<PAGE> 1
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 333-39585
PIMCO Advisors L.P.
800 Newport Center Drive,
Suite 100
Newport Beach, CA 92660
Tel: 714 717-7022
LOGO
December 12, 1997
Dear PIMCO Advisors L.P. Public Unitholder:
As you may know, we recently completed a combination of the businesses of
PIMCO Advisors L.P. ("PIMCO Advisors") and Oppenheimer Capital. In the
combination, Oppenheimer Capital, L.P. ("Opcap LP"), a New York Stock Exchange
listed partnership, received 26.1 million PIMCO Advisors units in exchange for
its interest in Oppenheimer Capital. As a result of the combination, Oppenheimer
Capital became a wholly-owned subsidiary of PIMCO Advisors, and Opcap LP's
publicly traded limited partner units became an indirect investment in PIMCO
Advisors. The Oppenheimer Capital merger has resulted in two public investment
vehicles in PIMCO Advisors: direct investments in PIMCO Advisors and indirect
investments through Opcap LP.
You may also know that due to recent legislation, publicly traded
partnerships like PIMCO Advisors and Opcap LP will become subject to a tax on
their gross income from active businesses after December 31, 1997.
As a result of that legislation and pursuant to the provisions of our
partnership agreement, effective December 31, 1997 the public ownership of PIMCO
Advisors and Opcap LP is being combined into a single entity, Opcap LP, which
will change its name to PIMCO Advisors Holdings L.P. In the restructuring, all
of your PIMCO Advisors limited partner units will be contributed to Opcap LP,
and you will be issued an equal number of Opcap LP limited partner units and
become a limited partner in Opcap LP. After the restructuring, each Opcap LP
unit will represent indirectly the same investment you now have in one PIMCO
Advisors unit.
The primary purposes of the restructuring are to (i) permit Public
Unitholders in PIMCO Advisors to continue to maintain an investment in a
publicly traded entity while consolidating all public ownership of PIMCO
Advisors into one entity and (ii) allow PIMCO Advisors to become a private
partnership, which will not be subject to the new tax on its gross income from
active businesses. Management believes that there are several benefits
associated with combining the public ownership in the PIMCO Advisors enterprise
into a single entity. The number of public holders in the one entity will be
greater than the number in either Opcap LP or PIMCO Advisors individually, which
should have a favorable impact on market liquidity. Additionally, the
combination will simplify the organizational structure of the PIMCO Advisors
business and reduce confusion in the marketplace created by two publicly traded
securities representing essentially the same investment. Finally, having a
single public entity will substantially reduce administrative costs. The
restructuring also will benefit the nonpublic unitholders of PIMCO Advisors
because they will retain an interest in a partnership (PIMCO Advisors) that will
not be subject to a new 3.5% federal tax that will be imposed after December 31,
1997, on the gross income of certain publicly traded partnerships, including
Opcap LP.
Because each Opcap LP limited partner unit represents an indirect
investment in one PIMCO Advisors unit, your economic interest in the PIMCO
Advisors business will not be altered or diminished in any way. Also, since our
general partner will remain the controlling general partner of both
partnerships, the restructuring will not result in a change in the management of
your investment.
YOU DO NOT NEED TO TAKE ANY ACTION FOR THE RESTRUCTURING TO OCCUR AND YOU
ARE NOT BEING ASKED TO VOTE ON ANY ITEMS. On December 31, 1997, you will
automatically become a limited partner of Opcap LP and cease to be a limited
partner of PIMCO Advisors. A letter of transmittal to be used for surrendering
your PIMCO Advisors unit certificates in exchange for Opcap LP unit certificates
will be sent to you after December 31, 1997.
The restructuring is intended to be a tax-free transaction for holders of
PIMCO Advisors units. For further information regarding the tax consequences of
the restructuring, you should review the discussion of federal tax matters
included in the accompanying Prospectus.
The accompanying Prospectus gives detailed information about Opcap LP and
the restructuring. We encourage you to read it carefully.
Sincerely yours,
LOGO
William D. Cvengros
Chief Executive Officer
<PAGE> 2
PROSPECTUS
OPPENHEIMER CAPITAL, L.P.
800 NEWPORT CENTER DRIVE, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
ISSUANCE OF UP TO 20,258,372 UNITS OF LIMITED PARTNER INTEREST OF
OPPENHEIMER CAPITAL, L.P. TO UNITHOLDERS OF PIMCO ADVISORS L.P.
This Prospectus is being furnished to the Public Unitholders (as defined in
the partnership agreement of PIMCO Advisors L.P. ("PIMCO Advisors")) of units of
limited partner interest ("PIMCO Advisors LP Units") in PIMCO Advisors in
connection with the restructuring (the "Restructuring") of the public ownership
of PIMCO Advisors. As of December 31, 1997 (the "Effective Date"), all PIMCO
Advisors LP Units held by Public Unitholders will be contributed by the general
partners of PIMCO Advisors, on behalf of each Public Unitholder, to Oppenheimer
Capital, L.P. (the "Partnership") in return for the issuance to the Public
Unitholders of an equal number of units of limited partner interest in the
Partnership ("Partnership Units"). This action is being taken pursuant to the
power granted by the PIMCO Advisors Amended and Restated Agreement of Limited
Partnership (the "PIMCO Advisors Partnership Agreement").
The Partnership is a Delaware limited partnership which as its sole
business holds general partner units ("PIMCO Advisors GP Units") in PIMCO
Advisors. Each Partnership Unit represents an indirect interest in one PIMCO
Advisors GP Unit. PIMCO Advisors GP Units are entitled to the same economic
benefits as PIMCO Advisors LP Units. Accordingly, after the Restructuring,
Public Unitholders will hold the same economic interest in PIMCO Advisors as
they did before the transaction. Following the Effective Date, all trading in
the PIMCO Advisors Class A LP Units on the New York Stock Exchange ("NYSE") will
cease, and thereafter the Partnership Units will be the sole publicly-traded
investment in the PIMCO Advisors business.
On the Effective Date, Public Unitholders will automatically cease to be
limited partners of PIMCO Advisors and will become limited partners of the
Partnership. Thereafter, Public Unitholders of record on the Effective Date may
receive certificates representing Partnership Units upon surrender of their
PIMCO Advisors LP Unit certificates in accordance with the instructions provided
herein. Public Unitholders will receive one Partnership Unit for each PIMCO
Advisors LP Unit they hold on the Effective Date. Nonpublic Unitholders (as
defined in the PIMCO Advisors Partnership Agreement) will continue to maintain a
direct interest in PIMCO Advisors.
Partnership Units will be traded on the NYSE under the symbol "OCC" until
the Effective Date and under the symbol "PA" thereafter. In addition, it is
expected that after the Restructuring, the Partnership will change its name to
PIMCO Advisors Holdings L.P. PIMCO Advisors Class A LP Units are expected to
continue to be traded on the NYSE until the Effective Date under the symbol "PA"
and thereafter will not be publicly traded. On November 4, 1997, the last
trading day prior to the execution of the agreement and plan of merger relating
to the Oppenheimer Capital Merger (as defined herein), the closing sale prices
for the Partnership Units and PIMCO Advisors Class A LP Units on the NYSE were
$52 3/16 and $30 3/8, respectively. On December 9, 1997, the closing sales
prices for the Partnership Units and PIMCO Advisors Class A LP Units on the NYSE
were $54 3/8 and $32 15/16, respectively.
WE CALL YOUR ATTENTION TO THE FACTORS SPECIFIED UNDER THE CAPTION "RISK
FACTORS AND OTHER IMPORTANT CONSIDERATIONS" BEGINNING ON PAGE 8, WHICH ADDRESS
CERTAIN CONSIDERATIONS RELATING TO AN INVESTMENT IN THE PARTNERSHIP.
NO VOTE OF UNITHOLDERS IS REQUIRED IN CONNECTION WITH THE RESTRUCTURING. NO
PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND A PROXY.
No person is authorized to give any information or to make any
representation not contained in the Prospectus, and any information or
representation not contained herein must not be relied upon as having been
authorized by PIMCO Advisors or the Partnership. This Prospectus does not
constitute an offer of any securities, and does not constitute a solicitation of
a consent or an offer to sell to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any issuances made hereunder shall, under any circumstances,
create any implication that there has been no change in the assets, properties
or affairs of PIMCO Advisors or the Partnership since the date hereof or that
information set forth herein is correct as of any time subsequent.
------------------------
THE SECURITIES ISSUABLE PURSUANT TO THIS PROSPECTUS HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is December 12, 1997
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY......................................... 1
RISK FACTORS AND OTHER IMPORTANT
CONSIDERATIONS................................ 8
Risks Relating to Ownership of PIMCO Advisors
through the Partnership..................... 8
Other Risks................................... 10
THE RESTRUCTURING............................... 11
Introduction.................................. 11
Terms of the Restructuring.................... 11
Reasons for the Restructuring................. 12
Effects of the Restructuring.................. 12
Existing Economic Interests of the Partners... 13
Authority of the General Partner to Effect the
Restructuring............................... 14
Background of the General Partners'
Restructuring Authority..................... 14
Interests of Certain Persons in the
Restructuring............................... 15
Accounting Treatment.......................... 15
EXCHANGE OF PARTNERSHIP UNIT CERTIFICATES....... 15
UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS.................................... 16
Overview of Transactions...................... 16
Oppenheimer Capital, L.P...................... 16
PIMCO Advisors L.P............................ 17
THE PARTNERSHIP................................. 27
General....................................... 27
Recent Developments........................... 27
BUSINESS OF THE PARTNERSHIP..................... 31
Overview...................................... 31
General....................................... 31
Primary Markets and Strategy for Growth....... 32
Investment Management Firms................... 33
PIMCO Advisors Mutual Funds................... 41
Regulation.................................... 42
Competition................................... 43
Properties.................................... 43
Legal Proceedings............................. 44
MANAGEMENT OF THE PARTNERSHIP................... 45
Management of the Partnership................. 45
Management of PIMCO Advisors.................. 45
Executive Compensation........................ 51
Compensation of Board Members................. 52
Compensation of General Partner............... 52
Compensation Pursuant to Contract............. 52
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions..... 53
Oppenheimer Capital, L.P. 1997 Unit Incentive
Plan........................................ 53
Executive Deferred Compensation Plan.......... 54
RELATIONSHIP BETWEEN THE PARTNERSHIP AND PIMCO
ADVISORS...................................... 55
Operating Agreement........................... 55
<CAPTION>
PAGE
-----
<S> <C>
Exchange Rights............................... 55
Expense Reimbursement......................... 56
CERTAIN RELATIONSHIPS AND TRANSACTIONS.......... 56
PGP Indebtedness.............................. 56
Withdrawal and Removal of a General Partner of
the Partnership or PIMCO Advisors........... 57
Indemnification............................... 57
Contribution Agreement........................ 58
Registration Rights Agreements................ 58
RECENT UNIT PRICES AND DISTRIBUTIONS............ 60
SELECTED FINANCIAL DATA OF OPPENHEIMER CAPITAL,
L.P........................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE PARTNERSHIP............................ 64
The Partnership............................... 64
Oppenheimer Capital........................... 65
SELECTED CONSOLIDATED FINANCIAL DATA OF PIMCO
ADVISORS...................................... 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PIMCO ADVISORS............................. 74
Overview...................................... 74
Results of Operations......................... 74
Capital Resources and Liquidity............... 81
Economic Factors.............................. 82
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE PARTNERSHIP............. 83
DESCRIPTION OF THE PARTNERSHIP AGREEMENT........ 85
COMPARISON OF PIMCO ADVISORS LIMITED PARTNER
UNITS AND PARTNERSHIP UNITS................... 89
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......... 95
Tax Consequences of the Restructuring......... 95
Tax Classification of the Partnership......... 95
Tax Allocations............................... 98
Certain Limitations on Losses and
Deductions.................................. 99
Disposition of Partnership Units.............. 99
Backup Withholding............................ 100
Certain Additional Tax Considerations for
Holders of Partnership Units................ 100
Special Status Taxpayers...................... 100
State and Local Taxes......................... 101
LEGAL MATTERS................................... 101
EXPERTS......................................... 101
AVAILABLE INFORMATION........................... 102
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
i
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere or incorporated by reference
in this Prospectus and the Annexes hereto. Public Unitholders are urged to read
this Prospectus and the Annexes in their entirety and should carefully consider
the information set forth under the heading "Risk Factors and Other
Considerations." Unless otherwise indicated, all unit information reflects the
completion of the Oppenheimer Capital Merger and the 1.67-for-one split of the
Partnership Units described in "The Partnership."
THE PARTNERSHIP
The Partnership is a Delaware limited partnership which as its sole
business holds 26.1 million PIMCO Advisors GP Units, representing an
approximately 23.9% interest in PIMCO Advisors.
PIMCO Advisors is one of the nation's largest investment management firms
with approximately $190 billion of assets under management at October 31, 1997
(as adjusted to include the assets under management of Oppenheimer Capital).
PIMCO Advisors offers a broad range of investment management services and styles
to institutional and retail investors, combining the fixed income-oriented
investment management operations of Pacific Investment Management Company
("Pacific Investment Management"), the equity-oriented operations of Oppenheimer
Capital and five smaller affiliated domestic and international equity investment
management firms, and mutual fund operations. PIMCO Advisors provides investment
management services primarily to (i) large institutional clients through
separate accounts, (ii) smaller institutional clients and financial
intermediaries through the institutional share classes of the PIMCO Funds
(described below) and (iii) retail investors through the retail share classes of
the PIMCO Funds, which are sold principally through broker-dealers.
PIMCO Advisors strategy is to pursue growth by marketing the investment
management expertise, performance record and reputation of its seven
institutional investment management firms (the "Investment Management Firms").
The Investment Management Firms are six Delaware partnerships: Pacific
Investment Management, Oppenheimer Capital, Columbus Circle Investors ("CCI"),
Cadence Capital Management ("Cadence"), NFJ Investment Group ("NFJ") and
Parametric Portfolio Associates ("Parametric") and one United Kingdom limited
partnership, Blairlogie Capital Management ("Blairlogie").
The seven Investment Management Firms are structured as separate
subsidiaries. PIMCO Advisors believes this decentralized structure enables the
Investment Management Firms to implement their own distinct investment
strategies and philosophies, providing financial and other incentives for the
managers of each of the firms to render superior performance and client service.
The Managing Directors of the Investment Management Firms have a significant
profits interest in their respective Investment Management Firms, and a number
of them hold substantial direct and indirect economic interests in PIMCO
Advisors.
The Partnership's business results from the November 30, 1997 merger of
Oppenheimer Capital with a subsidiary of PIMCO Advisors (the "Oppenheimer
Capital Merger"). Prior to the Oppenheimer Capital Merger, the Partnership's
only asset was a 67.6% interest in Oppenheimer Capital. In the Oppenheimer
Capital Merger, PIMCO Advisors acquired from the Partnership the remaining 67.6%
general partner interest in Oppenheimer Capital it did not own, as a result of
which Oppenheimer Capital became a wholly-owned subsidiary of PIMCO Advisors and
the Partnership received 26.1 million PIMCO Advisors GP Units.
PIMCO Partners, G.P. ("PGP") is the sole general partner of the Partnership
and is the controlling general partner of PIMCO Advisors.
1
<PAGE> 5
THE RESTRUCTURING
The Restructuring.................. Under the authority conferred by the
PIMCO Advisors Partnership Agreement, the
general partners, on behalf of each
Public Unitholder, will contribute the
PIMCO Advisors LP Units held by the
Public Unitholders to the Partnership. In
exchange for the PIMCO Advisors LP Units,
the Partnership will issue an equal
number of Partnership Units to the Public
Unitholders. Each Partnership Unit
represents an indirect investment in a
single PIMCO Advisors unit. Accordingly,
Public Unitholders will continue to hold
the same economic interest in PIMCO
Advisors as they did before the
Restructuring. Nonpublic Unitholders will
continue to maintain a direct interest in
PIMCO Advisors.
Distribution Ratio................. Each Public Unitholder will receive one
Partnership Unit for each PIMCO Advisors
LP Unit held as of the Effective Date.
Effective Date..................... Following close of business on December
31, 1997.
Total Number of Partnership Units
to be Issued....................... Up to 20,258,372 million Partnership
Units.
Trading Market..................... Partnership Units are currently listed
for trading on the NYSE under the symbol
"OCC" and are expected to be listed for
trading under the symbol "PA" after the
Effective Date.
Risk Factors....................... Unitholders are referred to the matters
discussed in "Risk Factors and Other
Important Considerations."
Primary Purposes of the
Restructuring...................... The primary purposes of the Restructuring
are to (i) permit Public Unitholders in
PIMCO Advisors to continue to maintain an
investment in a publicly traded entity
while consolidating all public ownership
of PIMCO Advisors into one entity and
(ii) allow PIMCO Advisors to become a
private partnership, which will not be
subject to the new tax on its gross
income from active businesses. Management
believes that there are several benefits
associated with combining the public
ownership in the PIMCO Advisors
enterprise into a single entity. The
number of public holders in the one
entity will be greater than the number in
either the Partnership or PIMCO Advisors
individually, which should have a
favorable impact on market liquidity.
Additionally, the combination will
simplify the organizational structure of
the PIMCO Advisors business and reduce
confusion in the marketplace created by
two publicly traded securities
representing essentially the same
investment. Finally, having a single
public entity will substantially reduce
administrative costs. The Restructuring
also will benefit the Nonpublic
Unitholders of PIMCO Advisors because
they will retain an interest in a
partnership (PIMCO Advisors) that will
not be subject to the new federal tax on
gross income that
2
<PAGE> 6
will apply to certain publicly traded
partnerships, including the Partnership,
after December 31, 1997. See "The
Restructuring -- Reasons for the
Restructuring."
Tax Consequences................... The Restructuring is intended to be a
tax-free transaction for the Public
Unitholders. Public Unitholders are,
however, encouraged to seek the advice of
their tax advisor to determine whether
there are any tax consequences that
affect them. See "Certain Federal Income
Tax Consequences."
Relationship with PIMCO Advisors... Following the Restructuring, the
Partnership will remain a general partner
of PIMCO Advisors. The relationship
between the Partnership and PIMCO
Advisors is governed by the PIMCO
Advisors Partnership Agreement and an
operating agreement (the "Operating
Agreement") between the two partnerships
which, among other things, provides for
the maintenance of a one-for-one exchange
ratio between the Partnership Units and
the PIMCO Advisors units held by the
Partnership (excluding the PIMCO Advisors
units underlying the general partner
interest in the Partnership), and
provides for certain exchange rights and
registration rights for Nonpublic
Unitholders. See "Relationship Between
the Partnership and PIMCO
Advisors -- Operating Agreement."
Distribution Policy................ The Partnership will make quarterly
distributions of available cash on each
Partnership Unit. The distributions on
each Partnership Unit will generally be
equal in amount to the distributions
received on the underlying PIMCO Advisors
units held by the Partnership less any
applicable taxes because all of the
expenses (other than taxes) of the
Partnership will be paid by PIMCO
Advisors.
3
<PAGE> 7
STRUCTURE
STRUCTURE -- THE RESTRUCTURING AND AFTER THE RESTRUCTURING
4
<PAGE> 8
SUMMARY FINANCIAL DATA OF OPPENHEIMER CAPITAL, L.P.
The following table sets forth summary financial data of the Partnership
(retroactively restated to reflect a 1.67 to 1 unit split effective December 1,
1997) and Oppenheimer Capital for the three months ended July 31, 1997 and 1996,
and each of the five years ended April 30, 1997. This information should be read
in conjunction with the Financial Statements of Oppenheimer Capital, L.P. and
the Consolidated Financial Statements of Oppenheimer Capital and the related
notes thereto included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Oppenheimer
Capital, L.P."
<TABLE>
<CAPTION>
OPPENHEIMER CAPITAL, L.P.
-----------------------------------------------------------------------------------
FOR THE THREE
MONTHS
ENDED JULY 31, FOR THE YEARS ENDED APRIL 30,
------------------- -----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- ------- -------- -------- ------- ------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATING DATA:
Revenues............................... $19,585(3) $12,280 $ 56,046(1) $ 61,316(1) $34,282 $35,091 $30,022
Expenses............................... 685 685 2,720 2,720 3,461 4,038 3,704
------- ------- ------- ------- ------- ------- -------
Net income............................. $18,900(3) $11,595 $ 53,326(1) $ 58,596(1) $30,821 $31,053 $26,318
======= ======= ======= ======= ======= ======= =======
Net income per unit.................... $ 0.72(3) $ 0.45 $ 2.06(1) $ 2.28(1) $ 1.21 $ 1.22 $ 1.04
Distributions declared per unit........ $ 0.57 $ 0.39 $ 2.10(2) $ 1.90(2) $ 1.30 $ 1.28 $ 1.16
Weighted average number of units
outstanding.......................... 25,763 25,656 25,663 24,457 25,277 25,122 25,065
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
JULY 31, -----------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA AT:
Total assets........................... $118,313 $116,149 $110,099 $96,633 $98,116 $98,365
Total liabilities...................... 14,806 17,858 12,713 10,321 10,319 9,683
------- -------- -------- ------- ------- -------
Partners' capital...................... $103,507 $ 98,291 $ 97,386 $86,312 $87,797 $88,682
======== ======== ======= ======= =======
</TABLE>
- ---------------
(1) Includes revenues and a gain on Quest sale of $1.8 million, or $.07 per unit
in fiscal 1997 and $17.7 million, or $.69 per unit in fiscal 1996.
(2) Includes a special distribution related to the Quest sale of $.06 per unit
in fiscal 1997 and $.33 in fiscal 1996.
(3) Includes revenues and a gain on Quest sale of $2.8 million, or $.11 per
unit.
<TABLE>
<CAPTION>
OPPENHEIMER CAPITAL
--------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED JULY 31, FOR THE YEARS ENDED APRIL 30,
-------------------- --------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- ------- -------- -------- -------- -------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATING DATA:
Revenues.................................. $ 55,043 $41,075 $181,974 $158,215 $129,912 $112,290 $94,733
Expenses.................................. 30,302 23,441 103,064 95,551 83,066 64,683 54,707
------- ------- -------- -------- -------- -------- -------
Operating Income.......................... 24,741 17,634 78,910 62,664 46,846 47,607 40,026
Gain on Quest sale(1)..................... 4,374 -- 2,806 27,725 -- -- --
------- ------- -------- -------- -------- -------- -------
Income before income taxes and minority
interest................................ $ 29,115 $17,634 $ 81,716 $ 90,389 $ 46,846 $ 47,607 $40,026
======= ======= ======== ======== ======== ======== =======
Assets under management at period end (in
billions)............................... $ 60.8 $ 40.4 $ 51.2 $ 40.6 $ 31.8 $ 29.4 $ 26.4
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
JULY 31, --------------------------------------------------------
1997 1997 1996 1995 1994 1993
-------------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA AT:
Total assets............................. $103,055 $ 93,019 $ 76,338 $ 56,129 $ 43,034 $37,677
Total liabilities........................ 54,356 53,044 41,462 41,582 30,557 27,830
Minority interest........................ 396 277 174 87 25 18
-------- -------- -------- -------- -------- -------
Partners' capital........................ $ 48,303 $ 39,698 $ 34,702 $ 14,460 $ 12,452 $ 9,829
======== ======== ======== ======== ======== =======
</TABLE>
- ---------------
(1) Reflects the gain realized by Oppenheimer Capital on the sale of the
investment advisory and other contracts and business relationship for its
twelve Quest for Value mutual funds to Oppenheimer Funds, Inc., on November
22, 1995.
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA OF PIMCO ADVISORS
The following table sets forth summary consolidated financial data of PIMCO
Advisors for the nine months ended September 30, 1997 and 1996, and each of the
five years ended December 31, 1996. PIMCO Advisors and its subsidiaries were
formed on November 15, 1994, when Pacific Financial Asset Management Corporation
("PFAMCo") merged certain of its investment management businesses and
substantially all of its assets (the "PFAMCo Group") into Thomson Advisory Group
L.P. ("TAG L.P.") (the "Consolidation"). Under generally accepted accounting
principles, the Consolidation is accounted for as an acquisition of TAG L.P. by
PFAMCo Group, even though the legal form was the reverse. Therefore, the
historical financial statements include the operations of PFAMCo Group, in its
corporate form, prior to the Consolidation and the combined results of PIMCO
Advisors, in its partnership form, for the period since the Consolidation. This
information should be read in conjunction with the Consolidated Financial
Statements of PIMCO Advisors L.P. and Subsidiaries and the related notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of PIMCO Advisors."
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues...................... $344,210 $287,161 $392,024 $323,014 $180,263 $165,856 $120,155
Operating expenses.................. 232,572 190,975 261,978 215,271 145,220 131,447 93,011
Amortization of intangibles, options
and restricted units.............. 31,000 30,852 41,171 42,723 6,202 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income.................... 80,638 65,334 88,875 65,020 28,841 34,409 27,144
Other income, net................... 3,249 2,401 3,454 3,964 1,083 864 1,115
-------- -------- -------- -------- -------- -------- --------
Income before income tax expense.... 83,887 67,735 92,329 68,984 29,924 35,273 28,259
Income tax expense.................. 1,226 834 1,201 517 10,669 15,556 11,405
-------- -------- -------- -------- -------- -------- --------
Net income.......................... $ 82,661 $ 66,901 $ 91,128 $ 68,467 $ 19,255 $ 19,717 $ 16,854
======== ======== ======== ======== ======== ======== ========
Net income allocated to:
General Partner and Class A
Limited Partner units........... $ 45,329 $ 39,421 $ 52,916 $ 46,655 $ 4,976
Class B Limited Partner units..... 37,332 27,480 38,212 21,812 1,128
Pre-Consolidation................. -- -- -- -- 13,151
-------- -------- -------- -------- --------
Total............................... $ 82,661 $ 66,901 $ 91,128 $ 68,467 $ 19,255
======== ======== ======== ======== ========
NET INCOME PER UNIT(1):
General Partner and Class A Limited
Partner units..................... $ 1.06 $ 0.96 $ 1.29 $ 1.16 $ 0.12
Class B Limited Partner units....... $ 1.06 $ 0.76 $ 1.05 $ 0.59 $ 0.03
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING (POST-CONSOLIDATION):
Units outstanding:
General Partner................... 800 800 800 800 800
Class A Limited Partner........... 40,146 40,132 40,135 40,108 40,018
Class B Limited Partner........... 32,983 32,961 32,961 32,961 32,961
-------- -------- -------- -------- --------
Total............................... 73,929 73,893 73,896 73,869 73,779
Weighted average effect of unit
options........................... 3,906 2,915 3,119 1,684 984
-------- -------- -------- -------- --------
Total............................... 77,835 76,808 77,015 75,553 74,763
======== ======== ======== ======== ========
DIVIDENDS/DISTRIBUTIONS............. $104,042 $ 97,560 $131,604 $ 89,613 $ 24,384 $ 22,158 $ 12,950
======== ======== ======== ======== ======== ======== ========
FINANCIAL CONDITION AT END OF
PERIOD:
Total assets(2)..................... $365,728 $373,545 $358,500 $369,592 $379,708 $ 70,388 $ 43,189
Total liabilities................... 86,752 68,802 62,257 38,035 34,179 44,567 17,686
-------- -------- -------- -------- -------- -------- --------
Total Partners' capital(3).......... $278,976 $304,743 $296,243 $331,557 $345,529 $ 25,821 $ 25,503
======== ======== ======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED DECEMBER 31,
ENDED SEPTEMBER 30, --------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER STATISTICS:
Assets under management (in
millions)......................... $130,632 $104,540 $110,022 $ 95,182 $ 72,175 $ 57,182 $ 43,737
Operating Profit Available for
Distribution(1)................... 113,830 97,763 132,314 111,205 12,306 -- --
Cash flows provided by operating
activities........................ 112,502 119,882 140,446 86,921 25,852 23,620 9,309
Cash flows (used in) provided by
investing activities.............. (16,598) (2,983) (2,446) (17,771) 22,401 (436) (1,149)
Cash flows used in financing
activities........................ (104,042) (97,560) (131,604) (89,238) (2,549) (14,900) (15,800)
</TABLE>
- ---------------
(1) Computed on earnings following the Consolidation. Operating Profit Available
for Distribution is defined by the PIMCO Advisors Partnership Agreement as
the sum of net income plus non-cash charges from the amortization of
intangible assets, non-cash compensation expenses arising from option and
restricted unit plans, and losses of any subsidiary which is not a
flow-through entity for tax purposes.
(2) Upon completion of the Consolidation, approximately $284.9 million of
intangible assets were created. See Note 3 in the Notes to the Consolidated
Financial Statements of PIMCO Advisors L.P. and Subsidiaries.
(3) Stockholders' equity before the Consolidation.
7
<PAGE> 11
RISK FACTORS AND OTHER IMPORTANT CONSIDERATIONS
Each Public Unitholder should carefully read this entire Prospectus,
including the Exhibits and the documents incorporated herein by reference, and
should give particular attention to the considerations discussed below.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "intend" and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), regarding events, conditions and financial trends that may affect the
Partnership's future plans of operations, business strategy, results of
operations and financial position. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Factors that could cause or contribute to such differences include, but
are not limited to, those described below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Partnership"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of PIMCO Advisors" and elsewhere in this Prospectus.
RISKS RELATING TO OWNERSHIP OF PIMCO ADVISORS THROUGH THE PARTNERSHIP
The Partnership's operating income is derived from its investment in PIMCO
Advisors GP Units. Therefore, an investment in the Partnership Units will
effectively involve the same risks as the Public Unitholders' current investment
in PIMCO Advisors LP Units. These risks include the following:
RELIANCE ON KEY PERSONNEL AND PROFIT-SHARING PAYMENTS
The ability of PIMCO Advisors and the Investment Management Firms to
attract and retain clients is dependent to a large extent on their ability to
attract and retain key employees, including skilled portfolio managers. Certain
of PIMCO Advisors employees are responsible for significant client
relationships. In particular, PIMCO Advisors depends, to a significant extent,
on the services of William H. Gross of Pacific Investment Management and key
portfolio managers of each of the other Investment Management Firms. Mr. Gross
is one of the best-known fixed income portfolio managers in the United States,
and the loss of his services could have a material adverse effect on PIMCO
Advisors. In order to help retain these and other key personnel, each of the
Investment Management Firms has a substantial profit-sharing plan for its senior
management. Oppenheimer Capital maintains a benefit plan for its senior
management which offers a significant profits interest in the performance of the
Investment Management Firm. The other Investment Management Firms reserve a
substantial percentage of their adjusted net book income for profit-sharing
payments (45% in the case of Pacific Investment Management and CCI, and in the
case of the other Investment Management Firms, 15% of the first $3.0 million of
such income, 25% of the next $2.0 million of such income, 40% of the next $5.0
million of such income and 45% of such income in excess of $10 million). These
profit-sharing payments significantly reduce the amount of the Investment
Management Firms' profits that is distributed to PIMCO Advisors and becomes
available for distribution to unitholders of PIMCO Advisors and indirectly to
unitholders of the Partnership. There can be no assurance that key personnel
will be retained.
COMPETITION
The investment management business is highly competitive. PIMCO Advisors
and its Investment Management Firms compete with a large number of other
domestic and foreign investment management firms, commercial banks, insurance
companies, broker-dealers and other financial services providers. Some of the
financial services companies with which the firms compete have greater
resources, assets under management and administration than PIMCO Advisors and
the Investment Management Firms and offer a broader array of investment products
and services.
8
<PAGE> 12
PIMCO Advisors believes that the most important factors affecting its
success are the abilities, performance records and reputations of its investment
managers, and the development of new investment and marketing strategies. The
relative importance of these factors varies depending on the type of investment
management service involved. Client service is also an important competitive
factor. PIMCO Advisors ability to increase and retain client assets could be
adversely affected if client accounts underperform the market over time or if
key investment managers leave the firms. The ability of PIMCO Advisors and the
Investment Management Firms to compete with other investment management firms is
also dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions. There are
relatively few barriers to entry by new investment management firms in the
institutional managed accounts business, which increases competitive pressure.
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 by PIMCO Advisors. Many competitors apply
substantial resources to advertising and marketing their mutual funds which may
adversely affect the ability of PIMCO Advisors-sponsored funds to attract new
retail clients and to retain retail assets under management.
