners, Ltd. and subsidiaries (PXP or the Company) provide
a variety of financial services to a broad base of institutional, corporate and
individual clients. The original business of PXP's predecessor company, Duff &
Phelps Corporation (D&P), which was founded in 1932, was to provide clients with
investment research on public utility companies. D&P grew by expanding its
products and services in areas in which management believed its core investment
research business provided a competitive advantage. D&P's utility research was
expanded over time to include leading industrial and financial companies. As its
capabilities in investment research grew, D&P built upon its reputation to
establish a range of complementary financial services. D&P entered the
institutional investment management business in 1979, and investment management
grew to become D&P's primary business. In 1995, D&P merged with Phoenix
Securities Group, Inc. (PSG), the money management subsidiary of Phoenix Home
Life Mutual Insurance Company (PHL). The merger between D&P and PSG formed
Phoenix Duff & Phelps Corporation, which was renamed PXP in 1998. In 1996, in
order to better focus on merging and growing the retail and institutional
investment management business, PXP exited the fee based investment research,
investment banking and financial advisory businesses.
PXP is organized into two lines of business: retail investment management and
institutional investment management. The retail investment management line of
business provides investment management services on a discretionary basis
(including administrative services) to retail accounts, consisting of open-end
mutual funds and individually managed accounts. Individually managed accounts
are primarily administered through broker-dealer sponsored and distributed wrap
programs offered to high net-worth individuals. The institutional investment
management line of business provides discretionary and advisory investment
management services primarily to corporate entities and multi-employer
retirement funds, as well as endowment, insurance and other special purpose
funds, including three closed-end funds.
Investment management fees for the management of discretionary accounts are
based on the asset value of the investment portfolios under management, while
fees for advisory accounts are fixed. Management fee revenues from managing the
PHL general account represent approximately 12.2% of total institutional account
management fee revenue for the nine months ended September 30, 1998. Mutual fund
shares and variable annuity products are distributed by Phoenix Equity Planning
Corporation (PEPCO), a wholly owned subsidiary of PXP, under sales agreements
with unaffiliated national and regional broker-dealers and financial
institutions and registered representatives of WS Griffith & Co., Inc.
(Griffith). Griffith is a registered broker-dealer subsidiary of PHL engaged in
the retail distribution of mutual funds and variable annuity contracts. Griffith
is currently one of the largest sellers of PXP's retail investment products,
accounting for approximately 5% and 82% of mutual fund and variable annuity
product sales, respectively, as of September 30, 1998. Through Griffith, PEPCO
obtains the services of approximately 1,240 PHL insurance agents and brokers who
are registered representatives of Griffith.
The following table summarizes operating revenues, pre-tax income and assets
under management by line of business as of, and for the nine months ended,
September 30, 1998 and 1997, respectively:
Assets Under
Revenues Pre-Tax Income Management
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
(in thousands) (in thousands) (in millions)
Retail $106,052 $ 67,658 $15,768 $19,790 $18,225 $18,916
Institutional 58,187 42,077 10,949 6,077 29,786 26,246
Other 1,575 1,575 2,394 2,842
Total $165,814 $111,310 $29,111 $28,709 $48,011 $45,162
13
<PAGE>
Results of Operations
Assets Under Management
At September 30, 1998, PXP had $48.0 billion of assets under management, a
decrease of $2.5 billion (5%) from June 30, 1998, and an increase of $2.8
billion (6%) from September 30, 1997. The decrease from June 30, 1998 and the
increase from September 30, 1997 reflect the effects of market volatility
experienced in the past year. Since the majority of the Company's revenues are
earned based upon assets under management, this information is important to an
understanding of the business.
September 30, June 30, December 31, September 30,
1998 1998 1997 1997
(in millions)
Retail:
Open-end Mutual Funds $ 12,474 $ 13,867 $ 13,001 $ 13,371
Managed Accounts * 5,751 6,511 5,559 5,545
--------- --------- --------- ---------
18,225 20,378 18,560 18,916
Institutional:
Closed-end Funds 3,433 3,380 3,336 3,106
Institutional Accounts ** 18,035 18,430 16,155 15,969
PHL General Account 8,318 8,359 8,351 7,171
--------- --------- --------- ---------
29,786 30,169 27,842 26,246
--------- --------- --------- ---------
$ 48,011 $ 50,547 $ 46,402 $ 45,162
========= ========= ========= =========
* Managed Accounts represent assets that are individually managed for retail
clients.
