SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1998 [ ] Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the
transition period from ___________ to ___________ Commission file number 1-10994
PHOENIX INVESTMENT PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4191764
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
56 Prospect Street 06115
Hartford, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (860) 403-7667
PHOENIX DUFF & PHELPS CORPORATION
(Former name)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Convertible Subordinated Debentures New York Stock Exchange
(Stated value $25.00 per debenture)
Securities registered pursuant to Section 12(g) of the Act:
None
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 1999, computed by reference to the last reported
price at which the stock was sold on such date, was $136,866,368.
The number of shares outstanding of the registrant's common stock, par value
$.01 per share, as of March 12, 1999 was 43,643,007.
Portions of the following documents Part of this Form 10-K into
are incorporated by reference which the document is incorporated
into this Form 10-K: by reference:
Phoenix Investment Partners, Ltd.
1999 Proxy Statement Part III
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD.
ANNUAL REPORT FOR 1998 ON FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1.Business........................................................ 1
Executive Officers of the Company............................... 16
Item 2.Properties...................................................... 18
Item 3.Legal Proceedings............................................... 18
Item 4.Submission of Matters to a Vote of Security Holders............. 19
PART II
Item 5.Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 20
Item 6.Selected Financial Data......................................... 20
Item 7.Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 21
Item 8.Financial Statements and Supplementary Data..................... 32
Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 61
PART III
Item 10.Directors and Executive Officers of the Registrant............. 61
Item 11.Executive Compensation......................................... 61
Item 12.Security Ownership of Certain Beneficial Owners and Management. 61
Item 13.Certain Relationships and Related Transactions................. 61
PART IV
Item 14.Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................ 62
Signatures............................................................. 65
<PAGE>
PART I
Item 1. Business.
Phoenix Investment Partners, Ltd. (the Company) and its operating subsidiaries,
Duff & Phelps Investment Management Co. (DPIM), Phoenix Investment Counsel, Inc.
(PIC), National Securities & Research Corporation (NS&RC), Phoenix Equity
Planning Corporation (PEPCO), Roger Engemann and Associates (REA), the
wholly-owned subsidiary of the Company's wholly-owned subsidiary Pasadena
Capital Corporation (PCC), and Seneca Capital Management LLC (Seneca), provide a
variety of investment management services to a broad base of institutional and
individual clients. Unless the context otherwise requires, all references in
this report to the Company refer to Phoenix Investment Partners, Ltd. and its
subsidiaries.
History of the Business
The Company's original business, which dates back to 1932, was to provide
clients with investment research on public utility companies. The Company grew
by expanding its products and services in areas in which management believed its
core investment research business provided a competitive advantage. As its
capabilities in investment research grew, the Company built upon its reputation
to establish a range of complementary financial services. The Company entered
the institutional investment management business in 1979, and investment
management grew to become the Company's primary business. In 1995, pursuant to
an Agreement and Plan of Merger among Duff & Phelps Corporation, PM Holdings,
Inc. (Holdings), a wholly-owned subsidiary of Phoenix Home Life Mutual Insurance
Company (PHL), and Phoenix Securities Group, Inc. (PSG), a wholly-owned
subsidiary of Holdings, PSG was merged with and into Duff & Phelps Corporation
(the Merger). At the time of the Merger, Holdings became 60% owner of the
outstanding common stock of the Company and Duff & Phelps Corporation was
renamed Phoenix Duff & Phelps Corporation (PDP). In 1996, in order to focus on
merging and growing the retail and institutional investment management business,
the Company exited the fee based investment research, investment banking and
financial advisory businesses.
The Company's continued growth of its retail and institutional investment lines
of business was based upon the development of its investment management business
model, which contemplated both internal and external expansion. The model offers
both the retail and institutional lines of business access to the investment
skills of a variety of talented money managers through a consolidated
distribution and administrative platform, essentially a "multi-manager/single
platform" model. In 1998, in order to emphasize the importance of the model, PDP
was renamed Phoenix Investment Partners, Ltd. The following acquisitions were
important components in developing the model:
o On July 17, 1997, the Company acquired a 74.9% interest in Seneca, which is a
registered investment advisor providing services primarily to institutional
investors.
o On September 3, 1997, the Company acquired PCC, whose wholly-owned subsidiary
REA is a registered investment advisor providing investment management
services primarily to individual investors and Securities and Exchange
Commission (SEC) registered investment companies.
o On March 1, 1999, the Company acquired the retail mutual fund and closed-end
fund businesses of the New York City-based Zweig Fund Group (Zweig). Zweig
manages eight retail mutual funds and two closed-end funds, and certain
institutional accounts.
General
The Company currently operates two lines of business: retail and institutional
investment management. The retail line of business provides investment
management services on a discretionary basis (including administrative
services), with products 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 line of business provides discretionary
and non-discretionary advisory investment management services primarily to
corporate entities and multi-employer retirement funds, as well as endowment,
insurance and other special purpose funds, including closed-end funds.
1
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The following table summarizes revenues, pre-tax income, and assets under
management by line of business for the years ended, December 31, 1998 and 1997,
respectively:
Assets Under
Revenues Pre-Tax Income Management
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
(in thousands) (in thousands) (in millions)
Retail $140,383 $102,129 $20,157 $22,351 $21,729 $18,560
Institutional 79,064 60,371 15,024 8,481 31,758 27,842
All other 2,100 2,100 19,794 9,413
-------- -------- ------- ------- ------- -------
Total $221,547 $164,600 $54,975 $40,245 $53,487 $46,402
The Company, through its subsidiaries DPIM, PIC, REA and Seneca, manages 799
institutional accounts (including PHL's General Account and three closed-end
funds), 54 open-end mutual funds, and 18,389 individually managed accounts at
December 31, 1998.
The following tables set forth the combined assets under management and
management fees for DPIM, PIC, REA and Seneca at, and for the year ended,
December 31, 1998:
Assets Under Management
(in millions)
Source:
Retail Products:
Open-end Mutual Funds $ 14,407
Managed Accounts (a) 7,322
---------
21,729
Institutional Products:
Closed-end Funds 3,505
Institutional Accounts (b) 19,468
PHL General Account 8,785
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31,758
Total $ 53,487
=========
Assets Classification:
Equity $ 19,087
Balanced 13,316
Fixed Income 20,687
Money Market 397
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Total $ 53,487
=========
Advisor:
DPIM $ 15,894
PIC 23,875
REA 7,784
Seneca 5,934
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Total $ 53,487
=========
Management Fees
(in thousands)
Source:
Retail Products:
Open-end Mutual Funds $ 71,930
Managed Accounts (a) 42,136
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114,066
Institutional Products:
Closed-end Funds 18,031
Institutional Accounts (b) 51,548
PHL General Account 9,485
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79,064
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Total $ 193,130
=========
(a) Managed Accounts represent assets that are individually managed for retail
clients.
(b) Institutional Accounts include 100% of the assets managed by Seneca.
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Investment Management
General
The Company's operating subsidiaries providing investment management services
are DPIM, PIC, REA and Seneca.
DPIM
DPIM was established by the Company in 1979 with the acquisition of Boyd,
Watterson & Co., a Cleveland-based investment manager founded in 1928. It
provides investment management services to a variety of institutions and
individuals. As of December 31, 1998, DPIM had approximately $15.9 billion in
assets under management. DPIM's clients include a number of investment
companies, including three closed-end investment companies, Duff & Phelps
Utilities Income Inc. (the Utilities Income Fund), Duff & Phelps Utilities
Tax-Free Income Inc. (the Utilities Tax-Free Fund), and Duff & Phelps Utility
and Corporate Bond Trust Inc. (the Utility and Corporate Bond Trust)
(collectively the Duff & Phelps Funds). DPIM's clients also include corporate,
public and multi-employer retirement funds and endowment, insurance and other
special purpose funds. As of December 31, 1998, DPIM's 80 employees included 17
portfolio managers, who have an average of 17 years of investment management
experience, and 9 research analysts. DPIM maintains offices in Chicago, Illinois
and Cleveland, Ohio. For the year ended December 31, 1998, DPIM had total
revenues of $43.6 million.
On January 2, 1997, DPIM completed the purchase of Nuveen Institutional Advisory
Corp.'s (Nuveen) 50% interest in Nuveen/Duff & Phelps Investment Advisors, a
general partnership, for total consideration of $2.2 million. The partnership
was originally established as a joint venture between Nuveen and DPIM in May
1990 for the purpose of providing investment advisory services to nuclear
decommissioning funds. The partnership, now 100% owned by DPIM (50% owned by
DPIM and 50% owned by DPIM's subsidiary, DPIM, Inc.), has been renamed Phoenix
Duff & Phelps Investment Advisors and continues to provide these same services.
PIC
PIC's original business dates back to the 1930's and was acquired by PHL in 1975
from an unrelated third party. PIC, which is an investment advisor registered
under the Investment Advisors Act of 1940 as amended (the Advisors Act),
provides investment management services for mutual funds and institutional
investors. PIC also manages the investment assets (other than investments in
real estate and mortgages) of the General Account and substantially all of the
Variable Products Separate Accounts of PHL, which is one of the ten largest
mutual life insurance companies in the United States.
Investment management and advisory services are provided by PIC for
institutional and mutual fund clients with respect to publicly-traded equity,
convertible and fixed income securities, as well as privately-placed fixed
income securities. As of December 31, 1998, PIC had approximately $11.2 billion
institutional and $12.6 billion mutual fund assets under management. As of
December 31, 1998, PIC's 61 employees included 18 portfolio managers, who have
an average of approximately 13 years of investment management experience, and 8
research analysts. PIC maintains offices in Enfield and Hartford, Connecticut;
Greenfield, Massachusetts; Sarasota, Florida; and Scotts Valley, California. For
the year ended December 31, 1998, PIC had total revenues of $82.2 million.
REA
REA is an investment advisor registered under the Advisors Act, specializing in
growth-style equity investing. As of December 31, 1998, REA managed assets of
$7.8 billion for over 15,000 individually managed accounts and six mutual funds.
The majority of assets under management are invested in large-cap growth
equities, however, REA also manages small-cap, global growth, balanced and value
portfolios. Founded in 1969 by Roger Engemann, REA is located in Pasadena,
California. As of December 31, 1998, REA's 75 employees included 3 portfolio
managers, who have an average of 32 years of investment management experience,
and 5 research analysts. For the year ended December 31, 1998, PCC and its
subsidiary, REA, had total revenues of $45.2 million.
3
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Seneca
Seneca, based in San Francisco, California, was established in July 1996 through
an assignment of assets from GMG/Seneca Capital Management L.P. Seneca provides
investment management services to foundations, endowments, corporations, public
funds and private clients, and also provides subadvisory services to certain
open-end mutual funds. As of December 31, 1998, Seneca had approximately $5.9
billion in assets under management, split between equities and fixed income
products. As of December 31, 1998, Seneca had 50 employees, including 8
portfolio managers who have an average of over 12 years of investment management
expertise, and 8 research analysts. For the year ended December 31, 1998, Seneca
had total revenues of $25.2 million.
Investment Philosophy
DPIM
DPIM's fixed income approach is described as a "core" approach with an emphasis
on fundamental research and the avoidance of credit risk. This investment
approach begins with an intensive analysis of economic fundamentals and a
forecast of interest rate trends with the objective of enhancing portfolio
returns. DPIM places a significant emphasis on "sector" values, believing
certain market sectors and industry groups offer more attractive returns than
others. Credit research skills are utilized in the security selection process,
which emphasizes investment grade bonds.
DPIM's equity investment philosophy is founded on the view that equity
investments should be made in securities that provide higher total returns
coupled with lower risk relative to broad stock market indices. Capital
appreciation and relatively high dividend income are key factors in meeting
these goals. In addition, portfolios are geared towards equities with relatively
low price-to-earnings ratios and higher than average returns on equity. The
equity strategy emphasizes a long-term investment horizon, which usually results
in low portfolio turnover and thus lower transaction costs. The portfolio
managers invest in equities of medium to large companies to provide a relatively
high level of liquidity.
PIC
PIC applies a "sector rotation" approach to fixed-income management and utilizes
a wide variety of market sectors to enhance performance. These sectors may
include investment-grade and below investment-grade securities. Undervalued
sectors will be significantly overweighted relative to the market, while
overvalued sectors will be de-emphasized. PIC utilizes significant expertise in
non-traditional fixed-income sectors where values have not been realized in the
marketplace and attempts to minimize overall interest rate risk by constraining
portfolio durations.
PIC's approach to investing in equity securities is based on the belief that
stocks of companies with superior growth, purchased at reasonable valuations,
will produce superior investment results over time. PIC seeks to outperform the
Standard & Poor's 500 stock index over full market cycles by selecting
securities of issuers whose future earnings are expected to increase faster than
the market. PIC's strategy emphasizes that early identification and timely
investment of the market's driving themes are the key elements to multi-year
outperformance. It considers the top-down market perspective and bottom-up
issuer analysis as equally critical to the decision making process and regards
an effective sell discipline as important as stock selection in achieving
long-term investment objectives.
REA
REA's investment approach is predicated on the belief that high quality
companies possessing strong brand identities and consistent, superior earnings
growth rates ultimately deliver superior long-term risk-adjusted returns. In
addition to these characteristics, REA looks for companies with quality
management focused on shareholder value and with financial strength and a
favorable long-term outlook. REA believes that such companies are best
discovered through a fundamental, bottom-up approach and that client portfolios
should normally remain fully invested. Investment research emphasizes meetings
with the management teams of portfolio companies. Portfolio managers and
analysts also attend management conferences and presentations, place research
oriented calls to management, participate in conference calls with management
and review written company reports.
4
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Seneca
Seneca actively manages domestic equity, fixed income and balanced products
using a disciplined, bottom-up investment process executed by a team of
investment professionals.
The "Value Driven Fixed Income" approach is bottom-up, research-driven and
opportunistic, intended to identify fundamental value and to capitalize on
volatility and market inefficiencies. Extensive fundamental research is the
standard. Value is added through sector selection, issue selection (based on
credit research and structure analysis), and trading opportunities. Duration is
targeted and managed around a narrow band.
The equity approach is bottom-up, with an emphasis on fundamental earnings
acceleration, earnings quality and sustainability, and valuation. In addition to
standard financial analysis and careful review of Wall Street research, analysts
meet directly and frequently with portfolio candidates. Analysts ask specific
and targeted questions to calibrate earnings trends. Seneca offers a mid to
large cap growth equity product called "Growth with Controlled Risk," which
blends two distinct universes of stocks: "Forecast Appreciation" and "Proven
Appreciation." Forecast Appreciation focuses on stocks for which Seneca
forecasts major earnings acceleration. Proven Appreciation focuses on
well-established large capitalization stocks that have continually paid
dividends for the last 20 years. The combination of stocks from each universe
produces a portfolio that grows at a rate consistent with a growth style, but is
cushioned against downside risk in turbulent markets. The second equity product
that Seneca offers is called "Earnings Driven Growth." This equity discipline
exploits the correlation between earnings acceleration and price appreciation.
The equity strategy screens for growth across all market capitalizations. The
focus is on stocks for which earnings growth rates are projected at
substantially higher levels than the market, and for which major earnings
accelerations are forecasted.
Investment Management Agreements and Fees
Overview
The strategy of the Company is to increase assets under management by offering
institutional and mutual fund clients a broad array of investment products and
services while at the same time moderating growth to insure that clients receive
the highest quality of service. The Company believes that the number of managed
investment accounts has a greater impact on the quality of investment advisory
services than the amount of assets under management because of the time needed
to service each account's particular investment requirements. Portfolio managers
devote substantially all of their time to investment management. General
informational services for clients, such as investment performance and account
information, are assigned to other personnel dedicated exclusively to client
relations. In addition, portfolio managers typically manage accounts of clients
with similar investment objectives, thereby enabling clients to benefit from the
expertise of their portfolio managers in achieving their investment objectives.
Portfolio managers actively manage client portfolios and exercise investment
discretion within general investment guidelines provided by their clients.
Client policies regarding the use of investment techniques and strategies, such
as derivative securities and leverage, are followed.
DPIM, PIC, REA and Seneca, as investment advisors to investment companies, are
subject to the Investment Company Act of 1940, as amended (the 1940 Act). Under
the 1940 Act, advisory and subadvisory agreements with investment companies,
including the Duff & Phelps Funds, may be continued in effect for a period of
more than two years from the date of their execution only so long as such
continuance is specifically approved at least annually by a majority of the
disinterested directors of such investment company and by either the board of
directors or the stockholders of the investment company. In addition, the 1940
Act requires such agreements to be terminable without penalty to the investment
company by its directors or stockholders upon relatively short notice: 60 days
in the case of agreements with mutual funds and typically 30 to 60 days in the
case of agreements with institutional clients. Agreements generally may not be
assigned without the consent of the client and terminate automatically in the
event of their assignment. "Assignment" in these agreements typically has the
meaning given under the 1940 Act, which definition would include certain changes
in the ownership of the Company or its investment advisory subsidiaries. The
Company's advisory agreements with non-investment company clients are generally
terminable without penalty upon notice by the client.
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Management fees paid by a mutual fund must initially be negotiated with the
fund's board of directors and must be annually approved by a majority of the
board's disinterested directors. Increases in the fees must thereafter be
approved by the fund's shareholders. Since shareholder approval must be obtained
in order to implement fee increases, management fees paid by mutual funds tend
to be increased infrequently and competitive forces in the mutual fund industry
influence these negotiations for fee changes.
Other than the following, no account or fund represents more than 2% of the
Company's total revenues during 1998: PHL General Account and PHL sponsored
variable products, Duff & Phelps Utilities Income Fund, Phoenix Series Balanced
Fund, Phoenix Series Growth Fund, Phoenix Income and Growth Fund, The Phoenix
Edge Series Growth Fund and the Phoenix-Engemann Growth Fund.
DPIM
DPIM offers fixed income and equity investment management services on both a
discretionary basis, where DPIM makes the investment decisions with respect to
the assets under management; and a non-discretionary basis, where DPIM
recommends investment policies and strategies to clients who maintain their own
investment staffs that make the investment decision. Assets pertaining to
non-discretionary investment management services are not included in the
Company's assets under management.
DPIM has entered into investment management agreements with each of its
institutional, open-end mutual fund, and closed-end fund clients. Under the
open-end mutual fund agreements, DPIM earns management fees based on the average
daily net asset values of each fund. The agreements prescribe, for each fund, a
tiered-fee structure whereby the fee percentage is decreased as the fund grows
through net asset thresholds. Fees for the management of institutional advisory
accounts are based on the asset value of the investment portfolios under
management, while fees for non-discretionary advisory accounts are fixed rate
fees. Fees for the management of the Duff & Phelps funds are based on assets
managed, calculated based on average weekly assets.
DPIM has wrap contracts with both large and small programs. With a few minor
exceptions, fees for the management of wrap assets are payable quarterly in
advance. As of December 31, 1998, DPIM participated in programs which provided
annual investment management fees ranging from .45% to 1.00% of assets under
management. The range reflects, among other factors, the difference in the level
of client service and reporting for which DPIM is responsible under the
different programs. These investment management agreements are terminable by
either party upon relatively short notice.
PIC
PIC has entered into investment management agreements with each of its
institutional and mutual fund clients, including agreements with PHL with
respect to its General Account and variable products. In addition, PIC has
entered into sub-advisory management agreements with certain unrelated
investment advisors for which it has agreed to manage all or a part of a mutual
fund portfolio. Pursuant to these agreements, PIC has been granted discretionary
authority to make investment decisions with respect to assets under management
within certain general investment guidelines and, in the case of the PHL General
Account, subject to oversight by the PHL Board of Directors and the Investment
Committee thereof.
For open-end mutual funds, PIC earns management fees based on the average daily
net asset values of each fund. The agreements prescribe, for most funds, a
tiered-fee structure whereby the fee percentage is decreased as the fund grows
through net asset thresholds. For the investment management services provided to
the mutual funds, PIC receives fees ranging generally from .40% to .75% per
annum of each fund's average daily net asset value. These management fees are
payable monthly.
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For institutional clients, PIC is compensated under investment management
contracts on the basis of fees calculated as a percentage of assets under
management. The percentage of the fee generally declines as the amount of assets
under management increases above certain thresholds. In addition, the fee
percentage is also dependent upon the difficulty in managing the investments;
generally, investments in equity securities command a higher fee percentage than
fixed income securities, as do investments in foreign securities, which require
more extensive management time. Fees for the management of institutional
accounts are based on the asset value of the investment portfolios under
management and are typically payable monthly or quarterly. For its
investment management services, PIC receives management fees from discretionary
advisory accounts ranging from .15% to .75% per annum of the accounts' average
net asset values.
Pursuant to an investment management agreement with PHL effective as of January
1, 1995, PIC provides non-real estate investment management services to the PHL
General Account, which, as of December 31, 1998, had approximately $8.8 billion
in assets managed by PIC. PIC receives a management fee of .10% and .12% per
annum based on net asset values for publicly traded bonds and privately placed
bonds, respectively, which represent approximately 95% of the assets managed. A
fee ranging from .05% to .45% per annum is earned based on net assets invested
in preferred stocks, including government securities; cash and cash equivalents;
common stock; venture capital, oil and gas, and leveraged lease products. The
management fee is payable monthly based on the average monthly net asset value
of the General Account. For the year ended December 31, 1998, management fees
paid to PIC with respect to the General Account totaled $9.5 million. The
Company believes that the management fees payable to PIC by PHL under the
General Account agreement are no less favorable to PIC than the management fees
that would be obtained from unaffiliated persons based on the size of this
account and the types of investments in which the assets of such account are
invested.
REA
REA has entered into investment management agreements with its clients, each of
which provides for REA to earn management fees based on the assets managed.
Regarding wrap business, contracts are structured in one of two ways. In the
majority of cases and for all of the larger programs, REA has one investment
management agreement with the sponsor which covers all accounts managed by REA
in that particular program. For a number of the smaller programs, REA has an
individual investment management agreement with each client. With a few minor
exceptions, fees for the management of wrap assets are payable quarterly in
advance. As of December 31, 1998, REA participated in programs which provided
annual investment management fees ranging from .45% to 1.00% of assets under
management. The range reflects, among other factors, the difference in the level
of client service and reporting for which REA is responsible under the different
programs. These investment management agreements are terminable by either party
upon relatively short notice.
