UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] 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: 1-9468
NVEST, L.P.
-----------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3405992
- ------------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Boylston Street, Boston, Massachusetts 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 578-3500
--------------------------------------------------
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
The issuer is a limited partnership. There were 6,250,605 units of limited
partner interest and 110,000 units of general partner interest outstanding at
July 31, 1999.
1 of 27
NVEST, L.P.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF NVEST, L.P. (THE "PARTNERSHIP")
Balance Sheet as of December 31, 1998 and June 30, 1999 3
Statement of Income for the three and six months ended June 30, 1998 and 1999 4
Statement of Cash Flows for the six months ended June 30, 1998 and 1999 5
Notes to Financial Statements 6
FINANCIAL STATEMENTS OF NVEST COMPANIES, L.P. (THE "OPERATING PARTNERSHIP")
Consolidated Balance Sheet as of December 31, 1998 and June 30, 1999 10
Consolidated Statement of Income for the three and six months ended June 30, 1998 and 1999 11
Consolidated Statement of Cash Flows for the six months ended June 30, 1998 and 1999 12
Notes to Consolidated Financial Statements 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
Nvest, L.P. 15
The Operating Partnership 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
2 of 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NVEST, L.P.
BALANCE SHEET
(in thousands)
DECEMBER 31, 1998 JUNE 30, 1999
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,772 $ 3
Distribution receivable from the Operating Partnership 5,017 4,888
------------ -------------
Total current assets 7,789 4,891
Investment in the Operating Partnership (Note 6) 71,831 65,165
------------ -------------
Total assets $79,620 $70,056
------------ -------------
------------ -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Distribution payable $ 4,105 $ 4,000
Gross income tax payable and accrued expenses 3,622 753
------------ -------------
Total current liabilities 7,727 4,753
Contingent liabilities (Note 7)
Partners' capital (6,516,248 units at December 31, 1998
and 6,348,580 units at June 30, 1999) 71,893 65,303
------------ -------------
Total liabilities and partners' capital $79,620 $70,056
------------ -------------
------------ -------------
See Accompanying Notes to Financial Statements.
3 of 27
NVEST, L.P.,
STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------- ------------ -------------
REVENUES
Equity in earnings of the Operating Partnership $ 4,214 $ 3,750 $ 8,178 $ 7,717
Interest income 5 6 5 45
------------ ------------- ------------ -------------
4,219 3,756 8,183 7,762
EXPENSES
Gross income tax and other expenses 874 833 1,755 1,753
------------ ------------- ------------ -------------
Net income $ 3,345 $ 2,923 $ 6,428 $ 6,009
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Net income per unit (Note 5):
Basic $ 0.52 $ 0.46 $ 1.01 $ 0.94
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Diluted $ 0.51 $ 0.46 $ 0.99 $ 0.94
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Distributions declared per unit $ 0.63 $ 0.63 $ 1.23 $ 1.26
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Weighted average units outstanding - diluted (Note 5) 7,242 6,401 7,130 6,443
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
See Accompanying Notes to Financial Statements.
4 of 27
NVEST, L.P.
STATEMENT OF CASH FLOWS
(in thousands, unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1998 1999
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,428 $ 6,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of the Operating Partnership (8,178) (7,717)
Distributions received from the Operating Partnership 9,699 9,936
Increase (decrease) in gross income tax payable and accrued expenses 1,755 (2,868)
---------------- ----------------
Net cash provided by operating activities 9,704 5,360
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of units of the Operating Partnership - exercised options and other (1,855) -
Proceeds from sale of units of the Operating Partnership (Note 4) - 5,220
---------------- ----------------
Net cash provided by (used in) investing activities (1,855) 5,220
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders (8,814) (8,129)
Proceeds from issuance of units - exercised options and other 1,855 -
Payment for retirement of units (Note 4) - (5,220)
---------------- ----------------
Net cash used in financing activities (6,959) (13,349)
---------------- ----------------
Net increase in cash and cash equivalents 890 (2,769)
Cash and cash equivalents, beginning of period - 2,772
---------------- ----------------
Cash and cash equivalents, end of period $ 890 $ 3
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Transfer of partners' capital from the Operating Partnership $ 2,748 $ 644
---------------- ----------------
---------------- ----------------
See Accompanying Notes to Financial Statements.
5 of 27
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ORGANIZATION
Nvest, L.P. ("Nvest") is a publicly traded limited partnership listed on the New
York Stock Exchange. Effective with a restructuring completed on December 31,
1997 (the "Restructuring"), Nvest's business currently is to engage in the
investment advisory business by acting as advising general partner of Nvest
Companies, L.P. (the "Operating Partnership"). The Operating Partnership
operates through investment management firms that offer a broad array of
investment management products and styles across a wide range of asset
categories to institutions, mutual funds and private clients. Nvest's primary
asset at June 30, 1999 was 6,348,580 units of the Operating Partnership,
representing a general partner's interest in the Operating Partnership.
As a result of the Restructuring, Nvest receives distributions from the
Operating Partnership and pays a 3.5% federal gross income tax on its
proportionate share of the gross income of the Operating Partnership. Nvest
expects to distribute to its unitholders substantially all of the distributions
received from the Operating Partnership after accruing the 3.5% federal gross
income tax, any state tax, and any other expenses of Nvest.
NOTE 2 - BASIS OF PRESENTATION
The unaudited financial statements of Nvest have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the annual report of
Nvest filed on Form 10-K for the year ended December 31, 1998. In the opinion of
management, all adjustments, consisting only of normal recurring accruals, have
been made to present fairly the financial statements of Nvest at June 30, 1999
and for the three and six month periods ended June 30, 1998 and 1999. The
financial statements of Nvest should also be read in conjunction with the
consolidated financial statements of the Operating Partnership included herein.
NOTE 3 - EXCHANGE OF NVEST COMPANIES, L.P. UNITS FOR NVEST, L.P. UNITS
Each quarter, Nvest provides holders of Operating Partnership units a limited
opportunity to exchange their units for Nvest units, subject to applicable
requirements intended to ensure that the Operating Partnership remains a private
partnership. During the six months ended June 30, 1999, 34,605 Operating
Partnership units had been exchanged for an equal number of Nvest units and
Nvest had received 34,605 units of the Operating Partnership. On July 1, 1999,
an additional 15,625 Operating Partnership units were exchanged for an equal
number of Nvest units and Nvest received 15,625 units of the Operating
Partnership.