FACTORS AFFECTING FEE REVENUES
General Considerations
Investment management agreements between Investment Management Firms and
their clients typically provide for fees based on a percentage of the assets
under management, determined at least quarterly and valued at current market
levels. The percentage of the fee applicable to a particular classification of
assets under management is a function of several factors. For example,
investments or strategies which have a higher degree of risk and uncertainty
command a higher percentage fee. Therefore, significant fluctuations in
securities prices or in the investment patterns of clients that result in shifts
in assets under management can have a material effect on PIMCO Advisors
consolidated revenues and profitability. Such fluctuations in asset valuations
and client investment patterns may be affected by overall economic conditions
and other factors influencing the capital markets and the net sales of mutual
fund shares generally, including interest rate fluctuations. Virtually all of
PIMCO Advisors revenues are derived from investment management agreements with
clients that are terminable at any time or upon 30 to 60 days' notice, as is the
case generally in the investment management industry. Any termination of
agreements representing a significant portion of assets under management could
have an adverse impact on PIMCO Advisors results of operations. The investment
management business is highly competitive and fees vary among investment
managers. Some of the Investment Management Firms' fees are higher than those of
many investment managers relative to the average size of accounts under
management. Each Investment Management Firm's ability to maintain its fee
structure in the competitive environment is dependent to a large extent on the
ability of its investment managers to provide clients with service and
investment returns that will cause clients to be willing to pay those fees.
There can be no assurance that the Investment Management Firms will be able to
retain their clients or sustain their fee structures in the future.
Reliance on Performance-Based Fees
Approximately 5.3%, 4.5% and 4.1% of PIMCO Advisors revenues (as adjusted
to combine with the revenues of Oppenheimer Capital) for the nine months ended
September 30, 1997 and the years ended December 31, 1996 and December 31, 1995,
respectively, were derived from performance-based fees. Most of these revenues
are attributable to Pacific Investment Management's operations. To earn a
performance-based fee with respect to an account, the relevant Investment
Management Firm must generally outperform a specific benchmark over a particular
period. Performance-based fee arrangements make revenues more volatile, but also
provide an opportunity to earn higher fees than could be obtained under fee
arrangements based solely on a percentage of assets under management. Pacific
Investment Management's StocksPLUS(R) product, which accounted for $11.3 billion
of assets under management at September 30, 1997, is subject to a
performance-based arrangement in which under-performance relative to the S&P 500
over a particular time period results in no fees being paid by clients, while
superior performance results in incentive fees that are not
9
<PAGE> 13
subject to a cap. In addition to the StocksPLUS accounts, several large fixed
income accounts aggregating approximately $10.9 billion at September 30, 1997,
also have performance-based fee arrangements. Pacific Investment Management's
performance-based fee arrangements, including the StocksPLUS fee arrangement,
can materially affect Pacific Investment Management's revenues, and thus those
of PIMCO Advisors, from period to period.
USE OF DERIVATIVES
The use of derivatives by investors has received national attention in
recent years because of losses suffered on investments in derivatives. The
Investment Management Firms, from which PIMCO Advisors obtains its operating
income, have used derivatives and plan to continue using derivatives in the
future. In particular, Pacific Investment Management has used derivatives since
1980 in various ways, principally to manage portfolio risk and exploit market
inefficiencies.
LIABILITY AS GENERAL PARTNER
After the Restructuring, the Public Unitholders will be limited partners in
the Partnership. The Partnership's sole business is holding PIMCO Advisors GP
Units. As a general partner of PIMCO Advisors, the Partnership is liable for the
obligations of PIMCO Advisors although the PIMCO Advisors assets would be used
first to satisfy such obligations. As limited partners, the Public Unitholders
will not be liable for obligations of the Partnership. However, their investment
in the Partnership may be adversely affected to the extent the Partnership is
required to satisfy PIMCO Advisors obligations.
OTHER RISKS
LACK OF PARTICIPATION IN MANAGEMENT; VOTING
As the sole general partner of the Partnership and the general partner with
a controlling interest in PIMCO Advisors, PGP has ultimate control over the
operations of the Partnership and PIMCO Advisors. Limited partners of the
Partnership have only limited voting rights on matters affecting the
Partnership's business and have no right to participate in the management of the
Partnership or PIMCO Advisors. Holders of Partnership Units have no voting
rights regarding the selection of the management board of the Partnership. If
PGP resigned or was removed as general partner and the limited partners of the
Partnership elected to continue the operations of the Partnership, its successor
would be elected by holders of a majority of Partnership Units outstanding. A
vote of holders of 80% or more of the Partnership Units is required to remove
PGP as general partner of the Partnership, and PGP and its affiliates may vote
their Partnership Units, if any, with respect to removal (while PGP owns no
Partnership Units, 154,356 Partnership Units are owned by PIMCO Advisors, which
is controlled by PGP). However, even if PGP were removed as general partner of
the Partnership, such removal would not affect its status as the controlling
general partner of PIMCO Advisors.
CASH DISTRIBUTIONS
Distributions to limited partners of the Partnership will be dependent upon
distributions by PIMCO Advisors, which, in turn, are dependent upon the
Distributable Cash of PIMCO Advisors. Distributable Cash is defined in the PIMCO
Advisors Partnership Agreement as the Operating Profit Available for
Distribution (as defined below in "Recent Unit Prices and
Distributions -- Distribution Policy") less the amount, if any, required for
expenses, for capital expenditures, for future payments on indebtedness, as
reserves or otherwise in the business of PIMCO Advisors, determined in the
discretion of the general partners. While PIMCO Advisors pays all of the
Partnership's expenses (other than taxes), after December 31, 1997,
distributions on the Partnership Units will be less than those on PIMCO Advisors
units due to tax on the Partnership's gross income from active businesses.
10
<PAGE> 14
THE RESTRUCTURING
INTRODUCTION
Due to recent legislation, after December 31, 1997, certain publicly traded
limited partnerships, including PIMCO Advisors and the Partnership, will become
subject to federal taxation as a corporation unless they elect to be subject to
a tax on their gross income from active businesses or unless their partnership
interests cease to be publicly traded by such date. The limited partner units in
both PIMCO Advisors and the Partnership are currently publicly traded, and they
represent the same economic interest in the business of PIMCO Advisors. In order
to consolidate the public ownership of PIMCO Advisors in one entity and to
prevent PIMCO Advisors from being subject to such a tax while permitting the
Public Unitholders to maintain an investment in a publicly traded entity, PIMCO
Advisors will effect the Restructuring, pursuant to authority granted in the
PIMCO Advisors Partnership Agreement, by contributing, on behalf of the Public
Unitholders, all of the PIMCO Advisors units held by Public Unitholders to the
Partnership effective as of December 31, 1997. In the Restructuring, the Public
Unitholders will receive one Partnership Unit for each PIMCO Advisors unit
contributed on their behalf. Each Partnership Unit will have one underlying
PIMCO Advisors unit. Accordingly, Public Unitholders will continue to hold
indirectly through the Partnership the same economic interest in PIMCO Advisors
as they did before the Restructuring. Effective January 1, 1997, the Partnership
will elect to be subject to the tax on gross income from active businesses
rather than be subject to taxation as a corporation. The general partners of
PIMCO Advisors have expressly been granted authority to effect the Restructuring
without the consent of or other action by the limited partners under the PIMCO
Advisors Partnership Agreement.
TERMS OF THE RESTRUCTURING
TIMING
The Restructuring is expected to occur on December 31, 1997. Failure to
effect the Restructuring on or prior to the Effective Date in the absence of a
change in the applicable tax laws would result in PIMCO Advisors being subject
to a tax on certain of its gross income for part or all of the 1998 taxable
year.
CONTRIBUTION OF PUBLICLY OWNED UNITS TO THE PARTNERSHIP
Following the close of business on the Effective Date, all of the PIMCO
Advisors LP Units held of record by a Public Unitholder will be contributed to
the Partnership. The general partners have the authority to effect this
contribution pursuant to Section 16.1 of the PIMCO Advisors Partnership
Agreement. See "-- Authority of General Partner to Effect the Restructuring."
Upon contribution of the PIMCO Advisors LP Units to the Partnership, the
Partnership will convert the PIMCO Advisors LP Units into PIMCO Advisors GP
Units in accordance with the PIMCO Advisors Partnership Agreement. In exchange
for each contributed PIMCO Advisors LP Unit, the Partnership will issue one
Partnership Unit to the Public Unitholder whose unit is contributed. The
Partnership Units are listed on the NYSE. The general partners of PIMCO
Advisors, on behalf of the Public Unitholders, will take all actions necessary
for the Public Unitholders to be admitted as limited partners of the
Partnership. Following the Effective Date, all trading in the PIMCO Advisors
Class A LP Units on the NYSE will cease, and thereafter the Partnership Units
will be the sole publicly-traded investment in the PIMCO Advisors business.
CONTINUING RELATIONSHIP WITH PIMCO ADVISORS
In connection with the Restructuring, the Partnership and PIMCO Advisors
will enter into an Operating Agreement which will govern the ongoing
relationship of the Partnership and PIMCO Advisors, and provide, among other
things, that: (i) the Partnership shall take such actions as shall be required
from time to time so as to ensure that the number of outstanding Partnership
Units is at all times equal to the number of PIMCO Advisors units held by the
Partnership and its subsidiaries which are allocable to the limited partner
interests in the Partnership, (ii) the Partnership shall provide certain holders
of PIMCO Advisors units a limited right to exchange their PIMCO Advisors units
for Partnership Units (see "Relationship Between the Partnership and PIMCO
Advisors -- Exchange Rights"), (iii) the Partnership shall assume and agree to
perform the obligations of PIMCO Advisors under PIMCO Advisors unit incentive
plans and certain agreements relating
11
<PAGE> 15
to the issuance of PIMCO Advisors units, (iv) the Partnership shall adopt and
maintain one or more unit incentive plans for the benefit of individuals
providing services to the Partnership, PIMCO Advisors and their respective
subsidiaries, and (v) the Partnership shall not engage in any business other
than that incidental to its ownership of PIMCO Advisors units and its status as
a general partner of PIMCO Advisors. See "Relationship Between the Partnership
and PIMCO Advisors -- Operating Agreement."
REASONS FOR THE RESTRUCTURING
GENERAL
The primary purposes of the Restructuring are to (i) permit Public
Unitholders to continue to maintain an investment in a publicly traded entity
while consolidating all public ownership of PIMCO Advisors into one entity and
(ii) allow PIMCO Advisors to become a private partnership, which will not be
subject to the new tax on the gross income from active businesses of publicly
traded partnerships. Management believes that there are several benefits
associated with combining the public ownership in the PIMCO Advisors enterprise
into a single entity. The number of public holders in the one entity will be
greater than the number in either the Partnership or PIMCO Advisors
individually, which should have a favorable impact on market liquidity.
Additionally, the combination will simplify the organizational structure of the
PIMCO Advisors business and reduce confusion in the marketplace created by two
publicly traded securities representing essentially the same investment.
Finally, having a single public entity will substantially reduce administrative
costs. The Restructuring also will benefit the Nonpublic Unitholders of PIMCO
Advisors because they will retain an interest in a partnership (PIMCO Advisors)
that will not be subject to the new federal tax on gross income that will apply
to certain publicly traded partnerships, including the Partnership, after
December 31, 1997.
CONSOLIDATION OF PUBLIC OWNERSHIP INTO THE PARTNERSHIP
Both PIMCO Advisors units and Partnership Units represent an investment in
the business of PIMCO Advisors and both are currently publicly traded on the
NYSE. Management believes that consolidating all of the public ownership of
PIMCO Advisors into the Partnership through the Restructuring should
substantially reduce administrative burdens and costs, increase liquidity and
eliminate confusion in the marketplace, thereby making the Partnership Units
more attractive to investors.
PRESERVATION OF PARTNERSHIP TAXATION FOR NONPUBLIC UNITHOLDERS
Under current law, after December 31, 1997, PIMCO Advisors will become
subject to federal taxation as a corporation unless it elects to be subject to a
federal tax on its gross income from active businesses or unless PIMCO Advisors
Class A LP Units cease to be publicly traded prior to that time (and may be
subject to similar taxes imposed by states in which PIMCO Advisors is subject to
such taxes). By effecting the Restructuring, PGP intends to preserve the current
tax treatment of PIMCO Advisors for its Nonpublic Unitholders by terminating the
public trading of PIMCO Advisors Class A LP Units. See "-- Interests of Certain
Persons in the Restructuring."
EFFECTS OF THE RESTRUCTURING
PUBLIC UNITHOLDERS WILL BECOME LIMITED PARTNERS OF THE PARTNERSHIP
As a result of the Restructuring, the Public Unitholders will cease to be
limited partners of PIMCO Advisors and will become limited partners of the
Partnership. As limited partners of the Partnership, their rights will be
governed by the Amended and Restated Agreement of Limited Partnership of
Oppenheimer Capital, L.P. (the "Partnership Agreement"), rather than the PIMCO
Advisors Partnership Agreement. See "Description of Partnership Units." The sole
business of the Partnership after the Restructuring will continue to be that of
holding PIMCO Advisors GP Units, and each Partnership Unit will represent an
indirect investment in a single PIMCO Advisors unit. Accordingly, Public
Unitholders will continue to hold indirectly through the Partnership the same
economic interest in PIMCO Advisors as they did before the transaction.
Nonpublic Unitholders will remain partners in PIMCO Advisors after the
Restructuring.
12
<PAGE> 16
EFFECT ON DISTRIBUTIONS
As a publicly traded partnership, the Partnership will be subject to a 3.5%
federal tax on its gross income from active businesses after December 31, 1997.
Accordingly, while the Partnership's expenses (other than taxes) will be paid by
PIMCO Advisors, distributions on the Partnership Units will be less than the
distributions received by the Partnership on the PIMCO Advisors GP Units owned
by it. See "Recent Unit Prices and Distributions -- Distribution Policy of the
Partnership."
MANAGEMENT AND CONTROL OF THE PARTNERSHIP
PGP is the controlling general partner of PIMCO Advisors and the sole
general partner of the Partnership. Accordingly, after the Restructuring, Public
Unitholders will continue to hold interests in an entity controlled by PGP. PGP
has delegated its authority to manage the day to day operations of the
Partnership to a management board. See "Management of the Partnership."
PIMCO ADVISORS NOT SUBJECT TO A TAX
As a result of the Restructuring, PIMCO Advisors is expected to be treated
as a non-publicly-traded partnership for tax purposes. Accordingly, Nonpublic
Unitholders will continue to receive distributions from PIMCO Advisors without
any reduction for taxes on the gross income of PIMCO Advisors.
TAX CONSEQUENCES OF THE RESTRUCTURING TO UNITHOLDERS
The exchange of PIMCO Advisors units for Partnership Units is intended to
be treated for federal income tax purposes as a contribution of property to a
partnership in exchange for an interest in the Partnership. As such, under
Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"), no
gain or loss will be recognized by the exchanging party or the Partnership on
the exchange. The exchanging party will have a tax basis in its Partnership
Units equal to the tax basis such party had in the surrendered PIMCO Advisors
units and will have a holding period for the Partnership Units that includes the
holding period that it had for the surrendered PIMCO Advisors units.
Furthermore, the Partnership will have a tax basis in the contributed PIMCO
Advisors units equal to the tax basis of such PIMCO Advisors units in the hands
of the exchanging party and will have a holding period for the PIMCO Advisors
units that includes the holding period for such PIMCO Advisors units in the
hands of the exchanging party. See "Certain Federal Income Tax Consequences."
EXISTING ECONOMIC INTERESTS OF THE PARTNERS
Interests in PIMCO Advisors are divided into units of limited partner
interest and units of general partner interest. PIMCO Advisors GP Units are held
only by general partners of PIMCO Advisors, but have the same economic rights,
including rights to distributions, as PIMCO Advisors LP Units. Limited partner
units of PIMCO Advisors are further divided into Class A units and Class C units
and, until March 1, 1998, Class B units. The general partner units are divided
into Class A units and, until March 1, 1998, Class B units. For each fiscal
quarter ending on or prior to December 31, 1997, the Class A units have had a
priority right over Class B units with respect to distributions. Beginning with
the fiscal quarter ending March 31, 1998, the priority right to distributions
for Class A units will cease and Class A units and Class B units will represent
identical interests in PIMCO Advisors. PIMCO Advisors issued 6.0 million Class C
units of limited partner interest ("PIMCO Advisors Class C units") in connection
with the Oppenheimer Capital Merger. All of the PIMCO Advisors Class C units are
currently held by Opgroup, a wholly-owned corporate subsidiary of PIMCO
Advisors. The PIMCO Advisors Class C units have the same economic rights as the
other PIMCO Advisors LP Units, except that distributions with respect to the
PIMCO Advisors Class C units are limited to $3.00 per annum per unit. Effective
January 1, 1998, the PIMCO Advisors Partnership Agreement will be amended to
entitle the Class C LP Units to a minimum distribution of $2.75 per unit per
year, commencing with the quarter ending March 31, 1998, and to cause the Class
C LP Units to be convertible at the election of the holder into PIMCO Advisors
Class A LP Units on a one-for-one basis. All PIMCO Advisors Class C LP Units are
held by a subsidiary of PIMCO Advisors, and PIMCO Advisors has no present
intention of converting such units.
13
<PAGE> 17
AUTHORITY OF THE GENERAL PARTNER TO EFFECT THE RESTRUCTURING
In order to protect Nonpublic Unitholders from an Adverse Partnership Tax
Event (as defined below), the PIMCO Advisors Partnership Agreement confers on
the general partners broad authority to effect one or more restructurings of
PIMCO Advisors to prevent a change in its partnership tax status. An Adverse
Partnership Tax Event is defined in the PIMCO Advisors Partnership Agreement as
(i) PIMCO Advisors being treated as an association taxable as a corporation,
(ii) PIMCO Advisors being reconstituted as a corporation, or (iii) PIMCO
Advisors otherwise becoming subject to federal taxation on its income, or the
occurrence of another event which would have caused any of (i), (ii) or (iii) to
occur but for the occurrence of a restructuring of PIMCO Advisors.
Section 16.1 of the PIMCO Advisors Partnership Agreement provides that the
general partners may take all actions appropriate to accomplish one or more
restructurings of PIMCO Advisors, without consent of or other action on the part
of any other unitholder and whether or not such actions or omissions may treat
Public Unitholders differently than the general partners and their affiliates or
result in different and more favorable treatment of the general partners and
their affiliates. Such actions expressly include, but are not limited to, (a)
the creation of one or more business entities controlled by the general partner,
affiliates of the general partner or affiliates of PIMCO Advisors, (b) the
transfer of all or any part of the business of PIMCO Advisors or assets of PIMCO
Advisors to one or more existing or newly-created business entities in exchange
for interests in such business entities, which interests may be subject to
substantial restrictions on transfer, (c) the initiation of exchange or
redemption transactions which will permit and may automatically effect, without
the consent of any limited partner, the exchange of some or all outstanding
limited partner units for interests in one or more existing or newly-created
business entities which hold, directly or indirectly, interests in all or any
part of the business of PIMCO Advisors or assets of PIMCO Advisors, (d) the
imposition of substantial restrictions on the transferability of some or all of
the limited partner units (or interests in one or more successor entities) and
(e) causing PIMCO Advisors and any one or more successor entities to enter into
agreements governing their relationships following the restructuring, on terms
and conditions determined by the general partners, including, without
limitation, agreements providing for (i) the issuance and sale by a successor
entity, of its securities and the contribution of the proceeds of such issuance
and sale to PIMCO Advisors, in exchange for units or other PIMCO Advisor
securities, (ii) the acquisition by a successor entity of businesses or assets
and the contribution of such businesses or assets to PIMCO Advisors in exchange
for units, (iii) the adoption by a successor entity of one or more employee
benefit plans involving the issuance of its securities, the assumption by such
successor entity of the outstanding employee benefit plans of such successor
entity to PIMCO Advisors, in exchange for units, and (iv) the exchange of
outstanding units for securities of a successor entity upon request by the
holders of such units, the registration of such securities under federal and
state securities laws in connection with a public offering, and the concomitant
listing of such securities on a national securities exchange. The PIMCO Advisors
Partnership Agreement provides no appraisal or similar rights to any unitholder
with respect to any restructuring, nor does it require that the general partners
obtain an opinion as to the fairness of any restructuring to the Public
Unitholders.
BACKGROUND OF THE GENERAL PARTNERS' RESTRUCTURING AUTHORITY
At the time of PIMCO Advisors organization in 1987, its publicly traded
master limited partnership ("MLP") form offered important tax advantages because
there was no federal income tax at the partnership level. In December 1987,
however, Congress passed the Revenue Act of 1987, one of the provisions of which
provided that MLPs, with certain exceptions not applicable to PIMCO Advisors,
would be taxed for federal income tax purposes as corporations. The tax status
of MLPs existing on December 17, 1987 was "grandfathered" until December 31,
1997. In August 1997, Congress passed the Taxpayer Relief Act of 1997, which
provided, among other things, that any previously grandfathered MLP may elect to
continue its partnership status as an "electing 1987 partnership" if it agrees
to be subject to a tax on its gross income from active businesses in tax years
beginning after December 31, 1997.
PIMCO Advisors current organizational structure (other than its ownership
of Oppenheimer Capital) results from the Consolidation of the investment
advisory businesses of certain subsidiaries of PFAMCo, i.e. Pacific Investment
Management, Cadence, Parametric, NFJ and Blairlogie, with the investment
advisory and mutual fund distribution businesses, including CCI, formerly
conducted under the name of TAG L.P., and its
14
<PAGE> 18
affiliate Thomson Investor Services Inc. As part of the Consolidation, PGP
replaced Thomson Advisory Group, Inc. ("TAG") as the general partner of PIMCO
Advisors.
Concurrent with their approval of the Consolidation, the limited partners
of PIMCO Advisors expressly approved amendments to the PIMCO Advisors
Partnership Agreement which, among other things, conferred on the general
partners broad authority to effect one or more restructurings of PIMCO Advisors
to prevent an adverse change in partnership tax treatment. The amendments to the
PIMCO Advisors Partnership Agreement also modified the fiduciary duties of the
general partners, including expressly relieving the general partners of any
fiduciary or other duties or liabilities to PIMCO Advisors or any unitholder for
any actions taken or omitted to be taken in good faith and without recklessness
with respect to any restructuring, notwithstanding that such actions or
omissions may treat Public Unitholders differently than general partners and
their affiliates and result in more favorable treatment of the general partners
and their affiliates.
INTERESTS OF CERTAIN PERSONS IN THE RESTRUCTURING
The Nonpublic Unitholders, including PGP and certain members of the
Management Board of PIMCO Advisors (the "PIMCO Advisors Management Board"), have
an interest in the Restructuring because, as contemplated by the PIMCO Advisors
Partnership Agreement, PIMCO Advisors will preserve partnership tax treatment
for the Nonpublic Unitholders' investment in PIMCO Advisors. Under current law,
after December 31, 1997, PIMCO Advisors will become subject to federal taxation
as a corporation unless it elects to be subject to a tax on its gross income or
unless PIMCO Advisors limited partner interests cease to be publicly traded
prior to such time as will be accomplished through the Restructuring. After the
Restructuring, the Public Unitholders will own interests in a publicly-traded
partnership that is subject to a tax on its gross income after December 31,
1997. The Nonpublic Unitholders will continue to hold their interests in PIMCO
Advisors, which will not be subject to such a tax on gross income.
ACCOUNTING TREATMENT
The issuance of new Partnership Units in exchange for PIMCO Advisors units
does not create a new basis of accounting since the entities share a common
general partner. In accordance with generally accepted accounting principles,
the Partnership's investment and capital accounts will be increased by the
amount representing the book value of the PIMCO Advisors units contributed.
There will be no accounting recognition given for the exchange in the financial
statements of PIMCO Advisors.
EXCHANGE OF PARTNERSHIP UNIT CERTIFICATES
As of the Effective Date, the Public Unitholders will become limited
partners of the Partnership and cease to be limited partners of PIMCO Advisors.
The PIMCO Advisors LP Units held by Public Unitholders on the Effective Date
will on that date be transferred to the Partnership on the books of the transfer
agent of PIMCO Advisors and reclassified as PIMCO Advisors GP Units in
accordance with the PIMCO Advisors Partnership Agreement. Because the general
partners of PIMCO Advisors will effect the transfer of the Public Unitholders'
units on behalf of the Public Unitholders pursuant to the authority granted to
the general partners by the PIMCO Advisors Partnership Agreement, the Public
Unitholders do not need to take any action for the transfer to occur.
As of the Effective Date, each Public Unitholder will become a limited
partner of the Partnership and receive one Partnership Unit for each PIMCO
Advisors unit it held immediately prior to the Effective Date. As of the
Effective Date, the certificates which formerly represented the Public
Unitholders' PIMCO Advisors Units will be deemed cancelled and of no further
force or effect (except that the certificates must be surrendered as described
below in order to receive certificates for Partnership Units received in the
Restructuring). Public Unitholders may exchange the certificates which prior to
the Effective Date represented PIMCO Advisors LP Units for certificates
representing Partnership Units by completing a letter of transmittal, which will
be sent to the Public Unitholders after December 31, 1997, and mailing the
letter of transmittal, along with their certificates, to the address indicated
in the letter of transmittal. Regardless of whether a Public Unitholder submits
the letter of transmittal and its certificates, the Public Unitholder will be
deemed to own one Partnership Unit for each PIMCO Advisors unit held immediately
prior to the Effective Date and will cease to have any direct ownership interest
in PIMCO Advisors.
15
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
OVERVIEW OF TRANSACTIONS
The pro forma condensed financial statements present the effects on the
Partnership and PIMCO Advisors of three significant events identified herein as
the Opgroup Transaction, the Oppenheimer Capital Merger and the Restructuring.
The Opgroup Transaction. On November 4, 1997 PIMCO Advisors and Oppenheimer
Group Inc. ("Opgroup") completed the acquisition by PIMCO Advisors of 100% of
the outstanding common stock of Opgroup in exchange for 2.1 million PIMCO
Advisors Class A LP Units and the rights to exchange up to $230 million of
outstanding term notes for an additional 6.9 million PIMCO Advisors Class A LP
Units at a rate of $33 1/3 per unit. At that date, Opgroup owned various assets
including an approximate 32.4% interest in Oppenheimer Capital, the 1% general
partner interest in the Partnership and the advisory contracts for eight closed
end mutual funds. The Partnership, at that time, owned the remaining 67.6%
interest in Oppenheimer Capital. Immediately following the acquisition PIMCO
Advisors split the 1% general partner interest in the Partnership into a .01%
general partner interest and a .99% limited partner interest, and sold the
general partner interest to PGP for $80,000, its approximate book value. As
explained further in Note 1 the purchase method of accounting was used by PIMCO
Advisors to record the acquisition of Opgroup. These transactions have no
accounting impact on the Partnership.
The Oppenheimer Capital Merger. In the Oppenheimer Capital Merger,
Oppenheimer Capital merged with a transitory limited partnership subsidiary of
PIMCO Advisors, with the Partnership receiving 26.1 million PIMCO Advisors Class
A GP Units of PIMCO Advisors, representing an approximate 23.9% ownership of
PIMCO Advisors. This transaction involving entities under common control was
accounted for using the book values at PIMCO Advisors. PIMCO Advisors
reclassified the amount representing the non-controlling interest into partners
capital. The Partnership recorded as its investment in PIMCO Advisors an amount
representing the book value of PIMCO Advisors units received. Prior to the
Oppenheimer Capital Merger, the Partnership split its units on a 1.67-for-one
basis, the effect of which was to align the economic interests of PIMCO Advisors
and the Partnership. This split has no accounting impact; however, the
post-split units outstanding have been reflected in all per unit computations
for the Partnership.
The Restructuring. On December 31, 1997, the approximately 22.6 million
PIMCO Advisors LP Units held by Public Unitholders (assuming that all 9.0
million PIMCO Advisors Class A LP Units issued in or issuable as a result of the
Opgroup Transaction will be held by Public Unitholders) will be contributed to
the Partnership in exchange for an equal number of Partnership Units. This
transaction will be recorded by the Partnership at the amount representing the
book value of the PIMCO Advisors LP Units contributed. The Restructuring has no
accounting impact on PIMCO Advisors.
Other. The historical financial information of Oppenheimer Capital, Opgroup
and the Partnership are presented herein based upon calendar year results and
balances since these entities will change to a calendar year end effective
December 31, 1997. Previously Oppenheimer Capital, Opgroup and the Partnership
have utilized a fiscal year end of April 30.
Book value per unit is based upon units outstanding exclusive of the
dilutive effects of options, and deferred unit awards.
OPPENHEIMER CAPITAL, L.P.
The following pro forma condensed financial statements of the Partnership
as of September 30, 1997 and for the nine months then ended, and for the year
ended December 31, 1996 give effect to the Oppenheimer Capital Merger and the
Restructuring transactions described above. The pro forma condensed statement of
financial condition has been prepared as though the Oppenheimer Capital Merger
and the Restructuring had been effected on September 30, 1997 and the pro forma
condensed statements of operations have been prepared as though the Oppenheimer
Capital Merger and the Restructuring had been effected on January 1, 1996.
16
<PAGE> 20
PIMCO ADVISORS L.P.
The following pro forma condensed financial statements of PIMCO Advisors as
of September 30, 1997 and for the nine months then ended, and for the year ended
December 31, 1996 give effect to the Opgroup Transaction and the Oppenheimer
Capital Merger described above. The pro forma condensed statement of financial
condition has been prepared as though the Opgroup Transaction and the
Oppenheimer Capital Merger had been effected on September 30, 1997 and the
condensed statements of operations have been prepared as though the Opgroup
Transaction and the Oppenheimer Capital Merger had been effected on January 1,
1996.
The pro forma information for the Partnership and PIMCO Advisors is
presented for illustrative purposes and does not purport to be indicative of the
results which would have been obtained had the transactions been effected on the
assumed dates, nor is the information intended to be indicative of the results
which may occur in the future. The accompanying Notes to Pro Forma Condensed
Financial Statements should be read for a description of the principal
assumptions made in the preparation of the pro forma information. Management
believes that the assumptions used in the preparation of the pro forma
information are reasonable.
17
<PAGE> 21
OPPENHEIMER CAPITAL, L.P.
PRO FORMA CONDENSED STATEMENT OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
OPPENHEIMER
CAPITAL PRO FORMA
OPPENHEIMER MERGER (NOTE RESTRUCTURING POST
CAPITAL, 2) PRO FORMA (NOTE 3) RESTRUCTURING
L.P. ADJUSTMENTS POST MERGER ADJUSTMENTS AND MERGER
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........ $ 157,197 $ -- $ 157,197 $ -- $ 157,197
Investment in operating
partnership.................... 43,932,954 239,066,002 282,998,956 245,670,755 528,669,711
Intangible assets, net........... 38,220,593 (38,220,593) -- -- --
Note receivable.................. 32,193,000 (32,193,000) -- -- --
Other assets..................... 380,901 -- 380,901 -- 380,901
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS................ $114,884,645 $168,652,409 $283,537,054 $245,670,755 $529,207,809
============ ============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
Partners' capital................ $114,884,645 $168,652,409 $283,537,054 $245,670,755 $529,207,809
------------ ------------ ------------ ------------ ------------
Total Partners' capital..... 114,884,645 168,652,409 283,537,054 245,670,755 529,207,809
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL......... $114,884,645 $168,652,409 $283,537,054 $245,670,755 $529,207,809
============ ============ ============ ============ ============
Book Value per Unit
Outstanding.................... $ 4.41 $ 10.88 $ 10.88
============ ============ ============
</TABLE>
See accompanying Notes to Pro Forma Condensed Financial Statements.
18
<PAGE> 22
OPPENHEIMER CAPITAL, L.P.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OPPENHEIMER PRO FORMA
OPPENHEIMER CAPITAL MERGER RESTRUCTURING POST
CAPITAL, (NOTE 2) PRO FORMA (NOTE 3) RESTRUCTURING
L.P. ADJUSTMENTS POST MERGER ADJUSTMENTS AND MERGER
----------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Equity in earnings of operating
partnership..................... $41,389,363 $ (15,191,689) $26,197,674 $ 22,732,683 $ 48,930,357
Interest........................... 2,414,475 (2,414,475) -- -- --
----------- ------------ ----------- ----------- -----------
Total Revenues............. 43,803,838 (17,606,164) 26,197,674 22,732,683 48,930,357
----------- ------------ ----------- ----------- -----------
EXPENSES
Amortization of intangibles,
deferred compensation........... 1,956,000 (1,956,000) -- -- --
Other.............................. 96,579 (96,579) -- -- --
----------- ------------ ----------- ----------- -----------
Total Expenses............. 2,052,579 (2,052,579) -- -- --
----------- ------------ ----------- ----------- -----------
Income before income tax expense... 41,751,259 (15,553,585) 26,197,674 22,732,683 48,930,357
Income tax expense (note 5)........ -- -- -- -- --
----------- ------------ ----------- ----------- -----------
NET INCOME........................... $41,751,259 $ (15,553,585) $26,197,674 $ 22,732,683 $ 48,930,357
=========== ============ =========== =========== ===========
Earnings per unit.................... $ 1.52 $ 1.01 $ 1.01
=========== =========== ===========
Cash flow per unit................... $ 1.85 $ 1.73 $ 1.73
=========== =========== ===========
Units outstanding -- adjusted for
split
All classes of units............... 26,054,414 -- 26,054,414 22,608,372 48,662,786
Dilutive effect of options and
awards.......................... 1,467,596 (1,467,596) -- -- --
----------- ------------ ----------- ----------- -----------
Total...................... 27,522,010 (1,467,596) 26,054,414 22,608,372 48,662,786
=========== ============ =========== =========== ===========
</TABLE>
See accompanying Notes to Pro Forma Condensed Financial Statements.
