SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-10994 -------------- For the quarterly period ended September 30, 1997 PHOENIX DUFF & PHELPS CORPORATION DELAWARE 95-4191764 (State of Incorporation) (I.R.S. Employer Identification No.) 56 Prospect St., Hartford, Connecticut 06115-0480 (860) 403-5000 (Address of principal executive offices) (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ On October 31, 1997, the registrant had 44,090,261 shares of $.01 par value common stock outstanding.
PHOENIX DUFF & PHELPS CORPORATION AND SUBSIDIARIES Quarter Ended September 30, 1997 Index PART I - FINANCIAL INFORMATION: Page ---- Item 1. Consolidated Financial Statements: Consolidated Condensed Statements of Financial Condition. 3 September 30, 1997 and December 31, 1996 Consolidated Statements of Income ....................... 4 Three Months Ended September 30, 1997 and Three Months Ended September 30, 1996 Consolidated Statements of Income ....................... 5 Nine Months Ended September 30, 1997 and Nine Months Ended September 30, 1996 Consolidated Condensed Statements of Cash Flows ......... 6 Nine Months Ended September 30, 1997 and Nine Months Ended September 30, 1996 Notes to the Consolidated Financial Statements........... 7 Item 2. Management's Discussion and Analysis of: Results of Operations and Financial Condition............ 12 Liquidity and Capital Resources ......................... 16 PART II - OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders...... 17 Item 6. Exhibits and Reports on Form 8-K......................... 17 Signatures...................................................... 18 2
PART I. Financial Information Item 1. Consolidated Financial Statements Phoenix Duff & Phelps Corporation and Subsidiaries Consolidated Condensed Statements of Financial Condition (In thousands) <TABLE> <CAPTION> (Unaudited) September 30,December 31, 1997 1996 <S> <C> <C> Assets Current Assets Cash and cash equivalents $ 58,485 $ 22,466 Marketable securities, at market 12,932 4,070 Accounts receivable 29,997 25,668 Prepaid expenses and other current assets 1,865 4,287 --------- -------- Total current assets 103,279 56,491 Deferred commissions 3,601 17,749 Furniture, equipment and leasehold improvements, net 10,509 8,377 Goodwill and intangible assets, net 473,360 226,754 Investment in Beutel, Goodman & Company Ltd. 31,214 31,746 Long-term investments and other assets 28,106 24,567 --------- -------- Total assets $ 650,069 $365,684 ========== ======== Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued liabilities $ 25,623 $ 13,306 Due to seller 31,576 Short-term notes payable 9,497 Payables to related parties 5,286 3,874 Broker-dealer payable 7,664 8,487 Current portion of long-term debt 2,500 --------- -------- Total current liabilities 79,646 28,167 Deferred taxes, net 71,458 33,860 Long-term debt, net of current portion 191,938 14,000 Lease obligations and other long-term liabilities 9,288 7,884 --------- -------- Total liabilities 352,330 83,911 --------- -------- Minority Interest 552 Series A Convertible Exchangeable Preferred Stock 78,822 78,504 -------- -------- Stockholders' Equity Common stock, $.01 par value, 100,000,000 shares authorized, 44,290,261 and 44,037,416 shares issued, 44,090,261 and 44,037,416 shares outstanding and 200,000 and zero shares held in treasury 443 440 Additional paid-in capital 188,532 185,415 Retained earnings 18,484 12,812 Net unrealized gain on securities available for sale 12,957 4,932 Foreign currency translation (501) (330) Treasury stock (1,550) --------- -------- Total stockholders' equity 218,365 203,269 --------- -------- Total liabilities and stockholders' equity $ 650,069 $365,684 ========= ======== </TABLE> The accompanying notes are an integral part of these statements. 3
Phoenix Duff & Phelps Corporation and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) <TABLE> <CAPTION> (Unaudited) Three months ended September 30, 1997 1996 <S> <C> <C> Revenues Investment management fees $ 36,565 $ 28,833 Mutual funds - ancillary fees 5,152 6,110 Other income and fees 532 985 --------- -------- Total revenues 42,249 35,928 --------- -------- Operating Expenses Employment expenses 18,247 12,694 Other operating expenses 10,191 8,319 Depreciation and amortization of leasehold improvements 697 540 Amortization of goodwill and intangible assets 3,672 2,436 Amortization of deferred commissions 1,531 --------- -------- Total operating expenses 32,807 25,520 --------- -------- Operating Income 9,442 10,408 --------- -------- Other Income - Net 1,335 912 --------- -------- Interest (Expense) Income - Net Interest expense (1,505) (409) Interest income 776 475 --------- -------- Total interest (expense) income - net (729) 66 --------- -------- Income to Minority Interest (290) Income before income taxes 9,758 11,386 Provision for income taxes 3,676 5,056 --------- -------- Net Income 6,082 6,330 Series A preferred stock dividends 1,188 1,184 --------- -------- Income available to common stockholder $ 4,894 $ 5,146 ========= ======== Weighted average shares outstanding Primary 44,696 44,088 Fully diluted 54,599 53,944 Earnings per share Primary $ .11 $ .12 Fully diluted $ .12 </TABLE> The accompanying notes are an integral part of these statements. 4
