SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-10994 -------------- For the quarterly period ended September 30, 2000 PHOENIX INVESTMENT PARTNERS, LTD. DELAWARE 95-4191764 (State of Incorporation) (I.R.S. Employer Identification No.) 56 Prospect St., Hartford, Connecticut 06115-0480 (860) 403-5000 (Address of principal executive offices) (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ On October 31, 2000, the registrant had 45,894,419 shares of $.01 par value common stock outstanding.
PHOENIX INVESTMENT PARTNERS, LTD. AND SUBSIDIARIES Quarter Ended September 30, 2000 Index PART I - FINANCIAL INFORMATION: Page Item 1. Consolidated Financial Statements: Consolidated Condensed Statements of Financial Condition. 3 September 30, 2000 and December 31, 1999 Consolidated Statements of Income........................ 4 Three Months Ended September 30, 2000 and Three Months Ended September 30, 1999 Consolidated Statements of Income........................ 5 Nine Months Ended September 30, 2000 and Nine Months Ended September 30, 1999 Consolidated Condensed Statements of Cash Flows ......... 6 Nine Months Ended September 30, 2000 and Nine Months Ended September 30, 1999 Notes to Consolidated Financial Statements............... 7 Item 2. Management's Discussion and Analysis of: Results of Operations and Financial Condition............ 14 Liquidity and Capital Resources.......................... 20 Market Risk.............................................. 21 Cautionary Statement under Section 21E of the Securities Exchange Act of 1934.................................. 21 PART II - OTHER INFORMATION: Item 1. Legal Proceedings........................................ 22 Item 4. Submission of Matters to a Vote of Security Holders...... 22 Item 6. Exhibits and Reports on Form 8-K......................... 22 Signatures........................................................ 23 2
PART I. Financial Information Item 1. Consolidated Financial Statements Phoenix Investment Partners, Ltd. and Subsidiaries Consolidated Condensed Statements of Financial Condition (in thousands) (Unaudited) September 30, December 31, 2000 1999 Assets Current Assets Cash and cash equivalents $ 43,559 $ 42,203 Marketable securities, at market 10,152 7,941 Accounts receivable 49,429 45,658 Prepaid expenses and other current assets 3,352 3,487 --------- -------- Total current assets 106,492 99,289 Deferred commissions 688 1,219 Furniture, equipment and leasehold improvements, net 12,967 12,475 Goodwill and intangible assets, net 574,789 556,534 Long-term investments and other assets 16,637 12,169 --------- -------- Total assets $ 711,573 $681,686 ========= ======== Liabilities and Stockholders' Equity Current Liabilities Accounts payable and other accrued liabilities $ 47,161 $ 45,987 Payables to related parties 3,024 4,749 Broker-dealer payable 10,494 13,197 Current portion of long-term debt 225 964 --------- -------- Total current liabilities 60,904 64,897 Deferred taxes, net 39,811 45,656 Long-term debt, net of current portion 225 754 Convertible subordinated debentures 70,021 76,364 Credit facilities 245,000 235,000 Lease obligations and other long-term liabilities 4,783 3,759 --------- -------- Total liabilities 420,744 426,430 --------- -------- Minority Interest 2,407 4,255 --------- -------- Stockholders' Equity Common stock, $.01 par value, 100,000,000 shares authorized, 47,852,783 and 45,760,201 shares issued, and 45,824,865 and 43,760,201 shares outstanding 479 458 Additional paid-in capital 216,822 200,410 Retained earnings 84,689 60,737 Unrealized gains on securities available-for-sale 2,842 5,143 Unearned compensation on restricted stock (2,021) (1,029) Treasury stock, at cost, 2,027,918 and 2,000,000 shares (14,389) (14,718) --------- -------- Total stockholders' equity 288,422 251,001 --------- -------- Total liabilities and stockholders' equity $ 711,573 $681,686 ========= ======== The accompanying notes are an integral part of these statements. 3
Phoenix Investment Partners, Ltd. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data) (Unaudited) Three Months Ended September 30, 2000 1999 Revenues Investment management fees $ 71,079 $ 64,168 Mutual funds - ancillary fees 7,649 7,814 Other income and fees 1,947 1,384 --------- -------- Total revenues 80,675 73,366 --------- -------- Operating Expenses Employment expenses 35,641 29,395 Other operating expenses 19,073 17,377 Depreciation and amortization of leasehold improvements 959 1,031 Amortization of goodwill and intangible assets 7,763 7,992 Amortization of deferred commissions 134 339 --------- -------- Total operating expenses 63,570 56,134 --------- -------- Operating Income 17,105 17,232 --------- -------- Equity in Earnings of Unconsolidated Affiliates 245 359 --------- -------- Nonrecurring Items (2,700) (5,900) --------- -------- Gain on Sale 3,672 --------- -------- Other Income (Expense) - Net 622 (120) --------- -------- Interest (Expense) Income - Net Interest expense (4,865) (5,090) Interest income 653 955 --------- -------- Total interest expense - net (4,212) (4,135) --------- -------- Income to Minority Interest (1,315) (948) --------- -------- Income Before Income Taxes 13,417 6,488 Provision for income taxes 4,894 2,712 --------- -------- Net Income $ 8,523 $ 3,776 ========= ======== Weighted average shares outstanding Basic 44,884 43,929 Diluted 55,793 54,031 Earnings per share Basic $ .19 $ .09 Diluted $ .16 $ .08 The accompanying notes are an integral part of these statements. 4
Phoenix Investment Partners, Ltd. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data) (Unaudited) Nine Months Ended September 30, 2000 1999 Revenues Investment management fees $ 214,212 $182,258 Mutual funds - ancillary fees 26,260 23,300 Other income and fees 5,204 3,772 --------- -------- Total revenues 245,676 209,330 --------- -------- Operating Expenses Employment expenses 99,296 85,167 Other operating expenses 56,444 48,601 Depreciation and amortization of leasehold improvements 2,970 2,875 Amortization of goodwill and intangible assets 23,636 22,297 Amortization of deferred commissions 531 1,348 --------- -------- Total operating expenses 182,877 160,288 --------- -------- Operating Income 62,799 49,042 --------- -------- Equity in Earnings of Unconsolidated Affiliates 362 825 --------- -------- Nonrecurring Items 1,800 (5,900) --------- -------- Gain on Sale 12,544 --------- -------- Other Income - Net 1,452 578 --------- -------- Interest (Expense) Income - Net Interest expense (14,631) (13,995) Interest income 1,702 2,415 --------- -------- Total interest expense - net (12,929) (11,580) --------- -------- Income to Minority Interest (4,091) (2,534) --------- -------- Income Before Income Taxes 61,937 30,431 Provision for income taxes 27,433 13,237 --------- -------- Net Income $ 34,504 $ 17,194 ========= ======== Weighted average shares outstanding Basic 44,476 43,810 Diluted 54,335 53,873 Earnings per share Basic $ .78 .39 Diluted $ .67 .36 The accompanying notes are an integral part of these statements. 5
