SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission file number 1-10994
PHOENIX DUFF & PHELPS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4191764
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
56 Prospect Street 06115
Hartford, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (860) 403-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Series A Convertible Exchangeable New York Stock Exchange
Preferred Stock (Stated value
$25.00 per share)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 13, 1998, computed by reference to the last reported
price at which the stock was sold on such date, was $143,634,115.
The number of shares outstanding of the registrant's common stock, par value
$.01 per share, as of March 13, 1998 was 43,943,098.
Portions of the following documents are Part of this Form 10-K into
incorporated by reference into this Form 10-K: which the document is
incorporated by reference:
Phoenix Duff & Phelps Corporation
1998 Proxy Statement Part III
PHOENIX DUFF & PHELPS CORPORATION
ANNUAL REPORT FOR 1997 ON FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business....................................................... 1
Executive Officers of the Company.............................. 18
Item 2. Properties..................................................... 19
Item 3. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............ 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 21
Item 6. Selected Financial Data........................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 22
Item 8. Financial Statements and Supplementary Data.................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant............. 58
Item 11. Executive Compensation......................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management. 58
Item 13. Certain Relationships and Related Transactions................. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 59
Signatures............................................................... 62
PART I
Item 1.
Business.
Phoenix Duff & Phelps Corporation (the "Company") and its operating
subsidiaries, Duff & Phelps Investment Management Co. ("DPIM"), Phoenix
Investment Counsel, Inc. ("PIC"), National Securities & Research Corporation
("NS&RC"), Phoenix Equity Planning Corporation ("PEPCO"), Roger Engemann and
Associates ("REA"), the wholly-owned subsidiary of the Company's wholly-owned
subsidiary Pasadena Capital Corporation ("PCC"), and Seneca Capital Management
LLC ("Seneca") provide a variety of financial services to a broad base of
institutional, corporate and individual clients. Unless the context otherwise
requires, all references in this report to the "Company" refer to Phoenix Duff &
Phelps Corporation and its subsidiaries.
History of the Business
The Company's original business, which dates back to 1932, was to provide
clients with investment research on public utility companies. The Company grew
by expanding its products and services in areas in which management believed its
core investment research business provided a competitive advantage. For example,
the Company's utility research was expanded over time to include leading
industrial and financial companies. As its capabilities in investment research
grew, the Company built upon its reputation to establish a range of
complementary financial services. The Company entered the institutional
investment management business in 1979, and investment management grew to become
the Company's primary business.
In order to expand the Company's investment management business, on
November 1, 1995, pursuant to an Agreement and Plan of Merger dated as of June
14, 1995 (the "Merger Agreement") among Duff & Phelps Corporation, PM Holdings,
Inc. ("Holdings") and Phoenix Securities Group, Inc. ("PSG"), a wholly-owned
subsidiary of Holdings, PSG was merged with and into Duff & Phelps Corporation
(the "Merger"). Pursuant to the Merger, Duff & Phelps Corporation was renamed
Phoenix Duff & Phelps Corporation. Holdings is a wholly-owned subsidiary of
Phoenix Home Life Mutual Insurance Company ("Phoenix Home Life"). PSG, through
its subsidiaries, conducted Phoenix Home Life's investment management operations
other than real estate and mortgages. As a result of the Merger, PSG's
subsidiaries, PIC, PEPCO and NS&RC, are now direct or indirect wholly-owned
subsidiaries of the Company.
Pursuant to the Merger Agreement, on November 1, 1995, the capital stock
of PSG was converted into 26.4 million shares of the Company's common stock and
the approximately 17.0 million shares of the Company's common stock then issued
remain outstanding. Holdings owns approximately 60% of the outstanding common
stock of the Company.
In connection with the Merger, a special cash dividend of $1.75 per share
and a stock dividend of one-tenth of a share of the Company's Series A
Convertible Exchangeable Preferred Stock ("Series A Preferred Stock") with
respect to each share of the Company's common stock were paid on November 8,
1995 by the Company to its stockholders of record on October 31, 1995, the day
preceding the consummation of the Merger. Additionally, pursuant to the Merger
Agreement, Holdings contributed $30.7 million in cash to the capital of PSG
immediately prior to the Merger, and immediately following the Merger, Holdings
exchanged $35.0 million of debt owed to it by PSG for 1.4 million shares of
Series A Preferred Stock.
The Merger has provided the Company access to the broader retail client
base of PIC and NS&RC and to new distribution channels for its products through
PEPCO and Phoenix Home Life's agent field force, while introducing PIC to the
institutional clients of the Company. The Merger has also allowed the Company to
add the Phoenix family of mutual funds to its current product line, thereby
broadening its line of products.
In order to better focus on merging and growing the retail and
institutional investment management business, the Company announced on May 14,
1996, that it was exiting the fee based investment research, investment banking
and financial advisory businesses, which were part of Duff & Phelps Corporation
prior to the Merger. This action was completed on July 1, 1996.
Although by reason of the Merger, Duff & Phelps Corporation acquired PSG,
for accounting purposes under generally accepted accounting principles, PSG was
deemed to be the surviving entity. Accordingly, PSG's financial statements are
deemed to be the financial statements of the surviving entity and the Merger was
accounted for as an acquisition of Duff & Phelps Corporation by PSG using the
purchase method of accounting. As a result, the historical financial statements
include the operations and balances of PSG for the periods prior to the Merger
and the combined operations since November 1, 1995.
1
In order to continue expansion of the Company's institutional investment
management business, on July 17, 1997, pursuant to a purchase agreement, the
Company acquired a majority interest in Seneca, which is a registered investment
advisor providing services primarily to institutional investors.
On September 3, 1997, pursuant to a purchase agreement, the Company
acquired PCC, whose wholly-owned subsidiary REA is a registered investment
advisor providing investment management services primarily to individual
investors and SEC registered investment companies.
General
The Company, through its subsidiaries DPIM, PIC, NS&RC, REA and Seneca,
manages 1,052 institutional accounts (including Phoenix Home Life's General
Account), 46 open-end mutual funds, three closed-end mutual funds and 15,326
individually managed accounts. The following tables set forth the combined
assets under management and management fees for DPIM, PIC, NS&RC, REA and Seneca
at, and for the year ended, December 31, 1997.
Assets Under Management
(In millions)
Source:
Open-end Mutual Funds $ 13,001
Managed Accounts (a) 5,559
Closed-end Mutual Funds 3,336
Institutional Accounts (b) 16,155
Phoenix Home Life General Account 8,351
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Total $ 46,402
=========
Assets Classification:
Equity $ 15,924
Balanced 11,743
Fixed Income 18,360
Money Market 375
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Total $ 46,402
=========
Advisor:
DPIM $ 13,637
PIC 20,508
NS&RC 1,671
REA 6,216
Seneca 4,370
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Total $ 46,402
=========
Management Fees (c)
(In thousands)
Source:
Open-end Mutual Funds $ 63,732
Managed Accounts (a) 14,020
Closed-end Mutual Funds 15,518
Institutional Accounts (b) 36,539
Phoenix Home Life General Account 8,526
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Total $ 138,335
=========
(a) Managed Accounts represent assets which are individually managed for retail
and institutional clients.
(b) Institutional Accounts include 100% of the assets managed by Seneca.
(c) Management fees include REA for the period from September 3, 1997 through
December 31, 1997 and Seneca for the period from July 17, 1997 through
December 31, 1997.
2
Investment Management
Five of the Company's operating subsidiaries provide investment management
services: DPIM, PIC, NS&RC, REA and Seneca.
DPIM
General. DPIM was established by the Company in 1979 with the acquisition
of Boyd, Watterson & Co., a Cleveland-based investment manager founded in 1928.
It provides investment management services to a variety of institutions and
individuals. DPIM's clients include a number of investment companies, including
Duff & Phelps Utilities Income Inc., a closed-end investment company which
commenced operations in 1987 (the "Utilities Income Fund"), Duff & Phelps
Utilities Tax-Free Income Inc., a closed-end investment company established in
1991 (the "Utilities Tax-Free Fund") and Duff & Phelps Utility and Corporate
Bond Trust Inc., a closed-end investment company established in January 1993
(the "Utility and Corporate Bond Trust") (collectively the "Duff & Phelps
Funds"). DPIM's clients also include corporate, public and multi-employer
retirement funds and endowment, insurance and other special purpose funds.
Additionally, through March 1997, DPIM managed the high yield bond portfolios of
D&P CBO Partners, L.P. and Windy City CBO Partners, L.P., two partnerships which
issued collateralized bond obligations. Subsidiaries of the Company invested as
general and limited partners of these partnerships. DPIM offers fixed income and
equity investment management services on both a discretionary basis, where DPIM
makes the investment decisions with respect to the assets under management; and
an advisory basis, where DPIM recommends investment policies and strategies to
clients that maintain their own investment staffs that make the investment
decision. As of December 31, 1997, DPIM's 90 employees included 16 portfolio
managers, who have an average of 17 years of investment management experience.
DPIM maintains offices in Cleveland, Ohio and Chicago, Illinois. As of December
31, 1997, DPIM had approximately $13.6 billion in assets under management. For
the year ended December 31, 1997, DPIM had total revenues of $39.0 million.
On January 2, 1997, DPIM completed the purchase of Nuveen Institutional
Advisory Corp.'s ("Nuveen") 50% interest in Nuveen/Duff & Phelps Investment
Advisors, a general partnership, for a total consideration of $2.2 million. The
partnership was originally established as a joint venture between Nuveen and
DPIM in May 1990 for the purpose of providing investment advisory services to
nuclear decommissioning funds. The partnership, now 100% owned by DPIM (50%
owned by DPIM and 50% owned by DPIM's subsidiary, DPIM, Inc.), has been renamed
Phoenix Duff & Phelps Investment Advisors and continues to provide these same
services.
Investment Philosophy. DPIM believes that its experience in investment
management and research are valuable assets in its investment decision-making
process.
DPIM's fixed income approach is described as a "core" approach with an
emphasis on fundamental research and the avoidance of credit risk. This
investment approach begins with an intensive analysis of economic fundamentals
and a forecast of interest rate trends with the objective of enhancing portfolio
returns. DPIM places a significant emphasis on "sector" values, believing
certain market sectors and industry groups offer more attractive returns than
others in varying economic environments. Superior credit research skills are
utilized in the security selection process, which emphasizes investment grade
bonds.
DPIM's equity investment philosophy is founded on the view that equity
investments should be made in securities that provide higher total returns
coupled with lower risk relative to broad stock market indices. Capital
appreciation and relatively high dividend income are key factors in meeting
these goals. In addition, equity portfolios are geared towards equities with
relatively low price-to-earnings ratios and higher than average returns on
equity. The equity strategy emphasizes a long-term investment horizon which
usually results in low portfolio turnover and thus lower transaction costs. The
portfolio managers invest in equities of medium to large companies to provide a
relatively high level of liquidity.
3
Investment Products. DPIM manages the assets of the following closed-end
funds (each of which is traded on the New York Stock Exchange), other funds,
institutional accounts and individually managed accounts.
Closed-End Funds
Duff & Phelps Utilities Income Inc.
The primary investment objectives of the Utilities Income Fund, which
invests in a diversified portfolio of equity and fixed-income securities of
publicly traded utilities, are current income and long-term growth of income
with capital appreciation as a secondary objective. At December 31, 1997, the
Utilities Income Fund had a net asset value of approximately $2.6 billion.
Duff & Phelps Utilities Tax-Free Income Inc.
The primary investment objective of the Utilities Tax-Free Fund, which
invests primarily in a diversified portfolio of investment grade tax-exempt
obligations issued by or on behalf of utilities, is current income exempt from
regular federal income tax consistent with the preservation of capital. At
December 31, 1997, the Utilities Tax-Free Fund had a net asset value of
approximately $201 million.
Duff & Phelps Utility and Corporate Bond Trust Inc.
The primary investment objective of the Utility and Corporate Bond
Trust, which invests primarily in a diversified portfolio of investment grade
debt securities and preferred stocks issued by or on behalf of utilities and
other corporate entities, mortgage-backed securities and other asset-backed
securities, is high current income consistent with investing in securities of
investment grade quality. At December 31, 1997, the Utility and Corporate Bond
Trust had a net asset value of approximately $508 million.
Other Funds
Enhanced Reserves Portfolio
DPIM manages the assets of the Enhanced Reserves Portfolio of the Phoenix
Duff & Phelps Institutional Mutual Funds, an open-end diversified management
investment company. (Prior to July 19, 1996 this portfolio was known as the Duff
& Phelps Enhanced Reserves Fund.) The primary investment objective of the
Enhanced Reserves Portfolio, which invests primarily in a diversified portfolio
of U.S. government securities and high grade corporate debt obligations,
is high current income consistent with the preservation of capital. At
December 31, 1997, the Enhanced Reserves Portfolio had a net asset value of
approximately $77 million.
Real Estate Funds
DPIM manages the assets of the Phoenix Real Estate Securities Portfolio of
the Phoenix Multi-Portfolio Fund and the Phoenix Real Estate Equity Securities
Portfolio of the Phoenix Duff & Phelps Institutional Mutual Funds (collectively,
the Real Estate Funds). The primary investment objectives of these Real Estate
Funds, which invest primarily in equity real estate investment trusts (REITs),
are high capital appreciation and current income. At December 31, 1997, the
Phoenix Real Estate Securities Portfolio and the Phoenix Real Estate Equity
Securities Portfolio had net asset values of approximately $59 million and $17
million, respectively.
Phoenix Real Estate Securities Series
DPIM manages the assets of the Phoenix Real Estate Securities Series of
the Phoenix Edge Series Fund, Phoenix Home Life's variable product. The primary
investment objectives of the Phoenix Real Estate Securities Series, which
invests primarily in REITs, are high capital appreciation and current income.
At December 31, 1997, the Phoenix Real Estate Securities Series had a net asset
value of approximately $55 million.
Phoenix Core Equity Fund
DPIM manages the assets of the Phoenix Core Equity Fund of the Phoenix
Equity Series Fund. The primary investment objective of the Phoenix Core Equity
Fund, which invests primarily in equity securities of the 1,000 largest
companies traded in the United States, is long-term capital appreciation. At
December 31, 1997, the Phoenix Core Equity Fund had a net asset value of
approximately $10 million.
4
CBO Funds
DPIM managed diversified portfolios of high yield bonds which secured
collateralized bond obligations ("CBOs") issued by two limited partnerships,
each of which is described in more detail below. The CBOs were issued in
separate classes having different interest rates and different priority rights
to payment. Principal and interest payments on the high yield bonds in the
collateral portfolios were used to service principal and interest payments on
the CBOs. The CBOs were payable solely out of the proceeds of the collateral
which secured them and thus were nonrecourse. The CBOs were retired in February
1997.
DPIM, pursuant to separate management agreements, managed the collateral
portfolios of the two CBO limited partnerships. Additionally, as owners with
other investors of general partnership and limited partnership interests in the
partnerships, subsidiaries of the Company were entitled to a portion of any
assets remaining after the CBOs were retired.
In 1989, a wholly-owned subsidiary of the Company, CBO Investments Co.,
and other investors organized the first of the above-mentioned limited
partnerships, D&P CBO Partners, L.P. (the "D&P Partnership"), which together
with its wholly-owned corporation, D&P CBO Corp., issued $301 million in
aggregate principal amount of CBOs. CBO Investments Co. contributed $250,000 to
become a general partner and $650,000 to become a limited partner of the D&P
Partnership. In 1996, D&P CBO was liquidated in accordance with contractual
arrangements and the Company has no remaining investment.
In 1990, another wholly-owned subsidiary of the Company, Windy City
Investments Co., and other investors organized a second limited partnership,
Windy City CBO Partners, L.P. (the "Windy City Partnership"), which together
with its wholly-owned corporation, Windy City CBO Corp., issued $184.3 million
in aggregate principal amount of CBOs. Windy City Investments Co. contributed
$350,000 to become a general partner and $500,000 to become a limited partner of
the Windy City Partnership. As a result of income earned by the Windy City
Partnership, the Company's investment in that partnership had a book value of
$8.8 million at December 31, 1996. In 1997, Windy City CBO was liquidated in
accordance with contractual arrangements and the Company has no remaining
investment.
Institutional Accounts
At December 31, 1997, DPIM provided discretionary and advisory investment
management services to approximately 304 institutional accounts of varying size,
including corporate, public and multi-employer retirement funds and endowment,
insurance and other special purpose funds, including 39 individual and small
institutional accounts. As of December 31, 1997, DPIM's discretionary assets
consisted of approximately $2.2 billion in equity accounts and $7.7 billion in
fixed income accounts. Additionally, DPIM had approximately $11.1 billion in
total assets under management on an advisory basis at December 31, 1997.
Managed Accounts
At December 31, 1997, DPIM provided investment management services through
participation in various broker-dealer sponsored and distributed wrap programs.
Wrap programs offer broker-dealer clients discretionary portfolio management
services provided by unaffiliated investment managers selected by the broker. At
December 31, 1997, DPIM had approximately $268.6 million in assets under
management related to wrap programs.
Investment Management Agreements and Fees. Fees for the management of
discretionary accounts are based on the asset value of the investment portfolios
under management, while fees for advisory accounts are fixed rate fees. Pursuant
to an investment advisory agreement between DPIM and the Utilities Income Fund,
DPIM receives a quarterly fee at an annual rate of .60% of the first $1.5
billion of the average weekly net assets of the Utilities Income Fund and .50%
of the average weekly net assets in excess of $1.5 billion. Fees from the
Utilities Income Fund totaled $12.7 million for 1997 (representing 33% of DPIM's
total revenues for 1997). Pursuant to an investment advisory agreement between
DPIM and the Utilities Tax-Free Fund, DPIM receives a monthly fee at an annual
rate of .50% of the average weekly net assets of the Utilities Tax-Free Fund.
Fees from the Utilities Tax-Free Fund totaled $1.0 million for 1997. Pursuant to
an investment advisory agreement between DPIM and the Utility and Corporate Bond
Trust, DPIM receives a monthly fee at an annual rate of .50% of the average
weekly net assets of the Utility and Corporate Bond Trust. Fees from the Utility
and Corporate Bond Trust totaled $1.8 million for 1997. Pursuant to an
investment advisory agreement between DPIM and the Enhanced Reserves Portfolio,
DPIM receives a monthly fee at an annual rate of .24% of the first $1.0 billion
of the average daily net assets of the Enhance Reserves Portfolio and .19% of
the average daily net assets in excess of $1.0 billion. Fees from the Enhanced
Reserves Portfolio totaled $235 thousand for 1997. Pursuant to investment
5
advisory agreements between DPIM and the Real Estate Funds, DPIM receives a
monthly fee at an annual rate of .50% of the average daily net assetvalue of the
Real Estate Funds. Fees from the Real Estate Funds totaled $116 thousand for
1997. Pursuant to an investment advisory agreement between DPIM and the Phoenix
Real Estate Securities Series, DPIM receives a fee at an annual rate ranging
from .65% to .75% based on the assets of the fund. Fees from the Phoenix Real
Estate Securities Series totaled $90 thousand for 1997. Pursuant to an
investment advisory agreement between DPIM and the Core Equity Fund, DPIM
receives a monthly fee at an annual rate of .75% of the first $1.0 billion of
the average daily net assets of the fund, .70% of the next $1.0 billion of
average daily net assets and .65% of the average daily net assets in excess of
$2.0 billion. Fees from the Phoenix Core Equity Fund totaled $15 thousand for
1997. Pursuant to investment management agreements with various wrap program
sponsors, DPIM receives fees ranging from .45% to 1.00% of assets under
management. Other than the Utilities Income Fund, the Utilities Tax-Free Fund
and the Utility and Corporate Bond Trust, no single account represented more
than 2% of DPIM's total revenues during 1997.
DPIM, as investment advisor to investment companies, is subject to the
Investment Company Act of 1940, as amended (the "1940 Act"). Under the 1940 Act,
advisory and subadvisory agreements with investment companies, including the
Duff & Phelps Funds, may be continued in effect for a period of more than two
years from the date of their execution only so long as such continuance is
specifically approved at least annually by a majority of the disinterested
directors of such investment company and by either the board of directors or the
stockholders of the investment company. In addition, the 1940 Act requires such
agreements to be terminable without penalty to the investment company by its
directors or stockholders upon 60 days' notice to the advisor and further
requires such agreements to automatically terminate in the event of their
assignment or a change in control of the advisor. DPIM's advisory agreements
with non-investment company clients are generally terminable without penalty
upon notice by the client to DPIM.
PIC and NS&RC
General. PIC and NS&RC, each of which is an investment advisor registered
under the Investment Advisors Act of 1940, as amended (the "Advisors Act"),
provide investment management services for mutual funds and, in the case of PIC,
for institutional investors. PIC also manages the investment assets (other than
investments in real estate and mortgages) of the General Account and
substantially all of the Variable Products Separate Accounts of Phoenix Home
Life, which is the ninth largest mutual life insurance company in the United
States.
Investment management and advisory services are provided by PIC and NS&RC
for their institutional and mutual fund clients with respect to publicly-traded
equity, convertible and fixed income securities and, in the case of PIC,
privately-placed fixed income securities. As of December 31, 1997, PIC and NS&RC
had approximately $20.5 billion and $1.7 billion, respectively, in assets under
management. As of December 31, 1997, PIC and NS&RC's 81 employees included 23
portfolio managers, who have an average of 14 years of investment management
experience. PIC and NS&RC maintain offices in Enfield and Hartford, Connecticut;
Greenfield, Massachusetts; Sarasota, Florida; and Scotts Valley, California. For
the year ended December 31, 1997, PIC and NS&RC had total revenues of $74.2
million and $13.9 million, respectively.