** Institutional Accounts include 100% of the assets managed by Seneca
Capital Management.
Three Months Ended September 30, 1998 Compared with Three Months Ended
September 30, 1997 - Historical
Revenues for the three months ended September 30, 1998 of $57.4 million, which
includes $21.3 million for PCC and Seneca, increased $15.1 million (36%) from
$42.2 million, which includes $7.6 million for PCC and Seneca (which were
purchased on September 3, 1997 and July 17, 1997, respectively), for the same
period in 1997. Excluding the effects of PCC and Seneca, the Company's revenues
for the three months ended September 30, 1998 increased $1.5 million (4%)
compared to the same period in 1997.
Investment management fees of $49.9 million for the three months ended September
30, 1998, which includes $19.5 million for PCC and Seneca, increased $13.3
million (36%) as compared to $36.6 million, which includes $7.5 million for PCC
and Seneca, for the same period in 1997. Management fees earned from open-end
mutual funds, including institutional mutual funds, decreased $.3 million.
Management fees earned from closed-end funds, PHL sponsored variable annuity
products, and managed accounts increased $1.3 million primarily as a result of a
$1.0 billion increase in average assets under management resulting from
investment performance. Managed accounts management fees also increased as a
result of new accounts, additional deposits to existing accounts, and investment
performance. Management fees earned from managing PHL's general account
increased $.3 million as a result of a $1.2 billion increase in average assets
under management offset, in part, by a change in the fee structure.
Institutional accounts management fees increased $.4 million as a result of an
increase in average assets under management due to new accounts, additional
deposits to existing accounts, and investment performance. The addition of
several new mutual funds in the latter part of 1997 for which the advisors,
subsidiaries of the Company, agreed to waive or reimburse expenses to the extent
they exceeded limits detailed in the funds' prospectuses, decreased revenues by
$.4 million.
14
<PAGE>
Mutual funds - ancillary fees of $6.8 million for the three months ended
September 30, 1998, which includes $1.8 million for PCC and Seneca, increased
$1.6 million (32%) as compared to $5.2 million, which includes $.7 million for
PCC and Seneca, for the same period in 1997. Fund accounting fees earned on
open-end mutual funds and PHL sponsored variable annuity products increased $.4
million primarily as a result of an approved change in the fee structure. This
change was implemented to reimburse Phoenix Equity Planning Corporation (PEPCO)
for operating costs related to the out-sourcing of substantially all of PXP's
fund accounting operations in the first quarter of 1998. Net distributor fees
increased $.4 million, primarily as a result of decreased trailing commissions.
Shareholder service agent fees decreased $.2 million as a result of a decline in
mutual fund shareholder accounts.
Other income and fees of $.7 million for the three months ended September 30,
1998, which includes $.1 million of contingent deferred sales charge (CDSC)
income from the Phoenix-Engemann B share mutual funds, increased $.2 million
(30%) as compared to $.5 million for the same period in 1997 primarily as a
result of redemption income on C share mutual funds, which PXP began offering in
late 1997.
Employment expenses of $22.2 million for the three months ended September 30,
1998, which includes $7.4 million for PCC and Seneca, increased $3.5 million
(19%) as compared to $18.7 million, which includes $3.8 million for PCC and
Seneca, for the same period in 1997. Annual salary adjustments were offset, in
part, by a reduction in the number of employees (primarily in the investment
portfolio and sales management areas) in the third quarter of 1998 as compared
to the same period in the prior year. Incentive compensation increased $.6
million resulting from improved performance by several portfolio managers and
research analysts. The out-sourcing of substantially all of PXP's fund
accounting operations in the first quarter of 1998 decreased employment expenses
by $.3 million.
Other operating expenses of $14.0 million for the three months ended September
30, 1998, which includes $2.5 million for PCC and Seneca, increased $4.3 million
(44%) as compared to $9.7 million, which includes $1.2 million for PCC and
Seneca, for the same period in 1997. Other operating expenses increased $1.6
million as a result of payments to a third party administrator related to the
out-sourcing of substantially all of PXP's fund accounting operations in the
first quarter of 1998. Other operating expenses increased $.6 million as a
result of additional administrative costs incurred on behalf of the
Phoenix-Engemann and Phoenix-Seneca Funds (the Funds) a portion of which are
recovered by administrative fees earned on the Funds. The use of consultants,
primarily for information technology purposes, increased other operating
expenses by $.3 million.