REA has an investment management agreement with each of its non-wrap
individually managed clients. In each case, fees are payable quarterly in
advance. As of December 31, 1998, REA investment management fee rates for
non-wrap clients ranged from .50% to 2.00% of assets under management. The fee
rate is negotiated separately with each client and reflects, among other
factors, the size of the account, the length of the relationship and the
investment style selected. These investment management agreements are terminable
by either party at any time.
REA has an investment management agreement with the Phoenix-Engemann Funds, an
open-end management investment company whose shares are offered in six funds.
Under the agreement, REA earns management fees based on the average daily net
asset values of each fund. The agreement prescribes, for each fund, a tiered-fee
structure whereby the fee percentage is decreased as the fund grows through net
asset thresholds. Fees reflect the complexity of and effort required by the
investment methodology underlying each fund's management. As of December 31,
1998, the investment management agreement with the Phoenix-Engemann Funds
prescribed annual fee rates ranging from .60% to 1.10% of average daily net
assets. Fees are payable on REA's request and, since each fund's inception, have
been settled monthly in arrears. The investment management agreement is
terminable by either party upon 60 days notice.
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Seneca
Seneca has investment management agreements with each of its institutional
accounts. Pursuant to these agreements, Seneca has been granted discretionary
authority to make investment decisions within certain general portfolio
guidelines. These investment contracts are generally cancelable upon 30 days
notice by either party.
Seneca charges quarterly management fees, in advance, based upon the market
value of the investments. The standard fee schedule for the Growth with
Controlled Risk institutional accounts is 1.00% on the first $5 million, .80% on
the next $10 million and .50% on amounts over $15 million of assets managed. The
standard fee schedule for the Earnings Driven Growth institutional accounts is
1.00% on the first $10 million, .80% on the next $25 million and .70% on amounts
over $35 million of assets managed. The standard fee schedule for the Value
Driven Fixed Income institutional accounts is .50% on the first $35 million and
.35% on amounts over $35 million of assets managed.
Retail Product Line
Mutual Funds
DPIM, PIC, REA and Seneca are investment advisors, and/or subadvisors, to 54
open-end mutual fund portfolios, which had aggregate assets under management of
approximately $14.4 billion as of December 31, 1998. Mutual funds managed by
DPIM, PIC, REA and Seneca are available to retail investors. PIC is investment
advisor to 42 mutual fund portfolios, which had aggregate assets under
management of approximately $12.6 billion as of December 31, 1998. DPIM is
investment advisor to 6 mutual fund portfolios which had aggregate assets under
management of approximately $.5 billion as of December 31, 1998. REA is
investment advisor to 6 mutual fund portfolios, which had aggregate assets under
management of approximately $1.2 billion as of December 31, 1998. REA subadvises
two additional mutual funds and Seneca subadvises six mutual funds, all of which
are advised by PIC.
PIC also serves as investment advisor to three investment funds of a non-U.S.
investment company qualifying under the laws of Luxembourg as a societe
d'investissement a capital variable (SICAV), the shares of which are distributed
overseas to foreign investors by non-U.S. subsidiaries of PHL. The SICAV had
approximately $68.1 million in aggregate assets under management as of December
31, 1998.
The following table provides, with respect to each mutual fund, information
concerning its year of establishment, fee schedule, assets under management, and
advisor:
Assets Under
Management
Year as of
Fund Established Fee* December 31, 1998 Advisor
----------- ---- ----------------- -------
(in thousands)
Phoenix Series Fund:
Balanced Fund 1970 .55%(a) $1,720,626 PIC
Growth Fund 1969 .70%(a) 2,908,689 PIC
High Yield Fund 1980 .65%(a) 539,786 PIC
Money Market Fund 1980 .40%(b) 202,715 PIC
Aggressive Growth Fund 1968 .70%(a) 309,099 PIC
U.S.Government Securities Fund 1987 .45%(a) 191,364 PIC
----------
$5,872,279
----------
Phoenix Multi-Portfolio Fund:
Tax-Exempt Bond Portfolio 1988 .45%(a) $ 113,006 PIC
Mid Cap Portfolio 1989 .75%(a) 325,424 PIC
Emerging Markets Bond
Portfolio 1995 .75%(a) 75,825 PIC
Strategic Income Portfolio 1993 .55%(a) 5,963 PIC
Real Estate Securities
Portfolio 1995 .75%(a) 40,796 DPIM
International Portfolio 1989 .75%(a) 199,907 PIC **
----------
$ 760,921
----------
8
<PAGE>
Assets Under
Management
Year as of
Fund (continued) Established Fee* December 31, 1998 Advisor
- ---------------- ----------- ---- ----------------- -------
(in thousands)
Phoenix Strategic Equity Series Fund:
Equity Opportunities Fund 1944 .70%(a) $ 200,577 PIC
Small Cap Fund 1995 .70%(a) 265,766 PIC
Strategic Theme Fund 1995 .75%(a) 160,662 PIC
----------
$ 627,005
----------
The Phoenix Edge Series Fund:
Multi-Sector Fixed-Income
Series 1986 .50%(c) $ 187,420 PIC
Money Market Series 1986 .40%(d) 194,762 PIC
Growth Series 1986 .70%(c) 1,876,539 PIC
Strategic Allocation Series 1986 .60%(c) 481,098 PIC
Balanced Series 1992 .55%(c) 280,220 PIC
Strategic Theme Series 1996 .75%(c) 74,951 PIC
Research Enhanced Index Series 1997 .45% 69,394 PIC
Engemann Nifty Fifty Series 1998 .90%(c) 13,114 PIC
Growth and Income Series 1998 .70%(c) 41,739 PIC
Schafer Mid-Cap Value Series 1998 1.05% 7,904 PIC
Seneca Mid-Cap Growth Series 1998 .80% 7,802 PIC
Value Equity Series 1998 .70%(c) 9,553 PIC
Real Estate Securities Series 1995 .75% 36,423 DPIM
International Series 1990 .75%(c) 242,055 PIC **
----------
$3,522,974
----------
Other Phoenix Funds:
Strategic Allocation
Fund, Inc. 1982 .65%(a) $ 330,896 PIC
Income and Growth Fund 1940 .70%(a) 915,100 PIC
Multi-Sector Short Term
Bond Fund 1992 .55%(a) 54,539 PIC
Phoenix-Aberdeen Worldwide
Opportunities Fund 1960 .75%(a) 196,658 PIC **
Multi-Sector Fixed
Income Fund, Inc. 1989 .55%(a) 282,540 PIC
California Tax-Exempt
Bonds, Inc. 1983 .45%(a) 99,178 PIC
----------
$1,878,911
----------
Phoenix Equity Series:
Phoenix-Oakhurst Growth
and Income Fund 1997 .75%(a) $ 207,781 PIC
Core Equity Fund 1997 .75%(a) 54,924 DPIM
----------
$ 262,705
----------
Phoenix Investment Trust 97:
Phoenix-Hollister Small
Cap Value Fund 1997 .90%(a) $ 33,650 PIC
Phoenix-Hollister Value
Equity Fund 1997 .75%(a) 36,572 PIC
----------
$ 70,222
----------
Phoenix Duff & Phelps
Institutional Mutual Funds:
Growth Stock Portfolio 1996 .60%(e) $ 67,657 PIC
Managed Bond Portfolio 1996 .45%(e) 120,559 PIC
Core Equity Portfolio 1998 .50% 10,874 DPIM
Enhanced Reserves Portfolio 1996 .24%(f) 19,533 DPIM
Real Estate Equity
Securities Portfolio 1995 .50% 20,375 DPIM
----------
$ 238,998
----------
9
<PAGE>
Assets Under
Management
Year as of
Fund (continued) Established Fee* December 31, 1998 Advisor
- ---------------- ----------- ---- ------------------ -------
(in thousands)
Phoenix-Engemann Mutual Funds:
Growth Fund 1986 .90%(g) $ 542,288 REA
Balanced Return Fund 1987 .80%(g) 91,713 REA
Nifty Fifty Fund 1990 .90%(g) 380,385 REA
Global Growth Fund 1993 1.10%(g) 22,431 REA
Small & Mid-Cap Growth Fund 1994 1.00%(g) 100,725 REA
Value 25 Fund 1996 .90%(g) 35,701 REA
----------
$1,173,243
----------
Phoenix-Seneca Mutual Funds:
Bond Fund 1998 .50% $ 30,199 PIC
Growth Fund 1998 .70% 61,684 PIC
Real Estate Securities Fund 1998 .85% 21,859 PIC
Mid-Cap "Edge" Fund 1998 .80% 18,368 PIC
----------
$ 132,110
----------
Sub-total $14,539,368
===========
Subadvisory relationship with
Aberdeen, net effect ** $ (200,030)
SICAV 68,132
-----------
Total $14,407,470
===========
* - Fee rate for the Phoenix Series Fund, Phoenix Multi-Portfolio Fund,
Strategic Equity Series Fund, Other Phoenix Funds, Phoenix Equity Series,
Phoenix Investment Trust, and The Phoenix Duff & Phelps Institutional Mutual
Funds represents annual basis points earned on the first billion of average
assets managed. Fee rate for The Phoenix Edge Series Fund represents annual
basis points earned on the first $250 million of average assets managed. The fee
rate for the Phoenix-Engemann Mutual Funds represents annual basis points earned
on the first $50 million of average assets managed. The Phoenix-Seneca Mutual
Funds and certain Phoenix Edge Series and Phoenix Duff & Phelps Institutional
Mutual Funds have fixed rates.
(a) - remaining fee schedules range from: .40% to .85% for the next billion, and
.35% to .80% in excess of two billion of assets managed.
(b) - remaining fee schedule is: .35% for the next billion, and .30% in excess
of two billion of assets managed.
(c) - remaining fee schedules range from: .45% to .85% for the next $250
million, and .40% to .80% in excess of $500 million of assets managed.
(d) - remaining fee schedule is: .35% for the next $250 million, and .30% in
excess of $500 million of assets managed.
(e) - remaining fee schedules range from: .40% to .55% in excess of one billion
of assets managed.
(f) - remaining fee schedule is: .19% in excess of one billion of assets
managed.
(g) - remaining fee schedule ranges from: .70% to 1.0% for the next
$450 million, and .60% to .90% in excess of $500 million of assets managed.
**- Aberdeen Fund Managers (Aberdeen), an affiliate of PHL, is subadvisor to
the non-U.S. portion of PIC's international and worldwide mutual fund assets,
totaling $.6 million, which are not included in total assets under management
reported by the Company at December 31, 1998. In addition, $.3 million and
$.1 million of the U.S. portion of certain other assets managed by Aberdeen
are subadvised by DPIM and PIC, respectively, and have been included in
assets under management reported by the Company at December 31, 1998.
10
<PAGE>
All of the above mutual funds are open-end funds, which continuously offer to
sell and redeem their shares at prices based on the net asset value of the
fund's portfolio. DPIM, PIC, REA and Seneca's mutual funds are distributed
through the non-proprietary wholesale distribution channel. Each fund, other
than the Phoenix Duff & Phelps Institutional Mutual Funds and the Phoenix Edge
Series Fund, offers investors two pricing structures, Class A and Class B shares
and certain funds also offer Class C shares, representing traditional front-end
load, back-end load and level-load, respectively. The Class A shares issued to
the public by the Phoenix Funds are all subject to conventional front-end sales
charges, except for a money-market fund which is sold on a no-load basis. The
Class B shares issued by these mutual funds are subject to contingent deferred
sales charges, which are typically paid by the holder upon redemption of such
shares during the first five years after purchase. The Class C shares issued by
these mutual funds are subject to contingent deferred sales charges, which are
typically paid by the holder upon redemption of such shares during the first
year. The Phoenix Duff & Phelps Institutional Mutual Funds are offered as Class
X and Class Y shares, which are similar to Class A and Class B shares,
respectively. The Phoenix Edge Series Fund has only one class of shares similar
to Class A shares. Shares of open-end mutual funds are generally redeemable at
any time and are generally not traded in the secondary market. As a result, the
Company's revenues from such mutual funds vary due to redemptions and purchases
of shares, in addition to fluctuations in the value of the securities in their
portfolios. Net advisory fees realized from these mutual funds totaled $71.9
million for the year ended December 31, 1998.
Managed Accounts
At December 31, 1998, REA and DPIM provided investment management services
through participation in various broker-dealer sponsored and distributed wrap
programs. Wrap programs offer broker-dealer clients discretionary portfolio
management services provided by unaffiliated investment managers selected by the
broker. In addition, REA provides investment advisory services to "high
net-worth" individuals, outside of a wrap program. At December 31, 1998, REA and
DPIM had approximately $7.3 billion in assets under management related to wrap
programs.
REA and DPIM manage the assets of individually managed accounts as follows:
Assets Under
Management
Number of as of
Source Fee * Accounts December 31, 1998
- ------ ----- --------- -----------------
(in thousands)
Wrap .58% 14,129 $ 5,076,606
Non-wrap .96% 4,260 2,245,112
--------- -----------
Total 18,389 $ 7,321,718
========= ===========
* - Fee represents weighted average annual basis points charged.
Assets of $4.0 billion were managed within the Merrill Lynch "Consults" wrap
program.
Institutional Product Line
Institutional Accounts
DPIM, PIC and Seneca have a broad institutional client base consisting primarily
of medium-sized pension and profit sharing plans of corporations, governmental
entities and unions, as well as endowments and foundations, public and
multi-employer retirement funds and other special purpose funds, each of which
has between $.2 million and $1.9 billion (except for $8.8 billion for PHL's
General Account) in assets managed. Additionally, as of December 31, 1998, DPIM
provided non-discretionary investment advisory services to institutional
accounts with total assets of $7.2 billion.
11
<PAGE>
DPIM, PIC and Seneca manage institutional accounts, including PHL's General
Account, as follows:
Assets Under
Management
Number of as of
Advisor Accounts December 31, 1998
--------- -----------------
(in thousands)
DPIM 295 $ 11,112,433
PIC 29 11,206,540
Seneca 475 5,934,155
----- -----------
Total 799 $ 28,253,128
===== ============
Closed-End Funds
DPIM manages the assets of the following closed-end funds (each of which is
traded on the New York Stock Exchange):
Net Asset Value
as of
Fund Fee * December 31, 1998
------ -----------------
(in thousands)
Utilities Income Fund .60% $ 2,773,980
Utilities Tax-Free Fund .50% 202,173
Utility and Corporate Bond Trust .50% 528,631
-----------
Total $ 3,504,784
===========
* - Fee represents annual rate based on average weekly net assets of the
respective fund. The rate for the Utilities Income Fund is for the first $1.5
billion of average weekly net assets. A rate of .50% is earned on average
weekly net assets in excess of $1.5 billion.
Client Development
The ability of DPIM, PIC, REA and Seneca to attract and retain clients is
largely dependent on the portfolio managers and other key employees of these
companies. Each company, therefore, maintains a variety of competitive
compensation programs designed to reward both short-term and long-term
profitability, investment performance and new business. In an effort to maximize
time devoted by portfolio managers to investment management, client relations
and shareholder service departments attend to the informational needs of
clients.
Product innovation is also central to the development of new clients and the
retention of existing clients. New investment management products typically
require "seed" funding to assist in attracting accounts and developing an
initial performance record. Traditionally, PHL has directly or indirectly
provided seed funding for new investment funds managed by PIC. PHL may not
continue to provide such funding. If such funding is not provided by PHL, it
will likely be funded by the Company.
12
<PAGE>
Distribution
Marketing, Distribution, and Support Services
Retail Product Marketing and Distribution
PEPCO, a broker-dealer registered under the Securities Exchange Act of 1934, as
amended (the Exchange Act), serves as principal underwriter and national
wholesale distributor of the mutual funds and managed accounts managed by DPIM,
PIC, REA and Seneca, as well as the variable contracts issued by PHL (or an
insurance company subsidiary) which are invested in The Phoenix Edge Series
Fund. PEPCO also provides a wide range of investment management support
services, including accounting, pricing, record keeping and transfer agency
services. Net revenues relating to these support services paid to PEPCO
(including net sales loads, net distribution fees, administrative fees and
shareholder service agent fees) totaled $25.7 million for the year ended
December 31, 1998. PEPCO has been granted exclusive distribution rights pursuant
to distribution agreements with each of the Phoenix Mutual Funds and receives
commissions for shares distributed, depending on the size of the particular
sale, ranging from 2.0% to 4.75% on sales of less than $1 million. Individual
sales of $1 million or more are made without commission. Commissions on sales of
variable contracts which are invested in The Phoenix Edge Series Fund range from
3.0% to 6.0% of the purchase or premium payments made under such contracts.
Mutual fund shares and variable products are distributed by PEPCO under sales
agreements with unaffiliated national and regional broker-dealers and financial
institutions and registered representatives of WS Griffith & Co., Inc.
(Griffith). A substantial portion of PEPCO's distribution commissions are paid
by Griffith to these entities. PEPCO also engages in telemarketing of these
mutual funds and variable product contracts to existing and potential clients.
In addition, mutual funds are marketed to existing and potential institutional
clients through registered representatives of PEPCO.
Griffith is a registered broker-dealer subsidiary of PHL engaged in the retail
distribution of mutual funds and variable product contracts. Griffith is
currently the largest distributor of the Company's investment products,
accounting for approximately 5% and 78% of mutual fund and variable product
sales, respectively, for the year ended December 31, 1998. Through Griffith,
PEPCO obtains the services of approximately 1,180 PHL insurance agents and
brokers who are registered representatives of Griffith.
Sales and marketing personnel of PEPCO also direct substantial efforts towards
establishing and maintaining relationships with unaffiliated national and
regional broker-dealers and financial institutions. Due to the highly
competitive nature of the investment management business, the ability of DPIM,
PIC, REA and Seneca to compete for mutual fund customers is becoming
increasingly dependent on developing and maintaining an effective distribution
channel through such entities.
Institutional Product Marketing and Distribution
At December 31, 1998, DPIM, PIC and Seneca had 799 institutional investment
clients, with most of their business coming by referral. DPIM, PIC and Seneca
also solicit new accounts by relying on their portfolio managers to establish
relationships with pension fund consulting firms whose role is advising clients
in the selection of investment management firms. This strategy has the benefit
of magnifying DPIM's, PIC's and Seneca's marketing effort because a successful
relationship with a consultant tends to create multiple solicitation
opportunities.
Institutional marketing efforts are directed toward investment management
consultants who are retained by institutional investors to assist in competitive
reviews of potential investment managers. These consultants recommend investment
managers to their institutional clients based on their review of investment
managers' performance histories and investment management styles. Sales and
marketing personnel at DPIM, PEPCO and Seneca establish and maintain
relationships with these consultants and provide information and materials to
these consultants in order to enable them to evaluate DPIM, PIC and Seneca.
13
<PAGE>
Support Services
PEPCO provides various support services for the mutual funds whose assets are
managed by DPIM, PIC, REA and Seneca. Under financial agent agreements, it
performs accounting, administrative, pricing and record retention services for
these funds and receives monthly fees in an amount equal to the costs incurred
in performing such services. In the first quarter of 1998, PEPCO began
out-sourcing substantially all of its mutual fund accounting function to an
unrelated third party service provider. PEPCO continues to serve as the funds'
transfer agent, for which it receives an annual fixed fee of $14.95 for each
shareholder account, except for the daily dividend funds, for which it receives
$19.25 per shareholder account, subject to a certain minimum fee (plus
out-of-pocket expenses). In 1998, the Boards of Directors of most of the funds
approved a change to the transfer agent fee, effective in 1999, to $17.95 per
shareholder account, except for the daily dividend funds, which was changed to
$22.25.
Investment in Beutel, Goodman & Company Ltd
BG is a Canadian corporation engaged in the investment management business with
its main office in Toronto, Ontario. On November 15, 1993, the Company and
affiliates of the Company (i) purchased 43,333 Class 3 Common Shares of Beutel,
Goodman & Company Ltd. (BG), representing 40% of the outstanding voting capital
stock of BG, for a purchase price of $7.8 million paid in cash, and (ii)
purchased $23.3 million of 8.5% Redeemable Unsecured Debentures of BG payable
periodically from the net earnings of BG and maturing as to any unpaid principal
on November 14, 2003. At December 31, 1995, the Company held approximately $9.5
million of the 8.5% BG debentures. These debentures were retired during 1996. On
April 1, 1994, the Company purchased an additional 19,118 Class 3 Common Shares
of BG for a purchase price of $7.2 million. As a result of the purchase of the
19,118 shares, the Company owned 49% of the outstanding voting capital stock of
BG.
On December 3, 1998, the Company sold its 49% investment in the outstanding
common stock of BG to an unrelated third party for $47 million. The Company
received $37 million in cash at closing and a $10 million three-year
interest-bearing note. An additional $3 million may be paid to the Company if
specified earnings thresholds are met in the next two calendar years. Proceeds
from the sale of BG were used to pay down debt.
Investment Research and Investment Banking
The Company, directly or through subsidiaries, provided investment research to
outside clients such as banks, insurance companies, investment advisors, brokers
and investment banking firms, beginning in 1932. Investment research was
provided by the Company's subsidiary Duff & Phelps Investment Research Co.
(Investment Research) until October 1994, when Investment Research was dissolved
into the Company. In 1996, the Company sold the assets of its high yield
research business to former executives of the investment research division.
The Company also provided financial advisory and investment banking services to
individuals, corporations and financial institutions through its wholly owned
subsidiary Duff & Phelps Financial Consulting Co., later known as Duff & Phelps
Capital Markets (Capital Markets). Capital Markets formed Duff & Phelps
Securities Co., its wholly owned subsidiary, which was a registered
broker-dealer offering institutional brokerage services. In 1996, the Company
sold the assets of Capital Markets (including Duff & Phelps Securities Co.) to
several former executives of Capital Markets.