Phoenix Investment Partners, Ltd. and Subsidiaries Consolidated Condensed Statements of Cash Flows (in thousands) (Unaudited) Nine Months Ended ` September 30, 2000 1999 Cash Flows from Operating Activities: Net income $ 34,504 $ 17,194 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of leasehold improvements 2,970 2,875 Amortization of goodwill and intangible assets 23,636 22,297 Amortization of deferred commissions 531 1,348 Income to minority interest 4,091 2,534 Compensation recognized under employee benefit plans 1,998 1,265 Gain on sale (12,544) Nonrecurring items 2,700 5,900 Equity in earnings of unconsolidated affiliates, net of dividends (318) (633) Changes in other operating assets (3,228) (1,647) Changes in other operating liabilities (6,603) (3,257) -------- -------- Net cash provided by operating activities 47,737 47,876 -------- -------- Cash Flows from Investing Activities: Purchase of subsidiaries, net of cash acquired (59,191) (138,551) Proceeds from sale of National-Oilwell, Inc. common stock 12,544 Proceeds from sale of Cleveland operations 4,985 Capital expenditures, net (3,737) (4,375) (Purchase) sale of marketable securities, net (333) 10,804 Purchase of long-term investments (736) (569) Proceeds from long-term investments 489 -------- -------- Net cash used in investing activities (46,468) (132,202) -------- -------- Cash Flows from Financing Activities: Proceeds from borrowings, net 8,733 109,358 Dividends paid (10,552) (7,869) Distributions to minority interest (3,627) (1,978) Stock repurchases (284) (2,723) Proceeds from issuance of stock 5,817 2,362 Other financing activities (174) --------- -------- Net cash provided by financing activities 87 98,976 -------- -------- Net increase in cash and cash equivalents 1,356 14,650 Cash and cash equivalents, beginning of period 42,203 29,298 -------- -------- Cash and Cash Equivalents, End of Period $ 43,559 $ 43,948 ======== ======== Supplemental Cash Flow Information: Interest paid $ 13,669 $13,549 Income taxes paid $ 41,778 $27,347 The accompanying notes are an integral part of these statements. 6
Phoenix Investment Partners, Ltd. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- 1. Basis of Presentation The unaudited consolidated financial statements of Phoenix Investment Partners, Ltd. and Subsidiaries (PXP or the Company) included herein have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Reclassifications have been made, when necessary, to conform the prior period presentation to the current period presentation. 2. Pending Merger On September 10, 2000, PXP entered into an agreement and plan of merger with its majority stockholder PM Holdings, Inc. and its parent Phoenix Home Life Mutual Insurance Company (PHL). Pursuant to the agreement, PM Holdings, Inc. will acquire the remaining outstanding shares of PXP not already owned by PM Holdings, Inc. for $15.75 per share, subject to approval by PXP shareholders. As of September 30, 2000 PHL held a 58% interest in PXP. 3. Acquisition Related Activity In September 2000, PXP, in accordance with the original terms of Roger Engemann & Associates, Inc.'s (REA) Purchase and Sale Agreement, paid REA an additional purchase price of $50 million, based upon growth in REA's management fee revenues. This additional purchase price was financed through borrowings from an existing credit facility and is included as a component of goodwill and intangible assets in the Consolidated Condensed Statements of Financial Condition. On March 1, 1999, PXP acquired the retail mutual fund and closed-end fund businesses of the New York City-based Zweig Fund Group (Zweig) for consideration of approximately $135 million. The agreement provides for an additional payout dependent upon revenue growth of the purchased businesses through December 31, 2001. The purchase price for Zweig represents the consideration paid and the direct costs incurred by PXP related to the purchase. The excess of purchase price over the fair value of acquired net tangible assets of Zweig totaled $136.4 million. Of this excess purchase price, $77.2 million has been allocated to intangible assets, primarily associated with investment management contracts, which are being amortized over their estimated useful lives using the straight-line method. The average estimated useful life of the intangible assets is approximately 12 years. The remaining excess purchase price of $59.1 million has been classified as goodwill and is being amortized over 40 years using the straight-line method. Related amortization of $7.1 million and $5.7 million has been expensed for the year to date periods ended September 30, 2000 and 1999, respectively. 7
The following table summarizes the calculation and allocation of Zweig's purchase price (in thousands): Purchase price: Consideration paid $135,000 Transaction costs 2,391 -------- Total purchase price $137,391 ======== Purchase price allocation: Fair value of acquired net assets $ 1,033 Identified intangibles 77,210 Goodwill 59,148 -------- Total purchase price allocation $137,391 ======== 4. Pro Forma Results The Company's financial results for 2000 include the operations of Zweig, while the first nine months of 1999 exclude the operations of Zweig for the period from January 1, 1999 through February 28, 1999. Management believes that, for comparative purposes, the most meaningful financial presentation for 1999 is on a pro forma basis. The following financial information for the nine months ended September 30, 2000 reflects actual results. The pro forma financial information for the nine months ended September 30, 1999 is derived from the historical financial statements of PXP and Zweig, and gives effect to the acquisition of Zweig by PXP assuming the acquisition was effected on January 1, 1999. The pro forma financial information does not necessarily reflect the actual results that would have been obtained had the acquisition taken effect on the aforementioned assumed date. Nine Months Ended September 30, 2000 1999 Actual Pro Forma (in thousands, except per share data) Revenues $245,676 $216,014 -------- -------- Employment expenses 99,296 87,631 Other operating expenses 59,945 54,135 Amortization of goodwill and intangible assets 23,636 23,901 ------- ------- Operating income 62,799 50,347 Other income (expense) - net 16,158 (4,497) Interest expense - net (12,929) (12,864) Income to minority interest (4,091) (2,534) ------- ------- Income before income taxes 61,937 30,452 Provision for income taxes 27,433 13,246 ------- ------- Net income $34,504 $17,206 ======= ======= Earnings per share Basic $ .78 $ .39 Diluted $ .67 $ .36 8