In addition, consistent with federal tax law, the partnership agreement of the
Operating Partnership generally permits holders of units to exchange a "block"
of units at any time. A "block" for this purpose is at least equal to two
percent of the outstanding units of the Operating Partnership, reduced by the
units held by certain parties that are deemed to be affiliated with the
Operating Partnership, including units held by Nvest. Currently, a "block" for
this purpose is approximately 340,000 units.
NOTE 4 - UNIT REPURCHASE PLAN
On September 15, 1998, the Board of Directors of the general partner of Nvest
and the Operating Partnership approved a plan to repurchase up to one million
limited partnership units of the partnerships. The repurchase plan authorizes
the purchase of units over a twelve-month period in either the open market or
privately negotiated transactions. In the case of purchases of Nvest units, the
Operating Partnership has made and is expected to continue to make a
corresponding purchase at the same cost of Operating Partnership units from
Nvest. During the three and six month periods ended June 30, 1999, the Operating
Partnership repurchased 48,473 and 202,273 units at a cost of $ 1,164,000 and
$5,220,000, respectively.
6 of 27
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 5 - NET INCOME PER UNIT
The calculation of basic and diluted net income per unit and weighted average
units outstanding follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
(in thousands, except per unit data)
Net income - for basic calculation $ 3,345 $ 2,923 $ 6,428 $ 6,009
Additional equity in earnings of the Operating
Partnership, net of gross income tax and
other expenses, related to incremental
units assumed outstanding * 341 10 640 31
------------- ------------- ------------- -------------
Net income - for diluted calculation $ 3,686 $ 2,933 $ 7,068 $ 6,040
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average units outstanding:
Basic 6,452 6,375 6,373 6,405
Incremental units assumed outstanding
from exercise of unit options * 790 26 757 38
------------- ------------- ------------- -------------
Diluted 7,242 6,401 7,130 6,443
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per unit:
Basic $ 0.52 $ 0.46 $ 1.01 $ 0.94
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted $ 0.51 $ 0.46 $ 0.99 $ 0.94
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
* When an option for a unit of Nvest is exercised, the Operating Partnership
issues a unit to Nvest. This increases Nvest's relative ownership interest
in the Operating Partnership. Dilution due to option exercises occurs at
the Operating Partnership and affects Nvest proportionately.
NOTE 6 - INVESTMENT IN THE OPERATING PARTNERSHIP
Investment activity in the Operating Partnership for the six months ended June
30, 1999 follows (in thousands):
Investment in the Operating Partnership at December 31, 1998 $ 71,831
Investment from exercise of options and other unit issuances -
Investment from unit exchanges (Note 3) 644
Sale of units of the Operating Partnership (Note 4) (5,220)
Equity in earnings of the Operating Partnership 7,717
Distributions declared by the Operating Partnership ($1.54 per unit) (9,807)
-------------
Investment in the Operating Partnership at June 30, 1999 $ 65,165
-------------
-------------
7 of 27
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - CONTINGENT LIABILITIES
The business units of the Operating Partnership are from time to time subject to
legal proceedings and claims which arise in the course of their businesses. In
the opinion of management, the amount of any ultimate liability with respect to
currently pending actions will not have a material adverse effect on the results
of operations or financial condition of Nvest.
NOTE 8 - TAX CONSIDERATIONS FOR PUBLIC UNITHOLDERS
Unitholders of Nvest have two principal tax advantages compared to shareholders
of corporations. First, limited partnerships, such as Nvest and the Operating
Partnership, do not pay federal corporate income taxes. As a publicly traded
partnership, Nvest is, however, subject to a 3.5% federal tax on its gross
income. This results in an overall tax expense that is roughly one-half of what
Nvest would pay if it were taxed as a corporation. The partnership structure
permits Nvest to retain a significantly higher percentage of its cash flow, and
thereby to pay higher distributions to Nvest unitholders, than if it were taxed
as a corporation.
The second principal tax benefit is that purchasers of Nvest units after August
10, 1993, are allowed an additional deduction that reduces the amount of income
on which they pay taxes. This deduction permits such unitholders to amortize a
substantial portion of the price paid for Nvest units over 15 years and
significantly reduces the current effective tax rate on distributions paid by
Nvest to unitholders. Due to this amortization benefit, the cash distributions
that Nvest pays to unitholders are likely to continue to exceed the amount of
taxable income on which unitholders must pay taxes. Amortization deductions
decrease the tax basis of units held and will likely be recaptured as ordinary
income if and when the units are sold.
A hypothetical example of the amount of the amortization tax benefit for 1998 is
explained in detail in Note 5 to the financial statements of Nvest contained in
Nvest's annual report on form 10-K for the year ended December 31, 1998. For the
six months ended June 30,1999, Nvest estimates that taxable income to the public
unitholder before the amortization deduction was approximately $1.55 per unit.
The amount of the amortization deduction varies depending on the purchase price
and other factors. However, using a purchase price in December 1998 of $26.75
per unit (of which approximately $23 would represent amortizable assets), the
amortization deduction would reduce net taxable income by $0.77 per unit,
resulting in a deferral of nearly 50% of estimated taxable income until the
units are sold. The relative value of this tax benefit will vary depending on a
number of factors, including the unit purchase price and the amount of taxable
income allocable to unitholders. For the six months ended June 30, 1999, Nvest
declared distributions of $1.26 per unit. Under this illustration, the effective
tax rate to the unitholder on the distributions for this quarter would be
approximately 25%. Based on the assumptions above, the tax benefit for the six
months ended June 30, 1999 is shown in tabular form as follows:
Per
Unit
Distributions declared for the six months ended June 30, 1999 $ 1.26
Allocation of estimated taxable income prior to tax amortization of the purchase price $ 1.55
Less estimated tax amortization allocation of the purchase price (1/15 of $23.00 FOR
TWO QUARTERS) (0.77)
----
Net taxable income $ 0.78
Estimated income tax (assumed 40% personal income tax rate) (0.31)
Total distributions declared for the six months ended June 30, 1999, net of ---
income taxes $ 0.95
----
----
8 of 27
NVEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 8 - TAX CONSIDERATIONS FOR PUBLIC UNITHOLDERS (CONTINUED)
This example is based solely on estimates of taxable income for the six months
ended June 30, 1999. Under Federal law, unitholders are required to pay tax on
their allocable share of Nvest's taxable income regardless of the amount of
distributions paid. Distributions in excess of net taxable income are not
subject to tax in 1999 but decrease a unitholder's tax basis by a like amount.