Subsequent to the sale of its assets, Capital Markets was renamed DPCM Holdings,
Inc. (DPCM). DPCM has a joint venture affiliate located in Greenwich,
Connecticut through which it invests in private equity transactions, expansion
financings and recapitalizations involving management participation.
14
<PAGE>
Competition
The investment management business is highly competitive. Thousands of
investment management firms offer their services to potential clients. In
addition, various services and investments offered by insurance companies, banks
and securities dealers compete with the services offered by the Company. Some of
these firms are larger and have access to greater resources than the Company.
Although the Company's range of product offerings has increased significantly
with the acquisitions of REA and Seneca, many of the Company's competitors offer
a broader range of advisory services than those of the Company. In addition, the
investment advisory industry is characterized by relatively low cost of entry
and new investment management firms are frequently created.
The Company believes that the most important factors affecting competition for
investment management clients are the performance records and reputations of
investment managers and their investment professionals, marketing and access to
distribution channels, product innovation, customer service and management fees.
The Company's ability to increase and retain clients' assets could be materially
adversely affected if client accounts underperform the market or if key
portfolio managers terminate their employment with the Company. In the past, the
Company has not experienced a high turnover rate among its portfolio managers.
The ability of the Company to compete with other investment management firms
also is dependent, in part, on the relative attractiveness of its investment
philosophy and methods under prevailing market conditions.
A large number of mutual funds are sold to the public by investment management
firms, broker-dealers, insurance companies and banks in competition with mutual
funds sponsored and managed by the Company's investment management subsidiaries.
Many of the Company's competitors apply substantial resources to advertising and
marketing their mutual funds, which may adversely affect the ability of funds
managed by the Company to attract new clients and to retain assets under
management. Load mutual funds have for some time faced significant competition
from no-load funds, resulting in the reduction of sales fees and leading to
consideration of alternative load structures. The ability to attract and retain
assets in these funds, most of which have sales fees, is dependent to a
significant degree on the ability to maintain relationships with both
unaffiliated brokers and financial institutions and participating insurance
agents and brokers in PHL's agent field force who are registered representatives
of Griffith. Shareholder account service is also important to retaining mutual
fund customers.
Regulation
The Company and its subsidiaries are subject to extensive governmental
regulation and supervision. The Company, DPIM, PIC, NS&RC, REA and Seneca are
registered with the Securities and Exchange Commission (the SEC) under the
Advisors Act and, as necessary, are registered under applicable state investment
advisory laws. Registrations, reporting, maintenance of books and records,
custodial arrangements and other compliance procedures required pursuant to the
Advisors Act and applicable state securities laws are maintained independently
by the Company, DPIM, PIC, NS&RC, REA and Seneca. In addition, each of the
mutual funds managed by DPIM, PIC, REA and Seneca are registered with the SEC
under the 1940 Act. DPIM, PIC, REA and Seneca are, therefore, subject to the
1940 Act insofar as it relates to investment advisors for registered investment
companies. On June 1, 1998, NS&RC assigned its rights under its investment
management contracts to PIC.
PEPCO is registered as a broker-dealer under the Exchange Act and state
securities laws and is therefore subject to minimum net capital requirements
imposed on broker-dealers by the SEC. The SEC rules require an aggregate
indebtedness to net capital ratio of no more than 15:1. As of December 31, 1998,
PEPCO had net capital of $6.0 million, compared to required net capital of $.6
million, and a ratio of aggregate indebtedness to net capital of 1.50:1. In
addition, as a registered broker-dealer, PEPCO is also a member of the National
Association of Securities Dealers, Inc. (NASD). The SEC and NASD require that,
in addition to the minimum net capital requirements, PEPCO comply with a variety
of operational standards, including proper record keeping and the licensing of
its representatives. The SEC and NASD periodically examine PEPCO and review
periodic reports with respect to its operations and financial condition.
DPIM, PIC, REA and Seneca are also subject to ERISA, insofar as they are
"fiduciaries" under ERISA with respect to employee benefit plan clients subject
to ERISA.
15
<PAGE>
Because PHL owns a majority equity interest in the Company, New York law
relating to the subsidiaries of life insurance companies may apply to the
business activities conducted by the Company, including the requirement that
transactions with affiliates be fair, equitable and reasonable. However, no
prior insurance regulatory approval is or will be required with respect to the
investment management activities of subsidiaries of the Company or the
distribution by such entities of investment products. In the case of investments
in the Variable Products Separate Accounts of PHL, the individual or group
insurance or annuity or similar insurance contract issued by PHL or an insurance
company subsidiary is subject to prior review and approval by insurance
regulators in each jurisdiction where the product is to be sold.
The laws and regulations described above generally grant supervisory agencies
broad administrative powers, including the power to limit or restrict a firm
from conducting its business in the event that it fails to comply with relevant
laws and regulations. Possible sanctions that may be imposed in the event of
noncompliance include the suspension of individual employees, limitations on the
firm's business for specified periods of time, revocation of the firm's
registration as an investment advisor or broker-dealer, censures and fines.
Changes in these laws or regulations could have a material adverse impact on the
profitability and mode of operations of the Company.
The officers, directors and employees of the Company may from time to time own
securities which are also owned by one or more of the clients of the Company.
The Company has internal policies with respect to personal investing which
require reporting of securities transactions and restrict certain transactions
so as to reduce the possibility of conflict of interest.
Employees
As of December 31, 1998, the Company and its subsidiaries employed approximately
650 persons. The Company considers its employee relations to be satisfactory.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
Philip R. McLoughlin 52 Chairman of the Board, Chief Executive Officer
and Director
Calvin J. Pedersen 57 President and Director
Michael E. Haylon 41 President of PIC, Executive Vice President
and Director
John F. Sharry 47 President, Retail Division
William R. Moyer 54 Senior Vice President and Chief Financial
Officer
Leonard J. Saltiel 45 Senior Vice President
Thomas N. Steenburg 50 Senior Vice President
Elizabeth R. Rudden 44 Vice President
The executive officers of the Company are elected annually and serve at the
discretion of the Board of Directors of the Company.
16
<PAGE>
Mr. McLoughlin has been Chairman of the Board of the Company since May 1997 and
Chief Executive Officer of the Company since November 1, 1995. Mr. McLoughlin
has also been a Director of PHL since February 1994 and has been employed by PHL
as Executive Vice President - Investments since December 1988. In addition, Mr.
McLoughlin serves as Chairman and President of PEPCO, Chairman of PIC, Chief
Executive Officer and Vice Chairman of DPIM and Chairman and Chief Executive
Officer of NS&RC. He also is a member of the Board of Directors of PIC, PEPCO,
DPIM, NS&RC, PCC, Duff & Phelps Utilities Tax-Free Income Inc., and Duff &
Phelps Utility and Corporate Bond Trust Inc. Mr. McLoughlin also serves as
President and as a Director or Trustee of the Phoenix Funds, Phoenix Duff &
Phelps Institutional Mutual Funds, and Phoenix-Aberdeen Series Fund. He is a
Director of PM Holdings, Inc., Phoenix Charter Oak Trust Company, Aberdeen Asset
Management plc, The World Trust, a Luxembourg closed-end fund, The Emerging
World Trust Fund, a Luxembourg closed-end fund, and PXRE Corporation, a
publicly-traded corporation, and its wholly-owned subsidiary, PXRE Reinsurance
Company.
Mr. Pedersen has been President of the Company since July 1993 and a Director of
the Company since January 1992. From January 1992 to July 1993, Mr. Pedersen
served as an Executive Vice President of the Company. Mr. Pedersen was also an
Executive Vice President of Duff & Phelps, Inc. (DPI, Inc.), the former parent
of the Company's operating subsidiaries, from 1988 until its dissolution. From
1986 to 1988, he served as Senior Vice President - Marketing and Sales of DPI,
Inc. Mr. Pedersen joined the Company in 1986 from First Chicago Investment
Advisors, an investment management company, where he was a Managing Director and
head of the Account Management and Administration Division. Mr. Pedersen is also
President and Chief Executive Officer of Duff & Phelps Utilities Income Inc.,
Duff & Phelps Utilities Tax-Free Income Inc., and Duff & Phelps Utility and
Corporate Bond Trust Inc. and serves as a Director and Chairman of DPIM and as a
Director or Trustee of the Phoenix Funds, Phoenix-Aberdeen Series Fund and
Phoenix Duff & Phelps Institutional Mutual Funds.
Mr. Haylon has been an Executive Vice President and a Director of the Company
since November 1, 1995. From February 1993 to November 1, 1995, Mr. Haylon was
Senior Vice President - Securities Investments of PHL. Mr. Haylon is also
President of PIC, Executive Vice President of NS&RC, Executive Vice President of
DPIM and Executive Vice President of the Phoenix Funds, Phoenix Duff & Phelps
Institutional Mutual Funds and Phoenix-Aberdeen Series Fund. From June 1991
through January 1993, Mr. Haylon was Vice President, Public Fixed Income and
from June 1990 through May 1991, he was Vice President, Public Bond Investments
of PHL. Mr. Haylon was Vice President of Aetna Capital Management from August
1986 until June 1990 and a Managing Director of Aetna Bond Investors from
February 1989 until June 1990. Mr. Haylon also serves as a member of the Boards
of Directors of PIC, PEPCO, and NS&RC.
Mr. Sharry has been President of the Retail Division of the Company since
January 1, 1999. From January 1, 1998 to December 31, 1998, Mr. Sharry was
Executive Vice President of the Company. From November, 1995 to December 31,
1997, Mr. Sharry was Senior Vice President of the Retail Line of Business. Mr.
Sharry serves as Executive Vice President of PEPCO, the Phoenix Funds, Phoenix
Duff & Phelps Institutional Mutual Funds and Phoenix-Aberdeen Series Fund. From
1994 to 1995, Mr.Sharry was a Managing Director and Director of Retail Marketing
at Putnam Investments. Mr. Sharry was a Director and National Sales Manager of
Putnam's Broker/Dealer Division from 1992 to 1994. Mr. Sharry was also a member
of Putnam's Executive Committee. From 1988 to 1992, Mr. Sharry was First Vice
President, National Sales Manager, Insurance/Annuity Division at Dean Witter
Reynolds, Inc. Mr.Sharry was also Vice President, Regional Insurance Coordinator
from 1985 to 1988 and Regional Marketing Director from 1983 to 1985 at Security
First/Holden Group. Mr. Sharry is a member of the Investment Company Institute's
Marketing Policy Committee, the Forum for Investor Advice board of directors and
the Executive Committee of the DALBAR Excellence and Trust program.
17
<PAGE>
Mr. Moyer has been Senior Vice President and Chief Financial Officer of the
Company since November 1, 1995. From November 1990 to November 1, 1995, Mr.
Moyer was Vice President - Investment Products Finance of PHL. In addition, Mr.
Moyer serves as Senior Vice President, Chief Financial Officer and Treasurer of
PIC, PEPCO and NS&RC. Mr. Moyer serves as Senior Vice President and Chief
Financial Officer of DPIM. Mr. Moyer is also a Vice President of the Phoenix
Funds, Phoenix Duff & Phelps Institutional Mutual Funds and Phoenix-Aberdeen
Series Fund. Mr. Moyer serves as a member on the Boards of Directors of PIC,
PEPCO, NS&RC and PCC.
Mr. Saltiel has been Senior Vice President of the Company since February 5,
1998. From March 1994 to February 5, 1998, Mr. Saltiel held various positions up
to Managing Director - Operations and Service with PEPCO. From March 1, 1992 to
November 1, 1995, Mr. Saltiel held various positions with PHL. From January 1,
1990 to December 31, 1992, Mr. Saltiel was Vice President and Controller and
from January 9, 1987 to December 31, 1989, he was Vice President and Associate
Controller of Home Life Insurance Company. Mr. Saltiel serves as Senior Vice
President of PEPCO and Vice President of the Phoenix Funds, Phoenix Duff &
Phelps Institutional Mutual Funds and Phoenix-Aberdeen Series Fund.
Mr. Steenburg has been Senior Vice President of the Company since January 1,
1999. From November 1, 1995 to December 31, 1998, Mr. Steenburg was Vice
President and Counsel of the Company. In addition, Mr. Steenburg is Executive
Vice President of DPIM, Vice President, Counsel and Secretary of PEPCO, PIC and
NS&RC. From October 1991 through October 31, 1995, Mr. Steenburg served as
Counsel with PHL. Prior to joining PHL, Mr. Steenburg engaged in the private
practice of law. Mr. Steenburg currently serves as Secretary or Assistant
Secretary to most of the open and closed end investment companies advised by the
Company's subsidiaries. Mr. Steenburg serves as a member on the Board of
Directors of PCC.
Ms. Rudden has been with the Company since November 1981 and currently holds the
position of Vice President, Human Resources. From May 22, 1995 to December 31,
1995, she was Vice President, Mutual Fund Customer Service with PEPCO. From
October 1982 through May 21, 1995, Ms. Rudden held various positions relating to
mutual fund and variable annuity customer service and operations.
Item 2. Properties.
The Company, which is headquartered in Hartford, conducts its operations through
offices located in Hartford and Enfield, Connecticut; Chicago, Illinois;
Greenfield, Massachusetts; Cleveland, Ohio; Pasadena, San Francisco and Scotts
Valley, California; and Sarasota, Florida in which locations it leases a total
of approximately 239,000 square feet of office space.
Item 3. Legal Proceedings.
On June 6, 1997, Gigatek Memory Systems, Inc. (Gigatek) sued Capital Markets
Co., and three former employees of Capital Markets in Los Angeles Superior
Court. Plaintiff's case was dismissed in 1998.
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On October 10, 1995, three individuals who are members of Associated Surplus
Dealers (ASD), a non-profit mutual benefit corporation organized to promote the
surplus merchandise industry, filed an action on behalf of themselves and as a
class action on behalf of other members of ASD in the Superior Court of the
State of California for the County of Los Angeles, Case No. BC 136761, against
the directors of ASD, a corporation named Walter Fletcher, Inc. (WFI) allegedly
controlled by one of the director defendants who was also the Executive Director
of ASD, an attorney for ASD, and Duff & Phelps Corporation and Duff & Phelps
Financial Consulting Co. (now known, respectively, as Phoenix Investment
Partners, Ltd. and DPCM Holdings, Inc.) (both hereinafter referred to as DP).
The complaint alleged that all defendants breached fiduciary duties to the
plaintiffs in connection with the sale of certain assets to WFI at a price of
approximately $2.55 million that were later sold by WFI to a third party at a
price of approximately $60 million. The complaint specifically alleged that DP,
which had valued WFI's assets at $2.55 million, grossly undervalued the WFI
assets causing the plaintiffs to suffer substantial losses. On October 16, 1995,
a corporation that is a member of ASD filed a similar class action suit with
substantially similar allegations. On October 17, 1995, another corporation that
is a member of ASD filed yet another similar class action on behalf of ASD
members with substantially the same allegations. The various suits sought
compensatory damages, attorney's fees, costs, and punitive damages in
unspecified amounts. On January 6, 1996, the three groups filed a single,
consolidated complaint (the Consolidated Complaint).
On March 7, 1996, 90 other individual and corporate plaintiffs filed an action
in Los Angeles Superior Court against DP and others. The complaint is not a
class action but is similar in other respects to the Consolidated Complaint.
This action has now been consolidated with the class action.
On May 10, 1996, the Court heard defendants' demurrers to the Consolidated
Complaint and sustained them in part. On July 3, 1996, a Second Amended
Complaint was filed, alleging that DP was professionally negligent, breached its
fiduciary duty, aided and abetted other defendants in breaching their fiduciary
duties, and breached its engagement agreement with ASD. Additional demurrers
were filed, and some were granted and others denied. The final claims against DP
are breach of contract (class claim), negligence (class claim), breach of
fiduciary duty (derivative claim) and aiding and abetting breach of fiduciary
duty (derivative claim). The Court has set a trial date of April 22, 1999.
Management of the Company, at this time, does not expect the above litigation to
have a material adverse effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No items submitted.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is listed and traded principally on the New York
Stock Exchange under the symbol "PXP." Information concerning the range of high
and low sales prices for the Company's common stock, and the dividends declared,
for each quarterly period within the past two fiscal years is set forth below:
Dividends
Quarter Ended High Low Declared
1998
March 31 $9.38 $7.38 $.06
June 30 $9.88 $8.19 $.06
September 30 $9.44 $6.63 $.06
December 31 $8.75 $6.69 $.06
1997
March 31 $8.50 $6.88 $.06
June 30 $8.13 $6.63 $.06
September 30 $9.31 $7.31 $.06
December 31 $8.19 $7.00 $.06
As of March 12, 1999, the closing price of the Company's common stock on the New
York Stock Exchange was $7 15/16 per share.
Item 6. Selected Financial Data.
(in thousands, except per share amounts)
Year Ended December 31* 1998 1997 1996 1995 1994
Operating revenues $221,547 $164,600 $152,504 $112,206 $104,429
Net income 34,640 24,147 26,719 15,690 17,020
Basic earnings per share** 0.76 0.44 0.50 0.51
Diluted earnings per share** 0.68 0.44 0.50 0.40
Total assets 563,718 604,949 365,684 356,619 97,201
Long-term obligations 146,561 194,299 21,884 33,858 3,517
Convertible subordinated
debentures 76,364
Convertible exchangeable
preferred stock 78,827 78,504 78,029
Cash dividends declared
per common share** 0.24 0.24 0.21 0.05
* 1998 reflects the consolidated results of Phoenix Investment Partners, Ltd.
1997 reflects the results of Phoenix Investment Partners, Ltd. and includes
Seneca Capital Management from July 17,1997 to December 31, 1997 and Pasadena
Capital Corporation from September 3, 1997 to December 31,1997. 1996 reflects
the results of Phoenix Investment Partners, Ltd., while 1995 reflects the
results of Phoenix Securities Group, Inc. from January 1, 1995 to October 31,
1995 and the combined results of Phoenix Investment Partners, Ltd. for the
period from November 1, 1995 to December 31, 1995. 1994 reflects the results
of Phoenix Securities Group, Inc. only.
** Basic and diluted earnings per share and cash dividends declared per common
share prior to 1995 are not meaningful because of the recapitalization in
connection with the merger. The 1995 basic and diluted earnings per share
reflect ten months of Phoenix Securities Group, Inc. and two months of the
combined company.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Phoenix Investment Partners, Ltd. (the Company) offers a wide range of
investment management services to meet the needs of individual and institutional
investors. The Company earns substantially all of its revenues from fees for
providing investment advisory and distribution services to the Phoenix mutual
funds, institutional clients, high net worth individuals, the Phoenix closed-end
funds and the general account of Phoenix Home Life Mutual Insurance Company
(PHL), the Company's majority shareholder. The Phoenix funds consist of open-end
mutual funds and variable annuity subaccounts managed by the Company's seven
investment management groups.
The Company was formed on November 1, 1995 when Phoenix Securities Group, Inc.
(PSG), the money management subsidiary of PM Holdings, Inc. (PM Holdings),
merged into Duff & Phelps Corporation (D&P). PM Holdings is a wholly-owned
subsidiary of PHL. Upon consummation of the merger, PM Holdings owned
approximately 60% of the outstanding common stock of the Company. During 1997,
the Company acquired Pasadena Capital Corporation (Pasadena) and a majority
interest in Seneca Capital Management LLC (Seneca) (the Acquisitions). Details
of the merger and these acquisitions are discussed in Note 3 of the Company's
1998 Consolidated Financial Statements.
The 1998 net income of $34.6 million represents the Company's operations
inclusive of Seneca and Pasadena for the full year. The 1997 net income of $24.1
million represents the Company's operations inclusive of the operations of
Seneca and Pasadena from their respective acquisition dates. The 1996 net income
of $26.7 million represents the Company's operations prior to the Acquisitions.
As a result of the required accounting presentation and the inherent
difficulties of analyzing and comparing the historical financial statements to
the prior years' results, management has also included 1997 and 1996 financial
information on a pro forma basis as if the Acquisitions had occurred on January
1, 1996. The following is a comparison of the historical financial statements
and a discussion of the pro forma financial information which is found in Note 4
of the Company's 1998 Consolidated Financial Statements. The principal operating
entities referred to in this discussion are described in Note 1 of the Company's
1998 Consolidated Financial Statements.
Assets Under Management
The following table presents actual year-end assets under management at December
31, 1998, 1997 and 1996. The revenues of the Company are substantially earned
based upon assets under management and, accordingly, these trends are important
for understanding the business.
1998 1997 1996
(in millions)
Retail Products:
Open-end Mutual Funds $ 14,407 $ 13,001 $ 11,304
Managed Accounts * 7,322 5,559 228
-------- -------- --------
21,729 18,560 11,532
-------- -------- --------
Institutional Products:
Closed-end Funds 3,505 3,336 2,984
Institutional Accounts ** 19,468 16,155 12,276
PHL General Account 8,785 8,351 6,857
-------- ------- --------
31,758 27,842 22,117
-------- ------- --------
Total $ 53,487 $ 46,402 $ 33,649
======== ======== ========
* Managed Accounts represent assets that are individually managed for retail
clients.
** Institutional Accounts include 100% of the assets managed by Seneca.
At December 31, 1998 the Company had $53.5 billion in assets under management,
an increase of $7.1 billion (15%) from $46.4 billion at December 31, 1997, which
represented an increase of $12.8 billion (38%) from $33.6 billion at December
31, 1996. Positive market performance increased assets under management by $6.5
billion and $3.7 billion during 1998 and 1997, respectively. Sales of open-end
mutual funds (which includes institutional mutual funds and PHL sponsored
variable products) and managed accounts were $2.6 billion and $1.5 billion in
1998 and 1997, respectively, but were offset by redemptions of $3.3 billion and
$2.4 billion, respectively. Sales of institutional accounts in 1998 and 1997
were $4.9 billion and $1.6 billion, respectively, but were offset by lost
accounts totaling $4.0 billion and $3.7 billion, respectively.