Phoenix Duff & Phelps Corporation and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) <TABLE> <CAPTION> (Unaudited) Nine months ended September 30, 1997 1996 <S> <C> <C> Revenues Investment management fees $ 92,248 $ 89,132 Mutual funds - ancillary fees 16,304 16,285 Financial consulting and investment research fees 7,699 Other income and fees 2,758 3,124 --------- -------- Total revenues 111,310 116,240 --------- -------- Operating Expenses Employment expenses 49,001 44,882 Other operating expenses 27,243 28,332 Depreciation and amortization of leasehold improvements 1,944 1,624 Amortization of goodwill and intangible asset,net 8,403 7,266 Amortization of deferred commissions 2,836 4,155 --------- -------- Total operating expenses 89,427 86,259 --------- -------- Operating Income 21,883 29,981 --------- -------- Other Income - Net 764 4,425 --------- -------- Gain on Sale 6,907 Interest (Expense) Income - Net Interest expense (1,954) (1,319) Interest income 1,399 1,456 --------- -------- Total interest (expense) income - net (555) 137 --------- -------- Income to Minority Interest (290) Income before income taxes 28,709 34,543 Provision for income taxes 11,541 14,508 --------- -------- Net Income 17,168 20,035 Series A preferred stock dividends 3,562 3,529 --------- -------- Income available to common stockholders $ 13,606 $ 16,506 ========= ======== Weighted average shares outstanding Primary 44,555 44,004 Fully diluted 54,488 53,898 Earnings per share Primary $ .31 $ .38 Fully diluted $ .37 </TABLE> The accompanying notes are an integral part of these statements. 5
Phoenix Duff & Phelps Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (In thousands) <TABLE> <CAPTION> (Unaudited) Nine months ended September 30, 1997 1996 <S> <C> <C> Cash flows from operating activities: Net income $ 17,168 $ 20,035 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of leasehold improvements 1,944 1,624 Amortization of goodwill and intangible assets 8,403 7,266 Amortization of deferred commissions 2,836 4,155 Income to minority interest 290 Equity earnings of unconsolidated affiliates (658) (4,675) Payments of deferred commissions (4,444) (8,329) Gain on sale of deferred commissions asset (6,907) Changes in other operating assets and liabilities (488) (4,616) Unrealized (appreciation) depreciation on mutual fund investments (197) 27 -------- -------- Net cash provided by operating activities 17,947 15,487 -------- -------- Cash flows from investing activities: Purchase of subsidiaries, net of cash acquired (179,075) Duff & Phelps Capital Markets transaction (5,228) Proceeds from the sale of deferred commissions asset 26,015 Proceeds from long-term investments 11,246 2,672 Purchase of partnership interest (2,220) Other investing activities 6,532 4,137 Capital expenditures, net (1,726) (2,354) -------- --------- Net cash used in investing activities (139,228) (773) -------- --------- Cash flows from financing activities: Borrowing (repayment) of long-term debt, net 168,833 (400) Dividends paid (11,496) (10,089) Stock repurchase (1,550) Other financing activities (140) Proceeds from issuance of stock 1,653 2,149 -------- -------- Net cash provided by (used in)financing activities 157,300 (8,340) -------- -------- Net increase in cash and cash equivalents 36,019 6,374 Cash and cash equivalents, beginning of period 22,466 16,306 -------- -------- Cash and cash equivalents, end of period $ 58,485 $22,680 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 6
Phoenix Duff & Phelps Corporation and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The unaudited consolidated financial statements of Phoenix Duff & Phelps Corporation (PDP or the Company) included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes included in PDP's Form 10-K for the year ended December 31, 1996. 2. Organization As described more fully in Notes 1 and 3 to PDP's Annual Report for the year ended December 31, 1996, PDP was formed on November 1, 1995 when Phoenix Securities Group Inc. (PSG), merged into Duff & Phelps Corporation (D&P). The transaction was accounted for as a purchase of D&P by PSG. 3. Merger Related Activity On September 3, 1997, PDP acquired Pasadena Capital Corporation ("Pasadena"), the parent company of Roger Engemann & Associates, Inc. PDP paid an initial purchase price of approximately $180 million. An additional payment will be made based on the adjusted net tangible assets of Pasadena as of the closing date. This additional purchase price, estimated at $31.6 million, has been reflected in the September 30, 1997 financial statements. The merger agreement further provides for an "earn-out", based on growth in management fee revenues of up to a total of $66 million to be paid out on the third, fourth and fifth anniversaries of the transaction. Pasadena, which operates in southern California, manages approximately $6.3 billion in assets, primarily individual accounts but also including The Pasadena Funds, a family of six equity