19
<PAGE> 23
OPPENHEIMER CAPITAL, L.P.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OPPENHEIMER PRO FORMA
OPPENHEIMER CAPITAL MERGER RESTRUCTURING POST
CAPITAL, (NOTE 2) PRO FORMA (NOTE 3) RESTRUCTURING
L.P. ADJUSTMENTS POST MERGER ADJUSTMENTS AND MERGER
----------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Equity in earnings of operating
partnership..................... $40,125,810 $ (14,726,366) $25,399,444 $22,040,030 $ 47,439,474
Interest........................... 3,219,300 (3,219,300) -- -- --
----------- ------------ ----------- ----------- -----------
Total Revenues............. 43,345,110 (17,945,666) 25,399,444 22,040,030 47,439,474
----------- ------------ ----------- ----------- -----------
EXPENSES
Amortization of intangibles,
deferred compensation........... 3,912,000 (3,912,000) -- -- --
Other.............................. 128,772 (128,772) -- -- --
----------- ------------ ----------- ----------- -----------
Total Expenses............. 4,040,772 (4,040,772) -- -- --
----------- ------------ ----------- ----------- -----------
Income before income tax expense... 39,304,338 (13,904,894) 25,399,444 22,040,030 47,439,474
Income tax expense (note 5)........ -- -- -- -- --
----------- ------------ ----------- ----------- -----------
NET INCOME........................... $39,304,338 $ (13,904,894) $25,399,444 $22,040,030 $ 47,439,474
=========== ============ =========== =========== ===========
Earnings per unit.................... $ 1.43 $ 0.97 $ 0.97
=========== =========== ===========
Cash flow per unit................... $ 1.91 $ 1.92 $ 1.92
=========== =========== ===========
Units outstanding -- adjusted for
split
All classes of units............... 26,054,414 -- 26,054,414 22,608,372 48,662,786
Dilutive effect of options and
awards.......................... 1,467,596 (1,467,596) -- -- --
----------- ------------ ----------- ----------- -----------
Total...................... 27,522,010 (1,467,596) 26,054,414 22,608,372 48,662,786
=========== ============ =========== =========== ===========
</TABLE>
See accompanying Notes to Pro Forma Condensed Financial Statements.
20
<PAGE> 24
PIMCO ADVISORS L.P.
PRO FORMA CONDENSED STATEMENT OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
OPPENHEIMER
OPGROUP CAPITAL
PIMCO TRANSACTION PRO FORMA POST MERGER (NOTE
ADVISORS (NOTE 1) OPGROUP 2) PRO FORMA POST
L.P. OPGROUP ADJUSTMENTS TRANSACTION ADJUSTMENTS MERGER
------------ ------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.... $ 33,172,652 $ 34,245,574 $ (32,193,000) $ 35,225,226 $ 32,193,000 $ 67,418,226
Fees receivable.............. 81,617,543 47,180,390 -- 128,797,933 -- 128,797,933
Short term investments....... 24,934,892 3,440,224 -- 28,375,116 -- 28,375,116
Intangible assets, net....... 180,815,838 1,196,100 838,618,536 1,020,630,474 -- 1,020,630,474
Fixed assets, net............ 10,801,603 3,682,175 -- 14,483,778 -- 14,483,778
Other assets................. 34,385,585 3,381,092 -- 37,766,677 -- 37,766,677
------------ ------------- ------------ --------------- ------------- ---------------
TOTAL ASSETS............. $365,728,113 $ 93,125,555 $ 806,425,536 $1,265,279,204 $ 32,193,000 $1,297,472,204
============ ============= ============ =============== ============= ===============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable, accrued
expenses and other......... $ 24,187,295 $ 9,118,651 $ -- $ 33,305,946 $ -- $ 33,305,946
Accrued compensation......... 53,085,409 16,517,311 -- 69,602,720 -- 69,602,720
Other non current
liabilities................ 9,479,234 263,198,378 (262,193,000) 10,484,612 -- 10,484,612
------------ ------------- ------------ --------------- ------------- ---------------
Total Liabilities........ 86,751,938 288,834,340 (262,193,000) 113,393,278 -- 113,393,278
------------ ------------- ------------ --------------- ------------- ---------------
Non-controlling interest in
subsidiary................. -- 45,063,146 532,933,617 577,996,763 (577,996,763) --
------------ ------------- ------------ --------------- ------------- ---------------
Partners' capital............ 286,063,032 (172,765,681) 535,684,919 648,982,270 610,189,763 1,259,172,033
Unamortized compensation..... (7,086,857) (68,006,250) -- (75,093,107) -- (75,093,107)
------------ ------------- ------------ --------------- ------------- ---------------
Total Partners'
Capital................ 278,976,175 (240,771,931) 535,684,919 573,889,163 610,189,763 1,184,078,926
------------ ------------- ------------ --------------- ------------- ---------------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL...... $365,728,113 $ 93,125,555 $ 806,425,536 $1,265,279,204 $ 32,193,000 $1,297,472,204
============ ============= ============ =============== ============= ===============
Book Value per Unit
Outstanding................ $ 3.77 $ 6.92 $ 10.86
============ =============== ===============
</TABLE>
See accompanying Notes to Pro Forma Condensed Financial Statements.
21
<PAGE> 25
PIMCO ADVISORS L.P.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OPPENHEIMER
OPGROUP CAPITAL
PIMCO TRANSACTION MERGER
ADVISORS (NOTE 1) PRO FORMA (NOTE 2) PRO FORMA
L.P. OPGROUP ADJUSTMENTS POST ACQUISITION ADJUSTMENTS POST MERGER
------------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Investment advisory
fees................... $302,240,609 $159,924,705 $ -- $462,165,314 $ -- $462,165,314
Distribution and servicing
fees................... 40,316,623 3,983,566 -- 44,300,189 -- 44,300,189
Other income.............. 1,652,823 -- -- 1,652,823 -- 1,652,823
------------ ------------ ------------ ------------ ------------ ------------
Total Revenues.... 344,210,055 163,908,271 -- 508,118,326 -- 508,118,326
------------ ------------ ------------ ------------ ------------ ------------
EXPENSES
Compensation and
benefits............... 151,560,373 67,973,079 -- 219,533,452 -- 219,533,452
Amortization of
intangibles, deferred
compensation........... 30,999,737 10,281,739 31,448,195 72,729,671 -- 72,729,671
Commissions............... 32,188,873 -- -- 32,188,873 -- 32,188,873
Other..................... 45,574,214 18,104,988 -- 63,679,202 -- 63,679,202
Non controlling
interest............... -- 41,652,072 (19,985,011) 21,667,061 (21,667,061) --
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses.... 260,323,197 138,011,878 11,463,184 409,798,259 (21,667,061) 388,131,198
------------ ------------ ------------ ------------ ------------ ------------
Income before income tax
expense................ 83,886,858 25,896,393 (11,463,184) 98,320,067 21,667,061 119,987,128
Income tax expense........ 1,225,610 3,038,553 -- 4,264,163 -- 4,264,163
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME.................. $ 82,661,248 $ 22,857,840 $(11,463,184) $ 94,055,904 $ 21,667,061 $115,722,965
============ ============ ============ ============ ============ ============
Earnings per unit (note
4)........................ $ 1.06 $ 1.07 $ 1.01
============ ============ ============
Units outstanding
All classes of units...... 73,938,686 -- 9,019,608 82,958,294 26,054,414 109,012,708
Dilutive effect of options
and awards............. 3,906,437 -- 703,404 4,609,841 1,467,596 6,077,437
------------ ------------ ------------ ------------ ------------ ------------
Total............. 77,845,123 -- 9,723,012 87,568,135 27,522,010 115,090,145
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying Notes to Pro Forma Condensed Financial Statements.
22
<PAGE> 26
PIMCO ADVISORS L.P.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OPPENHEIMER
OPGROUP CAPITAL
PIMCO TRANSACTION PRO FORMA MERGER
ADVISORS (NOTE 1) POST (NOTE 2) PRO FORMA
L.P. OPGROUP ADJUSTMENTS ACQUISITION ADJUSTMENTS POST MERGER
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Investment advisory
fees................. $342,707,775 $176,561,199 $ -- $519,268,974 $ -- $519,268,974
Distribution and
servicing fees....... 48,182,499 4,265,670 -- 52,448,169 -- 52,448,169
Other income............ 1,134,108 -- -- 1,134,108 -- 1,134,108
------------ ------------ ------------ ------------ ------------ ------------
Total
Revenues...... 392,024,382 180,826,869 -- 572,851,251 -- 572,851,251
------------ ------------ ------------ ------------ ------------ ------------
EXPENSES
Compensation and
benefits............. 173,526,137 73,424,810 -- 246,950,947 -- 246,950,947
Amortization of
intangibles, deferred
compensation......... 41,171,400 13,714,578 41,930,927 96,816,905 -- 96,816,905
Commissions............. 37,738,954 -- -- 37,738,954 -- 37,738,954
Other................... 47,258,294 27,881,901 -- 75,140,195 -- 75,140,195
Non controlling
interest............. -- 40,361,521 (26,646,681) 13,714,840 (13,714,840) --
------------ ------------ ------------ ------------ ------------ ------------
Total
Expenses...... 299,694,785 155,382,810 15,284,246 470,361,841 (13,714,840) 456,647,001
------------ ------------ ------------ ------------ ------------ ------------
Income before income tax
expense.............. 92,329,597 25,444,059 (15,284,246) 102,489,410 13,714,840 116,204,250
Income tax expense...... 1,201,417 2,805,887 -- 4,007,304 -- 4,007,304
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME................ $ 91,128,180 $ 22,638,172 $(15,284,246) $ 98,482,106 $ 13,714,840 $112,196,946
============ ============ ============ ============ ============ ============
Earnings per unit (note
4)...................... $ 1.17 $ 1.12 $ 0.97
============ ============ ============
Units outstanding
All classes of units.... 73,938,686 -- 9,019,608 82,958,294 26,054,414 109,012,708
Dilutive effect of
options and awards... 3,906,437 -- 703,404 4,609,841 1,467,596 6,077,437
------------ ------------ ------------ ------------ ------------ ------------
Total........... 77,845,123 -- 9,723,012 87,568,135 27,522,010 115,090,145
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying Notes to Pro Forma Condensed Financial Statements.
23
<PAGE> 27
OPPENHEIMER CAPITAL, L.P. AND PIMCO ADVISORS L.P.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
1. THE OPGROUP TRANSACTION
In its acquisition accounting PIMCO Advisors recorded the net assets
acquired at the fair value of the consideration given, including the assumption
of $230 million of debt payable to Opgroup's former shareholders, assumption of
a $32.2 million note payable to the Partnership and the issuance of 2.1 million
units of PIMCO Advisors Class A LP Units. The pro forma adjustments assume that
the $230 million of debt is exchanged for 6.9 million PIMCO Advisors Class A LP
Units because the cash flow applicable to the units is expected to be higher in
the aggregate than the cash flow from interest on the debt and because such
presentation results in the most conservative presentation of earnings per unit.
Following the closing Opgroup repaid the $32.2 million note, utilizing a cash
advance from PIMCO Advisors. Thus the Opgroup Transaction adjustments reflect a
reduction in cash of $32.2 million, a reduction in debt of $262.2 million and an
increase to Partners' capital of $230 million for these transactions.
Because PIMCO Advisors exercises effective control over Oppenheimer Capital
as its managing general partner, consolidation accounting is used and the
non-controlling interest in this subsidiary was recorded at $578.0 million,
consistent with the values established for PIMCO Advisors interest in
Oppenheimer Capital. The adjustment amount of $532.9 million reflects the
elimination of the historical $45.1 million value of the interest carried in
Opgroup's statements for this non-controlling interest. The adjustment to
increase Partners' capital by $535.7 million results from the assumed exchange
of the $230.0 million of debt discussed above; $64.9 million of value associated
with the issuance of the 2.1 million PIMCO Advisors Class A LP Units; and the
assumption of Opgroup's negative net assets of $240.8 million. The adjustment to
intangibles of $838.7 million reflects the elimination of $1.2 million of
existing intangibles bringing the total intangibles arising from the Opgroup
Transaction to $839.9 million.
These intangibles will be allocated to the value of the businesses
acquired--$32.2 million allocable to the advisory contracts and $807.7 million
to the Oppenheimer Capital business. Management believes the expected life of
each of these intangibles exceeds the 20 year amortization life to be used for
financial statement purposes, which will result in the aggregate annual charge
of $41.9 million reflected in the adjustments to the pro forma condensed
statements of operations. The non-controlling interests, share of this increased
amortization amount is also shown as adjustments. PIMCO Advisors will
continually evaluate the recoverability of the intangible balances by assessing
whether the amortization of the balances over their remaining life can be
recovered through expected undiscounted cash flows from future operations of the
acquired businesses.
At the time of the transaction, key management of Oppenheimer Capital were
granted rights to 1.3 million Partnership Units with an aggregate value of $68
million. After giving effect to the 1.67-for-one unit split of Partnership
Units, PIMCO Advisors will issue 2,171,000 PIMCO Advisors' units to support
these awards. These units will be received upon vesting on the third, fourth and
fifth anniversaries of the closing of the Opgroup Transaction. The cost will be
amortized to compensation expense over a five-year period.
2. THE OPPENHEIMER CAPITAL MERGER
For PIMCO Advisors The adjustments to the condensed statement of financial
condition reflect the contribution of available cash at the Partnership arising
from the aforementioned repayment of the $32.2 million note, and the
contribution of the non controlling interest in Oppenheimer Capital at the book
value of $578.0 million, to PIMCO Advisors in exchange for an equivalent market
value of PIMCO Advisors units--approximately 26.1 million PIMCO Advisors Class A
LP Units. The aggregate book value of the assets contributed of $610.2 million
represents the adjustment to Partners' capital. The adjustments to the condensed
statements of operations eliminate the portion of the net earnings previously
allocated to the non-controlling interest.
24
<PAGE> 28
OPPENHEIMER CAPITAL, L.P. AND PIMCO ADVISORS L.P.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the Partnership The adjustments to the condensed statement of
financial condition reflect the receipt of 26.1 million PIMCO Advisors Class A
LP Units from PIMCO Advisors in replacement of its investment in Oppenheimer
Capital and related intangible assets and the cash received from the repayment
of the $32.2 million note. The adjustment of $168.7 million to Partners' capital
reflects establishing the investment in PIMCO Advisors at $283.0 million (the
proportionate amount of PIMCO Advisors Partners' capital). The adjustments to
the condensed statements of operations eliminate the amounts previously recorded
as equity in earnings from Oppenheimer Capital and in replacement thereof record
a proportionate share of PIMCO Advisors' pro forma earnings. The adjustments
also eliminate the interest income and related taxes associated with the note
which was paid off, and amortization of intangibles that no longer exist.
3. THE RESTRUCTURING OF PIMCO ADVISORS
The adjustment of $245.7 million to the investment in operating partnership
represents the Partnership's increased ownership by virtue of its receipt of
22.6 million PIMCO Advisors LP Units, or approximately 20.7% of the outstanding
PIMCO Advisors units, recorded at the per unit book value of PIMCO Advisors. The
Partnership will issue an equal number of its units to the contributing partners
of PIMCO Advisors and Partners' capital reflects the increase associated with
that issuance.
The adjustments to the condensed statements of operations of the
Partnership reflect the inclusion of an approximate 20.7% additional interest in
the pro forma results of operations of PIMCO Advisors, representing the
proportionate ownership of the new interests contributed.
25
<PAGE> 29
OPPENHEIMER CAPITAL, L.P. AND PIMCO ADVISORS L.P.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. RECOGNITION OF PROPORTIONATE EARNINGS OF PIMCO ADVISORS
Subsequent to December 31, 1997, Class A LP Units and Class B LP Units of
PIMCO Advisors will participate as one class in earnings and distribution
rights. Accordingly, the historical priority of the PIMCO Advisors Class A LP
Units will no longer exist. The pro forma post-Oppenheimer Transaction and pro
forma post-Oppenheimer Capital Merger results reflect treatment of all units on
an equal basis and as one group, and thus a blended distribution and earnings
per unit at the PIMCO Advisors level as will be utilized in reporting the
results of operations for any unitholder in the future. In addition, all
calculations are based upon the number of units outstanding and the dilutive
effects of options as of September 30, 1997. As a result, the pro forma earnings
per unit and distributions per unit at PIMCO Advisors, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CLASS A UNITS
PIMCO Advisors
Earnings per unit....................... $1.29 $1.17 $1.06 $1.06
Distributions per unit.................. $1.88 $1.79 $1.54 $1.54
PIMCO Advisors after the Opgroup
Transaction
Earnings per unit....................... $1.12 $1.07
Distributions per unit.................. $1.92 $1.69
PIMCO Advisors after the Opgroup
Transaction and the Oppenheimer Capital
Merger
Earnings per unit....................... $0.97 $1.01
Distributions per unit.................. $1.92 $1.73
CLASS B UNITS
PIMCO Advisors
Earnings per unit....................... $1.05 $1.17 $1.06 $1.06
Distributions per unit.................. $1.68 $1.79 $1.54 $1.54
PIMCO Advisors after the Opgroup
Transaction
Earnings per unit....................... $1.12 $1.07
Distributions per unit.................. $1.92 $1.69
PIMCO Advisors after the Opgroup
Transaction and the Oppenheimer Capital
Merger
Earnings per unit....................... $0.97 $1.01
Distributions per unit.................. $1.92 $1.73
</TABLE>
5. PROVISION FOR FEDERAL TAX ON PUBLICLY TRADED PARTNERSHIPS
In August 1997, federal tax legislation was passed which permits publicly
traded partnerships to elect to continue to be treated as partnerships for
federal tax purposes. For those partnerships so electing, including the
Partnership, commencing in 1998 there will be imposed a federal tax of 3.5% on
gross income derived from active businesses of the Partnership and any
partnerships in which it holds an interest. In certain states comparable state
legislation is expected to result in the imposition of a state level tax of
approximately 1% calculated in the same manner as the federal assessment and
applied to gross income from the conduct of active businesses in such states.
The accompanying pro forma financial information has not been adjusted to
reflect the imposition of these taxes assuming they had been in effect during
the periods presented. It is expected, however, that cash flow available for
distribution would have been reduced by approximately 11% because of these
taxes.
26
<PAGE> 30
THE PARTNERSHIP
GENERAL
The Partnership is a Delaware limited partnership which as its sole
business holds 26.1 million PIMCO Advisors GP Units, representing an
approximately 23.9% interest in PIMCO Advisors. The Partnership was formed as a
Delaware limited partnership in 1987.
PIMCO Advisors is one of the nation's largest investment management firms
with approximately $190 billion of assets under management at October 31, 1997
(as adjusted to include the assets under management of Oppenheimer Capital).
PIMCO Advisors offers a broad range of investment management services and styles
to institutional and retail investors, combining the fixed income-oriented
investment management operations of Pacific Investment Management, the
equity-oriented operations of Oppenheimer Capital and five smaller affiliated
domestic and international equity investment management firms, and mutual fund
operations. PIMCO Advisors provides investment management services primarily to
(i) large institutional clients through separate accounts, (ii) smaller
institutional clients and financial intermediaries through the institutional
share classes of the PIMCO Funds (described below) and (iii) retail investors
through the retail share classes of the PIMCO Funds, which are sold principally
through broker-dealers.
PIMCO Advisors strategy is to pursue growth by marketing the investment
management expertise, performance record and reputation of its seven Investment
Management Firms. The Investment Management Firms are six Delaware partnerships:
Pacific Investment Management, Oppenheimer Capital, CCI, Cadence, NFJ and
Parametric and one United Kingdom limited partnership, Blairlogie.
The seven Investment Management Firms are structured as separate
subsidiaries. PIMCO Advisors believes this decentralized structure enables the
Investment Management Firms to implement their own distinct investment
strategies and philosophies, providing financial and other incentives for the
managers of each of the firms to render superior performance and client service.
The Managing Directors of the Investment Management Firms have a significant
profits interest in their respective Investment Management Firms, as well as
substantial economic interests in PIMCO Advisors.
The Partnership's business results from the November 30, 1997 merger of
Oppenheimer Capital with a subsidiary of PIMCO Advisors. Prior to November 30,
1997, the Partnership's only significant asset was an approximately 67.6%
interest in Oppenheimer Capital. In the Oppenheimer Capital Merger, Oppenheimer
Capital became a wholly-owned subsidiary of PIMCO Advisors and the Partnership
received 26.1 million PIMCO Advisors GP Units.
PGP is the sole general partner of the Partnership and is the controlling
general partner of PIMCO Advisors. The Partnership has five employees.
The Partnership's principal offices are located at 800 Newport Center
Drive, Newport Beach, California 92660. The Partnership's telephone number is
(714) 717-7022.
RECENT DEVELOPMENTS
The Opgroup Transaction. On November 4, 1997, PIMCO Advisors acquired the
investment advisory assets of Opgroup, including a 32.4% managing general
partner interest in Oppenheimer Capital, the one percent general partner
interest in the Partnership and one percent general partner interests in three
subsidiaries of Oppenheimer Capital and the ownership of Value Advisors LLC, a
newly formed limited liability company holding eight closed-end investment fund
management contracts formerly held by Advantage Advisors, Inc. As consideration
for these assets, the Opgroup stockholders received 2,119,608 PIMCO Advisors
Class A LP Units, rights (the "Opgroup Exchange Rights") to acquire up to
6,900,000 additional PIMCO Advisors Class A LP Units (or, after the
Restructuring, an equivalent number of Partnership Units) at $33 1/3 per unit
upon exchange of 6% Senior Notes due December 1, 2037 of Opgroup (the "Opgroup
Notes") and rights to require PIMCO Advisors to re-purchase some or all of these
units for $25.50 per unit (the "Opgroup Put Rights") (the "Opgroup
Transaction").
27
<PAGE> 31
PIMCO Advisors acquisition of Opgroup's investment advisory assets in the
Opgroup Transaction was accomplished as follows:
(i) Immediately prior to the transaction, Opgroup redeemed certain
shares of its outstanding stock in exchange for (A) $244 million in
available cash, (B) $150 million in Opgroup Notes and (C) an $80 million
face amount Certificate of Long-Term Indemnity Indebtedness (which is
reduced upon the occurrence of certain indemnity obligations with respect
to the investment management assets), which under certain circumstances
converts into an equal principal amount of Opgroup Notes. The Opgroup Notes
are limited in recourse to the assets of Opgroup.
(ii) Following the redemption, a newly-formed, wholly-owned limited
liability company subsidiary of PIMCO Advisors merged with and into
Opgroup. In the merger, Opgroup became a subsidiary of PIMCO Advisors, and
the Opgroup Stockholders received 2,119,608 PIMCO Advisors Class A LP
Units, the Opgroup Exchange Rights, and the Opgroup Put Rights. The Opgroup
stockholders also received certain registration rights with respect to
these units. See "Certain Relationships and Transactions."
(iii) Immediately following the merger, Opgroup, then a subsidiary of
PIMCO Advisors, caused its subsidiary Oppenheimer Financial Corp. ("Opfin")
to contribute (i) the ownership of Value Advisors LLC and the one percent
general partner interest in the Partnership to PIMCO Advisors, and then
(ii) Opfin's 32.4% managing general partner interest in Oppenheimer Capital
and the one percent general partner interests in three subsidiaries of
Oppenheimer Capital to Value Advisors LLC (then a subsidiary of PIMCO
Advisors). In exchange for these contributions, Opfin received 6,000,000
PIMCO Advisors Class C Units. Each PIMCO Advisors Class C LP Unit is
entitled to the same proportionate share of profits, losses and
distributions as a PIMCO Advisors Class A LP Unit, but with a maximum
distribution of $3.00 per year, or $0.75 per quarter subject to a catch-up
on an annual basis. In connection with this transaction, the Partnership
adopted an amendment to its partnership agreement converting the one
percent general partner interest into a one-one hundredth of one percent
general partner interest, with the remaining interest converted to
Partnership Units. PIMCO Advisors then sold the general partner interest in
the Partnership to PGP for $80,000. Subsequent to the closing, PIMCO
Advisors loaned $35 million to Opgroup, and Opgroup used a portion of the
proceeds of this loan to retire the indebtedness owed by Opfin to the
Partnership (the "Opfin Debt").
28
<PAGE> 32
The Opgroup Transaction is depicted in the following diagrams:
BEFORE OPGROUP TRANSACTION
AFTER OPGROUP TRANSACTION
29
<PAGE> 33
The Oppenheimer Capital Merger. On November 30, 1997, Oppenheimer Capital
merged with a transitory limited partnership subsidiary of PIMCO Advisors, with
Oppenheimer Capital surviving. As a result of the Oppenheimer Capital Merger,
Oppenheimer Capital became an indirect wholly-owned subsidiary of PIMCO
Advisors, and the Partnership (the other general partner of Oppenheimer Capital
prior to the Oppenheimer Capital Merger, which held a 67.6% interest in
Oppenheimer Capital), received an aggregate of 25.5 million PIMCO Advisors GP
Units and was admitted as a general partner of PIMCO Advisors. Concurrent with
the merger, the Partnership acquired an additional 0.5 million PIMCO Advisors GP
Units for $16.7 million in cash. On December 1, 1997, a 1.67-for-one split of
the Partnership Units occurred having the effect that each Partnership Unit
outstanding after the unit split represents an economic interest in one PIMCO
Advisors GP Unit (after taking account of the 0.3 million PIMCO Advisors GP
Units underlying the general partner interest in the Partnership held by PGP).
OPPENHEIMER CAPITAL MERGER CHART
30
<PAGE> 34
BUSINESS OF THE PARTNERSHIP
OVERVIEW
The Partnership is a holding company which owns 26.1 million PIMCO Advisors
GP Units, representing an approximately 23.9% interest in PIMCO Advisors. PIMCO
Advisors is one of the nation's largest publicly traded investment management
firms with approximately $190 billion of assets under management at October 31,
1997 (as adjusted to include the assets under management of Oppenheimer
Capital). PIMCO Advisors business is conducted principally through the seven
Investment Management Firms, which are subsidiaries of PIMCO Advisors.
GENERAL
The table below sets forth the assets under management of PIMCO Advisors
and its seven Investment Management Firms (as adjusted to include the assets
under management of Oppenheimer Capital) at the dates indicated:
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT (IN MILLIONS)
------------------------------------------------------------------------
AT AT DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------------
1997 1996 1995 1994 1993(2) 1992(2)
-------------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Pacific Investment
Management................ $108,531 $ 88,147 $ 76,371 $ 56,883 $53,001 $41,249
Oppenheimer Capital......... 60,915 48,227 37,266 28,508 26,144 26,277
Columbus Circle Investors... 11,462 14,159 12,670 10,304 9,848 8,070
Cadence Capital
Management................ 4,929 3,229 2,393 1,762 1,647 940
Parametric Portfolio
Associates................ 2,519 2,001 1,569 1,546 1,385 932
NFJ Investment Group........ 2,271 1,743 1,455 1,072 966 534
Blairlogie Capital
Management................ 875 673 645 479 97 --
Other(1).................... 45 70 79 129 1,194 2,630
-------- -------- -------- -------- ------- -------
Total............. $191,547 $158,249 $132,448 $100,683 $94,282 $80,632
======== ======== ======== ======== ======= =======
</TABLE>
- ---------------
(1) Includes assets under management not advised or subadvised by the Investment
Management Firms. For years ended December 31, 1992 and 1993, includes
assets invested in the Cash Accumulation Trust, a money market fund, which
is currently subadvised by Columbus Circle Investors.
(2) Pro forma as if the Consolidation had occurred on January 1, 1993.
The table below sets forth the aggregate assets under management of PIMCO
Advisors and its seven Investment Management Firms (as adjusted to include the
assets under management of Oppenheimer Capital) by investment type:
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT (IN MILLIONS)
----------------------------------------------------
AT AT DECEMBER 31,
SEPTEMBER 30, ----------------------------------
1997 1996 1995 1994
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Institutional Separate Accounts
Fixed Income............................... $ 78,621 $ 63,388 $ 55,362 $ 42,582
Equity..................................... 49,865 44,053 37,984 28,678
Institutional Mutual Funds(1)
Fixed Income............................... 22,565 19,592 16,732 11,830
Equity..................................... 5,728 5,077 3,768 2,515
Retail Mutual Funds
Fixed Income............................... 3,801 3,262 2,578 2,479
Equity..................................... 20,033 14,939 10,364 7,064
Wrap Fee and Option Management............... 7,649 5,020 2,820 2,930
Retail Money Market.......................... 3,285 2,918 2,840 2,605
--------- ------- ------- --------
Total.............................. $ 191,547 $158,249 $132,448 $100,683
========= ======= ======= ========
</TABLE>
- ---------------
(1) Includes assets managed under pooling arrangements.
31
<PAGE> 35
PIMCO Advisors markets its investment management services to institutional
and mutual fund clients through client service representatives at each of the
Investment Management Firms and through distributors including PIMCO Funds
Distribution Company ("PFD", formerly known as PIMCO Advisors Distribution
Company), a wholly-owned broker-dealer which distributes and markets shares of
the retail mutual funds of PIMCO Advisors.
The revenues of PIMCO Advisors and its seven Investment Management Firms
consist principally of management fees based on the value of assets under
management and in some cases the performance of the advisor. The table below
sets forth management fees for PIMCO Advisors and its seven Investment
Management Firms (as adjusted to combine with the management fees of Oppenheimer
Capital) for the periods indicated:
<TABLE>
<CAPTION>
MANAGEMENT FEES
--------------------------------------------------------------------------
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
1997 1996 1995 1994(2) 1993(2) 1992(2)
------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pacific Investment Management...... $ 200,433 $222,274 $180,937 $141,218 $144,487 $106,279
Oppenheimer Capital................ 159,925(3) 176,561(3) 147,087(3) 118,933 106,345 88,503
Columbus Circle Investors.......... 43,835 63,698 53,078 44,363 39,460 32,151
Cadence Capital Management......... 17,456 17,873 14,555 12,120 9,504 6,103
Parametric Portfolio Associates.... 3,160 3,466 3,753 4,451 4,505 2,932
NFJ Investment Group............... 6,331 7,271 5,916 4,967 3,795 2,007
Blairlogie Capital Management...... 3,224 3,721 2,916 420 23 --
Other(1)........................... 27,802 20,038 20,455 23,936 20,592 22,805
-------- -------- -------- -------- -------- --------
Total..................... $ 462,166 $514,902 $428,697 $350,408 $328,711 $260,780
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes revenues not directly allocable to the investment management
services of the Investment Management Firms, the management fees of the Cash
Accumulation Trust and intercompany eliminations.
(2) Pro forma as if the Consolidation had occurred on January 1, 1993.
(3) Includes fees from former Advantage Advisers Funds.
A principal component of PIMCO Advisors marketing strategy is the
historical performance of the Investment Management Firms relative to selected
benchmarks over long periods of time. For example, Pacific Investment Management
stresses its record in equaling or exceeding client-selected performance
benchmarks over long periods through a measured risk taking approach that
emphasizes preservation of capital. Over the last 5 years, Pacific Investment
Management's Total Return composite, representing approximately 57% of Pacific
Investment Management's total assets under management at September 30, 1997,
outperformed the Lehman Brothers Aggregate Bond Index by approximately 159 basis
points (8.51% compared to 6.92%) annually on a compound basis after adjusting
for the advisory fees paid to Pacific Investment Management.
PRIMARY MARKETS AND STRATEGY FOR GROWTH
The two primary markets for the investment management services offered by
the Investment Management Firms are the institutional market and the mutual fund
market. Several of the Investment Management Firms also manage private accounts
for high net worth individuals.
INSTITUTIONS
The institutional market for investment management services includes
corporate, government and multi-employer pension plans, charitable endowments
and foundations, and corporations purchasing investment management services for
their own account. Each of the Investment Management Firms serves the
institutional market and conducts its own institutional marketing activities. In
general, the Investment Management Firms' marketing approach targets Fortune
1,000 companies and other large institutional
32
<PAGE> 36
investors. The Investment Management Firms seek to develop client relationships
through investment management performance and focused and responsive client
service. Their business strategies also involve increasing assets under
management for non-US clients, expanding the array of fixed income and equity
products offered to clients, seeking to expand market share with medium and
smaller institutional investors by offering pooled investment vehicles such as
the PIMCO Funds (described below), and otherwise seeking to diversify and expand
their businesses by investment strategy, method of delivery and markets.
MUTUAL FUNDS
Like the institutional market for investment management services, the
mutual fund market has expanded rapidly in recent years.