Investment Philosophy. PIC's and NS&RC's approach to investing in equity
securities is based on the belief that stocks of companies with superior growth,
purchased at reasonable valuations, will produce superior investment results
over time. PIC and NS&RC seek to outperform the Standard & Poor's 500 stock
index over full market cycles by selecting securities of issuers whose future
earnings are expected to increase faster than the market. PIC's and NS&RC's
strategy emphasizes that early identification and timely investment of the
market's driving themes are the key elements to multi-year outperformance. It
considers the top-down market perspective and bottom-up issuer analysis as
equally critical to the decision making process and regards an effective sell
discipline as important as stock selection in achieving long-term investment
objectives.
PIC and NS&RC apply a "sector rotation" approach to fixed-income
management. PIC and NS&RC utilize a wide variety of market sectors to enhance
performance. These sectors may include investment and below investment-grade
securities. Undervalued sectors will be significantly overweighted relative to
the market, while overvalued sectors will be de-emphasized. PIC and NS&RC
utilize significant expertise in non-traditional fixed-income sectors where
values have not been realized in the marketplace. PIC and NS&RC attempt to
minimize overall interest rate risk by constraining portfolio durations.
6
As of December 31, 1997, PIC employed 23 portfolio managers and 15
research analysts. The portfolio managers and research analysts meet regularly
to develop a consensus regarding the impact of macroeconomic conditions on the
market and to establish current and long-term investment strategies. Focusing on
sectors and industries for which growth is anticipated, PIC's portfolio managers
formulate a "buy" list of recommended securities through evaluation of
investment research provided by PIC's research analysts, who both perform their
own research and review and analyze research generated by national and regional
brokerage firms and other entities which produce investment research. PIC also
formulates its investment decisions through direct contact with the management
of various issuers. The "buy" list is then utilized by the portfolio managers
who select securities from this list for their assigned portfolios as
appropriate in light of their clients' general investment guidelines.
PIC's investment professionals carefully scrutinize each others' suggested
investments in order to determine whether such investments should be placed on
the "buy" list. PIC believes that the collective process of formulating
investment strategies and recommending securities enhances the dissemination of
successful investment ideas and promotes the prompt sale of underperforming
securities.
Investment Products. The strategy of PIC and NS&RC is to increase
assets under management by offering institutional and mutual fund clients
a broad array of investment products and services while at the same time
moderating growth to insure that clients receive the highest quality of service.
PIC and NS&RC believe that the number of managed investment accounts has a
greater impact on the quality of investment advisory services than the amount
of assets under management because of the time needed to service each account's
particular investment requirements. Portfolio managers devote substantially
all of their time to investment management. General informational services for
clients, such as investment performance and account information, are assigned
to other personnel dedicated exclusively to client relations. In addition,
portfolio managers typically manage accounts of clients with similar investment
objectives, thereby enabling clients to benefit from the expertise of their
portfolio managers in achieving their investment objectives.
Portfolio managers actively manage client portfolios and exercise
investment discretion within general investment guidelines provided by their
clients. Client policies regarding the use of investment techniques and
strategies such as derivative securities and leverage, are followed. While a
large portion of assets under management are currently invested in equity and
fixed income securities of domestic issuers, PIC and NS&RC also invest actively
in equity and fixed income securities of foreign issuers.
PIC and NS&RC manage the assets of the following mutual funds and
institutional accounts.
Mutual Funds
Mutual funds managed by PIC and NS&RC are available for both institutional
and retail investors. PIC and NS&RC are investment advisors to 36 mutual fund
portfolios which had aggregate assets under management of approximately $11.9
billion as of December 31, 1997. The following table provides, with respect to
each mutual fund, information concerning its year of establishment, assets under
management and investment advisor:
7
Assets Under
Management
Year as of
Fund Established December 31, 1997 Advisor
($ in thousands)
Phoenix Series Fund:
Balanced Fund 1970 $1,720,043 PIC
Convertible Fund 1970 206,104 PIC
Growth Fund 1969 2,565,275 PIC
High Yield Fund 1980 623,956 PIC
Money Market Fund 1980 161,753 PIC
Aggressive Growth Fund 1968 262,283 PIC
U.S. Government Securities Fund 1987 186,592 PIC
----------
$5,726,006
==========
Phoenix Multi-Portfolio Fund:
Tax-Exempt Bond Portfolio 1988 $ 127,906 PIC
Mid Cap Portfolio 1989 371,240 PIC
Emerging Markets Bond Portfolio 1995 108,222 PIC
International Portfolio 1989 149,822 PIC
Diversified Income Portfolio 1993 6,593 PIC
---------
$ 763,783
=========
Phoenix Strategic Equity Series Fund:
Equity Opportunities Fund 1944 $ 183,939 NS&RC
Small Cap Fund 1995 330,463 PIC
Strategic Theme Fund 1995 149,511 PIC
---------
$ 663,913
=========
The Phoenix Edge Series Fund:
Multi-Sector Fixed-Income Fund 1986 $ 191,894 PIC
Money Market Fund 1986 126,607 PIC
Growth Fund 1986 1,505,568 PIC
Total Return Fund 1986 428,993 PIC
Balanced Fund 1992 231,181 PIC
International Fund 1990 194,108 PIC
Strategic Theme Fund 1996 47,620 PIC
----------
$2,725,971
==========
Other Phoenix Funds:
Strategic Allocation Fund 1982 $ 319,455 PIC
Income and Growth Fund 1940 828,024 NS&RC
Phoenix Multi Sector Short Term
Bond Fund 1992 40,758 NS&RC
Worldwide Opportunities Fund 1960 158,239 NS&RC
Multi-Sector Fixed Income Fund 1989 352,842 NS&RC
California Tax-Exempt Fund 1983 107,427 NS&RC
----------
$1,806,745
==========
Phoenix Equity Series:
Growth and Income Fund 1997 $ 16,037 PIC
=========
Phoenix Investment Trust 97:
Phoenix Small Cap Value Fund 1997 $ 11,703 PIC
Phoenix Value Equity Fund 1997 11,799 PIC
---------
$ 23,502
=========
8
Assets Under
Management
Year as of
Fund Established December 31, 1997 Advisor
($ in thousands)
Phoenix Duff & Phelps
Institutional Mutual Funds:
Balanced Fund 1996 $ 29,786 PIC
Growth Fund 1996 61,981 PIC
U.S. Government Bond Fund 1996 8,451 PIC
Managed Bond Fund 1996 79,472 PIC
Money Market Fund 1996 9,849 PIC
---------
$ 189,539
=========
Total $11,915,496
===========
All of these mutual funds are "open-end" funds, which continuously offer
to sell and redeem their shares at prices based on the net asset value of the
fund's portfolio. Shares of open-end mutual funds are generally redeemable at
any time and are generally not traded in the secondary market. As a result, the
Company's revenues from such mutual funds vary due to redemptions and purchases
of shares, in addition to fluctuations in the value of the securities in their
portfolios. Net advisory fees realized from these mutual funds by PIC and NS&RC
totaled $61.4 million for the year ended December 31, 1997.
Institutional Accounts
At December 31, 1997, PIC provided discretionary investment management
services to approximately 28 institutional accounts of varying size, including
corporate, public and multi-employer retirement funds and endowment, insurance
and other special purpose funds. As of December 31, 1997, PIC and NS&RC managed
discretionary assets of approximately $1.8 billion.
Investment Management Agreements and Fees. PIC and NS&RC have entered into
investment management agreements with each of their institutional and mutual
fund clients, including agreements with Phoenix Home Life with respect to its
General Account. In addition, PIC has entered into sub-investment management
agreements with each of the investment advisors for which it has agreed to
manage all or a part of a mutual fund portfolio.
Pursuant to these agreements, PIC and NS&RC have been granted
discretionary authority to make investment decisions with respect to assets
under management within certain general investment guidelines and, in the case
of the Phoenix Home Life General Account, subject to oversight by the Phoenix
Home Life Board of Directors and the Investment Committee thereof.
Investment management agreements are terminable by either party upon
relatively short notice: 60 days in the case of agreements with mutual funds and
typically 30 to 60 days in the case of agreements with institutional clients.
Agreements generally may not be assigned without the consent of the client and
terminate automatically in the event of their assignment. "Assignment" in these
agreements typically has the meaning given under the 1940 Act, which definition
would include certain changes in the ownership of the Company or its investment
advisory subsidiaries.
PIC and NS&RC are compensated under investment management agreements on
the basis of fees calculated as a percentage of assets under management. The
percentage of the fee generally declines as the amount of assets under
management increases above certain thresholds. In addition, the percentage of
the fee is also dependent upon the difficulty of management of the investments;
generally, investments in equity securities command a higher percentage fee than
fixed income securities, as do investments, such as investments in foreign
securities, which require more extensive management time. Assets managed by PIC
and NS&RC are valued at their net asset values, which is the standard measure
adopted by the industry for valuing securities. Management fees for
institutional clients are typically payable monthly or quarterly. For their
investment management services, PIC and NS&RC receive management fees from
discretionary accounts ranging from .15% to .75% per annum of the accounts'
average net asset values and from each mutual fund ranging from .40% to .75%
per annum of the funds' average daily net asset values.
9
Management fees are negotiated by PIC and NS&RC and their clients.
Management fees paid by a mutual fund must initially be negotiated with the
fund's board of directors and must be annually approved by a majority of the
board's disinterested directors. Increases in the fees must thereafter be
approved by the fund's shareholders. Since shareholder approval must be obtained
in order to implement fee increases, management fees paid by mutual funds tend
to be increased infrequently and competitive forces in the mutual fund industry
influence these negotiations for fee changes.
Pursuant to an investment management agreement with Phoenix Home Life
effective as of January 1, 1995, PIC provides non-real estate investment
management services to the Phoenix Home Life General Account, which as of
December 31, 1997 had approximately $8.4 billion in assets managed by PIC. PIC
receives a management fee based on net asset values ranging from .10% to .45%
per annum, with a blended rate of approximately .12%, of net assets invested in
preferred stocks, publicly traded bonds, including government securities; cash
and cash equivalents; privately placed bonds, common stock; venture capital, oil
and gas and leveraged lease products. The management fee is payable monthly
based on the average net asset value of the General Account. For the year ended
December 31, 1997, management fees paid to PIC with respect to the General
Account totaled $8.5 million.
Until March 1, 1996, PIC also managed the assets in five Phoenix Home Life
Pooled Separate Accounts, which on that date were reorganized into a new
institutional mutual fund series managed by PIC, the Phoenix Duff & Phelps
Institutional Mutual Funds. For the investment management services provided to
the new institutional mutual fund series, PIC receives investment management
fees ranging from .25% to .60% per annum of each fund's average daily net asset
value. These management fees are payable monthly. For the year ended December
31, 1997, management fees paid to PIC with respect to these institutional
mutual funds totaled $1.1 million.
The Company believes that the management fees payable to PIC under the
General Account and Pooled Separate Account investment management agreements
are no less favorable to PIC than the management fees that would be obtained
from unaffiliated persons based on the size of these accounts and the types of
investments in which the assets of such accounts are invested. Any changes
in management fees to be paid to PIC under these agreements will be
negotiated by PIC and Phoenix Home Life, with such changes being subject to the
approval of a majority of the disinterested directors of the Company who are
neither employees nor directors of Phoenix Home Life or its subsidiaries. The
Company expects that any compensation under these agreements will be at
competitive rates which are no less favorable to PIC than the management fees
that would be obtained from unaffiliated persons based on the size of these
accounts and the types of investments in which the assets of such accounts are
invested.
REA
General. REA is an investment advisor registered under the Advisors Act,
specializing in growth-style equity investing. As of December 31, 1997, REA
managed asssets of $6.2 billion for over 14,000 individually managed accounts
and six mutual funds. The majority of assets under management are invested in
large-cap growth equities, however, REA also manages small-cap, global growth,
balanced and value portfolios. Founded in 1969 by Roger Engemann, REA is
located in Pasadena, California and as of December 31, 1997 had 78 employees
For the period from its acquisition by the Company through December 31, 1997,
PCC and its subsidiaries had total revenues of $14.0 million.
Investment Philosophy. REA's investment approach is predicated on the
belief that high quality companies possessing strong brand identities and
consistent, superior earnings growth rates ultimately deliver superior long-term
risk-adjusted returns. In addition to these characteristics, REA looks for
companies with quality management focused on shareholder value and with
financial strength and a favorable long-term outlook. REA believes that such
companies are best discovered through a fundamental, bottom-up approach and that
client portfolios should normally remain fully invested. Investment research
emphasizes meetings with the management teams of portfolio companies. Portfolio
managers and analysts also attend management conferences and luncheons, place
research oriented calls to management, participate in conference calls with
management and review written company reports.
10
Investment Products. REA manages the assets of individually managed
accounts and mutual funds, as follows:
Assets Under
Management
Number of as of
Source Accounts/Funds December 31, 1997
($ in millions)
Individually Managed Accounts:
Wrap 13,075 $ 4,054
Non-wrap 1,236 1,236
------ ------
Total 14,311 5,290
Mutual Funds 6 926
------ ------
Total Assets Under Management 14,317 $6,216
====== ======
Individually Managed Accounts
The majority of REA's individually managed account business is through
participation in broker sponsored and distributed wrap programs. Wrap programs
offer broker-dealer clients discretionary portfolio management services by
unaffiliated investment managers selected by the broker and his or her client.
As of December 31, 1997, REA participated in over 60 such programs, including
those sponsored by Merrill Lynch, American Express, Smith Barney and A.G.
Edwards. Assets of $2.7 million were managed within the Merrill Lynch
"Consults" wrap program, and the top ten wrap programs accounted for
approximately 90% of the total wrap assets managed by REA.
In addition to its wrap business, REA also manages assets for high-net
worth and smaller institutional clients serviced directly by REA. These accounts
are characterized by their larger account size, relative to wrap, and their
long-term relationships with REA. Many of these clients established their
accounts over ten years ago.
Mutual Funds
As of December 31, 1997, REA managed assets totaling $926 million in six
open-end mutual funds, as follows:
Assets Under
Management
Year as of
Fund Established December 31, 1997
($ in thousands)
Phoenix-Engemann Funds:
Growth Fund 1986 $ 466,955
Balanced Return Fund 1987 69,313
Nifty Fifty Fund 1990 284,156
Global Growth Fund 1993 19,061
Small & Mid-Cap Growth Fund 1994 53,148
Value 25 Fund 1996 33,179
---------
Total $ 925,812
=========
The funds are distributed through the non-proprietary wholesale
distribution channel. Each fund offers investors three pricing structures, Class
A, Class B and Class C shares, representing traditional front-end load, back-end
load and level-load, respectively.
11
Investment Management Agreements and Fees. REA has entered into investment
management agreements with its clients, each of which provides for REA to earn
management fees based on the assets managed.
Regarding wrap business, contracts are structured in one of two ways. In
the majority of cases and for all of the larger programs, REA has one investment
management agreement with the sponsor which covers all accounts managed by REA
in that particular program. For a number of the smaller programs, REA has an
individual investment management agreement with each client. With a few minor
exceptions, fees for the management of wrap assets are payable quarterly in
advance. As of December 31, 1997, REA participated in programs which provided
annual investment management fees ranging from .45% to 1.00% of assets under
management. The range reflects, among other factors, the difference in the level
of client service and reporting for which REA is responsible under the different
programs. These investment management agreements are terminable by either party
upon relatively short notice.
REA has an investment management agreement with each of its non-wrap
individually managed clients. In each case fees are payable quarterly in
advance. As of December 31, 1997, REA investment management fee rates for
non-wrap clients ranged from .50% to 2.00% of assets under management. The fee
rate is negotiated separately with each client and reflects, among other
factors, the size of the account, the length of the relationship and the
investment style selected. These investment management agreements are terminable
by either party at any time.
REA has an investment management agreement with the Phoenix-Engemann
Funds. Under the agreement, REA earns management fees based on the average
daily net asset values of each fund. The agreement prescribes, for each fund, a
tiered-fee structure whereby the fee percentage is decreased incrementally as
the fund grows through net asset thresholds. Fees reflect the complexity of and
effort required by the investment methodology underlying each fund's management.
As of December 31, 1997, the investment management agreement with the
Phoenix-Engemann Funds prescribed annual fee rates ranging from .60% to 1.10%
of average daily net assets. Fees are payable on REA's request and, since each
fund's inception, have been settled monthly in arrears. The investment
management agreement is terminable by either party upon 60 days notice.
Seneca
General. Seneca, based in San Francisco, California, was established in
July, 1996 through an assignment of assets from GMG/Seneca Capital Management,
L.P. Seneca provides investment management services to foundations, endowments,
corporations, public fund and private clients. As of December 31, 1997, Seneca
had approximately $4.4 billion in assets under management, split between
equities and fixed income products. As of December 31, 1997, Seneca had 43
employees, including 8 portfolio managers who have an average of over 12 years
of investment management expertise. For the period from its acquisition by the
Company through December 31, 1997, Seneca had total revenues of $9.3 million.
Investment Philosophy. Seneca actively manages domestic equity, fixed
income and balanced products using a disciplined, bottom-up investment process
executed by a team of investment professionals.
The fixed income approach (Value Driven Fixed Income) is bottom-up,
research-driven and opportunistic, intended to identify fundamental value and to
capitalize on volatility and market inefficiencies. Extensive fundamental
research is the standard. Value is added through sector selection, issue
selection (based on credit research and structure analysis), and trading
opportunities. Duration is targeted and managed around a narrow band.
The equity approach is bottom-up, with an emphasis on fundamental earnings
acceleration, earnings quality and sustainability, and valuation. In addition to
standard financial analysis and careful review of Wall Street research, analysts
meet directly and frequently with portfolio candidates. Analysts ask specific
and targeted questions to calibrate earnings trends. Seneca offers a mid to
large cap growth equity product called "Growth with Controlled Risk", which
blends two distinct universes of stocks: "Forecast Appreciation" and "Proven
Appreciation". Forecast Appreciation focuses on stocks for which Seneca
forecasts major earnings acceleration. Proven Appreciation focuses on
well-established large capitalization stocks that have continually paid
dividends for the last 20 years. The combination of stocks from each universe
produces a portfolio which grows at a rate consistent with a growth style, but
is cushioned against downside risk in turbulent markets. The second equity
product that Seneca offers is called "Earnings Driven Growth". This equity
12
discipline exploits the correlation between earnings acceleration and price
appreciation. The equity strategy screens for growth across all market
capitalizations. The focus is on stocks for which earnings growth rates are
projected at substantially higher levels than the market, and for which major
earnings accelerations are forecasted.
Investment Products. At December 31, 1997, Seneca provided advisory
investment management to a variety of institutional and private clients managed
on a separate account basis. Seneca is also sub-advisor for a series of socially
responsible mutual funds and a real estate mutual fund.
Investment Management Agreements and Fees. Seneca has separate investment
management agreements with each of its separate account and mutual fund
clients. Pursuant to these agreements, Seneca has been granted discretionary
authority to make investment decisions within certain general portfolio
guidelines. These investment contracts are generally cancelable upon 30 days
notice by either party.
Seneca charges quarterly management fees, in advance, based upon the
market value of the investments. The standard fee schedule for the Growth with
Controlled Risk managed accounts is 1.00% on the first $5 million, .80% on the
next $10 million and .50% on amounts over $15 million of assets managed.
The standard fee schedule for the Earnings Driven Growth accounts is 1.00% on
the first $10 million, .80% on the next $25 million and .70% on amounts over $35
million of assets managed. The standard fee schedule for the Value Driven Fixed
Income accounts is .50% on the first $30 million, .35% on the next $20 million
and .25% on amounts over $50 million of assets managed.
Clients and Client Development
Institutional Accounts
DPIM, PIC and Seneca have a broad institutional client base consisting
primarily of medium-sized pension and profit sharing plans of corporations,
governmental entities and unions, as well as endowments and foundations, each of
which has between $.4 million and $418 million in assets managed. As of December
31, 1997, assets under management by DPIM, PIC and Seneca with respect to their
1,052 institutional advisory accounts were approximately $16.2 billion, or
34.7% of the total assets under management by the Company as of that date.
As of December 31, 1997, PIC managed approximately $8.4 billion of the
approximately $10.2 billion in assets held in Phoenix Home Life's General
Account. The balance of the General Account assets consisted primarily of
investments in real estate and mortgages and insurance policy loans. PIC also
manages assets held in certain of the Separate Accounts of Phoenix Home Life.
Separate Accounts are separate investment accounts of an insurance company, the
assets of which are by law segregated from the insurance company's general
account assets. By purchasing an investment contract or policy, such as a group
annuity contract, from Phoenix Home Life, an institutional investor can place
its assets, together with the assets of other investors, in one or more Separate
Accounts ("Pooled Separate Accounts"). On March 1, 1996, certain of the Pooled
Separate Accounts were reorganized into new mutual funds managed by PIC, the
Phoenix Duff & Phelps Institutional Mutual Funds. Most of the investors in the
Pooled Separate Accounts elected to invest their account assets in the new
mutual funds and those investors that did not so elect received cash in an
amount equal to the value of their account. As of December 31, 1997, the Phoenix
Duff & Phelps Institutional Mutual Funds had $267 million of assets under
management. Similarly, Phoenix Home Life and one of its insurance company
subsidiaries have each created Separate Accounts to hold assets backing their
respective obligations under variable insurance and annuity contracts ("Variable
Separate Accounts"), which assets are invested in mutual funds managed primarily
by PIC. Virtually all of the assets held in Variable Separate Accounts are
currently invested in The Phoenix Edge Series Fund, which had approximately
$2.8 billion in aggregate net assets as of December 31, 1997.