As individual tax situations may vary, each prospective purchaser is urged to
consult with his or her tax advisor. The statements herein may constitute
forward-looking statements within the meaning of the federal securities laws.
The accuracy of these forward-looking statements depends in large part on the
interpretation and application of tax laws and regulations, which are subject to
change, and estimates made by Nvest based on such interpretations.
THE OPERATING PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands)
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 52,135 $ 29,467
Management and advisory fees receivable 98,914 105,666
Investment securities 18,715 14,650
Other 7,057 10,067
------------- --------------
Total current assets 176,821 159,850
Intangible assets:
Investment advisory contracts 505,292 487,594
Goodwill 131,291 129,485
Fixed assets 34,708 38,821
Other assets 51,270 53,170
------------- --------------
Total assets $ 899,382 $ 868,920
------------- --------------
------------- --------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses $ 124,317 $ 102,322
Distribution payable 34,439 34,309
Notes payable 4,437 16,667
------------- --------------
Total current liabilities 163,193 153,298
Deferred compensation, benefits and other 19,307 19,188
Notes payable 270,000 270,000
------------- --------------
Total liabilities 452,500 442,486
Contingent liabilities (Note 3)
Partners' capital (44,725,799 units at December 31,
1998 and 44,523,526 units at June 30, 1999) 446,882 426,434
------------- --------------
Total liabilities and partners' capital $ 899,382 $ 868,920
------------- --------------
------------- --------------
See Accompanying Notes to Consolidated Financial Statements.
10 of 27
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per unit data, unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------- ------------ -------------
REVENUES
Management and advisory fees $ 158,773 $ 145,282 $ 309,665 $ 293,595
Other revenues and interest income 13,493 14,475 26,055 28,866
------------ ------------- ------------ -------------
172,266 159,757 335,720 322,461
------------ ------------- ------------ -------------
Expenses
Compensation and benefits 86,315 78,333 167,569 161,167
Restricted unit plan compensation 955 879 1,926 1,812
Amortization of intangibles 9,901 10,129 19,735 20,239
Depreciation and amortization 2,090 2,327 4,024 4,635
Occupancy, equipment and systems 7,788 8,648 15,674 17,025
Interest expense 5,265 5,389 10,683 10,695
Other 29,897 27,463 57,983 52,432
------------ ------------- ------------ -------------
142,211 133,168 277,594 268,005
------------ ------------- ------------ -------------
Income before income taxes 30,055 26,589 58,126 54,456
Income tax expense 1,940 1,263 2,964 2,552
------------ ------------- ------------ -------------
Net income $ 28,115 $ 25,326 $ 55,162 $ 51,904
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Distributions declared per unit $ 0.77 $ 0.77 $ 1.51 $ 1.54
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Weighted average units outstanding - diluted 45,307 44,576 45,258 44,622
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
See Accompanying Notes to Consolidated Financial Statements.
11 of 27
THE OPERATING PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
1998 1999
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,162 $ 51,904
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangibles 19,735 20,239
Restricted unit plan compensation 1,926 1,812
---------------- ---------------
Subtotal 76,823 73,955
Depreciation and amortization 4,024 4,635
Increase in accounts receivable and other assets (10,583) (7,938)
Increase (decrease) in accounts payable and other liabilities 17,028 (17,197)
---------------- ---------------
Net cash provided by operating activities 87,292 53,455
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,607) (8,748)
Acquisition payments (11,667) (5,652)
---------------- ---------------
Net cash used in investing activities (20,274) (14,400)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to unitholders (68,480) (68,733)
Proceeds from issuance of units - exercised options 1,022 -
Payment for retirement of units - (5,220)
Proceeds from (repayment of) notes payable (42,431) 12,230
---------------- ---------------
Net cash used in financing activities (109,889) (61,723)
---------------- ---------------
Net decrease in cash and cash equivalents (42,871) (22,668)
Cash and cash equivalents, beginning of period 91,986 52,135
---------------- ---------------
Cash and cash equivalents, end of period $ 49,115 $ 29,467
---------------- ---------------
---------------- ---------------
Cash paid during the period for interest $ 11,161 $ 11,086
---------------- ---------------
---------------- ---------------
Cash paid during the period for income taxes $ 1,176 $ 4,783
---------------- ---------------
---------------- ---------------
Supplemental disclosure of non-cash increase in partners' capital $ 250 $ -
---------------- ---------------
---------------- ---------------
See Accompanying Notes to Consolidated Financial Statements.
12 of 27
THE OPERATING PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ORGANIZATION
Nvest Companies, L.P. (the "Operating Partnership") operates through investment
management firms that offer a broad array of investment management products and
styles across a wide range of asset categories to institutions, mutual funds and
private clients. The business of the Operating Partnership was conducted by
Nvest, L.P. ("Nvest") prior to the Restructuring completed on December 31, 1997,
as described more fully in Note 1 of the financial statements of Nvest included
herein.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Operating Partnership
should be read in conjunction with the annual report of Nvest filed on Form 10-K
for the year ended December 31, 1998. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, have been made to
present fairly the financial statements of the Operating Partnership at June 30,
1999 and for the three and six month periods ended June 30, 1998 and 1999.
Certain amounts in prior period financial statements have been reclassified to
conform with the 1999 presentation.
NOTE 3 - CONTINGENT LIABILITIES
The business units of the Operating Partnership are from time to time subject to
legal proceedings and claims which arise in the course of their businesses. In
the opinion of management, the amount of any ultimate liability with respect to
currently pending actions will not have a material adverse effect on the results
of operations or financial condition of the Operating Partnership.