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Historical Financial Statements
General
The historical financial statements reflect the consolidated results of the
Company for the period from January 1, 1996 to December 31, 1998. Each year's
results include a substantial non-cash amortization expense resulting from
merger and acquisition related goodwill and other intangible assets.
Statement of Income for 1998 Compared to 1997
Revenues for 1998 of $221.5 million increased $56.9 million (35%) from $164.6
million in 1997, of which $38.2 million and $18.7 million of this increase
related to the retail and institutional lines of business, respectively. The
inclusion of Pasadena and Seneca for a full year in 1998 compared to a partial
year in 1997 contributed $53.6 million to this increase. Excluding the effects
of Pasadena and Seneca, the Company's revenues for 1998 increased $3.3 million
(2%) compared to 1997.
Investment management fees of $193.1 million for 1998 (representing 87% of
revenues) increased $54.7 million (39%) from $138.5 million in 1997. Excluding
the effects of Pasadena and Seneca, which contributed $48.3 million to this
increase, investment management fees for 1998 increased $6.4 million (5%)
compared to 1997. Excluding Pasadena, management fees for the retail line of
business, including managed accounts and open-end mutual funds, increased $2.5
million of which $2.2 million is due to an $800 million increase in average
assets under management. The increase in average assets managed is due to strong
investment performance by investment managers of several of the mutual funds
both in absolute terms and relative to the strong performance of the market in
general. This performance more than offset a net outflow of assets under
management. Funds under reimbursement increased $1.2 million, decreasing
revenue, primarily due to the start-up of several new funds in late 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.
Excluding Seneca, management fees earned by the institutional line of business,
including closed-end mutual funds, PHL's general account, and institutional
accounts, increased $3.9 million primarily due to a $1.8 billion increase in
average assets under management offset, in part, by a change in the fee
structure on PHL's general account. The increase in average assets managed is
principally due to asset additions in December 1997 from PHL. The closed-end
funds contributed $2.5 million to the increase in management fees, of which $.7
million is due to a change in the investment advisory agreements and $1.8
million is due to a $300 million increase in average assets managed, the result
of positive performance.
Mutual funds - ancillary fees, a component of the retail line of business, of
$25.7 million in 1998 increased $3.2 million (14%) from $22.5 million in 1997.
Excluding the effect of Pasadena, which contributed $5.0 million to this
increase, mutual funds - ancillary fees for 1998 decreased $1.9 million (8%)
compared to 1997. The full-year effect of the sale of the deferred commissions
asset in June 1997 resulted in a $2.2 million decrease in net distributor fees.
Shareholder service fees, which are directly related to the number of mutual
fund shareholder accounts, decreased $.8 million due to a decline in these
accounts. Fund accounting fees increased $1.3 million, of which $.6 million is
due to an increase in average assets managed and $.7 million is the result of a
change in the fee structure for the open-end mutual funds. This change was
implemented in order to reimburse Phoenix Equity Planning Corporation (PEPCO)
for operating costs related to the out-sourcing of substantially all of the
Company's fund accounting operations in the first quarter of 1998.
Other income and fees, a component of the retail line of business, of $2.7
million for 1998 decreased $.9 million (26%) from $3.6 million in 1997.
Excluding the effect of Pasadena, which increased other income and fees by $.3
million, other income and fees for 1998 decreased $1.2 million (33%) compared to
1997. This decrease is primarily the result of the sale of the Company's then
existing deferred commissions asset in June 1997, for which the Company had
previously earned a fee if shares were redeemed within five years of purchase.
Operating expenses of $172.9 million for 1998 increased $39.2 million (29%) from
$133.6 million in 1997, of which $28.3 million and $10.9 million related to the
retail and institutional lines of business, respectively. The inclusion of
Pasadena and Seneca for a full year in 1998 compared to a partial year in 1997
contributed $34.0 million to this increase. Excluding the effects of Pasadena
and Seneca, operating expenses increased $5.2 million (4%) in 1998 over 1997, of
which $5.6 million and $(.4) million related to the retail and institutional
lines of business, respectively.
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<PAGE>
Employment expenses of $90.4 million for 1998 increased $17.7 million (24%) from
$72.7 million in 1997. Excluding the effects of Pasadena and Seneca, which
contributed $17.9 million to this increase, employment expenses for 1998
decreased $.2 million compared to 1997. Employment expenses for the retail line
of business, excluding Pasadena, decreased $1.6 million. Annual salary
adjustments and increased incentive compensation payments, resulting from
improved performance by several portfolio managers and research analysts, were
more than offset by reductions in staff levels particularly in the investment
portfolio and sales management areas, as well as in fund accounting due to its
out-sourcing. The institutional line of business, excluding Seneca, experienced
a $1.4 million increase in employment expenses. Annual salary adjustments were
partially offset by $.9 million of non-recurring charges resulting from a senior
executive exercising certain rights under his employment agreement in 1997. The
Company's profit sharing plan paid out $.4 million more in 1998 than in 1997
increasing employment expenses for both the retail and institutional lines of
business.
Other operating expenses of $55.0 million for 1998 increased $14.7 million (36%)
from $40.3 million in 1997. Excluding the effects of Pasadena and Seneca, which
contributed $6.3 million to this increase, other operating expenses for 1998
increased $8.4 million compared to 1997, and was primarily attributable to the
retail line of business. Payments to a third party administrator of $5.3 million
represented the 1998 cost of out-sourcing substantially all of the Company's
fund accounting operations in the first quarter of 1998. Additional
administrative costs incurred on behalf of the Phoenix-Engemann and
Phoenix-Seneca Funds (Funds), which were recovered by administrative fees earned
on the Funds, increased expenses by $2.6 million. The Company's increased
reliance on outside consultants in 1998, primarily for information technology
purposes, increased other operating expenses by $1.5 million. Non-recurring
costs in 1997 of $1.8 million included $1.2 million for printing and other
charges incurred to promote the newly acquired Funds and other new open-end
mutual funds, and $.6 million relating to the sublease of certain office space.
Various other less significant year-over-year changes netted to an increase of
$.8 million.
Restructuring charges, a component of the retail line of business, of $.4
million and $.7 million in 1998 and 1997, respectively, are the result of the
Company's decision in late 1997 to out-source substantially all of its fund
accounting operations effective in the first quarter of 1998.
Depreciation and amortization of leasehold improvements of $3.7 million for 1998
increased $.7 million (24%) from $3.0 million in 1997. Excluding the effects of
Pasadena and Seneca, which contributed $.5 million to this increase,
depreciation and amortization of leasehold improvements for 1998 increased $.2
million compared to 1997 as a result of capital asset purchases.
Amortization of goodwill and intangibles of $22.1 million for 1998 increased
$8.1 million (58%) from $14.0 million in 1997. Amortization expense related to
the retail line of business increased $7.2 million as a result of the
amortization of goodwill and intangible assets related to the Pasadena
acquisition. Amortization expense related to the institutional line of business
increased $.9 million as a result of the amortization of goodwill and intangible
assets related to the Seneca acquisition.
Amortization of deferred commissions, a component of the retail line of
business, of $1.4 million for 1998, which relates entirely to the
Phoenix-Engemann B shares, decreased $1.6 million (54%) from $3.0 million in
1997. A decrease of $2.8 million is the result of the sale of the Company's then
existing deferred commissions asset in June 1997. An increase of $1.2 million is
from the deferred commissions asset relating to Pasadena prior to February 1,
1998, which continues to be amortized.
Operating income of $48.7 million for 1998 increased $17.7 million (57%) from
$31.0 million in 1997 as a result of the changes discussed above.
Equity in earnings of unconsolidated affiliates of $3.5 million for 1998
decreased $2.9 million (46%) from $6.4 million in 1997. In 1997, the Company's
investment in Financial Alliance Investors I, L.P. (FA) resulted in equity
earnings of $4.5 million, upon completion of the leveraged transaction for which
it was created. A portion of the money to be received from FA was held in escrow
but was released in 1998 resulting in additional equity earnings of $.4 million.
The Company recognized losses in 1997 related to its share of equity earnings
from Windy City CBO Partners, L.P. (WCCBO) and Greystone Capital Management
(Greystone) of $1.5 million and $.6 million, respectively. Equity income from
the Company's investment in Beutel, Goodman & Company Ltd. (BG) decreased $.5
million due to the sale of BG in the fourth quarter of 1998. In addition, the
Company's share of income from its joint venture in Inverness/Phoenix Capital
LLC (IPC) decreased $.4 million in 1998.
23
<PAGE>
Gain on sale of $16.6 million in 1998 is the result of the December 3, 1998 sale
of the Company's 49% interest in BG to an unrelated third party. The sale of BG
resulted in cash proceeds of $37.0 million and a note receivable of $10.0
million. Gain on sale of $6.9 million in 1997 is the result of the sale of the
Company's deferred commissions asset, excluding Pasadena's, in June 1997.
Other income - net of $1.0 million in 1998, which includes $.6 million from
Seneca, increased $1.1 million from a net expense of $33 thousand in 1997. A
decrease of $.2 million is the result of a decrease in unrealized gains on
mutual fund investments. Numerous individually insignificant items increased
other income by $.7 million.
Interest expense - net of $12.6 million in 1998 increased $9.3 million from $3.3
million in 1997. Interest charges resulting from financing the Pasadena
acquisition resulted in $5.6 million of additional interest expense in 1998 in
the retail line of business. Interest charges resulting from financing the
Seneca acquisition resulted in $.8 million of additional interest expense in
1998 in the institutional line of business. During 1997, a previous credit
facility and a bridge loan were paid in full, decreasing interest expense by
$1.0 million. The exchange of the Company's preferred stock for convertible
debentures in the second quarter of 1998 resulted in $3.4 million of additional
interest expense, while eliminating the Company's preferred stock dividend.
Other interest and dividend income decreased $.6 million.
Income to minority interest, a component of the institutional line of business,
of $2.2 million and $.7 million in 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.
Net income for 1998 of $34.6 million reflects an increase of $10.5 million (43%)
from the $24.1 million in 1997, resulting from the increased income and expenses
discussed above. The effective tax rate decreased to 37.0% in 1998 from 40.0% in
1997 as a result of the BG sale, amended prior year state tax returns, and the
utilization of foreign tax credits.
Statement of Income for 1997 Compared to 1996
Revenues for 1997 of $164.6 million, which includes $27.2 million for Pasadena
and Seneca, increased $12.1 million (8%) from $152.5 million in 1996 which
included $8.2 million for Duff & Phelps Capital Markets Co. (Capital Markets)
through June 30, 1996. Excluding the effects of Pasadena, Seneca and Capital
Markets, the Company's revenues for 1997 decreased $6.9 million (5%) compared to
1996.
Investment management fees of $138.5 million for 1997, which includes $25.0
million for Pasadena and Seneca, increased $20.3 million (17%) from $118.2
million in 1996. Management fees earned on closed-end mutual funds increased $.5
million due to an increase in assets under management as a result of positive
performance. Fees earned managing PHL's general account increased $.4 million
due to an increase in assets managed. Management fees for 1997 related to
managed accounts increased $.4 million as a result of an increase in assets
under management. Management fees earned on institutional and advisory accounts
decreased $3.6 million due to lost accounts. Fees earned managing PHL sponsored
variable products decreased $1.1 million as a result of a change in the fee
structure (which also increased both fund accounting and underwriting fees)
offset, in part, by an increase in assets under management. Management fees
earned on open-end mutual funds, including institutional mutual funds, decreased
$.2 million as a result of a decrease in assets under management. Funds under
reimbursement increased $.2 million, decreasing revenue, primarily due to the
start-up of several new funds in 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. Other management fees decreased $.6
million partly due to an increase in subadvisory fees paid to Greystone and the
liquidation of WCCBO in March 1997.
Mutual funds - ancillary fees of $22.5 million for 1997, which includes $2.2
million for Pasadena, increased $.5 million (2%) from $22.0 million in 1996.
Fund accounting fees increased $2.7 million primarily as a result of a change in
the fee structures for the open-end mutual funds as well as PHL sponsored
variable products, on which no such fees were earned prior to January 1997. Net
distributor fees decreased by $3.2 million as a result of the sale of the
deferred commissions asset. Other ancillary fees decreased $1.0 million
primarily as a result of decreased shareholder service agent fees resulting from
a decline in mutual fund shareholder accounts. Underwriter fees decreased $.2
million as a result of the closure of Capital Markets in 1996, offset, in part,
by a new fee schedule for the PHL sponsored variable products.
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<PAGE>
Financial consulting and investment research services were not offered by the
Company in 1997 as the operations of Capital Markets and the fee-based
investment research and securities businesses were divested and closed,
respectively, in 1996, resulting in a $7.7 million decrease in revenues in 1997
as compared to 1996.
Other income and fees of $3.6 million for 1997 decreased $1.0 million (22%) from
$4.6 million in 1996. This decrease is primarily due to a decrease in redemption
income as a result of the sale of the Company's then existing deferred
commissions asset in June 1997, for which the Company had previously earned a
fee if shares were redeemed within five years of purchase.
Operating expenses of $133.6 million for 1997, which includes $19.3 million for
Pasadena and Seneca, increased $20.4 million (18%) from $113.2 million in 1996.
Excluding the effects of Pasadena and Seneca, expenses increased $1.1 million in
1997 over 1996.
Employment expenses of $72.7 million for 1997, which includes $9.6 million for
Pasadena and Seneca, increased $13.9 million (24%) from $58.8 million in 1996. A
new profit sharing plan for certain eligible employees increased employment
expenses by $.6 million. Employment expenses decreased $8.2 million due to the
divestiture of Capital Markets and the closure of the fee-based investment
research and securities businesses in 1996. Non-recurring charges, resulting
from a senior executive exercising certain rights under his employment
agreement, increased employment expenses by $.9 million in 1997. The remaining
increase was primarily due to an expansion of the sales force, an increase in
sales-based and performance-based incentive compensation and annual salary
adjustments.
Other operating expenses of $40.3 million for 1997, which includes $4.7 million
for Pasadena and Seneca, increased $3.7 million (10%) from $36.5 million in
1996. Operating expenses decreased $1.2 million primarily as a result of the
divestiture of Capital Markets in 1996. In addition, a one-time loss of $.6
million was recognized in the second quarter of 1997 relating to the sublease of
certain office space.
Restructuring charges of $.7 million in 1997 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 $3.0 million for
1997, which includes $.3 million for Pasadena and Seneca, increased $.7 million
(33%) from $2.2 million in 1996. An increase in depreciation expense relating to
capital assets purchased in 1997 and 1996 more than offset the effect of the
divestiture of Capital Markets which decreased depreciation expense by $.4
million.
Amortization of goodwill and intangibles of $13.9 million for 1997 increased
$4.3 million (45%) from $9.6 million in 1996 as a result of the acquisitions of
Pasadena and Seneca.
Amortization of deferred commissions of $3.0 million for 1997, which includes
$.2 million for Pasadena, decreased $3.1 million (50%) from $6.1 million in 1996
as a result of the sale of the Company's then existing deferred commissions
asset in June 1997. A deferred commissions asset relating to Pasadena continues
to be amortized.
Operating income of $31.0 million for 1997 decreased $8.3 million (21%) from
$39.3 million in 1996 as a result of the changes discussed above.
Equity in earnings of unconsolidated affiliates of $6.4 million for 1997
increased $1.0 million (19%) from $5.3 million in 1996. The Company's share of
income from its investment in FA increased revenues by $4.5 million. Equity
income from the Company's investment in BG increased $1.3 million. The Company's
share of equity earnings from WCCBO was a loss of $1.5 million in 1997, due to
the liquidation of WCCBO in early 1997, as compared to income of $1.6 million in
1996. The Company's share of equity earnings from the DPIM/Nuveen joint venture
was zero in 1997 as compared to $.6 million in 1996. On January 2, 1997, the
Company purchased the remaining interest in the DPIM/Nuveen joint venture and
consolidated operations. In addition, the Company's share of the IPC joint
venture income decreased $1.1 million in 1997 primarily as a result of the joint
venture's recognition of an advisory fee in 1996 from a significant
non-recurring transaction. The Company's investment in Greystone in 1997
resulted in a loss of $.6 million, as compared to a loss of $.7 million in 1996.
Greystone was in a start-up phase in both years.
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<PAGE>
Gain on sale of $6.9 million in 1997 is the result of the sale of the Company's
deferred commissions asset, excluding Pasadena's, in June 1997. The sale, which
was to an unrelated third party, resulted in proceeds of $26.0 million. As part
of the transaction, the purchaser will fund future B share commissions and be
entitled to distributor fees from the Company's outstanding B share mutual funds
as well as any contingent deferred sales charges, excluding those relating to
the Phoenix-Engemann funds.
Other expense - net of $33 thousand in 1997 decreased $102 thousand (75%) from
$135 thousand in 1996 primarily from an increase in unrealized gains on
marketable securities.
Interest expense - net of $3.3 million in 1997 increased $3.7 million from net
interest income of $.4 million in 1996 as a result of the interest charges from
the financing of the Pasadena and Seneca acquisitions offset, in part, by a
decrease in interest expense of $.5 million due to a reduction in outstanding
debt on a previous credit facility. Interest income decreased $.3 million
primarily due to a decrease of $.4 million from the BG debentures, which were
fully redeemed in December 1996.
Income to minority interest of $.7 million in 1997 represents the minority
shareholders' interest in the equity earnings of Seneca, which is fully
consolidated in the Company's financial statements.
Net income for 1997 of $24.1 million reflects a decrease of $2.6 million (10%)
from the $26.7 million in 1996, resulting from the increased income and expenses
discussed above. The effective tax rate decreased to 40.0% in 1997 from 40.5% in
1996 as a result of settlements in 1997 with federal and state tax authorities
for the tax years 1990 to 1993, offset by the effect of goodwill amortization
resulting from the Pasadena acquisition.
Pro Forma Financial Information (See Note 4 to the Consolidated Financial
Statements)
Statement of Income for 1998 Compared to Pro Forma 1997
Revenues for 1998 of $221.5 million increased $14.4 million (7%) from pro forma
$207.1 million in 1997, of which $6.0 million and $8.4 million of this increase
related to the retail and institutional lines of business, respectively.
Investment management fees of $193.1 million in 1998 (representing 87% of
revenues) increased $18.7 million (11%) from pro forma of $174.4 million for
1997. Management fees for the retail line of business, including managed
accounts and open-end mutual funds, increased $9.7 million primarily due to a
$1.2 billion increase in average assets under management. The increase in
average assets managed is due to strong investment performance by investment
managers of several of the mutual funds both in absolute terms and relative to
the strong performance of the market in general. This performance more than
offset a net outflow of assets under management. Funds under reimbursement
increased $1.2 million, decreasing revenue, primarily due to the start-up of
several new funds in late 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. Management fees earned for the
institutional line of business, including closed-end mutual funds, PHL's general
account, and institutional accounts, increased $9.0 million primarily due to a
$2.5 billion increase in average assets under management offset, in part, by a
change in the fee structure on PHL's general account. The increase in average
assets managed is principally due to net asset additions from PHL and Seneca.
The closed-end funds contributed $2.5 million to the increase in management
fees, of which $.7 million is due to a change in the investment advisory
agreements and $1.8 million is due to a $300 million increase in average assets
managed, the result of positive performance.
Mutual funds - ancillary fees, a component of the retail line of business, of
$25.7 million in 1998 decreased $1.9 million (7%) from pro forma $27.6 million
in 1997. Net distributor fees decreased $2.3 million, of which $2.2 million is
the full-year effect of the sale of the deferred commissions asset in June 1997.
Shareholder service fees, which are directly related to the number of mutual
fund shareholder accounts, decreased $1.0 million due to a decline in these
accounts. Fund accounting fees increased $1.3 million, of which $.6 million is
due to an increase in average assets managed and $.7 million is the result of a
change in the fee structure for the open-end mutual funds. This change was
implemented in order to reimburse PEPCO for operating costs related to the
out-sourcing of substantially all of the Company's fund accounting operations in
the first quarter of 1998. Other ancillary fees increased $.1 million.
26
<PAGE>
Other income and fees, a component of the retail line of business, of $2.7
million in 1998 decreased $2.4 million (47%) from pro forma $5.1 million in
1997. This decrease is primarily due to a decrease in redemption income as a
result of the sale of the Company's then existing deferred commissions asset in
June 1997, for which the Company had previously earned a fee if shares were
redeemed within five years of purchase.
Employment expenses of $90.4 million in 1998 increased $2.3 million (3%) from
pro forma $88.1 million in 1997. Employment expenses for the retail line of
business decreased $2.0 million. Annual salary adjustments and increased
incentive compensation payments, resulting from improved performance by several
portfolio managers and research analysts, were more than offset by reductions in
staff levels particularly in the investment portfolio and sales management
areas, as well as in fund accounting due to its out-sourcing. The institutional
line of business experienced a $4.3 million increase in employment expenses
primarily due to increased incentive compensation payments. Annual salary
adjustments were partially offset by $.9 million of non-recurring charges
resulting from a senior executive exercising certain rights under his employment
agreement in 1997. The Company's profit sharing plan paid out $.4 million more
in 1998 than in 1997 increasing employment expenses for both the retail and
institutional lines of business.
Other operating expenses of $60.4 million in 1998 increased $1.2 million (2%)
from pro forma $59.2 million in 1997, of which the retail line of business
increased $1.7 million and the institutional line of business decreased $.5
million. In the retail line, payments to a third party administrator of $5.3
million represented the 1998 cost of out-sourcing substantially all of the
Company's fund accounting operations in the first quarter of 1998. The Company's
increased reliance on outside consultants in 1998, primarily for information
technology purposes, increased other operating expenses by $1.5 million.
Non-recurring costs in 1997 of $1.1 million included $.5 million for printing
and other charges incurred to promote new open-end mutual funds, and $.6 million
relating to the sublease of certain office space. Restructuring charges, a
component of the retail line of business, decreased $.4 million as a result of
the Company's decision in late 1997 to out-source substantially all of its fund
accounting operations effective in the first quarter of 1998. Depreciation and
amortization of leasehold improvements increased $.3 million as a result of
capital asset purchases. Amortization of deferred commissions, a component of
the retail line of business, decreased $3.6 million, of which $2.8 million is
the result of the sale of the Company's then existing deferred commissions asset
in June 1997. Various other less significant year-over-year changes netted to a
decrease of $.8 million.