Open-end Mutual Funds
DPIM, PIC, NS&RC and REA are investment advisors to 46 open-end mutual
fund portfolios which had aggregate assets under management of approximately
$13.0 billion as of December 31, 1997. These mutual funds (the "Phoenix Funds")
are available to both institutional and retail investors.
Several of the Phoenix Funds are offered in a variety of classes. The
Class A shares issued to the public by the Phoenix Funds are all subject to
conventional front-end sales charges, except for a money-market fund which is
sold on a no-load basis. The Class B shares issued by these mutual funds are
subject to contingent deferred sales charges which are typically paid by the
13
holder upon redemption of such shares during the first five years after
purchase. The Class C shares issued by these mutual funds are subject to
contingent deferred sales charges which are typically paid by the holder upon
redemption of such shares during the first year. The Phoenix Duff & Phelps
Institutional Mutual Funds are offered as Class X and Class Y shares, which
are similar to Class A and Class B shares, respectively. The Phoenix Edge Series
Fund has only one class of shares.
PIC also serves as investment advisor to three investment funds of a
non-U.S. investment company qualifying under the laws of Luxembourg as a societe
d'investissement a capital variable ("SICAV"), the shares of which are
distributed overseas to foreign investors by non-U.S. subsidiaries of Phoenix
Home Life. The SICAV had approximately $41.9 million in aggregate assets under
management as of December 31, 1997. PIC also provides sub-investment advisory
services under contracts with investment advisors to manage two mutual fund
portfolios which are included among its 28 institutional accounts. As of
December 31, 1997, PIC managed approximately $314 million in aggregate assets
under management under these sub-advisory agreements.
Managed Accounts
REA and DPIM are investment advisors to 15,326 individually managed
accounts. The majority of REA and DPIM's managed account business is through
participation in various broker sponsored wrap programs.
Closed-end Mutual Funds
DPIM is the investment advisor to 3 closed-end mutual fund portfolios
which had aggregate assets under management of approximately $3.3 billion as of
December 31, 1997. These mutual funds are not open for additional deposits.
Client Development
The ability of DPIM, PIC, NS&RC, REA and Seneca to attract and retain
clients is largely dependent on the portfolio managers and other key employees
of these companies. Each company, therefore, maintains a variety of competitive
compensation programs designed to reward both short-term and long-term
profitability, investment performance and new business. In an effort to maximize
time devoted by portfolio managers to investment management, client relations
and shareholder service departments attend to the informational needs of
clients.
Product innovation is also central to the development of new clients and
the retention of existing clients. New investment management products typically
require "seed" funding to assist in attracting accounts and developing an
initial performance record. Traditionally, Phoenix Home Life has directly or
indirectly provided seed funding for new investment funds managed by PIC.
Phoenix Home Life may not continue to provide such funding. If such funding is
not provided by Phoenix Home Life, it will likely be internally generated or
financed by the Company.
Other than the following, no account or fund represents more than 2% of
the Company's total revenues during 1997: Phoenix Home Life and Phoenix Home
Life sponsored products, Duff & Phelps Utilities Income Fund, Balanced Fund,
Phoenix Series Growth Fund, Phoenix Series High Yield Fund, Phoenix
Multi-Portfolio Mid-Cap Portfolio, Phoenix Income and Growth Fund and The
Phoenix Edge Series Growth Fund.
Distribution
Marketing, Distribution and Support Services
Marketing. At December 31, 1997, DPIM and PIC had 304 and 28 institutional
investment clients, respectively, with most of their business coming by
referral. DPIM and PIC also solicit new accounts by relying on their portfolio
managers to establish relationships with pension fund consulting firms whose
role is advising clients in the selection of investment management firms. This
strategy has the benefit of magnifying DPIM's and PIC's marketing effort
because a successful relationship with a given consultant tends to create
multiple solicitation opportunities.
14
Institutional marketing services are directed toward investment management
consultants who are retained by institutional investors to assist in competitive
reviews of potential investment managers. These consultants recommend investment
managers to their institutional clients based on their review of investment
managers' performance histories and investment management styles. Sales and
marketing personnel at DPIM and PEPCO establish and maintain relationships with
these consultants and provide information and materials to these consultants in
order to enable them to evaluate DPIM and PIC.
Distribution. PEPCO, a broker-dealer registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), serves as principal
underwriter and national wholesale distributor of the mutual funds managed by
PIC, NS&RC and REA, as well as the variable and annuity contracts issued by
Phoenix Home Life (or an insurance company subsidiary) which are invested in The
Phoenix Edge Series Fund. PEPCO also provides a wide range of investment
management support services, including accounting, pricing, record keeping and
transfer agency services. Net revenues relating to these support services paid
by PIC, NS&RC and REA to PEPCO (including net sales loads, net distribution
fees, administrative fees and shareholder service agent fees) totaled $22.5
million for the year ended December 31, 1997. PIC, NS&RC and PEPCO were acquired
by the Company pursuant to the Merger on November 1, 1995 in order to expand the
Company's investment management business. PEPCO has been granted exclusive
distribution rights pursuant to distribution agreements with each of the Phoenix
Mutual Funds and receives commissions for shares distributed, depending on the
size of the particular sale, ranging from 2.0% to 4.75% on sales of less
than $1 million. Individual sales of $1 million or more are made without
commission. Commissions on sales of variable contracts which are invested in
The Phoenix Edge Series Fund range from 3.0% to 6.0% of the purchase or premium
payments made under such contracts. Mutual fund shares and variable products
are distributed by PEPCO under sales agreements with unaffiliated national
and regional broker-dealers and financial institutions and registered
representatives of WS Griffith & Co., Inc. (Griffith). Griffith is a registered
broker-dealer subsidiary of Phoenix Home Life engaged in the retail distribution
of Phoenix funds and variable contracts. A substantial portion of PEPCO's
distribution commissions are paid by it to these entities. PEPCO also engages
in telemarketing of these mutual funds and variable contracts to existing
and potential clients. In addition, mutual funds are marketed to existing
and potential institutional clients through registered representatives of PEPCO.
Griffith is currently the largest distributor of Phoenix Home Life
investment products. Mutual fund sales by PEPCO, other than with respect to
money market funds, totaled $1.2 billion in 1997, of which Griffith accounted
for 5%. Sales by PEPCO of variable products totaled $433 million in 1997, of
which Griffith accounted for 68%. Through Griffith, PEPCO obtains the services
of more than 1,330 Phoenix Home Life insurance agents and brokers who are
registered representatives of Griffith.
Sales and marketing personnel of PEPCO also direct substantial efforts
towards establishing and maintaining relationships with unaffiliated national
and regional broker-dealers and financial institutions. Due to the highly
competitive nature of the investment management business, the ability of PIC,
NS&RC and REA to compete for mutual fund customers is becoming increasingly
dependent on developing and maintaining an effective distribution channel
through such entities.
Support Services. PEPCO also provides various support services for the
mutual funds whose assets are managed by PIC, NS&RC and REA. Under financial
agent agreements, it performs accounting, administrative, pricing and record
retention services for these funds and receives monthly fees generally at the
annual rate of .05% for the first $100 million of the aggregate daily net
assets, .04% of $100 million to $300 million of the aggregate daily net assets,
.03% of $300 million to $500 million of the aggregate daily net assets and .015%
on greater than $500 million of the aggregate daily net assets. In the first
quarter of 1998, PEPCO will be outsourcing substantially all of its mutual fund
accounting function to an unrelated third party service provider. PEPCO also
serves as the funds' transfer agent, for which it receives an annual fixed fee
of $14.95 for each shareholder account, except for the daily dividend funds, for
which it receives $19.25 per shareholder account, subject to a certain minimum
fee (plus out-of-pocket expenses).
15
Investment in Beutel, Goodman & Company Ltd.
On November 15, 1993, the Company and affiliates of the Company (i)
purchased 43,333 Class 3 Common Shares of Beutel, Goodman & Company Ltd. ("BG"),
representing 40% of the outstanding voting capital stock of BG, for a purchase
price of $7.8 million paid in cash, and (ii) purchased $23.3 million of 8.5%
Redeemable Unsecured Debentures of BG payable periodically from the net earnings
of BG and maturing as to any unpaid principal on November 14, 2003. At December
31, 1995, the Company held approximately $9.5 million of the 8.5% BG debentures.
These debentures were retired during 1996. On April 1, 1994, the Company
purchased an additional 19,118 Class 3 Common Shares of BG for a purchase price
of $7.2 million. As a result of the purchase of the 19,118 shares, the Company
owns 49% of the outstanding voting capital stock of BG. BG is a Canadian
corporation engaged in the investment management business and has its main
office in Toronto, Ontario. As of December 31, 1997, it managed approximately
$10.1 billion of assets for corporate and public pension funds, charitable
organizations and individuals. All of the outstanding BG capital stock not owned
by the Company is owned by management employees of BG. All of the shareholders
of BG have entered into an agreement providing among other things that the
management group and the Company shall each be entitled to specified
representation on the BG board of directors, that the management group shall
have authority over the day-to-day operations of BG and that net earnings of BG
shall be used for specified purposes in accordance with specified priorities.
During 1997, BG's Shareholders' Agreement was amended providing for the
recognition by the Company of up to 100% of BG's earnings.
Competition
The investment management business is highly competitive. Thousands of
investment management firms offer their services to potential clients. In
addition, various services and investments offered by insurance companies, banks
and securities dealers compete with the services offered by the Company. Some of
these firms are larger and have access to greater resources than the Company.
Although the Company's range of product offerings has increased significantly
recently with the acquisitions of PIC, NS&RC, REA and Seneca, many of the
Company's competitors offer a broader range of advisory services than those of
the Company. In addition, the investment advisory industry is characterized by
relatively low cost of entry and new investment management firms are frequently
created.
The Company believes that the most important factors affecting
competition for investment management clients are the performance records and
reputations of investment managers and their investment professionals,
marketing and access to distribution channels, product innovation, customer
service and management fees. The Company's ability to increase and retain
clients' assets could be materially adversely affected if client accounts
underperform the market or if key portfolio managers terminate their employment
with the Company. In the past, the Company has not experienced a high turnover
rate among its portfolio managers. The ability of the Company to compete with
other investment management firms also is dependent, in part, on the relative
attractiveness of its investment philosophy and methods under prevailing
market conditions.
A large number of mutual funds are sold to the public by investment
management firms, broker-dealers, insurance companies and banks in competition
with mutual funds sponsored and managed by the Company's investment management
subsidiaries. Many of the Company's competitors apply substantial resources to
advertising and marketing their mutual funds, which may adversely affect the
ability of funds managed by the Company to attract new clients and to retain
assets under management. Load mutual funds have for some time faced significant
competition from no-load funds, resulting in the reduction of sales fees and
leading to consideration of alternative load structures. The ability to attract
and retain assets in these funds, most of which have sales fees, is dependent to
a significant degree on the ability to maintain relationships with both
unaffiliated brokers and financial institutions and participating insurance
agents and brokers in Phoenix Home Life's agent field force who are registered
representatives of Griffith. Shareholder account service is also important to
retaining mutual fund customers.
Investment Research and Investment Banking
The Company, directly or through subsidiaries, provided investment
research to outside clients such as banks, insurance companies, investment
advisors, brokers and investment banking firms, beginning in 1932. Investment
research was provided by the Company's subsidiary Duff & Phelps
Investment Research Co. ("Investment Research") until October 1994, when
Investment Research was dissolved into the Company.
16
The Company also provided financial advisory and investment banking
services to individuals, corporations and financial institutions through its
wholly owned subsidiary Duff & Phelps Financial Consulting Co., later known as
Duff & Phelps Capital Markets ("Capital Markets"). Capital Markets formed Duff &
Phelps Securities Co., its wholly owned subsidiary, which was a registered
broker-dealer offering institutional brokerage services.
The Company announced on May 14, 1996, that it was exiting the
subscription investment research, investment banking, and financial advisory
businesses. Subsequently it sold the assets of Capital Markets (including Duff &
Phelps Securities Co.) to several former executives of Capital Markets, and it
sold the assets of its high yield research business to other former executives
of the investment research division.
Subsequent to the sale of its assets, Capital Markets was renamed DPCM
Holdings, Inc. ("DPCM"). DPCM has a joint venture affiliate located in
Greenwich, Connecticut through which it invests in private equity transactions,
expansion financings and recapitalizations involving management participation.
Regulation
The Company and its subsidiaries are subject to extensive governmental
regulation and supervision. The Company, DPIM, PIC, NS&RC, REA and Seneca are
registered with the Securities and Exchange Commission (the "SEC") under the
Advisors Act and, as necessary, are registered under applicable state investment
advisory laws. Registrations, reporting, maintenance of books and records,
custodial arrangements and other compliance procedures required pursuant to the
Advisors Act and applicable state securities laws are maintained independently
by the Company, DPIM, PIC, NS&RC, REA and Seneca, with advice and assistance
from PEPCO. In addition, each of the mutual funds managed by DPIM, PIC, NS&RC
and REA are registered with the SEC under the 1940 Act. DPIM, PIC, NS&RC and REA
are, therefore, subject to the 1940 Act insofar as it relates to investment
advisors for registered investment companies.
PEPCO is registered as a broker-dealer under the Exchange Act and state
securities laws and is therefore subject to minimum net capital requirements
imposed on broker-dealers by the SEC. The SEC rules require an aggregate
indebtedness to net capital ratio of no more than 15:1. As of December 31, 1997,
PEPCO had net capital of $6.3 million and a ratio of aggregate indebtedness to
net capital of 1.74:1. In addition, as a registered broker-dealer, PEPCO is also
a member of the National Association of Securities Dealers, Inc. ("NASD"). The
SEC and NASD require that, in addition to the minimum net capital requirements,
PEPCO comply with a variety of operational standards, including proper record
keeping and the licensing of its representatives. The SEC and NASD periodically
examine PEPCO and review periodic reports with respect to its operations and
financial condition.
DPIM, PIC, REA and Seneca are also subject to ERISA, insofar as they are
"fiduciaries" under ERISA with respect to employee benefit plan clients subject
to ERISA.
Because Phoenix Home Life owns a majority equity interest in the Company,
New York law relating to the subsidiaries of life insurance companies may apply
to the business activities conducted by the Company, including the requirement
that transactions with affiliates be fair, equitable and reasonable. However, no
prior insurance regulatory approval is or will be required with respect to the
investment management activities of subsidiaries of the Company or the
distribution by such entities of investment products. In the case of investments
in Separate Accounts, the individual or group insurance or annuity or similar
insurance contract issued by Phoenix Home Life or an insurance company
subsidiary is subject to prior review and approval by insurance regulators in
each jurisdiction where the product is to be sold.
The laws and regulations described above generally grant supervisory
agencies broad administrative powers, including the power to limit or restrict a
firm from conducting its business in the event that it fails to comply with
relevant laws and regulations. Possible sanctions that may be imposed in the
event of noncompliance include the suspension of individual employees,
limitations on the firm's business for specified periods of time, revocation of
the firm's registration as an investment advisor or broker-dealer, censures and
fines. Changes in these laws or regulations could have a material adverse impact
on the profitability and mode of operations of the Company.
17
The officers, directors and employees of the Company may from time to time
own securities which are also owned by one or more of the clients of the
Company. The Company has internal policies with respect to personal investing
which require reporting of securities transactions and restrict certain
transactions so as to reduce the possibility of conflict of interest.
Employees
As of December 31, 1997, the Company and its subsidiaries employed
approximately 690 persons. The Company considers its employee relations to be
satisfactory.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
Philip R. McLoughlin 51 Chairman of the Board, Chief Executive
Officer and Director
Calvin J. Pedersen 56 President and Director
Michael E. Haylon 40 President of PIC, Executive Vice President
and Director
John F. Sharry 46 Executive Vice President
William R. Moyer 53 Senior Vice President and Chief Financial
Officer
Leonard J. Saltiel 44 Senior Vice President
The executive officers of the Company are elected annually and serve at
the discretion of the Board of Directors of the Company.
Mr. McLoughlin has been Chairman of the Board of the Company since May
1997 and Chief Executive Officer of the Company since November 1, 1995. Mr.
McLoughlin has also been a Director of Phoenix Home Life since February 1994 and
has been employed by Phoenix Home Life as Executive Vice President Investments
since December 1988. In addition, Mr. McLoughlin serves as President of PEPCO,
Chairman of PIC and Chairman and Chief Executive Officer of NS&RC. He also is a
member of the Board of Directors of these corporations, Duff & Phelps Utilities
Tax-Free Income Inc. and Duff & Phelps Utility and Corporate Bond Trust Inc. Mr.
McLoughlin also serves as President and as a Director or Trustee of the Phoenix
Funds, Phoenix Duff & Phelps Institutional Mutual Funds and Phoenix-Aberdeen
Series Fund (collectively, the "Phoenix Mutual Funds"). He is a Director of PM
Holdings, Inc., Phoenix Charter Oak Trust Company, Aberdeen Asset Management
plc, The World Trust, a Luxembourg closed-end fund, The Emerging World Trust
Fund, a Luxembourg closed-end fund, and of PXRE Corporation ("PXRE"), a
publicly-traded corporation, and of its wholly-owned subsidiary, PXRE
Reinsurance Company ("PXRE Reinsurance").
Mr. Pedersen has been President of the Company since July 1993 and a
Director of the Company since January 1992. From January 1992 to July 1993,
Mr.Pedersen served as an Executive Vice President of the Company. Mr. Pedersen
was also an Executive Vice President of Duff & Phelps, Inc. ("DPI, Inc."),
the former parent of the Company's operating subsidiaries, from 1988 until its
dissolution. From 1986 to 1988, he served as Senior Vice President - Marketing
and Sales of DPI, Inc. Mr. Pedersen joined the Company in 1986 from First
Chicago Investment Advisors, an investment management company, where he was a
Managing Director and head of the Account Management and Administration
Division. Mr. Pedersen is also President and Chief Executive Officer of Duff &
Phelps Utilities Income., Duff & Phelps Utilities Tax-Free Income Inc. and
Duff & Phelps Utility and Corporate Bond Trust Inc. and serves as a Director or
Trustee of the Phoenix Mutual Funds.
18
Mr. Haylon has been an Executive Vice President and a Director of the
Company since November 1, 1995. From February 1993 to November 1, 1995, Mr.
Haylon was Senior Vice President - Securities Investments of Phoenix Home
Life. Mr. Haylon is also President of PIC, Executive Vice President of NS&RC
and Executive Vice President of all of the Phoenix Mutual Funds. From June
1991 through January 1993, Mr. Haylon was Vice President, Public Fixed Income
and from June 1990 through May 1991, he was Vice President, Public Bond
Investments of Phoenix Home Life. Mr. Haylon was Vice President of Aetna
Capital Management from August 1986 until June 1990 and a Managing Director
of Aetna Bond Investors from February 1989 until June 1990. Mr. Haylon also
serves as a member of the Boards of Directors of PIC, PEPCO and NS&RC.
Mr. Sharry has been Executive Vice President of the Company since January
1, 1998. From November, 1995 to December 31, 1997, Mr. Sharry was Senior Vice
President of the Retail Line of Business and responsible for Sales, Marketing,
Customer Service and the transfer agent of the Phoenix Mutual Funds, variable
annuities, managed accounts and retirement planning products of PEPCO. From 1994
to 1995, Mr. Sharry was a Managing Director and Director of Retail Marketing at
Putnam Investments. Mr. Sharry was a Director and National Sales Manager of
Putnam's Broker/Dealer Division from 1992 to 1994. Mr. Sharry was also a member
of Putnam's Executive Committee. From 1988 to 1992, Mr. Sharry was First Vice
President, National Sales Manager, Insurance/Annuity Division at Dean Witter
Reynolds, Inc. Mr. Sharry was also Vice President, Regional Insurance
Coordinator from 1985 to 1988 and Regional Marketing Director from 1983 to 1985
at Security First/Holden Group. Mr. Sharry is a member of the Investment Company
Institute's Marketing Policy Committee, the Forum for Investor Advice board of
directors and the Executive Committee of the Dalbar Excellence and Trust
program.
Mr. Moyer has been Senior Vice President and Chief Financial Officer of
the Company since November 1, 1995. From November 1990 to November 1, 1995,
Mr. Moyer was Vice President - Investment Products Finance of Phoenix Home
Life. Prior to joining Phoenix Home Life in November 1990, Mr. Moyer was a
Senior Manager at Price Waterhouse LLP where he was employed for over seven
years. In addition, Mr. Moyer serves as Senior Vice President - Finance and
Treasurer of PIC, PEPCO and NS&RC. Mr. Moyer is also a Vice President of
several of the Phoenix Mutual Funds.
Mr. Saltiel has been Senior Vice President of the Company since February
5, 1998. From March 1993 to February 5, 1998, Mr. Saltiel held various positions
up to Managing Director - Operations and Service with PEPCO. From January 1,
1993 to November 1, 1995, Mr. Saltiel held various positions with Phoenix Home
Life. From January 1, 1990 to December 31, 1992, Mr. Saltiel was Vice President
and Controller and from January 9, 1987 to December 31, 1989, he was Vice
President and Associate Controller of Home Life Insurance Company. From August
1, 1977 to January 8, 1987, Mr. Saltiel held various finance positions with
Philadelphia Life Insurance Company.