5. 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. The Company's reportable segments are its retail and institutional investment management lines of business. The retail line primarily serves 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, closed-end funds, structured finance products, and multi-employer retirement funds, as well as endowment, insurance and other special purpose funds. The following tables summarize pertinent financial information relative to the Company's operations for the nine month periods ended September 30, 2000 and 1999: September 30, 2000 Insti- All Retail tutional Other Total -------- ------- ------- --------- (in thousands) Revenues $157,286 $86,982 $ 1,408 $245,676 -------- ------- ------- -------- Employment and other operating expenses 96,815 59,713 2,713 159,241 Amortization of goodwill and intangible assets 12,760 10,876 23,636 -------- ------- ------- -------- Operating income (loss) 47,711 16,393 (1,305) 62,799 Other income - net 4,512 1,045 10,601 16,158 Interest expense (8,607) (5,258) (766) (14,631) Interest income 176 276 1,250 1,702 Minority interest (4,091) (4,091) -------- ------- ------- ------- Income before income taxes $ 43,792 $ 8,365 $ 9,780 $ 61,937 ======== ======= ======= ======== (in millions) Assets under management $ 29,116 $32,742 $ -- $ 61,858 ======== ======= ======= ======== September 30, 1999 Insti- All Retail tutional Other Total -------- ------- ------- --------- (in thousands) Revenues $132,035 $75,720 $ 1,575 $209,330 -------- ------- ------- -------- Employment and other operating expenses 85,644 50,422 1,925 137,991 Amortization of goodwill and intangible assets 12,325 9,972 22,297 -------- ------- ------- -------- Operating income (loss) 34,066 15,326 (350) 49,042 Other (expense) income - net (5,973) 456 1,020 (4,497) Interest expense (6,967) (3,534) (3,494) (13,995) Interest income 559 186 1,670 2,415 Minority interest (2,534) (2,534) -------- ------- ------- ------- Income (loss) before income taxes $ 21,685 $ 9,900 $(1,154) $ 30,431 ======== ======= ======= ======== (in millions) Assets under management $ 24,418 $33,627 $ -- $ 58,045 ======== ======= ======= ======== The "All Other" column represents corporate office revenue and expenses which are not directly attributable to a line of business. 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. 9
6. Long-term Debt At September 30, 2000 and December 31, 1999, PXP had outstanding borrowings of $200 million under a $200 million Credit Agreement. In addition, at September 30, 2000 and December 31 1999, PXP had outstanding borrowings of $45 million and $35 million, respectively, under a separate $175 million Credit Agreement. Interest rates on both credit agreements are variable. The credit agreements require no principal repayments prior to maturity. The Company's majority stockholder, PHL, has guaranteed the obligations, for which it is paid a .10% guarantee fee on the outstanding balances. 7. Dividends and Other Capital Transactions On November 6, 2000, the Company's Board of Directors declared a quarterly dividend of $.08 per common share payable December 7, 2000, to stockholders of record on November 24, 2000. Interest on the 6% Convertible Subordinated Debentures for the period from September 10, 2000 through December 9, 2000 will be payable on December 11, 2000 to registered holders as of November 20, 2000. 8. Comprehensive Income The components of comprehensive income, and related tax effects, are as follows: Tax (Expense) Net Before Tax Benefit of Tax ---------- -------- ------- Three Months Ended September 30, 2000 (in thousands) Net income $13,417 $ (4,894) $ 8,523 ------- -------- ------- Other comprehensive income: Net unrealized appreciation on securities available-for-sale arising during period 130 (53) 77 Less: reclassification adjustment for gains realized in net income (3,672) 1,505 (2,167) ------ -------- ------- Total other comprehensive income (3,542) 1,452 (2,090) ------ -------- ------- Comprehensive income $9,875 $ (3,442) $ 6,433 ====== ======== ======= Nine Months Ended September 30, 2000 Net income $61,937 $(27,433) $34,504 ------- -------- ------- Other comprehensive income: Net unrealized appreciation on securities available-for-sale arising during period 8,644 (3,544) 5,100 Less: reclassification adjustment for gains realized in net income (12,544) 5,143 (7,401) ------- -------- ------- Total other comprehensive income (3,900) 1,599 (2,301) ------ -------- ------- Comprehensive income $58,037 $(25,834) $32,203 ======= ======== ======= 10
Tax (Expense) Net Before Tax Benefit of Tax ---------- -------- ------- Three Months Ended September 30, 1999 (in thousands) Net income $6,488 $ (2,712) $ 3,776 ------ -------- ------- Other comprehensive income: Net unrealized appreciation on securities available-for-sale arising during period 1,463 (600) 863 ------ -------- ------- Comprehensive income $7,951 $ (3,312) $ 4,639 ====== ======== ======= Nine Months Ended September 30, 1999 Net income $30,431 $(13,237) $17,194 ------- -------- ------- Other comprehensive income: Net unrealized appreciation on securities available-for-sale arising during period 3,136 (1,286) 1,850 ------ -------- ------- Comprehensive income $33,567 $(14,523) $19,044 ======= ======== ======= 9. Nonrecurring Items Legal Settlement In September 2000, PXP agreed to settle pending litigation between PXP and the former members of Associated Surplus Dealers, as outlined in the Company's 1999 Annual Report on Form 10-K, for $2.7 million, including a provision for attorneys fees. The terms of the final settlement are being negotiated. Insurance Recovery In the second quarter of 2000, PXP received a $4.5 million insurance recovery related to a $5.9 million loss recorded in the third quarter of 1999, which resulted from the Company's decision to reimburse two mutual fund investment portfolios which had inadvertently sustained losses. Sale of Cleveland Operations On June 30, 2000, PXP sold its Cleveland-based operations of Duff & Phelps Investment Management Co. (DPIM), which managed and serviced $3.3 billion of advisory assets, to a local management group. PXP received cash and a note receivable totaling $8.3 million. Additional consideration may be received based upon future revenue run rates. The transaction, as recorded, did not have a material impact on the Company's pre-tax results of operations. However, due to the inclusion of $8.5 million of non-deductible goodwill in the basis of the Cleveland operations, the Company recorded a $3.4 million tax expense. 11
