SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10994
______________
For the quarterly period ended March 31, 1996
PHOENIX DUFF & PHELPS CORPORATION
DELAWARE 95-4191764
(State of Incorporation) (I.R.S. Employer
Identification No.)
56 Prospect St., (860) 403-5000
Hartford, Connecticut 06115-0480
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
On April 30, 1996, the registrant had 43,627,741 shares of $.01 par value common
stock outstanding.
PHOENIX DUFF & PHELPS CORPORATION AND SUBSIDIARIES
Quarter Ended March 31, 1996
Index
PART I - FINANCIAL INFORMATION:
ITEM 1. Consolidated Financial Statements:
Consolidated Condensed Statements of Financial Condition - 3
March 31, 1996 and December 31, 1995
Consolidated Statements of Income - 4
Three Months Ended March 31, 1996 and
Three Months Ended March 31, 1995
Consolidated Condensed Statements of Cash Flows - 5
Three Months Ended March 31, 1996 and
Three Months Ended March 31, 1995
Notes to the Consolidated Financial Statements 6-9
ITEM 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition 10-12
Signatures 13
Part I. Financial Information
Item 1. Consolidated Financial Statements
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Condensed Statements of Financial Condition
(Unaudited)
March 31, December 31,
1996 1995
Assets (in thousands)
Current Assets
Cash and cash equivalents $ 14,711 $ 16,306
Marketable securities, at market 4,005 3,473
Accounts receivable 30,458 32,024
Prepaid expenses and other assets 2,405 1,816
-------- --------
Total current assets 51,579 53,619
Deferred commissions 13,836 13,139
Furniture, equipment and leasehold improvements, net 9,066 8,262
Intangible assets, net 65,710 67,089
Goodwill, net 162,440 163,480
Investment in Beutel, Goodman & Company Ltd. 39,362 39,730
Long-term investments and other assets 11,953 11,300
-------- --------
Total assets $353,946 $356,619
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 13,509 $ 12,317
Payables to related parties 2,279 10,386
Taxes payable to related party 1,447
Broker-dealer payable 8,277 8,520
-------- --------
Total current liabilities 24,065 32,670
Deferred taxes 30,756 30,572
Long-term debt 26,200 23,500
Lease obligations and other long-term liabilities 9,859 10,358
-------- --------
Total liabilities 90,880 97,100
-------- --------
Contingent Liabilities
Series A Convertible Exchangeable Preferred Stock 78,057 78,029
-------- --------
Stockholders' Equity
Common stock, $.01 par value, 100,000,000
shares authorized, 43,627,741 and 43,563,521 shares
issued and outstanding 436 436
Additional paid-in capital 181,753 181,700
Retained earnings 3,754
Net unrealized loss on securities available for sale (308) (192)
Foreign currency translation (626) (454)
-------- --------
Total stockholders' equity 185,009 181,490
-------- --------
Total liabilities and stockholders' equity $353,946 $356,619
======== ========
The accompanying notes are an integral part of these statements.
3
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended March 31,
1996 1995
(in thousands, except
per share data)
Revenues
Investment management fees $ 30,608 $ 18,769
Mutual funds - ancillary fees 4,258 4,155
Financial consulting fees 3,170
Underwriting fees 595 306
Investment research 1,485
Other income and fees 1,069 812
--------- ---------
Total revenues 41,185 24,042
--------- ---------
Operating Expenses
Employment expenses 16,277 6,959
Other operating expenses 10,024 7,640
Depreciation and amortization of leasehold
improvements 510 344
Amortization of goodwill and intangible assets 2,408 466
Amortization of deferred commissions 1,432 1,861
--------- ---------
Total operating expenses 30,651 17,270
--------- ---------
Operating Income 10,534 6,772
--------- ---------
Other Income - Net 2,803
--------- ---------
Interest Expense - Net
Interest expense 475 638
Interest income (473) (347)
--------- ---------
Total interest expense - net 2 291
--------- ---------
Income before income taxes 13,335 6,481
Provision for income taxes 6,222 3,002
--------- ---------
Net Income 7,113 3,479
Series A preferred stock dividends 1,172
--------- ---------
Income available to common stockholders $ 5,941 $ 3,479
========= =========
Weighted average shares outstanding
Primary 43,957
Fully diluted 53,760
Earnings per share
Primary $ .14
Fully diluted $ .13
The accompaying notes are an integral part of these statements.