Item 2. Properties.
The Company, which is headquartered in Hartford, conducts its operations
through offices located in Hartford and Enfield, Connecticut; Chicago, Illinois;
Greenfield, Massachusetts; Cleveland, Ohio; Pasadena, San Francisco and Scotts
Valley, California; and Sarasota, Florida in which locations it leases a total
of approximately 232,000 square feet of office
space.
Item 3. Legal Proceedings.
In August 1995, a legal action was filed by Peter Crane and Lisa Crane,
Co-Executors of the Estate of Sally Crane, Deceased, Plaintiffs, against Duff &
Phelps Capital Markets Co. (now known as DPCM Holdings, Inc.) ("Capital
Markets") in the Circuit Court of Cook County, Illinois. Plaintiffs allege that
Capital Markets negligently valued certain closely-held stock in connection with
the decedent's federal estate tax return. Capital Markets contended that the
valuation was properly made. The case was settled during 1997 with no material
adverse effect on the Company's financial position or results of operations.
On October 10, 1995, three individuals who are members of Associated
Surplus Dealers ("ASD"), a non-profit mutual benefit corporation organized to
promote the surplus merchandise industry, filed an action on behalf of
themselves and as a class action on behalf of other members of ASD in the
Superior Court of the State of California for the County of Los Angeles, Case
No. BC 136761, against the directors of ASD, a corporation named Walter
Fletcher, Inc. ("WFI") allegedly controlled by one of the director defendants
who was also the Executive Director of ASD, an attorney for ASD, and Duff &
19
Phelps Corporation and Duff & Phelps Financial Consulting Co. (now known,
respectively, as Phoenix Duff & Phelps Corporation and DPCM Holdings, Inc.)
(both hereinafter referred to as "DP"). The complaint alleged that all
defendants breached fiduciary duties to the plaintiffs in connection with the
sale of certain assets to WFI at a price of approximately $2.55 million that
were later sold by WFI to a third party at a price of approximately $60 million.
The complaint specifically alleged that DP, which had valued WFI's assets at
$2.55 million, grossly undervalued the WFI assets causing the plaintiffs to
suffer substantial losses. On October 16, 1995, a corporation that is a member
of ASD filed a similar class action suit with substantially similar allegations.
On October 17, 1995, another corporation that is a member of ASD filed yet
another similar class action on behalf of ASD members with substantially the
same allegations. The various suits sought compensatory damages, attorney's
fees, costs, and punitive damages in specified amounts. On January 6, 1996, the
three groups filed a single, consolidated complaint (the Consolidated
Complaint).
On March 7, 1996, 90 other individual and corporate plaintiffs filed an
action in Los Angeles Superior Court against DP and others. The complaint is not
a class action but is similar in other respects to the Consolidated Complaint.
This action has now been consolidated with the class action.
On May 10, 1996, the Court heard defendants' demurrers to the Consolidated
Complaint and sustained them in part. On July 3, 1996, a Second Amended
Complaint was filed, alleging that DP was professionally negligent, breached its
fiduciary duty, aided and abetted other defendants in breaching their fiduciary
duties, and breached its engagement agreement with ASD. Additional demurrers
were filed, and some were granted and others denied. The final claims against DP
are breach of contract (class claim), negligence (class claim), breach of
fiduciary duty (derivative claim) and aiding and abetting breach of fiduciary
duty (derivative claim). The parties have exchanged documents and completed
other, preliminary discovery. Plaintiffs are attempting to complete settlement
with two of the other defendants.
On June 6, 1997, Gigatek Memory Systems, Inc. ("Gigatek") sued Capital
Markets Co., and three former employees of Capital Markets in Los Angeles
Superior Court. Defendants filed a Demurrer and Motion to Strike on September 9,
1997, which was granted in part and denied in part on October 16, 1997.
On November 6, 1997, Gigatek filed a First Amended Complaint that alleged
that in March of 1996 Capital Markets was retained to render a valuation opinion
as to the fair market value of Gigatek's common stock and related Stock
Appreciation Rights. Plaintiffs alleged that Capital Markets breached its
Engagement Letter with Gigatek by failing to fairly and accurately value the
Stock Appreciation Rights and failing to properly determine the fair market
value of Gigatek's common stock. Capital Markets' valuation was the subject of
an arbitration in March, 1997, between Gigatek and its ex-Chief Executive
Officer, in which the three arbitrators awarded almost $6 million to the ex-CEO
as the value of his Stock Appreciation Rights in Gigatek. This arbitration was
based on the Capital Markets valuation. Gigatek is suing Capital Markets
claiming at least $6 million of damages, including the arbitration award,
related attorney's fees, expert fees, and costs. Plaintiffs also seek punitive
damages. Plaintiffs and defendants are in the early stages of discovery.
Management of the Company, at this time, does not expect the above
litigation to have a material adverse effect on the Company's financial position
or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No items submitted.
20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock is listed and traded principally on the New York
Stock Exchange under the symbol "DUF". Information concerning the range of high
and low sales prices for the Company's common stock, and the dividends declared,
for each quarterly period within the past two fiscal years is set forth below:
Dividends
Quarter ended High Low Declared
1997
March 31 $8.50 $6.88 $.06
June 30 $8.13 $6.63 $.06
September 30 $9.31 $7.31 $.06
December 31 $8.19 $7.00 $.06
1996
March 31 $7.00 $5.63 $.05
June 30 $7.88 $5.88 $.05
September 30 $7.25 $6.00 $.05
December 31 $7.38 $6.00 $.06
As of March 13, 1998, the closing price of the Company's common stock on the New
York Stock Exchange was $8 3/16 per share.
Item 6. Selected Financial Data.
(in thousands, except per share data)
Year ended December 31* 1997 1996 1995 1994 1993
Operating revenues $164,600 $152,504 $112,206 $104,429 $99,872
Net income 24,147 26,719 15,690 17,020 23,043
Basic earnings per share** 0.44 0.50 0.51
Total assets 604,949 365,684 356,619 97,201 103,118
Long-term obligations 194,299 21,884 33,858 3,517 3,930
Convertible exchangeable
preferred stock 78,827 78,504 78,029
Cash dividends declared per
common share** 0.24 0.21 0.05
* 1997 reflects the results of Phoenix Duff & Phelps Corporation and
includes Seneca Capital Management from July 17, 1997 to December 31, 1997
and Pasadena Capital Corporation from September 3, 1997 to December 31, 1997.
1996 reflects the results of Phoenix Duff & Phelps Corporation, while 1995
reflects the results of Phoenix Securities Group, Inc. from January 1, 1995
to October 31, 1995 and the combined results of Phoenix Duff & Phelps
Corporation for the period from November 1, 1995 to December 31, 1995.
1994 and 1993 reflect the results of Phoenix Securities Group, Inc. only.
** Basic earnings per share and cash dividends declared per common share prior
to 1995 are not meaningful because of the recapitalization in connection
with the Merger. The 1995 basic earnings per share reflect ten months of
Phoenix Securities Group, Inc. and two months of the combined company.
21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Phoenix Duff & Phelps Corporation (the Company) was formed on November 1, 1995
when Phoenix Securities Group, Inc. (PSG), the money management subsidiary of PM
Holdings, Inc. (PM Holdings), merged into Duff & Phelps Corporation (D&P). PM
Holdings is a wholly-owned subsidiary of Phoenix Home Life Mutual Insurance
Company (PHL). Upon consummation of the merger, PM Holdings owned approximately
60% of the outstanding common stock of the Company. Under generally accepted
accounting principles, the transaction was accounted for as a reverse merger
with the purchase accounting method applied to the former D&P assets and
liabilities. The historical financial statements include the operations and
balances of PSG for the periods prior to the merger and the combined operations
since November 1, 1995.
During 1997, the Company acquired the operations of Pasadena Capital Corporation
(PCC) and a majority interest in GMG/Seneca Capital Management LLC (Seneca).
Both of these companies are based in California. Details of these acquisitions
are discussed in Note 3 of the Company's 1997 Consolidated Financial Statements.
The 1997 net income of $24.1 million represents the Company's operations
inclusive of the operations of Seneca from July 17, 1997 through December 31,
1997 and PCC from September 3, 1997 through December 31, 1997. The 1996 net
income of $26.7 million represents the Company's operations prior to the
acquisitions of PCC and Seneca, while the 1995 net income of $15.7 million
represents ten months of PSG operations and two months, i.e., November and
December, of the Company's operations. As a result of the required accounting
presentation and the inherent difficulties of analyzing and comparing the
historical financial statements to the 1997 results, management has also
included 1996 financial information on a pro forma basis as if the acquisitions
of PCC and the majority interest in Seneca had occurred on January 1, 1996. The
following discussion begins with a comparison of the historical financial
statements and follows with a discussion of the pro forma financial information
which is found in Note 4 of the Company's 1997 Consolidated Financial
Statements. The principal operating entities referred to in this discussion are
described in Note 1 of the Company's 1997 Consolidated Financial Statements.
Assets Under Management
The following table presents actual year-end assets under management at December
31, 1997 and 1996 as well as December 31, 1996 assets under management presented
as if the acquisitions of PCC and the majority interest in Seneca had occurred
on January 1, 1996. The revenues of the Company are substantially earned based
upon assets under management and, accordingly, these trends are important for
understanding the business.
1997 1996 1996
Actual Actual Pro Forma
(in millions)
Open-end Mutual Funds $ 13,001 $11,304 $12,106
Managed Accounts * 5,559 228 4,585
Closed-end Mutual Funds 3,336 2,984 2,984
Institutional Accounts ** 16,155 12,276 15,742
PHL General Account 8,351 6,857 6,857
-------- ------- -------
$ 46,402 $33,649 $42,274
======== ======= =======
* Managed Accounts represent assets which are individually managed for
retail and institutional clients.
** Institutional Accounts include 100% of the assets managed by Seneca Capital
Management.
At December 31, 1997, the Company had $46.4 billion in assets under management,
an increase of $12.8 billion from $33.6 billion at December 31, 1996. This
increase is primarily the result of the acquisitions of PCC, on September 3,
1997, and a majority interest in Seneca, on July 17, 1997, which increased
assets under management by $10.6 billion at December 31, 1997. Sales of open-end
mutual funds were $1.3 billion in 1997 but were offset by redemptions of $2.2
billion. Sales and redemptions of managed accounts were each $.2 billion in
1997. New institutional accounts increased assets under management by $.9
billion but were offset by lost accounts totaling $3.0 billion. In December
1997, $1.0 billion was added to the assets managed by the Company for the PHL
general account. The remaining change in assets under management was the
result of positive performance.
22
Historical Financial Statements
General
The historical financial statements reflect the results of operations of PSG
from January 1, 1995 to October 31, 1995 and the combined results of the Company
for the period from November 1, 1995 to December 31, 1997. This accounting
treatment is required under generally accepted accounting principles. The 1997
and 1996 results include a substantial noncash amortization expense resulting
from merger and acquisition related goodwill and other intangible assets.
Statement of Income for 1997 Compared to 1996
Revenues for 1997 of $164.6 million, which includes $27.2 million for PCC and
Seneca, increased $12.1 million (8%) from $152.5 million in 1996 which included
$8.2 million for Duff & Phelps Capital Markets Co. (Capital Markets) through
June 30, 1996. Excluding the effects of PCC, Seneca and Capital Markets, the
Company's revenues for 1997 decreased $6.9 million (5%) compared to 1996.
Investment management fees of $138.3 million for 1997, which includes $24.7
million for PCC and Seneca, increased $20.2 million (17%) from $118.2 million in
1996. Management fees earned on closed-end mutual funds increased $.5 million
due to an increase in assets under management as a result of positive
performance. Fees earned managing PHL's general account increased $.4 million
due to an increase in assets managed. Management fees for 1997 related to
managed accounts increased $.4 million as a result of an increase in assets
under management. Management fees earned on institutional and advisory accounts
decreased $3.6 million due to lost accounts. Fees earned managing PHL sponsored
variable products decreased $1.1 million as a result of a change in the fee
structure (which also increased both fund accounting and underwriting fees)
offset, in part, by an increase in assets under management. Management fees
earned on open-end mutual funds, including institutional mutual funds, decreased
$.2 million as a result of a decrease in assets under management. Funds under
reimbursement increased $.2 million, decreasing revenue, primarily due to the
start-up of several new funds in 1997 for which the advisors, subsidiaries of
the Company, agreed to waive or reimburse expenses to the extent they exceeded
limits detailed in the funds' prospectuses. Other management fees decreased $.6
million partly due to an increase in sub-advisory fees paid to Greystone Capital
Management (Greystone) and the liquidation of Windy City CBO Partners, L.P.
(WCCBO) in March 1997.
Mutual funds - ancillary fees of $22.5 million for 1997, which includes $2.2
million for PCC, increased $.5 million (2%) from $22.0 million in 1996. Fund
accounting fees increased $2.7 million primarily as a result of a change in the
fee structures for the open-end mutual funds as well as PHL sponsored variable
products, on which no such fees were earned prior to January 1997. Net
distributor fees decreased by $3.2 million as a result of the sale of the
deferred commissions asset. Other ancillary fees decreased $1.0 million
primarily as a result of decreased shareholder service agent fees resulting from
a decline in mutual fund shareholder accounts. Underwriter fees decreased $.2
million as a result of the closure of Capital Markets in 1996, offset, in part,
by a new fee schedule for the PHL sponsored variable products.
Financial consulting and investment research services were not offered by the
Company in 1997 as the operations of Capital Markets and the fee-based
investment research and securities businesses were divested and closed,
respectively, in 1996, resulting in a $7.7 million decrease in revenues in 1997
as compared to 1996.
Other income and fees of $3.7 million for 1997, which includes $.3 million for
PCC, decreased $.9 million (19%) from $4.6 million in 1996. This decrease is
primarily due to a decrease in redemption income as a result of the sale of the
Company's then existing deferred commissions asset in June 1997, for which the
Company had previously earned a fee if shares were redeemed within five years of
purchase.
Operating expenses of $133.6 million for 1997, which includes $19.3 million for
PCC and Seneca, increased $20.4 million (18%) from $113.2 million in 1996.
Excluding the effects of PCC and Seneca, expenses increased $1.1 million in 1997
over 1996.
23
Employment expenses of $71.6 million for 1997, which includes $8.6 million for
PCC and Seneca, increased $12.8 million (22%) from $58.8 million in 1996. A new
profit sharing plan for certain eligible employees increased employment expenses
by $.6 million. Employment expenses decreased $8.2 million due to the
divestiture of Capital Markets and the closure of the fee-based investment
research and securities businesses in 1996. Non-recurring charges, resulting
from a senior executive exercising certain rights under his employment
agreement, increased employment expenses by $.9 million in 1997. The remaining
increase was primarily due to an expansion of the sales force, an increase in
sales-based and performance-based incentive compensation and annual salary
adjustments.
Other operating expenses of $41.4 million for 1997, which includes $6.0 million
for PCC and Seneca, increased $4.8 million (13%) from $36.5 million in 1996.
Operating expenses decreased $1.2 million primarily as a result of the
divestiture of Capital Markets in 1996. In addition, a one-time loss of $.6
million was recognized in the second quarter of 1997 relating to the sublease of
certain office space.
Restructuring charges of $.7 million in 1997 are the result of the Company's
decision to out-source substantially all of its fund accounting operations
effective in the first quarter of 1998.
Depreciation and amortization of leasehold improvements of $3.0 million for
1997, which includes $.2 million for PCC and Seneca, increased $.7 million (33%)
from $2.2 million in 1996. An increase in depreciation expense relating to
capital assets purchased in 1997 and 1996 more than offset the effect of the
divestiture of Capital Markets which decreased depreciation expense by $.4
million.
Amortization of goodwill and intangibles of $13.9 million for 1997 increased
$4.3 million (45%) from $9.6 million in 1996 as a result of the acquisitions of
PCC and Seneca.
Amortization of deferred commissions of $3.0 million for 1997, which includes
$.2 million for PCC, decreased $3.1 million (50%) from $6.1 million in 1996 as a
result of the sale of the Company's then existing deferred commissions asset in
June 1997. A deferred commissions asset relating to PCC continues to be
amortized.
Operating income of $31.0 million for 1997 decreased $8.3 million (21%) from
$39.3 million in 1996 as a result of the changes discussed above.
Equity in earnings of unconsolidated affiliates of $6.4 million for 1997
increased $1.0 million (19%) from $5.3 million in 1996. The Company's share of
income from its investment in Financial Alliance Investors I, L.P. increased
revenues by $5.5 million. Equity income from the Company's investment in Beutel,
Goodman & Company Ltd. (BG) increased $1.3 million. The Company's share of
equity earnings from WCCBO was a loss of $1.5 million in 1997, due to the
liquidation of WCCBO in early 1997, as compared to income of $1.6 million in
1996. The Company's share of equity earnings from the DPIM/Nuveen joint venture
was zero in 1997 as compared to $.6 million in 1996. On January 2, 1997, the
Company purchased the remaining interest in the DPIM/Nuveen joint venture and
consolidated operations. In addition, the Company's share of the
Inverness/Phoenix LLC joint venture income decreased $1.1 million in 1997
primarily as a result of the joint venture's recognition of an advisory fee in
1996 from a significant non-recurring transaction. The Company's investment in
Greystone in 1997 resulted in a loss of $.6 million, as compared to a loss of
$.7 million in 1996. Greystone was in a start-up phase in both years.
Gain on sale of $6.9 million in 1997 is the result of the sale of the Company's
deferred commissions asset, excluding PCC's, in June 1997. The sale, which was
to an unrelated third party, resulted in proceeds of $26.0 million. As part of
the transaction, the purchaser will fund future B share commissions and be
entitled to distributor fees from the Company's outstanding B share mutual funds
as well as any contingent deferred sales charges, excluding those relating to
the Phoenix-Engemann funds.
Other expense - net of $33 thousand in 1997 decreased $102 thousand (75%) from
$135 thousand in 1996 primarily from an increase in unrealized gains on
marketable securities.
Interest expense - net of $3.3 million in 1997 increased $3.7 million from net
interest income of $.4 million in 1996 as a result of the interest charges from
the financing of the PCC and Seneca acquisitions offset, in part, by a decrease
in interest expense of $.5 million due to a reduction in outstanding debt on a
previous credit facility. Interest income decreased $.3 million primarily due to
a decrease of $.4 million from the BG debentures, which were fully redeemed in
December 1996.
24
Income to minority interest of $.7 million in 1997 represents the minority
shareholders' interest in the equity earnings of Seneca, which is fully
consolidated in the Company's financial statements.
Net income for 1997 of $24.1 million reflects a decrease of $2.6 million (10%)
from the $26.7 million in 1996, resulting from the effects of the increased
income and expenses discussed above. The effective tax rate decreased to 40.0%
in 1997 from 40.5% in 1996 as a result of settlements in 1997 with federal and
state tax authorities for the tax years 1990 to 1993, offset by the effect of
goodwill amortization resulting from the PCC acquisition.
Statement of Income for 1996 Compared to 1995
Revenues for 1996 of $152.5 million increased $40.3 million (36%) from $112.2
million in 1995 reflecting the inclusion of $51.3 million of D&P's revenues,
including Capital Markets through June 30, in 1996 compared to $10.3 million for
the two months included in 1995. Excluding the effect of D&P, the Company's
revenues for 1996 decreased $.7 million compared to 1995.
Management fees decreased $1.5 million as a result of a $3.9 million decrease in
fees from the loss of certain institutional accounts offset, in part, by an
increase of $1.2 million in management fees earned on mutual funds and a $2.4
million increase in fees earned managing PHL's general account and PHL sponsored
variable products. The remaining decrease is primarily the result of an increase
in funds under reimbursement due to the conversion of certain separate accounts
to mutual funds for which Phoenix Investment Counsel, Inc. (PIC) agreed to
reimburse or waive expenses to the extent they exceeded limits detailed in the
funds' prospectuses. The reimbursements increased $.9 million in 1996 as
compared to 1995.
Mutual funds - ancillary fees increased primarily as a result of a $2.5 million
increase in underwriting and distributor fee revenues.
Other income and fees decreased by $1.8 million as a result of a decline in B
share redemptions, for which the Company earned a fee if shares were redeemed
within five years of purchase.
Employment expenses increased $5.3 million due to an expansion of the sales
force, an increase in sales-based and performance-based incentive compensation
and annual salary adjustments.
Operating expenses for 1996 of $113.2 million increased $29.2 million (35%) from
$84.0 million in 1995, reflecting the inclusion of $35.6 million of D&P
operating expenses, including Capital Markets through June 30, in 1996 compared
to $9.6 million for 1995. Excluding the effect of D&P, expenses increased $3.2
million in 1996 over 1995. These increases were offset, in part, by reductions
in other operating expenses ($7.8 million) primarily relating to cost savings
achieved by the merger, and reduced amortization of deferred commissions ($1.4
million).
Depreciation increased $.7 million.
Amortization of goodwill and intangible assets increased $6.4 million in 1996 as
a result of the merger.
Operating income increased $11.1 million (39%) to $39.3 million for 1996
compared to $28.2 million for 1995 as a result of the changes discussed above.