Depreciation and amortization of leasehold improvements of $1.0 million for the
three months ended September 30, 1998, which includes $.2 million for PCC and
Seneca, increased $.3 million (40%) from $.7 million, which includes $.1 million
for PCC and Seneca, for the same period in 1997 as a result of capital assets
purchased since September, 1997.
Amortization of goodwill and intangible assets of $5.5 million for the three
months ended September 30, 1998 increased $1.9 million (50%) as compared to $3.7
million for the same period in 1997 as a result of a full quarter of
amortization of the intangible assets and goodwill resulting from the PCC and
Seneca acquisitions being included in 1998.
Amortization of deferred commissions of $.4 million for the three months ended
September 30, 1998, which relates entirely to the Phoenix-Engemann B share
mutual funds, decreased $.4 million (100%) as compared to no amortization for
the same period in 1997. This decrease is the result of the sale of PXP's then
existing deferred commissions asset (excluding PCC's) in the second quarter of
1997, which eliminated the amortization charge.
Operating income of $14.2 million for the three months ended September 30, 1998
increased $4.8 million (51%) as compared to $9.4 million for the same period in
1997 as a result of the changes discussed above.
15
<PAGE>
Equity in earnings of unconsolidated affiliates of $.6 million for the three
months ended September 30, 1998 decreased $.4 million (38%) as compared to $1.0
million for the same period in 1997. Income from the investment in Beutel
Goodman & Company Ltd. (BG) decreased $.2 million and PXP's share of income from
its joint venture in Inverness/Phoenix Capital LLC decreased $.3 million. PXP's
share of equity earnings from Greystone Financial Group (GFG) was zero in the
third quarter of 1998 compared to a $.1 million loss in the second quarter of
1997.
Other income - net, a loss of $.3 million for the three months ended September
30, 1998, decreased $.6 million compared to $.3 million of income for the same
period in 1997 primarily as a result of net unrealized losses on marketable
securities.
Interest expense - net of $3.6 million for the three months ended September 30,
1998, which includes $.2 million of net interest income for PCC and Seneca,
increased $2.9 million as compared to $.7 million for the same period in 1997,
which includes less than $.1 million of net interest income for PCC and Seneca.
Interest charges from financing the PCC and Seneca acquisitions resulted in $1.8
million of additional interest offset, in part, by a decrease of $.5 million due
to the elimination of outstanding debt on a previous credit facility and bridge
loan. The exchange of PXP's preferred stock for convertible debentures in the
second quarter of 1998 resulted in $1.2 million of additional interest expense.
Other interest and dividend income decreased $.6 million.
Income to minority interest of $.7 million and $.3 million for the three months
ended September 30, 1998 and 1997, respectively, 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 44% for the three months ended September 30, 1998
increased from 38% for the same period in 1997. This increase represents the
effect of non-deductible goodwill amortization resulting from the PCC
acquisition offset, in part, by a decrease in 1997 resulting from benefits
relating to settlements with federal and state authorities.
As a result of the variances discussed above, net income for the three months
ended September 30, 1998 of $5.7 million decreased $.3 million (6%) compared to
$6.1 million for the third quarter of 1997.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended
September 30, 1997 - Historical
Revenues for the nine months ended September 30, 1998 of $165.8 million, which
includes $60.0 million for PCC and Seneca, increased $54.5 million (49%) from
$111.3 million, which includes $7.6 million for PCC and Seneca, for the same
period in 1997. Excluding the effects of PCC and Seneca, the Company's revenues
for the nine months ended September 30, 1998 increased $2.7 million (3%)
compared to the same period in 1997.