4
Phoenix Duff & Phelps Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months ended March 31,
1996 1995
(in thousands)
Cash flows from operating activities:
Net income $ 7,113 $ 3,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 510 344
Amortization of goodwill and intangible assets 2,408 466
Amortization of deferred commissions 1,432 1,861
Changes in other operating assets and liabilities (10,065) 3,156
Unrealized appreciation
on mutual fund investments (80) (203)
-------- --------
Net cash provided by operating activities 1,318 9,103
-------- --------
Cash flows from investing activities:
Purchase of marketable securities, net (452) (271)
Sale of fixed assets 136
Change in long-term investments, net (574)
Capital expenditures (1,451) (268)
-------- --------
Net cash used in investing activities (2,341) (539)
-------- --------
Cash flows from financing activities:
(Repayment) under note payable agreement (1,862)
Borrowing of long-term debt 2,700
Dividends paid (3,353)
Proceeds from issuance of stock 81
-------- --------
Net cash used in financing activities (572) (1,862)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,595) 6,702
Cash and cash equivalents, beginning of period 16,306 11,433
-------- --------
Cash and cash equivalents, end of period $ 14,711 $ 18,135
======== ========
The accompanying notes are an integral part of these statements.
5
Phoenix Duff & Phelps Corporation
Notes to the Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements of Phoenix Duff & Phelps
Corporation (PDP or the Company) included herein have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and notes
included in PDP's Annual Report incorporated by reference in PDP's Form 10-K
for the year ended December 31, 1995.
The accompanying consolidated financial statements for the first quarter of
1995 include only the accounts of Phoenix Securities Group, Inc. (PSG) and
its wholly-owned subsidiaries.
2. Organization
As described more fully in Notes 1 and 3 to PDP's Annual Report for the year
ended December 31, 1995, PDP was formed on November 1, 1995 when PSG merged
into Duff & Phelps Corporation (D&P) (the Merger). Reflected in these
financial statements is management's best estimate of the preliminary
purchase price allocation.
3. Dividends
For the period ended March 31, 1996, earnings per share were computed using
weighted average shares of common stock and common stock equivalents
outstanding. Common stock equivalents are based on outstanding stock options
under nonqualified stock option plans.
On May 13, 1996, the Company's Board of Directors approved quarterly
dividends of (1) $.05 per common share, and (2) $.375 per preferred share,
payable June 10, 1996 to shareholders of record on May 29, 1996.
4. Investment in Beutel, Goodman & Company Ltd.
At March 31, 1996, PDP had a 49% interest in the outstanding common stock of
Beutel, Goodman & Company Ltd. (BG). BG is a Canadian-based investment
counseling firm with approximately $8.9 billion in assets under management
at March 31, 1996. In addition, PDP held approximately $8.9 million of 8.5%
BG debentures due 2003.
6
The March 31, 1996 consolidated condensed statement of financial condition
and income statement contain the following components related to the BG
investment (in thousands):
Statement of Financial Condition:
Acquisition costs of investment in BG's
common stock and debentures $ 39,122
Equity in BG income 1,641
Dividends received (114)
Amortization of BG acquisition costs (661)
Currency translation adjustments (626)
---------
Total BG investment $ 39,362
---------
Statement of Income:
Interest income - BG debentures $ 135
=========
The PDP consolidated condensed statement of financial condition contains
currency translation adjustments related to the investment in BG as a
component of stockholders' equity. These losses, resulting from the
translation of foreign currency, are deferred and accumulated in
stockholders' equity until the investment in BG is sold or substantially
liquidated.
The following reflects summarized BG financial information as of
March 31, 1996 (in thousands):
Total revenues $ 6,800
Net income 1,900
5. CBO Investments
For the three months ended March 31, 1996, the Company's equity interests,
inclusive of unrealized losses on securities, in the earnings of D&P CBO
Partners, L.P. and Windy City CBO Partners, L.P. were zero and $409,000,
respectively. The Company's undistributed earnings in investments at March
31, 1996 in D&P CBO Partners, L.P. and Windy City CBO Partners, L.P. were
zero and $8.0 million, respectively. In addition, the Company received
management fees of approximately $155,000 from Windy City CBO Partners,
L.P. for the three month period ended March 31, 1996.