The mutual fund industry is highly competitive and is characterized by a
high degree of fragmentation and a large and rapidly increasing number of
product offerings. Marketing strategies, product development, business
development, sales expertise and servicing are increasingly important. The
traditional channel for the distribution of mutual funds (other than money
market funds) is through brokerage firms that are not affiliated with the funds'
sponsor organization and that are compensated primarily through front-end sales
loads deducted from the purchaser's investment at the time of the sale.
Increasingly other distribution arrangements and channels have become important.
These include "no-load" or "low-load" funds, sold primarily through direct
marketing efforts or captive sales forces affiliated with the sponsor
organization; "private label" and "proprietary" funds managed by and offered
primarily through, or to customers of, a financial organization such as a
brokerage firm, insurance company or bank; and "back-end load" or "level load"
funds offered through brokerage and other third-party channels, but with
compensation to the selling brokers being funded through commission advances
from the funds' sponsor which are recovered through ongoing charges against fund
assets assessed under Rule 12b-1 under the Investment Company Act of 1940, as
amended, contingent deferred sales charges assessed against shareholders at the
time they redeem their investments, or a combination of such sources.
PIMCO Advisors retail strategy is to build a "brand name" awareness of the
fund group both at the broker-dealer level and the retail investor level,
creating a valuable, long-term franchise. Leveraging off the depth and expertise
of its Investment Management Firms, PIMCO Advisors has recently developed
several new funds to enhance its product line and expects to continue to
supplement its fund offerings.
EXPANSION OPPORTUNITIES
PIMCO Advisors actively seeks opportunities to expand its business and
product offerings through acquisitions, strategic alliances or other business
combinations, and is often in discussions with numerous prospects regarding
possible transactions. While PIMCO Advisors is engaged in certain preliminary
discussions, it has not reached an agreement for any such transaction, and there
can be no assurances that any such transactions will occur.
INVESTMENT MANAGEMENT FIRMS
PACIFIC INVESTMENT MANAGEMENT COMPANY (PACIFIC INVESTMENT MANAGEMENT)
General
Pacific Investment Management had aggregate assets under management at
September 30, 1997 and December 31, 1996 of $108.5 billion and $88.1 billion,
respectively, of which 89.5% and 90.0%, respectively, consisted of fixed income
accounts and 10.5% and 10.0%, respectively, consisted of equity-related
accounts. Pacific Investment Management's clients principally include large and
medium-sized corporate pension and profit sharing plans, public pension plans,
multiemployer pension plans, foreign institutions and foundations and endowment
funds. Its client list includes many of the nation's largest pension funds,
foundations and endowments and other institutional investors.
33
<PAGE> 37
Investment Strategy
Pacific Investment Management believes that its strength in the management
of fixed income assets is derived from its investment philosophy, which stresses
a long-term or secular focus, active management, with measured risktaking, and
the application of strong analytical capabilities across all fixed income market
sectors. Under Pacific Investment Management's investment philosophy, longer
term macro-economic trends are key inputs to portfolio strategy, and moderate
portfolio duration ranges are favored to reduce volatility relative to
client-specified benchmarks. Pacific Investment Management's investment strategy
process begins with a "top-down" approach utilizing an intensive review of
long-term and cyclical trends to anticipate interest rates, volatility, yield
curve shape and credit trends. These forecasts become the basis for the major
portfolio strategies. Pacific Investment Management then uses a "bottom up"
process to select specific portfolio investments.
In managing fixed income investment advisory accounts, within client and
mutual fund guidelines, Pacific Investment Management uses a broad array of
fixed income investments, including investment grade and below investment grade
securities, as well as derivatives. Pacific Investment Management has developed
and employs, in the case of derivatives as well as other instruments, various
risk controls at the portfolio and individual instrument levels in an effort to
evaluate and monitor interest rate, liquidity and credit quality risk.
As part of its active management style, Pacific Investment Management uses
internally developed, proprietary computer software programs in managing its
clients' assets rather than analytical models purchased from outside sources.
Pacific Investment Management believes that its proprietary computer technology
provides it with an important competitive advantage.
Pacific Investment Management has sought to expand its client base beyond
the traditional defined benefit pension market, and has increased its presence
in the defined contribution pension market. Pacific Investment Management's
strategy also involves focusing on financial service aggregators of retail
assets such as unaffiliated sponsors of mutual funds and other registered
investment advisors (including fee-based financial planners) who recommend the
use of "no-load" mutual funds such as the institutional and administrative
classes of PIMCO Funds PIMS Series (as defined below under -- PIMCO Advisors
Mutual Funds) to their clients, and consultant alliances. In addition, Pacific
Investment Management seeks to increase both institutional and retail assets
under management from non-US investors.
Investment Products. Pacific Investment Management offers a range of
investment services for both fixed income and equity assets:
FIXED INCOME PORTFOLIOS. Pacific Investment Management offers a
variety of strategies for clients with fixed income portfolios, designed to
reflect each particular client's investment objective:
Total Return Portfolios -- Pacific Investment Management structures
total return portfolios with the objective of realizing maximum total
return, consistent with the preservation of capital and prudent
investment management across the spectrum of fixed income securities.
This strategy generally results in a portfolio duration of three to six
years. Portfolios utilizing this strategy represented approximately $66
billion of Pacific Investment Management's total assets under management
at September 30, 1997.
Low Duration Portfolios -- Pacific Investment Management has actively
managed low duration accounts since 1979 (overall portfolio duration one
to three years). The objectives in the low duration portfolios are to
preserve principal through investment in low-volatility instruments,
while seeking to achieve superior riskadjusted returns.
Other Duration Specific or Sector Specific Portfolios -- Pacific
Investment Management also offers clients active management of
portfolios based upon specific duration targets (e.g., long duration
portfolios or guaranteed investment contract ("GIC") alternative
products which are designed to outperform GICs) and sector emphases
(e.g., international, high-yield, or mortgages).
International And Other Portfolios. -- Pacific Investment Management, as
investment advisor to a series of offshore funds and individual clients,
provides fixed income investment advice to non-US
34
<PAGE> 38
investors. Assets under management for these offshore funds totaled $1.2
billion and $476 million at September 30, 1997 and December 31, 1996,
respectively. Pacific Investment Management also serves as subadvisor
for a series of term trusts investing in mortgage related securities
that are marketed to Japanese investors. These trusts had assets of $1.3
billion and $1.4 billion at September 30, 1997 and December 31, 1996,
respectively. Pacific Investment Management also serves as subadvisor
for nine families of US mutual funds sponsored by other mutual fund
complexes. Total assets under management for these nonaffiliated funds
at September 30, 1997 and December 31, 1996 were $2.7 billion and $3.5
billion, respectively.
EQUITY RELATED PORTFOLIOS. Pacific Investment Management also manages
an enhanced equity based strategy StocksPLUS, which accounted for $11.3
billion of assets under management at September 30, 1997. StocksPLUS
represents a proprietary technique developed by Pacific Investment
Management that combines the active management of stock index futures (to
provide a proxy for equity market returns) with active management of a
short-term fixed income portfolio using much of the same analytics as is
used by Pacific Investment Management in its fixed income portfolios.
Set forth below is a table showing Pacific Investment Management's assets
under management and the number of portfolios at the dates indicated:
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT ($ IN MILLIONS)(1)
---------------------------------------------------------------
AT DECEMBER 31,
AT SEPTEMBER ---------------------------------------------
30,
1997 1996 1995 1994
--------------- ------------- ------------- -------------
NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT
---- -------- --- ------- --- ------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolios:
Total Return Portfolios........... 203 $ 62,001 182 $51,078 162 $45,075 153 $34,681
Low Duration Portfolios........... 30 6,687 30 5,829 30 5,365 25 4,253
Other Duration Specific or Sector
Specific Portfolios:
Duration/Specific.............. 16 11,069 17 9,514 10 7,719 11 3,506
GIC Alternatives............... 33 4,676 21 2,918 13 1,968 12 1,634
Mortgages...................... 17 3,966 15 3,545 19 4,514 25 4,649
Global/Non-US.................. 31 4,412 17 3,096 9 1,670 8 1,680
Other.......................... 20 4,337 11 3,318 14 2,359 10 1,750
--- -------- --- ------- --- ------- --- -------
Total..................... 350 97,148 293 79,298 257 68,670 244 52,153
--- -------- --- ------- --- ------- --- -------
Equity/Related Portfolios:
StocksPLUS........................ 20 11,342 20 8,838 20 7,591 17 4,636
Other............................. 1 41 1 11 4 110 4 94
--- -------- --- ------- --- ------- --- -------
Total..................... 21 11,383 21 8,849 24 7,701 21 4,730
--- -------- --- ------- --- ------- --- -------
TOTAL ASSETS UNDER MANAGEMENT....... 371 $108,531 314 $88,147 281 $76,371 265 $56,883
=== ======== === ======= === ======= === =======
</TABLE>
- ---------------
(1) Includes the managed assets of PIMCO Funds.
Performance-Based Fees. Pacific Investment Management's fee schedules are
typically computed as a percentage of assets under management. Pacific
Investment Management's StocksPLUS product, which accounted for $11.3 billion of
assets under management at September 30, 1997, generally is subject to a
performance-based fee schedule in which underperformance relative to the S&P 500
index over a particular time period results in no fees being paid by clients and
superior performance results in incentive fees that are not subject to a cap.
The StocksPLUS fee arrangement can materially affect Pacific Investment
Management's total revenues from period to period.
In addition to the StocksPLUS accounts, several large fixed income accounts
also have performance-based fee arrangements. For these accounts, Pacific
Investment Management must outperform a specified fixed income benchmark over a
particular time period in order to receive a performance-based fee, but
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<PAGE> 39
generally is entitled to a base fee determined with reference to the value of
assets under management. Such arrangements can make Pacific Investment
Management's revenues volatile, but also provide an opportunity to earn higher
fees than could be obtained under fee arrangements based solely on a percentage
of assets under management.
Employees
Pacific Investment Management's 13 Managing Directors have an average of 18
years of industry experience. Of the 13 Managing Directors, three (William H.
Gross, William F. Podlich, III and James F. Muzzy) have been associated with
Pacific Investment Management since its founding and the other ten have been
with Pacific Investment Management for an average of 11 years. At September 30,
1997, the firm-wide staff of 314 included 59 investment professionals, of whom
20 are Chartered Financial Analysts. Pacific Investment Management's portfolio
managers, including the fixed income staff (25 professionals), are responsible
for research and trading. Account managers (40 professionals) are primarily
responsible for client relationship management and/or marketing.
OPPENHEIMER CAPITAL
General
Oppenheimer Capital has over $60 billion in assets under management as of
September 30, 1997. Oppenheimer Capital's fundamental strategy is to
consistently increase its assets under management by providing comprehensive,
cost-effective investment management services to its clients. Oppenheimer
Capital seeks to combine the preservation of capital in falling markets with
market or above-market performance in rising markets.
Investment Strategies
INVESTMENT PHILOSOPHY. Oppenheimer Capital seeks to adhere to a
disciplined, value-oriented investment philosophy, by identifying
company-specific, rather than industry-specific opportunities. By investing
in quality securities that are temporarily out of favor or have been
overlooked, Oppenheimer Capital seeks to preserve capital in falling
markets, reduce volatility compared to the overall market and produce
superior returns. Oppenheimer Capital subscribes to a similar
value-oriented philosophy with respect to fixed income investing.
Oppenheimer Capital seeks to identify the best relative fixed income values
available in the market by capitalizing on market inefficiencies which
occur as a result of unusual volatility, popular misperceptions, temporary
supply or demand shocks and other short-term conditions.
EQUITY INVESTMENT PROCESS. Original company-specific research drives
Oppenheimer Capital's equity investment process. Oppenheimer Capital
develops its own investment rationale internally. While each investment is
unique, Oppenheimer Capital's investment process generally involves four
basic steps. First, Oppenheimer Capital engages in an extensive analysis of
corporate fundamentals, focusing on companies with the following
characteristics: (i) successful cash flow generation and deployment, (ii) a
proven management team whose financial interests are aligned with those of
shareholders, (iii) a strong competitive position with significant barriers
to entry, (iv) sustainable levels of profitability and (v) capital
allocation consistent with creating shareholder value. Second, Oppenheimer
Capital's analysts prepare a written investment thesis, which is actively
reviewed and debated by the Investment Management Firm's investment
professionals. Third, once an investment thesis has been accepted, the
subject company's name is added to an approved list, from which Oppenheimer
Capital selects securities to construct its investment portfolios. Fourth,
Oppenheimer Capital continually reviews each investment thesis to evaluate
company performance and uses this review process to guide Oppenheimer
Capital's future investment decisions regarding securities of the subject
company.
FIXED INCOME INVESTMENT PROCESS. Every fixed income portfolio is
structured according to three critical investment decisions: (i) duration
and yield curve positioning; (ii) sector allocation; and (iii) credit
quality allocation. Based on extensive analysis of current market dynamics
and historical yield
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<PAGE> 40
relationships, Oppenheimer Capital seeks to add value to client portfolios
at each stage of this decision process.
Investments
Oppenheimer Capital applies this disciplined valuation approach across a
complete spectrum of actively managed US and non-US equity investments:
CORE VALUE. Core portfolios consist of large and mid-cap equities,
generally capitalized in excess of $1 billion. The approved list for core
portfolios consists of approximately 75 to 85 companies from which
Oppenheimer Capital professionals construct portfolios of 35 to 45 names
designed to meet specific client objectives.
MID-CAP VALUE. Dedicated mid-cap portfolios give Oppenheimer Capital
clients the opportunity for focused participation in companies capitalized
between $500 million and $5 billion at the time of purchase. From the core
and small-cap approved lists, portfolio managers construct portfolios of 25
to 35 securities.
SMALL-CAP VALUE. Small-cap portfolios seek to take advantage of
mispricings that occur in companies in the $50 million to $1 billion
capitalization range. Portfolios of 55 to 75 securities are selected from a
small-cap approved list of 80 to 100 names.
NON-US AND GLOBAL VALUE. Oppenheimer Capital has established an
international group, Oppenheimer Capital International, to apply its proven
value discipline to international markets.
Revenues
The revenues of Oppenheimer Capital consist principally of investment
management fees generated from accounts under management based primarily on
the value of assets in each account and also, to a limited extent, on
performance. Total operating revenues increased 34.0% for the three months
ended July 31, 1997 to $55.0 million from $41.1 million for the three
months ended July 31, 1996. For the five years ended April 30, 1997,
Oppenheimer Capital's investment management fee income has grown from $79.5
million to $175.8 million, representing a compound annual increase of
17.2%. Investment management fee income for the three months ended July 31,
1997, as compared to the three months ended July 31, 1996, increased 34.6%
from $39.4 million to $53.1 million.
The sources of Oppenheimer Capital's fee income are diversified and
balanced among the public, jointly trusteed and corporate employee benefit
plans, endowments and foundations, and individual and small tax-exempt
institutions which together account for 67% of fee income. Mutual funds and
other commingled products and wrap fee accounts contribute the balance. No
single separately managed account represented more than two percent of
Oppenheimer Capital's total investment management revenues during the year
ended April 30, 1997.
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<PAGE> 41
Assets Under Management
The following table sets forth the amount of assets under Oppenheimer
Capital's management at September 30, 1997 and April 30, 1997, 1996 and
1995 in millions.
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30, APRIL 30, APRIL 30,
1997 1997 1996 1995
------------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Separate Account Management
Public Employee Benefit Plans............... $14,610 $ 13,172 $ 10,928 $ 8,988
Jointly Trusteed Benefit Plans.............. 12,238 10,659 9,379 7,064
Corporate Employee Benefit Plans............ 8,775 7,294 5,857 4,737
Endowments & Foundations.................... 1,713 1,428 1,106 925
Individuals & Small Institutions............ 700 632 825 623
------- ------- ------- -------
Total Separate Account Management............. 38,036 33,185 28,095 22,337
Wrap Fee...................................... 7,649 6,025 3,469 1,804
Mutual Funds & Other Commingled Products...... 15,230 12,014 9,003 6,256
Option Management(1).......................... -- -- -- 1,397
------- ------- ------- -------
Total............................... $60,915 $ 51,224 $ 40,567 $ 31,794
======= ======= ======= =======
</TABLE>
- ---------------
(1) During fiscal 1996, Oppenheimer Capital withdrew from the option management
business to concentrate on businesses offering higher returns.
At April 30, 1993 and 1994, total assets under management were (in
millions) $26,386 and $29,402, respectively. For the five years ended April 30,
1997, assets under management grew at a compound annual rate of 16.7%.
Investment Products
Separate accounts comprise the majority of assets under management, with
mutual funds and other commingled products, wrap fee accounts and variable
annuities comprising the retail management segment.
SEPARATE ACCOUNT MANAGEMENT. Oppenheimer Capital's traditional, core
business is separate account management, constituting approximately $33.1
billion or 64.8% of assets under management at April 30, 1997. Separate
account management includes institutional clients, such as state and local
public benefit plans, jointly-trusteed (Taft-Hartley) plans and corporate
benefit plans, as well as individual and other tax-free clients. The
minimum size for new investment management accounts is generally $10
million for equity accounts and $15 million for fixed income accounts.
RETAIL MANAGEMENT. Since 1982, Oppenheimer Capital has formed a range
of retail businesses including: (i) wrap fee accounts, programs through
which brokers offer their clients discretionary portfolio management
services; (ii) management of assets for insurance product separate
accounts; (iii) equity open-end mutual funds; (iv) closed-end investment
companies; and (v) money market open-end mutual funds. In fiscal 1996,
Oppenheimer Capital began to implement a strategic decision to withdraw
from selling directly to the retail market, and to instead market directly
to institutions with strong retail distribution capabilities.
NEW BUSINESS INITIATIVES. Over the past several years, Oppenheimer
Capital has introduced a variety of new products, consistent with its
diversification strategy. These products include international equity
management offered through Oppenheimer Capital International, collective
trust funds offered through Oppenheimer Capital Trust Company and SITs.
Recently Discontinued Operations and Significant Dispositions
On January 31, 1997, the Quest For Value Dual Purpose Fund redeemed all
18,004,302 of its income shares for total proceeds of $209 million. On March 3,
1997, the fund began trading as an open-end mutual
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<PAGE> 42
fund and was renamed Oppenheimer Quest Capital Value Fund. Oppenheimer Capital
is currently managing the Oppenheimer Quest Capital Value Fund under a
subadvisory agreement with OFI.
On May 12, 1997, Oppenheimer Capital sold its exclusive license to market
financial products to members of the American Medical Association for $1
million.
Oppenheimer Capital sold its 50% interest in Saratoga Capital Management
during the fourth fiscal quarter of 1997.
Employees
Oppenheimer Capital has a staff of 344 employees, including 43 investment
professionals. The average tenure of these professionals at Oppenheimer Capital
is 9 years, and their average investment experience is 19 years. Besides the
staff of 43 investment professionals, Oppenheimer Capital has a support staff of
301 individuals.
COLUMBUS CIRCLE INVESTORS (CCI)
General
CCI, based in Stamford, Connecticut and established in 1975, manages
discretionary accounts for entities such as corporate, government and union
pension and profit sharing plans, foundations and educational institutions, as
well as accounts for "high net worth" individuals. In addition, CCI has a
private collective investment program for accredited investors. As of September
30, 1997, assets under management by CCI, exclusive of the approximately $5.6
billion of assets of the PIMCO MMS Funds (as defined below under -- PIMCO
Advisors Mutual Funds) and the Cash Accumulation Trust under CCI management,
were approximately $5.9 billion for 102 clients.
CCI's principal equity products consist of its "core" portfolios, which
accounted for approximately $4.3 billion (or 37%) of its assets under management
at September 30, 1997. CCI uses its "positive momentum & positive surprise"
style for these portfolios, which principally consist of "large cap" US equity
securities. CCI also applies its "positive momentum & positive surprise" style
to manage "small cap" portfolios aggregating approximately $3.5 billion (or 30%)
of its assets under management at September 30, 1997; "mid cap" portfolios
aggregating approximately $1.7 billion (or 15%) of its assets under management
at September 30, 1997; and "equity income" portfolios aggregating approximately
$460 million (or four percent) of its assets under management at September 30,
1997. CCI also manages several relatively small fixed income, balanced and
specialized equity portfolios.
While net cash inflows for PIMCO Advisors, as a whole, were significant
($7.6 billion during the first nine months of 1997, $6.7 billion in 1996 and
$6.6 billion in 1995), CCI experienced substantial net cash outflows in 1995,
1996 and the first nine months of 1997, attributable in large part to
underperformance measured against relevant benchmarks in "Large Cap" portfolios.
This trend has continued in the fourth quarter of 1997.
Investment Strategy
CCI's investment strategy has remained essentially unchanged since 1975.
CCI's investment philosophy is based on the premise that companies producing
results which exceed the expectations of investors and Wall Street equity
research analysts will have rising stock prices, while companies with
disappointing results will experience stock price decline. CCI's investment
discipline focuses on the potential for "positive momentum & positive surprise."
CCI monitors numerous factors, including political and economic developments,
secular trends and industry and group dynamics, in addition to company-specific
events, to determine which companies are best-positioned to achieve revenue and
earnings acceleration. In addition to meeting the criteria for potential
"positive momentum & positive surprise," thorough fundamental analysis is
completed prior to making an investment decision. Depending upon market
conditions, CCI seeks to enhance investment performance by writing "covered"
call and stock index options on securities held in equity accounts.
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<PAGE> 43
Seven of the equity portfolios within the PIMCO Funds (plus the Tax Exempt
Fund) currently are managed by the same individuals who manage CCI's individual
and institutional private accounts. Accordingly, the CCI investment philosophy
and techniques described above are also applied to such equity and fixed income
funds. CCI's policy is to accept only new accounts of $10 million or more
(except in its accredited investors program). In 1995, CCI formed Columbus
Circle Trust Company, a limited purpose Connecticut trust company, which enables
CCI to provide trust and investment advisory services to smaller accounts.
Employees
Two of CCI's nine Managing Directors, Irwin F. Smith and Donald A.
Chiboucas, have been with CCI since its founding in 1975. Mr. Smith also
previously served as Chairman and Chief Executive Officer of Thomson Advisory
Group, L.P. At September 30, 1997, CCI had 94 employees, of whom 38 were
investment professionals. In July 1997, Mr. Christopher Burnham jointed the firm
as its Chief Executive Officer and President.
CADENCE CAPITAL MANAGEMENT (CADENCE)
General
Cadence, based in Boston, Massachusetts and established in 1988,
specializes in disciplined, growth-oriented management of equity securities. At
September 30, 1997, Cadence had $4.9 billion of assets under management, managed
separate account portfolios for 77 clients and subadvised five portfolios within
the PIMCO Funds.
Investment Strategy
Cadence is a "growth at a reasonable price" equity manager. Cadence's
philosophy is to participate in the long-term growth of the equity markets by
constructing fully invested portfolios of stocks selling at reasonable
valuations in relation to the fundamental prospects of the underlying companies.
Cadence uses a disciplined, "bottom-up" investment process which utilizes
quantitative screening for favorable fundamental and valuation attributes,
followed by "hands-on" qualitative research to confirm the apparent business
trends. Cadence structures its portfolios to be broadly based, typically
including 80 to 100 issues.
The investment strategy of Cadence involves the application of a
proprietary investment management process to different universes of equity
securities which are usually differentiated by market capitalization into four
categories: large cap (the top 1,000 market cap issues), mid cap (market cap of
over $500 million excluding the largest 250 issues), small cap ($100 million to
$1 billion) and micro cap (up to $100 million). Through this strategy, Cadence
is able to differentiate its investment products while remaining focused on a
single investment style.
Employees
The three Managing Directors of Cadence include David B. Breed, a founder
of the firm; William Bannick, who joined Cadence Inc. in October 1992; and
Katherine A. Burdon, who joined Cadence Inc. in December 1992 and was promoted
to Managing Director in May 1995. Mr. Breed is the Chief Executive Officer of
Cadence and is responsible for the original development and ongoing maintenance
of the investment process. Mr. Bannick is responsible for investment management
and client service. Ms. Burdon is a portfolio manager/analyst with client
services responsibilities and research responsibilities in healthcare,
telecommunications, and broadcast media. Cadence had a total of 28 employees at
September 30, 1997, including seven portfolio managers in addition to Mr. Breed.
PARAMETRIC PORTFOLIO ASSOCIATES (PARAMETRIC)
Parametric, based in Seattle, Washington, and established in 1987,
specializes in the management of broadly diversified domestic and international
equity strategies for tax-exempt and taxable clients. The firm offers active and
indexed strategies which are structured to meet client specific risk and return
objectives.
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<PAGE> 44
Active portfolios seek superior returns relative to an assigned benchmark within
a risk controlled framework, while indexed portfolios are constructed to closely
track an appropriate index. In addition, Parametric manages tax efficient
separate account strategies for a growing clientele of taxable investors.
Parametric uses quantitative techniques in portfolio construction and
management. The active portfolios are designed to maintain economic sector
allocations similar to the benchmark. Security selection is based on a ranking
system which evaluates each stock's exposure to valuation, earnings and momentum
factors. Portfolios are optimized to achieve a diversified group of securities
which have exposure to factors associated with superior return and risk
characteristics.
Parametric manages a wide variety of index funds which extend to both large
and small capitalizations and across value and growth styles. The international
assignments include allocations to developed countries and emerging markets.
At September 30, 1997, Parametric had assets under management of $2.5
billion, managed separate accounts for 29 clients, and served as subadvisor for
two portfolios within the PIMCO Funds and seven portfolios for several
unaffiliated families of funds.
NFJ INVESTMENT GROUP (NFJ)
NFJ, based in Dallas, Texas and established in 1989, is a disciplined,
value-oriented manager of equity securities. NFJ's specialty is investing in a
combination of low P/E stocks with high dividends selected through a proprietary
screening model. NFJ's business strategy involves targeting the U.S. pension and
mutual fund markets with specific attention to the pension consultants which
dominate the pension market. NFJ believes that its value niche and conservative
investment style is attractive to prospective clients because it naturally
complements the styles of other growth or core equity managers. NFJ has
developed a structured process with a systematic buy/sell discipline based on
fundamental research and computer modeling. NFJ's investment philosophy is based
on research showing that portfolios with a combination of low P/E stocks and
high dividends consistently outperform market indices. The low P/E bias is based
on the belief that "out of favor" stocks are not normally subjected to
significant negative earnings surprises because their low P/E ratios already
incorporate the market's negative expectations. The high dividend component
offers an "income cushion" to protect returns when market conditions are
unfavorable. At September 30, 1997, NFJ had assets under management of $2.3
billion, managed separate account portfolios for 25 clients and also served as
manager for seven portfolios within the PIMCO Funds and seven unaffiliated
families of funds.
BLAIRLOGIE CAPITAL MANAGEMENT (BLAIRLOGIE)
Blairlogie, based in Edinburgh, Scotland and founded in late 1992,
specializes in international equity investments. Blairlogie provides an
international investment product that combines country selection strategies with
the systematic application of an investment process more typically used by U.S.
investment firms. Blairlogie focuses its marketing efforts in the U.S. and seeks
to capitalize on increased demand for international investment products by U.S.
pension funds and retail-oriented U.S. mutual funds. Blairlogie's investment
strategy involves the application of fundamental valuation criteria to country
allocations and then to stock selection in order to enhance client returns over
time, while seeking a relatively low level of overall portfolio risk.
Blairlogie's future business strategy may also include the development of
investment management relationships in the United Kingdom and other parts of
Europe. At September 30, 1997, Blairlogie had assets under management of $875
million in the managed separate account portfolios for nine clients and served
as manager for three portfolios within PIMCO Funds and served as subadvisor to
one affiliated and two unaffiliated families of funds.
PIMCO ADVISORS MUTUAL FUNDS
PIMCO Advisors, together with the Investment Management Firms, sponsors and
manages mutual funds for both institutional and retail investors.
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PIMCO FUNDS
In January 1997, PIMCO Advisors restructured its proprietary mutual funds
into a single fund family called "PIMCO Funds" which is comprised of two series:
(i) PIMCO Funds: Pacific Investment Management Series ("PIMCO Funds PIMS
Series"), 24 funds advised by Pacific Investment Management, and (ii) PIMCO
Funds: Multi-Manager Series ("PIMCO Funds MMS Series"), 22 funds advised by
PIMCO Advisors and subadvised by the Investment Management Firms and one
independent subadvisor. The PIMCO Funds PIMS Series are primarily fixed income
funds and the PIMCO Funds MMS Series are primarily equity funds. PIMCO Funds are
offered in up to five different share classes: institutional and administrative
share classes for institutional investors and, for retail investors, Class A
shares (which are "front end" load), Class B shares (which are "back-end load"),
and Class C shares (which are "level load"). The PIMCO Funds now feature a
"unified fee" structure which has specified advisory and administrative fees per
fund. As a result, PIMCO Advisors and Pacific Investment Management (and not the
PIMCO Funds) bear the risk of increases in service costs (including of
third-party service providers such as transfer agents) and will directly benefit
from decreases in those costs.
MARKETING AND DISTRIBUTION
PFD, a wholly-owned subsidiary of PIMCO Advisors, is the distributor for
the PIMCO Funds. PIMCO Advisors uses PFD to distribute the retail share classes
of PIMCO Funds through a large, diversified network of unaffiliated retail
broker-dealers, including many leading full-service broker-dealers. PFD has
selling agreements with over 1,000 broker-dealers and banks. The sales and
marketing personnel develop and support sales and marketing strategies between
PIMCO Advisors and the different retail broker-dealers. Additionally, the
relationships fostered by this group allow PFD's wholesalers to have access to
the branch offices and sales representatives of the retail broker-dealers. At
September 30, 1997, PIMCO Funds had approximately $30.2 billion of assets under
management of which approximately $22.9 billion were in PIMCO Funds PIMS Series
and approximately $7.3 billion were in PIMCO Funds MMS Series.
REGULATION
Virtually all aspects of the investment management business of PIMCO
Advisors are subject to various federal and state laws and regulations. PIMCO
Advisors and its Investment Management Firms are registered with the Commission
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and
are registered under various state securities laws. The Advisers Act imposes
numerous obligations on registered investment advisors including fiduciary,
recordkeeping, operational and disclosure obligations. Blairlogie is also a
member of the Investment Management Regulatory Organization in the United
Kingdom. Pacific Investment Management and Parametric are registered with the
Commodity Futures Trading Commission as Commodity Trading Advisors and are
members of the National Futures Association. Pacific Investment Management and
its subsidiary, StocksPLUS Management, Inc., are also registered as Commodity
Pool Operators.
PIMCO Advisors and its Investment Management Firms are subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and to
regulations promulgated thereunder, insofar as they are "fiduciaries" under
ERISA with respect to many of their clients.
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict any
of the Investment Management Firms from conducting their business in the event
that they fail to comply with such laws and regulations. Possible sanctions that
may be imposed in the event of such noncompliance include the suspension of
individual employees, limitations on the Investment Management Firm's business
activities for specified periods of time, revocation of the Investment
Management Firm's registration as an investment advisor, and other censures and
fines. Changes in these laws or regulations could have a material adverse impact
on the profitability and mode of operations of PIMCO Advisors and its Investment
Management Firms.
The officers, directors and employees of PIMCO Advisors and its Investment
Management Firms may from time to time own securities which are also owned by
one or more of their clients. Under the direction of
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PIMCO Advisors, each firm has adopted internal policies with respect to personal
investment by employees. Each firm requires reports of securities transactions
and restricts certain transactions so as to minimize possible conflicts of
interest.
PFD is registered as a broker-dealer under the Exchange Act and is subject
to regulation by the Commission, the National Association of Securities Dealers,
Inc. and other federal and state agencies. As a registered broker-dealer, it is
subject to the Commission's net capital rule and certain state securities laws
designed to enforce minimum standards regarding the general financial condition
and liquidity of a broker-dealer. Under certain circumstances, these rules limit
the ability of PFD's parent to make withdrawals of capital and receive
dividends. The securities industry is one of the most highly regulated in the
United States, and failure to comply with related laws and regulations can
result in the revocation of broker-dealer licenses, the imposition of censures
or fines and the suspension or expulsion from the securities business of a firm,
its officers or employees.
COMPETITION
The investment management business is highly competitive. PIMCO Advisors
and its Investment Management Firms compete with a large number of other
domestic and foreign investment management firms, commercial banks, insurance
companies, broker-dealers and other financial services providers. Some of the
financial services companies with which the firms compete have greater
resources, assets under management and administration than PIMCO Advisors and
the Investment Management Firms and offer a broader array of investment products
and services.
PIMCO Advisors believes that the most important factors affecting its
success are the abilities, performance records and reputations of its investment
managers, and the development of new investment and marketing strategies. The
relative importance of these factors varies depending on the type of investment
management service involved. Client service is also an important competitive
factor. PIMCO Advisors ability to increase and retain client assets could be
adversely affected if client accounts underperform the market or if key
investment managers leave the firms. The ability of PIMCO Advisors and the
Investment Management Firms to compete with other investment management firms is
also dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions. There are
relatively few barriers to entry by new investment management firms in the
institutional managed accounts business, which increases competitive pressure.