mutual funds with approximately $968 million in assets under management at September 30, 1997. On July 17, 1997, PDP acquired a majority interest in GMG/Seneca Capital Management LLC ("GMG/Seneca"), a San Francisco based investment advisor. Under the terms of the transaction, GMG/Seneca was renamed Seneca Capital Management ("Seneca"). As consideration for the purchase of a majority interest, PDP paid $36.2 million, $26.7 million in cash and $9.5 million in short-term notes. Additional consideration of approximately $3.5 million, dependent upon the retention of certain revenue earning accounts, may be paid on January 1, 1999. The remaining interests in the Company continue to be held by Seneca senior management. Seneca, founded by Gail Seneca in 1989, managed $4.2 billion in assets at September 30, 1997. The purchase price for Pasadena and Seneca represents the consideration paid and the direct costs incurred by PDP to purchase Pasadena and a majority interest in Seneca. Preliminary analyses have been performed in order to identify intangible assets and to allocate purchase price to identifiable assets. The excess of purchase price over the fair value of acquired net tangible assets of Pasadena and Seneca totaled $218.4 million. Of this excess purchase price, $110.2 million has been identified as identifiable intangible assets, primarily associated with investment management contracts, which are being amortized over their estimated useful lives, using the straight-line method. The average estimated useful life of the identifiable intangible assets is 13 years. The remaining fair value adjustments to assets and liabilities totaled ($39.9) million. The remaining excess purchase price of $148.1 million has been classified as goodwill and is being amortized over 40 years using the straight-line method. Related amortization expense of $1.1 million has been charged to expense for the period ended September 30, 1997. 7
<TABLE> <CAPTION> The following table summarizes the calculation and allocation of purchase price (in thousands): <S> <C> <C> <C> Purchase Price: Pasadena Seneca Total Consideration paid or payable $ 211,576 $ 36,218 $ 247,794 Transaction costs 2,398 1,218 3,616 Total Purchase Price $ 213,974 $ 37,436 $ 251,410 ========= ========= ========= Purchase Price Allocation: Fair value of acquired net assets $ 30,720 $ 2,248 $ 32,968 Identified intangibles 97,404 12,833 110,237 Deferred taxes (39,935) (39,935) Goodwill 125,785 22,355 148,140 -------- --------- --------- Total Allocation of Purchase Price $213,974 $ 37,436 $ 251,410 ======== ========= ========= </TABLE> In separate transactions, Phoenix Duff & Phelps entered into agreements to acquire Pasadena National Trust Company, for an estimated purchase price of $1.2 million, and GMG/Seneca Capital Management L.P., for an estimated purchase price of $.7 million. The following pro forma financial information for the three and nine months ended September 30, 1997 and 1996 is derived from the historical financial statements of PDP, Pasadena and Seneca, and gives effect to the acquisitions of Pasadena and a majority interest in Seneca by PDP. The pro forma financial information has been prepared assuming these acquisitions were effected on December 31, 1995. <TABLE> <CAPTION> Three months ended Sept.30, Nine months ended Sept.30, Pro Forma 1996 Pro Forma 1997 Pro Forma 1996 Pro Forma 1997 (In thousands, except per share amounts) <S> <C> <C> <C> <C> Revenues $ 52,756 $ 50,724 $ 153,821 $ 158,947 -------- -------- --------- --------- Expenses Employment expenses 22,091 17,938 65,436 60,689 Other expenses 13,481 13,734 43,229 44,153 Amortization of goodwill and intangible assets 5,531 5,531 16,488 16,488 -------- -------- --------- --------- Total Expenses 41,103 37,203 125,153 121,330 -------- -------- --------- --------- Operating Income 11,653 13,521 28,668 37,617 Other Income - Net 2,034 836 13,399 4,484 Interest Expense-Net 2,686 2,784 8,043 8,699 Income to Minority Interest (360) (225) (800) (674) --------- -------- --------- --------- Income before income taxes 10,641 11,348 33,224 33,728 Provision for income taxes 4,875 5,411 14,698 14,783 --------- -------- --------- --------- Net Income $ 5,766 $ 5,937 $ 18,526 $ 17,945 ========= ========= ========= ========= Earnings per share Primary .10 .11 .32 .33 Fully Diluted -- -- -- -- </TABLE> 8
4. Dividends and Other Capital Transactions For the periods ended September 30, 1997 and September 30, 1996, earnings per share were computed using weighted average shares of common stock and common stock equivalents outstanding. Common stock equivalents are based on outstanding stock options under nonqualified stock option plans. On October 22, 1997, the Company's Board of Directors approved quarterly dividends of $.06 per common share and $.375 per preferred share, payable December 10, 1997 to stockholders of record on November 28, 1997. As of September 30, 1997, the Company, in accordance with the previously announced stock repurchase program, had purchased 200,000 shares of PDP common stock at a total cost of $1.6 million. 