SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10994
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For the quarterly period ended March 31, 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 April 30, 1997, the registrant had 44,087,831 shares of $.01 par value common
stock outstanding.
PHOENIX DUFF & PHELPS CORPORATION AND SUBSIDIARIES
Quarter Ended March 31, 1997
Index
PART I - FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements:
Consolidated Condensed Statements of Financial Condition. 3
March 31, 1997 and December 31, 1996
Consolidated Statements of Income ....................... 4
Three Months Ended March 31, 1997 and
Three Months Ended March 31, 1996
Consolidated Condensed Statements of Cash Flows ......... 5
Three Months Ended March 31, 1997 and
Three Months Ended March 31, 1996
Notes to the Consolidated Financial Statements........... 6 - 7
Item 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition............ 8 - 9
Liquidity and Capital Resources. ....................... 10
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders...... 11
Signatures...................................................... 11
PART I. Financial Information
Item 1. Consolidated Financial Statements
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Condensed Statements of Financial Condition
(In thousands)
(Unaudited)
March 31, December 31,
1997 1996
Assets
Current Assets
Cash and cash equivalents $ 27,596 $ 22,466
Marketable securities, at market 4,059 4,070
Accounts receivable 27,050 25,668
Prepaid expenses and other current assets 3,703 4,287
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Total current assets 62,408 56,491
Deferred commissions 18,883 17,749
Furniture, equipment and leasehold improvements, net 8,334 8,377
Goodwill and intangible assets, net 226,467 226,754
Investment in Beutel, Goodman & Company Ltd. 32,127 31,746
Long-term investments and other assets 12,610 24,567
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Total assets $ 360,829 $ 365,684
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 14,300 $ 13,306
Payables to related parties 4,241 3,874
Broker-dealer payable 7,091 8,487
Current portion of long-term debt 2,500
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Total current liabilities 25,632 28,167
Deferred taxes, net 35,319 33,860
Long-term debt, net of current portion 10,000 14,000
Lease obligations and other long-term liabilities 6,199 7,884
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Total liabilities 77,150 83,911
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Contingent Liabilities
Series A Convertible Exchangeable Preferred Stock 78,822 78,504
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Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares authorized,
44,046,631 and 44,037,416 shares issued and outstanding 442 440
Additional paid-in capital 188,035 185,415
Retained earnings 12,743 12,812
Net unrealized gain on securities available for sale 5,409 4,932
Foreign currency translation (527) (330)
Treasury stock (1,245)
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Total stockholders' equity 204,857 203,269
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Total liabilities and stockholders' equity $ 360,829 $ 365,684
=========== ==========
The accompanying notes are an integral part of these statements.
3
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Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three months ended March 31,
1997 1996
Revenues
Investment management fees $ 28,844 $ 30,608
Mutual funds - ancillary fees 5,821 4,853
Financial consulting and investment research fees 4,655
Other income and fees 1,221 1,069
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Total revenues 35,886 41,185
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Operating Expenses
Employment expenses 15,197 16,277
Other operating expenses 8,500 10,024
Depreciation and amortization of
leasehold improvements 641 510
Amortization of goodwill and intangible assets 2,365 2,408
Amortization of deferred commissions 1,702 1,432
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Total operating expenses 28,405 30,651
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Operating Income 7,481 10,534
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Other (Expense) Income - Net (1,163) 2,803
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Interest (Income) Expense - Net
Interest expense 240 475
Interest income (293) (473)
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Total interest (income) expense - net (53) 2
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Income before income taxes 6,371 13,335
Provision for income taxes 2,612 6,222
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Net Income 3,759 7,113
Series A preferred stock dividends 1,185 1,172
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Income available to common stockholders $ 2,574 $ 5,941
========== =========
Weighted average shares outstanding
Primary 44,597 43,957
Fully diluted 54,472 53,760
Earnings per share
Primary $ .06 $ .14
Fully diluted $ .13
The accompanying notes are an integral part of these statements.