10. Gain on Sale On March 3, 2000, PXP sold 188,260 shares of National-Oilwell, Inc. (NOI) common stock, included in marketable securities at December 31, 1999, for $251/2 per share, realizing a gain of $4.8 million in the first quarter. In addition, on March 2, 2000, DPI Oil Service, LP (DPI), an affiliated limited partnership in which PXP holds an interest, sold a portion of its shares of NOI. The Company's proportionate share of the proceeds from the sale was $1.1 million, resulting in a total first quarter gain to PXP of $5.9 million relating to the sale of NOI shares. On March 13, 2000, DPI distributed its remaining shares of NOI common stock. As a result of this distribution, PXP received 354,134 shares of NOI. On June 16, 2000 PXP sold 100,000 shares of NOI common stock for $30.05 per share, realizing a gain of $3.0 million. On August 7, 2000, PXP sold an additional 100,000 shares of NOI common stock at an average price of $36.72 per share, realizing a gain of $3.7 million. As of September 30, 2000 the Company held 154,134 shares of NOI, which are included in marketable securities. 11. 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 potentially dilutive common shares had been issued, and the numerator is increased for any related net income effect. Potentially dilutive shares are based on outstanding stock options and convertible securities. The following tables reconcile the Company's basic earnings per share to diluted earnings per share: Per-Share Income Shares Amount (in thousands) For the Three Months Ended September 30, 2000 Basic EPS Income available to common stockholders $ 8,523 44,884 $ .19 ====== Effect of Dilutive Securities Stock options 2,198 6% convertible debentures 657 8,711 ------- ------ Diluted EPS Income available to common stockholders and assumed conversions $ 9,180 55,793 $ .16 ======= ====== ====== 12
Per-Share Income Shares Amount (in thousands) For the Nine Months Ended September 30, 2000 Basic EPS Income available to common stockholders $ 34,504 44,476 $ .78 ====== Effect of Dilutive Securities Stock options 1,148 6% convertible debentures 2,005 8,711 ------- ------ Diluted EPS Income available to common stockholders and assumed conversions $ 36,509 54,335 $ .67 ======== ====== ====== For the Three Months Ended September 30, 1999 Basic EPS Income available to common stockholders $ 3,776 43,929 $ .09 ====== Effect of Dilutive Securities Stock options 603 6% convertible debentures 681 9,499 ------- ------ Diluted EPS Income available to common stockholders and assumed conversions $ 4,457 54,031 $ .08 ======= ====== ====== For the Nine Months Ended September 30, 1999 Basic EPS Income available to common stockholders $ 17,194 43,810 $ .39 ====== Effect of Dilutive Securities Stock options 564 6% convertible debentures 2,022 9,499 ------- ------ Diluted EPS Income available to common stockholders and assumed conversions $ 19,216 53,873 $ .36 ======== ====== ====== 13
Phoenix Investment Partners, Ltd. and Subsidiaries Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition BUSINESS DESCRIPTION Phoenix Investment Partners, Ltd. and subsidiaries (PXP or the Company) provide a variety of financial services to a broad base of institutional, corporate and individual clients. PXP currently operates two lines of business: retail and institutional investment management. The retail line of business provides investment management services to individuals on a discretionary basis (including administrative services) with products consisting of open-end mutual funds and managed accounts. Managed accounts include broker-dealer sponsored and distributed wrap programs and individually managed account investment services (private client), both of which are offered to high net-worth individuals. The institutional line of business provides discretionary and non-discretionary investment management services primarily to corporate entities, closed-end funds, structured finance products, and multi-employer retirement funds, as well as endowment, insurance, and other special purpose funds. The following table summarizes operating revenues, income before income taxes, and assets under management by line of business as of, and for the nine months ended, September 30, 2000 and 1999: Income Before Assets Under Revenues Income Taxes Management ----------------- ----------------- ---------------- 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- (in thousands) (in thousands) (in millions) Retail $157,286 $132,035 $ 43,792 $ 21,685 $ 29,116 $ 24,418 Institutional 86,982 75,720 8,365 9,900 32,742 33,627 All other * 1,408 1,575 9,780 (1,154) -------- ------- -------- ------- -------- -------- Total $245,676 $209,330 $ 61,937 $ 30,431 $ 61,858 $ 58,045 ======== ======== ======== ======== ======== ======== * - "All other" represents corporate office revenue and expenses, which are not attributed directly to either line of business. 14
RESULTS OF OPERATIONS Assets Under Management At September 30, 2000, PXP had $61.9 billion of assets under management, a decrease of $2.7 billion from December 31, 1999, and an increase of $3.8 billion from September 30, 1999. The decrease from December 31, 1999 is principally the result of a reduction of $3.3 billion from the sale of Duff & Phelp's Investment Management Co.'s (DPIM) Cleveland operations in June 2000 and net asset outflows of $.8 billion, offset by $1.2 billion of positive performance. The increase from September 30, 1999 is principally the result of $7.8 billion of positive investment performance, offset, in part, by $3.3 billion from the sale of DPIM's Cleveland operations, as well as net asset outflows of $.4 billion. Since the revenues of the Company are substantially earned based upon assets under management, this information is important to an understanding of the business. September 30, June 30, December 31,September 30, 2000 2000 1999 1999 ------- -------- -------- -------- (in millions) Retail: Open-end Mutual Funds $17,605 $ 17,561 $ 18,073 $ 15,911 Managed Accounts * 11,511 11,470 10,370 8,507 ------- -------- -------- -------- 29,116 29,031 28,443 24,418 ------- -------- -------- -------- Institutional: Institutional Accounts ** 16,218 15,933 20,514 18,327 Structured Finance Products *** 1,886 1,673 1,276 1,196 Closed-end Funds 4,837 4,545 4,596 4,566 PHL General Account and Other PHL Related 9,801 9,650 9,772 9,538 ------- -------- -------- -------- 32,742 31,801 36,158 33,627 ------- -------- -------- -------- $61,858 $ 60,832 $ 64,601 $ 58,045 ======= ======== ======== ======== * Managed Accounts represent broker-dealer sponsored and distributed wrap fee programs and individually managed account investment services, both of which are offered to high net-worth individuals. ** Institutional Accounts include 100% of the assets managed by Seneca Capital Management. *** Structured Finance Products consist of debt and equity securities backed by an actively managed portfolio of equity or fixed income securities. Three Months Ended September 30, 2000 Compared with Three Months Ended September 30, 1999 - Historical Revenues for the three months ended September 30, 2000 of $80.7 million increased $7.3 million (10%) from $73.4 million for the same period in 1999. Revenues for the retail and institutional lines of business increased $6.0 million and $1.5 million, respectively. 15