NOTE 4 - UNIT REPURCHASE PLAN
On September 15, 1998, the Board of Directors of the general partner of Nvest
and the Operating Partnership approved a plan to repurchase up to one million
limited partnership units of the partnerships. The repurchase plan authorizes
the purchase of units over a twelve-month period in either the open market or
privately negotiated transactions. In the case of purchases of Nvest units, the
Operating Partnership has made and is expected to continue to make a
corresponding purchase at the same cost of Operating Partnership units from
Nvest. During the three and six month periods ended June 30, 1999, the Operating
Partnership repurchased 48,473 and 202,273 units at a cost of $1,164,000 and
$5,220,000, respectively.
13 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Any statements in this report that are not historical facts are intended to fall
within the safe harbor for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995. These statements may be identified by
such forward-looking terminology as "expect," "look," "believe," "anticipate,"
"may," "will," or similar statements or variations of such terms. Any
forward-looking statements should be considered in light of the risks and
uncertainties associated with Nvest and the Operating Partnership and their
businesses, economic and market conditions prevailing from time to time, and the
application and interpretation of federal and state tax laws and regulations,
all of which are subject to material changes and which may cause actual results
to vary materially from what had been anticipated. Certain factors that affect
Nvest and the Operating Partnership have been described in Nvest's Annual Report
on Form 10-K for the year ended December 31, 1998, particularly under Item 1,
"Business--Forward-Looking Statements" and include factors such as conditions
affecting fee revenues, reliance on key personnel, competition, regulatory and
legal matters, and tax considerations. Readers are encouraged to review these
factors carefully. The description of the potential effects of the Year 2000
issue includes forward-looking statements.
GENERAL
At year-end 1997, Nvest completed a restructuring (the "Restructuring") that
included the transfer of its business, assets and liabilities to a newly formed
operating partnership, Nvest Companies, L.P. (the "Operating Partnership"). As a
result of the Restructuring, Nvest's primary asset consists of its economic
interest in the Operating Partnership. Nvest records its investment in the
Operating Partnership under the equity method of accounting based on its
proportionate share of net income of the Operating Partnership. At June 30,
1999, Nvest owned approximately 6.3 million units, or approximately 14% of the
economic interests in the Operating Partnership. As part of the Restructuring,
Nvest elected to retain its partnership tax status in return for paying an
annual 3.5% federal gross income tax on its proportionate share of the gross
income of the Operating Partnership. For further information regarding the
Restructuring, please refer to Nvest's Annual Report on Form 10-K for the year
ended December 31, 1998, particularly the discussion under Item 1,
"Business--1997 Restructuring of the Partnership."
As a result of the Restructuring, Management's Discussion and Analysis includes
two sections. In the first section, the results of Nvest for the three and six
months ended June 30, 1999 are compared to the results for the three and six
months ended June 30, 1998. In the second section, the results of the Operating
Partnership for the three and six months ended June 30, 1999 are compared to the
results for the three and six months ended June 30, 1998.
14 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NVEST, L.P.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1998 1999 1998 1999
------------- ------------- ------------ -------------
(in thousands, except per unit data)
THE OPERATING PARTNERSHIP
Net income $ 28,115 $ 25,326 $ 55,162 $ 51,904
Add back restricted unit plan compensation * 955 879 1,926 1,812
------------- ------------- ------------ -------------
Net income available for allocation $ 29,070 $ 26,205 $ 57,088 $ 53,716
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
NVEST, L.P.
Percentage ownership of the Operating Partnership
on a weighted average basis - basic 14.494% 14.310% 14.321% 14.365%
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Equity in earnings of the Operating Partnership $ 4,214 $ 3,750 $ 8,178 $ 7,717
Gross income tax and other expenses, net 869 827 1,750 1,708
------------- ------------- ------------ -------------
Net income $ 3,345 $ 2,923 $ 6,428 $ 6,009
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Net income per unit - diluted ** $ 0.51 $ 0.46 $ 0.99 $ 0.94
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Distributions declared per unit $ 0.63 $ 0.63 $ 1.23 $ 1.26
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Weighted average units outstanding - diluted 7,242 6,401 7,130 6,443
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
* Restricted unit plan compensation is fully allocated to certain limited
partners of the Operating Partnership, and is added back to net income to
determine net income available for allocation.
** Net income per unit - diluted is calculated based on Nvest's percentage
ownership of the Operating Partnership on a diluted basis, which was
15.984% and 14.360% for the three months ended June 30, 1998 and 1999,
respectively, and 15.753% and 14.438% for the six months ended June 30,
1998 and 1999, respectively (see Note 5 of the Notes to Financial
Statements of Nvest, L.P. for the calculation of net income per unit).
GENERAL
Nvest derives its net income and cash available for distribution from its
ownership of units in the Operating Partnership. At June 30, 1999, Nvest
owned approximately 6.3 million units of the Operating Partnership,
representing an approximate 14% interest. Each quarter, Nvest distributes
to its unitholders substantially all of the distributions received from the
Operating Partnership after accruing its federal and state tax obligations
and miscellaneous operating expenses. Nvest's major expense is the 3.5%
federal gross income tax that is payable on Nvest's proportionate share of
the Operating Partnership's gross income.
15 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NVEST, L.P. (CONTINUED)
DISTRIBUTIONS TO UNITHOLDERS
On June 9, 1999, the Operating Partnership declared a quarterly distribution of
$0.77 per unit, payable on August 16, 1999. Nvest, in turn, declared a
distribution of $0.63 per unit, with the $0.14 difference consisting primarily
of the tax obligations discussed above. The Operating Partnership has
significant non-cash expenses which allow both it and, therefore, Nvest to
maintain a distribution level in excess of net income. Changes in operating cash
flow of the Operating Partnership directly impact the amount of distributions
that Nvest may pay.
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1998
Nvest's net income of $0.46 per unit (diluted) for the three months ended June
30, 1999 was down $0.05 from net income per unit (diluted) of $0.51 for the
three months ended June 30, 1998, reflecting the lower net income of the
Operating Partnership.