Amortization of goodwill and intangibles of $22.1 million in 1998 was unchanged
from pro forma 1997.
Other income - net of $21.0 million in 1998 increased $2.0 million from pro
forma $19.0 million in 1997. A $16.6 million non-recurring gain was recognized
in 1998 as a result of the December 3, 1998 sale of the Company's 49% interest
in BG to an unrelated third party. The sale of BG resulted in cash proceeds of
$37.0 million, a note receivable of $10.0 million and a $.5 million decrease in
equity income. In 1997, the Company's investment in FA resulted in equity
earnings of $4.5 million, upon completion of the leveraged transaction for which
it was created. A portion of the money to be received from FA was held in escrow
but was released in 1998 resulting in additional income of $.5 million.
Additionally, the Company recognized losses in 1997 related to its share of
equity earnings from WCCBO and Greystone of $1.5 million and $.6 million,
respectively. The Company's share of income from its joint venture in IPC
decreased $.4 million in 1998. Non-recurring gains of $6.9 million and $5.0
million were recognized in 1997 from the sale of the Company's deferred
commissions asset, excluding Pasadena's, in June 1997 and from the sale of
Pasadena's investment in its own mutual funds, respectively.
Interest expense - net of $12.6 million in 1998 increased $1.8 million (17%)
from pro forma $10.8 million in 1997. The exchange of the Company's preferred
stock for convertible debentures in the second quarter of 1998 resulted in $3.4
million of additional interest expense while eliminating the Company's preferred
stock dividend. Interest expense decreased $1.0 million due to the elimination
of outstanding debt on a previous credit facility and a bridge loan. Other
interest and dividend income decreased $.6 million.
Income to minority interest of $2.2 million in 1998 increased $1.0 million (83%)
from pro forma $1.2 million in 1997 due to Seneca's increased earnings.
Net income of $34.6 million in 1998 increased by $9.1 million (36%) over pro
forma $25.5 million in 1997, resulting from the increased income and expenses
discussed above. The effective tax rate decreased to 37.0% in 1998 from 43.0% in
1997 as a result of the BG sale, amended prior year state tax returns, and the
utilization of foreign tax credits.
27
<PAGE>
Statement of Income - Pro Forma for 1997 Compared to Pro Forma 1996
Revenues - pro forma of $207.1 million in 1997 decreased $4.7 million (2%) from
$211.8 million in 1996.
Investment management fees - pro forma of $174.4 million in 1997 increased $2.8
million (2%) from $171.6 million for 1996. Management fees from Pasadena
increased approximately $2.7 million due to increased asset performance. New
institutional accounts from Seneca increased fees by $4.3 million offset by a
decrease of $3.6 million in advisory and subadvisory fees resulting from lost
accounts. Management fees earned on mutual funds and managed accounts increased
$.6 million as a result of an increase in assets managed. Fees earned managing
PHL's general account and PHL sponsored variable products decreased $.7 million
as a result of a change in the variable product fee structure (which also
increased both fund accounting and underwriting fees) offset, in part, by an
increase in both general account and variable product assets under management.
Funds under reimbursement increased $.2 million, decreasing revenue, primarily
due to the start-up of several new funds in 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. Other management fees
decreased $.6 million partly due to an increase in subadvisory fees paid to
Greystone and the liquidation of WCCBO in March 1997.
Mutual funds - ancillary fees - pro forma of $27.6 million in 1997 increased
$2.0 million (8%) from $25.6 million in 1996. Fund accounting fees increased
$2.7 million primarily as a result of a change in the fee structures for the
open-end mutual funds and PHL sponsored variable products, on which no such fees
were earned prior to January 1997. Distributor fees decreased $2.0 million
primarily as a result of the sale of the deferred commissions asset. Underwriter
fees decreased $.2 million as a result of the divestiture of Capital Markets in
1996 offset, in part, by a new fee schedule for the PHL sponsored variable
products. Other ancillary fees decreased $1.3 million primarily as a result of
increased trails expense related to increased B share sales in the prior year
and a decrease in shareholder service agent fees resulting from a reduced number
of shareholder accounts.
Financial consulting and investment research services were not offered by the
Company in 1997 as the operations of Capital Markets and the fee-based
investment research and securities businesses were divested and closed,
respectively, in 1996, resulting in a $7.7 million decrease in revenues in 1997
as compared to 1996.
Other income and fees - pro forma of $5.1 million in 1997 decreased $1.8 million
(26%) from $6.9 million in 1996. This decrease is primarily due to a decrease in
redemption income as a result of the sale of the Company's then existing
deferred commissions asset in June 1997, for which the Company had previously
earned a fee if shares were redeemed within five years of purchase.
Employment expenses - pro forma of $88.1 million in 1997 increased $6.9 million
(8%) from $81.2 million in 1996. A new profit sharing plan for certain eligible
employees increased employment expenses by $.6 million. Employment expenses
decreased $8.2 million due to the divestiture of Capital Markets and the closure
of the fee-based investment research and securities businesses in 1996.
Non-recurring charges, resulting from a senior executive exercising certain
rights under his employment agreement, increased employment expenses by $.9
million in 1997. The remaining increase is primarily due to an expansion of the
sales force, an increase in sales-based and performance-based incentive
compensation and annual salary adjustments.
Other operating expenses - pro forma of $59.2 million in 1997 decreased $.7
million (1%) from $59.9 million in 1996. Amortization of deferred commissions
decreased $2.9 million primarily as a result of the sale of the Company's
deferred commissions asset, excluding Pasadena's, in June 1997. Pasadena's
deferred commissions expense increased $.2 million in 1997. Operating expenses
decreased $1.2 million as a result of the closing of Capital Markets in 1996.
Restructuring charges of $.7 million in 1997 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 increased by $.4 million. An increase in depreciation
expense caused by capital assets purchased in 1997 and 1996 more than offset the
effect of the divestiture of Capital Markets which decreased depreciation
expense by $.4 million.
Amortization of goodwill and intangibles - pro forma of $22.1 million in 1997
was unchanged from 1996.
28
<PAGE>
Other income - net - pro forma of $19.0 million in 1997 increased $13.8 million
from $5.2 million in 1996. A $6.9 million gain was recognized on the sale of the
Company's deferred commissions asset, excluding Pasadena's, in June 1997. A gain
of $5.0 million was realized in 1997 by Pasadena from the sale of its investment
in its own mutual funds, the proceeds of which were reinvested in Treasury
Bills. The Company's share of income from its investment in FA increased
revenues by $4.5 million. Equity income from the Company's investment in BG
increased $1.3 million. Other income from Pasadena increased by $.8 million.
Income from Seneca partnerships increased by $.6 million. The Company's share of
equity earnings from WCCBO was a loss of $1.5 million in 1997, due to the
liquidation of WCCBO in early 1997, as compared to income of $1.6 million in
1996. The Company's share of equity earnings from the DPIM/Nuveen joint venture
was zero in 1997 as compared to $.6 million in 1996. On January 2, 1997, the
Company purchased the remaining interest in the DPIM/Nuveen joint venture and
consolidated operations. In addition, the Company's share of IPC joint venture
income decreased $1.1 million in 1997 primarily as a result of the joint
venture's recognition of an advisory fee in 1996 from a significant
non-recurring transaction. The Company's investment in Greystone in 1997
resulted in a loss of $.6 million, as compared to $.7 million of losses in 1996.
Greystone was in a start-up phase in both years.
Interest expense - net - pro forma of $10.8 million in 1997 increased $.2
million (2%) from $10.6 million in 1996.
Income to minority interest - pro forma of $1.2 million in 1997 increased $.3
million (33%) from $.9 million in 1996. The minority shareholders' interest in
the equity earnings of Seneca, which is fully consolidated in the Company's
financial statements, increased due to Seneca's increased earnings in 1997.
Net income - pro forma of $25.5 million in 1997 reflects an increase of $1.7
million (7%) over the $23.9 million in 1996, resulting from the increased income
and expenses discussed above. The effective tax rate decreased to 43.0% in 1997
from 43.8% in 1996 as a result of settlements with federal and state tax
authorities in 1997 for the tax years 1990 to 1993.
Liquidity and Capital Resources
The Company's business is not considered to be capital intensive. Working
capital requirements for the Company have historically been provided by
operating cash flow. It is expected that such cash flows will continue to serve
as the principal source of working capital for the Company for the near future.
The Company's current 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 March 12, 1999, includes 43.6
million shares of common stock outstanding 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 1999, the total dividend on common stock will
be approximately $10.5 million based upon shares outstanding at March 12, 1999.
The total 1999 interest expense on the debentures based upon debentures
outstanding at March 12, 1999, 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 December 31, 1998 and 1997 was $140 million and $185 million, respectively.
An interest rate of approximately 6% was in effect on this borrowing as of
December 31, 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 December 31, 1998 and 1997, the
Company was in compliance with all covenants contained in the credit agreement.
The Company believes that funds from operations and amounts available under the
credit facility will provide adequate liquidity for the foreseeable future.
29
<PAGE>
PEPCO, a wholly-owned subsidiary of the Company, is subject to the net capital
requirements imposed on registered broker-dealers by the Securities Exchange Act
of 1934 (Act). At December 31, 1998, PEPCO had net capital (as defined in the
Act) of approximately $6.0 million, which exceeded the regulatory minimum by
$5.4 million. PEPCO operates pursuant to Rule 15c3-1 paragraph (a) of the Act
and, accordingly, is required to maintain a ratio of aggregate indebtedness (as
defined in the Act) to net capital, which may not exceed 15 to 1. This ratio at
December 31, 1998 was 1.50 to 1.
Management considers the liquidity of the Company to be adequate to meet present
and anticipated needs.
It is expected that the Company will finance the acquisition of the Zweig Fund
Group through borrowings under a $175 million bank credit facility, which is
currently being negotiated. Borrowings under this facility would be unsecured
and bear interest at a variable rate.
Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments and assets managed. The Company does not have
any derivative investments and, as of the fourth quarter of 1998, is no longer
exposed to foreign currency fluctuations.
The Company's exposure to changes in interest rates is limited to borrowings
under a five year credit agreement with a consortium of banks, which has an
interest rate that varies, at the Company's option, one, two, three or six
months after the borrowing date of the loan. The Company may select from the
Certificate of Deposit, Eurodollar, or the banks' base lending rate. The average
interest rate on the credit agreement in 1998 and 1997 was approximately 6%. In
addition, the Company has subordinated debentures bearing interest at 6%. At
December 31, 1998, the Company estimated that the fair value of the subordinated
debentures approximated market value.
The Company also invests excess cash in marketable securities, which consist of
mutual fund investments, of which the Company is the advisor, and U.S.
Government obligations. The fair value of these investments approximated market
value at December 31, 1998.
The Company's revenues are largely driven by the market value of its assets
under management and is therefore exposed to fluctuations in market prices.
Management fees earned on managed accounts and certain institutional accounts,
for any given quarter, are based on the market value of the portfolio on the
last day of the preceding quarter. Any significant increase or decline in the
market value of assets managed on the last day of a quarter would result in an
increase or decline in revenues for the following three months.
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 complete. The remediation
phase is virtually complete and the testing and contingency planning phases are
underway.
30
<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 is utilizing 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 has
substantially completed the remediation phase of the Year 2000 project and
expects to complete this work by June 30, 1999. The Company expects to be
substantially complete with the testing phase of the Year 2000 project by June
30, 1999 with the remainder scheduled to be done in the third quarter of 1999.
The testing of the contingency plans will occur in the third quarter of 1999
where appropriate. The total cost of the Year 2000 project is estimated at $5.6
million and is being funded through operating cash flows, which will be expensed
as incurred. To date, the Company has incurred approximately $2.4 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 annual 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; the Company's business is extremely competitive
with several competitors being 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. Attention is also directed to other risk factors set forth in
documents filed by the Company with the Securities and Exchange Commission.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS PAGE
Report of Independent Accountants.................................. 33
Consolidated Financial Statements:
Consolidated Statements of Financial Condition..................... 34
December 31, 1998 and 1997
Consolidated Statements of Income.................................. 35
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity......... 36
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows.............................. 37
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements.........................38-60
32
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Phoenix Investment Partners, Ltd.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Phoenix Investment Partners, Ltd. and its subsidiaries (collectively, the
Company) at December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Hartford, Connecticut
February 3, 1999
33
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD.
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
December 31,
1998 1997
Assets (in thousands)
Current Assets
Cash and cash equivalents $ 29,298 $ 21,872
Marketable securities, at market 16,275 12,000
Accounts receivable 9,493 8,977
Receivables from related parties 25,522 22,560
Prepaid expenses and other assets 2,951 2,712
-------- --------
Total current assets 83,539 68,121
Deferred commissions 2,798 3,998
Furniture, equipment and leasehold improvements, net 8,589 10,071
Intangible assets, net 146,402 159,666
Goodwill, net 300,255 308,451
Investment in Beutel, Goodman & Company Ltd. 29,884
Long-term investments and other assets 22,135 24,758
-------- --------
Total assets $563,718 $604,949
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,122 $ 2,491
Accrued compensation and benefits 18,660 16,684
Other accrued liabilities 7,943 5,655
Income taxes payable 10,934 912
Payables to related parties 3,032 3,135
Broker-dealer payable 9,568 9,157
Short-term notes payable 5,853
Current portion of long-term debt 964 2,241
-------- --------
Total current liabilities 53,223 46,128
Deferred taxes, net 53,446 66,020
Long-term debt, net of current portion 1,718 2,682
Convertible subordinated debentures 76,364
Credit facility 140,000 185,000
Lease obligations and other long-term liabilities 4,843 6,617
-------- --------
Total liabilities 329,594 306,447
-------- --------
Contingent Liabilities (Note 22)
Minority Interest 2,531 976
-------- --------
Series A Convertible Exchangeable Preferred Stock, zero and
10,000,000 shares authorized and zero and 3,169,599
shares outstanding, including zero and $277,340 of
accrued undeclared cumulative dividends 78,827
------- -------
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares
authorized, 45,172,258 and 44,295,261 shares issued
and 43,710,458 and 43,950,261 shares outstanding 451 443
Additional paid-in capital 195,224 188,567
Retained earnings 44,482 21,624
Accumulated other comprehensive income 3,571 10,674
Unearned compensation on restricted stock (1,529)
Treasury stock, at cost, 1,461,800 and 345,000 shares (10,606) (2,609)
------- --------
Total stockholders' equity 231,593 218,699
-------- --------
Total liabilities and stockholders' equity $563,718 $604,949
======== ========
The accompanying notes are an integral part of these statements.
34
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD.
Consolidated Statements of Income and Comprehensive Income
- --------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
(in thousands, except per share amounts)
Revenues
Investment management fees $193,130 $138,458 $118,160
Mutual funds - ancillary fees 25,739 22,523 22,030
Financial consulting and investment
research fees 7,699
Other income and fees 2,678 3,619 4,615
------- ------- -------
Total revenues 221,547 164,600 152,504
------- ------- -------
Operating Expenses
Employment expenses 90,407 72,703 58,805
Other operating expenses 54,989 40,297 36,523
Restructuring charges 366 734
Depreciation and amortization of
leasehold improvements 3,663 2,953 2,212
Amortization of goodwill and
intangible assets 22,057 13,950 9,623
Amortization of deferred commissions 1,380 3,001 6,052
------- ------- -------
Total operating expenses 172,862 133,638 113,215
------- ------- -------
Operating Income 48,685 30,962 39,289
------- ------- -------
Equity in Earnings of
Unconsolidated Affiliates 3,452 6,387 5,348
------- ------- -------
Gain on Sale 16,561 6,907
------- ------- -------
Other Income (Expense) - Net 1,034 (33) (135)
------- ------- -------
Interest (Expense) Income - Net
Interest expense (14,548) (5,638) (1,640)
Interest income 1,989 2,374 2,044
------- ------- -------
Total interest (expense) income - net (12,559) (3,264) 404
------- ------- -------
Income to Minority Interest (2,198) (714)
------- ------- -------
Income Before Income Taxes 54,975 40,245 44,906
Provision for income taxes 20,335 16,098 18,187
------- ------- -------
Net Income 34,640 24,147 26,719
Other Comprehensive Income, Net of Tax
Foreign currency translation adjustment 1,171 (841) 124
Unrealized (losses) gains on securities
available-for-sale (8,274) 6,913 5,124
------- ------- -------
Total other comprehensive (loss) income (7,103) 6,072 5,248
------- ------- -------
Comprehensive Income $27,537 $30,219 $31,967
======= ======= =======
Net Income $34,640 $24,147 $26,719
Series A preferred stock dividends 1,223 4,754 4,713
------- ------- -------
Income available to common stockholders $33,417 $19,393 $22,006
======= ======= =======
Weighted average shares outstanding
Basic 44,076 44,080 43,799
Diluted 54,297 54,435 53,971
Earnings per share
Basic $ .76 $ .44 $ .50
Diluted $ .68 $ .44 $ .50
The accompanying notes are an integral part of these statements.
35
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
(in thousands)
Common Accumu- Unearned
Stock and lated Other Compensa-
Additional Compre- tion on
Paid-In Retained hensive Restricted Treasury
Capital Earnings Income Stock Stock Total
Balances at December
31, 1995 $182,136 $ (646) $181,490
-------- -------- --------
Stock transactions 3,719 3,719
Net income $26,719 26,719
Dividends (13,907) (13,907)
Net unrealized
appreciation on securities
available-for-sale 5,124 5,124
Foreign currency translation
adjustment 124 124
------- ------- -------- --------
Balances at December
31, 1996 185,855 12,812 4,602 203,269
------- ------- ------- --------
Stock transactions 3,155 3,155
Net income 24,147 24,147
Treasury stock
purchases $(2,609) (2,609)
Dividends (15,335) (15,335)
Net unrealized
appreciation on securities
available-for-sale 6,913 6,913
Foreign currency translation
adjustment (841) (841)
------- ------- -------- -------- --------
Balances at December
31, 1997 189,010 21,624 10,674 (2,609) 218,699
------- ------- -------- -------- --------
Stock transactions 4,622 4,622
Net income 34,640 34,640
Treasury stock
purchases (7,997) (7,997)
Dividends (11,782) (11,782)
Issuance of restricted
stock 2,043 $ (2,043)
Amortization of unearned
compensation 514 514
Net unrealized
depreciation on securities
available-for-sale (8,274) (8,274)
Foreign currency translation
adjustment 1,171 1,171
-------- ------- -------- -------- -------- --------
Balances at December
31, 1998 $195,675 $44,482 $ 3,571 $ (1,529) $(10,606)$231,593
======== ======= ======== ======== ======== ========
Common stock issued and outstanding: 1998 1997 1996
(in thousands)
Balances at January 1, 43,950 44,037 43,563
Stock transactions 877 258 474
Treasury stock purchases (1,117) (345)
------- -------- --------
Balances at December 31, 43,710 43,950 44,037
======= ======== ========
The accompanying notes are an integral part of these statements.
36
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
(in thousands)
Cash Flows from Operating Activities:
Net income $34,640 $24,147 $26,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of leasehold
improvements 3,663 2,953 2,212
Amortization of goodwill and
intangible assets 22,057 13,950 9,623
Amortization of deferred commissions 1,380 3,001 6,052
Income to minority interest 2,198 714
Compensation recognized under employee
benefit plans 514
Gain on sale of Beutel, Goodman
& Company Ltd. (16,561)
Gain on sale of deferred commissions asset (6,907)
Equity in earnings of unconsolidated
affiliates, net of dividends 2,203 3,457 (2,992)
Payments of deferred commissions (180) (5,006) (10,663)
Deferred taxes (7,805) (9,892) 5,012
Changes in operating assets and liabilities:
Accounts receivable, net (516) 1,912 4,649
Receivables from related parties (2,962) (2,859) 167
Other assets 744 232 (2,694)
Payables to related parties (103) (742) (7,959)
Accounts payable and accrued liabilities 3,596 (3,931) (6,964)
Income taxes payable 10,377 3,609 5,435
Other liabilities (803) 1,059 (1,000)
------- ------- -------
Net cash provided by operating activities 52,442 25,697 27,597
------- ------- -------
Cash Flows from Investing Activities:
Purchase of subsidiaries (6,647) (243,532) (5,892)
Cash acquired from purchase of subsidiaries 42,379
Proceeds from sale of Beutel, Goodman
& Company Ltd. 37,000
Proceeds from sale of deferred
commissions asset 26,015
Purchase/sale of marketable securities, net (4,289) (7,663) (1,127)
Purchase of long-term investments (2,346) (2,720) (2,510)
Proceeds from long-term investment activity 11,245 9,214
Capital expenditures (2,182) (2,296) (3,004)
Other investing activities (643) (103) 532
------- -------- -------
Net cash provided by (used in)
investing activities 20,893 (176,675) (2,787)
------- -------- -------
Cash Flows from Financing Activities:
Borrowings on credit facility and
from related party 220,000
Repayment of debt (47,243) (53,182) (7,000)
Dividends paid (12,060) (15,330) (13,907)
Stock repurchases (7,997) (2,609)
Proceeds from stock issuance 1,391 1,689 2,257
Other financing activities (184)
------- ------- -------
Net cash (used in) provided by
financing activities (65,909) 150,384 (18,650)
Net increase (decrease) in cash and
cash equivalents 7,426 (594) 6,160
Cash and cash equivalents, beginning of year 21,872 22,466 16,306
------- ------- -------
Cash and Cash Equivalents, End of Year $29,298 $21,872 $22,466
======= ======= =======
Supplemental cash flow information:
Interest paid $14,561 $ 4,613 $ 1,538
Income taxes paid $17,551 $11,371 $17,444
The accompanying notes are an integral part of these statements.