Investment management fees of $71.1 million for the three months ended September 30, 2000 increased $6.9 million (11%) as compared to $64.2 million for the same period in 1999. Management fees earned by the retail line of business increased $6.2 million due to an increase of $4.5 billion in average assets under management. Management fees earned by the institutional line of business increased $.7 million primarily due to increases in average assets under management of $.5 billion and $3.4 billion for structured finance products and at Seneca, respectively, offset, in part, by a $5.7 billion decrease in other institutional assets under management, of which approximately $3.3 billion is the result of the sale of DPIM's Cleveland operations in June 2000. The increase in average assets managed, excluding Cleveland, since September 30, 1999 in each line of business is primarily due to investment performance. In addition, the retail line of business experienced net asset inflows for managed accounts of $2.0 billion since September 30, 1999, offset by net asset outflows of $1.3 billion from other retail products, primarily mutual funds. Excluding the sale of DPIM's Cleveland operations, the institutional line of business experienced $1.2 billion of net asset outflows, comprised principally of net asset outflows of $3.6 billion from DPIM, partially offset by net asset inflows of $1.4 billion from Seneca and $.6 billion from structured finance products. Mutual funds - ancillary fees, a component of the retail line of business, of $7.6 million for the three months ended September 30, 2000, decreased $.2 million (2%) as compared to $7.8 million for the same period in 1999. Administrative fees decreased $1.7 million partially as a result of a vote by the Board of Trustees of the Phoenix-Engemann Funds, which eliminated the administrative fee effective July 1, 2000, and whereby those funds going forward are reimbursing PXP for charges that were previously covered by the administrative fee (e.g.: shareholder service agent fees, fund accounting fees, printing, etc.). Net distributor fees increased $.7 million as a result of an increase in average assets managed, principally in the Phoenix-Engemann Funds. Fund accounting fees earned on open-end mutual funds and Phoenix Home Life Mutual Insurance Company (PHL) sponsored variable products increased $.7 million primarily as a result of an increase in average assets under management as well as reimbursement by the Phoenix-Engemann Funds. Other income and fees of $1.9 million for the three months ended September 30, 2000 increased $.6 million (41%) as compared to $1.4 million for the same period in 1999. A $1.1 million increase in commission income was offset, in part, by a $.1 million decrease in the net fees earned administering the Zweig closed-end funds and a $.2 million decrease due to the expiration of a name use fee. Operating expenses for the three months ended September 30, 2000 of $63.6 million increased $7.4 million (13%) from $56.1 million for the same period in 1999, of which $3.5 million and $4.0 million related to the retail and institutional lines of business, respectively. Employment expenses of $35.6 million for the three months ended September 30, 2000 increased $6.2 million (21%) as compared to $29.4 million for the same period in 1999. Incentive compensation increased by $3.7 million, of which $2.5 million is from certain subsidiaries that, in accordance with their respective operating agreements, receive increased compensation directly related to increases in their revenues or earnings. The addition of sales and marketing positions in both the retail and institutional lines of business in the third quarter of 2000 increased compensation expense by $2.6 million. Profit sharing expense increased by $1.1 million. Additionally, the third quarter of 1999 included $1.1 million of one-time severance costs, which were the result of a re-organization of the institutional line of business. An increase in base compensation expense, primarily the result of annual salary adjustments, was offset, in part, by certain other employment expense reductions. Other operating expenses of $19.1 million for the three months ended September 30, 2000 increased $1.7 million (10%) as compared to $17.4 million for the same period in 1999. An increase in outside services of $1.2 million was primarily the result of the increased use of consultants for various Company initiatives. Professional fees increased $.4 million as a result of various legal matters. Depreciation and amortization of leasehold improvements was $1.0 million for both of the three month periods ended September 30, 2000 and 1999. 16
Amortization of goodwill and intangible assets of $7.8 million for the three months ended September 30, 2000 decreased $.2 million (3%) as compared to $8.0 million for the same period in 1999 as a result of the sale of DPIM's Cleveland operations in June 2000 offset, in part, by other increases in intangible amortization. Amortization of deferred commissions, a component of the retail line of business, of $.1 million for the three months ended September 30, 2000 decreased $.2 million (60%) as compared to $.3 million for the same period in 1999 as a result of a decrease in Roger Engemann & Associates (REA) deferred commissions asset established prior to February 1, 1998, which continues to be amortized. Operating income of $17.1 million for the three months ended September 30, 2000 decreased $.1 million (1%) as compared to $17.2 million for the same period in 1999 as a result of the changes discussed above. Equity in earnings of unconsolidated affiliates of $.2 million for the three months ended September 30, 2000 decreased $.1 million (32%) as compared to $.4 million for the same period in 1999 due to a net decrease in equity earnings from certain PXP