Equity in earnings of the Operating Partnership of $3.8 million for the three
months ended June 30, 1999 was down $0.4 million from $4.2 million for the three
months ended June 30, 1998. Nvest receives a pro rata share of the Operating
Partnership's net income available for allocation based on its equity interest
in the Operating Partnership. The decrease was primarily due to the lower net
income of the Operating Partnership. See management's discussion and analysis of
the Operating Partnership's results beginning on page 18.
Gross income tax and other expenses of $0.8 million for the three months ended
June 30, 1999 decreased $0.1 million from $0.9 million for the three months
ended June 30, 1998. Gross income tax and other expenses consist primarily of a
3.5% federal tax on Nvest's proportionate share of the gross income of the
Operating Partnership.
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998
Nvest's net income of $0.94 per unit (diluted) for the six months ended June 30,
1999 was down $0.05 from net income per unit (diluted) of $0.99 for the six
months ended June 30, 1998, reflecting the lower net income of the Operating
Partnership.
Equity in earnings of the Operating Partnership of $7.7 million for the six
months ended June 30, 1999 was down $0.5 million from $8.2 million for the six
months ended June 30, 1998. Nvest receives a pro rata share of the Operating
Partnership's net income available for allocation based on its equity interest
in the Operating Partnership. The decrease was primarily due to the lower net
income of the Operating Partnership. See management's discussion and analysis of
the Operating Partnership's results beginning on page 18.
Gross income tax and other expenses of $1.8 million for the six months ended
June 30, 1999 was unchanged from the six months ended June 30, 1998. Gross
income tax and other expenses consist primarily of a 3.5% federal tax on Nvest's
proportionate share of the gross income of the Operating Partnership.
16 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NVEST, L.P. (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
Nvest distributes to its unitholders substantially all of the distributions
received from the Operating Partnership, after accruing its tax obligations and
miscellaneous operating expenses. To the extent that there are any temporary
cash shortfalls due to the timing of tax payments and the receipt of quarterly
distributions, the Operating Partnership makes short-term loans available to
Nvest.
17 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
1998 1999 1998 1999
--------------- --------------- -------------- --------------
(in thousands, except per unit data)
Revenues $172,266 $159,757 $335,720 $322,461
--------------- --------------- -------------- --------------
Expenses:
Restricted unit plan compensation 955 879 1,926 1,812
Amortization of intangibles 9,901 10,129 19,735 20,239
Compensation and other expenses 133,295 123,423 258,897 248,506
--------------- --------------- -------------- --------------
144,151 134,431 280,558 270,557
--------------- --------------- -------------- --------------
Net income $ 28,115 $ 25,326 $ 55,162 $ 51,904
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
Operating cash flow (1) $ 38,971 $ 36,334 $ 76,823 $ 73,955
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
Operating cash flow per unit - diluted (1) $ 0.86 $ 0.82 $ 1.70 $ 1.66
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
Distributions declared per unit $ 0.77 $ 0.77 $ 1.51 $ 1.54
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
Weighted average units outstanding - diluted 45,307 44,576 45,258 44,622
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
NOTE:
(1) Operating cash flow, as defined by Nvest, is equal to net income plus
non-cash charges for amortization of intangibles and restricted unit plan
compensation. Operating cash flow per unit should not be construed as an
alternative to net income per unit of Nvest, L.P. or as an alternative to cash
flow from operating activities as reported in the consolidated statement of cash
flows. Operating cash flow, as calculated above, may not be consistent with
comparable computations by other companies.
18 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
GENERAL
The Operating Partnership is an investment management firm with approximately
$136 billion in assets under management at June 30, 1999. It operates through
twelve investment management firms and six distribution and consulting firms to
provide a wide array of investment styles and products to institutional, mutual
fund and private client markets. The Operating Partnership's assets under
management include equity and fixed income securities, money market funds and
real estate.
The Operating Partnership seeks to grow by expanding the investment management
firms' capabilities, pursuing the acquisition of investment management firms,
and expanding marketing efforts and distribution channels. The Operating
Partnership supports its firms' existing businesses and new initiatives that
demonstrate substantial potential for growth in assets under management by
allocating capital and other resources to those businesses and initiatives. In
addition, the Operating Partnership and the investment management firms identify
opportunities for joint marketing efforts, enhanced distribution of investment
products (such as mutual funds) and operational efficiencies across the
organization.
Two new ventures were initiated by the Operating Partnership during the second
quarter of 1999. The first is a joint venture with Asahi Life Management
Company, an affiliate of Asahi Mutual Life Insurance Company of Tokyo. The joint
venture will provide investment management services to Japanese institutions and
individuals, and the Operating Partnership's investment management firms are
expected to begin managing approximately $1 billion in assets for Asahi by the
end of 1999. The second venture involved the acquisition of the Kobrick Funds, a
growth equity investment manager with $200 million in assets under management.
The Kobrick Funds include three equity mutual funds, with strong records since
their inception in 1998 and the potential for substantial growth.
The Operating Partnership's revenues derive primarily from management and
advisory fees earned from services provided by the investment management firms.
For institutional and private clients, fees are generally billed quarterly and
are calculated as a percentage of actual assets under management at the
beginning or end of the calendar quarter. For mutual fund clients, fees are
billed monthly and are calculated as a percentage of the fund's average daily
net assets. Changes in assets under management, which can result from changes in
market values of securities, net client inflows or outflows, and acquisitions,
have a major impact on revenues earned by the Operating Partnership. The
Operating Partnership can also earn additional management and advisory fee
revenues as a result of performance fees and transaction fees. Such fees are
generally earned at the end of the performance contract period or upon
completion of specific transactions, sometimes resulting in periodic
fluctuations in the recognition of such revenues.
In addition to management and advisory fees, the Operating Partnership earns
other revenues related to services provided to mutual funds and other clients,
distribution fees and sales fees.
DISTRIBUTION POLICY
The Operating Partnership generally distributes to its unitholders operating
cash flow not required for normal business operations and working capital needs,
including support of its growth strategy and the repurchase of units. Operating
cash flow is defined as net income plus non-cash charges for amortization of
intangibles and restricted unit plan compensation. During the first six months
of 1999, the Operating Partnership declared distributions of $1.54 per unit,
compared to $1.51 per unit declared during the first six months of 1998.