Selection of advisors by institutional investors often is subject to a
competitive review process relying heavily upon historical performance. As a
result, new firms such as Blairlogie typically require a three to five year
start-up period during which they experience losses and require subsidies.
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 by PIMCO Advisors. Many competitors apply
substantial resources to advertising and marketing their mutual funds which may
adversely affect the ability of PIMCO Advisors-sponsored funds to attract new
clients and to retain assets under management. The ability to attract and retain
mutual fund assets in the load mutual funds which PIMCO Advisors offers is
dependent to a significant degree on the ability to attract, retain and motivate
retail brokerage salespersons.
PROPERTIES
The principal offices of the Partnership and PIMCO Advisors are located at
800 Newport Center Drive, Newport Beach, California where it occupies
approximately 10,460 square feet of space under a lease expiring in 2002 and at
2187 Atlantic Street, Stamford, Connecticut where PIMCO Advisors and PFD occupy
approximately 17,200 square feet of space under a sublease expiring in 2002.
Pacific Investment Management's principal offices are located at 840 Newport
Center Drive and 5 Civic Plaza, Newport Beach, California where it occupies
approximately 70,000 square feet of space under leases expiring in 1998.
Oppenheimer Capital currently maintains office space at the following locations:
approximately 40,000 square feet at the Oppenheimer Tower, New York, New York;
39,800 square feet at the Merrill Lynch Tower, New
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York, New York; and 44,000 square feet at 33 Maiden Lane, New York, New York.
CCI's principal office is located at 1 Station Place, Stamford, Connecticut,
where it occupies approximately 31,000 square feet of space under a lease
expiring in 1999. Each location is a modern office building and the demised
space is adequate for the Partnership's and PIMCO Advisors current operations,
but more space may be necessary should PIMCO Advisors business expand.
LEGAL PROCEEDINGS
On November 10, 1997, Richard Buzby filed an action on behalf of a
purported class of limited partners of the Partnership against PIMCO Advisors
and certain individuals associated with the previous general partner of the
Partnership in the Court of Chancery of the State of Delaware, New Castle
County. The complaint alleges, among other things, various breaches of fiduciary
duty, conflicts of interest and unfair dealing in connection with the
Oppenheimer Capital Merger. The complaint seeks compensatory and/or
rescissionary money damages or, alternatively, injunctive relief or rescission
of the transactions. Since that date, certain other complaints have been filed
in the states of Delaware and New York, making similar allegations. These cases
are expected to be consolidated in the Court of Chancery of the State of
Delaware, New Castle County. The Partnership and PIMCO Advisors believe the
suits are without merit, and intend to contest them vigorously.
Except as described above, there are no material legal proceedings pending
or, to the knowledge of management, threatened against the Partnership or PIMCO
Advisors.
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MANAGEMENT OF THE PARTNERSHIP
MANAGEMENT OF THE PARTNERSHIP
The Partnership Agreement provides that the Partnership is managed by its
general partner, PGP. PGP has delegated day to day management of the Partnership
to a management board which has appointed executive officers of the Partnership.
The board members and executive officers of the Partnership are comprised of the
following persons, who also serve as executive officers of PIMCO Advisors:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- --------------------------------- ---- -----------------------------------
<S> <C> <C>
William D. Cvengros.............. 49 Board Member, Chief Executive
Officer and President
Kenneth M. Poovey................ 65 Board Member, Executive Vice
President and General Counsel
Robert M. Fitzgerald............. 45 Board Member, Senior Vice President
and Chief Financial Officer
James G. Ward.................... 43 Senior Vice President and Director
of Human Resources
Richard M. Weil.................. 34 Senior Vice President
</TABLE>
Biographical information with respect to the above-listed individuals is
set forth in "-- Management of PIMCO Advisors."
Because the sole business of the Partnership is that of owning PIMCO
Advisors Units, certain information relating to the management of PIMCO Advisors
is set forth below.
MANAGEMENT OF PIMCO ADVISORS
PIMCO Advisors is managed by its general partners, PGP and the Partnership.
PGP has direct control of the Partnership, and therefore controls PIMCO
Advisors. The general partners have the equal right, power and authority to
manage and control the business and affairs of PIMCO Advisors and to take any
action deemed necessary or desirable by them in connection with the business of
PIMCO Advisors. Any difference arising as to any action connected with the
business of PIMCO Advisors, other than those requiring the unanimous consent of
the general partners, is decided by the general partners holding a majority of
the outstanding PIMCO GP Units.
Each of the following actions require the unanimous consent of all of the
general partners: (i) the constitution of a delegate and the delegation to such
delegate of any of the rights, powers and duties of the general partners and any
revision or revocation of such constitution or delegation; (ii) any merger or
consolidation of PIMCO Advisors with another business entity in which PIMCO
Advisors is not the surviving entity; (iii) any sale of all or substantially all
of PIMCO Advisors' assets; (iv) any incurrence of indebtedness by PIMCO Advisors
or its subsidiaries except in the ordinary course of business; (v) initiation,
consent to or acquiescence in any Insolvency Event (as defined in the PIMCO
Advisors Partnership Agreement) with respect to PIMCO Advisors; (vi) any other
action which would make it impossible for the general partners to carry on the
ordinary course of business of PIMCO Advisors; (vii) any determination, after
the occurrence of an Event of Withdrawal (as defined in the PIMCO Advisors
Partnership Agreement) with respect to a general partner, to carry on the
business of PIMCO Advisors; (viii) any determination or election pursuant to
Section 17.1 of the PIMCO Advisors Partnership Agreement (relating to
dissolution); (ix) any action which would cause an Assignment Event, a Tax
Realization Event or a Termination Event (as such terms are defined in the PIMCO
Advisors Partnership Agreement), or which would, prior to the Restructuring,
cause an Adverse Partnership Tax Event; and (x) and any amendment of Article X
(relating to management) Article XV (relating to indemnification) or Article XVI
(relating to restructurings) of the PIMCO Advisors Partnership Agreement.
In addition to the actions requiring unanimous consent of the general
partners, the rights and powers of the general partners to take the following
actions may not be delegated: (i) any determination or action
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<PAGE> 49
pursuant to Article XVI of the PIMCO Advisors Partnership Agreement (relating to
the restructuring authority); (ii) admission of any successor or additional
general partner; (iii) any amendment of the PIMCO Advisors Partnership
Agreement; and (iv) any action which would require the approval of partners
other than the general partners.
Other than as provided above, the general partners have jointly delegated
substantially all of the management and control of PIMCO Advisors to the PIMCO
Advisors Management Board. Except as described below, the PIMCO Advisors
Management Board has, in turn, delegated its rights, powers and duties to manage
and control the business of PIMCO Advisors to an Executive Committee.
Pursuant to the terms of the delegation of authority by the general
partners of PIMCO Advisors, the PIMCO Advisors Management Board is composed of
(i) the Chief Executive Officer of PIMCO Advisors; (ii) six other persons
designated by PGP; (iii) three disinterested persons designated by (A)
representatives of the Public General Partners (defined as any general partner
of PIMCO Advisors that has at least one class of equity security outstanding
that is registered under Section 12 of the Exchange Act and which, together with
its subsidiaries, holds PIMCO Units representing more than 95% of its
consolidated assets other than cash and cash equivalents), if any, in proportion
to their ownership of PIMCO GP Units or (B) if there are no Public General
Partners, PGP or its successor as general partner of PIMCO Advisors; (iv) the
Chief Executive Officer and one Managing Director of each of the two Investment
Managing Firms having the greatest total income, determined as of the date of
appointment; and (v) one Managing Director of each of two other Investment
Managing Firms designated from time to time by the Management Board upon the
recommendation of the nominating committee. Pacific Investment Management
Company, a wholly owned subsidiary of Pacific Life Insurance Company ("PIMCO
Inc."), and PIMCO Partners, LLC ("PPLLC"), the general partners of PGP, have
agreed that the six persons designated by PGP (referred to in clause (ii) above)
will be the Chief Executive Officer of the Pacific Investment Management, two
other individuals designated by PPLLC and three individuals designated by PIMCO
Inc. In addition, PIMCO Inc. and PPLLC have agreed that the designees of PGP
designated pursuant to PGP's status as a Public General Partner (as defined in
the PIMCO Advisors Partnership Agreement) will be such individuals as they shall
mutually agree upon.
At any meeting of the PIMCO Advisors Management Board, a majority of the
members present may take any action on behalf of the PIMCO Advisors Management
Board except the following, which generally require the affirmative vote of at
least 75% of the members: (i) the constitution of, or delegation of rights,
powers and duties to, a committee, and the appointment or removal of the members
of a committee; (ii) provision for, prescription of the powers and duties of, or
delegation of rights, powers and duties to, any officer of PIMCO Advisors; (iii)
appointment or removal of any individual as an officer of PIMCO Advisors, unless
such appointment or removal has been recommended by the nominating committee;
(iv) provision of any salary or bonus for any officer of PIMCO Advisors, unless
such salary or bonus has been approved by the compensation committee; (v)
approval of the partnership agreement, operating agreement or profit sharing
plan of an Investment Management Firm, any amendment of any such agreement or
plan, and any increase in the compensation of any Managing Director of an
Investment Management Firm; (vi) removal of a Managing Director of an Investment
Firm; (vii) any issuance of PIMCO Advisors units or any other equity security if
the PIMCO Advisors units issued or subject to issuance upon conversion of such
equity security exceed 20% of the outstanding PIMCO Advisors units; (viii)
certain incurrences of indebtedness by PIMCO Advisors or its subsidiaries; or
(ix) any significant acquisition or disposition of a business by PIMCO Advisors.
The Executive Committee is composed of five members. The members of the
Executive Committee include the Chief Executive Officer of PIMCO Advisors; three
members appointed by the PGP-appointed members of the Management Board; and one
member appointed by the Management Board, upon the recommendation of the
Nominating Committee, which member must have been appointed to the Management
Board by an Investment Management Firm other than Pacific Investment Management.
PIMCO Inc. and PPLLC, the general partners of PGP, have agreed that the three
members of the PIMCO Advisors Management Board designated by PGP to the
Executive Committee will be (a) the Chief Executive Officer of the Pacific
Investment Management, (b) one member designated by PPLLC, who shall be the
chairperson of the Executive Committee and (c) one member designated by PIMCO
Inc.
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<PAGE> 50
Under the terms of the delegation, the Executive Committee has all of the
rights, powers and duties of the PIMCO Advisors Management Board to manage and
control the business and affairs of PIMCO Advisors, except that the Executive
Committee may not: (i) constitute any committee or subcommittee, delegate its
power to any committee or subcommittee, revise or revoke any such constitution
or delegation, or appoint or remove any member of such committee or
subcommittee; (ii) provide for, prescribe the duties of, delegate any rights or
powers to, appoint, or determine the compensation of, any officer of PIMCO
Advisors; (iii) approve any partnership agreement, operating agreement or profit
sharing plan of any Investment Management Firm, any amendment to such agreement
or plan or any increase in the compensation of any Managing Director of an
Investment Management Firm; (iv) remove a Managing Director of an Investment
Management Firm; (v) issue any equity security of PIMCO Advisors; (vi) incur any
indebtedness by PIMCO Advisors or its subsidiaries; (vii) acquire or dispose of
any business of PIMCO Advisors; or (viii) perform any action the authority for
which has been delegated to another committee.
In addition, PIMCO Advisors has an Audit Committee, a Compensation
Committee, and a Unit Incentive Committee of the Management Board, each
comprised of members of the PIMCO Advisors Management Board.
The members of the PIMCO Advisors Management Board and the executive
officers of PIMCO Advisors are as set forth below. The initial terms of all
PIMCO Advisors Management Board members expire on April 30, 1999: PIMCO Advisors
Management Board members thereafter will be appointed to one year terms.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
--------------------------- --- ------------------------------------------------------
<S> <C> <C>
Walter E. Auch, Sr......... 76 Board Member
David B. Breed............. 50 Board Member
Donald A. Chiboucas........ 53 Board Member
William D. Cvengros........ 49 Board Member and Chief Executive Officer
Walter B. Gerken........... 75 Board Member and Chairman
William H. Gross........... 53 Board Member
Brent R. Harris............ 38 Board Member
Donald R. Kurtz............ 67 Board Member
George A. Long............. 56 Board Member
James F. McIntosh.......... 57 Board Member
Kenneth H. Mortenson....... 51 Board Member
William F. Podlich, III.... 53 Board Member
Glenn S. Schafer........... 48 Board Member
Thomas C. Sutton........... 55 Board Member
William S. Thompson, Jr.... 52 Board Member
Benjamin L. Trosky......... 37 Board Member
Kenneth M. Poovey.......... 65 Executive Vice President and General Counsel
Stephen J. Treadway........ 50 Executive Vice President
Robert M. Fitzgerald....... 45 Senior Vice President and Chief Financial Officer
James G. Ward.............. 43 Senior Vice President and Director of Human Resources
Richard M. Weil............ 34 Senior Vice President
</TABLE>
Set forth below is certain biographical information with respect to the
persons who are the members of the Management Board or who serve as executive
officers of PIMCO Advisors or the Partnership:
Walter E. Auch, Sr. Mr. Auch has served as a member of the PIMCO Advisors
Management Board (or a predecessor management board of PIMCO Advisors) as an
independent member and as a member of the Audit Committee, Compensation
Committee and Unit Incentive Committee since the Consolidation in November 1994.
He currently is a management consultant. Mr. Auch was a Director of TAG from
October 1990 until November 1994. He was previously the Chairman and Chief
Executive Officer of the Chicago Board Options Exchange from 1979 to 1986. He is
also a Director of Geotek Industries, Inc., Fort
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<PAGE> 51
Dearborn Fund, Shearson VIP Fund, Shearson Advisors Fund, Shearson TRAK Fund,
Banyan Strategic Land Trust, Banyan Strategic Land Fund II, Banyan Mortgage
Investment Fund, Express American Holding Corporation and Nicholas/Applegate
Funds.
David B. Breed. Mr. Breed has served as Chief Executive Officer and a
Managing Director of Cadence since the Consolidation in November 1994. From
February 1988 to July 1993, he was a Managing Director and Director of Cadence
Capital Management Corporation, and he was Chief Executive Officer and Chief
Investment Officer thereof until November 1994.
Donald A. Chiboucas. Mr. Chiboucas has served as a member of the PIMCO
Advisors Management Board (or predecessor management boards of PIMCO Advisors)
and the President and a Managing Director of CCI since the Consolidation in
November 1994. Mr. Chiboucas was Senior Executive Vice President of TAG Inc. and
PIMCO Advisors, a member of PIMCO Advisors' Executive Operating Committee and
President of CCI from October 1990 until November 1994.
William D. Cvengros. Mr. Cvengros is Chief Executive Officer of the
Partnership and has served as Chief Executive Officer of PIMCO Advisors and as a
member of the PIMCO Advisors Management Board (or predecessor management boards
of PIMCO Advisors) since the Consolidation in November 1994. In February 1986,
Mr. Cvengros became both Chairman of the Board and Directors of Pacific
Investment Management Company (the predecessor to Pacific Investment
Management). He was associated with Pacific Life Insurance Company ("Pacific
Life") from July 1972 when he joined Pacific Life as an investment analyst. He
was promoted to Executive Vice President, Investment Operations of Pacific Life
in April 1986, and became a Director in January 1988. Mr. Cvengros became Vice
Chairman and Chief Investment Officer of Pacific Life in January 1990 and
remained in such role until November 1994. Mr. Cvengros also served as a
Director of Pacific Mutual Distributors, Inc., Mutual Service Corporation,
PFAMCo, PMRealty Advisors, Inc., and the predecessors of Blairlogie, Parametric,
NFJ and Cadence. He is currently a Director of Furon Corporation and Remedy
Temp.
Robert M. Fitzgerald. Mr. Fitzgerald is Senior Vice President, Chief
Financial Officer and Chief Accounting Officer of the Partnership and PIMCO
Advisors. He joined PIMCO Advisors in February 1995. From April 1994 through
January 1995, he served as a consultant to various companies, including Pacific
Investment Management. From October 1991 until April 1994, he served in various
senior executive positions, including President, at Mechanics National Bank.
Prior to October 1991, he was a partner with Price Waterhouse LLP. He is a
Certified Public Accountant.
Walter B. Gerken. Mr. Gerken has served as Chairman of the PIMCO Advisors
Management Board (or a predecessor management board of PIMCO Advisors) since the
Consolidation in November 1994. Mr. Gerken is also on the Board of Commercial
Mortgage Securities Trust, Inc. Mr. Gerken is the former Chairman of the Board
and CEO of Pacific Life.
William H. Gross. Mr. Gross is a Managing Director of Pacific Investment
Management and has served as a member of the PIMCO Advisors Management Board (or
a predecessor management board of PIMCO Advisors) since the Consolidation in
1994. Mr. Gross joined Pacific Investment Management (the predecessor to Pacific
Investment Management) in June 1971 and became a Managing Director in February
1982. He serves as a Director and Vice President of StocksPLUS and as a Senior
Vice President of PIMCO Funds.
Brent R. Harris. Mr. Harris is a Managing Director of Pacific Investment
Management and has served as a member of the PIMCO Advisors Management Board (or
a predecessor management board of PIMCO Advisors) since the Consolidation in
November 1994. Mr. Harris was a Managing Director of Pacific Investment
Management (the predecessor to Pacific Investment Management) until November
1994. He joined Pacific Investment Management as an Account Manager in June
1985, and became a Vice President in February 1987, a Senior Vice President in
February 1990, a Principal in April 1991 and a Managing Director in April 1993.
Mr. Harris serves on the boards of PIMCO Commercial Mortgage Securities Trust,
Inc. and StocksPLUS. He also serves as a Trustee and Chairman of the PIMCO Funds
and the PIMCO Commercial Mortgage Securities Trust, Inc.
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<PAGE> 52
Donald R. Kurtz. Mr. Kurtz has served on the PIMCO Advisors Management
Board (or a predecessor management board of PIMCO Advisors) as an independent
member and as a member of the Audit Committee, Compensation Committee and Unit
Incentive Committee since the Consolidation in November 1994. Mr. Kurtz was a
Director of TAG from May 1992 until November 1994. From December 1994 until
October 1995, he was acting Managing Director of Domestic Equity Investments at
General Motors Investment Management Corp. Prior thereto, he served as Vice
President or Director, Internal Asset Management at General Motors Investment
Management Corp. from January 1990 and at General Motors Corp. from February
1987 until December 1989.
George A. Long. Mr. Long has served as a member of the PIMCO Advisors
Management Board since November 1997. He also has served as the Chairman and
Chief Executive Officer of Oppenheimer Capital since July 1997, the President of
Oppenheimer Capital since May 1996 and the Chief Investment Officer of
Oppenheimer Capital since 1987. Mr. Long served as a Managing Director of
Oppenheimer Capital from 1992 to May 1996. He also served as an Analyst of
Oppenheimer & Co., Inc. from 1969 to 1982.
James F. McIntosh. Mr. McIntosh has served as a member of the PIMCO
Advisors Management Board (or a predecessor management board of PIMCO Advisors)
as an independent member and as a member of the Audit Committee, Compensation
Committee and Unit Incentive Committee since the Consolidation in November 1994.
Prior to that time, he served as a Director of Pacific Investment Management
Company (the predecessor to Pacific Investment Management), a position he held
since June 1983. He is currently the Executive Director of Allen, Matkins, Leck,
Gamble & Mallory LLP, a law firm, which position he has held from October 1994.
From January 1981 to October 1994, he was Executive Director of Paul, Hastings,
Janofsky & Walker LLP, a law firm.
Kenneth H. Mortenson. Mr. Mortenson has served as a member of the PIMCO
Advisors Management Board since November 1997. He is a Managing Director of
Oppenheimer Capital, a position that he has held since 1987.
William F. Podlich, III. Mr. Podlich is a Managing Director of Pacific
Investment Management and has served as a member of the PIMCO Advisors
Management Board (or a predecessor management board of PIMCO Advisors) since the
Consolidation in November 1994. Mr. Podlich joined Pacific Investment Management
Company (the predecessor to Pacific Investment Management) as a Director in
August 1969 and became a Managing Director in February 1982. Mr. Podlich serves
as a Director of StocksPLUS and of Maxagen Technology, Inc.
Kenneth M. Poovey. Mr. Poovey is Executive Vice President and General
Counsel of the Partnership and PIMCO Advisors. Mr. Poovey has served as
Executive Vice President of PIMCO Advisors since May 1997 and as General Counsel
of PIMCO Advisors since November 1994. Prior to May 1997, Mr. Poovey was a
partner with the law firm of Latham & Watkins with which he has been affiliated
since 1980.
Glenn S. Schafer. Mr. Schafer has served as a member of the PIMCO Advisors
Management Board (or a predecessor management board of PIMCO Advisors) since the
Consolidation in November 1994. He currently serves as a Director and the
President of Pacific Life. Mr. Schafer was the Executive Vice President and
Chief Financial Officer of Pacific Life from April 1991 until January 1995.
Thomas C. Sutton. Mr. Sutton has served as a member of the PIMCO Advisors
Management Board (or a predecessor management board of PIMCO Advisors) since the
Consolidation in November 1994. Mr. Sutton has been the Chairman and Chief
Executive Officer of Pacific Life since January 1990 and a Director of Pacific
Life since 1987. He has been associated with Pacific Life since June 1965 and
became its President in September 1987. Mr. Sutton is also a Director of Edison
International, Newhall Land and Farming Company and The Irvine Company.
William S. Thompson, Jr. Mr. Thompson is a Managing Director and the CEO of
Pacific Investment Management and has served as a member of the PIMCO Advisors
Management Board (or a predecessor management board of PIMCO Advisors) since the
Consolidation in November 1994. Prior thereto, Mr. Thompson was a Managing
Director and the Chief Executive Officer of Pacific Investment Management
Company (the predecessor to Pacific Investment Management). Mr. Thompson joined
Pacific Investment
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<PAGE> 53
Management Company in April 1993. From February 1975 until April 1993, he was
with Salomon Brothers Inc., an investment banking firm, serving as a Managing
Director starting in 1981 and he is currently a Director of Spieker Properties.
Stephen J. Treadway. Mr. Treadway is an Executive Vice President of PIMCO
Advisors and Director, Chairman and President of PFD. He joined PIMCO Advisors
in May 1996. Prior thereto, he was associated with Smith Barney, Inc. for
eighteen years and served in various senior positions, including Executive Vice
President.
Benjamin L. Trosky. Mr. Trosky is a Managing Director of Pacific Investment
Management, and a member of the PIMCO Advisors Management Board. Mr. Trosky
joined Pacific Investment Management Company (the predecessor to Pacific
Investment Management) in October 1990, became a Vice President in April 1991,
and was an Executive Vice President from February 1994 through November 1994. He
served as Executive Vice President of Pacific Investment Management after the
Consolidation, and became a Managing Director in February 1996. Mr. Trosky
currently serves as a Senior Vice President of PIMCO Commercial Mortgage
Securities Trust, Inc.
James G. Ward. Mr. Ward is Senior Vice President and Director of Human
Resources of the Partnership and PIMCO Advisors. Mr. Ward served as Vice
President and Director of Human Resources of PIMCO Advisors April 1995 through
December 1996. Prior to that time, he served as Vice President and Director of
Human Resources for Pacific Investment Management, a position he held beginning
October 1994. From November 1987 through October 1994, he served as Vice
President and Director of Human Resources for Salomon Brothers Inc.
Richard M. Weil. Mr. Weil is Senior Vice President and Secretary of the
Partnership and PIMCO Advisors. Mr. Weil joined PIMCO Advisors in March 1996.
Mr. Weil was a Vice President in the Global Asset Management Group of Bankers
Trust Company from December 1994 through February 1996 and was associated with
the law firm of Simpson, Thatcher & Bartlett from September 1989 through
November 1994.
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<PAGE> 54
EXECUTIVE COMPENSATION
Prior to the date of the Opgroup Transaction, the Partnership did not have
any employees. During such time, the officers of Oppenheimer Capital performed
the management functions on behalf of the Partnership. The current executive
officers of the Partnership are also executive officers of PIMCO Advisors. The
compensation of the executive officers will be allocated between PIMCO Advisors
and the Partnership based on the amount of services provided to each entity. The
following table sets forth the cash compensation paid or allocated with respect
to the three years ended December 31, 1996 for services rendered to PIMCO
Advisors in all capacities by the Chief Executive Officer of PIMCO Advisors (who
is also the Chief Executive Officer of the Partnership) and each of the four
most highly compensated executive officers of PIMCO Advisors or the Partnership
(the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION OTHER RESTRICTED SECURITIES ALL
------------------------------ ANNUAL UNIT UNDERLYING OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SAR COMPENSATION
UNDERLYING POSITION(1) YEAR ($) ($) ($) ($) (#) ($)
- ------------------------- ---- -------- -------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William D. Cvengros.......... 1996 $500,000 $950,000 $ 9,500(2) -- -- $ 3,444(3)
Chief Executive Officer 1995 500,000 800,000 4,620 -- -- --
1994 63,847(5) 62,500 -- $3,248,571(4) 400,000 1,915
Stephen J. Treadway.......... 1996 $196,730(5) $250,000 -- $ 562,500(4) 100,000 $303,444(3)(6)
Executive Vice President 1995 -- -- -- -- -- --
1994 -- -- -- -- -- --
Robert M. Fitzgerald......... 1996 $209,500(7) $220,000 -- -- 10,000 $ 30,000(6)
Senior Vice President and 1995 175,000(5) 175,000 -- -- 30,000 --
Chief Financial Officer 1994 -- -- -- -- -- --
Richard M. Weil.............. 1996 $166,667(5) $ 91,167 -- -- 32,500 $ 75,000(6)
Senior Vice President 1995 -- -- -- -- -- --
1994 -- -- -- -- -- --
James G. Ward................ 1996 $155,000 $105,000 -- -- 10,000 $ 19,000(3)(6)
Senior Vice President 1995 150,000 90,000 -- -- -- --
and Director of 1994 125,000 25,000 $ 18,700 -- 10,000 --
Human Resources
</TABLE>
- ---------------
(1) During fiscal year 1997, George L. Long served as the Chairman and Chief
Executive and Investment Officer of Oppenheimer Capital. In such capacities,
Mr. Long performed management functions on behalf of the Partnership. Mr.
Long's salary for his services in such capacities in the fiscal years ended
April 30, 1997, 1996 and 1995 was $350,000, $350,000 and $350,000,
respectively, and his bonus compensation during such periods was $3,573,000,
$3,825,000 and $2,000,000, respectively.
(2) Represents a bonus paid in lieu of the employer contribution to the PIMCO
Advisors 401(k) Savings and Investment Plan.
(3) Represents the premiums on term life insurance and long-term disability.
(4) Mr. Cvengros was awarded 100,000 PIMCO Advisors Class A LP Units and 100,000
PIMCO Advisors Class B LP Units. These units vest over a five year period,
pay distributions quarterly and had an aggregate value of $3,248,571 at
December 31, 1996. Mr. Treadway was awarded 25,000 PIMCO Advisors Class A LP
Units. These units vest over a five year period, pay distributions quarterly
and had an aggregate value of $562,500 at December 31, 1996.
(5) Mr. Cvengros joined PIMCO Advisors in November 1994, and his salary reflects
a partial year of service. Mr. Treadway joined PIMCO Advisors in May 1996,
and his salary reflects a partial year of service. Mr. Fitzgerald joined
PIMCO Advisors in February 1995, and his 1995 salary reflects a partial year
of service. Mr. Weil joined PIMCO Advisors in March 1996, and his salary
reflects a partial year of service.
(6) Represents amounts deferred under PIMCO Advisors L.P. Executive Deferred
Compensation Plan. An additional amount, which cannot currently be
determined, may be contributed by PIMCO Advisors at such time as the amounts
deferred are invested by the trustee of the plan in PIMCO Advisors Class A
LP Units to cause the effective purchase price not to exceed 85% of the
current market price for Partnership Units (until December 31, 1997, PIMCO
Advisors Class A LP Units) on the investment date.
(7) The salary and bonus amounts for Mr. Fitzgerald include amounts deferred in
the PIMCO Advisors 401(k) Savings and Investment Plan of $9,500 for 1996.
Compensation to key employees who are not executive officers may exceed the
compensation paid to executive officers in any given year.
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<PAGE> 55
The following table provides information on option exercises in 1996 by the
Named Executive Officers, and the value of unexercised options held by each
Named Executive Officer at December 31, 1996:
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS/SARS AT
ACQUIRED VALUE OPTIONS/SARS AT-FY-END(#) FY-END($)
ON EXERCISE REALIZED EXERCISABLE (E)/ EXERCISABLE(E)/
NAME (#) ($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ------------------------------------ ----------- -------- ----------------------------- ----------------
<S> <C> <C> <C> <C>
William D. Cvengros................. -- -- 400,000(U) $2,754,021(U)
Stephen J. Treadway................. -- -- 100,000(U) 244,505(U)
Robert M. Fitzgerald................ -- -- 40,000(U) 192,840(U)
Richard M. Weil..................... -- -- 32,500(U) 55,880(U)
James G. Ward....................... -- -- 20,000(U) 98,820(U)
</TABLE>
COMPENSATION OF BOARD MEMBERS
PIMCO Advisors pays members of the Management Board who are not employees
of the Partnership, PIMCO Advisors, an Investment Management Firm or Pacific
Life a $20,000 annual retainer plus $750 per in-person meeting ($250 per
conference call meeting) of the Management Board attended and for each meeting
of a committee of the Management Board. Members who are employees of the
Partnership, PIMCO Advisors or any Investment Management Firm or Pacific Life
are not entitled to any additional compensation for their services as Board
members. Pursuant to the terms of the Partnership's 1996 Unit Incentive Plan,
the non-employee members of the Management Board may elect to receive restricted
Partnership Units in lieu of such retainer, with such restricted units valued at
91% of fair market value on the date of issuance.
COMPENSATION OF GENERAL PARTNER
The general partners of the Partnership and PIMCO Advisors receive no
compensation from the Partnership or PIMCO Advisors for services rendered to the
Partnership or PIMCO Advisors as a general partner. Rather, the general
partners' interests in profits and losses of the Partnership and PIMCO Advisors
are based on their interest in the Partnership and PIMCO Advisors, respectively.
Upon liquidation, the liquidating distributions to the general partners will be
based on the number of Partnership Units and PIMCO Advisors GP Units each holds.
Each general partner is reimbursed for all direct expenses paid by it on behalf
of PIMCO Advisors, for all expenses incurred by it in connection with the
business and affairs of PIMCO Advisors and, in the case of a Public General
Partner (as defined in the PIMCO Advisors Partnership Agreement), for all
expenses (other than taxes) of the Public General Partner. The Partnership is a
Public General Partner and, therefore, all of its expenses (other than taxes)
are paid by PIMCO Advisors.
COMPENSATION PURSUANT TO CONTRACT
William D. Cvengros, the Chief Executive Officer of the Partnership and
PIMCO Advisors and a member of the PIMCO Advisors Management Board and the
Executive Committee, is party to an employment agreement with PIMCO Advisors,
the term of which was extended through December 31, 1998 by the management board
of PIMCO Advisors in January 1997. Under the agreement, Mr. Cvengros receives an
annual base salary of $500,000 and a guaranteed annual bonus of $500,000. Mr.
Cvengros is also eligible to receive a discretionary bonus in the target range
of $200,000 to $500,000 (which amount may be increased or decreased upon the
recommendation of the Executive Committee and the approval of the PIMCO Advisors
Management Board). PIMCO Advisors granted Mr. Cvengros options to purchase up to
400,000 PIMCO Advisors Class B LP Units under the PIMCO Advisors 1994 Unit
Option Plan. In 1994, Mr. Cvengros was also granted 100,000 restricted PIMCO
Advisors Class A LP Units and 100,000 restricted PIMCO Advisors Class B LP Units
which are forfeitable to PGP upon certain events of termination. If his contract
is terminated without cause between December 31, 1996 and December 31, 1998, he
is entitled to accrued and
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<PAGE> 56
unpaid salary and bonus payments totaling $500,000 and immediate vesting of all
of his options and restricted units.
Kenneth M. Poovey, Executive Vice President and General Counsel of the
Partnership and PIMCO Advisors, and PIMCO Advisors have agreed to a compensation
arrangement, pursuant to which Mr. Poovey receives an annual base salary of
$300,000. Mr. Poovey is also eligible to receive a bonus in the target range of
$300,000 to $900,000. PIMCO Advisors granted Mr. Poovey 25,000 restricted PIMCO
Advisors Class B LP Units vesting over a three year period, and Mr. Poovey is
eligible, based on performance, for a second grant of up to 25,000 restricted
PIMCO Advisors Class B LP Units in the first quarter of 1998, which will also
vest over a three year period. PIMCO Advisors granted Mr. Poovey options to
purchase up to 50,000 PIMCO Advisors Class B LP Units, which will vest over a
period of five years. Upon his hire in March of 1997, PIMCO Advisors also paid
Mr. Poovey a $100,000 relocation loan which will be forgiven over five years
subject to certain conditions.