Investment management fees of $144.3 million for the nine months ended September
30, 1998, which includes $54.6 million for PCC and Seneca, increased $52.1
million (56%) as compared to $92.2 million, which includes $7.5 million for PCC
and Seneca, for the same period in 1997. Management fees earned from open-end
mutual funds, including institutional mutual funds, closed-end funds, PHL
sponsored variable annuity products, and managed accounts increased $5.3 million
due to investment performance and, to a lesser degree, new accounts and
additional deposits to existing accounts. An increase of $3.8 million is due to
a $1.3 billion increase in average assets under management. The increase in
average assets under management is primarily the result of investment
performance in the first half of 1998. Management fees earned from managing
PHL's general account increased $.8 million as a result of a $1.4 billion
increase in average assets under management offset, in part, by a change in the
fee structure. Institutional accounts management fees decreased $.2 million
primarily due to a decrease in the average blended basis points earned. Funds
under reimbursement, a reduction to revenues, increased $1.2 million primarily
due to the addition of several new mutual funds in the latter part of 1997 for
which the advisors, subsidiaries of the Company, agreed to waive or reimburse
expenses to the extent they exceeded limits detailed in the funds' prospectuses.
16
<PAGE>
Mutual funds - ancillary fees of $19.4 million for the nine months ended
September 30, 1998, which includes $5.4 million for PCC and Seneca, increased
$3.1 million (19%) as compared to $16.3 million, which includes $.7 million for
PCC for the same period in 1997. Fund accounting fees earned on open-end mutual
funds and PHL sponsored variable annuity products increased $1.1 million
primarily as a result of an increase in average assets under management and an
approved change in the fee structure. This change was implemented to reimburse
PEPCO for additional administrative costs related to the out-sourcing of
substantially all of PXP's fund accounting operations in the first quarter of
1998. Net distributor fees decreased $2.3 million primarily as a result of the
sale of the then existing deferred commissions asset (excluding PCC's) in June
of 1997. Shareholder service agent fees decreased $.5 million primarily as a
result of a decline in mutual fund shareholder accounts.
Other income and fees of $2.1 million for the nine months ended September 30,
1998, which includes $.5 million of CDSC income from the Phoenix-Engemann B
share mutual funds, decreased $.7 million (25%) as compared to $2.8 million,
which includes $.1 million for PCC and Seneca, for the same period in 1997. A
decrease of $1.2 million is due to reduced CDSC income resulting from the sale
of the Company's deferred commissions asset, excluding PCC's. Redemption income
on C shares increased other income and fees by $.1 million.
Employment expenses of $67.3 million for the nine months ended September 30,
1998, which includes $20.7 million for PCC and Seneca, increased $17.8 million
(36%) as compared to $49.5 million, which includes $3.8 million for PCC and
Seneca, for the same period in 1997. Annual salary adjustments were offset, in
part, by a reduction in the number of employees (primarily in the investment
portfolio and sales management areas) as compared to the same period in the
prior year. Incentive compensation increased $2.6 million resulting from
improved performance by several portfolio managers and research analysts. The
resignation and retirement of two key executives in the first half of 1997
decreased employment expenses by $.6 million in the first nine months of 1998.
Other operating expenses of $40.4 million for the nine months ended September
30, 1998, which includes $7.7 million for PCC and Seneca, increased $13.6
million (51%) as compared to $26.8 million, which includes $1.2 million for PCC
and Seneca, for the same period in 1997. Other operating expenses increased $3.6
million as a result of payments to a third party administrator related to the
out-sourcing of substantially all of PXP's fund accounting operations in the
first quarter of 1998. Other administrative expenses increased $2.5 million as a
result of additional administrative costs incurred on behalf of the
Phoenix-Engemann and Phoenix-Seneca Funds (the Funds), a portion of which are
recovered by administrative fees earned on the Funds. The use of consultants,
primarily for information technology purposes, increased other operating
expenses by $1.1 million. A one-time loss of $.6 million was recorded in the
second quarter of 1997 relating to the sub-lease of certain office space.
Restructuring charges of $.4 million for the nine months ended September 30,
1998 are the result of the Company's decision to out-source substantially all of
its fund accounting operations effective in the first quarter of 1998.
Depreciation and amortization of leasehold improvements of $2.8 million for the
nine months ended September 30, 1998, which includes $.5 million for PCC and
Seneca, increased $.9 million (46%) from $1.9 million, which includes $.1
million for PCC and Seneca, for the same period in 1997 primarily as a result of
capital assets purchased since September, 1997.
Amortization of goodwill and intangible assets of $16.5 million for the nine
months ended September 30, 1998 increased $8.1 million (97%) as compared to $8.4
million for the same period in 1997 as a result of the amortization of the
intangible assets and goodwill identified in the purchase price allocations of
PCC and Seneca.