limited partnership investments. In September 2000 a nonrecurring item of $2.7 million resulted from an agreement to settle pending litigation with the former members of Associated Surplus Dealers. The 1999 item resulted from the Company's decision to reimburse two mutual fund investment portfolios which had inadvertently sustained losses, of which $4.5 million was recovered in the second quarter of 2000. Gain on sale of $3.7 million is the result of the sale of an additional 100,000 shares of National-Oilwell, Inc. (NOI) common stock, which were distributed to PXP in March 2000 from a joint venture investment. Other income - net of $.6 million for the three months ended September 30, 2000 increased $.7 million as compared to other expense of $.1 million for the same period in 1999, of which $.4 million is due to an increase in unrealized gains on marketable securities. Interest expense - net of $4.2 million for the three months ended September 30, 2000 increased $.1 million (2%) as compared to $4.1 million for the same period in 1999. A $70 million decrease in the average outstanding balance on the credit facilities offset, in part, by a 1.0% increase in the average interest rate charged on borrowings, decreased interest expense by $.2 million. The repayment of an interest-bearing promissory note in the fourth quarter of 1999, decreased interest income by $.2 million in the third quarter of 2000 as compared to the same quarter in 1999. Income to minority interest of $1.3 million and $.9 million for the three months ended September 30, 2000 and 1999, 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 the three months ended September 30, 2000 of $8.5 million reflects an increase of $4.7 million (126%) from $3.8 million for the third quarter of 1999, resulting from the changes discussed above. The effective tax rate of 36.5% for the three months ended September 30, 2000 decreased 5.3% from 41.8% for the same period in 1999 due to the effect of certain provision to tax return items. Nine Months Ended September 30, 2000 Compared with Nine Months Ended September 30, 1999 - Historical Revenues for the nine months ended September 30, 2000 of $245.7 million, which includes $20.1 million for Zweig, increased $36.3 million (17%) from $209.3 million for the same period in 1999, which includes $20.1 million for Zweig. Revenues for the retail and institutional lines of business increased $25.3 million and $11.3 million, respectively. 17
Investment management fees of $214.2 million for the nine months ended September 30, 2000, which includes $17.2 million for Zweig, increased $32.0 million (18%) as compared to $182.3 million for the same period in 1999, which includes $17.5 million for Zweig. Excluding Zweig, management fees earned by the retail and institutional lines of business increased $23.9 million and $8.4 million, respectively, due to increases of $5.2 billion and $1.0 billion, respectively, in average assets under management. The overall increase in average assets managed since September 30, 1999 in each line of business is primarily due to investment performance. In addition, the retail line of business experienced net asset inflows for managed accounts of $2.0 billion since September 30, 1999 offset by net asset outflows of $1.3 billion from other retail products, primarily mutual funds. Excluding the sale of DPIM's Cleveland operations, the institutional line of business experienced $1.2 billion of net asset outflows, comprised principally of net asset outflows of $3.6 billion from DPIM, partially offset by net asset inflows of $1.4 billion from Seneca and $.6 billion from structured finance products. Mutual funds - ancillary fees, a component of the retail line of business, of $26.3 million for the nine months ended September 30, 2000, which includes $1.7 million for Zweig, increased $3.0 million (13%) as compared to $23.3 million for the same period in 1999, which includes $.9 million for Zweig. Administrative fees decreased $1.2 million primarily as a result of a vote by the Board of Trustees of the Phoenix-Engemann Funds, which eliminated the administrative fee effective July 1, 2000, and whereby these funds now reimburse PXP for charges that were previously covered by the administrative fee (e.g.: shareholder service agent fees, fund accounting fees, printing, etc.) offset by an increase in average assets of the Phoenix-Engemann Funds during the first six months of 2000. Net distributor fees increased $1.6 million as a result of an increase in average assets managed, principally in the Phoenix-Engemann Funds. Fund accounting fees earned on open-end mutual funds and PHL sponsored variable products increased $.9 million primarily as a result of an increase in average assets under management as well as reimbursement by the Phoenix-Engemann Funds. Shareholder service agent fees increased $.5 million as a result of a change in the fee structure, which took effect in April 1999, and reimbursement by the Phoenix-Engemann Funds beginning July 1, 2000. Other income and fees of $5.2 million for the nine months ended September 30, 2000, which includes $1.3 million for Zweig, increased $1.4 million (38%) as compared to $3.8 million for the same period in 1999, which includes $1.7 million for Zweig, primarily due to an increase in commission income. Operating expenses for the nine months ended September 30, 2000 of $182.9 million, which includes $15.9 million for Zweig, increased $22.6 million (14%) from $160.3 million for the same period in 1999, which includes $18.3 million for Zweig. Operating expenses for the retail and institutional lines of business increased $11.6 million and $10.2 million, respectively. Employment expenses of $99.3 million for the nine months ended September 30, 2000, which includes $2.4 million for Zweig, increased $14.1 million (17%) as compared to $85.2 million for the same period in 1999, which includes $6.6 million for Zweig. Incentive compensation increased by $12.4 million, of which $9.1 million is from certain subsidiaries that, in accordance with their operating agreements, receive increased compensation directly related to increases in their revenues or earnings. Other sales and performance based incentive compensation increased $3.3 million. The addition of sales and marketing positions in both the retail and institutional lines of business in the third quarter of 2000 increased compensation expense by $2.6 million. Profit sharing expense increased by $1.7 million. Amortization of unearned compensation, related to the issuance of restricted stock grants, increased employment expense by $1.0 million. Savings resulting from the closing of the equity department in Hartford in April 1999 decreased employment expenses by $1.4 million for the nine months ended September 30, 2000. An increase in base compensation expense, primarily as a result of annual salary adjustments, was offset, in part, by certain other employment expense reductions. 18