6. First quarter 1996 compared to pro forma first quarter 1995
PDP results from the Merger on November 1, 1995 of the businesses of PSG
and D&P. The Merger was accomplished by the contribution by PM Holdings,
Inc. (PSG's parent) of the businesses and substantially all of the assets
of PSG to D&P in exchange for an approximately 60% 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"). Under this
accounting treatment, the first quarter 1995 financial statements include
the operations of PSG prior to the Merger and do not include the operations
of D&P or reflect certain adjustments associated with the Merger. Because
this accounting treatment makes it difficult to analyze
7
and compare the historical financial statements, management believes the most
meaningful financial presentation for the first quarter of 1995 is on a pro
forma basis.
The following pro forma financial information for the three months ended
March 31, 1995 is 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 has been prepared assuming these transactions and arrangements were
effected on January 1, 1995.
The financial information for the three months ended March 31, 1996 reflects
actual results for the quarter. The first quarter 1995 pro forma information
does not necessarily reflect the actual results that would have been obtained
had the Merger taken effect on the aforementioned assumed date.
Three months ended March 31,
1996 - Actual 1995 - Pro forma
------------- ----------------
(in thousands, except per share amounts)
Revenues $ 41,185 $ 39,345
-------- --------
Expenses
Employee expenses 16,277 13,533
Other operating expenses 11,966 12,969
Amortization of goodwill and
intangible assets 2,408 2,408
-------- --------
30,651 28,910
-------- --------
Operating income 10,534 10,435
Other income - net 2,803 527
Interest expense - net 2 (87)
-------- --------
Income before income taxes 13,335 11,049
Provision for income taxes 6,222 4,911
-------- --------
Net income $ 7,113 $ 6,138
======== ========
Earnings per common and common
equivalent share
Primary $ 0.14 $ 0.11
Assuming full dilution $ 0.13
8
7. Recent Accounting Pronouncements
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", was adopted by PDP in 1996. SFAS No. 121 mandates specific
methodologies to be used for identifying and measuring the impairment of
long-lived assets. Management has determined that the adoption of
SFAS No. 121 has not materially impacted the consolidated financial
statements.
9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Assets Under Management
- - -----------------------
As of March 31, 1996, Phoenix Duff & Phelps had $34.3 billion of assets under
management, down .6% from March 31, 1995, on a pro forma basis. Since the
revenues of the Company are substantially based upon assets under management,
this information is important to an understanding of the business.
Pro Forma Actual Actual
March 31, December 31, March 31,
1995 1995 1996
Open-end mutual funds $ 10,036 $ 11,141 $ 11,508
Closed-end funds 2,715 3,056 2,844
Institutional 15,956 14,626 13,442
General account 5,810 6,223 6,501
-------- -------- --------
$ 34,517 $ 35,046 $ 34,295
======== ======== ========
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
- - ----------------------------------------------------------------------------
1995 - Historical
- - ------------------
The historical financial statements reflect the results of operations of PSG
only for the first quarter of 1995 and the consolidated results of the Company
for the first quarter of 1996.
Revenues for the three months ended March 31, 1996 were $41.2 million, a $17.1
million (71%) increase from the corresponding period in 1995 reflecting the
inclusion of $15.8 million of D&P's revenues in 1996 and a $1.3 million increase
in PSG's revenues resulting principally from increased average assets under
management on which investment management fees are generated.
Operating expenses for the three months ended March 31, 1996 of $30.7 million
increased by $13.4 million (77%) over the corresponding period in 1995
reflecting the inclusion of $11.8 million of D&P's expenses in 1996. PSG's
expenses in 1996 increased $1.6 million over the same period in 1995 principally
from increased employment expenses resulting in large part from increased sales
based and performance based compensation and annual salary adjustments.
Operating income increased $3.8 million (56%) to $10.5 million for the three
months ended March 31, 1996 compared to the same period in 1995 as a result of
the changes discussed above.
Net income in the first quarter of 1996 of $7.1 million reflects an increase of
$3.6 million (104%) over the same period in 1995 resulting from the effects of
the increased operating income discussed above and increased non operating
income resulting particularly from the company's share of the earnings of Duff &
Phelps/Inverness LLC joint venture income of $1.5 million in the first quarter
of 1995 relating to the recognition of the joint venture's advisory fee income
on a significant first quarter transaction. The change in the effective tax
rate was negligible.
10
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
- - ----------------------------------------------------------------------------
1995 - Pro Forma (See Note 6.)