37
<PAGE>
PHOENIX INVESTMENT PARTNERS, LTD.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Business
Phoenix Investment Partners, Ltd. (PXP) (formerly known as Phoenix Duff &
Phelps Corporation) was formed on November 1, 1995 when Phoenix Securities
Group, Inc. (PSG), a money management subsidiary of PM Holdings, Inc. (PM
Holdings), merged into Duff & Phelps Corporation (D&P) (the Merger). PM
Holdings, a wholly-owned subsidiary of Phoenix Home Life Mutual Insurance
Company (Phoenix Home Life), owns approximately 60% of the outstanding PXP
common stock and approximately 46% of the outstanding PXP convertible
subordinated debentures (see Note 13).
PXP and its subsidiaries provide a variety of investment management and
related services to a broad base of institutional, corporate and individual
clients throughout the U.S. PXP's businesses include investment advisory,
broker-dealer operations and, through June 30, 1996, fee based investment
research operations and financial consulting services. PXP manages its
operations as two separate lines of business, that of retail and
institutional investment management services. The retail line of business
provides discretionary investment management products to individuals,
including mutual funds and managed accounts. The institutional 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. The principal
operating subsidiaries of PXP included in these consolidated financial
statements are as follows:
o Phoenix Equity Planning Corporation (PEPCO), a registered broker-dealer,
serves principally as distributor, underwriter and financial agent for
products registered with the Securities and Exchange Commission (SEC).
o Phoenix Investment Counsel, Inc. (PIC), a wholly-owned subsidiary of
PEPCO, is a registered investment advisor providing investment management
services primarily under agreements with affiliated registered investment
companies and other institutional advisors and investors.
o Duff & Phelps Investment Management Co. (DPIM) and its subsidiary,
Phoenix Duff & Phelps Investment Advisors (PDPIA), are registered
investment advisors providing investment management services to a variety
of institutions and individuals, including SEC registered investment
companies, corporate, public and multi-employer retirement funds,
endowment, insurance and other special purpose funds and high yield bond
portfolios.
o Roger Engemann & Associates (REA), a wholly-owned subsidiary of Pasadena
Capital Corporation (PCC), which in turn is a wholly-owned subsidiary of
PXP, is a registered investment advisor. REA provides investment
management services primarily to individual investors and SEC registered
investment companies. PCC and REA were acquired from a third party on
September 3, 1997 (see Note 3). These consolidated financial statements
include operations and cash flows for REA and PCC from the date of
acquisition.
o Seneca Capital Management LLC (Seneca), a majority-owned subsidiary of
PXP, is a registered investment advisor. Seneca provides investment
management services primarily to institutional investors. A majority
interest in Seneca was acquired on July 17, 1997 (see Note 3). These
consolidated financial statements include operations and cash flows for
Seneca from the date of acquisition.
National Securities & Research Corporation (NS&RC), a registered investment
advisor, provided investment management services, through May 31, 1998,
under agreements with affiliated registered investment management companies.
On June 1, 1998, NS&RC assigned its rights under such agreements to PIC.
Duff & Phelps Capital Markets Co. (DPCM) provided a wide range of investment
banking and financial advisory services until July 1, 1996 when PXP exited
the fee based investment research, investment banking and financial advisory
businesses.
38
<PAGE>
2. Summary of Significant Accounting Policies
Significant accounting policies, which have been consistently applied, are
as follows:
Basis of Presentation
PXP's consolidated financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP). The consolidated
financial statements include the accounts of PXP and its subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to prior years' amounts to conform
to the current year presentation. The preparation of financial statements in
conformity with GAAP requires the use of estimates. Accordingly, certain
amounts in the consolidated financial statements contain estimates made by
management. Actual results could differ from these estimates. Significant
estimates, specifically those used to determine the carrying value of
goodwill and intangible assets, are discussed in these notes to the
consolidated financial statements.
Recent Accounting Pronouncements
PXP adopted Statement of Financial Accounting Standards (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 17)
PXP adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," as of December 31, 1998. This statement supercedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," by
replacing the "industry segment" approach with the "management approach."
The management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source for reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers.
(See Note 7)
As these pronouncements only address financial statement disclosure, they
have no impact on PXP's financial results.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less at the time of purchase.
Marketable Securities
Marketable securities consist of mutual fund investments and U.S. Government
obligations which are being carried at market value in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
The mutual fund investments are classified as assets held for trading
purposes. Any unrealized appreciation or depreciation on these assets is
included in other income. The U.S. Government securities are considered to
be available-for-sale, with any unrealized appreciation or depreciation, net
of income taxes, reported as a component of accumulated other comprehensive
income in stockholders' equity. Market values for both the mutual funds and
the U.S. Government obligations are determined based on publicly quoted
market prices.
39
<PAGE>
Deferred Commissions
Deferred commissions are commissions paid to broker-dealers on sales of
mutual fund shares referred to as B shares. These commissions are recorded
as deferred costs and are recovered by on-going monthly distribution fees
received from mutual funds or upon redemption of the B shares by
shareholders within five to six years of purchase. Deferred costs on
outstanding shares are amortized on a straight-line basis, generally over
five to six years or until the B shares are redeemed.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are recorded at cost.
Depreciation of furniture and equipment is computed using the straight-line
method based upon estimated useful lives of up to ten years. Leasehold
improvements are amortized over the lives of the related leases. Major
renewals or betterments are capitalized and recurring repairs and
maintenance are charged to operations.
Intangible Assets and Goodwill
Intangible assets are amortized on a straight-line basis over the estimated
remaining lives of such assets. Goodwill represents the excess of the
purchase price of acquisitions and mergers over the identified net assets.
Goodwill is being amortized on a straight-line basis over 40 years.
Long-lived Assets
The propriety of the carrying value of long-lived assets is periodically
reevaluated in accordance with SFAS No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed Of," by
comparing estimates of future undiscounted cash flows to the carrying value
of assets. Assets are considered impaired if the carrying value exceeds the
expected future undiscounted cash flows. Such analyses are performed at
least annually, or more frequently if warranted by events or circumstances
affecting PXP's business. Based on these evaluations, there were no
adjustments to the carrying value of long-lived assets in 1998, 1997 or
1996.
Revenue Recognition
Investment management fees and mutual funds - ancillary fees are recorded as
income during the period in which services are performed. Investment
management fees are generally computed and earned based upon a percentage of
assets under management. Mutual funds - ancillary fees consist of dealer
concessions, distribution fees, administrative fees, shareholder service
agent fees and accounting fees. Dealer concessions and underwriting fees
earned (net of related expenses) from the distribution and sale of
affiliated mutual fund shares and other securities are recorded on a trade
date basis.
Financial consulting and investment research fees, through June 1996, were
recognized in accordance with customer contracts in which fees were
generally based on completed transactions, professional time incurred or
research subscriptions.
Pursuant to the terms of its distribution plans with affiliated mutual
funds, PXP received a combined $27.3 million, $23.2 million and $28.0
million in 1998, 1997 and 1996, respectively, from affiliated mutual funds
for providing distribution and other services. Of these amounts, $22.9
million, $20.2 million and $19.5 million in 1998, 1997 and 1996,
respectively, was paid in the form of trailing commissions, for services
rendered, to outside broker-dealers and to WS Griffith & Co., Inc.
(Griffith), a registered broker-dealer which is a wholly-owned subsidiary of
PM Holdings. The balances of $4.4 million, $3.0 million and $8.5 million in
1998, 1997 and 1996, respectively, were retained as reimbursement for
distribution services provided by PXP and are included in revenues as a part
of mutual funds - ancillary fees.
40
<PAGE>
Contingent deferred sales charge (CDSC) revenue is recognized when deferred
commissions are collected on redemptions of B shares made within five to six
years of their purchase and on C shares made within one year of purchase.
CDSC redemption income earned in 1998, 1997 and 1996 was $.5 million, $1.3
million and $2.4 million, respectively, and is included in other income and
fees. Since the sale of PEPCO's deferred commissions asset in June 1997, PXP
only recognizes CDSC revenue related to redemptions of C shares of Phoenix
Funds and B shares of the Phoenix-Engemann Funds sold prior to February 1,
1998.
Income Taxes
PXP accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability
approach for financial reporting of income taxes. PXP and its eligible
subsidiaries file consolidated federal and state income tax returns. Certain
subsidiaries, which are consolidated for financial reporting purposes, are
not eligible to be included in the consolidated federal income tax return.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes.
SFAS No. 109 allows recognition of deferred tax assets that are more likely
than not to be realized in future years. It is management's assessment,
based upon PXP's earnings and projected future taxable income, that it is
more likely than not that the deferred tax assets at December 31, 1998, with
the exception of the foreign tax credit, will be realized. A valuation
allowance of $6.8 million and $1.1 million was provided at December 31, 1998
and 1997, respectively, related to the foreign tax credit.
Investment in Beutel, Goodman & Company Ltd.
The equity method was used to account for PXP's investment in the stock of
Beutel, Goodman & Company Ltd. (BG), which was sold in 1998. The difference
between the value assigned to the investment in BG at the merger date and
PXP's equity in BG's historical cost basis net assets was being amortized on
a straight-line basis over 28 years. (See Note 8)
Foreign Currency Translation
The investment in BG had been translated into U.S. dollars at the rate of
exchange existing at year-end. The gains and losses resulting from foreign
currency translation, net of income taxes, were deferred and accumulated in
stockholders' equity until the investment was sold. (See Note 8)
Earnings Per Share
Earnings per share (EPS) is calculated 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. The computation of diluted EPS is similar to
basic EPS, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued, and the numerator is increased for
any related net income effect. Potentially dilutive shares, for the purpose
of calculating diluted EPS, are based on outstanding stock options and
convertible securities. Basic and diluted EPS have been disclosed in the
income statement. A reconciliation between the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted
EPS computation is presented in Note 14. EPS for prior years and interim
periods presented in these financial statements has been restated.
41
<PAGE>
Employee Benefits
PXP and its subsidiaries are members of the multi-employer group medical,
group life, pension and 401K savings plans sponsored and administered by
Phoenix Home Life. Certain current and former employees of PXP are covered
under these plans. The qualified pension and 401K savings plans comply with
the requirements established by the Employee Retirement Income Security Act
of 1974 (ERISA). An excess benefits plan provides the portion of pension
obligations which is in excess of amounts permitted by ERISA. PXP is charged
annually by Phoenix Home Life for its costs under the plans and for PXP's
matching portion of the 401K savings plan. These costs were $3.9 million for
1998 and 1997, and $3.3 million for 1996.
On January 1, 1997, certain employees of PXP became eligible to participate
in PXP sponsored Profit Sharing and Restricted Stock plans. Annual
contributions from company profits, as determined by PXP's Board of
Directors, may be made to the Profit Sharing Plan to the extent that
deductible contributions are permitted by the Internal Revenue Code. If the
contributions exceed those limits, the excess will be paid to the
participants as restricted PXP stock. The Restricted Stock Plan is not part
of the Profit Sharing Plan, but is in addition to it. PXP expensed $1.0
million and $.6 million in 1998 and 1997, respectively, under the Profit
Sharing Plan.
Since PXP is covered under a multi-employer benefit plan, applicable
information regarding the actuarial present value of vested and non-vested
accumulated plan benefits and the net assets of the plan available for
benefits has been omitted.
3. Acquisitions, Merger and Goodwill and Intangible Assets
Pasadena Capital Corporation and Seneca Capital Management Acquisitions
On September 3, 1997, PXP acquired PCC, the parent company of REA, for
$214.0 million. The merger agreement provides for an "earn-out," based on
growth in management fee revenues, of up to a total of $66.0 million to be
paid out on the third, fourth and fifth anniversaries of the transaction.
PCC, which operates in Pasadena, California, managed assets of $7.8 billion
at December 31, 1998, primarily individually managed accounts but also
including the Phoenix-Engemann Funds, a family of six equity mutual funds
with $1.2 billion in assets under management.
On July 17, 1997, PXP acquired a 74.9% majority interest in Seneca, a San
Francisco-based investment advisor. The remaining interests in Seneca
continue to be held by its management. During the period from three to five
years after the acquisition date, either PXP or Seneca's management may
exercise their respective rights to buy or sell the remaining interest in
Seneca. The purchase price paid by PXP was $37.5 million, including $28.0
million in cash and $9.5 million in short-term notes. On July 27, 1998, PXP
purchased a 74.9% interest in GMG/Seneca Capital Management L.P. for $.7
million. The additional purchase price has been allocated to the intangible
value of Seneca's investment contracts. Additional consideration of $3.5
million, based upon the retention of certain revenue earning accounts, will
be paid to Seneca during the first quarter of 1999. Seneca managed assets of
$6.1 billion, primarily institutional accounts, at December 31, 1998.
The purchase price for PCC and Seneca represents the consideration paid and
the direct costs incurred by PXP to purchase PCC and a majority interest in
Seneca. The excess of the purchase price over the fair value of acquired net
tangible assets of PCC and Seneca totaled $213.5 million. Of this excess
purchase price, $111.0 million has been classified as identifiable
intangible assets, primarily associated with investment management
contracts, which are being amortized over their estimated average useful
life of 13 years using the straight-line method. Fair value adjustments to
assets and liabilities totaled $(39.9) million. The remaining excess
purchase price of $142.5 million has been classified as goodwill and is
being amortized over 40 years using the straight-line method. Related
goodwill amortization of $3.6 million and $1.2 million has been charged to
expense in 1998 and 1997, respectively.
42
<PAGE>
The following table summarizes the calculation and allocation of purchase
price (in thousands):
Purchase price: PCC Seneca Total
Consideration paid $211,565 $ 36,953 $248,518
Transaction costs 2,442 1,298 3,740
-------- -------- --------
Total purchase price $214,007 $ 38,251 $252,258
======== ======== ========
Purchase price allocation:
Fair value of acquired net assets $37,932 $ 782 $ 38,714
Identified intangibles 97,404 13,567 110,971
Deferred taxes (39,936) (39,936)
Goodwill 118,607 23,902 142,509
-------- -------- --------
Total purchase price allocation $214,007 $ 38,251 $252,258
======== ======== ========
PSG and D&P Merger
The merger of PSG and D&P was accounted for as an acquisition of D&P by PSG
using the purchase accounting method (a "reverse acquisition"). The excess
of the purchase price over acquired net tangible assets and liabilities of
D&P as of November 1, 1995 totaled $162.2 million. Of the excess purchase
price, $57.9 million has been classified as identifiable intangible assets,
primarily associated with investment management contracts, which are being
amortized over their original average expected life of 14 years using the
straight-line method. The remaining fair value adjustments to assets and
liabilities totaled $(29.0) million. The remaining excess purchase price of
$133.3 million has been classified as goodwill and is being amortized over
40 years using the straight-line method. Related goodwill amortization of
$3.3 million was charged to expense in 1998, 1997 and 1996.
Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, were as follows:
1998 1997
(in thousands)
Goodwill:
Excess purchase price over net tangible
assets and identifiable intangibles of
subsidiaries acquired $321,795 $ 321,932
Accumulated amortization (21,540) (13,481)
-------- ---------
Goodwill, net $300,255 $ 308,451
======== =========
Intangible assets:
Investment contracts $168,523 $ 167,788
Covenant not to compete 5,000 5,000
Employee base 2,588 2,588
Other intangibles 335 335
Accumulated amortization (30,044) (16,045)
-------- ---------
Intangible assets, net $146,402 $ 159,666
======== =========
These consolidated financial statements include amortization expense related
to goodwill and intangible assets of $22.1 million, $13.9 million and $9.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.
43
<PAGE>
4. Pro Forma Results (Unaudited)
The following unaudited pro forma financial information for the years ended
December 31, 1997 and 1996 was 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 and certain transactions effected by
PCC and Seneca in connection with the acquisitions. The pro forma financial
information for these periods has been prepared assuming these acquisitions
were effected on January 1, 1996.
Year Ended December 31,
1997 1996
(in thousands,
except per share amounts)
Revenues $207,111 $211,847
-------- --------
Employment expenses 88,065 81,171
Other operating expenses 59,202 59,869
Amortization of goodwill and
intangible assets 22,057 22,057
------- --------
Operating income 37,787 48,750
Other income - net 18,989 5,213
Interest expense - net (10,751) (10,585)
Minority interest (1,224) (899)
------- --------
Income before income taxes 44,801 42,479
Provision for income taxes 19,255 18,614
------- --------
Net income $25,546 $ 23,865
======= ========
Earnings per share
Basic $ .47 $ .44
Diluted $ .47 $ .44
The pro forma information is not necessarily indicative of the results that
would have been obtained had the transactions and arrangements taken effect
on the assumed dates, nor is the information intended to be a projection for
any future period.
5. Marketable Securities
PXP's marketable securities consist of both trading securities and
securities available-for-sale. Securities available-for-sale have
contractual maturity dates of less than one year. The composition of PXP's
marketable securities at December 31, was as follows:
1998
Unrealized
Cost Gain (Loss) Market
(in thousands)
Trading:
Phoenix Multi-Sector Fixed
Income Fund $ 1,585 $ (328) $ 1,257
Other affiliated mutual funds 3,100 264 3,364
Available-for-sale:
U.S. Government obligations 11,654 11,654
------- ------- -------
$16,339 $ (64) $16,275
======= ======= =======
44
<PAGE>
1997
Unrealized
Cost Gain (Loss) Market
(in thousands)
Trading:
Phoenix Multi-Sector Fixed
Income Fund $ 2,461 $ (125) $ 2,336
Other affiliated mutual funds 2,169 95 2,264
Available-for-sale:
U.S. Government obligations 7,400 7,400
------- ------- -------
$12,030 $ (30) $12,000
======= ======= =======
6. Sale of Deferred Commissions Asset
On June 1, 1997, PXP sold its title to and interest in the balance of its
deferred commissions asset to an unrelated third party. PXP recognized a
gain of $6.9 million based on cash proceeds of $26.0 million and a book
value of $19.1 million at the time of the sale. As part of the transaction,
the third party is entitled to receive the distributor fees and contingent
deferred sales charges related to PXP's outstanding B share mutual funds,
excluding those from sales of Phoenix-Engemann Funds prior to February 1,
1998. PXP, through PEPCO, began distributing the Phoenix-Engemann Funds in
September 1997, upon the acquisition of PCC by PXP. Effective February 1998,
sales of Phoenix-Engemann B share mutual funds became part of PXP's
agreement with the unrelated third party.
PXP has a three year commitment, expiring June 1, 2000, from the unrelated
third party to fund all commissions paid by PXP upon the sale of B share
mutual funds.
7. Segment Information
PXP has determined that its reportable segments are those based on the
method used for internal reporting, which disaggregates the business by
customer category. PXP's reportable segments are its retail and
institutional lines of business. The retail line serves primarily the
individual investor by acting as advisor to and, in certain instances,
distributor for open-end mutual funds and managed accounts. The
institutional line provides management services primarily to corporate
entities and multi-employer retirement funds, as well as endowment,
insurance and other special purpose funds.
The following tables summarize pertinent financial information relative to
PXP's operations for 1998 and 1997. Segment data for 1996 has not been
disclosed because management found it impracticable to obtain meaningful
information for that year.
Year Ended December 31, 1998 Insti-
Retail tional All Other Total
------- ------- --------- --------
(in thousands)
Revenues $140,383 $79,064 $ 2,100 $221,547
-------- ------- ------- --------
Employment and
other operating expenses 96,498 50,644 147,142
Depreciation and leasehold
amortization 2,589 1,074 3,663
Amortization of goodwill
and intangible assets 12,624 9,433 22,057
-------- ------- ------- --------
Operating income 28,672 17,913 2,100 48,685
Other income - net 189 663 20,195 21,047
Interest income 673 200 1,116 1,989
Interest expense (9,377) (1,554) (3,617) (14,548)
Minority interest (2,198) (2,198)
-------- ------- ------- -------
Income before income taxes $ 20,157 $15,024 $19,794 $ 54,975
======== ======= ======= ========
Assets under management
(in millions) $ 21,729 $31,758 $ -- $ 53,487
======== ======= ======== ========
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<PAGE>
Year Ended December 31, 1997 Insti-
Retail tional All Other Total
------- ------- --------- --------
Revenues $102,129 $60,371 $ 2,100 $164,600
-------- ------- ------- --------
Employment and
other operating expenses 75,702 41,033 116,735
Depreciation and leasehold
amortization 2,249 704 2,953
Amortization of goodwill
and intangible assets 5,426 8,524 13,950
-------- ------- ------- --------
Operating income 18,752 10,110 2,100 30,962
Other income - net 6,935 36 6,290 13,261
Interest income 466 55 1,853 2,374
Interest expense (3,802) (1,006) (830) (5,638)
Minority interest (714) (714)
-------- ------- ------- -------
Income before income taxes $ 22,351 $ 8,481 $ 9,413 $ 40,245
======== ======= ======= ========
Assets under management
(in millions) $ 18,560 $27,842 $ -- $ 46,402
======== ======= ======= ========
The "All Other" column represents corporate office revenue and expenses
which are not attributed directly to either line of business.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" (see Note 2). There are no
intersegment revenues. Balance sheet asset information by line of business
is not reported as the information is not produced internally and is not
utilized in managing the business.
8. Investment in Beutel, Goodman & Company Ltd.
On December 3, 1998, PXP sold its 49% investment in the outstanding common
stock of BG, a Canadian-based investment management firm, to an unrelated
third party for $47 million. PXP received $37 million in cash at closing and
a $10 million three-year interest-bearing note. An additional $3 million may
be paid to PXP if specified earnings thresholds are met in the next two
calendar years. Proceeds from the sale of BG were used to pay down debt.
At the time of the sale, the book value of PXP's investment in BG was $26.2
million. In addition, there was a cumulative translation adjustment of $2.5
million included as a component of accumulated other comprehensive income in
stockholders' equity, net of $1.7 million of deferred taxes. As a result of
the sale, PXP recognized a gain on the sale of $20.8 million and a foreign
exchange loss of $4.2 million, which are included, net, in gain on sale in
the Consolidated Statements of Income and Comprehensive Income (Statements
of Income).