Other operating expenses of $56.4 million for the nine months ended September 30, 2000, which includes $5.8 million for Zweig, increased $7.8 million (16%) as compared to $48.6 million for the same period in 1999, which includes $5.6 million for Zweig. Rent expense increased $1.0 million due to a one-time charge related to a DPIM sublease transaction during the second quarter of 2000. Commissions and finders fees increased $1.0 million due to increased sales. Professional fees increased $1.0 million as a result of various legal matters. Expenses related to open-end mutual funds, for which PXP is reimbursed by the funds, increased $.7 million. An increase in outside services of $1.4 million, a result of the increased use of consultants for various Company initiatives, was offset, in part, by a $.4 million decrease in computer services, primarily resulting from the completion of the Company's Year 2000 project and a decreased reliance on PHL's mainframe systems. An increase of $.7 million resulted from an increase in broker/dealer meeting expenses. Various other less significant year over year variances increased other operating expenses by $2.2 million. Depreciation and amortization of leasehold improvements of $3.0 million for the nine months ended September 30, 2000, which includes $.5 million for Zweig, remained relatively constant from $2.9 million for the same period in 1999, which includes $.4 million for Zweig. Amortization of goodwill and intangible assets of $23.6 million for the nine months ended September 30, 2000 increased $1.3 million (6%) as compared to $22.3 million for the same period in 1999 as a result of the Zweig purchase, which was completed on March 1, 1999 offset, in part, by the sale of DPIM's Cleveland operations in June 2000. Amortization of deferred commissions, a component of the retail line of business, of $.5 million for the nine months ended September 30, 2000 decreased $.8 million (61%) as compared to $1.3 million for the same period in 1999 as a result of a decrease in REA's deferred commissions asset established prior to February 1, 1998, which continues to be amortized. Operating income of $62.8 million for the nine months ended September 30, 2000 increased $13.8 million (28%) as compared to $49.0 million for the same period in 1999 as a result of the changes discussed above. Equity in earnings of unconsolidated affiliates of $.4 million for the nine months ended September 30, 2000 decreased $.5 million (56%) as compared to $.8 million for the same period in 1999 primarily due to a net decrease in equity earnings from certain PXP limited partnership investments. In September 2000 a nonrecurring item of $2.7 million resulted from an agreement to settle pending litigation with the former members of Associated Surplus Dealers. In the second quarter of 2000, PXP received a $4.5 million insurance recovery related to the Company's decision to reimburse $5.9 million to two mutual fund investment portfolios, which had inadvertently sustained losses in the third quarter of 1999. Gain on sale of $12.5 million is the result of the sale of NOI common stock either directly or through an entity in which PXP has a partnership interest. Other income - net of $1.5 million for the nine months ended September 30, 2000 increased $.9 million (151%) as compared to $.6 million for the same period in 1999, of which $.4 million is the result of an increase in unrealized gains on investments in marketable securities. Interest expense - net of $12.9 million for the nine months ended September 30, 2000 increased $1.3 million (12%) as compared to $11.6 million for the same period in 1999 of which $.7 million is due to additional interest charges resulting from the financing of the Zweig acquisition and a 1.0% increase in the average interest rate charged on borrowings offset, in part, by a $25 million reduction in the average outstanding balance since September 30, 1999. The repayment of an interest-bearing promissory note in the fourth quarter of 1999, decreased interest income by $.7 million in 2000. Income to minority interest of $4.1 million and $2.5 million for the nine months ended September 30, 2000 and 1999, respectively, represents the minority shareholders' interest in the equity earnings of Seneca, which is fully consolidated in the Company's financial statements. 19
Net income for the nine months ended September 30, 2000 of $34.5 million reflects an increase of $17.3 million from $17.2 million for the same period in 1999, resulting primarily from the changes discussed above. The effective tax rate of 44.3% for the nine months ended September 30, 2000 increased .8% from 43.5% for the same period in 1999. This increase is primarily the result of the sale of the DPIM's Cleveland operations in June 2000, for which there was a $3.4 million tax expense resulting from related goodwill included in the basis of the disposed operations offset, in part, by the effect of certain provision to tax return items. A tax liability, related to a portfolio-loss reimbursement recorded in the third quarter of 1999, was released as a result of a related insurance recovery in June 2000, which also decreased the effective tax rate for the nine months ended September 30, 2000. Nine Months Ended September 30, 2000 Compared with Nine Months Ended September 30, 1999 - Pro Forma (see Note 4) Except for the items noted below, the variances for the nine months ended September 30, 2000 compared to the same pro forma period in 1999 are substantially the same as historical. Investment management fees of $214.2 million for the nine months ended September 30, 2000 increased $26.4 million (14%) from $187.8 million for the same pro forma period in 1999. In addition to the historical variances noted above, Zweig investment management fees decreased $5.9 million due to a $.7 billion decrease in average assets under management resulting primarily from net asset outflows. Net income of $34.5 million for the nine months ended September 30, 2000 increased $17.3 million as compared to $17.2 million for the same pro forma period in 1999, resulting from the changes discussed above. The effective tax rate increased to 44.3% for the nine months ended September 30, 2000 from 43.6% for the same pro forma period in 1999, resulting entirely from the historical variances noted above. LIQUIDITY AND CAPITAL RESOURCES The Company's business is not considered to