In July 1996, PIMCO Advisors made a $250,000 relocation loan to Robert M.
Fitzgerald, Senior Vice President and Chief Financial Officer of PIMCO Advisors
and the Partnership. The loan bears interest at 8% per annum, and $200,000 of
the principal and interest thereon will be forgiven over three years subject to
continued employment. At December 31, 1996, the loan had an outstanding
principal balance of $250,000. In January 1995, PIMCO Advisors made a $100,000
relocation loan to James G. Ward, Senior Vice President, Director Human
Resources of the Partnership and PIMCO Advisors. The loan bears interest at 8%
per annum, and the principal and interest thereon will be forgiven over three
years subject to continued employment. At December 31, 1996, the loan had an
outstanding principal balance of $33,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The members of the Unit Incentive Committee of the Management Board of
PIMCO Advisors are currently Messrs. Auch, Kurtz, and McIntosh, each of whom
were appointed to the Unit Incentive Committee of PIMCO Advisors in November
1997. None of Messrs. Auch, Kurtz or McIntosh have previously served as an
officer or otherwise been engaged as an employee of PIMCO Advisors.
OPPENHEIMER CAPITAL, L.P. 1997 UNIT INCENTIVE PLAN
Prior to the Restructuring, the Partnership and PIMCO Advisors will adopt
the 1997 Unit Incentive Plan (the "1997 Plan"). Pursuant to the Operating
Agreement between the Partnership and PIMCO Advisors, PIMCO Advisors has agreed
to issue to the Partnership a number of PIMCO Advisors units equal to the number
of Partnership Units issued under the 1997 Plan from time to time. See
"Relationship Between the Partnership and PIMCO Advisors."
The 1997 Plan is designed to provide performance incentives for key
employees and consultants of the Partnership, PIMCO Advisors and its
subsidiaries through the grant or issuance of options, restricted units, unit
payments, deferred units, and unit appreciation rights covering Partnership
Units and, in the case of persons qualifying as Nonpublic Unitholders, PIMCO
Advisors units, thereby stimulating their personal and active interest in the
Partnership's and PIMCO Advisors development and financial success, and inducing
them to remain in the Partnership's and PIMCO Advisors employ. The 1997 Plan is
administered by the Unit Incentive Committee of the PIMCO Advisors Management
Board. The aggregate number of Partnership Units that may be issued upon the
exercise of options or rights or may be subject to awards under the 1997 Plan
may not exceed 20,000,000.
Concurrent with the Restructuring, all of the outstanding awards under
PIMCO Advisors unit-based employee benefit plans (the 1996 Unit Incentive Plan,
the Restricted Unit Plan and the 1993 Unit Option Plan) and outstanding awards
under the Amended and Restated Oppenheimer Capital Restricted Option Plan and
the Amended and Restated Oppenheimer Capital Restricted Unit Plan will be
assumed by the 1997 Plan.
Participation by officers and persons deemed to be "directors" of the
Partnership in the 1997 Plan (except to the extent of awards previously granted
under the PIMCO Advisors plans and assumed under the 1997 Plan) is subject to
approval by the holders of the Partnership Units of an amendment to the 1997
Plan
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<PAGE> 57
providing that officers and persons deemed to be "directors" of the Partnership
are eligible to receive awards under the plan.
EXECUTIVE DEFERRED COMPENSATION PLAN
PIMCO Advisors maintains an Executive Deferred Compensation Plan (the
"Deferred Compensation Plan"). The Deferred Compensation Plan is an unfunded
nonqualified deferred compensation plan pursuant to which (i) a portion of
compensation otherwise payable to certain eligible employees of PIMCO Advisors
and its subsidiaries, including the Investment Management Firms, is subject to
mandatory deferral and (ii) eligible employees of PIMCO Advisors and its
subsidiaries, including the Investment Management Firms, may elect to defer
additional amounts of compensation. The primary purpose of the Deferred
Compensation Plan is to provide deferred compensation to a select group of
management and highly compensated employees. The Deferred Compensation Plan is
not a qualified plan under Section 401(a) of the Code.
An employee's eligibility to participate in the Deferred Compensation Plan
is determined based on that employee's total compensation and the employee's
direct or indirect equity stake in PIMCO Advisors. Employees who have an equity
stake in relation to their compensation in excess of a predetermined ratio based
on their compensation level are not eligible to participate. Subject to this
limitation, each employee of a participating entity whose total compensation is
more than $250,000 is generally eligible to participate in the Deferred
Compensation Plan.
The Deferred Compensation Plan is administered by the Unit Incentive
Committee. PIMCO Advisors and the participating entities will make certain
contributions to a grantor, or "rabbi," trust in connection with the Deferred
Compensation Plan. The trustee under the grantor trust is responsible for
establishing and maintaining for each Deferred Compensation Plan participant a
deferral account that is (i) credited the amount of compensation deferred by
each participant and any additional amounts contributed by a participating
entity and (ii) debited the amount of distributions paid to the participant.
In addition to deferred cash payments, the Deferred Compensation Plan
provides for the issuance of restricted PIMCO Advisors Class A LP Units and
restricted PIMCO Advisors Class B LP Units (collectively, "Restricted Units") to
be distributed on a deferred basis. Pursuant to the Deferred Compensation Plan
provisions permitting the issuance of deferred Restricted Units, PIMCO Advisors
may from time to time issue Restricted Units to the trustee, who shall credit
such Restricted Units to an account maintained for each participant on whose
behalf Restricted Units are issued.
Prior to the Effective Date, the Deferred Compensation Plan will be amended
to cause the plan to be a joint plan of PIMCO Advisors and the Partnership, and
to make employees of the Partnership eligible to participate in the plan. As
amended, the plan will provide that, at such time as a participant becomes
eligible to receive a distribution of any amounts credited to the participant's
account under the Deferred Compensation Plan, such participant (i) if he or she
is not qualified as a Nonpublic Unitholder, will receive from the Partnership a
number of Partnership Units equal to the number of units credited to the
participant's account, in which case PIMCO Advisors will issue to the
Partnership an equal number of PIMCO Advisors GP Units and cancel the units
credited to the participant's account, or (ii) if he or she is qualified to be a
Nonpublic Unitholder, PIMCO Advisors will issue PIMCO Advisors units directly to
the participant, in which case such units may be eligible, pursuant to the
Operating Agreement between the Partnership and PIMCO Advisors, to be exchanged
for Partnership Units, subject to the limitations described in "Relationship
Between the Partnership and PIMCO Advisors -- Exchange Rights."
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<PAGE> 58
RELATIONSHIP BETWEEN THE PARTNERSHIP AND PIMCO ADVISORS
OPERATING AGREEMENT
The Partnership and PIMCO Advisors are party to the Operating Agreement
which, together with the PIMCO Advisors Partnership Agreement, governs the
ongoing relationship of the Partnership and PIMCO Advisors.
Pursuant to the Operating Agreement, the Partnership agrees to take such
actions as shall be required from time to time so as to ensure that the number
of outstanding Partnership Units is at all times equal to the number of PIMCO
Advisors Units held by the Partnership and its subsidiaries which are allocable
to the limited partner interests in the Partnership. The Operating Agreement
provides that upon any issuance of Partnership Units, the Partnership shall
immediately contribute the consideration, if any, received by the Partnership
for such Partnership Units to PIMCO Advisors in exchange for PIMCO Advisors GP
Units equal in number to the number of such Partnership Units.
The Operating Agreement provides that the Partnership shall, at the request
of PIMCO Advisors from time to time, adopt and maintain one or more unit
incentive plans covering Partnership Units or PIMCO Advisors Units for the
benefit of individuals providing services to the Partnership, PIMCO Advisors and
their respective subsidiaries. Awards under the unit incentive plans to
individuals providing services to PIMCO Advisors and its subsidiaries are to be
determined by the Unit Incentive Committee.
In addition, the Operating Agreement provides that the Partnership assumes
and agrees to perform the obligations of PIMCO Advisors under: (i) the PIMCO
Advisors unit-based incentive plans (the 1993 Unit Option Plan and 1996 Unit
Incentive Plan (but with regard to options outstanding immediately after giving
effect to the Restructuring, only to the extent such options are exercisable to
purchase Partnership Units), the awards of which will be assumed by the 1997
Plan); (ii) the Exchange Right issued by PIMCO Advisors in the Opgroup
Transaction; and (iii) the 1994 Registration Rights Agreement and the 1997
Registration Rights Agreement (each as described under "Certain Relationships
and Transactions -- Registration Rights Agreements").
The Operating Agreement provides that the Partnership may not, without the
written consent of PIMCO Advisors, (a) carry on any business except in
connection with or incidental to (i) the performance of its duties as a general
partner under the PIMCO Advisors Partnership Agreement, (ii) the direct or
indirect acquisition, ownership or disposition of PIMCO Advisors units, and
(iii) its governance and existence; (b) merge or consolidate with or into any
other Person, or sell or otherwise dispose of all or substantially all of its
assets, or effect a recapitalization with respect to the Partnership Units, or
issue or agree to issue any equity securities other than Partnership Units; or
(c) create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to any indebtedness
(other than indebtedness of PIMCO Advisors as to which the Partnership is liable
in its capacity as a general partner of PIMCO Advisors).
The Operating Agreement also provides rights for certain holders of PIMCO
Advisors units and rights thereto to exchange their PIMCO Advisors units for
Partnership Units, subject to certain limitations. These rights are described
below under "Exchange Rights."
EXCHANGE RIGHTS
Pursuant to the Operating Agreement, twice each year, as soon as
practicable after financial statements for the preceding year, or for the first
six months of the fiscal year, as the case may be, are available, the
Partnership shall file a registration statement under the Securities Act (or
prepare a prospectus under a continuing registration statement) covering
Partnership Units to be issued in exchange for Private Units (as defined below)
(a "Registration Statement"). The Registration Statement shall cover resales by
affiliates of the Partnership. Upon the effectiveness of the Registration
Statement, the Partnership shall make an offer to the holders of Private Units
(each, a "Private Unitholder") to acquire some or all of the Private Units held
by them in exchange for an equal number of Partnership Units (an "Exchange").
The Operating Agreement
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<PAGE> 59
defines a "Private Unit" as a PIMCO Advisors unit (i) designated as a Private
Unit in a written certificate executed by PIMCO Advisors and not subsequently
revoked, (ii) issued pursuant to a unit incentive plan covering PIMCO Advisors
units, or (iii) held by the obligees under the $130 million of indebtedness owed
by PGP described in "Certain Relationships and Transactions -- PGP
Indebtedness." Those Private Unitholders who hold Private Units that are subject
to registration rights under the 1994 Registration Rights Agreements will be
entitled to exercise such rights with respect to any Partnership Units received
pursuant to an exchange of such Private Units for Partnership Units that is
permitted under the safe harbor rules and other unit transfer provisions under
the PIMCO Advisors Partnership Agreement.
The exchange rights described above are subject to limitations imposed by
the general partners pursuant to their authority under the PIMCO Advisors
Partnership Agreement. Under these limitations, which are intended to allow
exchanges pursuant to the exchange rights to qualify under an IRS regulatory
safe harbor for avoiding "publicly traded partnership" tax status for PIMCO
Advisors, certain limitations are imposed on the number of Private Units that
may be exchanged in any one year, with exceptions for certain types of "block
transfers" and other exchanges. "Block transfers" and certain other exchanges
may be permitted other than in the semi-annual exchanges.
EXPENSE REIMBURSEMENT
In accordance with the PIMCO Advisors Partnership Agreement, PIMCO Advisors
pays all of the expenses (other than taxes) of the Partnership. See "Management
of the Partnership -- Compensation of General Partner."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
PGP INDEBTEDNESS
The operations of PIMCO Advisors and the Investment Management Firms may be
affected by the terms of the $130 million of indebtedness owed by PGP. Although
this indebtedness does not constitute an obligation of PIMCO Advisors or any of
the Investment Management Firms, and the documents governing the indebtedness
are not binding on PIMCO Advisors or any of the Investment Management Firms, the
businesses of PIMCO Advisors and the Investment Management Firms have been and
are anticipated to continue to be conducted in compliance with the operating
restrictions in the documents governing the indebtedness in order to avoid a
default thereunder even though contrary courses of action may be in the best
interests of PIMCO Advisors or the Investment Management Firms. The operating
restrictions, which remain in effect until the debt matures in 2001 if the debt
is not prepaid, include, among other things, cash flow and interest coverage
requirements and restrictions on incurrence of indebtedness and liens,
investments, asset sales, mergers and consolidations, affiliate transactions,
issuance of additional PIMCO Advisors units and amendment of the PIMCO Advisors
Partnership Agreement. In particular, financial covenants relating to this
indebtedness could have the effect of inhibiting PIMCO Advisors' use of cash for
any purpose other than for distributions. The indebtedness is non-recourse to
PGP and is secured by, among other things, a pledge of certain PIMCO Advisors
units owned by PGP. In the event of a default under the indebtedness, the
lenders could foreclose upon the pledged PIMCO Advisors units which would reduce
the economic interests in PIMCO Advisors of PGP and its beneficial owners.
Management of PIMCO Advisors is currently in discussions with PGP and its
lenders concerning a modification to such indebtedness wherein PIMCO Advisors
would guarantee such indebtedness in exchange for a fee from PGP and the release
of certain of the restrictions relating to PIMCO Advisors in such indebtedness.
Also, PIMCO Advisors has obtained a commitment from a group of lenders for a
$140 million credit facility and has considered borrowing under the facility and
lending to PGP an amount sufficient for PGP to repay its lenders, thereby
eliminating all restrictions relating to PIMCO Advisors under the PGP
indebtedness. There can be no assurances that any agreement with respect to
these matters will be reached, or as to the terms of any such possible
arrangements if an agreement were reached.
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<PAGE> 60
WITHDRAWAL AND REMOVAL OF A GENERAL PARTNER OF THE PARTNERSHIP OR PIMCO ADVISORS
The Partnership Agreement provides that, except under certain limited
exceptions, the general partner of the Partnership may withdraw as general
partner of the Partnership only if (i) such withdrawal is approved by holders of
a majority of the Partnership Units and the general partner determines that the
Partnership's advisory agreements shall continue to be in effect (a "Partnership
Assignment Determination"), and (ii) counsel renders an opinion that such action
may be taken without approval of all of the partners and that the limited
partners will not lose their limited liability pursuant to Delaware law or the
Partnership Agreement (a "Partnership Limited Liability Determination"), and
provides certain other opinions relating to the status of the Partnership as a
partnership for federal income tax purposes (a "Partnership Tax Determination").
The general partner may be removed by a vote of holders of Partnership Units
holding 80% or more of all outstanding Partnership Units if a successor general
partner is appointed, counsel makes a Partnership Limited Liability
Determination, a Partnership Tax Determination, the general partner makes a
Partnership Assignment Determination and such removal is approved by the
successor general partner. Also, interests in the general partner may be sold or
transferred without any prior approval or consent of the holders of the
Partnership Units.
The PIMCO Advisors Partnership Agreement provides that any general partner
may withdraw as a general partner of PIMCO Advisors only if (a) the general
partner transfers all of its PIMCO Advisors GP Units to an affiliate of such
general partner, and the affiliate is admitted as a general partner of PIMCO
Advisors in accordance with the PIMCO Advisors Partnership Agreement or (b) such
withdrawal is approved by holders of a majority of the units of limited partner
interest (other than those held by the general partners and their affiliates)
and if counsel renders an opinion that the limited partners do not lose their
limited liability pursuant to Delaware law or the PIMCO Advisors Partnership
Agreement (a "PIMCO Advisors Limited Liability Determination"), and provides
certain other opinions relating to the status of PIMCO Advisors as a partnership
for federal income tax purposes (a "PIMCO Advisors Tax Determination") and the
continuation of PIMCO Advisors' advisory agreements (a "PIMCO Advisors
Assignment Determination"). The general partners may be removed by a vote of
unitholders holding 80% or more of all outstanding units if PIMCO Advisors
receives a PIMCO Advisors Limited Liability Determination, a PIMCO Advisors Tax
Determination and a PIMCO Advisors Assignment Determination with respect to such
removal and (ii) if such general partner is the sole general partner, a person
qualified to be general partner, which has agreed in writing to carry on the
business of PIMCO Advisors, is approved by the partners of PIMCO Advisors as
successor general partner. However, by virtue of PGP's and the Partnership's
ownership of units, either of the general partners can veto any such removal.
Also, interests in a general partner may be sold or transferred without any
prior approval or consent of the holders of PIMCO Advisors LP Units.
In the event of withdrawal or removal of a general partner of PIMCO
Advisors, the departing general partner will become a limited partner and its
PIMCO Advisors GP Units will be converted into PIMCO Advisors LP Units. At the
time of such conversion, the departing general partner must pay to PIMCO
Advisors any negative balance in its capital account. If PIMCO Advisors is
indebted to the departing general at the time of its withdrawal or removal,
PIMCO Advisors will repay the general partner, within 60 days, the amount of
such indebtedness, subject to reduction for damages incurred if the general
partner withdraws in violation of the PIMCO Advisors Partnership Agreement. All
outstanding obligations incurred by the departing general partner as general
partner of PIMCO Advisors will be assumed by the successor to the general
partner, or if there is no successor, by the remaining general partners.
INDEMNIFICATION
The Partnership Agreement requires the Partnership to indemnify the general
partner, its affiliates and all of its officers, directors, partners, employees
and agents (collectively, the "Indemnitees") against any and all proceedings in
which the Indemnitees may be involved, or threatened to be involved, as a party
or otherwise by reason of their management of the affairs of the Partnership or
which relates to or arises out of the Partnership or related entities. The
Partnership Agreement provides that such Indemnitees are not entitled to
indemnification with respect to any claim, issue or matter in which they have
been adjudged liable for actual fraud, willful misconduct or gross negligence,
unless and only to the extent that the court in which such action was brought,
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or another court of competent jurisdiction, determines upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnification
for such liabilities and expenses as the court may deem proper.
The Partnership Agreement also provides that the general partner will not
be liable to the Partnership or the holders of Partnership Units for errors in
judgment or for breach of fiduciary duty (including breach of any duty of care
or any duty of loyalty) unless the general partner's action or failure to act
involved an act or omission that constitutes actual fraud, gross negligence or
willful or wanton misconduct.
The PIMCO Advisors Partnership Agreement provides that PIMCO Advisors will
indemnify (i) any general partner, (ii) any former general partner, (iii) any
person which is or was an affiliate of any general partner or any former general
partner, (iv) any person which is or was an Associate (as defined in the PIMCO
Advisors Partnership Agreement) of any general partner, former general partner,
affiliate of a general partner or former general partner, or PIMCO Advisors or
its subsidiaries and (v) any person which is or was serving at the request of
PIMCO Advisors or any of its subsidiaries, any general partner or any former
general partner as an Associate of another person.
The PIMCO Advisors Partnership Agreement also provides that neither a
general partner nor any indemnitee will be liable to PIMCO Advisors or the
unitholders for errors in judgment or for breach of fiduciary duty (including
breach of any duty of care or any duty of loyalty) unless it is proved by clear
and convincing evidence that the general partner's action or failure to act
involved an act or omission undertaken with deliberate intent to cause injury to
PIMCO Advisors or was undertaken with reckless disregard for the best interests
of PIMCO Advisors.
CONTRIBUTION AGREEMENT
As part of the Opgroup Transaction, Opfin, Opgroup, PIMCO Advisors and
Value Advisors LLC entered into a contribution agreement (the "Contribution
Agreement") pursuant to which Opfin contributed its investment advisory assets
and its 100% interest in Value Advisors LLC to PIMCO Advisors in exchange for an
aggregate initial consideration of 6,000,000 PIMCO Advisors Class C LP Units.
Under the terms of the Contribution Agreement, if PIMCO Advisors or its direct
or indirect subsidiaries (other than Opgroup or Opfin) incurs a loss relating to
or arising from Opfin's investment advisory businesses or which is otherwise
attributable to the Opgroup Merger Agreement, and, as a result of such loss,
Opgroup receives an indemnification payment in excess of any loss incurred by
Opgroup or Opfin attributable to the same loss event (the excess portion
thereof, an "Excess Indemnification Payment"), then (i) if the indemnification
payment is in the form of a reduction of the face amount of the Indemnity
Certificate, Opfin shall return to PIMCO Advisors a number of PIMCO Advisors
Class C LP Units equal to the quotient of (x) 6,000,000 multiplied by the
principal amount of the reduction constituting such Excess Indemnification
Payment divided by (y) $265 million, or (ii) if the Excess Indemnification
Payment is in cash, Opgroup shall distribute the cash to PIMCO Advisors.
In addition, PIMCO Advisors agreed that if Opgroup or Opfin incurs a loss
for which Opgroup does not receive an indemnification payment in cash, PIMCO
Advisors will loan to Opgroup an amount equal to the loss. PIMCO Advisors
further agreed to loan Opgroup an amount sufficient to pay the remaining
principal and interest payments on the Opfin Debt.
REGISTRATION RIGHTS AGREEMENTS
PIMCO Advisors is a party to (i) that certain Registration Rights Agreement
dated November 4, 1997 between PIMCO Advisors and former Opgroup stockholders
(the "1997 Registration Rights Agreement"), and (ii) that certain Registration
Rights Agreement dated as of November 15, 1994 between PIMCO Advisors and
certain of its unitholders (the "1994 Registration Rights Agreement").
The holders of registration rights under the 1997 Registration Rights
Agreement were granted (i) the right to cause PIMCO Advisors to initiate up to
two registrations of their registrable securities (subject to customary
limitations, a minimum sale requirement and priority rights of holders of
registration rights under
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the 1994 Registration Rights Agreement) and (ii) certain piggyback registration
rights in respect of registrations initiated by PIMCO Advisors or by other
holders of registration rights granted pursuant to a separate agreement, subject
to approval of the managing underwriter. In the case of a registration initiated
by PIMCO Advisors, participation in such registration by the holders of
registration rights under the 1997 Registration Rights Agreement and other
registration rights agreements will not be reduced to less than 40%.
The holders of registration rights under the 1994 Registration Rights
Agreement were granted (i) the right to cause PIMCO Advisors to initiate up to
five demand registrations on Form S-1 and an unlimited number of demand
registrations on Form S-3 (subject to customary limitations and a minimum sale
requirement) and (ii) piggy-back registration rights in respect of primary
offerings by PIMCO Advisors similar to those held by the holders under the 1997
Registration Rights Agreement. The holders under the 1994 Registration Rights
Agreement generally have priority over the holders under the 1997 Registration
Rights Agreement with respect to management of the registration process and
inclusion of shares in registrations initiated by holders of registration
rights.
Pursuant to the Operating Agreement, the Partnership has agreed to provide
registration rights with respect to Partnership Units comparable to those
provided for in the 1997 Registration Rights Agreement and the 1994 Registration
Rights Agreement.
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RECENT UNIT PRICES AND DISTRIBUTIONS
The Partnership Units are traded on the NYSE under the symbol "OCC" and the
PIMCO Advisors Class A LP Units are traded on the NYSE under the symbol "PA."
Following the Restructuring, the Partnership expects to change its name to PIMCO
Advisors Holdings L.P. and the Partnership Units are expected to be traded under
the symbol "PA." At the Effective Date, PIMCO Advisors Class A LP Units will
cease to be publicly traded.
The following table sets forth, for the periods indicated, the high and low
trading prices for the Partnership Units as reported on the NYSE and the total
cash distributions paid per Partnership Unit:
PARTNERSHIP UNITS
<TABLE>
<CAPTION>
TRADING
PRICES*
------------- TOTAL CASH
YEAR ENDED APRIL 30, HIGH LOW DISTRIBUTIONS
--------------------------------------------------------- --- --- -------------
<S> <C> <C> <C>
1996
First Quarter.......................................... $24-1/2 $21-1/8 $ 0.550
Second Quarter......................................... 28 24 0.625
Third Quarter.......................................... 29-1/2 27 1.175
Fourth Quarter......................................... 30-3/4 27-3/4 0.825
-------
Total............................................... $3.1750
=======
1997
First Quarter.......................................... $30 $27-1/8 $ 0.650
Second Quarter......................................... 34-1/2 28 0.750
Third Quarter.......................................... 37-3/8 33-1/4 0.950
Fourth Quarter......................................... 38-1/4 32-1/2 1.150
-------
Total............................................... $ 3.500
=======
1998
First Quarter.......................................... $39-7/8 $32-1/8 $ 0.950
Second Quarter......................................... 55-1/2 39-1/8 0.950
Third Quarter (through December 9, 1997)............... 57-3/4 45-3/4 1.510
-------
Total............................................... $ 3.410
=======
</TABLE>
- ---------------
* Unit prices and distributions have not been restated to reflect the
1.67-to-one unit split effective as of December 1, 1997.
On November 4, 1997, the last trading day prior to the execution of the
agreement and plan of merger relating to the Oppenheimer Capital Merger, the
closing price of the Partnership Units was $52 3/16. On December 9, 1997, the
closing price of the Partnership Units was $54 3/8 and there were approximately
1,260 holders of record of the Partnership Units.
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The following table sets forth, for the periods indicated, the high and low
trading prices for the PIMCO Advisors Class A LP Units as reported on the NYSE
and the total cash distributions paid per PIMCO Advisors Class A LP Unit, GP
Unit and Class B LP Unit.
PIMCO ADVISORS UNITS
<TABLE>
<CAPTION>
TRADING PRICES CLASS A LP
CLASS A UNITS AND GP UNITS CLASS B UNITS
--------------- TOTAL CASH TOTAL CASH
YEAR ENDED DECEMBER 31, HIGH LOW DISTRIBUTIONS DISTRIBUTIONS
- ------------------------------------------------ ----- ----- ------------ -------------
<S> <C> <C> <C> <C>
1995
First Quarter................................. $ 18 1/4 $ 16 7/8 $0.239 $ 0.077
Second Quarter................................ 20 5/8 17 3/8 0.470 0.138
Third Quarter................................. 21 1/4 19 0.470 0.199
Fourth Quarter................................ 21 1/4 19 5/8 0.470 0.259
------ ------
Total...................................... $1.649 $ 0.673
====== ======
1996
First Quarter................................. $ 23 5/8 $ 20 1/2 $0.470 $ 0.444
Second Quarter................................ 22 1/4 20 1/8 0.470 0.318
Third Quarter................................. 22 7/8 20 0.470 0.447
Fourth Quarter................................ 23 7/8 21 3/4 0.470 0.449
------ ------
Total...................................... $1.880 $ 1.658
====== ======
1997
First Quarter................................. $ 27 1/4 $ 20 5/8 $0.470 $ 0.464
Second Quarter................................ 26 20 3/4 0.470 0.435
Third Quarter................................. 3115/16 24 1/2 0.470 0.505
Fourth Quarter (through December 9, 1997)..... 3413/16 29 1/8 0.580 0.580
------ ------
Total...................................... $1.990 $ 1.984
====== ======
</TABLE>
On November 4, 1997, the last trading day prior to the execution of the
agreement and plan of merger relating to the Oppenheimer Capital Merger, the
closing price of the PIMCO Advisors Class A LP Units as reported on the NYSE was
$30 3/8 per unit. On December 9, 1997 the closing price of PIMCO Advisors Class
A LP Units as reported on the NYSE was $32 15/16 per unit. On December 9, 1997,
there were approximately 650 holders of record of the PIMCO Advisors Class A LP
Units, 22 holders of record of PIMCO Advisors Class B LP Units and two holders
of record of the PIMCO Advisors GP Units. The PIMCO Advisors Class B LP Units
(and all PIMCO Advisors GP Units) are not publicly traded.
Distribution Policy of the Partnership
Prior to the Restructuring, quarterly distributions have been paid within
30 business days after the last day of each July, October, January and April to
unitholders of record as of the last day of each fiscal year quarter in respect
to which such distributions were made. Distributions were based on the results
of operations of Oppenheimer Capital. Following the Restructuring, distributions
will be paid within 30 days following the end of each calendar quarter.
The Partnership makes quarterly distributions in an amount equal to 99.99%
of available cash flow to the holders of Partnership Units and 0.01% to the
general partner. The Partnership Agreement requires the general partner of the
Partnership to cause a quarterly distribution to unitholders in an amount equal
to the cash distribution from PIMCO Advisors less applicable taxes. The PIMCO
Advisors Partnership Agreement provides that the general partners shall cause
PIMCO Advisors to distribute to unitholders on a quarterly basis cash in an
amount equal to Operating Profit Available for Distribution less any amount the
general partners deem may be required for capital expenditures, future payments
of indebtedness, as reserves or otherwise in
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the business of PIMCO Advisors. The PIMCO Advisors Partnership Agreement defines
Operating Profit Available for Distribution as the net income of PIMCO Advisors
for a given period (determined in accordance with generally accepted accounting
principles); provided, that Operating Profit Available for Distribution for such
period as so determined shall be adjusted in accordance with the following
special rules and clarifications:
(a) Operating Profit Available for Distribution shall be determined
without regard to losses of any subsidiary of PIMCO Advisors which is not
treated as a partnership, branch or division for federal income tax
purposes.
(b) Operating Profit Available for Distribution shall be determined
without regard to accrued revenues from performance fees unless such fees
are not subject to forfeiture.
(c) Operating Profit Available for Distribution shall be determined
without regard to any income or deductions attributable to the grant,
amendment, vesting or exercise of any option or other right to purchase or
receive PIMCO Advisors units or other equity securities.
(d) Operating Profit Available for Distribution shall be determined
without regard to any amortization of goodwill and other intangible assets.
The Partnership has changed its fiscal year to a calendar year, and
distributions will be made on a calendar quarter basis commencing December 31,
1997. PIMCO Advisors will declare a distribution for the period ended December
31, 1997 to holders of record of the PIMCO Advisors units immediately prior to
the effectiveness of the Restructuring. The Partnership will also declare a
distribution for the same period to holders of record of the Partnership Units
immediately prior to the effectiveness of the Restructuring. Accordingly,
holders of the Partnership Units prior to the Restructuring will receive a
distribution based on three months performance of PIMCO Advisors and two months
performance of Oppenheimer Capital.
No assurances can be given as to the Partnership's future earnings levels.
Distributions made by the Partnership will depend on PIMCO Advisors
profitability and the profitability of the Investment Management Firms. Such
profitability will be affected in part by overall economic conditions and other
factors affecting capital markets generally, which are beyond the control of the
Partnership and PIMCO Advisors. In addition, the general partners of PIMCO
Advisors may, in determining the amount of distributions, deduct from Operating
Profit Available for Distribution any amount the general partners deem may be
required for capital expenditures, reserves or otherwise in the business of
PIMCO Advisors. To the extent PIMCO Advisors or the Partnership retains profits
in any year, unitholders may have taxable income from the Partnership that
exceeds their cash distributions.
62
<PAGE> 66
SELECTED FINANCIAL DATA OF OPPENHEIMER CAPITAL, L.P.
The following table sets forth selected financial data of the Partnership
(retroactively restated to reflect a 1.67 to 1 unit split effective December 1,
1997) and Oppenheimer Capital for the three months ended July 31, 1997 and 1996,
and each of the five years ended April 30, 1997. This information should be read
in conjunction with the Financial Statements of Oppenheimer Capital, L.P. and
the Consolidated Financial Statements of Oppenheimer Capital and the related
notes thereto included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Oppenheimer
Capital, L.P."
<TABLE>
<CAPTION>
OPPENHEIMER CAPITAL, L.P.
-----------------------------------------------------------------------------------
FOR THE THREE
MONTHS
ENDED JULY 31, FOR THE YEARS ENDED APRIL 30,
------------------- -----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- ------- -------- -------- ------- ------- -------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATING DATA:
Revenues.................................... $19,585(3) $12,280 $ 56,046(1) $ 61,316(1) $34,282 $35,091 $30,022
Expenses.................................... 685 685 2,720 2,720 3,461 4,038 3,704
------- ------- ------- ------- ------- ------- -------
Net income.................................. $18,900(3) $11,595 $ 53,326(1) $ 58,596(1) $30,821 $31,053 $26,318
======= ======= ======= ======= ======= ======= =======
Net income per unit......................... $ 0.72 $ 0.45 $ 2.06 $ 2.28 $ 1.21 $ 1.22 $ 1.04
Distributions declared per unit............. $ 0.57 $ 0.39 $ 2.10 $ 1.90 $ 1.30 $ 1.28 $ 1.16
Weighted average number of units
outstanding............................... 25,763 25,656 25,663 25,457 25,277 25,122 25,065
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
JULY 31, -----------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA AT:
Total assets................................ $118,313 $116,149 $110,099 $96,633 $98,116 $98,365
Total liabilities........................... 14,806 17,858 12,713 10,321 10,319 9,683
-------- -------- -------- ------- ------- -------
Partners' capital........................... $103,507 $ 98,291 $ 97,386 $86,312 $87,797 $88,682
======== ======== ======== ======= ======= =======
</TABLE>
- ---------------
(1) Includes revenues and a gain on Quest sale of $1.8 million, or $.07 per unit
in fiscal 1997 and $17.7 million, or $.69 per unit in fiscal 1996.