5. Investment in Beutel, Goodman & Company Ltd. At September 30, 1997, PDP had a 49% interest in the outstanding common stock of Beutel, Goodman & Company Ltd. (BG). In 1997, BG's Shareholders' Agreement was amended allowing PDP to recognize up to 100% of BG's earnings. BG is a Canadian-based investment counseling firm with approximately $10.5 billion in assets under management at September 30, 1997. PDP's consolidated condensed statements of financial condition and consolidated income statements contain the following components related to the BG investment: <TABLE> <CAPTION> September 30, December 31, 1997 1996 (in thousands) <S> <C> <C> Statements of Financial Condition: Acquisition costs of investment in BG's common stock $ 30,045 $ 30,045 Equity in BG net income 7,287 4,021 Dividends received (2,870) (285) Amortization of BG acquisition costs over proportional net equity in BG's assets (2,387) (1,476) Deferred tax on translation adjustments (360) (229) Currency translation adjustments (501) (330) -------- -------- Total BG investment $ 31,214 $ 31,746 ======== ======== </TABLE> <TABLE> <CAPTION> September 30, September 30, 1997 1996 (in thousands) <S> <C> <C> Statements of Income: Equity in BG net income $ 3,266 $ 2,744 Amortization (911) (1,119) Interest income - BG debentures 404 -------- -------- $ 2,355 $ 2,029 ======== ======== </TABLE> The PDP consolidated condensed statements of financial condition contain currency translation adjustments, related to the investment in BG, as a component of stockholders' equity. These losses, resulting from the translation of foreign currency, are deferred and accumulated in stockholders' equity until the investment in BG is sold or substantially liquidated. 9
The following reflects summarized BG financial information for the nine months ended September 30,: <TABLE> <CAPTION> 1997 1996 (in thousands) <S> <C> <C> Total revenues $ 24,176 $21,716 Net income $ 3,108 $ 5,165 </TABLE> 6. Other Investments In the first quarter of 1997, D&P CBO Partners, LP (D&P CBO) and Windy City CBO Partners, LP (WCCBO) were liquidated. In accordance with the respective partnership agreements, the remaining assets of the partnerships were sold, obligations were settled and all remaining cash was distributed to the partners. PDP received cash proceeds of zero and $11.2 million from the liquidation of D&P CBO and WCCBO, respectively. As a result of the liquidation of the partnerships, PDP recognized losses of zero and $1.5 million, respectively, from D&P CBO and WCCBO representing its share of partnership losses up to the date of liquidation. 7. Capital Markets On May 14, 1996 the Company announced that it was exiting the fee based investment research and financial consulting businesses. Substantially all of the fee based investment research activities were immediately closed and, on July 1, 1996, the Company completed the sale of certain assets of the financial consulting and underwriting businesses to several former executives. These divestitures were contemplated at the time of the Merger. The financial effects of these divestitures were treated as adjustments to the purchase price relating to the Merger. 8. Sale of Deferred Commissions On June 26, 1997, PDP sold its title and interest in the balance of its deferred commissions asset to an unrelated third party. PDP recognized a gain of $6.9 million based on cash proceeds of $26.0 million and a book value of $19.1 million at the time of the sale. As part of the transaction, the third party is entitled to receive the distributor fees and contingent deferred sales charges related to the Company's outstanding "B" share mutual funds. PDP has a three year commitment, expiring June 26, 2000, from the unrelated third party to purchase all commissions, excluding those of Pasadena, incurred by the Company upon the sale of "B" share mutual funds. 9. Long-term Debt At September 30, 1997, PDP had outstanding borrowings of $190 million under a new $200 million Credit Agreement with a consortium of banks. Borrowings under this agreement are unsecured, mature in five years and bear interest at variable rates. Interest rates on such borrowings for the period ended September 30, 1997 were 6.0%. The outstanding balance is due in 2002. Phoenix Duff & Phelps' majority shareholder, Phoenix Home Life Mutual Insurance Company, has guaranteed the obligation. The Credit Agreement contains financial and operating covenants including, among other provisions, requirements that PDP maintain certain financial ratios and satisfy certain financial tests, including restrictions on the ability to incur indebtedness and limitations on PDP's capital expenditures. As of September 30, 1997, PDP was in compliance with these covenants. PDP financed the acquisitions of Pasadena and Seneca through existing resources and borrowings under the new Credit Agreement. 10