be capital intensive. Working capital requirements for the Company have historically been provided by operating cash flow. It is expected that such cash flows will continue to serve as the principal source of working capital for the Company for the near future. The Company's current capital structure, as of October 31, 2000, includes 45.9 million shares of common stock outstanding and $69.9 million of 6% Convertible Subordinated Debentures with a principal value of $25.00 per debenture. The current dividend rate on common stock is $.08 per share per quarter. If the dividend rate remains constant for 2000, the total annual dividend on common stock would be $14.7 million based upon shares outstanding at October 31, 2000. The total annual interest expense on the debentures based upon debentures outstanding at October 31, 2000, at an interest rate of 6%, would be $4.2 million. The Company has two five-year credit facilities, totaling $375 million, with no required principal repayments prior to maturity ($200 million matures in August 2002 and $175 million matures in March 2004). The outstanding obligations under the credit facilities at September 30, 2000 were $245 million with an average interest rate of approximately 7.0%. The credit agreements contain financial and operating covenants including, among other provisions, requirements that the Company maintain certain financial ratios and satisfy certain financial tests, restrictions on the ability to incur indebtedness, and limitations on the amount of the Company's capital expenditures. At September 30, 2000, the Company was in compliance with all covenants contained in the credit agreements. The Company believes that funds from operations and amounts available under the credit facility will provide adequate liquidity for the foreseeable future. 20
The Company has commitments with unrelated third parties whereby the third parties fund commissions paid by the Company upon the sale of Class B share mutual funds. The commitments, which were to have expired on September 30, 2000, were extended. Management expects to enter into similar financing effective after December 1, 2000. However, if the Company is not successful in securing refinancing, it will be necessary to fund these commissions using operating cashflows. The Company secured two letters of credit, totaling $4.2 million with the Bank of Montreal in June 2000, which will expire on November 30, 2000. PHL has guaranteed these lines of credit for which PXP will pay a guarantee fee. Management considers the liquidity of the Company to be adequate to meet present and anticipated needs. 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 has no exposure to foreign currency fluctuations. The Company's exposure to changes in interest rates is limited to borrowings under two five-year credit agreements, which have variable interest rates. The average interest rate on the credit agreements in the first nine months of 2000 and for all of 1999 was approximately 6.9% and 6.0%, respectively. In addition, the Company has Convertible Subordinated Debentures bearing interest at 6%. At September 30, 2000, the Company estimated that the fair value of the Convertible Subordinated Debentures approximated market value. The Company invests excess cash in marketable securities, which consist of mutual fund investments, of which the Company is the advisor, publicly traded securities, and U.S. Government obligations. The fair value of these investments approximated market value at September 30, 2000. The Company's revenues are largely driven by the market value of its assets under management and therefore the Company is exposed to fluctuations in market prices. Management fees earned on managed accounts and certain institutional accounts (approximately 35% of total assets under management), 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 a corresponding increase or decrease in revenues for the following three months. CAUTIONARY STATEMENT UNDER SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 This quarterly report contains forward-looking statements that involve risks and uncertainties, including, but not limited to, the following: The Company's performance is highly dependent on the amount of assets under management, which may decrease for a variety of reasons including changes in interest rates and adverse economic conditions; the Company's performance is very sensitive to changes in interest rates, which may increase from current levels; the Company's performance is affected by the demand for and the market acceptance of the Company's products and services; 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. 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. 21
PART II. Other Information Item 1. Legal Proceedings With regard to the litigation between PXP and the former members of Associated Surplus Dealers, as outlined in the Company's 1999 Annual Report on Form 10-K, a settlement of $2.7 million, including a provision for attorneys fees, was agreed upon in September 2000. The arbitration between PXP and its former president, as described in the Company's 1999 Annual Report on Form 10-K, has been tentatively scheduled for a hearing in January 2001. On July 25, 2000, five separate class action lawsuits were filed in the Delaware Chancery Court against PXP, Phoenix Home Life Mutual Insurance Company (Phoenix Home Life) and each of the Directors of PXP, seeking to enjoin the consummation of the proposed acquisition by Phoenix Home Life of the outstanding common stock of PXP not already owned by Phoenix Home Life. Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits and Reports on Form 8-K A Current Report on Form 8-K was filed on August 8, 2000 describing an offer by Phoenix Home Life Mutual Insurance Company (Phoenix Home Life) to purchase the remaining outstanding shares of the Registrant not already owned by Phoenix Home Life for $12.50 per share. A Current Report on Form 8-K was filed on September 13, 2000 describing a definitive Agreement and Plan of Merger entered into on September 10, 2000 with Phoenix Home Life and Phoenix Home Life's wholly-owned subsidiary PM Holdings, Inc., whereby PM Holdings, Inc. will acquire the remaining outstanding shares of the Registrant not already owned by PM Holdings, Inc.for $15.75 per share, subject to shareholder approval. 22
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Phoenix Investment Partners, Ltd. November 13, 2000 /s/ Philip R. McLoughlin ------------------------------ Philip R. McLoughlin, Chairman and Chief Executive Officer November 13, 2000 /s/ William R. Moyer ------------------------------ William R. Moyer, Chief Financial Officer 23