9. Long-term Investments and Other Assets
Long-term investments are accounted for using the equity method. In
accordance with SFAS No. 115, PXP has adjusted its investments for its
proportionate share of the investees' unrealized gains and losses on
securities available-for-sale and has included the unrealized gains and
losses, net of income taxes, as a component of accumulated other
comprehensive income in stockholders' equity. PXP's share of the earnings of
unconsolidated investments is included in equity in earnings of
unconsolidated affiliates in the Statements of Income.
46
<PAGE>
Inverness/Phoenix and Related Partnerships
At December 31, 1998, PXP had a 25% interest in Inverness/Phoenix Capital
LLC (IPC), formerly Duff & Phelps/Inverness LLC. IPC is a joint venture with
Inverness Management LLC, an unrelated third party. IPC acts as a general
partner to several partnerships which invest in private equity transactions
(primarily management led buy-outs), expansion financing and
recapitalizations involving management participation.
On January 17, 1996, IPC completed a management led buy-out of
National-Oilwell, Inc. (NOI) from Armco and USX. On October 28, 1996, NOI
successfully completed an initial offering of 4 million shares of common
stock which are traded on the New York Stock Exchange (NYSE: NOI). At
December 31, 1998 and 1997, PXP, through its investments in two limited
partnerships of which IPC is the general partner, had a beneficial ownership
interest in approximately 541,000 shares and 587,000 shares, respectively,
of the common stock of NOI. At December 31, 1998 and 1997, PXP's combined
investment in the limited partnerships was $6.1 million and $20.1 million,
respectively.
On November 25, 1996, IPC entered into an agreement to participate in a
management led buy-out of Financial Alliance Processing Services, Inc.
(Financial Alliance). On December 27, 1996, PXP invested $2.0 million in
Financial Alliance Investors I, L.P. (FA Investors), which was created to
purchase an equity interest in Financial Alliance. On October 24, 1997, FA
Investors sold its interest in Financial Alliance. PXP, based on its equity
interest in FA Investors, recognized income of $.5 million, including
interest, and $4.5 million in 1998 and 1997, respectively.
PXP had a $.7 million investment in Brown's Dock LLC (BD) at December 31,
1998. BD is an investment partnership established by IPC for the purpose of
investing in the convertible preferred stock of Penncorp Financial Group,
Inc. Phoenix Home Life holds the remaining interest in BD.
Other Investments
At December 31, 1998, PXP had other equity method investments totaling $.7
million and held other investments totaling $1.0 million.
Windy City CBO
PXP had an $8.8 million investment in Windy City CBO Partners, L.P. (WCCBO)
at December 31, 1996 and was both a general and a limited partner. The
partnership was established for the purpose of issuing $184.3 million of
Collateralized Bond Obligations (CBOs). The CBOs were non-recourse
obligations secured by a portfolio of high-yield bonds. In March 1997, WCCBO
was liquidated in accordance with contractual arrangements and PXP has no
remaining investment.
PXP's proportionate share of WCCBO's earnings in 1997 and 1996 was $(1.5)
million and $1.6 million, respectively. In addition, DPIM received fees for
managing the portfolios of high-yield bonds held by the partnership. These
management fees were $31 thousand and $.4 million in 1997 and 1996,
respectively.
Other Assets
At December 31, 1998, PXP had a three year $10.0 million 10% note receivable
resulting from the sale of BG (see Note 8). Interest on this note is due
quarterly. In addition, PXP had a $1.0 million note receivable, due in June
2001, at December 31, 1998 and 1997 resulting from the divestiture of DPCM.
Interest on this note is received monthly. At December 31, 1998 and 1997,
PXP had $2.5 million and $3.4 million, respectively, of prepaid compensation
expense related to the acquisition of PCC and REA.
47
<PAGE>
10. Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements at December 31, were
comprised of the following:
1998 1997
(in thousands)
Computer equipment $ 9,886 $ 9,291
Leasehold improvements 4,817 4,434
Furniture and office equipment 3,885 3,737
-------- -------
18,588 17,462
Accumulated depreciation and amortization (9,999) (7,391)
-------- -------
Furniture, equipment and leasehold
improvements, net $ 8,589 $10,071
======== =======
11. Income Taxes
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
(in thousands)
Current
Federal $26,789 $ 21,727 $11,964
State 2,150 2,239 2,040
------- -------- -------
Total current taxes 28,939 23,966 14,004
------- -------- -------
Deferred
Federal (7,074) (7,075) 4,549
State (1,530) (793) (366)
------- ------- -------
Total deferred taxes (8,604) (7,868) 4,183
------- ------- -------
Total income tax expense $20,335 $ 16,098 $18,187
======= ======== =======
Income tax expense for 1998 was calculated on pre-tax income of $55.0
million, which included $4.1 million of foreign source income from PXP's
investment in BG.
48
<PAGE>
Deferred taxes resulted from temporary differences between the amounts
reported in the consolidated financial statements and the tax bases of
assets and liabilities. The tax effects of temporary differences at December
31, were as follows:
1998 1997
(in thousands)
Deferred tax assets:
Foreign tax credit $ 6,765 $ 1,109
Investment in BG 4,321
Purchase accounting adjustments 1,034 2,655
Other investments 393 1,321
Other 3,375 3,181
-------- -------
Gross deferred tax assets 11,567 12,587
Valuation allowance (6,765) (1,109)
-------- -------
Gross deferred tax assets after valuation allowance 4,802 11,478
-------- -------
Deferred tax liabilities:
Purchase accounting adjustments 50,577 56,872
Other investments 3,605 9,342
Note receivable from sale of BG 2,744
Investment in BG 9,286
Other 1,322 1,998
-------- -------
Gross deferred tax liabilities 58,248 77,498
-------- -------
Deferred tax liability, net $ 53,446 $66,020
======== =======
The following presents a reconciliation of income tax expense computed at
the federal statutory rate to the income tax expense recognized in the
Statements of Income for the years ended December 31,:
1998 1997 1996
($ in thousands)
Tax at statutory rate $19,241 35% $14,086 35% $15,717 35%
State taxes, net of
federal benefit 1,140 2 1,159 3 1,082 2
Goodwill 2,621 5 1,895 5 1,495 3
Adjustments to tax accruals (1,446)(3) (753)(2)
Other, net (1,221)(2) (289)(1) (107)
------- --- ------- --- ------- ---
Income tax expense $20,335 37% $16,098 40% $18,187 40%
======= === ======= === ======= ===
12. Long-term and Short-term Debt
On August 14, 1997, PXP entered into a five year, $200 million Credit
Agreement with a consortium of banks. At December 31, 1998 and 1997, PXP had
outstanding borrowings of $140 million and $185 million, respectively, under
this agreement. Interest rates on such borrowings are variable. PXP may
select from the Certificate of Deposit, Eurodollar, or the banks' base
lending rate. Interest periods end, at PXP's option, one, two, three or six
months after the borrowing date of the loan. For the years ended December
31, 1998 and 1997, the average interest rate was approximately 6%. The
Credit Agreement requires no principal repayments prior to maturity. PXP's
majority stockholder, Phoenix Home Life, has guaranteed the obligation, for
which it is paid a .10% guarantee fee on the outstanding balance.
49
<PAGE>
The Credit Agreement contains financial and operating covenants including,
among other provisions, requirements that PXP maintain certain financial
ratios and satisfy certain financial tests, including restrictions on the
ability to incur indebtedness and limitations on PXP's capital expenditures.
As of December 31, 1998 and 1997, PXP was in compliance with these
covenants.
REA had a contract payable of $.9 million and $2.5 million at December 31,
1998 and 1997, respectively, resulting from a prior acquisition. In
addition, PCC had a note payable of $1.8 million and $2.4 million at
December 31, 1998 and 1997, respectively, to a former PCC shareholder.
On July 16, 1997, PXP entered into three 6% short-term promissory note
arrangements, totaling $5.9 million, pursuant to the terms of the purchase
agreement with Seneca.
These notes were paid in full in February 1998.
At December 31, 1996, PXP had outstanding borrowings of $16.5 million under
a $27 million Credit Agreement with a consortium of banks which were paid in
full in June 1997.
Interest expense relative to the credit agreements and short-term notes,
including commitment and guarantee fees, was $14.5 million, $5.6 million and
$1.6 million in 1998, 1997 and 1996, respectively.
13. Subordinated Debentures, Mandatorily Redeemable Equity Securities and Other
Capital Transactions
On April 3, 1998, PXP exercised its right to exchange the 3.2 million
outstanding shares of Series A Convertible Exchangeable Preferred Stock
(Series A Preferred Stock) for 6% Convertible Subordinated Debentures
(Debentures) due 2015. Each share of outstanding Series A Preferred Stock,
including unpaid and accrued dividends, was exchanged for a Debenture with a
$25.00 face value. Interest on the Debentures for the period from December
10, 1998 through March 9, 1999 will be payable on March 10, 1999 to
registered holders as of February 20, 1999. Each Debenture can be converted
into 3.11 shares of PXP common stock at any time. The Debentures may be
redeemed by PXP beginning five years from the date of the Merger. After such
time, at PXP's option, the Debentures may be redeemed in whole or in part
from time to time for cash in the principal amount, plus any accrued
interest.
On February 10, 1999, PXP declared a common share quarterly dividend of
$0.06 per share. PXP intends to continue to pay quarterly cash dividends,
however, future payment of cash dividends by PXP will depend upon the
financial condition, capital requirements and earnings of PXP.
On November 7, 1996, PXP's Board of Directors voted to authorize a stock
repurchase plan for up to 2.0 million shares of outstanding common stock.
Repurchases are being made from time to time in the open market or through
privately negotiated transactions at market prices. In accordance with the
stock repurchase program, PXP repurchased 1,116,800 and 345,000 shares of
PXP's common stock at costs of $8.0 million and $2.6 million during 1998 and
1997, respectively. No stock was repurchased during 1996.
50
<PAGE>
14. Earnings Per Share
The following tables reconcile PXP's basic earnings per share to diluted
earnings per share:
For the Year Ended December 31, 1998
(in thousands) Per Share
Income Shares Amount
Net Income $ 34,640
Less: preferred stock
dividends 1,223
Basic EPS
Income available to common
stockholders 33,417 44,076 $ .76
======
Effect of dilutive securities
Stock options 721
6% convertible debentures 2,015 9,500
Convertible preferred stock 1,223
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 36,655 54,297 $ .68
======== ====== ======
For the Year Ended December 31, 1997
(in thousands) Per Share
Income Shares Amount
Net Income $ 24,147
Less: preferred stock
dividends 4,754
Basic EPS
Income available to common
stockholders 19,393 44,080 $ .44
======
Effect of dilutive securities
Stock options 464
Convertible preferred stock 4,754 9,891
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 24,147 54,435 $ .44
======== ====== ======
51
<PAGE>
For the Year Ended December 31, 1996
(in thousands) Per Share
Income Shares Amount
Net Income $ 26,719
Less: preferred stock
dividends 4,713
Basic EPS
Income available to common
stockholders 22,006 43,799 $ .50
======
Effect of dilutive securities
Stock options 297
Convertible preferred stock 4,713 9,875
-------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 26,719 53,971 $ .50
======== ====== ======
15. Other Operating Expenses
Other operating expenses for the years ended December 31, were comprised of
the following:
1998 1997 1996
(in thousands)
Outside services $ 8,418 $ 5,937 $ 4,262
Rent and other occupancy 6,952 6,502 5,201
Travel, training and entertainment 6,468 5,654 4,652
Fund accounting 5,328
Computer services 4,726 3,472 3,206
Telephone and postage 3,515 3,191 3,174
Sales and marketing 3,222 3,082 2,913
Professional fees 2,117 1,914 1,225
Pasadena mutual fund expenses 2,079
Printing 2,062 2,799 2,697
Equipment rental and maintenance 1,571 1,344 1,255
Finder's fees 1,153 1,183 993
Other expenses 7,378 5,219 6,945
------- -------- -------
Total $54,989 $ 40,297 $36,523
======= ======== =======
16. Restructuring Charges
In November 1997, PXP announced that it would be out-sourcing substantially
all of its mutual fund accounting function to an unrelated service provider
effective in the first quarter of 1998. The non-recurring costs resulting
from this decision, primarily severance pay, were $.4 million and $.7
million in 1998 and 1997, respectively. These costs have been disclosed
separately in the Statements of Income.
52
<PAGE>
17. Comprehensive Income
The components of other comprehensive income, and related tax effects, were
as follows:
Tax
(Expense)
Before-Tax Benefit Net Of Tax
(in thousands)
Year Ended December 31, 1998
Foreign currency translation adjustment:
Foreign currency translation adjustment
arising during period $(2,195) $ 900 $(1,295)
Plus: reclassification adjustment for
currency translation losses
realized in net income 4,180 (1,714) 2,466
------- -------- -------
Net foreign currency translation
adjustment 1,985 (814) 1,171
Unrealized losses on securities
available-for-sale:
Unrealized holding losses arising
during period (14,024) 5,750 (8,274)
------- -------- -------
Other comprehensive loss $(12,039) $ 4,936 $(7,103)
======== ======== =======
Year Ended December 31, 1997
Foreign currency translation adjustment $(1,425) $ 584 $ (841)
------- -------- -------
Unrealized gains on securities
available-for-sale:
Unrealized holding gains arising
during period 11,290 (4,629) 6,661
Plus: reclassification adjustment
for losses realized in net income 427 (175) 252
------- ------- -------
Net unrealized gains 11,717 (4,804) 6,913
------- ------- -------
Other comprehensive income $10,292 $(4,220) $ 6,072
======= ======= =======
Year Ended December 31, 1996
Foreign currency translation adjustment $ 210 $ (86) $ 124
Unrealized gains on securities
available-for-sale:
Unrealized holding gains arising
during period 8,685 (3,561) 5,124
------- ------- -------
Other comprehensive income $ 8,895 $(3,647) $ 5,248
======= ======= =======
Accumulated other comprehensive income was comprised of unrealized gains on
securities available-for-sale of $3.6 million and $11.9 million and foreign
currency translation adjustments of zero and $(1.2) million at December 31,
1998 and 1997, respectively.
53
<PAGE>
18. Commitments and Lease Contingencies
PXP incurred rental expenses on operating leases of $5.8 million, $5.2
million and $4.6 million, and received income from subleases of $.9 million,
$.8 million and $.8 million in 1998, 1997 and 1996, respectively. PXP is
committed to the following future net minimum rental payments under
non-cancelable operating leases:
Income Net
Lease From Lease
Payments Subleases Payments
(in thousands)
1999 $ 6,657 $ 859 $ 5,798
2000 4,330 812 3,518
2001 3,034 571 2,463
2002 2,567 285 2,282
2003 2,535 285 2,250
2004 and thereafter 14,170 1,427 12,743
------- -------- -------
$33,293 $ 4,239 $29,054
======= ======== =======
19. Other Related Party Transactions
Revenues
PXP's subsidiaries manage assets and provide other investment advisory
services to Phoenix Home Life and subsidiaries (e.g., general account and
variable separate account products) and investment products (e.g.,
affiliated mutual funds). The revenues earned managing related party assets
for the years ended December 31, were as follows:
1998 1997 1996
(in thousands)
Management fees:
Affiliated mutual funds $82,702 $ 74,341 $71,192
Phoenix Home Life general account 9,485 8,526 8,156
Phoenix Home Life variable product
separate accounts, net of reimbursement 6,291 5,194 6,270
Other 3,236 1,194 1,423
------- -------- -------
Total management fees 101,714 89,255 87,041
------- -------- -------
Mutual funds - ancillary fees:
Fund accounting 6,870 5,524 2,800
Administrative 5,525 1,708
Transfer agent 5,136 5,523 5,889
Distributor, net 4,419 5,716 8,429
------- -------- -------
Total mutual funds - ancillary fees 21,950 18,471 17,118
------- -------- -------
$123,664 $107,726 $104,159
======== ======== ========
PXP received management fees averaging approximately .11% of the net asset
value of the Phoenix Home Life general account assets under management in
1998 and .12% in 1997 and 1996. PXP's transactions with affiliates comprised
approximately 56%, 64% and 68% of revenues, of which 7%, 8% and 10% of total
revenues related to Phoenix Home Life, for the years ended December 31,
1998, 1997 and 1996, respectively. PXP believes that its transactions with
these related parties were competitive with alternative third party sources
for each service provided.
54
<PAGE>
Receivables from Related Parties
Receivables from affiliates as of December 31, were as follows:
1998 1997
(in thousands)
Investment management fees $ 13,316 $12,453
Mutual funds - ancillary fees 5,031 3,655
Concessions 4,538 4,243
Other receivables 2,637 2,209
-------- -------
$ 25,522 $22,560
======== =======
Operating Expenses
Phoenix Home Life provides certain administrative services at the request of
PXP including payroll processing, purchasing, facility management and other
administrative support to PXP and its subsidiaries. Additionally, certain of
PXP's active and retired employees participate in the Phoenix Home Life
multi-employer retirement and benefit plans (see Note 2). The expenses
recorded by PXP for significant services provided by Phoenix Home Life for
the years ended December 31, were as follows:
1998 1997 1996
(in thousands)
Rent $ 3,238 $ 3,094 $ 3,041
Computer services 2,762 2,637 2,283
Administrative fees 2,131 2,212 2,482
Employee related charges:
Healthcare and life insurance benefits 1,703 1,814 1,027
Pension and savings plans 1,666 1,552 1,051
Other 577 559 1,233
Equipment rental and maintenance 1,008 954 990
Legal services 55 111 183
------- -------- -------
Total $13,140 $ 12,933 $12,290
======= ======== =======
PXP pays these charges based on contractual agreements. Computer services
are based upon actual or specified usage. Other charges are based on hourly
rates, square footage or head count. PXP reimburses Phoenix Home Life for
employee related charges based on actual costs paid by Phoenix Home Life.
PXP believes that these charges are competitive with alternative third party
sources for each service received.
Payables to Related Parties
Payables to related parties for operating expenses as of December 31, 1998
and 1997 were $3.0 million and $3.1 million, respectively.
Included in broker-dealer payable are commissions, including those payable
under 12b-1 distribution plans discussed in Note 2, of $3.1 million and $3.4
million in 1998 and 1997, respectively, payable to Griffith.
55
<PAGE>
20. Non-qualified Stock Option Plans and Restricted Stock Grants
Stock Option Plans
PXP has reserved a total of 9.7 million shares of company common stock to be
granted under three stock option plans: the 1989 Employee Stock Option Plan
(Employee Option Plan), the 1989 Employee Performance Stock Option Plan
(Performance Plan) and the 1992 Long-Term Stock Incentive Plan (1992 Plan).
These plans were established prior to the Merger.
PXP adopted the 1992 Plan, as amended, concurrent with the Merger. The
Compensation Committee of the Board of Directors administers the 1992 Plan,
designates which employees and outside directors participate in it and
determines the terms of the options to be granted. Under the 1992 Plan,
participants are granted non-qualified options to purchase shares of common
stock of PXP at an option price equal to not less than 85% of the fair
market value of the common stock at the time the option is granted. The
options held by a participant terminate no later than 10 years from the date
of grant. Options granted under the 1992 Plan vest, on average, in even
annual installments over a three year period from the date of grant.
Restricted Stock
Restricted shares of PXP's common stock are issued to certain officers under
the provisions of an approved restricted stock plan. Restricted stock is
issued at the market value of a share of PXP's common stock on the date of
the grant. If a participant's employment terminates due to retirement, death
or disability, the restrictions expire and the shares become fully vested.
If a participant terminates employment for any other reason, the non-vested
shares of restricted stock are forfeited. The restricted stock vests in even
annual installments over a three year period from the date of the grant.
Dividends declared are paid in cash as the restrictions lapse. Restricted
shares were first granted during 1998. At December 31, 1998, 243,130 shares
of restricted stock have been included in common stock shares outstanding.
The market value of the restricted stock at the time of the grant is
recorded as unearned compensation in a separate component of stockholders'
equity and is amortized to expense over the restricted period. During 1998,
$.5 million was charged to compensation expense relating to the plan.
As of December 31, 1998 restricted stock grants were as follows:
Average
Common Market
Shares Value
Balance, December 31, 1997 -- $ --
Awarded 246,640 $8.40
Earned
Forfeited (3,510) $8.40
--------
Balance, December 31, 1998 243,130 $8.40
========
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<PAGE>
Pro Forma Information
PXP has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans and compensation for restricted stock
grants has been recorded in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation
cost for the PXP stock option and restricted stock plans been determined
based on the fair value at the grant date for awards in 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, PXP's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
Net income - as reported (in thousands) $34,640 $ 24,417 $26,719
Net income - pro forma (in thousands) $33,194 $ 23,360 $26,363
Basic earnings per share - as reported $ .76 $ .44 $ .50
Basic earnings per share - pro forma $ .73 $ .42 $ .49
Diluted earnings per share - as reported $ .68 $ .44 $ .50
Diluted earnings per share - pro forma $ .65 $ .43 $ .49
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998: dividend yield of 2.7%, expected
volatility of 24.8%, risk free interest rate of 5.6% and expected lives of
between three and ten years.
As of December 31, 1998 options to purchase 25,390, 42,120 and 7,332,454
shares of common stock were outstanding at weighted average exercise prices
per share of approximately $2.79, $.28 and $7.72, respectively, under the
Employee Option Plan, Performance Plan and 1992 Plan, respectively.