17
<PAGE>
Amortization of deferred commissions of $1.0 million for the nine months ended
September 30, 1998, which relates entirely to the Phoenix-Engemann B share
mutual funds, decreased $1.8 million (65%) as compared to $2.8 million for the
same period in 1997 primarily as a result of the sale of PXP's then existing
deferred commissions asset (excluding PCC's) in the second quarter of 1997,
which eliminated the amortization charge.
Operating income of $37.4 million for the nine months ended September 30, 1998
increased $15.5 million (71%) as compared to $21.9 million for the same period
in 1997 as a result of the changes discussed above.
Equity in earnings of unconsolidated affiliates of $2.7 million for the nine
months ended September 30, 1998 increased $2.0 million as compared to $.7
million for the same period in 1997. PXP recorded a $1.5 million loss in 1997
related to the liquidation of Windy City CBO Partners, L.P. (WCCBO) in early
1997. PXP's share of equity earnings from GFG was zero for the nine months ended
September 30, 1998 compared to a $.6 million loss for the nine months ended
September 30, 1997. Income from the investment in BG decreased $.2 million,
while PXP's share of income from its joint venture in Inverness/Phoenix Capital
LLC decreased $.3 million from $.3 million for the nine months ended September
30, 1997.
Other income - net of $.3 million for the nine months ended September 30, 1998
increased $.2 million as compared to $.1 million for the same period in 1997.
In the second quarter of 1997, a $6.9 million non-recurring gain was recognized
on the sale of the Company's deferred commissions asset, excluding PCC's.
Interest expense - net of $9.6 million for the nine months ended September 30,
1998, which includes $.4 million of net interest income for PCC and Seneca,
increased $9.1 million as compared to $.5 million for the same period in 1997.
Interest charges from financing the PCC and Seneca acquisitions resulted in $7.7
million of additional interest offset, in part, by a decrease in interest
expense of $1.0 million due to the elimination of outstanding debt on a previous
credit facility and a bridge loan. The exchange of PXP's preferred stock for
convertible debentures in the second quarter of 1998 resulted in $2.3 million of
additional interest expense. Other interest and dividend income decreased $.5
million.
Income to minority interest of $1.6 million and $.3 million for the nine months
ended September 30, 1998 and 1997, respectively, 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 44% for the nine months ended September 30, 1998
increased from 40% for the same period in 1997. This increase represents the
effect of non-deductible goodwill amortization resulting from the PCC
acquisition.
As a result of the variances discussed above, net income for the nine months
ended September 30, 1998 of $16.3 million decreased $.9 million (5%) compared to
$17.2 million for the nine months ended September 30, 1997.
18
<PAGE>
Three Months Ended September 30, 1998 Compared with Pro Forma Three Months Ended
September 30, 1997 (see Note 4)
Revenues of $57.4 million for the three months ended September 30, 1998
increased $4.6 million (9%) as compared to pro forma $52.8 million for the same
period in 1997.
Investment management fees of $49.9 million for the three months ended September
30, 1998 increased $3.9 million (9%) from pro forma $ 46.0 million for the same
period in 1997. Management fees earned from open-end mutual funds, including
institutional mutual funds, closed-end funds, PHL sponsored variable annuity
products, and managed accounts increased $2.2 million primarily as a result of a
$.9 billion increase in average assets under management. The increase in assets
under management is primarily the result of new accounts, additional deposits to
existing accounts, and investment performance. Management fees earned from
managing PHL's general account increased $.3 million as a result of a $1.2
billion increase in average assets under management offset, in part, by a change
in the fee structure. Institutional accounts management fees increased $2.1
million as a result of an increase in average assets under management due to
increased market performance and additional deposits. The addition of several
new mutual funds in the latter part of 1997 for which the advisors, subsidiaries
of the Company, agreed to waive or reimburse expenses to the extent they
exceeded limits detailed in the funds' prospectuses, decreased revenues by $.4
million.
Mutual funds - ancillary fees of $6.8 million for the three months ended
September 30, 1998 increased $.5 million (9%) from pro forma $6.3 million for
the same period in 1997. Net distributor fees increased $.3 million primarily as
a result of decreased trailing commissions. Fund accounting fees earned on
open-end mutual funds and PHL sponsored variable annuity products increased $.4
million primarily as a result of an increase in average assets under management
and an approved change in the fee structure. This change was implemented to
reimburse PEPCO for additional administrative costs related to the out-sourcing
of substantially all of PXP's fund accounting operations in the first quarter of
1998. Shareholder service agent fees decreased $.1 million as a result of a
decline in mutual fund shareholder accounts.