10.Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement simplifies the standards for computing earnings per share ("EPS"). Basic EPS will replace primary EPS. Basic EPS will be computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS will be computed similarly to the present fully diluted EPS. Dual presentation of the basic and fully diluted EPS will be required on the face of the income statement. A reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation will be required. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. Restatement of all prior period EPS data will be required. Had EPS calculations for the Company been computed for the three and nine months ended September 30, 1997 using the SFAS No. 128 methodology, basic EPS would have been $.11 and $.31 per share, respectively, and diluted EPS would have been $.11 and $.31 per share, respectively. EPS calculations for the same periods in 1996 using the SFAS No. 128 methodology would not have been materially different from the reported amounts. 11.Subsequent Event On October 24, 1997, the Company received a distribution of $5.4 million from its equity investment in Financial Alliance Investors I, L.P. representing the Company's share of the proceeds realized by the partnership upon the sale of its interest in Financial Alliance Processing Services, Inc. In 1996, the Company had invested $2.0 million in Financial Alliance Investors I, L.P. 11
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Assets Under Management At September 30, 1997, PDP had $45.2 billion of assets under management, an increase of $10.8 billion from June 30, 1997, and $11.7 billion from September 30, 1996. This increase is primarily the result of the acquisitions of Pasadena Capital Corporation, on September 3, 1997, and a majority interest in Seneca Capital Management, on July 17, 1997, which increased assets under management by $10.2 billion. Since the revenues of the Company are substantially earned based upon assets under management, this information is important to an understanding of the business. <TABLE> <CAPTION> (In millions) September 30, June 30, December 31, September 30, 1997 1997 1996 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> Open-end Mutual Funds $ 13,371 $ 11,727 $ 11,532 $ 11,511 Managed Accounts * 5,545 242 Closed-end Mutual Funds 3,106 3,015 2,984 2,867 Institutional ** 15,969 12,367 12,276 12,387 PHL General Account 7,171 7,046 6,857 6,743 --------- --------- --------- --------- $ 45,162 $ 34,397 $ 33,649 $ 33,508 ========= ========= ========= ========= </TABLE> * Managed Accounts represent assets which are individually managed for retail clients through broker-dealer sponsored programs. ** Institutional includes 100% of the assets managed by Seneca Capital Management. Three Months Ended September 30, 1997 Compared with Three Months Ended September 30, 1996 Investment management fees of $36.6 million for the three months ended September 30, 1997, which includes $7.5 million for Pasadena and Seneca, increased $7.8 million (27%) as compared to $28.8 million for the same period in 1996. Management fees earned from institutional accounts decreased $.5 million due to the loss of certain accounts. Management fees earned from open-end mutual funds, including institutional mutual funds, increased $.8 million as a result of an increase in average assets. Fees earned managing Phoenix Home Life Mutual Insurance Company's (PHL) sponsored variable products decreased $.2 million as a result of a change in the fee structure (which increased fund accounting fees) offset, in part, by an increase in assets under management. Mutual funds - ancillary fees of $5.2 million for the three months ended September 30, 1997, which includes $.7 million for Pasadena, decreased $.9 million (16%) as compared to $6.1 million for the same period in 1996. Fund accounting fees increased $.7 million primarily as a result of a change in the fee structures for the open-end mutual funds and PHL sponsored variable products. Net distributor fees decreased $2.2 million due to a decrease in distributor fees of $1.2 million, primarily due to the sale of the deferred commissions asset and the related distributor fees, and an increase in trailing commissions expense of $1.0 million. Shareholder service agent fees decreased $.2 million as a result of a decline in mutual fund shareholder accounts. Other income and fees of $.5 million for the three months ended September 30, 1997 decreased $.5 million (46%) as compared to $1.0 million for the same period in 1996, due to reduced contingent deferred sales charge income resulting from the sale of the Company's deferred commissions asset in the second quarter of 1997. Employment expenses of $18.2 million for the three months ended September 30, 1997, which includes $3.4 million for Pasadena and Seneca, increased $5.5 million (44%) as compared to $12.7 million for the same period in 1996. In the third quarter of 1997, the Company incurred approximately $.3 million in fees for placement services associated with hiring additional investment professionals. The remaining increase was primarily the result of annual salary adjustments, incentives and increases in the workforce. 12