Outstanding Options
Weighted Weighted
Average Series A Average
Common Exercise Preferred Exercise
Shares Price Shares Price
Balance, December 31, 1995 3,620,285 $6.56 201,163 $25.95
Granted 1,518,366 $7.10
Exercised (473,895) $3.78 (36,715) $13.11
Canceled (531,834) $7.73 (52,234) $30.38
Forfeited (195,416) $6.95 (3,166) $29.10
--------- -------
Balance, December 31, 1996 3,937,506 $6.93 109,048 $28.05
Granted 2,735,329 $7.91
Exercised (257,845) $5.54 (12,345) $21.02
Canceled (73,334) $6.93
Forfeited (234,997) $7.56 (3,450) $41.55
--------- -------
Balance, December 31, 1997 6,106,659 $7.40 93,253 $28.49
Granted 1,851,808 $8.25
Exercised (222,846) $5.84
Canceled (10,491) $6.49 (93,253) $28.49
Forfeited (325,166) $7.47
--------- -------
Balance, December 31, 1998 7,399,964 $7.66 -- $ --
========= =======
57
<PAGE>
Exercisable Options
Weighted Weighted
Average Series A Average
Common Exercise Preferred Exercise
Shares Price Shares Price
Balance, December 31, 1995 1,904,053 $6.47 186,985 $25.82
Became exercisable 653,566 $6.67 10,413 $28.75
Exercised (473,895) $3.78 (36,715) $13.11
Canceled (531,834) $7.73 (52,234) $30.38
Forfeited (195,416) $6.95 (3,166) $29.10
--------- -------
Balance, December 31, 1996 1,356,474 $6.95 105,283 $28.18
Became exercisable 1,012,047 $6.88 3,765 $28.75
Exercised (257,845) $5.54 (12,345) $21.02
Canceled (33,334) $6.98
Forfeited (39,500) $10.12 (3,450) $41.55
--------- -------
Balance, December 31, 1997 2,037,842 $7.04 93,253 $28.49
Became exercisable 2,050,494 $7.39
Exercised (222,846) $5.84
Canceled (10,491) $6.49 (93,253) $28.49
Forfeited (325,166) $7.47
--------- -------
Balance, December 31, 1998 3,529,833 $7.27 -- $ --
========= =======
At December 31, 1998, 2.1 million shares of PXP common stock were available
for future grants.
21. Consolidated Quarterly Results of Operations (Unaudited)
A summary of the unaudited quarterly results of operations for the years
ended December 31, 1998 and 1997 is as follows:
(in thousands, except per share amounts)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
Revenues $ 54,296 $57,663 $58,050 $ 74,574
Expenses 44,620 48,491 47,787 48,710
-------- ------- ------- --------
Income before income taxes 9,676 9,172 10,263 25,864
Provision for income taxes 4,251 4,041 4,517 7,526
-------- ------- ------- --------
Net income $ 5,425 $ 5,131 $ 5,746 $ 18,338
======== ======= ======= ========
Earnings per share
Basic $ .10 $ .12 $ .13 $ .42
Diluted $ .10 $ .11 $ .12 $ .35
Dividends per common share
declared during the quarter $ .06 $ .06 $ .06 $ .06
Dividends per preferred share
declared during the quarter $ .375 $ .098 $ -- $ --
Market price per share
Common
Low $ 7.38 $ 8.19 $ 6.63 $ 6.69
High $ 9.38 $ 9.88 $ 9.44 $ 8.75
58
<PAGE>
(in thousands, except per share amounts)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
Revenues $ 35,245 $40,992 $44,036 $ 59,995
Expenses 28,874 28,412 34,278 48,459
-------- ------- ------- --------
Income before income taxes 6,371 12,580 9,758 11,536
Provision for income taxes 2,612 5,253 3,676 4,557
-------- ------- ------- --------
Net income $ 3,759 $ 7,327 $ 6,082 $ 6,979
======== ======= ======= ========
Earnings per share
Basic $ .06 $ .14 $ .11 $ .13
Diluted $ .06 $ .14 $ .11 $ .13
Dividends per common share
declared during the quarter $ .06 $ .06 $ .06 $ .06
Dividends per preferred share
declared during the quarter $ .375 $ .375 $ .375 $ .375
Market price per share
Common
Low $ 6.88 $ 6.63 $ 7.31 $ 7.00
High $ 8.50 $ 8.13 $ 9.31 $ 8.19
Preferred
Low $ 24.75 $ 24.63 $ 27.25 $ 25.38
High $ 28.50 $ 27.50 $ 30.50 $ 28.63
22. Contingent Liabilities
In October 1995, PXP, in one case, and its subsidiary DPCM were named
defendants in three related class action suits concerning a fairness opinion
issued by DPCM. The three cases were previously consolidated. There is
another separate case involving the same set of facts that has been brought
by other members of Associated Surplus Dealers (ASD), a corporation
organized to promote the surplus merchandise industry. The latter case has
now been consolidated with the other cases. The actions also name as
defendants the directors of ASD and a corporation (WFI) controlled by one of
the defendants. The complaints allege that shortly after the sale of the
assets of ASD to WFI for $2.6 million, the ASD assets were resold by WFI for
$60 million. The plaintiffs contend that DPCM and certain directors breached
their fiduciary duties and were negligent, causing ASD to receive less in
sales proceeds than anticipated. The plaintiffs seek compensatory damages,
attorneys' fees, costs of suit and punitive damages, all in unspecified
amounts. DPCM denies that its actions were inappropriate and intends to
vigorously defend the actions.
23. Fair Value of Financial Instruments
The following methods and assumptions were used in estimating the indicated
fair value of financial instruments:
o Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of these instruments.
o Marketable securities: The carrying amount equals market value.
59
<PAGE>
o Deferred commissions: The carrying amount is based on estimates from
third parties.
o Long-term investments and other assets: The fair value is based on
estimates made using appropriate valuation techniques.
o Long-term debt: The fair value is estimated based on the current rates
that would be offered to PXP on similar debt.
o Convertible Subordinated Debentures: The fair value is based on market
quotes.
The estimated fair values of PXP's financial instruments at December 31,
were as follows:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
Cash and cash equivalents $ 29,298 $29,298 $21,872 $ 21,872
Accounts receivable 35,015 35,015 31,537 31,537
Marketable securities 16,275 16,275 12,000 12,000
Deferred commissions 2,798 2,798 3,998 3,998
Long-term investments and
other assets 11,000 11,000 1,000 1,000
Accounts payable and accrued
liabilities 39,659 39,659 25,742 25,742
Debt 142,682 142,682 195,776 195,776
Convertible Subordinated Debentures 76,364 80,153
The carrying amounts for accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of fair value because of the short
nature of the transactions.
24. Net Capital Requirement
PEPCO is subject to broker-dealer net capital requirements. At December 31,
1998, net capital of $.6 million was required compared to actual net capital
of $6.0 million.
25. Subsequent Event
On December 16, 1998, PXP signed a definitive agreement to acquire the
retail mutual fund and closed-end fund businesses of the New York City-based
Zweig Fund Group. The Zweig Fund Group manages eight retail mutual funds and
two closed-end funds (collectively, the Zweig Funds). The agreement values
the Zweig business at $135 million and provides for an additional payout of
up to $29 million in the following three years depending on the purchased
businesses' revenue growth. At December 31, 1998, the Zweig Funds had
approximately $4.4 billion in assets under management. The transaction is
expected to close in March 1999, pending approval by fund shareholders. PXP
is currently negotiating a $175 million credit agreement in order to finance
this acquisition.
60
<PAGE>
Phoenix Investment Partners, Ltd.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item, to the extent not included
under the caption "Executive Officers of the Company" in Part I of
this report will appear under the caption "Election of Directors"
in the Company's definitive proxy statement for the 1999 annual
meeting of the shareholders (the 1999 Proxy Statement), and such
information shall be deemed to be incorporated herein by reference
to that portion of the 1999 Proxy Statement, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's most recently
completed fiscal year.
Item 11. Executive Compensation.
The information required by this item will appear under the caption
"Executive Compensation" in the 1999 Proxy Statement, and such
information shall be deemed to be incorporated herein by reference
to that portion of the 1999 Proxy Statement, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's most recently
completed fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will appear under the caption
"Principal Holders of Common Stock" in the 1999 Proxy Statement,
and such information shall be deemed to be incorporated herein by
reference to that portion of the 1999 Proxy Statement, to be filed
with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the end of the Company's most
recently completed fiscal year.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will appear under the caption
"Executive Compensation - Certain Transactions" in the 1999 Proxy
Statement, and such information shall be deemed to be incorporated
herein by reference to that portion of the 1999 Proxy Statement, to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the
Company's most recently completed fiscal year. Also see Note 19 to
the consolidated financial statements on page 54 of this Form 10-K.
61
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements
See index to Financial Statements in item 8.
2. Exhibits
2(d) Agreement and Plan of Merger between Phoenix Duff & Phelps
Corporation, Phoenix Apollo Corp. and Pasadena Capital Corporation
dated as of June 9, 1997 (incorporated herein by reference to
Exhibit 2(d) to the Registrant's current report on Form 8-K dated
July 1, 1997)
2(e) Agreement and Plan of Merger between Phoenix Duff & Phelps
Corporation and the persons signatory thereto (Stellar Capital
management, Inc., JB Capital Management, Inc. and SZRL Investments)
dated as of June 18, 1997 (incorporated herein by reference to
Exhibit 2(e) to the Registrant's current report on Form 8-K dated
July 1, 1997)
2(f) Acquisition Agreement by and among Phoenix Investment Partners,
Ltd., and Zweig/Glaser Advisers, Euclid Advisors LLC, Zweig
Advisors Inc., Zweig Total Return Advisors, Inc., Zweig Securities
Corp. and named equityholders dated as of December 15, 1998.
(incorporated herein by reference to Exhibit 2(f) to the
Registrant's current report on Form 8-K dated March 15, 1999)
2(g) Amendment No. 1 to the Acquisition Agreement by and among Phoenix
Investment Partners, Ltd., and Zweig/Glaser Advisers, Euclid
Advisors LLC, Zweig Advisors Inc., Zweig Total Return Advisors,
Inc., Zweig Securities Corp. and named equityholders dated as of
March 1, 1999. (incorporated herein by reference to Exhibit 2(g) to
the Registrant's current report on Form 8-K dated March 15, 1999)
3(a) Restated Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3(a) to the
Registrant's Current Report on Form 8-K dated November 15, 1995)
3(b) By-laws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3(b) to the Registrant's Current Report on
Form 8-K dated November 15, 1995)
4(a) Form of Common Stock certificate(1)
4(n) Amended and Restated Credit Agreement dated as of October 31, 1995
among the Registrant and various financial institutions and Bank of
America Illinois (incorporated herein by reference to Exhibit 4(n)
to the Registrant's 1995 Annual Report on Form 10-K of Phoenix
Investment Partners, Ltd.)
4(s) Form of Indenture between Phoenix Duff & Phelps Corporation and a
Trustee with respect to the 6% Convertible Subordinated Debentures
due 2015 into which the Series A Convertible Exchangeable Preferred
Stock will be exchangeable (incorporated herein by reference to
Exhibit 4(s) to the Registrant's registration statement on Form S-4
(Registration No. 33-97292))
10(a) The Registrant's 1989 Employee Stock Option Plan (incorporated
herein by reference to Exhibit 10.3 to the 1989 Annual Report on
Form 10-K of Duff & Phelps Inc.)(2)
10(i) Service Agreement among Duff & Phelps Investment Management Co.,
Duff & Phelps Utilities Income Inc., Duff & Phelps Investment
Research Co. and Duff & Phelps Inc.(1)
10(j) Mid-Continental Plaza Lease between Tishman Speyer Properties and
Duff & Phelps Inc.(1)
10(k) Form of Indemnification Agreement between the Registrant and its
directors and certain officers(1)(2)
10(m) Nonqualified Deferred Compensation Plans - Joinder Agreement
(incorporated herein by reference to Exhibit 10(m) to the
Registrant's Annual Report on Form 10-K for 1996) (2)
10(w) Tax Sharing and Indemnification Agreement between the Registrant
and Duff & Phelps Credit Rating Co. (Credit Rating) (incorporated
herein by reference to Exhibit 10.2 to Credit Rating's Annual
Report on Form 10-K for 1994)
10(x) Distribution and Indemnity Agreement between the Registrant and
Credit Rating (incorporated herein by reference to Exhibit 10.3 to
Credit Rating's Annual Report on Form 10-K for 1994)
62
<PAGE>
10(y) Services Agreement among the Registrant, Credit Rating and Duff &
Phelps Investment Management Co. (incorporated herein by reference
to Exhibit 10.4 to Credit Rating's Annual Report on Form 10-K for
1994)
10(z) Name Use Agreement between the Registrant and Credit Rating
(incorporated herein by reference to Exhibit 10.5 to Credit
Rating's Annual Report on Form 10-K for 1994)
10(aa) Sublease Agreement relating to Chicago, Illinois office space
between the Registrant and Credit Rating (incorporated herein by
reference to Exhibit 10.6 to Credit Rating's Annual Report on Form
10-K for 1994)
10(bb) License agreement dated November 1, 1995 between the Registrant and
Phoenix Home Life Mutual Insurance Company (incorporated herein by
reference to Exhibit 10(a) to the Registrant's Current Report on
Form 8-K dated November 15, 1995)
10(cc) Registration rights agreement dated November 1, 1995 between the
Registrant and PM Holdings, Inc. (incorporated herein by reference
to Exhibit 10(b) to the Registrant's Current Report on Form 8-K
dated November 15, 1995)
10(dd) Administrative agreement between Phoenix Home Life Mutual Insurance
Company and certain subsidiaries (incorporated herein by reference
to Exhibit 10(dd) to the Registrant's registration statement on
Form S-4 (Registration No.
33-97292))
10(ee) Computer services agreement between the Registrant and Phoenix Home
Life Mutual Insurance Company (incorporated herein by reference to
Exhibit 10(ee) to the Registrant's registration statement on Form
S-4 (Registration No.
33-97292))
10(ff) Investment management agreement between Phoenix Investment Counsel,
Inc. and Phoenix Home Life Mutual Insurance Company (incorporated
herein by reference to Exhibit 10(ff) to the Registrant's
registration statement on Form S-4 (Registration No. 33-97292))
10(gg) Leases between Phoenix Securities Group, Inc. and Phoenix Home Life
Mutual Insurance Company (incorporated herein by reference to
Exhibits 10(gg), (hh)and (ii) to the Registrant's registration
statement on Form S-4 (Registration No. 33-97292))
10(ii) Employment agreement dated November 1, 1995 between the Registrant
and Mr. Pedersen (incorporated herein by reference to Exhibit 10(d)
to the Registrant's Current Report on Form 8-K dated November 15,
1995)(2)
10(jj) Change of Control agreement dated June 10, 1996 between the
Registrant and Mr. McLoughlin (incorporated herein by reference to
Exhibit 10(jj) to the Registrant's Annual Report on Form 10-K for
1996)(2)
10(ll) Change of Control agreement dated June 10, 1996 between the
Registrant and Mr. Haylon (incorporated herein by reference to
Exhibit 10(ll) to the Registrant's Annual Report on Form 10-K for
1996)(2)
10(nn) Second Amended and Restated Operating Agreement between Seneca
Capital Management LLC and the Registrant (incorporated herein by
reference to Exhibit 1(a) to the Registrant's Report on Form 10-Q
dated June 30, 1997)
10(oo) Form of Put/Call Agreement (incorporated herein by reference to
Exhibit 1(a) to the Registrant's Report on Form 10-Q dated June 30,
1997)
10(pp) Employment Agreement dated as of December 15, 1998 by and between
Zweig/Glaser Advisers and Eugene J. Glaser (incorporated herein by
reference to Exhibit 10(pp) to the Registrant's current report on
Form 8-K dated March 15, 1999)
10(qq) Employment Agreement dated as of December 15, 1998 by and between
Zweig/Glaser Advisers and Barry Mandinach (incorporated herein by
reference to Exhibit 10(qq) to the Registrant's current report on
Form 8-K dated March 15, 1999)
10(rr) Employment Agreement dated as of December 15, 1998 by and between
Zweig/Glaser Advisers and Jeff Lazar (incorporated herein by
reference to Exhibit 10(rr) to the Registrant's current report on
Form 8-K dated March 15, 1999)
10(ss) Letter of Amendment to Employment Agreement dated as of January 20,
1999 by and between Zweig/Glaser Advisers and Jeffrey Lazar
(incorporated herein by reference to Exhibit 10(ss) to the
Registrant's current report on Form 8-K dated March 15, 1999)
10(tt) Employment Agreement dated as of December 15, 1998 by and between
Zweig/Glaser Advisers and Carlton B. Neel (incorporated herein by
reference to Exhibit 10(tt) to the Registrant's current report on
Form 8-K dated March 15, 1999)
10(uu) Letter of Amendment to Employment Agreement dated as of January 20,
1999 by and between Zweig/Glaser Advisers and Carlton B. Neel
(incorporated herein by reference to Exhibit 10(uu) to the
Registrant's current report on Form 8-K dated March 15, 1999)
63
<PAGE>
10(vv) Employment Agreement dated as of December 15, 1998 by and between
Zweig/Glaser Advisers and Jeffrey T. Cerutti (incorporated herein
by reference to Exhibit 10(vv) to the Registrant's current report
on Form 8-K dated March 15, 1999)
10(ww) Employment Agreement dated as of December 15, 1998 by and between
Zweig/Glaser Advisers and David Katzen (incorporated herein by
reference to Exhibit 10(ww) to the Registrant's current report on
Form 8-K dated March 15, 1999)
10(xx) Noncompetition/Nonsolicitation Agreement dated as of March 1, 1999
by and among the Registrant, Zweig/Glaser Advisers, Zweig Total
Return Advisors, Inc., Zweig Advisors Inc. and Eugene J. Glaser
(incorporated herein by reference to Exhibit 10(xx) to the
Registrant's current report on Form 8-K dated March 15, 1999)
10(yy) Noncompetition/Nonsolicitation Agreement dated as of March 1, 1999
by and among the Registrant, Zweig/Glaser Advisers, Zweig Total
Return Advisors, Inc., Zweig Advisors Inc. and Martin E. Zweig
(incorporated herein by reference to Exhibit 10(yy) to the
Registrant's current report on Form 8-K dated March 15, 1999)
10(zz) Administrative Services Agreement dated as of March 1, 1999 by and
between Zweig/Glaser Advisers LLC, and ZA Management Services, Inc.
(incorporated herein by reference to Exhibit 10(zz) to the
Registrant's current report on Form 8-K dated March 15, 1999)
10(aaa)Servicing Agreement dated as of March 1, 1999 by and among
Zweig/Glaser Advisers, Zweig Total Return Advisors, Inc., Zweig
Advisors, Inc., and Zweig Consulting LLC (incorporated herein by
reference to Exhibit 10(aaa) to the Registrant's current report on
Form 8-K dated March 15, 1999)
21 Subsidiaries of the Registrant
23(a) Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
(1) Incorporated herein by reference to the corresponding exhibit to
the Registrant's registration statement on Form S-1 (Registration
No. 33-45140).
(2) Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item
601 of Regulation S-K.
(b) Reports on Form 8-K.
None.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 26th day of
March, 1999.
PHOENIX INVESTMENT PARTNERS, LTD.
By:/s/ Philip R. McLoughlin
Philip R. McLoughlin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 26th day of March, 1999 by the following persons on
behalf of the registrant in the capacities indicated.
SIGNATURE
TITLE
/s/ Philip R. McLoughlin
Chairman of the Board, Chief Executive Officer and Director
Philip R. McLoughlin
/s/ Calvin J. Pedersen
President and Director
Calvin J. Pedersen
/s/ William R. Moyer
Senior Vice President and Chief Financial Officer
William R. Moyer
/s/ Clyde E. Bartter
President of Duff & Phelps Investment Management Co.
and Director
Clyde E. Bartter
/s/ Michael E. Haylon
Director
Michael E. Haylon
/s/ Robert W. Fiondella
Director
Robert W. Fiondella
/s/ Richard H. Booth
Director
Richard H. Booth
/s/ Edward P. Lyons
Director
Edward P. Lyons
65
<PAGE>
/s/ Marilyn E. LaMarche
Director
Marilyn E. LaMarche
/s/ James M. Oates
Director
James M. Oates
/s/ Ferdinand Verdonck
Director
Ferdinand Verdonck
/s/ Glen D. Churchill
Director
Glen D. Churchill
/s/ Donna F. Tuttle
Director
Donna F. Tuttle
/s/ David A. Williams
Director
David A. Williams
/s/ John T. Anderson
Director
John T. Anderson
66
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
In the following list of subsidiaries of the Company, those companies
which are indented represent subsidiaries of the corporation under which they
are indented. Except as otherwise indicated, 100% of the voting stock of each of
the subsidiaries listed below is owned of record or beneficially by its
indicated parent.
State or Other
Jurisdiction of
Name Incorporation
Phoenix Investment Partners, Ltd. Delaware
Duff & Phelps Investment Management Co. Illinois
DPIM, Inc. Illinois
Phoenix Duff & Phelps Investment
Advisors Illinois
DPCM Holdings, Co. Illinois
DP Holdings Ltd. New Brunswick, Canada
Phoenix Equity Planning Corporation Connecticut
Phoenix Investment Counsel, Inc. Massachusetts
National Securities & Research Corporation New York
Pasadena Capital Corporation California
Roger Engemann & Associates California
Seneca Capital Management LLC - 74.9% California
67
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-48338, No. 33-46359, No. 33-99412, No. 33-99414,
No. 333-19073 and No. 333-65495) of our report dated February 3, 1999 appearing
on page 33 of Phoenix Investment Partners, Ltd.'s Annual Report on Form 10-K for
the year ended December 31, 1998.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 26, 1999
68
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1998 Form 10-K Schedule 27
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 29,298
<SECURITIES> 16,275
<RECEIVABLES> 35,015
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,539
<PP&E> 18,588
<DEPRECIATION> 9,999
<TOTAL-ASSETS> 563,718
<CURRENT-LIABILITIES> 53,223
<BONDS> 76,364
0
0
<COMMON> 451
<OTHER-SE> 231,142
<TOTAL-LIABILITY-AND-EQUITY> 563,718
<SALES> 0
<TOTAL-REVENUES> 221,547
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 154,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,559
<INCOME-PRETAX> 54,975
<INCOME-TAX> 20,335
<INCOME-CONTINUING> 34,640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,640
<EPS-PRIMARY> .76
<EPS-DILUTED> .68
</TABLE>