4
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
Three months ended March 31,
1997 1996
Cash flows from operating activities:
Net income $ 3,759 $ 7,113
Adjust
ments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 641 510
Amortization of goodwill and intangible assets 2,365 2,408
Amortization of deferred commissions 1,702 1,432
Equity earnings of unconsolidated affiliates 934 (1,371)
Payments of deferred commissions (2,836) (2,128)
Changes in other operating assets and liabilities 962 (7,937)
Unrealized depreciation (appreciation)
on mutual fund investments 58 (80)
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Net cash provided by (used in) operating activities 7,585 (53)
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Cash flows from investing activities:
Purchase of marketable securities, net (47) (452)
Sale of fixed assets 136
Proceeds from long-term investments 11,246
Purchase of partnership interest (2,220)
Other investing activities (418) 797
Capital expenditures, net (598) (1,451)
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Net cash provided by (used in) investing activities 7,963 (970)
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Cash flows from financing activities:
(Repayment) borrowing of long-term debt, net (6,500) 2,700
Dividends paid (3,828) (3,353)
Stock repurchase (1,245)
Proceeds from issuance of stock 1,155 81
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Net cash used in financing activities (10,418) (572)
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Net increase (decrease) in cash and cash equivalents 5,130 (1,595)
Cash and cash equivalents, beginning of period 22,466 16,306
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Cash and cash equivalents, end of period $ 27,596 $ 14,711
========== =========
The accompanying notes are an integral part of these statements.
5
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
Merger). The transaction was accounted for as a purchase of D&P by PSG.
3. Dividends and Other Capital Transactions
For the periods ended March 31, 1997 and March 31, 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 May 13, 1997, the Company's Board of Directors approved quarterly
dividends of $.06 per common share and $.375 per preferred share, payable
June 10, 1997 to stockholders of record on May 29, 1997.
As of March 31, 1997, the Company, in accordance with the previously
announced stock repurchase program, had purchased 160,000 shares of PDP
common stock at a total cost of $1.2 million.
4. Investment in Beutel, Goodman & Company Ltd.
At March 31, 1997, PDP had a 49% interest in the outstanding common stock of
Beutel, Goodman & Company Ltd. (BG). BG is a Canadian-based investment
counseling firm with approximately $9.4 billion in assets under management at
March 31, 1997.
PDP's consolidated condensed statements of financial condition and
consolidated income statements contain the following components related to
the BG investment:
March 31, December 31,
1997 1996
(in thousands)
Statements of Financial Condition:
Acquisition costs of investment in BG's
common stock and debentures $ 30,045 $ 30,045
Equity in BG net income 5,108 4,021
Dividends received (341) (285)
Amortization of BG acquisition costs over
proportional net equity in BG's assets (1,793) (1,476)
Deferred tax on translation adjustments (366) (229)
Currency translation adjustments (526) (330)
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Total BG investment $ 32,127 $ 31,746
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6
March 31, March 31,
1997 1996
(in thousands)
Statements of Income:
Equity in BG net income, net of amortization $ 770 $ 644
Interest income - BG debentures 135
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$ 770 $ 779
========= =========
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.
The following reflects summarized BG financial information for the three
months ended March 31, :
1997 1996
(in thousands)
Total revenues $ 7,361 $ 6,800
Net income $ 2,237 $ 1,900
5. Other Investments
In the first quarter of 1997, D&P CBO Partners, L.P. (D&P CBO) and Windy
City CBO Partners, L.P. (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 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.
6. 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.
7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
Assets Under Management
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At March 31, 1997, Phoenix Duff & Phelps had $33.0 billion of assets under
management, a decrease of $0.7 billion (2%) from December 31, 1996, and down
$1.3 billion (4%) from March 31, 1996. Since the revenues of the Company are
substantially based upon assets under management this information is important
to an understanding of the business.
(In Millions)
March 31, December 31, March 31,
1997 1996 1996
----------- ----------- ------------
Open-end mutual funds $ 11,227 $ 11,532 $ 11,508
Closed-end mutual funds 2,878 2,984 2,844
Institutional 12,020 12,276 13,442
General account 6,845 6,857 6,501
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$ 32,970 $ 33,649 $ 34,295
========= ========= =========
Three Months Ended March 31, 1997 Compared with Three Months Ended
- ------------------------------------------------------------------
March 31, 1996
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Investment management fees of $28.8 million for the three months ended March 31,
1997 decreased $1.8 million (6%) as compared to $30.6 million for the same
period in 1996. Management fees from institutional accounts decreased $1.3
million as a result of a decrease in average assets under management due to the
loss of certain institutional accounts. Management fees for institutional mutual
funds, which were pooled separate accounts for two months of 1996 decreased
$363,000 as a result of lower fees earned on institutional mutual funds as
compared to pooled separate accounts. Fees earned managing Phoenix Home Life
Mutual Insurance Company's (PHL) sponsored variable products decreased $257,000
as a result of a change in the fee structure, which decreased investment
management fees, offset, in part, by an increase in average assets under
management.