Other income - net of $5.2 million for 1996 increased $4.3 million as compared
to 1995 due to an increase in equity income from BG, WCCBO and Nuveen/Duff &
Phelps Investment Advisors of $1.8 million, $1.1 million and $.5 million,
respectively. In addition, the Company's share of the Inverness/Phoenix LLC
joint venture income was $1.5 million in 1996 as a result of the joint venture's
recognition of a fee from a significant first quarter transaction. A $.6 million
loss was recognized in 1996 representing the Company's share of losses
attributable to its investment in Greystone, which was in a start-up phase.
25
Net income for 1996 of $26.7 million reflects an increase of $11.0 million (70%)
over the $15.7 million in 1995, resulting from the effects of the increased
income and expenses discussed above. In addition, interest expense decreased $.6
million in 1996 reflecting the difference in interest charged on PSG's note
payable, which was converted to preferred stock at the time of the merger, and
two months on the revolving facility in 1995, and that charged in 1996 on the
revolving credit facility. The effective tax rate decreased to 40.5% in 1996
from 44.7% in 1995 primarily as a result of a change in Connecticut tax law,
enacted in May of 1996 and retroactive to January 1, 1996, which modified the
method of apportioning income for investment advisors.
Pro Forma Financial Information (See Note 4 to the Consolidated Financial
Statements)
Statement of Income for 1997 Compared to 1996 - Pro Forma
Revenues - pro forma of $207.1 million in 1997 decreased $4.7 million (2%) from
$211.8 million in 1996.
Investment management fees - pro forma of $175.0 million in 1997 increased $6.4
million (4%) from $168.5 million for 1996. Management fees from PCC increased
approximately $6.4 million due to increased asset performance. New institutional
accounts from Seneca increased fees by $4.3 million offset by a decrease of $3.6
million in advisory and subadvisory fees resulting from lost accounts.
Management fees earned on mutual funds and managed accounts increased $.6
million as a result of an increase in assets managed. Fees earned managing PHL's
general account and PHL sponsored variable products decreased $.7 million as a
result of a change in the variable product fee structure (which also increased
both fund accounting and underwriting fees) offset, in part, by an increase in
both general account and variable product assets under management. Funds under
reimbursement increased $.2 million, decreasing revenue, primarily due to the
start-up of several new funds in 1997 for which the advisors, subsidiaries of
the Company, agreed to waive or reimburse expenses to the extent they exceeded
limits detailed in the funds' prospectuses. Other management fees decreased $.6
million partly due to an increase in sub-advisory fees paid to Greystone and the
liquidation of WCCBO in March 1997.
Mutual funds - ancillary fees - pro forma of $27.0 million in 1997 decreased
$1.6 million (6%) from $28.7 million in 1996. Fund accounting fees increased
$2.7 million primarily as a result of a change in the fee structures for the
open-end mutual funds and PHL sponsored variable products, on which no such fees
were earned prior to January 1997. Distributor fees decreased $2.9 million as a
result of the sale of the deferred commissions asset. Underwriter fees decreased
$.2 million as a result of the divestiture of Capital Markets in 1996 offset, in
part, by a new fee schedule for the PHL sponsored variable products. Other
ancillary fees decreased $1.3 million primarily as a result of increased trails
expense related to increased B share sales in the prior year and a decrease in
shareholder service agent fees resulting from a reduced number of shareholder
accounts.
Financial consulting and investment research services were not offered by the
Company in 1997 as the operations of Capital Markets and the fee-based
investment research and securities businesses were divested and closed,
respectively, in 1996, resulting in a $7.7 million decrease in revenues in 1997
as compared to 1996.
Other income and fees - pro forma of $5.1 million in 1997 decreased $1.8 million
(26%) from $6.9 million in 1996. This decrease is primarily due to a decrease in
redemption income as a result of the sale of the Company's then existing
deferred commissions asset in June 1997, for which the Company had previously
earned a fee if shares were redeemed within five years of purchase.
Employment expenses - pro forma of $88.1 million in 1997 increased $6.9 million
(8%) from $81.2 million in 1996. A new profit sharing plan for certain eligible
employees increased employment expenses by $.6 million. Employment expenses
decreased $8.2 million due to the divestiture of Capital Markets and the closure
of the fee-based investment research and securities businesses in 1996.
Non-recurring charges, resulting from a senior executive exercising certain
rights under his employment agreement, increased employment expenses by $.9
million in 1997. The remaining increase is primarily due to an expansion of the
sales force, an increase in sales-based and performance-based incentive
compensation and annual salary adjustments.
Other operating expenses - pro forma of $55.9 million in 1997 decreased $1.0
million (2%) from $56.9 million in 1996. Amortization of deferred commissions
decreased $2.9 million primarily as a result of the sale of the Company's
deferred commissions asset, excluding PCC's, in June 1997. PCC's deferred
commissions expense increased $.2 million in 1997. Operating expenses decreased
$1.2 million as a result of the closing of Capital Markets in 1996.
Restructuring charges of $.7 million in 1997 are the result of the Company's
26
decision to out-source substantially all of its fund accounting operations
effective in the first quarter of 1998. Depreciation and amortization of
leasehold improvements increased by $.4 million. An increase in depreciation
expense caused by capital assets purchased in 1997 and 1996 more than offset the
effect of the divestiture of Capital Markets which decreased depreciation
expense by $.4 million.
Amortization of goodwill and intangibles - pro forma of $22.0 million in 1997
was unchanged from 1996.
Other income - net - pro forma of $19.0 million in 1997 increased $13.8 million
from $5.2 million in 1996. A $6.9 million gain was recognized on the sale of the
Company's deferred commissions asset, excluding PCC's, in June 1997. A gain of
$5.0 million was realized in 1997 by PCC from the sale of its investment in its
own mutual funds, the proceeds of which were reinvested in Treasury Bills. The
Company's share of income from its investment in Financial Alliance Investors I,
L.P. increased revenues by $5.5 million. Equity income from the Company's
investment in BG increased $1.3 million. The Company's share of equity earnings
from WCCBO was a loss of $1.5 million in 1997, due to the liquidation of WCCBO
in early 1997, as compared to income of $1.6 million in 1996. The Company's
share of equity earnings from the DPIM/Nuveen joint venture was zero in 1997 as
compared to $.6 million in 1996. On January 2, 1997, the Company purchased the
remaining interest in the DPIM/Nuveen joint venture and consolidated operations.
In addition, the Company's share of the Inverness/Phoenix LLC joint venture
income decreased $1.1 million in 1997 primarily as a result of the joint
venture's recognition of an advisory fee in 1996 from a significant
non-recurring transaction. The Company's investment in Greystone in 1997
resulted in a loss of $.6 million, as compared to $.7 million of losses in 1996.
Greystone was in a start-up phase in both years.
Interest expense - net - pro forma of $10.8 million in 1997 increased $.2
million (2%) from $10.6 million in 1996.
Income to minority interest - pro forma of $1.2 million in 1997 increased $.3
million (33%) from $.9 million in 1996. The minority shareholders' interest in
the equity earnings of Seneca, which is fully consolidated in the Company's
financial statements, increased due to Seneca's increased earnings in 1997.
Net income - pro forma of $25.5 million in 1997 reflects an increase of $1.7
million (7%) over the $23.9 million in 1996, resulting from the effects of the
increased income and expenses discussed above. The effective tax rate decreased
to 43.0% in 1997 from 43.8% in 1996 as a result of settlements with federal and
state tax authorities in 1997 for the tax years 1990 to 1993.
Liquidity and Capital Resources
The Company's business is not considered to be capital intensive. Working
capital requirements for the Company have historically been provided by
operating cash flow. It is expected that such cash flows will continue to serve
as the principal source of working capital for the Company for the near future.
The Company's current 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 outstanding. Dividends on the preferred stock would total $4.8
million per annum based on preferred shares outstanding at December 31, 1997.
The current dividend rate on common stock is $.06 per share per quarter. If the
dividend rate remains constant for 1998, the total dividend on common stock will
be approximately $10.6 million based upon shares outstanding at December 31,
1997.
The Company has a $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. The outstanding obligation under this agreement at
December 31, 1997 was $185 million. Interest rates on such borrowings averaged
6.0% in 1997. The outstanding balance is due in 2002. The Company's majority
shareholder, PHL, has guaranteed the obligation. This Credit Agreement replaces
the three year revolving credit facility which was available at December 31,
1996.
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, including restrictions on the
ability to incur indebtedness, and limitations on the amount of the Company's
capital expenditures. At December 31, 1997, the Company was in compliance with
these covenants and believes that funds from operations and amounts available
under the agreement will provide adequate liquidity for the foreseeable future.
27
Phoenix Equity Planning Corporation (PEPCO), a wholly-owned subsidiary of the
Company, is subject to the net capital requirements imposed on registered
broker-dealers by the Securities Exchange Act of 1934 (Act). At December 31,
1997, PEPCO had net capital (as defined in the Act) of approximately $6.3
million, which exceeded the regulatory minimum by $5.5 million. PEPCO operates
pursuant to Rule 15c3-1 paragraph (a) of the Act and, accordingly, is required
to maintain a ratio of aggregate indebtedness (as defined in the Act) to net
capital which may not exceed 15 to 1. This ratio at December 31, 1997 was 1.74
to 1.
Management considers the liquidity of the Company to be adequate to meet present
and anticipated needs.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. There is the possibility
that some or all of a company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000.
Based upon preliminary assessments, the Company has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. Since many of the
core systems of the Company's business are investment related, Company
management believes that the majority of these systems are already Year 2000
compliant. The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will be mitigated. It is
anticipated that such modifications and conversions will be completed on a
timely basis. It is not known at this time if there could be a material impact
on the operations of the Company if such modifications and conversions are not
completed timely.
The Company will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. Certain systems are
already in the process of being converted due to previous Company initiatives
and it is expected that all core applications will be remediated by December 31,
1998 and tested by June, 1999. The total cost to the Company to become Year 2000
compliant is not expected to have a material impact on the Company's results of
operations.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
This annual report contains forward looking statements that involve risks and
uncertainties, including but not limited to the following: The Company's
performance is highly dependent on the amount of assets under management, which
may decrease for a variety of reasons including changes in interest rates and
adverse economic conditions; the Company's performance is very sensitive to
changes in interest rates, which may increase from current levels; the Company's
performance is affected by the demand for and the market acceptance of the
Company's products and services; the Company's business is extremely competitive
with several competitors being substantially larger than the Company; and the
Company's performance may be impacted by changes in the performance of financial
markets and general economic conditions. 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.
28
Item 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS PAGE
Report of Independent Accountants.................................. 30
Consolidated Financial Statements:
Consolidated Statements of Financial Condition..................... 31
December 31, 1997 and 1996
Consolidated Statements of Income.................................. 32
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity......... 33
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows.............................. 34
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements........................35-57
29
Report of Independent Accountants
To the Board of Directors and Stockholders of
Phoenix Duff & Phelps Corporation
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Phoenix Duff &
Phelps Corporation; its predecessor company, Phoenix Securities Group, Inc., and
their subsidiaries (collectively, the "Company") at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Beutel, Goodman & Company Ltd. (Beutel Goodman), an
investment which is reflected in the accompanying financial statements using the
equity method of accounting. The investment in Beutel Goodman represents 5% and
9% of total assets at December 31, 1997 and 1996, respectively, and the equity
in its net income represents 9%, 5% and 1% of income before income taxes for
each of the three years in the period ended December 31, 1997. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for Beutel Goodman, is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Hartford, Connecticut
February 6, 1998
30
PHOENIX DUFF & PHELPS CORPORATION
Consolidated Statements of Financial Condition
- ------------------------------------------------------------------------------
December 31,
1997 1996
Assets (in thousands)
Current Assets
Cash and cash equivalents $ 21,872 $ 22,466
Marketable securities, at market 12,000 4,070
Accounts receivable 9,865 5,967
Receivables from related parties 21,672 19,701
Prepaid expenses and other assets 2,712 4,287
-------- --------
Total current assets 68,121 56,491
Deferred commissions 3,998 17,749
Furniture, equipment and leasehold improvements, net 10,071 8,377
Intangible assets, net 159,666 55,094
Goodwill, net 308,451 171,660
Investment in Beutel, Goodman & Company Ltd. 29,884 31,746
Long-term investments and other assets 24,758 24,567
-------- --------
Total assets $604,949 $365,684
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 4,252 $ 982
Accrued compensation and benefits 15,936 9,671
Other accrued liabilities 5,554 2,653
Payables to related parties 3,135 3,874
Broker-dealer payable 9,157 8,487
Short-term notes payable 5,853
Current portion of long-term debt and credit facility 2,241 2,500
-------- --------
Total current liabilities 46,128 28,167
Deferred taxes, net 66,020 33,860
Long-term debt, net of current portion 2,682
Credit facility, net of current portion 185,000 14,000
Lease obligations and other long-term liabilities 6,617 7,884
-------- --------
Total liabilities 306,447 83,911
-------- --------
Contingent Liabilities (Note 20)
Minority Interest 976
Series A Convertible Exchangeable Preferred Stock,
10,000,000 shares authorized and 3,169,599 and
3,157,254 shares outstanding, including $277,340 and
$273,223 of accrued undeclared cumulative dividends 78,827 78,504
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares
authorized, 44,440,261 and 44,037,416 shares issued
and 44,095,261 and 44,037,416 shares outstanding 444 440
Additional paid-in capital 188,566 185,415
Retained earnings 21,624 12,812
Net unrealized gain on securities available for sale 11,845 4,932
Foreign currency translation adjustment (1,171) (330)
Treasury stock, at cost, 345,000 and zero shares (2,609)
------- --------
Total stockholders' equity 218,699 203,269
-------- --------
Total liabilities and stockholders' equity $604,949 $365,684
======== ========
The accompanying notes are an integral part of these statements.
31
PHOENIX DUFF & PHELPS CORPORATION
Consolidated Statements of Income
- ------------------------------------------------------------------------------
Year ended December 31,
1997 1996 1995
(in thousands, except per share data)
Revenues
Investment management fees $138,335 $118,160 $85,746
Mutual funds - ancillary fees 22,523 22,030 18,963
Financial consulting and investment
research fees 7,699 2,737
Other income and fees 3,742 4,615 4,760
------- ------- -------
Total revenues 164,600 152,504 112,206
------- ------- -------
Operating Expenses
Employment expenses 71,630 58,805 35,406
Other operating expenses 41,370 36,523 37,109
Restructuring charges 734
Depreciation and amortization of leasehold
improvements 2,953 2,212 928
Amortization of goodwill and
intangible assets 13,950 9,623 3,166
Amortization of deferred commissions 3,001 6,052 7,436
------- ------- -------
Total operating expenses 133,638 113,215 84,045
------- ------- -------
Operating Income 30,962 39,289 28,161
------- ------- -------
Equity in Earnings of
Unconsolidated Affiliates 6,387 5,348 972
------- ------- -------
Gain on Sale 6,907
Other Expense - Net (33) (135) (11)
------- ------- -------
Interest (Expense) Income - Net
Interest expense (5,638) (1,640) (2,262)
Interest income 2,374 2,044 1,512
------- ------- -------
Total interest (expense) income - net (3,264) 404 (750)
-------- ------- -------
Income to Minority Interest (714)
Income Before Income Taxes 40,245 44,906 28,372
Provision for income taxes 16,098 18,187 12,682
------- ------- -------
Net Income 24,147 26,719 15,690
Series A preferred stock dividends 4,754 4,713 759
------- ------- -------
Income available to common stockholders $19,393 $22,006 $14,931
======= ======= =======
Weighted average shares outstanding
Basic 44,080 43,799 29,263
Diluted 54,435 53,971 39,512
Earnings per share
Basic $ .44 $ .50 $ .51
Diluted $ .44 $ .50 $ .40
The accompanying notes are an integral part of these statements.
32
PHOENIX DUFF & PHELPS CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------
(in thousands)
Common Foreign Currency
Stock and Translation and
Additional Net Unrealized
Paid-In Retained Gain (Loss) Treasury
Capital Earnings on Securities Stock Total
-------- -------- ------------- -------- --------
Balances at December
31, 1994 $ 9,292 $24,612 $ 33,904
-------- ------- --------
Capital contributions 35,578 35,578
Duff &Phelps shares
outstanding 185,671 185,671
Stock transactions 147 147
Net income 15,690 15,690
Dividends (48,552) (40,302) (88,854)
Net unrealized
depreciation on
securities available
for sale $ (192) (192)
Foreign currency
translation adjustment (454) (454)
-------- ------- ------- --------
Balances at December
31, 1995 182,136 (646) 181,490
-------- ------- ------- --------
Stock transactions 3,719 3,719
Net income 26,719 26,719
Dividends (13,907) (13,907)
Net unrealized
appreciation on
securities available
for sale 5,124 5,124
Foreign currency
translation adjustment 124 124
-------- ------- ------- --------
Balances at December
31, 1996 185,855 12,812 4,602 203,269
-------- ------- ------- --------
Stock transactions 3,155 3,155
Treasury stock
purchases $(2,609) (2,609)
Net income 24,147 24,147
Dividends (15,335) (15,335)
Net unrealized
appreciation on
securities available
for sale 6,913 6,913
Foreign currency
translation adjustment (841) (841)
-------- ------- ------- ------- --------
Balances at December
31, 1997 $189,010 $21,624 $10,674 $(2,609) $218,699
======== ======= ======= ======= ========
Common stock issued and outstanding: 1997 1996 1995
(in thousands)
Balances at January 1, 44,037 43,563 1
Duff & Phelps shares outstanding 17,073
Conversion of Phoenix
Securities Group shares 26,399
Stock transactions 403 474 90
Treasury stock purchases (345)
------- -------- --------
Balances at December 31, 44,095 44,037 43,563
======= ======== ========
The accompanying notes are an integral part of these statements.
33
PHOENIX DUFF & PHELPS CORPORATION
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
(in thousands)
Cash Flows from Operating Activities:
Net income $24,147 $26,719 $15,690
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of leasehold
improvements 2,953 2,212 928
Amortization of goodwill and intangible
assets 13,950 9,623 3,166
Amortization of deferred commissions 3,001 6,052 7,436
Income to minority interest 714
Gain on sale of deferred commissions asset (6,907)
Equity in earnings of unconsolidated
affiliates, net of dividends 3,457 (2,992) (1,121)
Payments of deferred commissions (5,006) (10,663) (5,097)
Deferred taxes (9,892) 5,012 627
Changes in operating assets and liabilities:
Accounts receivable, net 1,024 4,649 668
Receivables from related parties (1,971) 167 (6,081)
Other assets 232 (2,694) 350
Payables to related parties (742) (7,959) 5,452
Accounts payable and accrued liabilities (322) (1,529) (1,151)
Other liabilities 1,059 (1,000) 334
------- -------- -------
Net cash provided by operating activities 25,697 27,597 21,201
------- -------- -------
Cash Flows from Investing Activities:
Purchase of subsidiaries (243,532) (5,892) (1,158)
Cash acquired from purchase of subsidiaries 42,379 2,417
Proceeds from sale of deferred
commissions asset 26,015
Purchase/sale of marketable securities (7,663) (1,127) (250)
Purchase/sale of long-term investments (2,720) (2,510) 1,081
Proceeds from long-term investment activity 11,245 9,214 2,491
Capital expenditures (2,296) (3,004) (1,332)
Other investing activities (103) 532
-------- ------- -------
Net cash (used in) provided by
investing activities (176,675) (2,787) 3,249
Cash Flows from Financing Activities:
Borrowings on credit facility
and from related party 220,000
Repayment of debt (53,182) (7,000) (5,517)
Dividends paid (15,330) (13,907) (45,891)
Stock repurchases (2,609)
Capital contribution 31,700
Proceeds from stock issuance 1,689 2,257 213
Other financing activities (184) (82)
------- ------- ------
Net cash provided by (used in)
financing activities 150,384 (18,650) (19,577)
Net (decrease) increase in cash and
cash equivalents (594) 6,160 4,873
Cash and cash equivalents, beginning of year 22,466 16,306 11,433
------- ------- -------
Cash and Cash Equivalents, End of Year $21,872 $22,466 $16,306
======= ======= =======
Supplemental cash flow information:
Interest paid $ 4,613 $ 1,538 $ 2,222
Income taxes paid $11,371 $17,444 $14,737
Supplemental disclosure of non-cash financing activities:
Dividend of preferred stock $(42,963)
Capital contribution $ 3,878
The accompanying notes are an integral part of these statements.
34
PHOENIX DUFF & PHELPS CORPORATION
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
1. Organization and Business
Phoenix Duff & Phelps Corporation (PDP) was formed on November 1, 1995 when
Phoenix Securities Group, Inc. (PSG), a money management subsidiary of PM
Holdings, Inc. (PM Holdings), merged into Duff & Phelps Corporation (D&P)
(the Merger). PM Holdings is a wholly-owned subsidiary of Phoenix Home Life
Mutual Insurance Company (Phoenix Home Life). PM Holdings owns approximately
60% of the outstanding PDP common stock and approximately 44% of the
outstanding PDP preferred stock (see Note 12).
PDP and its subsidiaries provide a variety of investment management and
related services to a broad base of institutional, corporate and individual
clients throughout the U.S. PDP's businesses include investment advisory,
broker-dealer operations and, through June 30, 1996, fee based investment
research operations and financial consulting services. PDP operates in one
industry segment, that of investment management services. The principal
operating subsidiaries included in these consolidated financial statements
are as follows:
- Phoenix Equity Planning Corporation (PEPCO), a registered broker-dealer,
serves principally as distributor, underwriter and financial agent for
products registered with the Securities and Exchange Commission (SEC).