Other operating expenses of $10.2 million for the three months ended September 30, 1997, which includes $1.7 million for Pasadena and Seneca, increased $1.9 million (23%) as compared to $8.3 million for the same period in 1996. Depreciation and amortization of leasehold improvements of $.7 million for the three months ended September 30, 1997, increased $.2 million (29%) from $.5 million for the same period in 1996 reflecting the inclusion of the depreciation and amortization of leasehold improvements expense of Pasadena and Seneca. Amortization of goodwill and intangible assets of $3.7 million for the three months ended September 30, 1997 increased $1.3 million (51%) primarily as a result of the amortization of the intangible assets and goodwill identified in the preliminary purchase price allocation of Pasadena and Seneca. Amortization of deferred commissions decreased $1.5 million (100%) for the three months ended September 30, 1997 compared to the same period in 1996 as a result of the sale of the deferred commissions asset in the second quarter of 1997, which eliminated the amortization charge. Operating income of $9.4 million for the three months ended September 30, 1997 decreased $1.0 million (9%) as compared to $10.4 million for the same period in 1996 as a result of the changes discussed above. Other income - net of $1.3 million for the three months ended September 30, 1997, which includes $.2 million for Pasadena and Seneca, increased $.4 million (46%) as compared to $.9 million for the same period in 1996. PDP's share of equity earnings from WCCBO was zero in the third quarter of 1997 compared to $.6 million for the third quarter of 1996, due to the liquidation of WCCBO in early 1997. In addition, PDP recorded $.1 million of losses in the third quarter of 1997 from its investment in Greystone Financial Group, representing its share of equity earnings in the company, compared to a $.5 million loss in the third quarter of 1996. PDP recorded income of $.3 million from its investment in Duff & Phelps/Inverness LLC as a result of a third quarter 1997 transaction as compared to zero in the third quarter of 1996. PDP's share of equity earnings from the DPIM/Nuveen joint venture was zero in the third quarter of 1997 compared to $.2 million for the third quarter of 1996. On January 1, 1997, the Company purchased the remaining interest in the DPIM/Nuveen joint venture and consolidated operations. The Company's share of the equity earnings of its investment in BG of $.8 million increased $.2 million for the three months ended September 30, 1997 as compared to $.6 million for the same period in 1996. Interest expense of $1.5 million increased $1.1 million primarily as a result of interest charges resulting from the financing of the Pasadena and Seneca acquisitions. Interest income of $.8 million increased $.3 million primarily as a result of maintaining higher average cash balances prior to the Pasadena and Seneca acquisitions. Income to minority interest of $.3 million for the three months ended September 30, 1997 represents the minority shareholders' interest in the equity earnings of Seneca, which is fully consolidated in the Company's financial statements. The effective tax rate of 37.7% for the three months ended September 30, 1997decreased from 44.4% for the same period in 1996. The decrease in the effective tax rate represents the benefits resulting from settlements with federal and state tax authorities for the tax years 1990 to 1993, offset, in part, by the effect of goodwill amortization resulting from the Pasadena acquisition. In addition, in the third quarter of 1996, certain changes in expense sharing arrangements between subsidiaries increased the rate. As a result of the effects discussed above, net income for the three months ended September 30, 1997 of $6.1 million represents a decrease of $.2 million (4%) compared to the $6.3 million for the third quarter of 1996. 13
Nine Months Ended September 30, 1997 Compared with Nine Months Ended September 30, 1996 Investment management fees of $92.2 million for the nine months ended September 30, 1997, which includes $7.5 million for Pasadena and Seneca, increased $3.1 million (3%) as compared to $89.1 million for the same period in 1996. Management fees earned from institutional accounts decreased $3.1 million as a result of the loss of certain accounts. Fees earned managing the open-end mutual funds increased $.1 million due to an increase in average assets. Management fees for institutional mutual funds, which were pooled separate accounts for two months of 1996, decreased $.7 million as a result of lost accounts and lower fees earned on institutional mutual funds as compared to pooled separate accounts. Fees earned managing PHL sponsored variable products decreased $.8 million as a result of a change in the fee structure (which increased fund accounting fees), which decreased investment management fees, offset, in part, by an increase in assets under management. Fees earned from Managed Accounts, excluding those managed by Pasadena, increased $.4 million as a result of increased accounts and positive performance. Fees earned from WCCBO, which ceased operations in early 1997, decreased $.3 million. Mutual funds - ancillary fees remained unchanged at $16.3 million for the nine months ended September 30, 1997 