Distributions declared per unit represented approximately 93 percent of the
Operating Partnership's operating cash flow per unit for the first six months of
1999.
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PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
ASSETS UNDER MANAGEMENT
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999
---- ---- ---- ---- ----
CLIENT TYPE (IN BILLIONS):
Institutional $ 85 $ 80 $ 87 $ 87 $ 89
Mutual Funds 38 33 36 35 36
Private Accounts and Other 13 12 12 11 11
---- ---- ---- ---- ----
$136 $125 $135 $133 $136
---- ---- ---- ---- ----
ASSET CLASS (IN BILLIONS):
Equity $ 66 $ 55 $ 61 $ 58 $ 61
Fixed Income 55 55 58 59 59
Money Market 9 9 10 10 10
Real Estate 6 6 6 6 6
---- ---- ---- ---- ----
$136 $125 $135 $133 $136
---- ---- ---- ---- ----
---- ---- ---- ---- ----
At June 30, 1999, assets under management of $136 billion had increased $1
billion from $135 billion at December 31, 1998 and were unchanged from $136
billion at June 30, 1998. Assets under management were up $3 billion from $133
billion at March 31, 1999, primarily as a result of positive market performance.
Over the past twelve months, the overall asset mix of the Operating
Partnership's investment management firms has shifted to a higher proportion of
assets in lower fee fixed income accounts from higher fee equity accounts. In
particular, the Operating Partnership has a relatively higher weighting of
domestic equity assets in the value investment style. The value investment style
has historically produced very competitive long-term results, but lagged market
indices such as the S&P 500 during 1998 and into the first quarter of 1999.
Domestic value equity products represented approximately 58% of the Operating
Partnership's equity assets under management at June 30, 1999.
During the second quarter of 1999, performance improved for many of the
Operating Partnership's investment products, across nearly all asset classes and
client types. In particular, more than half of the Operating Partnership's
mutual fund assets were in products ranked in the top quartile of their peer
groups, including funds at the Oakmark, CGM, Loomis Sayles, Reich & Tang and
Jurika & Voyles mutual fund families. Many institutional products, including
those managed by Snyder Capital, Reich & Tang and Westpeak Investment Advisors,
also did well in the quarter.
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1998
Net income of $25.3 million for the three months ended June 30, 1999 decreased
$2.8 million from $28.1 million for the three months ended June 30, 1998,
primarily as a result of lower management and advisory fee revenues, partially
offset by expense reductions in variable compensation and other expenses.
20 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Management and advisory fees of $145.3 million for the three months ended June
30, 1999 decreased $13.5 million (or 8%) from $158.8 million for the three
months ended June 30, 1998. The decrease reflected lower revenues from the
change in the mix of the Operating Partnership's assets under management from
higher fee equity accounts to lower fee fixed income accounts. Growth in
revenues in risk-adjusted equity products and lower fee fixed income and money
market products only partially offset the decline in revenues resulting from
value style equity products. Real estate transaction fees, the timing of which
is subject to the completion of specific transactions, were also down compared
to the second quarter of 1998, due to less activity by real estate investors,
including real estate investment trusts.
Other revenues and interest income of $14.5 million for the three months ended
June 30, 1999 increased $1.0 million from $13.5 million for the three months
ended June 30, 1998. The increase resulted primarily from client servicing fees,
including trading commissions and transfer agency fees.
Compensation and benefits of $78.3 million for the three months ended June 30,
1999 decreased $8.0 million from $86.3 million for the same period last year.
Base compensation increased $3.0 million as a result of annual salary increases
and increased staffing. Variable compensation, which results from subsidiary
incentive payments based on profitability, investment portfolio performance, new
business sales, and participation in the subsidiaries' growth in revenues and
profits, declined $11.0 million. Variable compensation as a percentage of total
compensation declined from 57% for the second quarter of 1998 to 48% for the
second quarter of 1999. The variable compensation plans reward the subsidiaries
for growth in their business, but also require them to share in the impact of
declines. In this way, the variable compensation plans act to reduce
fluctuations in the Operating Partnership's profitability.
Occupancy, equipment and systems expense of $8.6 million for the three months
ended June 30, 1999 increased $0.8 million from $7.8 million for the three
months ended June 30, 1998 due to lease renewals at higher rates and costs
associated with expanded business activities.
Other expense of $27.5 million for the three months ended June 30, 1999
decreased $2.4 million from $29.9 million for the three months ended June 30,
1998. Increases in third party distribution expenses were more than offset by
decreases in discretionary expenses for marketing and advertising and other
subsidiary expenses.
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998
Net income of $51.9 million for the six months ended June 30, 1999 decreased
$3.3 million from $55.2 million for the six months ended June 30, 1998,
primarily as a result of lower management and advisory fee revenues, partially
offset by expense savings in variable compensation and other expenses.
Management and advisory fees of $293.6 million for the six months ended June 30,
1999 decreased $16.1 million (or 5%) from $309.7 million for the six months
ended June 30, 1998. The decrease reflected lower revenues from the change in
the mix of the Operating Partnership's assets under management from higher fee
equity accounts to lower fee fixed income accounts. Growth in revenues in
risk-adjusted equity products and lower fee fixed income and money market
products only partially offset the decline in revenues resulting from value
style equity products. Real estate transaction fees, the timing of which is
subject to the completion of specific transactions, were also down compared to
the prior year.
Other revenues and interest income of $28.9 million for the six months ended
June 30, 1999 increased $2.8 million from $26.1 million for the six months ended
June 30, 1998. The increase resulted primarily from client servicing fees,
including trading commissions and transfer agency fees.
21 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THE OPERATING PARTNERSHIP (CONTINUED)
Compensation and benefits of $161.2 million for the six months ended June 30,
1999 decreased $6.4 million from $167.6 million for the same period last year.
Base compensation increased $6.8 million as a result of annual salary increases
and increased staffing. Variable compensation, which results from subsidiary
incentive payments based on profitability, investment portfolio performance, new
business sales, and participation in the subsidiaries' growth in revenues and
profits, declined $13.2 million. Variable compensation as a percentage of total
compensation declined from 55% for the six months ended June 30, 1998 to 49% for
the six months ended June 30, 1999. The variable compensation plans reward the
subsidiaries for growth in their businesses, but also require them to share in
the impact of declines. In this way, the variable compensation plans act to
reduce fluctuations in the Operating Partnership's profitability.