Mutual funds - ancillary fees increased $968,000 (20%) to $5.8 million for the
three months ended March 31, 1997 as compared to $4.9 million for the same
period in 1996. Fund accounting fees increased $470,000 primarily as a result of
a change in the fee structures for the retail mutual funds and PHL sponsored
variable products and an increase in institutional mutual fund average assets
under management. Net distributor fees increased $758,000 primarily due to
increased sales of B shares. Underwriter fees decreased $138,000 as a result of
decreased sales of mutual funds, offset by underwriter fees received from
certain PHL sponsored variable products. Shareholder service agent fees
decreased $128,000 as a result of fewer 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 increased $152,000 (14%) for the three months ended March
31, 1997 as compared to the same period in 1996, primarily as a result of
increased B share redemptions.
Employment expenses decreased $1.1 million (7%) for the three months ended March
31, 1997 as compared to the same period in 1996. This decrease is due to a $4.6
million reduction in employment expense resulting from the divestiture of Duff &
Phelps Capital Markets Co. This decrease was offset by non-recurring charges
resulting from a senior executive exercising certain rights under his employment
agreement which resulted in $1.6 million of employment expenses being recognized
in the first quarter of 1997. The remaining increase was primarily the result of
annual salary adjustments and increases in the workforce.
8
Other operating expenses decreased $1.5 million (15%) to $8.5 million for the
three months ended March 31, 1997 from $10.0 million for the same period in
1996. Operating expenses decreased primarily as a result of the July 1996
divestiture of Duff & Phelps Capital Markets Co.
Amortization of deferred commissions increased $270,000 (19%),for the three
months ended March 31, 1997 compared to the same period in 1996 as a result of
an increase in both the sales and redemptions of B shares. Depreciation and
amortization of leasehold improvements increased $131,000 (26%) for the three
months ended March 31, 1997 compared to the same period in 1996 as a result of
increased expenditures on information technology. Amortization of goodwill and
intangible assets remained relatively unchanged.
Operating income decreased $3.1 million (29%) to $7.5 million for the first
three months of 1997, as compared to the same period in 1996, as a result of the
changes discussed above.
Other (expense) income - net of ($1.2) million for the first three months of
1997 decreased $4.0 million (143%) as compared to $2.8 million in the
corresponding period in 1996. A $1.5 million loss was recognized in the
first quarter of 1997 as a result of the liquidation of WCCBO. Upon
liquidation, all remaining assets of WCCBO were sold and the remaining
proceeds were distributed to the partners. PDP's share of equity earnings
from WCCBO was ($1.5) million for the three months ended March 31, 1997 a
decrease of $2.0 million from the $524,000 for the same period in 1996.
In addition, PDP recorded $240,000 in losses in the first quarter of 1997
from its investment in Greystone Financial Group representing its share of
equity earnings in the company. No income or loss was recognized from the
Greystone investment in the first quarter of 1996. The Company's share
of the Duff & Phelps/Inverness LLC joint venture income decreased $1.5 million
in the first quarter of 1997 as compared to the same period in 1996, as a result
of the joint venture's recognition of a $1.5 million advisory fee from a
significant first quarter 1996 transaction compared to no equity earnings in
1997.
Interest expense decreased $235,000 in the first quarter of 1997 primarily as
a result of a decrease in outstanding debt from $26.2 million at March 31,
1996 to $10.0 million March 31, 1997.
The effective tax rate decreased from 47% in 1996 to 41% in 1997 primarily as
a result of a change in Connecticut tax law. The change, which was enacted in
May of 1996, modified the method of apportioning income for investment
advisors and, although retroactive to January 1, 1996, was not reflected
in the results of operations of the Company until the second quarter of 1996.
As a result of the effects discussed above, net income for the first three
months of 1997 of $3.8 million reflects a decrease of $3.4 million (47%)
compared to the $7.1 million for the first three months of 1996.
9
Liquidity and Capital Resources
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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.
If future sales of mutual funds with a contingent deferred sales charge require
payment of commissions which exceed internally generated cash, financing may be
necessary.
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 44.0 million shares
of common stock. Dividends on the preferred stock would total $4.7 million per
annum based on preferred shares outstanding at March 31, 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 March 31, 1997.
The Company has a bank credit agreement in place providing for a $27.0 million,
three year revolving credit facility. The outstanding obligation under the
credit agreement at March 31, 1997, was $10.0 million. Interest rates on such
borrowings averaged 6.5% for the first quarter of 1997. In the event adequate
financing is not available under this agreement, management believes that
additional financing can be secured. 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 March 31, 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.
10
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
No matters submitted to a vote.
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
May 14, 1997 /s/ Philip R. McLoughlin
-------------------------------
Philip R. McLoughlin, Chairman and
Chief Executive Officer
May 14, 1997 /s/ William R. Moyer
---------------------------------
William R. Moyer, Chief Financial Officer