- Phoenix Investment Counsel, Inc. (PIC), a wholly-owned subsidiary of
PEPCO, is a registered investment advisor providing investment management
services primarily under agreements with affiliated registered investment
management companies and other institutional advisors and investors.
- National Securities & Research Corporation (NS&RC), a registered
investment advisor, provides investment management services primarily
under agreements with affiliated registered investment management
companies.
- Duff & Phelps Investment Management Co. (DPIM), a registered investment
advisor, provides investment management services to a variety of
institutions and individuals, including SEC registered investment
companies, corporate, public and multi-employer retirement funds,
endowment, insurance and other special purpose funds and high yield bond
portfolios. These consolidated financial statements include operations
and cash flows for DPIM from the date of the Merger.
- Duff & Phelps Capital Markets Co. (DPCM) provided a wide range of
investment banking and financial advisory services. Duff & Phelps
Securities Co. (DPS), a wholly-owned subsidiary of DPCM, was a registered
broker-dealer. On May 14, 1996, PDP announced that it was exiting the fee
based investment research, investment banking and financial advisory
businesses acquired in the Merger. Substantially all of the fee based
investment research activities were immediately closed and, on July 1,
1996, PDP completed the sale of certain assets of the financial advisory
and investment banking businesses to several former executives. These
consolidated financial statements include operations and cash flows for
DPCM and DPS from the date of the Merger until the closure of these
operations.
- Roger Engemann & Associates (REA), a wholly-owned subsidiary of Pasadena
Capital Corporation (PCC), which in turn is a wholly-owned subsidiary of
PDP, is a registered investment advisor. REA provides investment
management services primarily to individual investors and SEC registered
investment companies. PCC and REA were acquired from a third party on
September 3, 1997 (see Note 3).
- Seneca Capital Management LLC (Seneca), a majority-owned subsidiary of
PDP, is a registered investment advisor. Seneca provides investment
management services primarily to institutional investors. A majority
interest in Seneca was acquired on July 17, 1997 (see Note 3).
35
The accompanying consolidated financial statements include the accounts of
Seneca for the period from July 17, 1997 through December 31, 1997 and PCC
and REA for the period from September 3, 1997 through December 31, 1997. The
financial statements for the period prior to the Merger with Duff & Phelps
in 1995 include only the accounts of PSG and its wholly-owned subsidiaries.
2. Summary of Significant Accounting Policies
Significant accounting policies, which have been consistently applied, are
as follows:
Basis of Presentation
PDP's consolidated financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP). The consolidated
financial statements include the accounts of PDP and its subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to prior years' amounts to conform
to the current year presentation. The preparation of financial statements in
conformity with GAAP requires the use of estimates. Accordingly, certain
amounts in the consolidated financial statements contain estimates made by
management. Actual results could differ from these estimates. Significant
estimates, specifically those used to determine the carrying value of
goodwill and intangible assets, are discussed in these notes to the
consolidated financial statements.
Recent Accounting Pronouncements
PDP adopted Statement of Financial Accounting Standard (SFAS) No. 129,
"Disclosure of Information about Capital Structure," as of December 31,
1997. This statement revises the disclosure requirements of SFAS No. 47,
"Disclosure of Long-Term Obligations." The effects of SFAS No. 129 are
addressed in Note 12.
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. This statement establishes
standards for the reporting and display of comprehensive income and its
components on the Statement of Income, and eliminates the reporting of items
directly as components of equity. PDP will adopt this statement in 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15,
1997. This statement requires the disclosure of different types of business
activities and economic environments of an enterprise, as they relate to a
specific segment. PDP will adopt this statement in 1998.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," is effective for fiscal years beginning after
December 15, 1997. This statement standardizes the disclosure requirements
for pensions and other postretirement benefits and is an amendment to SFAS
Nos. 87, 88 and 106. Since earlier application is encouraged, PDP has
adopted the statement as it relates to multi-employer plans (see Note 2).
As these statements only address financial statement disclosure, they have
no impact on PDP's financial results.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less at the time of purchase.
36
Marketable Securities
Marketable securities consist of mutual fund investments and U.S. Government
obligations both of which are being carried at market value in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The mutual fund investments are classified as assets held for
trading purposes. Any unrealized appreciation or depreciation on these
assets is included in other income. The U.S. Government securities are
considered to be available for sale. Any unrealized appreciation or
depreciation on these assets is recognized as a separate component of
stockholders' equity, net of income taxes. Market values for both the mutual
funds and the U.S. Government obligations are determined based on publicly
quoted market prices.
Deferred Commissions
Deferred commissions are commissions paid to broker-dealers on sales of
mutual fund shares referred to as B shares. These commissions are recorded
as deferred costs and are recovered by on-going monthly distribution fees
received from mutual funds or upon redemption of the B shares by
shareholders within five to six years of purchase. Deferred costs on
outstanding shares are amortized on a straight-line basis, generally over
five to six years or until the B shares are redeemed.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are recorded at cost.
Depreciation of furniture and equipment is computed using the straight-line
method based upon estimated useful lives of up to ten years. Leasehold
improvements are amortized over the lives of the related leases. Major
renewals or betterments are capitalized and recurring repairs and
maintenance are charged to operations.
Intangible Assets and Goodwill
Intangible assets are amortized on a straight-line basis over the estimated
remaining lives of such assets. Goodwill represents the excess of the
purchase price of acquisitions and mergers over the identified net assets.
Goodwill is being amortized on a straight-line basis over 40 years.
Long-lived Assets
The propriety of the carrying value of long-lived assets is periodically
reevaluated in accordance with SFAS No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed Of," by
comparing estimates of future undiscounted cash flows to the carrying value
of assets. Assets are considered impaired if the carrying value exceeds the
expected future undiscounted cash flows. Such analyses are performed at
least annually, or more frequently if warranted by events or circumstances
affecting PDP's business. Based on these evaluations, there were no
adjustments to the carrying value of long-lived assets in 1997 or 1996.
Revenue Recognition
Investment management fees and mutual funds - ancillary fees are recorded as
income during the period in which services are performed. Investment
management fees are generally computed and earned based upon a percentage of
assets under management. Mutual funds - ancillary fees consist of dealer
concessions, distribution fees, shareholder service agent fees and
accounting fees. Dealer concessions and underwriting fees earned (net of
related expenses) from the distribution and sale of affiliated mutual fund
shares and other securities are recorded on a trade date basis.
Financial consulting and investment research fees in 1995 and through June
1996, were recognized in accordance with customer contracts in which fees
were generally based on completed transactions, professional time incurred
or research subscriptions.
37
Pursuant to the terms of its distribution plans with affiliated mutual
funds, PDP received a combined $23.2 million, $28.0 million and $26.0
million in 1997, 1996 and 1995, respectively, from affiliated mutual funds
for providing distribution and other services. Of these amounts, $20.2
million, $19.5 million and $19.3 million in 1997, 1996 and 1995,
respectively, was paid, for services rendered, to outside broker-dealers and
to WS Griffith & Co., Inc., a registered broker-dealer which is a
wholly-owned subsidiary of PM Holdings, in the form of trailing commissions.
The balances of $3.0 million, $8.5 million and $6.7 million in 1997, 1996
and 1995, respectively, were retained as reimbursement for distribution
services provided by PDP and are included in revenues as a part of mutual
funds - ancillary fees.
Contingent deferred sales charge (CDSC) revenue is recognized when deferred
commissions are collected on redemptions of B shares made within five to six
years of their original purchase. CDSC redemption income earned in 1997,
1996 and 1995 was $1.3 million, $2.4 million and $4.2 million, respectively,
and is included in other income and fees. Since the sale of PEPCO's deferred
commissions asset in June 1997, PDP only recognizes CDSC revenue related to
redemptions of B shares of the Phoenix-Engemann mutual funds.
Income Taxes
PDP accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability approach for financial reporting of income taxes.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes.
SFAS No. 109 allows recognition of deferred tax assets that are more likely
than not to be realized in future years. It is management's assessment,
based upon PDP's earnings and projected future taxable income, that it is
more likely than not that the deferred tax assets at December 31, 1997, with
the exception of the foreign tax credit, will be realized. PDP had a
valuation allowance of $1.1 million at December 31, 1997 and 1996, primarily
related to the foreign tax credit.
PDP and its subsidiaries file consolidated federal and state income tax
returns. Prior to the Merger, PSG was included in the consolidated federal
and state tax returns of Phoenix Home Life. In connection with the Merger,
the tax allocation agreement with Phoenix Home Life was terminated. A new
tax allocation agreement between PDP and its subsidiaries was entered into
effective November 1, 1995.
Investment in Beutel, Goodman & Company Ltd.
The equity method is used to account for PDP's investment in the stock of
Beutel, Goodman & Company Ltd. (BG). The difference between the value
assigned to the investment in BG at the merger date and PDP's equity in BG's
historical cost basis net assets is being amortized on a straight-line basis
over 28 years.
Foreign Currency Translation
The investment in BG has been translated into U.S. dollars at the rate of
exchange existing at year-end. The gains and losses resulting from foreign
currency translation, net of income taxes, are deferred and accumulated in
stockholders' equity until the investment is sold or liquidated.
38
Earnings Per Share
PDP adopted SFAS No. 128, "Earnings per Share", as of December 31, 1997.
Basic earnings per share (EPS) has replaced primary EPS and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
similarly to the previously disclosed fully diluted EPS. Common stock
equivalents, for the purpose of calculating diluted earnings per share, are
based on outstanding stock options under the non-qualified stock option
plans. Basic and diluted EPS have been disclosed in the income statement. A
reconciliation between the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation
is presented in Note 13, and includes restated EPS data for prior years and
interim periods presented in these financial statements. The adoption of
SFAS No. 128 did not have a material impact on PDP's consolidated financial
statements.
Employee Benefits
PDP and its subsidiaries are members of the multi-employer group medical,
group life, pension and 401K savings plans sponsored and administered by
Phoenix Home Life. Certain current and former employees of PDP are covered
under these plans. The qualified pension and 401K savings plans comply with
the requirements established by the Employee Retirement Income Security Act
of 1974 (ERISA). An excess benefits plan provides the portion of pension
obligations which is in excess of amounts permitted by ERISA. PDP is charged
annually by Phoenix Home Life for its costs under the plans and for PDP's
matching portion of the 401K savings plan. These costs were $3.9 million,
$3.3 million and $4.9 million for 1997, 1996 and 1995, respectively.
On January 1, 1997, certain employees of PDP became eligible to participate
in PDP sponsored Profit Sharing and Restricted Stock plans. Annual
contributions from company profits, as determined by PDP's Board of
Directors, may be made to the Profit Sharing Plan to the extent that
deductible contributions are permitted by the Internal Revenue Code. If the
contributions exceed those limits, the excess will be paid to the
participants as restricted PDP stock, which the participants cannot sell for
a period of five years. The Restricted Stock Plan is not part of the Profit
Sharing Plan, but is in addition to it. The first contribution under the
Profit Sharing Plan will occur in 1998 in the amount of $.6 million.
Since PDP is covered under a multi-employer benefit plan, applicable
information regarding the actuarial present value of vested and non-vested
accumulated plan benefits and the net assets of the plan available for
benefits has been omitted.
3. Acquisitions, Merger and Goodwill and Intangible Assets
Pasadena Capital Corporation and GMG/Seneca Capital Management LLC
Acquisitions
On September 3, 1997, PDP acquired PCC, the parent company of REA, for
approximately $214.0 million. The merger agreement provides for an
"earn-out", based on growth in management fee revenues, of up to a total of
$66.0 million to be paid out on the third, fourth and fifth anniversaries of
the transaction. PCC, which operates in Pasadena, California, managed
approximately $6.2 billion in assets at December 31, 1997, primarily
individually managed accounts but also including the Phoenix-Engemann Funds,
a family of six equity mutual funds with approximately $926 million in
assets under management.
On July 17, 1997, PDP acquired a 74.9% 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 LLC (Seneca). The total purchase price paid by PDP
was approximately $37.5 million, $28.0 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 management. Seneca managed approximately $4.4 billion in
assets, primarily institutional accounts, at December 31, 1997.
39
The purchase price for PCC 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 the purchase price over the fair value of acquired net
tangible assets of PCC and Seneca totaled $212.8 million. Of this excess
purchase price, $110.2 million has been classified as identifiable
intangible assets, primarily associated with investment management
contracts, which are being amortized over their estimated average useful
life of 13 years using the straight-line method. Fair value adjustments to
assets and liabilities totaled $(39.9) million. The remaining excess
purchase price of $142.5 million has been classified as goodwill and is
being amortized over 40 years using the straight-line method. Related
goodwill amortization of $1.2 million has been charged to expense for the
period ended December 31, 1997.
The following table summarizes the calculation and allocation of purchase
price (in thousands):
Purchase Price: PCC Seneca Total
Consideration paid $211,565 $ 36,218 $247,783
Transaction costs 2,442 1,298 3,740
-------- -------- --------
Total Purchase Price $214,007 $ 37,516 $251,523
======== ======== ========
Purchase Price Allocation:
Fair value of acquired net assets $ 37,932 $ 782 $ 38,714
Identified intangibles 97,404 12,832 110,236
Deferred taxes (39,936) (39,936)
Goodwill 118,607 23,902 142,509
-------- -------- --------
Total Purchase Price Allocation $214,007 $ 37,516 $251,523
======== ======== ========
In separate transactions, PDP 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. As of December 31, 1997, these transactions have not been
consummated.
PSG and D&P Merger
PDP was formed on November 1, 1995 by the merger of the businesses of PSG
and D&P, a publicly traded investment management company listed on the New
York Stock Exchange. The Merger was accomplished by the contribution by PM
Holdings of the businesses and substantially all of the assets of PSG to D&P
in exchange for an approximately 60% equity interest in the combined entity.
The Merger was accounted for as an acquisition of D&P by PSG using the
purchase accounting method (a "reverse acquisition"). Therefore, the
consolidated financial statements presented herein reflect the operations of
PSG prior to the Merger and combined operations from the date of Merger. The
purchase price of D&P was established as the fair value of D&P based on the
trading price of D&P common stock immediately preceding the Merger plus
direct costs of the acquisition, including $3.9 million paid by PM Holdings.
The excess of the purchase price over acquired net tangible assets and
liabilities of D&P as of November 1, 1995 totaled $162.2 million. (The
historical cost basis of acquired net assets of $77.7 million included $48.8
million of intangible assets. The historical cost basis of operations
divested of $9.0 million included $8.6 million of intangible assets.) Of
this excess purchase price, $57.9 million has been classified as
identifiable intangible assets, primarily associated with investment
management contracts, which are being amortized over their original average
expected life of 14 years using the straight-line method. The remaining fair
value adjustments to assets and liabilities totaled $(29.0) million. The
remaining excess purchase price of $133.3 million has been classified as
goodwill and is being amortized over 40 years using the straight-line
method. Related goodwill amortization of $3.3 million, $3.2 million and $1.1
million was charged to expense in 1997, 1996 and 1995, respectively.
40
As was contemplated at the time of the Merger, on May 14, 1996, PDP
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,
PDP completed the sale of certain assets of the financial consulting and
underwriting businesses to several former executives. The financial effects
of these divestitures were treated as adjustments to the initial allocation
of the purchase price relating to the Merger and financial statement
amounts, both actual and pro forma, have not been restated.
The following table summarizes the purchase price allocation (in thousands,
except share price):
Purchase Price:
Shares outstanding at October 31, 1995 17,073
Closing price per share $ 10.875
---------
$ 185,669
Transaction costs 5,035
---------
Fair value of D&P $ 190,704
=========
Purchase Price Allocation:
Historical cost basis of acquired net assets $ 77,722
Historical cost basis of operations divested (8,985)
Identified intangibles 57,920
Other net tangible assets and liabilities 3,290
Exit costs of operations divested (5,828)
Deferred taxes and valuation allowance (19,472)
D&P option liability (7,050)
Goodwill 93,107
---------
Total Purchase Price Allocation $ 190,704
=========
Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, were as follows:
1997 1996
(in thousands)
Goodwill:
Excess purchase price over net tangible
assets and identifiable intangibles of
subsidiaries acquired $321,932 $179,407
Accumulated amortization (13,481) (7,747)
-------- --------
Goodwill, net $308,451 $171,660
======== ========
Intangible assets:
Investment contracts $167,788 $ 56,700
Employee base 2,588 1,220
Covenant not to compete 5,000 5,000
Other intangibles 335
Accumulated amortization (16,045) (7,826)
-------- --------
Intangible assets, net $159,666 $ 55,094
======== ========
These consolidated financial statements include amortization expense related
to goodwill and intangible assets of $13.9 million, $9.6 million and $3.2
million for the years ended December 31, 1997, 1996 and 1995, respectively.
41
4. Pro Forma Results (Unaudited)
The following unaudited pro forma financial information for the years ended
December 31, 1997 and 1996 was derived from the historical financial
statements of PDP, PCC and Seneca, and gives effect to the acquisitions of
PCC and a majority interest in Seneca and certain transactions effected by
PCC and Seneca in connection with the acquisitions. The pro forma financial
information for these periods has been prepared assuming these acquisitions
were effected on January 1, 1996.
Year ended December 31,
1997 1996
(in thousands,
except per share amounts)
Revenues $207,111 $211,847
-------- --------
Employment expenses 88,065 81,171
Other operating expenses 59,264 59,931
Amortization of goodwill and
intangible assets 21,995 21,995
------- --------
Operating income 37,787 48,750
Other income - net 18,989 5,213
Interest expense - net (10,751) (10,585)
Minority interest (1,224) (899)
------- -------
Income before income taxes 44,801 42,479
Provision for income taxes 19,255 18,614
------- --------
Net income $25,546 $ 23,865
======= ========
Earnings per share
Basic $ .47 $ .44
Diluted $ .47 $ .44
The following unaudited pro forma financial information for the year ended
December 31, 1995 was derived from the historical financial statements of
PSG and D&P, and gives effect to the Merger of PSG and D&P and certain
transactions effected by PSG and D&P in connection with the Merger. The pro
forma financial information for this period has been prepared assuming these
transactions and arrangements were effected on January 1, 1994, except for
the period from November 1, 1995 through December 31, 1995 which reflects
the actual combined results.
Year ended December 31, 1995
(in thousands, except per share amounts)
Revenues $165,339
--------
Employment expenses 61,962
Other operating expenses 58,437
Amortization of goodwill and
intangible assets 9,623
-------
Operating income 35,317
Other expense - net (509)
Interest income - net 462
-------
Income before income taxes 35,270
Provision for income taxes 17,303
-------
Net income $17,967
=======
Earnings per share
Basic $ .30
Diluted $ .34
The pro forma information is not necessarily indicative of the results that
would have been obtained had the transactions and arrangements taken effect
on the assumed dates, nor is the information intended to be a projection for
any future period.
42
5. Marketable Securities
PDP's marketable securities consist of both trading securities and
securities available for sale. Securities available for sale have
contractual maturity dates of less than one year. The composition of PDP's
marketable securities at December 31, was as follows:
1997
Unrealized
Cost Gain (Loss) Market
(in thousands)
Trading:
Phoenix Multi-Sector Fixed
Income Fund $ 2,461 $ (125) $ 2,336
Other affiliated mutual funds 2,169 95 2,264
Available for sale:
U.S. Government obligations 7,400 7,400
------- ------- -------
$12,030 $ (30) $12,000
======= ======= =======
1996
Unrealized
Cost Gain (Loss) Market
(in thousands)
Trading:
Phoenix Multi-Portfolio Fund $ 1,926 $ 55 $ 1,981
Other affiliated mutual funds 2,030 59 2,089
------- ------- -------
$ 3,956 $ 114 $ 4,070
======= ======= =======
6. Sale of Deferred Commissions
On June 1, 1997, PDP sold its title to 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 PDP's outstanding B share
mutual funds, excluding those from the Phoenix-Engemann Funds.
PDP has a three year commitment, expiring June 1, 2000, from the third party
to purchase all commissions paid by PDP upon the sale of B share mutual
funds, excluding those from the Phoenix-Engemann funds.
7. Investment in Beutel, Goodman & Company Ltd.
At December 31, 1997, PDP had a 49% investment in the outstanding common
stock of BG. During 1997, BG's Shareholders' Agreement was amended providing
for recognition by PDP of up to 100% of BG's earnings. BG is a
Canadian-based investment management firm with approximately $10.1 billion
(U.S.) in assets under management at December 31, 1997. During 1996, PDP
redeemed $9.5 million of 8.5% BG debentures, which were held as of December
31, 1995. The D&P purchase price allocation, described in Note 3, resulted
in $42.3 million of the aggregate purchase price being allocated to the
investment in BG including debentures. The difference between the value
assigned to the investment in BG and PDP's equity in BG's historical cost
value is being amortized over 28 years.
43
PDP's Consolidated Statements of Financial Condition and Consolidated
Statements of Income contain the following components related to the BG
investment for the years ended December 31,:
1997 1996
(in thousands)
Statements of Financial Condition:
Acquisition costs of investment in BG's
common stock $ 30,045 $30,045
Equity in BG net income 8,765 4,021
Dividends received (4,210) (285)
Amortization of BG acquisition costs over
proportional net equity in BG's assets (2,719) (1,476)
Deferred taxes on translation adjustments (826) (229)
Currency translation adjustments (1,171) (330)
------- -------
Total BG investment $ 29,884 $31,746
======== =======
Statements of Income:
Equity in BG net income $ 4,744 $ 3,637
Amortization (1,243) (1,438)
Interest income - BG debentures 441
-------- -------
Total BG income $ 3,501 $ 2,640
======== =======
The Consolidated Statements of Financial Condition contain foreign currency
translation adjustments related to the investment in BG as a component of
stockholders' equity. These adjustments are deferred and accumulated in
stockholders' equity, net of income taxes, until the investment in BG is
sold or substantially liquidated.