Occupancy, equipment and systems expense of $17.0 million for the six months
ended June 30, 1999 increased $1.3 million from $15.7 million for the six months
ended June 30, 1998 due to lease renewals at higher rates and costs associated
with expanded business activities.
Other expense of $52.4 million for the six months ended June 30, 1999 decreased
$5.6 million from $58.0 million for the six months ended June 30, 1998.
Increases in third party distribution expenses were more than offset by
decreases in discretionary expenses for marketing and advertising and other
subsidiary expenses.
CAPITAL RESOURCES AND LIQUIDITY
Operating cash flow not required for normal business operations and working
capital needs, including support of the Operating Partnership's growth strategy
and the repurchase of units, is generally distributed to unitholders each
quarter. Distributions to unitholders are typically declared during the last
month of calendar quarters. The Operating Partnership has the ability to make
distributions in excess of net income due to its non-cash amortization expense.
On June 9, 1999, the Operating Partnership declared a distribution of $0.77 per
unit. On a per unit basis, the Operating Partnership paid out approximately 93%
of its operating cash flow in distributions during the first six months of 1999.
At June 30, 1999, the Operating Partnership had available $170 million of its
$185 million in credit lines.
22 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) YEAR 2000
The statements in this section include "Year 2000 readiness disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
The "Year 2000" issue refers to problems that may result from computer programs
that were written using two digits rather than four to define the applicable
calendar year. Any computer programs that have date-sensitive software or
hardware may recognize a date using "00" as the year 1900 rather than the year
2000 or experience a variety of other date-related problems. Systems and
programs that are not capable of handling Year 2000 date issues could result in
system failures or miscalculations that could cause disruptions of operations,
including, among other things, an inability to process transactions, send
invoices, or engage in similar normal business activities.
Year 2000 issues arise in a number of different contexts in which the Operating
Partnership and its affiliated operating companies use computer programming. The
operating companies generally rely heavily upon data processing and other
services provided by third party service providers, including securities
custody, transfer agency, trading and pricing services, and on a daily basis,
trade through security exchanges which are highly automated. In their
operations, the companies also use both third party and internally developed
software programs and rely on customary telecommunications services and building
and property logistical services, including embedded computer-controlled
systems.
The Operating Partnership operates through separate, affiliated operating
companies that provide investment management, distribution and consulting
services. Each operating company has its own independent internal local area
network (LAN) computer system. All of the operating companies lease their office
space from third parties and certain of the operating companies conduct business
through multiple locations in major cities. Although each operating company
conducts business independently, many of the companies use similar third party
software and have common relationships and dependencies with third party service
providers.
Management at each of the affiliated operating companies has responsibility for
ensuring that Year 2000 issues are addressed at the individual firm. Each
operating company has identified a Year 2000 project manager responsible for the
company's Year 2000 compliance effort. In addition to existing technical and
other personnel, certain of the operating companies have hired consultants to
assist them in various aspects of the process of identifying, assessing,
remediating and testing for their Year 2000 projects. The Operating Partnership
provides coordination and assistance to the operating companies and has
implemented regular meetings of the Year 2000 project managers at the operating
companies to enable them to share information and ideas and develop and
coordinate strategies. The Operating Partnership has also provided enhanced
access to industry-sponsored programs and testing initiatives and other
assistance to certain of the operating companies. Progress on Year 2000
initiatives is monitored by the audit committee of the board of directors of the
general partner of the Operating Partnership and by the audit committees of each
affiliated operating company.
The Operating Partnership and its affiliated operating companies have identified
three principal stages of their Year 2000 project management process:
- ASSESSMENT, including identification and inventory of: information
technology (IT) programs, systems and equipment; non-IT systems,
principally in buildings and offices; and external relationships
and dependencies with third parties. The assessment process
includes a determination of whether the identified elements are
Year 2000 compliant and, if necessary, the measures needed to be
taken to make them compliant;
- IMPLEMENTATION of repair, replacement and retirement projects
necessary for programs and systems that are not Year 2000
compliant; and
- TESTING of programs, systems, equipment and third party
relationships and dependencies.
23 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 (CONTINUED)
ASSESSMENT. The Operating Partnership and its affiliated operating companies
believe that they have identified all material programs, systems, equipment and
external relationships and dependencies. The key systems and processes involving
Year 2000 issues for the operating companies generally include computer hardware
and software relating to portfolio accounting systems and LANs; the securities
transaction settlement process and transfer agency functions; and customary
logistical services associated with occupying buildings and property, including
management of real estate for client portfolios.
The companies also believe that they have completed the process of assessing
Year 2000 issues in their operations, including identification of the material
projects necessary to allow the firms to operate and process data into the next
century. Nearly all of these projects have now been completed. As projects have
been completed, the key systems and processes have been tested for compliance
with the Year 2000. Depending on the results of testing, additional projects may
become necessary.
The companies have also made significant progress in obtaining information,
including representations and/or certifications in many cases, regarding the
status of Year 2000 compliance projects at third parties with whom they have
relationships or dependencies, including firms providing broker-dealer,
securities custody, transfer agency, pricing and other services. The operating
companies will continue to seek information from third parties regarding their
Year 2000 readiness.
IMPLEMENTATION. The operating companies have made significant progress in
implementing steps required for their Year 2000 projects, including repairing,
replacing or modifying material programs and systems in order to be Year 2000
compliant. At certain operating companies, this process includes purchasing or
developing new software systems that are Year 2000 compliant, and the
acceleration of planned replacement of systems, such as portfolio accounting
systems, in conjunction with achieving Year 2000 compliance. Nearly all of these
projects have been completed and certain projects are expected to be completed
during the third quarter of this year.