Other income and fees of $.7 million for the three months ended September 30,
1998 increased $.2 million (30%) from pro forma $.5 million for the same period
in 1997.
Employment expenses of $22.2 million for the three months ended September 30,
1998 remained unchanged from the same pro forma period in 1997. Annual salary
adjustments were offset, in part, by a reduction in the number of employees
(primarily in the investment portfolio and sales management areas) during the
third quarter of 1998 as compared to the same period in the prior year.
Incentive compensation increased by $.6 million resulting from improved
performance by several portfolio managers and research analysts.
Other operating expenses of $15.4 million for the three months ended September
30, 1998 increased $2.4 million (18%) as compared to pro forma $13.0 million for
the same period in 1997. Other operating expenses increased $1.6 million as a
result of charges paid to a third party administrator related to the
out-sourcing of substantially all of PXP's fund accounting operations in the
first quarter of 1998. Other operating expenses increased $.6 million as a
result of additional costs incurred on behalf of the Phoenix-Engemann and
Phoenix-Seneca Funds. The use of consultants, primarily for information
technology purposes, increased other operating expenses by $.3 million.
Depreciation and amortization of leasehold improvements increased by $.3
million, as a result of additional capital assets purchases since September,
1997.
Amortization of goodwill and intangibles of $5.5 million for the three months
ended September 30, 1998 was the same as pro forma 1997.
19
<PAGE>
Other income - net of $.3 million for the three months ended September 30, 1998
decreased $.9 million as compared to pro forma $1.2 million for the same period
in 1997. Equity income from the Company's investment in BG decreased $.2
million. PXP's share of equity earnings from GFG was zero in the third quarter
of 1998 compared to a $.1 million loss in the third quarter of 1997, while PXP's
share of income from its joint venture in Inverness/Phoenix Capital LLC
decreased $.3 million. A decrease of $.5 million is due to net unrealized losses
on marketable securities in 1998.
Interest expense - net of $3.6 million for the three months ended September 30,
1998 increased $1.7 million (87%) as compared to pro forma $1.9 million for the
same period in 1997. This increase is primarily from the exchange of PXP's
preferred stock for convertible debentures in the second quarter of 1998, which
contributed $1.2 million to interest expense. Other interest and dividend income
decreased $.5 million.
Income to minority interest of $.7 million for the three months ended September
30, 1998 increased $.3 million (82%) as compared to pro forma $.4 million for
the same period in 1997 as a result of Seneca's increased earnings.
Net income of $5.7 million for the three months ended September 30, 1998
remained unchanged as compared to the same pro forma period in 1997. The
effective tax rate decreased to 44% for the three months ended September 30,
1998 from 45.8% for the same period in 1997.
Nine Months Ended September 30, 1998 Compared with Pro Forma Nine Months Ended
September 30, 1997 (see Note 4)
Revenues of $165.8 million for the nine months ended September 30, 1998
increased $12.0 million (8%) as compared to pro forma $153.8 million for the
same period in 1997.
Investment management fees of $144.3 million for the nine months ended September
30, 1998 increased $19.1 million (15%) from pro forma $125.2 million for the
same period in 1997. Management fees earned on open-end mutual funds, including
institutional mutual funds, closed-end funds, PHL's general account, PHL
sponsored variable annuity products, and managed accounts, increased $16.8
million due to increased average assets under management. The increase in
average assets under management is primarily the result of investment
performance in the first half of 1998. Management fees earned from institutional
accounts increased $3.5 million due to increased assets under management offset,
in part, by a decrease in the average blended basis points earned. Funds under
reimbursement, a reduction to revenues, increased $1.2 million primarily due to
the addition of several new mutual funds in the latter part of 1997 for which
the advisors, subsidiaries of the Company, agreed to waive or reimburse expenses
to the extent they exceeded limits detailed in the funds' prospectuses.