The following table reflects summarized BG financial information for 1997
and 1996. The asset and liability figures are based on the Canadian dollar
exchange rate at December 31, 1997 and 1996. The revenue and income amounts
are reflected at the average exchange rates for the years.
1997 1996
(in thousands)
Beutel, Goodman & Company Ltd.
Current assets $ 13,750 $10,193
Noncurrent assets 1,283 1,324
Current liabilities 8,145 4,690
Noncurrent liabilities 114 178
Shareholders' equity 6,774 6,649
Total revenues 34,522 30,228
Net income 4,680 6,944
Dividends 339 274
8. Long-term Investments and Other Assets
Long-term investments are accounted for using the equity method. In
accordance with SFAS No. 115, PDP has adjusted its investments for its
proportionate share of the investees' unrealized gains and losses on
securities available for sale and has included the unrealized gains and
losses, net of income taxes, in a separate component of stockholders'
equity. PDP's share of the earnings of unconsolidated investments is
included in equity in earnings of unconsolidated affiliates.
44
Inverness/Phoenix and Related Partnerships
At December 31, 1997, PDP had 50% interests in Inverness/Phoenix LLC (IP),
formerly Duff & Phelps/Inverness LLC (DPI), and Inverness/Phoenix Capital
LLC (IPC), joint ventures with Inverness Group Incorporated. IP and IPC
invest in private equity transactions (primarily management led buy-outs),
expansion financing and recapitalizations involving management
participation.
On January 17, 1996, IP completed a management led buy-out of
National-Oilwell, Inc. from Armco and USX. On October 28, 1996,
National-Oilwell, Inc. successfully completed an initial offering of 4
million shares of common stock which are traded on the New York Stock
Exchange (NYSE: NOI). At December 31, 1997, PDP, through its investments in
two limited partnerships, DPI Partners I and DPI Partners II, had a
beneficial ownership interest in approximately 587,000 shares of the common
stock of National-Oilwell, Inc. At December 31, 1997 and 1996, PDP's
combined investment in DPI Partners I and DPI Partners II was $20.1 million
and $8.8 million, respectively.
On November 25, 1996, IP entered into an agreement to participate in a
management led buy-out of Financial Alliance Processing Services, Inc.
(Financial Alliance). Financial Alliance is a credit and debit card
processing service company. On December 27, 1996, PDP invested approximately
$2.0 million in Financial Alliance Investors I, L.P. (FA Investors), which
was created to purchase Financial Alliance. On October 24, 1997, FA
Investors sold its interest in Financial Alliance. PDP, based on its equity
interest in FA Investors, recognized income of $5.5 million
Greystone Financial Group
At December 31, 1997 and 1996, PDP had a 30% equity interest in the common
stock of Greystone Financial Group (GFG) with a cost basis of $7,500. PDP
also had cumulative investments of $1.2 million and $.7 million in the 8%
Non-Cumulative Preferred Stock of GFG's wholly-owned subsidiary, Greystone
Asset Management, Inc. (GAM), as of December 31, 1997 and 1996,
respectively. GFG and GAM were in a start-up phase during 1997 and 1996 and
incurred losses. As a result of recognizing its proportionate share of
losses, PDP's remaining investments in GFG and GAM totaled zero and
$.1 million at December 31, 1997 and 1996, respectively.
Windy City CBO and D&P CBO
PDP had an $8.8 million investment in Windy City CBO Partners, L.P. (WCCBO)
at December 31, 1996 and was both a general and a limited partner. The
partnership was established for the purpose of issuing $184.3 million of
Collateralized Bond Obligations (CBOs). The CBOs were non-recourse
obligations secured by a portfolio of high-yield bonds. In March 1997, WCCBO
was liquidated in accordance with contractual arrangements and PDP has no
remaining investment. In 1995, PDP had an investment in D&P CBO Partners,
L.P. (D&P CBO). In 1996, D&P CBO was liquidated in accordance with
contractual arrangements and PDP has no remaining investment.
PDP's proportionate share of WCCBO's earnings in 1997 and 1996 was $(1.5)
million and $1.6 million, respectively, and $.5 million for the two months
ended December 31, 1995. In addition, DPIM received fees for managing the
portfolios of high-yield bonds held by the partnerships. These management
fees were $31 thousand and $.4 million in 1997 and 1996, respectively, and
$.1 million for the two months ended December 31, 1995.
Nuveen/Duff & Phelps Investment Advisors
PDP had a $.4 million investment in Nuveen/Duff & Phelps Investment Advisors
at December 31, 1996, representing a 50% interest in the joint venture. The
remaining 50% interest was purchased on January 2, 1997 for approximately
$2.2 million. The partnership, which is now fully consolidated, was renamed
Phoenix Duff & Phelps Investment Advisors (PDPIA) and continues to provide
the same services. PDPIA's earnings in 1997 were $.9 million. PDP's
proportionate share of Nuveen/Duff & Phelps Investment Advisors earnings in
1996 was $.7 million.
45
Other Assets
At December 31, 1997 and 1996, PDP had a $1.0 million note receivable,
resulting from the divestiture of DPCM, which is due in June 2001. Interest
on this note is received monthly. At December 31, 1997, PDP had $3.4 million
of prepaid bonuses related to the acquisition of PCC. At December 31, 1996,
PDP had a $3.5 million promissory note receivable, which was repaid in 1997.
9. Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements at December 31, were
comprised of the following:
1997 1996
(in thousands)
Computer equipment $ 9,291 $ 7,388
Leasehold improvements 4,434 2,926
Furniture and equipment 3,737 2,501
-------- -------
17,462 12,815
Accumulated depreciation and amortization (7,391) (4,438)
-------- --------
Furniture, equipment and leasehold
improvements, net $ 10,071 $ 8,377
======== =======
10. Income Taxes
The components of income tax expense for the years ended December 31, were
as follows:
1997 1996 1995
(in thousands)
Current
Federal $21,727 $ 11,964 $ 7,899
State 2,239 2,040 4,438
------- -------- -------
Total current taxes 23,966 14,004 12,337
------- -------- -------
Deferred
Federal (7,075) 4,549 78
State (793) (366) 267
------- -------- -------
Total deferred taxes (7,868) 4,183 345
------- -------- -------
Total income tax expense $16,098 $ 18,187 $12,682
======= ======== =======
Income tax expense for 1997 was calculated on pre-tax income of $40.2
million, which included $4.7 million of foreign source income comprised of
PDP's income from its investment in BG.
46
Deferred taxes resulted from temporary differences between the amounts
reported in the consolidated financial statements and the tax bases of
assets and liabilities. The tax effects of temporary differences at December
31, were as follows:
1997 1996
(in thousands)
Deferred tax assets:
Investment in BG $ 4,321 $ 1,668
Purchase adjustments 2,655 1,744
Other investments 1,321 1,196
Foreign tax credit 1,109 1,109
Option liability 791 606
Vacation accrual 587 455
Legal expenses 539 603
Excess of capital losses over gains 485 528
Other 779 2,608
-------- -------
Gross deferred tax assets 12,587 10,517
Valuation allowance (1,109) (1,120)
-------- -------
Gross deferred tax assets after valuation allowance 11,478 9,397
-------- -------
Deferred tax liabilities:
Purchase adjustments 56,872 21,076
Other investments 9,342 5,103
Investment in BG 9,286 7,931
Unbilled revenue 829 1,015
Fixed assets 604 567
Deferred commissions 339 6,571
Other 226 994
-------- -------
Gross deferred tax liabilities 77,498 43,257
-------- -------
Deferred tax liability, net $ 66,020 $33,860
======== =======
The following presents a reconciliation of income tax expense computed at
the federal statutory rate to the income tax expense recognized in the
consolidated financial statements for the years ended December 31,:
1997 1996 1995
($ in thousands)
Tax at statutory rate $14,086 35% $15,717 35% $9,930 35%
State taxes, net of federal
benefit 1,159 3 1,082 2 3,058 11
Goodwill 1,895 5 1,495 3 420 1
Tax provision to return adjustments (753) (2)
Other, net (289) (1) (107) (726) (2)
------ --- ------ --- ------ ---
Income tax expense $16,098 40% $18,187 40% $12,682 45%
======= === ======= === ======= ===
11. Long-term and Short-term Debt
On August 14, 1997, PDP entered into a five year, $200 million Credit
Agreement with a consortium of banks. At December 31, 1997, PDP had
outstanding borrowings of $185 million under this agreement. Interest rates
on such borrowings vary, at PDP's option, with the Certificate of Deposit,
Eurodollar, or the banks' base lending rate. Interest periods end, at PDP's
option, one, two, three or six months after the borrowing date of the loan.
For the period ended December 31, 1997, the average interest rate was 6.0%.
The Credit Agreement requires no principal repayments prior to maturity.
PDP's majority stockholder, Phoenix Home Life, has guaranteed the
obligation, for which it receives a .10% guarantee fee on the outstanding
balance.
47
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 December 31, 1997, PDP was in compliance with these covenants.
At December 31, 1996, PDP had outstanding borrowings of $16.5 million under
a $27 million Credit Agreement with a consortium of banks. Interest rates on
these borrowings averaged 6.5%. PDP repaid these borrowings in full in June,
1997.
On July 16, 1997, PDP entered into three short-term promissory note
arrangements pursuant to the terms of the purchase agreement with Seneca. At
December 31 1997, unpaid principal on these notes was $5.9 million. These
notes bear interest at an annual rate of 5.4%, are due in full in February,
1998 and are individually supported by separate letters of credit.
At December 31, 1997, REA had a contract payable of $2.5 million resulting
from a prior acquisition. In addition, PCC had a $2.4 million note payable
to a former PCC shareholder.
Interest expense relative to the credit agreements and short-term notes,
including commitment and guarantee fees, was $5.6 million, $1.5 million and
$.3 million in 1997, 1996 and 1995, respectively.
12. Mandatorily Redeemable Equity Securities and Other Capital Transactions
Holders of the Series A Convertible Exchangeable Preferred Stock (Series A
Preferred Stock) are entitled to receive an annual cash dividend of $1.50
per share payable quarterly when, as and if declared. Dividends are
cumulative from the date of original issuance and unpaid, undeclared
dividends are added to the liquidation preference and the mandatory
redemption price of the Series A Preferred Stock. The Series A Preferred
Stock is mandatorily redeemable, not prior to November 30, 2000, at $25.00
per share, plus accumulated but unpaid dividends, if not previously
converted, redeemed or exchanged. The total redemption value of the shares
outstanding at December 31, 1997 was $79.2 million.
Each share of Series A Preferred Stock can be converted into 3.11 shares of
common stock at any time. Each share of Series A Preferred Stock is
exchangeable in whole, but not in part, for 6% Convertible Subordinated
Debentures due 2015 (the Subordinated Debentures) of PDP at the option of
PDP on any date that is on or after the two year anniversary of the Merger.
Holders of outstanding Series A Preferred Stock will be entitled to receive
the $25.00 principal amount of the Subordinated Debentures in exchange for
each share of Series A Preferred Stock, including unpaid and accrued
dividends. As of December 31, 1997, PDP had not exchanged any Series A
Preferred Stock for Subordinated Debentures (see Note 24).
On October 22, 1997, PDP declared a common share quarterly dividend in the
amount of $0.06 per share and a preferred share quarterly dividend of $0.375
per share. PDP intends to continue to pay quarterly cash dividends. However,
future payment of cash dividends by PDP will depend upon the financial
condition, capital requirements and earnings of PDP.
On November 7, 1996, PDP's Board of Directors voted to authorize a stock
repurchase plan. The repurchase plan for up to 2.0 million shares of
outstanding common stock was effective immediately. Repurchases are being
made from time to time in the open market or through privately negotiated
transactions at market prices. During 1997, in accordance with the stock
repurchase program, PDP repurchased 345,000 shares of PDP's common stock at
a total cost of $2.6 million. No stock was repurchased during 1996.
48
13. Earnings Per Share
The following tables reconcile PDP's basic earnings per share to diluted
earnings per share:
For the Year Ended December 31, 1997
(in thousands) Per-Share
Income Shares Amount
Net Income $ 24,147
Less: preferred stock
dividends 4,754
Basic EPS
Income available to common
stockholders 19,393 44,080 $ .44
======
Effect of Dilutive Securities
Stock options 464
Convertible preferred stock 4,754 9,891
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 24,147 54,435 $ .44
======== ====== ======
For the Year Ended December 31, 1996
(in thousands) Per-Share
Income Shares Amount
Net Income $ 26,719
Less: preferred stock
dividends 4,713
Basic EPS
Income available to common
stockholders 22,006 43,799 $ .50
======
Effect of Dilutive Securities
Stock options 297
Convertible preferred stock 4,713 9,875
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 26,719 53,971 $ .50
======== ====== ======
49
For the Year Ended December 31, 1995
(in thousands) Per-Share
Income Shares Amount
Net Income $ 15,690
Less: preferred stock
dividends 759
Basic EPS
Income available to common
stockholders 14,931 29,263 $ .51
======
Effect of Dilutive Securities
Stock options 538
Convertible preferred stock 759 9,711
------- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 15,690 39,512 $ .40
======== ====== ======
14. Other Operating Expenses
Other operating expenses for the years ended December 31, were comprised of
the following:
1997 1996 1995
(in thousands)
Rent and other occupancy costs $ 6,502 $ 5,201 $ 5,306
Outside services 5,937 4,262 3,105
Travel, training and entertainment 5,654 4,652 2,373
Computer services 3,472 3,206 6,549
Telephone and postage 3,191 3,174 3,121
Printing 2,799 2,697 2,829
Professional fees 1,914 1,225 2,210
Sales and marketing 1,686 1,614 1,204
Promotional and advertising 1,396 1,299 1,924
Equipment rental and maintenance 1,344 1,255 1,812
Finders fees 1,183 993 697
Other expenses 6,292 6,945 5,979
------- -------- -------
Total $41,370 $ 36,523 $37,109
======= ======== =======
15. Restructuring Charges
In November, 1997, PDP announced that it would be outsourcing substantially
all of its mutual fund accounting function to a third party service provider
effective in the first quarter of 1998. This restructuring was initiated in
order to reduce estimated future operating costs and to allow PDP to focus
on money management services. As a result of this restructuring,
approximately 40 positions were eliminated. The non-recurring costs
resulting from this decision amounted to $.7 million as of December 31, 1997
and were primarily comprised of severance pay. These costs have been
disclosed separately in the Consolidated Statements of Income.
50
16. Commitments and Lease Contingencies
PDP and its subsidiaries incurred rental expenses on operating leases of
$5.2 million, $4.6 million and $3.4 million, net of income from subleases of
$.8 million, $.8 million and $.5 million in 1997, 1996 and 1995,
respectively. PDP and its subsidiaries are committed to the following future
net minimum rental payments under non-cancelable operating leases:
Income Net
Lease from Lease
Payments Subleases Payments
(in thousands)
1998 $ 6,611 $ 1,036 $ 5,575
1999 5,805 1,045 4,760
2000 4,484 1,008 3,476
2001 3,079 707 2,372
2002 2,463 285 2,178
2003 and thereafter 15,491 1,688 13,803
--------- --------- ---------
$ 37,933 $ 5,769 $ 32,164
========= ========= =========
17. Other Related Party Transactions
Revenues
PDP's subsidiaries manage assets and provide other investment advisory
services to Phoenix Home Life and subsidiaries (e.g., general account and
variable separate account products) and investment products (e.g.,
affiliated mutual funds). In 1996, the Phoenix Home Life pooled separate
accounts were converted to institutional mutual funds. The revenues earned
managing related party assets for the years ended December 31, were as
follows:
1997 1996 1995
(in thousands)
Management fees:
Affiliated mutual funds $74,341 $ 71,192 $55,647
Phoenix Home Life general account 8,526 8,156 7,201
Phoenix Home Life variable product
separate accounts, net of reimbursement 5,194 6,270 4,835
Phoenix Home Life pooled separate accounts 561 3,569
Other 603 862 789
------- -------- -------
Total management fees 88,664 87,041 72,041
------- -------- -------
Mutual funds - ancillary fees:
Distributor, net 5,716 8,429 6,694
Transfer agent 5,523 5,889 5,984
Fund accounting and administrative 5,524 2,800 2,629
------- -------- -------
Total mutual funds - ancillary fees 16,763 17,118 15,307
------- -------- -------
$105,427 $104,159 $87,348
======== ======== =======
For all years presented, PDP received management fees averaging
approximately .12% of the net asset value of the Phoenix Home Life general
account assets under management. PDP's transactions with affiliates
comprised approximately 64%, 68% and 78% of revenues, of which 8%, 10% and
14% of total revenues related to Phoenix Home Life, for the years ended
December 31, 1997, 1996 and 1995, respectively. PDP believes that its
transactions with these related parties were competitive with alternative
third party sources for each service provided.
51
Receivables from Related Parties
Receivables from affiliates as of December 31, were as follows:
1997 1996
(in thousands)
Investment management fees $ 12,093 $10,449
Mutual funds - ancillary fees 3,668 4,656
Concessions 4,243 3,976
Other receivables 1,668 620
-------- -------
$ 21,672 $19,701
======== =======
Operating Expenses
Phoenix Home Life provides certain administrative services at the request of
PDP including disbursement, tax, facility management and other
administrative support to PDP and its subsidiaries. Additionally, certain of
PDP's active and retired employees participate in the Phoenix Home Life
multi-employer retirement and benefit plans (see Note 2). The expenses
recorded by PDP for significant services provided by Phoenix Home Life for
the years ended December 31, were as follows:
1997 1996 1995
(in thousands)
Rent $ 3,094 $ 3,041 $ 2,062
Computer services 2,637 2,283 5,530
Administrative fees 2,212 2,482 6,940
Employee related charges:
Healthcare and life insurance benefits 1,814 1,027 1,793
Pension and savings plans 1,552 1,051 1,254
Other 559 1,233 1,866
Equipment rental and maintenance 954 990 1,009
Legal services 111 183 637
------- -------- -------
Total $12,933 $ 12,290 $21,091
======= ======== =======
PDP pays these charges based on contractual agreements. Computer services
are based upon actual or specified usage. Other charges are based on hourly
rates, square footage or head count. PDP reimburses Phoenix Home Life for
employee related charges based on actual costs paid by Phoenix Home Life.
PDP believes that these charges are competitive with alternative third party
sources for each service provided.
Payables to Related Parties
Payables to related parties for operating expenses as of December 31, 1997
and 1996 were $3.1 million and $3.9 million, respectively.
Included in broker-dealer payable are commissions, including those payable
under 12b-1 distribution plans discussed in Note 2, of $3.4 million and $3.0
million in 1997 and 1996, respectively, payable to WS Griffith & Co., Inc.,
a registered broker-dealer which is a wholly-owned subsidiary of PM
Holdings.
18. Non-qualified Stock Option Plans
Officers and key employees of D&P were eligible to participate in three
stock option plans: the 1989 Employee Stock Option Plan (Employee Option
Plan), the 1989 Employee Performance Stock Option Plan (Performance Plan)
and the 1992 Long-Term Stock Incentive Plan (1992 Plan). Under the plans,
participants were granted non-qualified options to purchase shares of common
stock of D&P at an option price equal to the fair value of a share of common
stock on the date of grant. The options under the 1989 plans are fully
vested.
52
Effective with the Merger, existing options under the 1992 Plan vested and
became exercisable for all participants, except for certain senior officers
whose options will vest and become exercisable in accordance with the plan's
original vesting schedule. Each vested option converted into an option
(converted option) to purchase one share of common stock and one-tenth of a
share of Series A Preferred Stock for each share of common stock for which
the option was exercisable immediately prior to the Merger, at an aggregate
option price that was $1.75 less than the previous option price per share.
PDP adopted the 1992 Plan, as amended, concurrent with the Merger. The 1992
Plan is administered by the Compensation Committee of the Board of
Directors, which designates which employees and outside directors
participate in the plan and the terms of the options to be granted. Under
the 1992 Plan, participants are granted non-qualified options to purchase
shares of common stock of PDP at an option price equal to not less than 85%
of the fair market value of the common stock at the time the option is
granted. The maximum number of shares of common stock for which options may
be granted is 9.7 million. The options held by a participant terminate no
later than 10 years from the date of grant. Options granted under the 1992
Plan vest, on average, in even annual installments over three years.
PDP has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the PDP
stock option plans been determined based on the fair value at the grant date
for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No.
123, PDP's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
1997 1996 1995
Net income - as reported (in thousands) $24,417 $ 26,719 $15,690
Net income - pro forma (in thousands) $23,360 $ 26,363 $15,673
Basic earnings per share - as reported $ .44 $ .50 $ .51
Basic earnings per share - pro forma $ .42 $ .49 $ .51
Diluted earnings per share - as reported $ .44 $ .50 $ .40
Diluted earnings per share - pro forma $ .43 $ .49 $ .40
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 2.7%, expected
volatility of approximately 23.4%, risk free interest rate of approximately
5.5% and expected lives of between three and ten years.