(2) Includes a special distribution related to the Quest sale of $.06 per unit
in fiscal 1997 and $.33 in fiscal 1996.
(3) Includes revenues and a gain on Quest sale of $2.8 million, or $.11 per
unit.
<TABLE>
<CAPTION>
OPPENHEIMER CAPITAL
-------------------------------------------------------------------------------
FOR THE THREE
MONTHS
ENDED JULY 31, FOR THE YEARS ENDED APRIL 30,
------------------- --------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- ------- -------- -------- -------- -------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATING DATA:
Revenues........................................ $55,043 $41,075 $181,974 $158,215 $129,912 $112,290 $94,733
Expenses........................................ 30,302 23,441 103,064 95,551 83,066 64,683 54,707
------- ------- -------- -------- -------- -------- -------
Operating Income................................ 24,741 17,634 78,910 62,664 46,846 47,607 40,026
Gain on Quest sale(1)........................... 4,374 -- 2,806 27,725 -- -- --
------- ------- -------- -------- -------- -------- -------
Income before income taxes and minority
interest...................................... $29,115 $17,634 $ 81,716 $ 90,389 $ 46,846 $ 47,607 $40,026
======= ======= ======== ======== ======== ======== =======
Assets under management at period end (in
billions)..................................... $ 60.8 $ 40.4 $ 51.2 $ 40.6 $ 31.8 $ 29.4 $ 26.4
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
JULY 31, --------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA AT:
Total assets.................................... $103,055 $ 93,019 $ 76,338 $ 56,129 $ 43,034 $37,677
Total liabilities............................... 54,356 53,044 41,462 41,582 30,557 27,830
Minority interest............................... 396 277 174 87 25 18
-------- -------- -------- -------- -------- -------
Partners' capital............................... $ 48,303 $ 39,698 $ 34,702 $ 14,460 $ 12,452 $ 9,829
======== ======== ======== ======== ======== =======
</TABLE>
- ---------------
(1) Reflects the gain realized by Oppenheimer Capital on the sale of the
investment advisory and other contracts and business relationship for its
twelve Quest for Value mutual funds to Oppenheimer Funds, Inc., on November
22, 1995.
63
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE PARTNERSHIP
The information set forth below is based on the historical financial
condition and results of operations of the Partnership and Oppenheimer Capital,
and does not reflect the effects of the Oppenheimer Capital Merger or the
Restructuring. All information has been retroactively restated, where
applicable, to reflect a 1.67 to 1 unit split effective December 1, 1997.
THE PARTNERSHIP
GENERAL
The primary source of income for the Partnership is its proportionate share
of the net income of Oppenheimer Capital and interest income on a $32,193,000
par value 10% note due from Oppenheimer Equities, Inc. in the year 2012 (the
"Equities note").
REVENUES AND EXPENSES
The Partnership recorded equity in earnings of Oppenheimer Capital for the
three months ended July 31, 1997 and July 31, 1996 of $18.8 million and $11.5
million, respectively. Equity in earnings of Oppenheimer Capital for the three
months ended July 31, 1997 included a gain recognized by Oppenheimer Capital on
the sale of the investment advisory and other contracts and business
relationships of the Quest for Value Dual Purpose Fund, Inc. to Oppenheimer
Funds, Inc. ("OFI") (the "Dual Purpose sale") of $2.8 million. Excluding the
Dual Purpose sale, the increase in equity in earnings of Oppenheimer Capital is
primarily due to the higher operating income of Oppenheimer Capital.
Other expenses consist of New York City unincorporated business tax
("UBT"). For the three months ended July 31, 1997 and July 31, 1996, New York
City UBT totaled $33,000 and $33,000, respectively.
The Partnership recorded equity in earnings of Oppenheimer Capital for the
years ended April 30, 1997, 1996 and 1995 of $52.8 million, $58.1 million, and
$31.1 million, respectively. Equity in earnings of Oppenheimer Capital for the
1997 and 1996 fiscal years included gains recognized by Oppenheimer Capital on
the sale of the Quest for Value Funds investment advisory and other contracts
and business relationships (the "Quest sale") to OFI of $1.8 million and $17.7
million, respectively. Equity in earnings of Oppenheimer Capital, excluding the
Quest sale, increased 26.4% to $51.0 million for the year ended April 30, 1997
from $40.4 million for the year ended April 30, 1996, as a result of higher
operating income at Oppenheimer Capital. Equity in earnings of Oppenheimer
Capital, excluding the Quest sale, increased 30.0% for the year ended April 30,
1996 from $31.1 million for the year ended April 30, 1995, primarily due to
higher operating income at Oppenheimer Capital. Interest income on the Equities
note for each of the years ended April 30, 1997, 1996 and 1995 totaled $3.2
million.
Amortization of goodwill for each of the years ended April 30, 1997, 1996
and 1995 amounted to $2.6 million. Other expenses consist of New York City UBT
computed at a rate of 4% of taxable income. For the years ended April 30, 1997,
1996 and 1995, New York City UBT amounted to $132,000, $132,000 and $873,000,
respectively. The decline in New York City UBT in fiscal 1996 reflects a change
in the tax law effective on January 1, 1995. As of that date, New York City UBT
is imposed on the total income of Oppenheimer Capital, and the Partnership is
allowed to claim a credit for its pro rata share of any New York City UBT paid
by Oppenheimer Capital. Previously, New York City UBT was assessed directly at
the Partnership level.
Net income for the three months ended July 31, 1997 and July 31, 1996
amounted to $18.9 million and $11.6 million, respectively, or $.72 per unit and
$.45 per unit, respectively. Excluding the Dual Purpose sale, net income for the
three months ended July 31, 1997 amounted to $16.1 million, or $.61 per unit.
Net income amounted to $53.3 million or $2.06 per unit based on an average
of 25.7 million units outstanding for the year ended April 30, 1997; $58.6
million or $2.28 per unit based on an average of 25.5 million units outstanding
for the year ended April 30, 1996; and $30.8 million or $1.21 per unit based on
an average of 25.3 million units outstanding for the year ended April 30, 1995.
Included in the net income for
64
<PAGE> 68
the years ended April 30, 1997 and 1996 are gains on the Quest sale, which
amounted to $1.8 million, or $.07 per unit and $17.7 million, or $.69 per unit,
respectively.
TAXES
The Partnership is not subject to federal, state, or local income taxes,
which are the obligations of the individual partners. However, beginning in
calendar year 1998, the Partnership will elect to be subject to a 3.5% federal
tax on its share of Oppenheimer Capital's gross income from the active conduct
of a trade or business in order to retain its partnership status. The imposition
of these taxes will reduce both net income and cash available for distribution
to partners. Similar taxes may be imposed by states in which the Partnership is
subject to such taxes.
LIQUIDITY AND CAPITAL RESOURCES
Until the Oppenheimer Capital Merger, the only business activity carried on
by the Partnership was its investment in Oppenheimer Capital. The Partnership
received quarterly cash distributions from Oppenheimer Capital and receives
interest income from Oppenheimer Equities, Inc. The Partnership distributed its
available cash flow to its partners, which equaled cash distributions from
Oppenheimer Capital plus interest income from the Equities note less New York
City UBT. Consequently, the Partnership did not require any additional liquidity
or capital resources.
Prior to the consummation of the Opgroup Transaction, the Partnership made
quarterly distributions in an amount equal to 99% of available cash flow to the
holders of Partnership Units and 1% to the general partner, Opfin. For the three
months ended July 31, 1997 and July 31, 1996, the Partnership declared
distributions to holders of Partnership Units of $.57 per unit and $.39 per
unit, respectively. Subsequent to the consummation of the Opgroup Transaction,
the general partner interest was reduced to 0.01% and the limited partner
interests were increased to 99.99%. Distributions subsequent to the reduction in
the general partner interest will be made accordingly.
For the years ended April 30, 1997, 1996 and 1995, the Partnership declared
total distributions to holders of Partnership Units of $2.10, $1.90 and $1.30
per unit, respectively. The total distributions for the years ended April 30,
1997 and 1996 included special distributions of $.06 and $.33, respectively,
related to the Quest sale.
OPPENHEIMER CAPITAL
GENERAL
Oppenheimer Capital's results of operations include those of its basic
institutional investment management business and those of its subsidiary
entities; Opcap Advisors ("Advisors"), OCC Distributors ("Distributors"),
Oppenheimer Capital Limited, Oppenheimer Capital Trust Company ("Opcap Trust"),
and 225 Liberty Street Advisers, L.P., formerly AMA Investment Advisers, L.P.
("AMA Advisers"). The results for the quarter ended July 31, 1996 also include
Saratoga Capital Management ("Saratoga"), which was sold on April 29, 1997.
For the periods presented, Oppenheimer Capital's operations have been
characterized by substantial increases in assets under management. This growth
has been from four principal sources. First, new clients have entered into
investment management agreements and existing clients have added funds to their
accounts under management. Second, rising securities price levels have increased
the market values of investment portfolios. Third, mutual funds and variable
annuities managed by Advisors have added to assets under management due to
increased sales and market appreciation. Fourth, wrap fee assets have increased
due to new accounts opened, expanded distribution to broker-dealers and market
appreciation. The growth in assets under management has been tempered by
Oppenheimer Capital's withdrawal from the low fee rate option management
business in fiscal 1996 in order to concentrate on businesses offering higher
returns. For the periods presented, the option management business had no
material effect on revenues or profitability. Revenues are generally derived
from charging a fee based on the net assets of clients' portfolios. All periods
65
<PAGE> 69
presented show increased operating revenue. Revenues for all periods presented
consist principally of investment management fees.
In fiscal 1996, Oppenheimer Capital began to implement a strategic decision
to withdraw from selling directly to the retail market, and to instead market
directly to institutions with strong retail distribution capabilities. In
November 1995, Oppenheimer Capital withdrew from the open-end mutual fund
distribution business (see the Quest sale) and began to eliminate retail
operations at AMA Advisers, completing this process in the first quarter of
fiscal 1997. Oppenheimer Capital also reduced the losses incurred by Saratoga
throughout fiscal 1997, and during the fourth quarter of fiscal 1997 sold its
interest in Saratoga. Additionally, Oppenheimer Capital terminated the
distribution of unit investment trusts during the fourth quarter of fiscal 1997.
QUARTER ENDED JULY 31, 1997
On July 18, 1997, Oppenheimer Capital completed the sale of the investment
advisory and other contracts and business relationships of its Quest for Value
Dual Purpose Fund to OFI, which is unrelated to Oppenheimer Capital. The fund
has been renamed the Oppenheimer Quest Capital Value Fund, and continues to be
managed by Advisors under a subadvisory agreement with OFI.
As shown below, the value of assets under management increased 50.3% to
$60.8 billion at July 31, 1997 from $40.4 billion at July 31, 1996. Oppenheimer
Capital continued to experience growth in its traditional business, the
management of separate accounts for large financial institutions and
high-net-worth individual investors, as well as its newer businesses, including
mutual funds and wrap fee accounts.
<TABLE>
<CAPTION>
AT JULY 31, AT JULY 31, PERCENT
1997 1996 INCREASE
----------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Separate Account Management.......................... $38,684 $27,456 40.9%
Wrap Fee............................................. 7,505 3,674 104.3%
Mutual Funds & Other Commingled Products............. 14,568 9,306 56.5%
------- ------- -----
$60,757 $40,436 50.3%
======= ======= =====
</TABLE>
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
The value of total assets under management increased 26.3% to $51.2 billion
at April 30, 1997 from $40.6 billion at April 30, 1996. The growth of assets
under management was tempered by the loss of $530 million in mutual fund assets
as a result of the closed-end Quest for Value Dual Purpose Fund redeeming all
income fund shares and converting to an open end fund. For the year ended April
30, 1997, assets under management for separately managed accounts increased
18.1% to $33.2 billion, mutual fund and other commingled products increased
33.4% to $12.0 billion, and wrap fee accounts increased 73.7% to $6.0 billion.
The value of total assets under management increased 27.6% to $40.6 billion
at April 30, 1996 from $31.8 billion at April 30, 1995. The growth of assets
under management was tempered by the loss of $1.5 billion in option management
accounts with a low effective fee rate and a reduction of $300 million in fixed
income mutual fund assets as a result of the Quest sale. For the year ended
April 30, 1996, assets under management for separately managed accounts
increased 25.8% to $28.1 billion from $22.3 billion, mutual fund and other
commingled products increased 43.9% to $9.0 billion from $6.3 billion, and wrap
fee accounts increased 92.3% to $3.5 billion from $1.8 billion.
GAIN ON QUEST SALE
On November 22, 1995, Oppenheimer Capital completed the Quest sale to OFI,
which is unrelated to Oppenheimer Capital, for an Initial Purchase Price Payment
of $41.7 million. In December 1996, a Deferred Purchase Price Payment of $3.8
million was received by Oppenheimer Capital as a result of the assets of the six
merged fixed income funds being at stated levels. The gains on the sale, before
New York City
66
<PAGE> 70
unincorporated business tax ("UBT") and minority interest, amounted to $2.8
million for the year ended April 30, 1997, and $27.7 million for the year ended
April 30, 1996.
Total assets of the twelve funds were $1.7 billion at November 21, 1995.
The six equity funds involved, representing $1.4 billion of those assets,
continue to be managed by Advisors under a subadvisory contract with OFI, which
allows the current portfolio management teams to remain in place. The six equity
funds were renamed the Oppenheimer Quest for Value funds (the "Quest funds").
The six fixed income funds, representing approximately $300 million of those
assets, were merged into comparable funds managed by OFI.
The overall impact of the Quest sale on Oppenheimer Capital's results has
been highly positive. Although the fee rate as a subadviser is less, assets in
the six equity funds have more than tripled to $4.9 billion at June 30, 1997 as
a result of the extensive distribution capabilities of OFI and market
appreciation. In addition, Oppenheimer Capital has eliminated distribution
expenses related to these funds. Reflecting the impact of these various factors,
the profitability of Oppenheimer Capital's mutual fund business has increased
significantly since the Quest sale.
Oppenheimer Capital implemented a portion of the mutual fund distribution
cost savings prior to the close of the Quest sale, and results for the quarter
ended April 30, 1996 reflected those savings. In addition, as a result of the
sale, significant expenditures that would have been made in systems, technology,
sales and marketing capabilities, and new product development have not been
necessary.
On January 31, 1997, the closed-end Quest for Value Dual Purpose Fund (the
"Fund") redeemed all of its income shares as required by its Articles of
Incorporation, and on February 28, 1997, the Fund converted to an open-end fund.
The investment contracts and other business relationships were sold to OFI (the
"Dual Purpose Fund sale"), and Advisors now serves as subadviser to the Fund
under an agreement with OFI. The subadvisory fee is significantly lower than the
management fee previously earned by Oppenheimer Capital. Annual subadvisory fees
related to the Fund are projected at $1.0 million annually, based on assets
under management at June 30, 1997, while Oppenheimer Capital received $5.0
million of investment management fees for the fiscal year ended April 30, 1997.
On July 18, 1997, Oppenheimer Capital received an initial payment of $7.0
million related to the Dual Purpose Fund sale.
OPERATING REVENUES -- QUARTER ENDED JULY 31, 1997
Total operating revenues increased 34.0% for the three months ended July
31, 1997 to $55.0 million from $41.1 million for the three months ended July 31,
1996. Total operating revenues include investment management fees, net
distribution assistance and commission income, and interest and dividends.
Investment management fees increased 34.6% for the three months ended July
31, 1997 to $53.1 million from $39.4 million for the three months ended July 31,
1996 as average assets under management for the three months ended July 31, 1997
increased 35.8% to $55.8 billion from $41.1 billion for the three months ended
July 31, 1996.
Net distribution assistance and commission income increased 13.9% to $1.6
million for the three months ended July 31, 1997 from $1.4 million for the three
months ended July 31, 1996. The increase was due to higher certificate of
deposit commission income resulting from greater demand for funds by banks, and
was offset in part by lower unit investment trust commission income as a result
of Oppenheimer Capital's decision to withdraw from this business during the
fourth quarter of fiscal 1997.
Interest and dividend income increased to $351,000 for the three months
ended July 31, 1997 from $237,000 for the three months ended July 31, 1996. This
increase can be primarily attributed to higher average cash balances.
OPERATING REVENUES -- YEARS ENDED APRIL 30, 1997, 1996 AND 1995
Total operating revenues increased 15.0% for the year ended April 30, 1997
to $182.0 million from $158.2 million for the year ended April 30, 1996 and
increased 21.8% for the year ended April 30, 1996 from
67
<PAGE> 71
$129.9 million for the year ended April 30, 1995. Total operating revenues
include investment management fees, net distribution assistance and commission
income, and interest and dividends.
Investment management fees increased 16.2% to $175.8 million for the year
ended April 30, 1997 from $151.3 million for the year ended April 30, 1996. This
increase is a result of average assets under management increasing 24.7% to
$45.8 billion for the year ended April 30, 1997 from $36.7 billion for the year
ended April 30, 1996. Investment management fee revenue grew less than assets
under management due to the lower subadvisory fee rates earned on the Quest
funds than the advisory fee rate prior to the Quest sale. These lower fee rates
were more than offset by asset growth for these funds and the elimination of
mutual fund distribution expenses. Annual subadvisory fees are projected at
$15.3 million, based on assets under management at June 30, 1997, down slightly
from the previous $15.7 million of annual fees for the twelve Quest for Value
Funds at November 22, 1995. Assets in the six equity funds have more than
tripled to $4.9 billion at June 30, 1997 from $1.4 billion on November 22, 1995,
reflecting record fund sales and market appreciation.
In addition, investment management fee revenue grew less than the increase
in assets under management due to a decline in performance fees earned in fiscal
1997 to $1.2 million from $3.0 million in fiscal 1996. These decreases were
offset in part by investment management fees increasing due to higher fee
realizations resulting from a continued shift in the asset mix toward higher
effective fee rate businesses such as variable annuities and wrap fee accounts.
Investment management fees increased 26.9% for the year ended April 30,
1996 from $119.2 million for the year ended April 30, 1995, primarily as a
result of average assets under management increasing 23.8% for the year ended
April 30, 1996 from $29.7 billion for the year ended April 30, 1995. This
increase also reflects higher fee realizations as a result of a shift in the
asset mix toward the higher fee rate businesses including mutual funds, variable
annuities and wrap fee accounts, and the withdrawal from the option management
business, which had very low fee rates. Offsetting the increase in part was the
lower fee rate earned subadvising the Quest funds as a result of the Quest sale.
Net distribution assistance and commission income decreased 18.9% to $4.9
million for the year ended April 30, 1997 from $6.1 million for the year ended
April 30, 1996. This decrease reflects reduced commission and distribution
income as a result of the Quest sale and lower unit investment trust commission
income due to reduced demand for fixed income unit investment trusts
(Oppenheimer Capital discontinued the distribution of unit investment trusts in
April 1997). This decrease was offset in part by a $1.3 million increase in
certificate of deposit commission income as a result of increased demand for
funds by banks.
Net distribution assistance and commission income decreased 42.0% for the
year ended April 30, 1996 from $10.4 million for the year ended April 30, 1995
primarily as a result of a $3.5 million decline in certificate of deposit
commission income as a result of lower demand for funds by banks, decreased unit
investment trust commission income, and reduced commission and distribution
income as a result of the Quest sale in November 1995.
Interest and dividend income increased 39.7% to $1.3 million for the year
ended April 30, 1997 from $895,000 for the year ended April 30, 1996. This
increase can be attributed to higher average cash balances.
Interest and dividend income increased to $.9 million for the year ended
April 30, 1996 from $275,000 for the year ended April 30, 1995. This increase
can be primarily attributed to the interest earned on the proceeds received from
the Quest sale.
OPERATING EXPENSES -- QUARTER ENDED JULY 31, 1997
Total operating expenses increased 29.3% for the three months ended July
31, 1997 to $30.3 million from $23.4 million for the three months ended July 31,
1996.
Oppenheimer Capital's most significant expense category is employee
compensation and benefits, which includes salaries, bonuses, sales commissions,
incentive compensation and other payroll related expenses. Compensation and
benefits expense increased 36.2% for the three months ended July 31, 1997 to
$24.0 million from $17.6 million for the three months ended July 31, 1996.
Compensation and benefits expense increased
68
<PAGE> 72
primarily due to higher incentive compensation costs due to increased new
business, higher operating profits and increased participation by key executives
in incentive compensation plans as a result of industry competitive pressures
and their individual contributions to firm profitability. In addition,
compensation and benefits expenses increased due to higher amortization expenses
related to restricted units granted to certain key employees on May 1, 1997, as
well as staff salary increases and additions to staff to support expanding
businesses. These increases were offset in part by staff reductions as a result
of the sale of Oppenheimer Capital's 50% interest in Saratoga and the decision
to withdraw from the distribution of unit investment trusts.
Occupancy expenses increased 17.7% for the three months ended July 31, 1997
to $1.8 million from $1.5 million for the three months ended July 31, 1996. This
increase was due to adjustments to rent escalation accruals during the quarters
ended July 31, 1997 and 1996.
General and administrative expenses increased 12.1% for the three months
ended July 31, 1997 to $3.1 million from $2.8 million for the three months ended
July 31, 1996. The increase in general and administrative expenses reflects
increased costs incurred in connection with the development of new businesses
and increased investments in computer equipment and software as a result of
increased technical support for professional and administrative staff and higher
professional services expense due to the expansion of Oppenheimer Capital's
business. This increase was offset in part by savings realized from the sale of
Oppenheimer Capital's interest in Saratoga.
Promotional expenses decreased 7.8% for the three months ended July 31,
1997 to $1.4 million from $1.6 million for the three months ended July 31, 1996.
The decrease in promotional expenses was due primarily to the elimination of
costs incurred by Saratoga and the elimination of the retail distribution of
unit investment trusts. This decrease was offset in part by increased travel and
entertainment expenses as a result of new business activities.
OPERATING EXPENSES -- YEARS ENDED APRIL 30, 1997, 1996 AND 1995
Total operating expenses increased 7.9% for the year ended April 30, 1997
to $103.1 million from $95.6 million for the year ended April 30, 1996 and
increased 15.0% for the year ended April 30, 1996 from $83.1 million for the
year ended April 30, 1995.
Oppenheimer Capital's most significant expense category is compensation and
benefits, which includes salaries, bonuses, sales commissions, incentive
compensation and other payroll related expenses. Compensation and benefits
expenses increased 12.9% to $77.7 million for the year ended April 30, 1997 from
$68.8 million for the year ended April 30, 1996 and increased 24.2% for the year
ended April 30, 1996 from $55.4 million for the year ended April 30, 1995. For
both years, compensation and benefits increased primarily due to higher
incentive compensation costs due to increased new business, higher operating
profits and increased participation by key executives in incentive compensation
plans as a result of industry competitive pressures and their individual
contributions to firm profitability. In addition, compensation and benefits
expense increased due to staff salary increases and additions to staff to
support expanding businesses. These increases were offset in part by significant
staff reductions at OCC Distributors, AMA Advisers, and in mutual fund
accounting in fiscal 1996 with most staff reductions occurring after the Quest
sale in November 1995. In fiscal 1997, staff size was reduced as a result of the
sale of Oppenheimer Capital's 50% interest in Saratoga and the termination of
the unit investment trust distribution effort during the fourth fiscal quarter.
Reflecting these reductions, staff size declined to 344 at April 30, 1997 from
348 at April 30, 1996, and from 417 at April 30, 1995.
Occupancy expense decreased 4.4% for the year ended April 30, 1997 to $6.6
million from $6.9 million for the year ended April 30, 1996 and increased 6.8%
for the year ended April 30, 1996 from $6.4 million for the year ended April 30,
1995. The decrease for the year ending April 30, 1997 reflects reduced rent
expense as a result of the termination of leases at AMA Advisers as well as
adjustments made to rent escalation accruals during the fiscal year. For the
year ended April 30, 1996, the increase was attributable to increased
amortization expense relating to leasehold improvements and increased equipment
rental costs.
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<PAGE> 73
Oppenheimer Capital subleases a portion of its space at the Oppenheimer
Tower, World Financial Center, from Oppenheimer & Co., Inc. ("Opco"), an
affiliated broker-dealer, paying a pro rata share of Opco's lease payments,
based on the percentage of total space leased. Oppenheimer Capital is currently
in negotiations to lease an additional 7,500 square feet at Oppenheimer Tower to
house its growing business.
General and administrative expenses increased 1.6% for the year ended April
30, 1997 to $12.5 million from $12.3 million for the year ended April 30, 1996
and increased 15.4% for the year ended April 30, 1996 from $10.7 million for the
year ended April 30, 1995. The rate of growth of general and administrative
expenses slowed in fiscal 1996 and continued in fiscal 1997 as Oppenheimer
Capital realized cost savings from the Quest sale and cost reductions at AMA
Advisers. As a result of the Quest sale in November 1995, Oppenheimer Capital
was able to eliminate all of its outstanding bank loans and related interest
expense. Offsetting these reductions in both fiscal 1997 and 1996 were increased
costs incurred in connection with the development of new businesses and
increased investments in computer equipment and software as a result of
increased technical support for professional and administrative staff and higher
professional services expense due to the expansion of Oppenheimer Capital's
business.
Promotional expenses decreased 16.7% for the year ended April 30, 1997 to
$6.3 million from $7.6 million for the year ended April 30, 1996 and decreased
28.3% for the year ended April 30, 1996 from $10.6 million for the year ended
April 30, 1995. The decrease in promotional expenses for both fiscal years was
due primarily to a reduction in expenses incurred by OCC Distributors as a
result of the elimination of the open-end mutual fund distribution effort, and
the retail operations of AMA Advisers, and was offset in part by increased
expenses in Oppenheimer Capital's new businesses due to increased travel and
entertainment expenses as a result of new business activities. In addition,
promotional expenses decreased in fiscal 1997 due in part to decreased
promotional activities at Saratoga.
OPERATING INCOME -- QUARTER ENDED JULY 31, 1997
Operating income for the three months ended July 31, 1997 increased 40.3%
to $24.7 million from $17.6 million for the three months ended July 31, 1996.
For the three months ended July 31, 1997, the operating profit margin expanded
to 44.9% from 42.9% for the three months ended July 31, 1996 as operating
revenues grew 34.0% while expenses increased only 29.3%.
OPERATING INCOME -- YEARS ENDED APRIL 30, 1997, 1996 AND 1995
Operating income increased 25.9% for the year ended April 30, 1997 to $78.9
million from $62.7 million for the year ended April 30, 1996 and increased 33.8%
for the year ended April 30, 1996 from $46.8 million for the year ended April
30, 1995. For the year ended April 30, 1997, the operating profit margin
expanded to 43.4% from 39.6% for the year ended April 30, 1996; and in the year
ended April 30, 1996, the operating profit margin increased from 36.1% for the
year ended April 30, 1995. The increase in operating income and operating profit
margin for both years is due to rising securities price levels, strong new
business growth and the resultant revenue increase combined with Oppenheimer
Capital controlling the rate of expense growth. In both fiscal 1997 and fiscal
1996, the operating revenue growth rate exceeded the operating expense growth
rate. This was accomplished primarily from the decision to withdraw from the
mutual fund distribution business (the Quest sale), which was completed in the
final quarter of fiscal 1996, and the suspension of retail sales activities at
AMA Advisers. This process, which began in fiscal 1996, was completed in the
first quarter of fiscal 1997. In addition, losses from Saratoga were reduced to
$1.4 million in fiscal 1997 from $2.5 million in fiscal 1996, and during the
fourth quarter of fiscal 1997, Oppenheimer Capital sold its 50% interest in
Saratoga.
TAXES
Oppenheimer Capital is not subject to federal, state, or local income
taxes, which are the obligations of the individual partners. Oppenheimer
Capital, however, was subject to New York City UBT of $1,194,000 for the three
months ended July 31, 1997 and $585,000 for the three months ended July 31,
1996. This increase was due to higher operating income as well as the gain on
the Dual Purpose sale.
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<PAGE> 74
Corporate subsidiaries of Oppenheimer Capital were subject to income taxes
of $24,000 for the three months ended July 31, 1997.
Oppenheimer Capital was subject to New York City UBT of $3.1 million, $3.7
million and $1.2 million, respectively, for the years ended April 30, 1997, 1996
and 1995. The decrease in New York City UBT expense in fiscal 1997 compared to
fiscal 1996 is due to a decline in net income in fiscal 1997 as a result of the
$27.7 million gain recorded for the Quest sale in fiscal 1996, compared with the
$2.8 million gain in fiscal 1997. This decline was offset in part by higher
operating income in fiscal 1997 than in fiscal 1996.
The increase in New York City UBT expense in fiscal 1996 from fiscal 1995
was due to a change in the tax law effective January 1, 1995 imposing taxes on
the total income of Oppenheimer Capital and allowing the Partnership a credit
for its pro rata share of any New York City UBT paid by Oppenheimer Capital.
Prior to January 1, 1995, New York City UBT was assessed directly at the
Partnership level. A second reason for the increase was Oppenheimer Capital's
higher earnings, including the gain realized on the Quest sale.
A corporate subsidiary of Oppenheimer Capital is subject to federal, state
and local income taxes. A foreign corporate subsidiary is subject to taxes in
the foreign jurisdiction in which it is located.
LIQUIDITY AND CAPITAL RESOURCES
Oppenheimer Capital's business is not capital intensive and its working
capital requirements are generally modest. To the extent that additional funds
are required by Oppenheimer Capital (e.g. to support increased investment
management fees receivable or to expand its facilities to accommodate the growth
of its businesses).
On July 31, 1997, Oppenheimer Capital declared a distribution to its
partners of $20.8 million which was paid on August 29, 1997. On April 30, 1997,
Oppenheimer Capital declared a distribution to its partners of $25.3 million
which was paid on May 30, 1997.
Oppenheimer Capital recorded gains on the Quest sale of $2.8 million in
fiscal 1997 and $27.7 million in fiscal 1996. The net proceeds from the sale
were used to pay a special distribution to partners of $2.3 million in fiscal
1997 and $12.6 million in fiscal 1996, and the remaining funds were used to
eliminate bank borrowings and to fund the working capital needs of Oppenheimer
Capital. At April 30, 1997, working capital totaled $30.8 million as compared
with $26.3 million at April 30, 1996 and partners capital increased to $39.7
million from $34.7 million during this same period.
SALE OF AMA LICENSE
In May 1997, Oppenheimer Capital sold its exclusive right to market to
members of the American Medical Association ("AMA") to Scudder, Stevens & Clark,
Inc. for $1.0 million. Simultaneously, Oppenheimer Capital purchased the AMA's
19.9% interest in AMA Advisers for $500,000. The $1.0 million payment was used
to reduce unamortized goodwill. AMA Advisers have been renamed 225 Liberty
Advisers, L.P.
SALE OF SARATOGA CAPITAL MANAGEMENT
On April 29, 1997, Oppenheimer Capital completed the sale of its 50%
interest in Saratoga. The proceeds, which are not significant, will be paid
annually to Oppenheimer Capital over a five year period, ending May 1, 2001.
Oppenheimer Capital continues to manage two portfolios of the Saratoga Advantage
Trust, for which it receives subadvisory fees.
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SELECTED CONSOLIDATED FINANCIAL DATA OF PIMCO ADVISORS
The following table sets forth selected consolidated financial data of
PIMCO Advisors for the nine months ended September 30, 1997 and 1996, and each
of the five years ended December 31, 1996. PIMCO Advisors and its subsidiaries
were formed on November 15, 1994, when PFAMCo merged the PFAMCo Group into TAG
L.P. Under generally accepted accounting principles, the Consolidation is
accounted for as an acquisition of TAG L.P. by PFAMCo Group, even though the
legal form was the reverse. Therefore, the historical financial statements
include the operations of PFAMCo Group, in its corporate form, prior to the
Consolidation and the combined results of PIMCO Advisors, in its partnership
form, for the period since the Consolidation. This information should be read in
conjunction with the Consolidated Financial Statements of PIMCO Advisors and the
related notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
PIMCO Advisors L.P. and Subsidiaries."