Mutual funds - ancillary fees of $19.4 million for the nine months ended
September 30, 1998 decreased $5.1 million (21%) from pro forma $24.5 million for
the same period in 1997. Net distributor fees decreased $2.4 million due to the
sale of the deferred commissions asset (excluding PCC's) offset, in part, by
increased fees earned from the Phoenix-Engemann Funds. Fund accounting fees
earned on open-end mutual funds and PHL sponsored variable annuity products
increased $1.1 million primarily as a result of an increase in average assets
under management and an approved change in the fee structure. This change was
implemented to reimburse PEPCO for additional administrative costs related to
the out-sourcing of substantially all of PXP's fund accounting operations.
Shareholder service agent fees decreased $.3 million as a result of a decline in
mutual fund shareholder accounts.
Other income and fees of $2.1 million for the nine months ended September 30,
1998 decreased $2.0 million (50%) from pro forma $4.1 million for the same
period in 1997, primarily as a result of the sale of the Company's then existing
deferred commissions asset in June 1997.
20
<PAGE>
Employment expenses of $67.3 million for the nine months ended September 30,
1998 increased $1.3 million (2%) as compared to pro forma $65.9 million for the
same period in 1997. Incentive compensation increased $2.6 million resulting
from improved performance by several portfolio managers and research analysts.
The resignation and retirement of two key executives in the first half of 1997,
decreased employment expenses by $.6 million. Annual salary adjustments were
offset, in part, by a reduction in the average number of employees (primarily in
the investment portfolio and sales management areas) as compared to the same
period in the prior year.
Other operating expenses of $44.6 million for the nine months ended September
30, 1998 decreased $1.9 million (4%) as compared to pro forma $42.7 million for
the same period in 1997. Amortization of deferred commissions decreased $3.1
million as a result of the sale of the Company's then existing deferred
commissions asset, excluding PCC's, in September 1997. The use of consultants,
primarily for information technology purposes, increased other operating
expenses by $1.1 million. Other operating expenses increased by $3.6 million as
a result of payments to a third party administrator related to the out-sourcing
of substantially all of PXP's fund accounting operations in the first quarter of
1998. The Company incurred $.4 million in restructuring charges as a result of
this out-sourcing. Depreciation and amortization of leasehold improvements
increased by $.3 million. A one-time loss of $.6 million was recorded in the
second quarter of 1997 relating to the sub-lease of certain office space.
Amortization of goodwill and intangibles of $16.5 million for the nine months
ended September 30, 1998 was the same as pro forma 1997.
Other income - net of $3.0 million for the nine months ended September 30, 1998
decreased $10.4 million (78%) as compared to pro forma $13.4 million for the
same period in 1997. A $6.9 million non-recurring gain was recognized on the
sale of the Company's deferred commissions asset, excluding PCC's, in the second
quarter of 1997. A non-recurring gain of $5.0 million was realized in the second
quarter of 1997 by PCC from the sale of its investment in its own mutual funds.
PXP recorded a $1.5 million loss in 1997 related to the liquidation of WCCBO in
early 1997. Equity income from the Company's investment in BG increased $.2
million, while PXP's share of income from its joint venture in Inverness/Phoenix
LLC Capital decreased $.3 million from $.3 million for the nine months ended
September 30, 1997. PXP's share of equity earnings from GFG was zero for the
nine months ended September 30, 1998 compared to a $.6 million loss for the same
period in 1997.
Interest expense - net of $9.6 million for the nine months ended September 30,
1998 increased $1.6 million (20%) as compared to pro forma $8.0 million for the
same period in 1997 primarily from the exchange of PXP's preferred stock for
convertible debentures in the second quarter of 1998, which resulted in $2.2
million of additional interest expense. Interest expense decreased $.7 million
due to the elimination of outstanding debt on a previous credit facility.
Income to minority interest of $1.6 million for the nine months ended September
30, 1998 increased $.8 million (100%) as compared to pro forma $.8 million for
the same period in 1997 as a result of Seneca's increased earnings.
Net income of $16.3 million for the nine months ended September 30, 1998
decreased $2.2 million (12%) as compared to pro forma $18.5 million for the same
period in 1997,as a result of the above. The effective tax rate remained
unchanged at 44%.
21
<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 flows. 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 assets are primarily liquid in nature and are not significantly
affected by inflation. The effects of inflation may result in increased employee
compensation, occupancy costs, and promotional costs. An increase in interest
rates or a substantial decline in the value of fixed income or equity securities
which causes a significant decline in the net asset value of the funds managed
by the Company would adversely affect the Company's financial condition and
results of operations.