As of December 31, 1997, options to purchase 55,870, 42,120 and 6,008,669
shares of common stock are outstanding at weighted average exercise prices
per share of approximately $1.46, $.28 and $7.50, respectively, under the
Employee Option Plan, Performance Plan and 1992 Plan, respectively.
53
Outstanding Options
Weighted Series A Weighted
Common Average Preferred Average
Shares Exercise Price Shares Exercise Price
Balance, November 1, 1995 2,144,384 $6.29
Granted 1,566,250 $6.64 214,439 $24.65
Exercised (90,349) $1.66 (13,276) $ 5.07
--------- -------
Balance, December 31, 1995 3,620,285 $6.56 201,163 $25.95
Granted 1,518,366 $7.10
Exercised (473,895) $3.78 (36,715) $13.11
Canceled (531,834) $7.73 (52,234) $30.38
Forfeited (195,416) $6.95 (3,166) $29.10
--------- --------
Balance, December 31, 1996 3,937,506 $6.93 109,048 $28.05
Granted 2,735,329 $7.91
Exercised (257,845) $5.54 (12,345) $21.02
Canceled (73,334) $6.93
Forfeited (234,997) $7.56 (3,450) $41.55
--------- -------
Balance, December 31, 1997 6,106,659 $7.40 93,253 $28.49
========= =======
Exercisable Options
Weighted Series A Weighted
Common Average Preferred Average
Shares Exercise Price Shares Exercise Price
Balance, November 1, 1995 884,991
Became exercisable 1,109,411 200,261
Exercised (90,349) $1.66 (13,276) $ 5.07
--------- -------
Balance, December 31, 1995 1,904,053 $6.47 186,985 $25.82
Became exercisable 653,566 $6.67 10,413 $28.75
Exercised (473,895) $3.78 (36,715) $13.11
Canceled (531,834) $7.73 (52,234) $30.38
Forfeited (195,416) $6.95 (3,166) $29.10
--------- -------
Balance, December 31, 1996 1,356,474 $6.95 105,283 $28.18
Became exercisable 1,012,047 $6.88 3,765 $28.75
Exercised (257,845) $5.54 (12,345) $21.02
Canceled (33,334) $6.98
Forfeited (39,500) $10.12 (3,450) $41.55
--------- -------
Balance, December 31, 1997 2,037,842 $7.04 93,253 $28.49
========= =======
At December 31, 1997, 3.6 million shares of PDP common stock were available
for future stock option grants.
54
19. Consolidated Quarterly Results of Operations (Unaudited)
A summary of the unaudited quarterly results of operations for the years
ended December 31, 1997 and 1996 is as follows:
(in thousands, except per share amounts)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
Revenues $ 35,245 $40,992 $44,002 $ 60,029
Expenses 28,874 28,412 34,244 48,493
-------- ------- ------- --------
Income before income taxes 6,371 12,580 9,758 11,536
Provision for income taxes 2,612 5,253 3,676 4,557
-------- ------- ------- --------
Net income $ 3,759 $ 7,327 $ 6,082 $ 6,979
======== ======= ======= ========
Earnings per share
Basic $ .06 $ .14 $ .11 $ .13
Diluted $ .06 $ .14 $ .11 $ .13
Dividends per common share
declared during the quarter $ .06 $ .06 $ .06 $ .06
Dividends per preferred share
declared during the quarter $ .375 $ .375 $ .375 $ .375
Market price per share
Common
Low $ 6.88 $ 6.63 $ 7.31 $ 7.00
High $ 8.50 $ 8.13 $ 9.31 $ 8.19
Preferred
Low $ 24.75 $ 24.63 $ 27.25 $ 25.38
High $ 28.50 $ 27.50 $ 30.50 $ 28.63
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
Revenues $ 44,461 $40,345 $37,315 $ 37,640
Expenses 31,126 30,523 25,929 27,277
-------- ------- ------- --------
Income before income taxes 13,335 9,822 11,386 10,363
Provision for income taxes 6,222 3,230 5,056 3,679
-------- ------- ------- --------
Net income $ 7,113 $ 6,592 $ 6,330 $ 6,684
======== ======= ======= ========
Earnings per share
Basic $ .14 $ .12 $ .12 $ .12
Diluted $ .14 $ .12 $ .12 $ .12
Dividends per common share
declared during the quarter $ .05 $ .05 $ .05 $ .06
Dividends per preferred share
declared during the quarter $ .375 $ .375 $ .375 $ .375
Market price per share
Common
Low $ 5.63 $ 5.88 $ 6.00 $ 6.00
High $ 7.00 $ 7.88 $ 7.25 $ 7.38
Preferred
Low $ 23.88 $ 23.88 $ 23.25 $ 23.00
High $ 26.25 $ 27.13 $ 25.63 $ 25.25
55
20. Contingent Liabilities
In October 1995, PDP, in one case, and its subsidiary DPCM were named
defendants in three related class action suits concerning a fairness opinion
issued by DPCM. The three cases were previously consolidated. There is
another separate case involving the same set of facts that has been brought
by other members of Associated Surplus Dealers (ASD), a corporation
organized to promote the surplus merchandise industry. The latter case has
now been consolidated with the other cases. The actions also name as
defendants the directors of ASD and a corporation (WFI) controlled by one of
the defendants. The complaints allege that shortly after the sale of the
assets of ASD to WFI for $2.6 million, the ASD assets were resold by WFI for
$60 million. The plaintiffs contend that DPCM and certain directors breached
their fiduciary duties and were negligent, causing ASD to receive less in
sales proceeds than anticipated. The plaintiffs seek compensatory damages,
attorneys' fees, costs of suit and punitive damages, all in unspecified
amounts. DPCM denies that its actions were inappropriate and intends to
vigorously defend the actions.
In June, 1997, Gigatek Memory Systems, Inc. (Gigatek) brought suit against
DPCM, several former employees of DPCM, and other defendants in connection
with an engagement to evaluate Gigatek common stock and certain related
Stock Appreciation Rights. The complaint alleges that the defendants were
negligent and breached their fiduciary duties to Gigatek resulting in a loss
of approximately $6 million. The plaintiffs seek compensatory damages. DPCM
denies that its actions were inappropriate and intends to vigorously defend
the action.
21. Off-Balance Sheet Risk
In the normal course of business, PDP enters into affiliated mutual fund
sales transactions as principal. If the payment for the securities subject
to such transactions is not received from the customer, PDP may be subject
to risk of loss if the market value of the security has decreased since the
date of the transaction. To the extent payment is not received within three
business days for the mutual fund shares purchased, such shares are
redeemed, thereby limiting any potential loss to the decrease of the net
asset value of such fund shares over that three business day time period.
Losses incurred during the three year period ended December 31, 1997 were
insignificant.
22. Fair Value of Financial Instruments
Cash and Cash Equivalents
The carrying amount of cash equivalents approximates fair value because of
the short maturity of these instruments.
Marketable Securities
The carrying amount equals market value.
Long-Term Investments and Other Assets
The fair value of long-term investments and other assets is based on
estimates made using appropriate valuation techniques.
Long-term Debt
The fair value is estimated based on the current rates that would be offered
to PDP on similar debt.
Series A Preferred Stock
The fair value of Series A Preferred Stock is based on the quoted market
price per share at December 31, 1997 and 1996, respectively.
56
The estimated fair values of PDP's financial instruments at December 31,
were as follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
Cash and cash equivalents $ 21,872 $21,872 $22,466 $ 22,466
Accounts receivable 31,537 31,537 25,668 25,668
Marketable securities 12,000 12,000 4,070 4,070
Deferred commissions 3,998 3,998 17,749 17,749
Long-term investments and
other assets 1,000 1,000 4,500 4,500
Accounts payable and accrued
liabilities 25,742 25,742 13,306 13,306
Debt 195,776 195,776 16,500 16,500
Series A Preferred Stock 78,827 90,730 78,504 78,931
The carrying amounts for accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of fair value because of the short
nature of the transactions.
23. Net Capital Requirement
PEPCO is subject to broker-dealer net capital requirements. At December 31,
1997 net capital of $.7 million was required compared to actual net capital
of $6.3 million.
24. Subsequent Event
During the first quarter of 1998, PDP's Board of Directors voted to
authorize the exchange of the 3.2 million shares of Series A Preferred Stock
for 6% Convertible Subordinated Debentures, due 2015. Holders of outstanding
Series A Preferred Stock as of the exchange date will be entitled to receive
the $25.00 principal amount of the Convertible Subordinated Debentures in
exchange for each share of Series A Preferred Stock, including unpaid and
accrued dividends.
57
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item, to the extent not included
under the caption "Executive Officers of the Company" in Part I of
this report will appear under the caption "Election of Directors"
in the Company's definitive proxy statement for the 1998 annual
meeting of the shareholders (the "1998 Proxy Statement"), and such
information shall be deemed to be incorporated herein by reference
to that portion of the 1998 Proxy Statement, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's most recently
completed fiscal year.
Item 11. Executive Compensation.
The information required by this item will appear under the caption
"Executive Compensation" in the 1998 Proxy Statement, and such
information shall be deemed to be incorporated herein by reference
to that portion of the 1998 Proxy Statement, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the Company's most recently
completed fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will appear under the caption
"Principal Holders of Securities" in the 1998 Proxy Statement, and
such information shall be deemed to be incorporated herein by
reference to that portion of the 1998 Proxy Statement, to be filed
with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the end of the Company's most
recently completed fiscal year.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will appear under the caption
"Executive Compensation - Certain Transactions" in the 1998 Proxy
Statement, and such information shall be deemed to be incorporated
herein by reference to that portion of the 1998 Proxy Statement, to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the
Company's most recently completed fiscal year. Also see Note 17 to
the consolidated financial statements on page 51 of this report.
58
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements
See index to Financial Statements in item 8.
2. Financial Statement Schedules
Beutel, Goodman & Company Ltd. Auditors' Report
3. Exhibits
2(d) Agreement and Plan of Merger between Phoenix Duff & Phelps
Corporation, Phoenix Apollo Corp. and Pasadena Capital Corporation
dated as of June 9, 1997 (incorporated herein by reference to
Exhibit 2(d) to the Registrant's current report on Form 8-K dated
July 1, 1997)
2(e) Agreement and Plan of Merger between Phoenix Duff & Phelps
Corporation and the persons signatory thereto (Stellar Capital
management, Inc., JB Capital Management, Inc. and SZRL Investments)
dated as of June 18, 1997 (incorporated herein by reference to
Exhibit 2(e) to the Registrant's current report on Form 8-K dated
July 1, 1997)
3(a) Restated Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3(a) to the
Registrant's Current Report on Form 8-K dated November 15, 1995)
3(b) By-laws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3(b) to the Registrant's Current Report on
Form 8-K dated November 15, 1995)
4(a) Form of Common Stock certificate(1)
4(n) Amended and Restated Credit Agreement dated as of October 31, 1995
among the Registrant and various financial institutions and Bank of
America Illinois (incorporated herein by reference to Exhibit 4(n)
to the Registrant's 1995 Annual Report on Form 10-K of Phoenix Duff
& Phelps Corporation)
4(r) Certificate of Designation, Voting Powers, Preferences and Rights
of Series A Convertible Exchangeable Preferred Stock (incorporated
herein by reference to Exhibit 3(a) to the Registrant's Current
Report on Form 8-K dated November 15, 1995)
4(s) Form of Indenture between Phoenix Duff & Phelps Corporation and a
Trustee with respect to the 6% Convertible Subordinated Debentures
due 2015 into which the Series A Convertible Exchangeable Preferred
Stock will be exchangeable (incorporated herein by reference to
Exhibit 4(s) to the Registrant's registration statement on Form S-4
(Registration No. 33-97292))
4(t) Form of Series A Convertible Exchangeable Preferred Stock
certificate (incorporated herein by reference to Exhibit 4(t) to
the Registrant's registration statement on Form S-4 (Registration
No. 33-97292))
10(a) The Registrant's 1989 Employee Stock Option Plan (incorporated
herein by reference to Exhibit 10.3 to the 1989 Annual Report on
Form 10-K of Duff & Phelps Inc.)(2) Phelps Utilities Income Inc.(1)
10(i) Service Agreement among Duff & Phelps Investment Management Co.,
Duff & Phelps Utilities Income Inc., Duff & Phelps Investment
Research Co. and Duff & Phelps Inc.(1)
10(j) Mid-Continental Plaza Lease between Tishman Speyer Properties
and Duff & Phelps Inc.(1)
10(k) Form of Indemnification Agreement between the Registrant and its
directors and certain officers(1)(2)
10(m) Nonqualified Deferred Compensation Plans - Joinder Agreement
(incorporated herein by reference to Exhibit 10(m) to the
Registrant's Annual Report on Form 10-K for 1996) (2)
10(s) Subscription and Loan Agreement dated November 15, 1993 between
Beutel, Goodman & Company Ltd. and the Registrant (incorporated
herein by reference to Exhibit 2(a) to the Registrant's Current
Report on Form 8-K dated November 29, 1993)
10(t) Debenture Purchase Agreement dated November 15, 1993 between Crown
Inc. and DP Holdings Ltd. (incorporated herein by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
November 29, 1993)
59
10(u) Shareholders Agreement dated November 15, 1993 by and among the
shareholders of Beutel, Goodman & Company Ltd. (incorporated herein
by reference to Exhibit 10(u) to the Registrant's Annual Report on
Form 10-K for 1993)
10(w) Tax Sharing and Indemnification Agreement between the Registrant
and Duff & Phelps Credit Rating Co. ("Credit Rating") (incorporated
herein by reference to Exhibit 10.2 to Credit Rating's Annual
Report on Form 10-K for 1994)
10(x) Distribution and Indemnity Agreement between the Registrant and
Credit Rating (incorporated herein by reference to Exhibit 10.3 to
Credit Rating's Annual Report on Form 10-K for 1994)
10(y) Services Agreement among the Registrant, Credit Rating and Duff &
Phelps Investment Management Co. (incorporated herein by reference
to Exhibit 10.4 to Credit Rating's Annual Report on Form 10-K for
1994)
10(z) Name Use Agreement between the Registrant and Credit Rating
(incorporated herein by reference to Exhibit 10.5 to Credit
Rating's Annual Report on Form 10-K for 1994)
10(aa) Sublease Agreement relating to Chicago, Illinois office space
between the Registrant and Credit Rating (incorporated herein by
reference to Exhibit 10.6 to Credit Rating's Annual Report on Form
10-K for 1994)
10(bb) License agreement dated November 1, 1995 between the Registrant and
Phoenix Home Life Mutual Insurance Company (incorporated herein by
reference to Exhibit 10(a) to the Registrant's Current Report on
Form 8-K dated November 15, 1995)
10(cc) Registration rights agreement dated November 1, 1995 between the
Registrant and PM Holdings, Inc. (incorporated herein by reference
to Exhibit 10(b) to the Registrant's Current Report on Form 8-K
dated November 15, 1995)
10(dd) Administrative agreement between Phoenix Home Life Mutual Insurance
Company and certain subsidiaries (incorporated herein by reference
to Exhibit 10(dd) to the Registrant's registration statement on
Form S-4 (Registration No. 33-97292))
10(ee) Computer services agreement between the Registrant and Phoenix Home
Life Mutual Insurance Company (incorporated herein by reference to
Exhibit 10(ee) to the Registrant's registration statement on Form
S-4 (Registration No. 33-97292))
10(ff) Investment management agreement between Phoenix Investment Counsel,
Inc. and Phoenix Home Life Mutual Insurance Company (incorporated
herein by reference to Exhibit 10(ff) to the Registrant's
registration statement on Form S-4 (Registration No. 33-97292))
10(gg) Leases between Phoenix Securities Group, Inc. and Phoenix Home
Life Mutual Insurance Company (incorporated herein by reference
to Exhibits 10(gg), (hh) and (ii) to the Registrant's
registration statement on Form S-4 (Registration No. 33-97292))
10(ii) Employment agreement dated November 1, 1995 between the Registrant
and Mr. Pedersen (incorporated herein by reference to Exhibit 10(d)
to the Registrant's Current Report on Form 8-K dated November 15,
1995)(2)
10(jj) Change of Control agreement dated June 10, 1996 between the
Registrant and Mr. McLoughlin (incorporated herein by reference to
Exhibit 10(jj) to the Registrant's Annual Report on Form 10-K for
1996)(2)
10(ll) Change of Control agreement dated June 10, 1996 between the
Registrant and Mr. Haylon (incorporated herein by reference to
Exhibit 10(ll) to the Registrant's Annual Report on Form 10-K for
1996)(2)
10(mm) Change of Control agreement dated June 10, 1996 between the
Registrant and Mr. Pepin (incorporated herein by reference to
Exhibit 10(mm) to the Registrant's Annual Report on Form 10-K for
1996)(2)
10(nn) Second Amended and Restated Operating Agreement between Seneca
Capital Management LLC and the Registrant (incorporated herein by
reference to Exhibit 1(a) to the Registrant's Report on Form 10-Q
dated June 30, 1997)
10(oo) Form of Put/Call Agreement (incorporated herein by reference to
Exhibit 1(a) to the Registrant's Report on Form 10-Q dated June 30,
1997)
21 Subsidiaries of the Registrant
23(a) Consent of Price Waterhouse LLP
23(b) Consent of Richter, Usher & Vineberg
27 Financial Data Schedule
___________
60
(1) Incorporated herein by reference to the corresponding exhibit to
the Registrant's registration statement on Form S-1 (Registration
No. 33-45140).
(2) Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item
601 of Regulation S-K.
(b) Reports on Form 8-K.
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.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 26th day of
March, 1998.
PHOENIX DUFF & PHELPS CORPORATION
By /s/ Philip R. McLoughlin
Philip R. McLoughlin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 26th day of March, 1998 by the following persons on
behalf of the registrant in the capacities indicated.
SIGNATURE
TITLE
/s/ Philip R. McLoughlin
Chairman of the Board, Chief Executive Officer and Director
Philip R. McLoughlin
/s/ Calvin J. Pedersen
President and Director
Calvin J. Pedersen
/s/ William R. Moyer
Senior Vice President and Chief Financial Officer
William R. Moyer
/s/ Clyde E. Bartter
President of Duff & Phelps Investment Management Co.
and Director
Clyde E. Bartter
/s/ Michael E. Haylon
Director
Michael E. Haylon
/s/ Robert W. Fiondella
Director
Robert W. Fiondella
/s/ Richard H. Booth
Director
Richard H. Booth
/s/ Edward P. Lyons
Director
Edward P. Lyons
/s/ Marilyn E. LaMarche
Director
Marilyn E. LaMarche
/s/ James M. Oates
Director
James M. Oates
62
/s/ Ferdinand Verdonck
Director
Ferdinand Verdonck
/s/ Glen D. Churchill
Director
Glen D. Churchill
/s/ Donna F. Tuttle
Director
Donna F. Tuttle
/s/ David A. Williams
Director
David A. Williams
/s/ John T. Anderson
Director
John T. Anderson
63
Item 14 - 2
Auditors' Report
To the Shareholders of
Beutel, Goodman & Company Ltd. -
Beutel, Goodman & Compagnie Ltee
We have audited the consolidated balance sheets of Beutel, Goodman & Company
Ltd. - Beutel, Goodman & Compagnie Ltee as at December 31, 1997 and 1996 and the
consolidated statements of earnings, deficit and changes in financial position
for each of the years then ended. These financial statements (not presented
herein) are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements (not presented herein)
present fairly, in all material respects, the financial position of the Company
as at December 31, 1997 and 1996 and the results of its operations and the
changes in its financial position for each of the years then ended in accordance
with Canadian generally accepted accounting principles.
/s/ Richter, Usher & Vineberg
Richter, Usher & Vineberg
Chartered Accountants
Montreal, Quebec
February 6, 1998
64
Exhibit 21
SUBSIDIARIES OF THE COMPANY
In the following list of subsidiaries of the Company, those companies
which are indented represent subsidiaries of the corporation under which they
are indented. Except as otherwise indicated, 100% of the voting stock of each of
the subsidiaries listed below is owned of record or beneficially by its
indicated parent.
State or Other
Jurisdiction of
Name Incorporation
Phoenix Duff & Phelps Corporation Delaware
Duff & Phelps Investment Management Co. Illinois
DPIM, Inc. Illinois
DPCM Holdings, Co. Illinois
DP Holdings Ltd. New Brunswick
Phoenix Equity Planning Corporation Connecticut
Phoenix Investment Counsel, Inc. Massachusetts
National Securities & Research Corporation New York
Pasadena Capital Corporation California
Roger Engemann & Associates California
Seneca Capital Management - 74.9% California
Beutel, Goodman & Company Ltd. - 49% Canada
65
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-48338, No. 33-46359, No. 33-99412, No.
33-99414 and No. 333-19073) of our report dated February 6, 1998 appearing on
page 30 of Phoenix Duff & Phelps Corporation's Annual Report on Form 10-K for
the year ended December 31, 1997.
/s/ Price Waterhouse LLP
Hartford, Connecticut
March 26, 1998
66
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
February 27, 1998
We consent to the use of our report dated February 6, 1998 relating to the
financial statements of Beutel, Goodman & Company Ltd. contained in the annual
report on Form 10-K of Phoenix Duff & Phelps Corporation by reference of such
report in the previously filed registration statements of Phoenix Duff & Phelps
on Form S-8 numbers 33-48338, 33-46359, 33-99412, 33-99414 and 333-19073.
/s/ Richter, Usher & Vineberg
General Partnership
Chartered Accountants
67