and 1996, including $.7 million for Pasadena and Seneca in 1997. Fund accounting fees increased $1.9 million primarily as a result of a change in the fee structures for the open-end mutual funds and PHL sponsored variable products on which no fees were earned prior to January 1997. Net distributor fees decreased $1.4 million from the prior year primarily due to the sale of the deferred commissions asset and related distributor fees in the second quarter of 1997, offset by increased sales of B share mutual funds prior to the sale. Underwriter fees decreased $.4 million (19%) as a result of the closure of Capital Markets in 1996 and decreased sales of mutual funds, offset by underwriter fees received from certain PHL sponsored variable products. Shareholder service agent fees decreased $.7 million as a result of a decline in shareholder accounts. Financial consulting and investment research services were not offered by PDP in 1997 as the operations of Duff & Phelps Capital Markets Co. and the fee-based investment research and securities businesses were divested and closed, respectively, in 1996. Other income and fees of $2.8 million for the nine months ended September 30, 1997 decreased $.3 million (12%) as compared to $3.1 million for the same period in 1996, primarily as a result of reduced contingent deferred sales charge income resulting from the sale of the Company's deferred commissions asset in the second quarter of 1997, partially offset by increased redemptions in 1997 prior to the sale. Employment expenses of $49.0 million for the nine months ended September 30, 1997, which includes $3.4 million for Pasadena and Seneca, increased $4.1 million (9%) as compared to $44.9 million for the same period in 1996. Employment expenses decreased $8.2 million due to the divestiture of Duff & Phelps Capital Markets Co. Non-recurring charges resulting from a senior executive exercising certain rights under his employment agreement resulted in an additional $1.6 million of employment expense being recognized in the first quarter of 1997. In addition, in 1997, the Company incurred approximately $1.0 million in fees for placement services associated with hiring additional investment professionals. The remaining increase was primarily the result of annual salary adjustments, incentives and increases in the workforce. Other operating expenses of $27.2 million for the nine months ended September 30, 1997, which includes $1.7 million for Pasadena and Seneca, decreased $1.1 million (4%) from $28.3 million for the same period in 1996. Other operating expenses decreased $3.1 million due to the July 1996 divestiture of Duff & Phelps Capital Markets Co. In addition, a one-time loss of $.6 million was recognized in the second quarter of 1997 relating to the sublease of certain office space. Depreciation and amortization of leasehold improvements of $1.9 million increased $.3 million (20%) from $1.6 million for the same period in 1996 primarily reflecting the inclusion of the depreciation and amortization expense of Pasadena and Seneca. Amortization of goodwill and intangible assets of $8.4 million for the nine months ended September 30, 1997 increased $1.1 million (16%) from $7.3 million for the same period in 1996 as a result of the amortization of the intangible assets and goodwill identified in the preliminary purchase price allocation of Pasadena and Seneca. Amortization of deferred commissions decreased $1.3 million (32%) for 14
the nine months ended September 30, 1997 compared to the same period in 1996 as a result of the sale of the deferred commissions asset in the second quarter of 1997, which eliminated the amortization charge. Operating income of $21.9 million for the nine months ended September 30, 1997 decreased $8.1 million (27%), as compared to $30.0 million for the same period in 1996, as a result of the changes discussed above. Other income - net of $.8 million for the nine months ended September 30, 1997 decreased $3.6 million (83%) as compared to $4.4 million for the same period in 1996. PDP's share of losses from WCCBO was $1.5 million for the period from January 1, 1997 until operations were terminated in March, a decrease of $2.9 million from the $1.4 million earned in the first nine months of 1996. The Company's share of the Duff & Phelps/Inverness LLC joint venture income was $1.5 million for the nine months ended September 30, 1996, as a result of the joint venture's recognition of an advisory fee from a significant first quarter 1996 transaction, compared to $.3 million in equity earnings for the same period in 1997. The Company's share of the equity earnings of its investment in BG of $2.4 million increased $.7 million for the nine months ended September 30, 1997 as compared to $1.7 million for the same period in 1996. The Company's share of the equity earnings from its investment in DPIM/Nuveen was $.5 million for the first nine months of 1996. On January 1, 1997, the Company purchased the remaining interest in the joint venture and consolidated operations. In addition, PDP recorded $.6 million in losses for the nine months ended September 30, 1997 