The Company's current capital structure, as of November 10, 1998, includes 43.5
million shares of common stock and $76.4 million of 6% Convertible Subordinated
Debentures with a principal value of $25.00 per debenture. The current quarterly
dividend rate on common stock is $.06 per share. If the dividend rate remains
constant for 1998, the total annual dividend on common stock would be
approximately $10.5 million based upon shares outstanding at September 30, 1998.
The total annual interest expense on the debentures based upon debentures
outstanding at September 30, 1998, at an interest rate of 6%, would be $4.6
million.
The Company has an agreement with a consortium of banks providing for a $200
million five year credit facility, with no required principal repayments prior
to maturity in August 2002. The outstanding obligation under the credit facility
at September 30, 1998 was $180 million. An interest rate of approximately 6% was
in effect on this borrowing as of September 30, 1998. 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, 1998, 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 facility will provide adequate liquidity for the
foreseeable future.
Management considers the liquidity of the Company to be adequate to meet present
and anticipated needs.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of a company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. In addition, other non-business
specific systems such as security alarms, elevators, telephones, etc. are
subject to malfunction due to their dependence upon computers or computer chips
for proper operation.
Based upon Company assessments, it has been determined that the Company will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will be mitigated. It is anticipated that such
modifications and conversions will be completed on a timely basis. The failure
of computer programs to recognize the year 2000 could have a negative impact on,
but is not limited to, the handling of securities trades, the pricing of
securities and the servicing of client accounts. If such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue would
have a material impact on the operations of the Company. As such, the Company
has created a Year 2000 Project Office to address the Year 2000 Issue. The
assessment and inventory phases of the project are virtually complete. The
remediation and testing phases are underway and the contingency planning phase
will commence in the fourth quarter of 1998.
22
<PAGE>
The Company has initiated formal communications with all of its software
vendors, service providers and information providers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 Issue. The Company's total Year 2000 project cost and
estimate to complete include the estimated costs and time associated with the
impact of a third party's Year 2000 Issue, and are based on presently available
information. However, if the systems of other companies on which the Company's
systems rely are not converted in a timely fashion, or are not converted at all,
or are converted in a manner that is incompatible with the Company's systems,
the Company's operations and financial results could be significantly adversely
affected.
The Company will utilize internal resources to reprogram, or replace, and test
the software for Year 2000 modifications. Certain systems are already in the
process of being converted due to previous Company initiatives. The Company
plans to complete the remediation phase of the Year 2000 project by February 28,
1999 and the testing phase by June 30, 1999. The total cost of the Year 2000
project is estimated at $5.5 million and is being funded through operating cash
flows, which will be expensed as incurred over the next two years. To date, the
Company has incurred approximately $1.8 million related to the assessment of its
Year 2000 project, and the development of a Year 2000 plan, remediation and
testing. The total cost to the Company to become Year 2000 compliant is not
expected to have a material impact on the Company's results of operations.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, and were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will prove to
be accurate and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
Cautionary Statement Under Section 21E of the Securities Exchange Act of 1934
This quarterly report contains forward looking statements that involve risks and
uncertainties including, but not limited to, the following: The Company's
performance is highly dependent on the amount of assets under management, which
may decrease for a variety of reasons including changes in interest rates and
adverse economic conditions; the Company's performance is very sensitive to
changes in interest rates, which may increase from current levels; the Company's
performance is affected by the demand for and the market acceptance of the
Company's products and services and the timely consummation of the BG
transaction; the investment management industry is extremely competitive;
several competitors are substantially larger than the Company; and
the Company's performance may be impacted by changes in the performance of
financial markets and general economic conditions. The costs involved to
complete the Year 2000 modifications are based on management's best estimates,
which were derived based upon assumptions relative to future events including
the continued availability of certain resources, third party modification plans
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
potential problems related to the Year 2000 Issue could affect the ability to
provide advisory services for the Company's products. Accordingly, actual
results may differ materially from those set forth in the forward looking
statements.
23
<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.
No items filed.
24
<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 Investment Partners, Ltd.
November 11, 1998 /s/ Philip R. McLoughlin
------------------------------
Philip R. McLoughlin, Chairman and
Chief Executive Officer
November 11, 1998 /s/ William R. Moyer
------------------------------
William R. Moyer, Chief Financial Officer
25
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