- - ------------------------------
Management and advisory fees of $30.6 million for the three months ended March
31, 1996 were up $1.0 million (3%) over the pro forma results of $29.6 million
for the same period a year ago as a result of higher overall assets under
management in the open-end and closed-end mutual funds and the Phoenix Home Life
Mutual Insurance Company (PHL) general account primarily due to investment
performance which was offset, in part, by the loss of certain institutional
accounts and related revenues. The most significant account loss (and one which
was known at the time of the Merger) was the AAL Mutual Funds which generated
revenues for the Company of $900,000 for the first quarter of 1995. Financial
consulting fees earned by Duff & Phelps Capital Markets Co. for the three months
ended March 31, 1996 of $3.2 million were $795,000 (33%) higher than $2.4
million earned in the same period a year ago. Underwriting and other securities
revenues were up by $289,000 for the three months ended March 31, 1996 compared
to the three months ended March 31, 1995 and research revenues were lower by
$83,000 for the same periods.
Compensation and employee benefits of $16.3 million for the first quarter of
1996 were up $2.7 million (20%) over the first quarter of 1995 in part due to
increased bonus payments and accruals in 1996 compared to 1995 of $1.3 million,
(including certain guaranteed bonuses), and an increase in compensation, related
taxes and benefits for Duff & Phelps Securities Co. and Phoenix Equity Planning
Co. (PEPCO). The majority of Duff & Phelps Securities Co.'s staff was hired
after the first quarter of 1995. PEPCO has increased its marketing and
distribution staff and has experienced an increase in sales based compensation.
Other operating expenses were essentially the same in total for the two quarters
being compared, however; there were reductions of certain charges for services
previously provided by PHL to PSG of $1.4 million which were offset by increases
in operating expenses related to Duff & Phelps Securities Co. and to new
marketing and distribution initiatives for PEPCO.
Amortization of goodwill and intangible assets of $2.4 million for the three
months ended March 31, 1996 and 1995 is a non-cash expense.
Operating income of $10.5 million for the three months ended March 31, 1996 is
up by $99,000 (1%) from the same period a year ago due to increased revenues of
$1.8 million offset by increased compensation, amortization and other operating
expenses as discussed above.
Other income of $2.8 million for the three months ended March 31, 1996 is up by
$2.3 million due to the company's share of the earnings of Duff &
Phelps/Inverness LLC joint venture income of $1.5 million in the first quarter
of 1995 relating to the recognition of the joint venture's advisory fee income
on a significant first quarter transaction. Additional income of $524,000
relating to Windy City CBO Partners, L.P. was realized for the first quarter of
1996 compared to a loss of $25,000 for the same period in 1995. Income from the
investment in Beutel, Goodman & Company Ltd. was $684,000, net of amortization,
for the first quarter of 1996 compared to $494,000 for the same period a year
ago.
Interest expense for the three months ended March 31, 1996 of $475,000 was
$225,000 less than the same period in the prior year due to the reduced amount
of outstanding balances on the revolving loan facility. Interest income of
$473,000 is $314,000 less than a year ago principally due to the reduced amount
of BG debentures and to lower average investable cash balances.
11
The provision for income taxes of $6.2 million for the three months ended March
31, 1996 was $1.3 million higher than the same period a year ago due to higher
pre-tax income and an effective rate increase to 46.7% from 44.4% for 1996 and
1995, respectively.
Net income of $7.1 million for the first quarter of 1996 was up by $1.0 million
(16%) from the first quarter of 1995.
Liquidity and Capital Resources
- - -------------------------------
PDP has $14.7 million of cash and cash equivalents at March 31, 1996. The cash
is available for general corporate purposes including the financing of brokers'
commissions with respect to sales of mutual funds distributed without a front-
end load.
The Company's bank credit agreement provides for a $40.0 million, three-year
revolving credit facility. As of March 31, 1996, $26.2 million was outstanding.
The credit agreement contains financial and operating covenants including, among
other provisions, requirements that the Company maintain certain financial
ratios and satisfy certain financial tests, restrictions on the ability to incur
indebtedness, and limitations on the amount of the Company's capital
expenditures. Commitment fees are accrued on the unused facility at a rate of
.25% per annum and are paid quarterly.
The Company believes that funds from operations and amounts available under the
credit agreement will provide adequate liquidity for the foreseeable future.
12
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Phoenix Duff & Phelps Corporation
/s/ Francis E. Jeffries
May 15, 1996 ---------------------------------------------
Francis E. Jeffries, Chairman
/s/ Philip R. McLoughlin
May 15, 1996 ---------------------------------------------
Philip R. McLoughlin, Vice Chairman and CEO
/s/ William R. Moyer
May 15, 1996 --------------------------------------------
William R. Moyer, Chief Financial Officer
13