TESTING. The operating companies have also completed nearly all testing of
systems used in their operations. The scope of testing varies from firm to firm
depending on the nature of the firm's business and the need for testing. The
testing process has generally included each operating company's internal
hardware and software systems and, in certain cases, participation in
individual, point-to-point testing with critical third party service providers
and in industry-wide testing. The companies began internal and external testing
in the fourth quarter of last year and have completed nearly all planned
testing. Additional testing is expected to continue in the third quarter of this
year. This process also involves examining the results of testing of internal
systems and external relationships and dependencies, as appropriate, and review
of information regarding the status of Year 2000 compliance programs of third
parties with which the firms have relationships and dependencies.
The Operating Partnership and the affiliated operating companies anticipate
that the aggregate cost of their efforts to achieve Year 2000 compliance will
be between $12-15 million. These amounts represent the historical amounts
spent and estimated future cost of purchasing replacement software and
hardware, and modifying existing hardware and software for Year 2000
compliance. They include the cost of purchasing and implementing planned
replacement of software (such as portfolio accounting software) that was
accelerated, at least in part, due to Year 2000 issues. The estimated
aggregate expense amount includes the cost of outside consultants engaged on
Year 2000 issues, but does not include salary and benefit expense of
technical or other operating personnel at the firms. Through June 30, 1999,
approximately $11 million has been spent on Year 2000 compliance efforts. The
cost of Year 2000 planning and implementation is paid out of operating cash
flow. The Operating Partnership does not currently believe that such costs
will, in the aggregate, cause the deferral of other material IT projects at
the operating companies as a group. Year 2000 costs are expected to
constitute approximately one-third of the aggregate IT budget of the
companies as a group for 1999. Management believes the cost of implementing
the action plans for Year 2000 compliance will not have a material adverse
effect on the operating results or financial condition of Nvest or the
Operating Partnership.
24 of 27
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 (CONTINUED)
Each of the operating companies is developing contingency plans to address
potential Year 2000 problems associated with mission-critical internal systems
and third party relationships and dependencies. These plans will vary depending
on each company's business needs. Certain of the companies have made substantial
progress in developing contingency plans.
Notwithstanding the Year 2000 efforts undertaken and planned, one or more of the
operating companies, and third parties with whom they have material
relationships, may not achieve Year 2000 compliance in a timely manner. The
Operating Partnership has not undertaken a comprehensive analysis of the
operational problems (or the related costs, including potential lost revenues)
that are reasonably likely to impact the Operating Partnership and its
affiliated operating companies if this occurs. Given the different systems and
business relationships of the operating companies, such an analysis on an
aggregate basis for the Operating Partnership as a whole may not be practical.
However, as a general matter, taking into account the level of effort undertaken
to date and planned to be taken, the Operating Partnership believes that the
most reasonably likely worst case scenario is that, notwithstanding the Year
2000 efforts of the Operating Partnership and the operating companies, one or
more of the companies may experience difficulties in conducting all or a portion
of normal business operations on behalf of clients for a period of time due to
one or more mission-critical system failures. Such difficulties could arise out
of Year 2000 problems experienced by one or more of the companies in their own
IT systems (or in non-IT, embedded computer-controlled systems in buildings in
which they operate), such as a temporary inability to process or track trades
and other transactions on behalf of clients in a timely manner. Difficulties
experienced by essential third party service providers could also hinder, or in
some cases, prevent, the companies from conducting normal business operations.
Due to the inherent uncertainty involved in evaluating at this time the extent
to which such disruptions may occur despite the efforts to address Year 2000
problems or the extent to which such disruptions could affect normal business
operations, Nvest is not able to estimate the amount of potential lost revenues
or other losses that might result if such disruptions were in fact to occur.
However, if normal business operations were materially disrupted, it could have
a material adverse impact on the results of operations of the Operating
Partnership and Nvest.
The businesses of the operating companies of the Operating Partnership are
substantially dependent upon their ability to execute securities transactions
and track changes in client portfolios. If one or more of the operating
companies experienced material difficulties due to Year 2000 issues, or if the
third parties with which the operating companies do business experienced such
difficulties, it could have a material adverse effect on the results of
operations and business of the Operating Partnership as a whole. This could, in
turn, have a material adverse effect on the results of operations of Nvest.
The foregoing discussion includes statements that are not historical and are
forward-looking. These statements involve risks and uncertainties that could
cause actual results to differ materially from what was anticipated in the
forward-looking statements. For example, the costs and projected completion
dates for Year 2000 compliance of the Operating Partnership and its affiliated
operating companies are estimates. Factors relating to Year 2000 issues that may
cause material differences in actual results include the availability and cost
of systems and personnel, non-compliance of third party service providers, and
similar uncertainties.
25 of 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Item 1 of Part II of Nvest's Form 10-Q for the quarter ended March 31, 1999,
together with Item 3 of Nvest's Form 10-K for the year ended December 31,
1998, report on a trial in the suit brought by the California Ironworkers
Field Pension Trust and several related trusts (the "Trusts") against the
Operating Partnership's subsidiary, Loomis, Sayles & Company, L.P. ("Loomis
Sayles") on June 7, 1996. The suit seeks money damages in excess of $20
million. As reported in the Form 10-Q, following trial, on March 26, 1999,
the U.S. District Court for the Central District of California entered a
decision for Loomis Sayles on all remaining counts of the complaint, except
for a limited claim as to which the court found for one of the Trusts.
Thereafter, on July 9, 1999, the Court entered judgment for that Trust in the
amount of $1.1 million. In early August, 1999, the Trusts filed notices of
their appeals and Loomis, Sayles filed notice of a cross-appeal. Management
believes that the final outcome of this matter will not have a material
adverse effect on the results of operations or financial condition of the
Operating Partnership or Nvest.
The Operating Partnership's firms are from time to time involved in various
legal proceedings and claims arising in the conduct of their investment
management and other businesses. Management believes that any such claims and
legal proceedings will not have a material adverse effect on the results of
operations or financial condition of the Operating Partnership or Nvest.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
26 of 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nvest, L.P.
- ----------------------------------------
Registrant
/s/ G. Neal Ryland August 16, 1999
- ---------------------------------------- ---------------
G. Neal Ryland Date
Executive Vice President and
Chief Financial Officer
/s/ Kevin P. Charleston August 16 , 1999
- ---------------------------------------- ---------------
Kevin P. Charleston Date
Senior Vice President and Treasurer
(Principal Accounting Officer)
27 of 27