from its investment in Greystone Financial Group representing its share of equity earnings in the company, an increase of $.1 million as compared to the same period in 1996. A gain on the sale of the Company's deferred commissions asset of $6.9 million was recognized in the second quarter of 1997. The sale, which was to an unrelated third party, resulted in proceeds of $26 million. As part of the transaction, the purchaser will fund future B share commissions and be entitled to distributor fees from the Company's outstanding B share mutual funds as well as any contingent deferred sales charges. Interest expense of $2.0 million for the nine months ended September 30, 1997 increased $.6 million (48%) as a result of interest charges resulting from the financing of the Pasadena and Seneca acquisitions offset, in part, by a decrease in interest expense of $.5 million due to a decrease in outstanding debt on a previous credit facility. Interest income decreased $.1 million due to a decrease of $.4 million from the BG debentures, which were fully redeemed in December 1996, offset by increased interest income as a result of maintaining higher cash balances prior to the Pasadena and Seneca acquisitions. Income to minority interest of $.3 million for the nine months ended September 30, 1997 represents the minority shareholders' interest in the equity earnings of Seneca, which is fully consolidated in the Company's financial statements. The effective tax rate of 40.2% for the nine months ended September 30, 1997 decreased from 41.9% for the same period in 1996. The decrease in the effective tax rate represents the benefits resulting from settlements with federal and state tax authorities for the tax years 1990 to 1993, offset by the effect of goodwill amortization resulting from the Pasadena acquisition. In addition, in the third quarter of 1996, certain changes in expense sharing arrangements between subsidiaries increased the rate. As a result of the effects discussed above, net income for the nine months ended September 30, 1997 of $17.2 million decreased $2.8 million (14%) compared to $20.0 million for the first nine months of 1996. 15
Liquidity and Capital Resources The Company's business is not considered to be capital intensive. Working capital requirements for the Company have historically been provided by operating cash flow. It is expected that such cash flows will continue to serve as the principal source of working capital for the Company for the near future. The Company's current capital structure includes 3.2 million shares of Series A Preferred Stock with a stated value of $25.00 per share and 44.1 million shares of common stock. Dividends on the preferred stock would total $4.8 million per annum based on preferred shares outstanding at September 30, 1997. The current dividend rate on common stock is $.06 per share per quarter. If the dividend rate remains constant for 1997, the total dividend on common stock would be approximately $10.6 million based upon shares outstanding at September 30, 1997. The Company has a bank credit agreement in place providing for a $200 million five year credit facility. The outstanding obligation under the credit agreement at September 30, 1997 was $190 million. An interest rate of approximately 6.0% was in effect on this borrowing as of September 30, 1997. The credit agreement contains financial and operating covenants including, among other provisions, requirements that the Company maintain certain financial ratios and satisfy certain financial tests, restrictions on the ability to incur indebtedness, and limitations on the amount of the Company's capital expenditures. At September 30, 1997, the Company was in compliance with all covenants contained in the credit agreement. The Company believes that funds from operations and amounts available under the credit agreement will provide adequate liquidity for the foreseeable future. Management considers the liquidity of the Company to be adequate to meet present and anticipated needs. 16
PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders No items submitted. Item 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as part of these reports: No items filed. (b) Reports on Form 8-K. A Current Report on Form 8-K was filed on July 1, 1997 describing the agreements to acquire Pasadena Capital Corporation and a majority interest in GMG/Seneca Capital Management LLC. A Current Report on Form 8-K was filed on September 18, 1997 describing the acquisitions of Pasadena Capital Corporation on September 3, 1997 and a majority interest in GMG/Seneca Capital Management LLC on July 17, 1997. A Current Report on Form 8-K/A was filed on November 13, 1997 which incorporated historical financial statements for Pasadena Capital Corporation and pro forma financial statements for the Pasadena and Seneca acquisitions. . 17
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Phoenix Duff & Phelps Corporation November 14, 1997 /s/ Philip R. McLoughlin Philip R. McLoughlin, Chairman and Chief Executive Officer November 14, 1997 /s/ William R. Moyer William R. Moyer, Chief Financial Officer 18