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues......................... $344,210 $287,161 $392,024 $323,014 $180,263 $165,856 $120,155
Operating expenses..................... 232,572 190,975 261,978 215,271 145,220 131,447 93,011
Amortization of intangibles, options
and restricted units................. 31,000 30,852 41,171 42,723 6,202 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income....................... 80,638 65,334 88,875 65,020 28,841 34,409 27,144
Other income, net...................... 3,249 2,401 3,454 3,964 1,083 864 1,115
-------- -------- -------- -------- -------- -------- --------
Income before income tax expense....... 83,887 67,735 92,329 68,984 29,924 35,273 28,259
Income tax expense..................... 1,226 834 1,201 517 10,669 15,556 11,405
-------- -------- -------- -------- -------- -------- --------
Net income............................. $ 82,661 $ 66,901 $ 91,128 $ 68,467 $ 19,255 $ 19,717 $ 16,854
======== ======== ======== ======== ======== ======== ========
Net income allocated to:
General Partner and Class A Limited
Partner units...................... $ 45,329 $ 39,421 $ 52,916 $ 46,655 $ 4,976
Class B Limited Partner units........ 37,332 27,480 38,212 21,812 1,128
Pre-Consolidation.................... -- -- -- -- 13,151
-------- -------- -------- -------- --------
Total.................................. $ 82,661 $ 66,901 $ 91,128 $ 68,467 $ 19,255
======== ======== ======== ======== ========
NET INCOME PER UNIT(1):
General Partner and Class A Limited
Partner units........................ $ 1.06 $ 0.96 $ 1.29 $ 1.16 $ 0.12
Class B Limited Partner units.......... $ 1.06 $ 0.76 $ 1.05 $ 0.59 $ 0.03
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING (POST-CONSOLIDATION):
Units outstanding:
General Partner...................... 800 800 800 800 800
Class A Limited Partner.............. 40,146 40,132 40,135 40,108 40,018
Class B Limited Partner.............. 32,983 32,961 32,961 32,961 32,961
-------- -------- -------- -------- --------
Total.................................. 73,929 73,893 73,896 73,869 73,779
Weighted average effect of unit
options.............................. 3,906 2,915 3,119 1,684 984
-------- -------- -------- -------- --------
Total.................................. 77,835 76,808 77,015 75,553 74,763
======== ======== ======== ======== ========
DIVIDENDS/DISTRIBUTIONS................ $104,042 $ 97,560 $131,604 $ 89,613 $ 24,384 $ 22,158 $ 12,950
======== ======== ======== ======== ======== ======== ========
FINANCIAL CONDITION AT END OF PERIOD:
Total assets(2)........................ $365,728 $373,545 $358,500 $369,592 $379,708 $ 70,388 $ 43,189
Total liabilities...................... 86,752 68,802 62,257 38,035 34,179 44,567 17,686
-------- -------- -------- -------- -------- -------- --------
Total Partners' capital(3)............. $278,976 $304,743 $296,243 $331,557 $345,529 $ 25,821 $ 25,503
======== ======== ======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER STATISTICS:
Assets under management (in
millions)............................ $130,632 $104,540 $110,022 $ 95,182 $ 72,175 $ 57,182 $ 43,737
Operating Profit Available for
Distribution(1)...................... 113,830 97,763 132,314 111,205 12,306 -- --
Cash flows provided by operating
activities........................... 112,502 119,882 140,446 86,921 25,852 23,620 9,309
Cash flows (used in) provided by
investing activities................. (16,598) (2,983) (2,446) (17,771) 22,401 (436) (1,149)
Cash flows used in financing
activities........................... (104,042) (97,560) (131,604) (89,238) (2,549) (14,900) (15,800)
</TABLE>
- ---------------
(1) Computed on earnings following the Consolidation. Operating Profit Available
for Distribution is defined by the PIMCO Advisors Partnership Agreement as
the sum of net income plus non-cash charges from the amortization of
intangible assets, non-cash compensation expenses arising from option and
restricted unit plans, and losses of any subsidiary which is not a
flow-through entity for tax purposes.
(2) Upon completion of the Consolidation, approximately $284.9 million of
intangible assets were created. See Note 3 in the Notes to the Consolidated
Financial Statements of PIMCO Advisors L.P. and Subsidiaries.
(3) Stockholders' equity before the Consolidation.
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<PAGE> 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PIMCO ADVISORS
The information set forth below discusses the financial condition and
results of operations of PIMCO Advisors and its predecessors, and does not
reflect the effects of the Opgroup Transaction, the Oppenheimer Capital Merger
or the Restructuring.
OVERVIEW
PIMCO Advisors was formed on November 15, 1994 when PFAMCo merged PFAMCo
Group into TAG L.P. PFAMCo Group comprised the operations of PFAMCo, an indirect
wholly-owned subsidiary of Pacific Life Insurance Company ("Pacific Life"), and
certain of its wholly-owned investment management subsidiaries. The businesses
of PFAMCo Group contributed to PIMCO Advisors were then contributed to
newly-formed subsidiaries of PIMCO Advisors. These businesses, as well as TAG
L.P.'s former division of CCI, are as follows at September 30, 1997:
Pacific Investment Management and its wholly owned subsidiary, StocksPLUS
Management, Inc. ("StocksPLUS Management"), manages primarily fixed income
investments, with approximately $108.5 billion in assets under management;
CCI and Columbus Circle Trust Company ("CCTC") manages primarily equity and
equity related investments, with approximately $11.5 billion in assets
under management;
Cadence manages equity and equity related investments, with approximately
$4.9 billion in assets under management;
Parametric manages equity and equity related investments, with
approximately $2.5 billion in assets under management;
NFJ manages equity and equity related investments, with approximately $2.3
billion in assets under management; and
Blairlogie manages equity and equity related investments, with
approximately $875 million in assets under management.
PIMCO Advisors, together with these six firms, sponsors and manages mutual
funds for both institutional and retail investors.
PIMCO Funds. In January 1997, PIMCO Advisors restructured its proprietary
mutual funds into a single fund family called "PIMCO Funds" which is comprised
of two series: (i) PIMCO Funds: Pacific Investment Management Series: PIMCO
Funds PIMS Series, 20 funds advised by Pacific Investment Management, and (ii)
PIMCO Funds: Multi Manager Series: PIMCO Funds MMS Series, 21 funds advised by
PIMCO Advisors and subadvised by the Investment Management Firms and one
independent subadvisor. The PIMCO Funds PIMS Series are primarily fixed income
funds and the PIMCO Funds MMS Series are primarily equity funds. All PIMCO Funds
are offered in up to five different share classes: institutional and
administrative share classes primarily for institutional investors and, for
retail investors, Class A shares (which are "front end" load), Class B shares
(which are "back-end load") and Class C shares (which are "level load"). The
PIMCO Funds now feature a "unified fee" structure which has specified advisory
and administrative fees per fund. As a result, PIMCO Advisors and Pacific
Investment Management (and not the PIMCO Funds) bear the risk of increases in
service costs (including of third-party service providers such as transfer
agents) and will directly benefit from decreases in those costs.
RESULTS OF OPERATIONS
GENERAL COMMENTARY
PIMCO Advisors derives substantially all its revenues and net income from
advisory fees for investment management services provided through its investment
management subsidiaries to its institutional and individual clients, and
advisory, distribution and servicing fees for services provided to the PIMCO
Funds.
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<PAGE> 78
Generally, such fees are determined based upon a percentage of client
assets under management and are billed quarterly to institutional clients,
either in advance or arrears, depending on the agreement with the client and
monthly in arrears to the PIMCO Funds. Revenues are determined in large part
based upon the level of assets under management, which itself is dependent upon
factors including market conditions, client decisions to add or withdraw assets
from PIMCO Advisors management, and PIMCO Advisors ability to attract new
clients. In addition, PIMCO Advisors has certain accounts which are subject to
performance based fee schedules wherein performance relative to the S&P 500
Index or other benchmarks over a particular time period can result in additional
fees. These fees accrue on a quarterly or annual basis, depending upon the
specific investment advisory contract. Quarterly fees generally are calculated
based upon a rolling twelve-month performance result. Annual fees have
historically been weighted towards second and fourth quarter billings although
the third quarter of 1997 reflects certain new annual account billings. As a
result, there is a seasonality to the recognition of such fees. Such performance
based fees can have a significant effect on revenues, but also provide an
opportunity to earn higher fees (as well as lower fees) than could be obtained
under fee arrangements based solely on a percentage of assets under management.
Intangible assets of approximately $284.9 million created by the
Consolidation represent the excess of the purchase price over the fair value of
net tangible assets of TAG L.P. deemed acquired by PFAMCo Group. Approximately
$80.7 million of the intangible assets represents the value assigned to PIMCO
Advisors master limited partnership ("MLP") structure. Under previous tax law,
an MLP was exempt from federal and most state and local income taxes through
December 31, 1997. As discussed elsewhere, the tax status has been extended.
However, the value attributed to the MLP structure is being amortized through
the period ended December 31, 1997. The remainder is being amortized over its
estimated life of 20 years.
Net income per unit is computed under the two-class method which allocates
net income to PIMCO Advisors Class A and Class B LP Units in proportion to the
Operating Profit Available for Distribution for each class. Operating Profit
Available for Distribution is defined by the PIMCO Advisors Partnership
Agreement and is computed as the sum of net income plus non-cash charges from
the amortization of intangible assets, non-cash compensation expenses arising
from option and restricted unit plans, and losses of any subsidiary which is not
a flow-through entity for tax purposes. PIMCO Advisors Class A LP and GP Units
are entitled to a priority distribution of $1.88 per unit per year until
December 31, 1997. Because of this, the amount of Operating Profit Available for
Distribution allocated to such units can be greater than the amount allocated to
PIMCO Advisors Class B LP Units. As a result, the net income allocated per PIMCO
Advisors Class A LP and GP Units is currently greater than the net income
allocated per PIMCO Advisors Class B LP Units. In addition, because of the
priority distribution, the initial dilution to net income per unit from the
assumed exercise of options can be applied entirely to PIMCO Advisors Class B LP
Units. However, growth in both net income and Operating Profit Available for
distribution in 1997 beyond the priority levels has resulted in the year to date
allocations as income and distribution, per unit to be equal across all classes.
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
PIMCO Advisors derives substantially all its revenues and net income from
advisory fees for investment management services provided to its institutional
and individual clients and advisory, distribution and servicing fees for
services provided to its two proprietary series of mutual funds ("Proprietary
Funds").
PIMCO Advisors consolidated 1997 third quarter revenues, including those of
its wholly owned distributor PFD, were $125.1 million compared to $97.1 million
in the third quarter of 1996, up $28.0 million. Advisory revenues were $110.2
million in the third quarter of 1997 compared to $84.7 million for the same
period in 1996, up $25.5 million. For the nine months ended September 30, 1997
PIMCO Advisors consolidated revenues were $344.2 million compared to $287.2
million in the same period of 1996. Revenues at the distributor for the nine
months of 1997 increased to $46.3 million in 1997 from $39.7 million in 1996.
Advisory revenue increases resulted from both the commitment of new assets by
institutional clients and from market appreciation. Performance based fees
amounted to $9.3 million during the third quarter of 1997 as compared to $4.9
million during the same period in 1996. For the nine months ended September 30,
1997 performance fees increased to $20.8 million, from $16.3 million in the
comparable period of 1996. The
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<PAGE> 79
increase in performance based fees occurred in both fixed income portfolio
products seeking to outperform relative benchmarks, and an equity product
seeking to outperform the S&P 500 Index.
Revenues by operating entity were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Pacific Investment Management............... $ 74.4 $ 54.9 $200.4 $162.1
Columbus Circle Investors................... 14.3 15.5 43.8 47.2
Cadence Capital Management.................. 6.8 4.5 17.5 13.0
Parametric Portfolio Associates............. 1.1 0.9 3.2 2.6
NFJ Investment Group........................ 2.4 1.8 6.3 5.4
Blairlogie Capital Management............... 1.1 0.9 3.2 2.8
PFD......................................... 16.3 13.3 46.3 39.7
Other....................................... 8.7 5.3 23.5 14.4
------ ----- ------ ------
$125.1 $ 97.1 $344.2 $287.2
====== ===== ====== ======
</TABLE>
Assets under management, in the aggregate, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
($ IN BILLIONS)
<S> <C> <C> <C> <C>
Beginning of period......................... $119.9 $100.8 $110.0 $ 95.2
End of period............................... $130.6 $104.5 $130.6 $104.5
</TABLE>
Compensation and benefits in the third quarter of 1997 of $55.5 million
were $12.3 million higher than the same period in 1996. For the nine month
period, this cost category increased from $128.1 million in 1996 to $151.6
million in 1997. These increases reflect additional staffing, at both Pacific
Investment Management and CCI, as well as higher profit sharing expenses which
are based on profits of each of the Investment Management Firms.
Commission expenses, incurred by PFD related to sales and servicing of
retail mutual funds, increased $2.5 million to $11.7 million in the third
quarter of 1997 compared to the same period a year ago, and increased $4.7
million to $32.2 million for the nine months of 1997 compared to 1996,
reflecting higher trail commissions due to an increased level of qualifying
assets, as well as increased "up front" commissions on higher current sales
levels.
General and administrative expenses amounted to $6.9 million during the
third quarter of 1997, an increase of $2.9 million over the same period a year
ago. This cost category increased by $5.8 million to $18.8 million for the nine
months of 1997 compared to 1996. This increase can be primarily attributed to
the conversion of the retail share classes of the PIMCO Funds to a fixed
administrative fee basis resulting in increases to this cost category for
expenses previously borne directly by the funds. There is a corresponding
increase in revenues related to this conversion. These incremental costs account
for substantially all of this increase.
Occupancy and equipment increased by $147,000 to $2.5 million in the third
quarter of 1997 from the same period a year ago; during the nine months of 1997
these costs increased $550,000 to $7.5 million compared to the same period in
1996. The increase in this expense category can be attributed primarily to
additional office space and equipment as a result of the additional staffing
discussed above.
Other expenses in the third quarter of 1997 increased by $1.4 million from
1996. Such costs for the nine months of 1997 increased $7.1 million to $22.5
million compared to the same period in 1996 due principally to increases in
marketing and promotional costs and professional fees as well as other increases
reflective of inflation and increased staffing.
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PRO FORMA FINANCIAL INFORMATION
Under generally accepted accounting principles, the Consolidation has been
accounted for as an acquisition of TAG L.P. by PFAMCo Group, even though the
legal form was the reverse. Therefore, the historical financial statements
include the operations of PFAMCo Group, in its corporate form, prior to the
Consolidation and the combined results of PIMCO Advisors, in its partnership
form, for the period since the Consolidation.
Due to the different bases of presentation and resulting difficulties in
analyzing comparative historical financial information as a result of the
required accounting presentation, management has included below certain pro
forma financial information as if the Consolidation occurred at the beginning of
1993. Pro forma results eliminate the significant comparative differences in the
historical results of operations arising primarily from different taxation of
corporations and partnerships, from the inclusion of TAG L.P.'s results of
operations in the pro forma results from the beginning of 1993 (rather than only
from the date of Consolidation reflected in the historical financial
statements), and from certain transactions and restructuring effected by the
Consolidation, principally related to the creation and amortization of
intangibles and revised profit sharing arrangements.
The following table summarizes the unaudited condensed pro forma results of
operations of PIMCO Advisors as if the Consolidation discussed above had
occurred on January 1, 1993. The pro forma operating results give effect to:
(i) the Consolidation of PFAMCo Group and TAG L.P.;
(ii) the amendment of existing options under TAG L.P.'s 1993 Unit
Option Plan;
(iii) the adoption of the PIMCO Advisors Class B LP Unit Option Plan;
(iv) the contribution of PFD to PIMCO Advisors in exchange for PIMCO
Advisors Class A LP Units; and
(v) certain transactions effected by PFAMCo Group and TAG L.P. in
connection with the Consolidation, primarily related to intangible
amortization and profit sharing.
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<PAGE> 81
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------- -------- -----------
(ACTUAL) (ACTUAL) (PRO FORMA)
(AMOUNTS IN MILLIONS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
REVENUES
Investment Advisory................................. $338.3 $281.6 $ 231.5
PFD................................................. 53.7 41.4 37.6
------ ------ ------
392.0 323.0 269.1
------ ------ ------
EXPENSES
Compensation and Benefits........................... 173.5 149.1 119.7
Commissions......................................... 37.7 28.7 23.1
Marketing and Promotional........................... 11.0 9.1 11.4
Occupancy and Equipment............................. 9.2 8.7 6.7
General and Administrative.......................... 17.6 11.4 7.4
Insurance........................................... 2.6 2.8 1.8
Professional Fees................................... 5.5 3.2 3.4
Amortization of intangibles,
options and restricted units...................... 41.2 42.7 40.7
Other (income) expense (net)........................ 2.6 (1.2) 0.2
------ ------ ------
300.9 254.5 214.4
------ ------ ------
NET INCOME.......................................... $ 91.1 $ 68.5 $ 54.7
====== ====== ======
Net Income per General Partner and Class A Limited
Partner unit...................................... $ 1.29 $ 1.16 $ 1.08
====== ====== ======
Net Income per Class B Limited Partner unit......... $ 1.05 $ 0.59 $ 0.28
====== ====== ======
Revenues by operating entity were as follows:
Pacific Investment Management.................. $222.3 $180.9 $ 142.9
Columbus Circle Investors...................... 63.7 53.0 45.1
Cadence Capital Management..................... 17.9 14.6 12.1
Parametric Portfolio Associates................ 3.5 3.8 4.5
NFJ Investment Group........................... 7.3 5.9 5.0
PFD............................................ 53.7 41.4 37.6
Other(1)....................................... 23.6 23.4 21.9
------ ------ ------
Consolidated PIMCO Advisors.................... $392.0 $323.0 $ 269.1
====== ====== ======
</TABLE>
- ---------------
(1) Includes PIMCO Advisors Institutional Services (formerly PFAMCo) and Mutual
Funds divisions and Blairlogie.
The pro forma information for 1994, given above, is not intended to reflect
the results that actually would have been obtained if the operations were
consolidated during the period presented.
PRO FORMA AND ACTUAL FINANCIAL INFORMATION
Year Ended December 31, 1996 Actual Compared to Year Ended December 31,
1995 Actual
PIMCO Advisors consolidated actual 1996 revenues, including those of its
wholly-owned distributor, PFD, were $392.0 million, compared to revenues of
$323.0 million in 1995. Advisory revenues in this comparison increased $56.7
million to $338.3 million in 1996. PFD's revenues increased $12.3 million to
$53.7 million in 1996. Revenue increases resulted from the commitment of new
assets primarily by institutional clients and increases in the market value of
existing assets under management. These increases were further enhanced by an
increase in performance based fees, which amounted to $22.5 million in 1996 as
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<PAGE> 82
compared to $19.1 million in 1995. The increase in performance based fees
occurred principally in fixed income portfolio products seeking to outperform
relative benchmarks.
Compensation and benefit expenses in 1996 of $173.5 million were $24.4
million higher than 1995, reflecting additional staffing at virtually all
subsidiaries, and increased profit sharing at the Investment Management Firms
due to improved profitability. The total number of employees increased 5.0% from
521 as of December 31, 1995 to 547 as of December 31, 1996.
Commission expenses increased by $9.0 million or 31.3% in 1996 as compared
with 1995. Commission expenses are incurred by PFD and are paid primarily to
broker-dealers and their sales people for the sale of PIMCO Advisors
retail-oriented mutual funds. These include "up-front" commissions paid at the
time of sale of the mutual funds, "trail" commissions for the maintenance of
assets in the mutual funds and service fee commissions paid for services
provided to mutual fund shareholders. The level of commission expense will vary
according to the level of assets in the mutual funds (on which trail and service
fee commissions are determined) and on the level of sales of mutual funds (on
which up-front commissions are determined). Trail and service fee commissions
are generally paid quarterly beginning one year after sale of the mutual funds.
Therefore, at any given time, trail and service fee commissions will be paid on
only the mutual fund assets that qualify for such payments. In 1996, trail and
service fee commissions increased to $30.3 million, an increase of $6.1 million
or 25.2%, compared to 1995. This increase is related to an increase in the
underlying qualifying assets. Up-front commissions increased from $4.5 million
in 1995 to $7.4 million in 1996, an increase of $2.9 million or 64.4%. This is a
result of increases in total sales volume and the mix of share classes sold.
Marketing and promotional costs increased $1.9 million or 20.9% in 1996
compared to 1995. This increase occurred at most entities, but primarily at PFD
and Pacific Investment Management. At PFD, increased mutual fund share sales
correlate to the increase. At Pacific Investment Management, increased travel
costs comprise the majority of the increase.
Occupancy and equipment costs increased $.5 million or 5.7% in 1996
compared to 1995. The increase relates to increased depreciation of equipment
and inflationary facilities cost increases at all entities.
General and administrative costs increased $6.2 million or 54.4% in 1996
compared to 1995. Pacific Investment Management converted its institutional fund
family to a fixed administrative fee basis in October 1995 resulting in
increases to this cost category for expenses previously borne directly by the
funds. There is a corresponding increase in revenues related to this conversion.
These incremental costs account for approximately $6.0 million of the increase.
Insurance costs decreased $.2 million or 7.1% in 1996 compared to 1995.
This decrease relates principally to PIMCO Advisors decreased cost of coverage
for general partner liability insurance coverage. Offsetting this decline,
partially, were slight increases due to increased assets under management, and
related activities at the Investment Management Firms.
Professional fees increased $2.3 million or 71.9% in 1996 compared to 1995.
This increase resulted primarily from the costs associated with the
restructuring of the three mutual fund "families" in December of 1996.
Other (income) expense, net, includes such items as consulting costs,
reimbursement agreements and income taxes, offset by other income, and reflects
a net increase of $3.8 million in 1996 compared to 1995. This increase is
comprised principally of decreased investment income and lower levels of
reimbursement under agreements with Pacific Life that became effective in
November 1994.
Amortization of intangibles, options and restricted units decreased $1.5
million principally due to the accelerated vesting in 1995 of outstanding
options and restricted units for certain employees terminating during 1995.
Year Ended December 31, 1995 Actual Compared to Year Ended December 31,
1994 Pro Forma
PIMCO Advisors consolidated actual 1995 revenues, including those of its
wholly-owned distributor, PFD, were $323.0 million, compared to pro forma
revenues of $269.1 million in 1994. Advisory revenues in
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<PAGE> 83
this comparison increased $50.1 million to $281.6 million in 1995. PFD's
revenues increased $3.8 million to $41.4 million in 1995. Revenue increases
resulted from the commitment of new assets by institutional clients and
increases in the market value of existing assets under management. These
increases were further enhanced by an increase in performance based fees, which
amounted to $19.1 million in 1995 as compared to $9.2 million in 1994. The
increase in performance based fees occurred principally in a product line that
seeks to outperform the S&P 500 Index.
Compensation and benefit expenses in 1995 of $149.1 million were $29.4
million higher than 1994, reflecting additional staffing at virtually all
subsidiaries, and increased profit sharing at the investment management firms
due to improved profitability. The total number of employees increased 12.5%
from 463, as of December 31, 1994, to 521, as of December 31, 1995.
Commission expenses increased by $5.6 million or 24.3% in 1995 as compared
with 1994 pro forma. In 1995, trail and service fee commissions increased to
$24.2 million, an increase of $7.9 million or 48.5%, compared to 1994. This
increase is related to an increase in the underlying qualifying assets. Up-front
commissions decreased from $6.8 million in 1994 to $4.5 million in 1995, a
decrease of $2.3 million or 33.8%. This is a result of decreases in total sales
volume and the mix of share classes sold.
Marketing and promotional costs declined $2.3 million or 20.6% in 1995
compared to 1994. This decrease occurred at most entities, but primarily at PFD
and Pacific Investment Management. At PFD, reduced mutual fund share sales
correlate to the reduction. At Pacific Investment Management, reduced
promotional costs comprise the majority of the reduction.
Occupancy and equipment costs increased $2.0 million or 29.8% in 1995
compared to 1994. The increase correlates strongly to new equipment and
facilities for increased staff, primarily at Pacific Investment Management.
General and administrative costs increased $4.0 million or 55.1% in 1995
compared to 1994. Pacific Investment Management converted its institutional fund
family to a fixed administrative fee basis in October 1995 resulting in
increases to this cost category for expenses previously borne directly by the
funds. There is a corresponding increase in revenues related to this conversion.
These incremental costs account for approximately $2.6 million of the increase.
The remaining increase was incurred at all entities and relates to higher levels
of staffing and activity.
Insurance costs increased $1.0 million or 55.0% in 1995 compared to 1994.
This increase relates principally to PIMCO Advisors increased cost of coverage
for general partner liability. Increases due to increased assets under
management and related activities also occurred at the Investment Management
Firms.
Professional fees declined $0.2 million or 5.7% in 1995 compared to 1994.
This decline resulted primarily from increased reliance on internal staffing.
Other (income) expense, net, includes such items as consulting costs,
reimbursement agreements and income taxes, offset by other income, and reflects
a net decrease of $1.4 million in 1995 compared to 1994. This decrease is
comprised principally of increased investment income and higher levels of
reimbursement under an agreement with Pacific Life that became effective in
November 1994.
Amortization of intangibles, options and restricted units increased $2.0
million principally due to the accelerated vesting of outstanding options and
restricted units for certain employees terminating during 1995.
HISTORICAL FINANCIAL INFORMATION ONLY
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The historical financial statements reflect the results of PFAMCo Group, in
its corporate form for the period January 1, 1994 to November 15, 1994 and PIMCO
Advisors post-Consolidation combined results in its partnership form from
November 16, 1994 to December 31, 1994, and for 1995. This accounting treatment,
known as "reverse acquisition" accounting, is required under generally accepted
accounting principles.
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<PAGE> 84
Therefore, many of the comparative differences in the results of operations
between 1995 and 1994 are due to the reorganization of PFAMCo Group into
partnership form, the inclusion of TAG's operations in PFAMCo Group's operations
from November 16, 1994, to December 31, 1994, and in 1995, and from transactions
and restructuring that occurred in the Consolidation. The 1994 and 1995 results
also include certain non-cash expenses related to the amortization of intangible
assets created by the Consolidation and from expenses related to option and
restricted unit plans.
PIMCO Advisors 1995 revenues, including PFD, were $323.0 million, compared
to $180.3 million in 1994, up $142.7 million. The increase in revenue results
primarily from the inclusion of TAG in the results of PIMCO Advisors operations
since the Consolidation, and to a lesser extent, from increased assets under
management at the investment management firms.
Compensation and benefits, which includes salaries, employee benefits and
incentive compensation, is the largest expense category. The increase in 1995 of
$31.9 million, to $149.1 million, reflects increased staff levels, higher profit
sharing and the inclusion of TAG in the full year of 1995, compared with only 46
days in 1994.
In addition to the effect of including TAG's operations for a full year in
1995, as compared to only 46 days in 1994, other expense categories reflect the
following fluctuations:
(i) Restricted units and option plans, which came into existence at
the Consolidation, include approximately $2.0 million of amortization
related to the accelerated vesting of outstanding options; and
(ii) Trail and service fee commissions increased approximately $7.0
million as a result of an increase in the underlying qualifying assets.
CAPITAL RESOURCES AND LIQUIDITY
PIMCO Advisors and its predecessor entities' combined business have not
historically been capital intensive. In general, working capital requirements
had been satisfied out of operating cash flow or short-term borrowings. PIMCO
Advisors will make quarterly profit-sharing payments and distributions to its
unitholders. PIMCO Advisors may need to finance profit-sharing payments using
short-term borrowings.
PIMCO Advisors had approximately $58.1 million of cash and cash equivalents
and short-term investments at September 30, 1997 compared to approximately $52.8
million at December 31, 1996, and approximately $52.8 million of cash and cash
equivalents and short term investments at December 31, 1996 compared to
approximately $46.5 million at December 31, 1995. The increases were due to the
timing of payment of certain current liabilities offset by the funding of "B"
Share commissions to brokers. "B" Shares involve the payment of commissions to
the selling broker by the distributor at the time of sale of mutual fund shares.
Through deferred sales charges to the investor, or 12-b1 plans with the mutual
fund, these "front-end" commissions are recouped by the distributor over a
period of years. PIMCO Advisors excess liquidity, after distributions to its
unitholders, is used for general corporate purposes including profit-sharing
payments and brokers' commissions on sales of mutual fund shares distributed
without a front-end sales load. To the extent that the level of such commissions
increases due to the introduction of new products and mutual fund pricing
structures, an alternate financing source may be needed. However, PIMCO Advisors
has made no decision as to the source or necessity of such financing.
PIMCO Advisors distributes substantially all of its Operating Profit
Available for Distribution, after appropriate reserves, to its partners.
Distributions are paid quarterly, in arrears, on the units outstanding to
unitholders of record on the thirtieth day of the first month following each
quarter-end. Actual unit distributions in 1996 were $1.88 for the PIMCO Advisors
GP and Class A LP Units and $1.658 for the PIMCO Advisors Class B LP Units.
These amounts reflect Operating Profit Available for Distribution for the fourth
quarter of 1995 and the first three quarters of 1996, as such distributions are
made in arrears. Actual unit distributions in 1995 were $1.649 for the PIMCO
Advisors GP and Class A LP Units and were $0.673 for the PIMCO Advisors Class B
LP Units. These amounts reflect Operating Profit Available for Distribution for
the 46 day period from the date of Consolidation through December 31, 1994, and
Operating Profit Available for Distribution for the first three quarters of
1995.
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<PAGE> 85
During the first nine months of 1997, PIMCO Advisors distributed $1.410 per
PIMCO Advisors Class A LP and GP Unit and $1.404 per PIMCO Advisors Class B LP
Unit related to the fourth quarter of 1996's and first two quarters of 1997's
earnings. During the third quarter of 1997, PIMCO Advisors distributed $0.47 per
PIMCO Advisors Class A LP and GP Unit and $0.505 per PIMCO Advisors Class B LP
Unit related to the second quarter of 1997's earnings. PIMCO Advisors declared a
third quarter distribution of $0.58 per PIMCO Advisors Class A LP and GP Unit
payable to holders of record on October 30, 1997. The payment date for this
distribution is November 15, 1997. PIMCO Advisors also declared a third quarter
distribution of $0.58 per PIMCO Advisors Class B LP Unit payable to holders of
record on October 30, 1997. The payment date for this distribution is November
30, 1997.
PIMCO Advisors currently has no long-term debt. In April 1996, PIMCO
Advisors obtained a $25 million, four year revolving line of credit for working
capital purposes. There was no outstanding balance at September 30, 1997, nor
was the facility utilized during the quarter ended September 30, 1997.
ECONOMIC FACTORS
The general economy including interest rates, inflation and client
responses to economic factors will affect, to some degree, the operations of
PIMCO Advisors. As a significant portion of assets under management are fixed
income funds, fluctuations in interest rates could have a material impact on the
operations of PIMCO Advisors. PIMCO Advisors advisory business is generally not
capital intensive and therefore any effect of inflation, other than on interest
rates, is not expected to have a significant impact on its operations or
financial condition. Client responses to the economy, including decisions as to
the amount of assets deposited may also impact the operations of PIMCO Advisors.
Any resulting revenue fluctuations may or may not be recoverable in the pricing
of services offered by PIMCO Advisors.
During the first nine months of 1997, assets under management for PIMCO
Advisors and its subsidiaries increased $20.6 billion. During 1996 and 1995,
assets under management for PIMCO Advisors and its subsidiaries increased $14.8
billion and $23.0 billion, respectively. While net cash inflows year to date in
1997, and 1996 and 1995 for PIMCO Advisors, as a whole, were significant ($7.6
billion in the first nine months of 1997, $6.7 billion in 1996 and $6.6 billion
in 1995), CCI experienced substantial net cash outflows in the same periods
(including $4.9 billion during the first nine months of 1997) predominantly from
its "large cap" separate account clients, attributable in large part to
underperformance measured against relevant benchmarks.
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<PAGE> 86
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE PARTNERSHIP
The following table sets forth pro forma information regarding beneficial
ownership of the Partnership Units as of November 1, 1997, giving effect to the
Restructuring as if it had occurred on that date, by each person who, to the
Partnership's knowledge, is the beneficial owner of more than five percent of
the Partnership Units, each person who may be deemed to be a "director" of the
Partnership or PIMCO Advisors, the Chief Executive Officer of the Partnership
and the Partnership's Named Executive Officers and all officers and persons who
may be deemed to be directors of the Partnership or PIMCO Advisors as a group.
Except as indicated, the address of each person or entity listed below is 800
Newport Center Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
PARTNERSHIP PARTNERSHIP PIMCO PERCENTAGE OWNERSHIP
UNITS PRIOR TO UNITS AFTER ADVISORS OF
RESTRUCTURING(1) RESTRUCTURING(1)(2) UNITS(1)(2)(3) PARTNERSHIP UNITS(3)
---------------- ------------------- -------------- --------------------
<S> <C> <C> <C> <C>
FIVE PERCENT HOLDERS (other than
those listed as members of the
PIMCO Advisors Management Board
below)
PIMCO Partners, G.P. ("PGP")(4)...... 0 0 53,790,539 56.7%
Pacific Life Insurance Company
("Pacific Life")(5)................ 0 0 58,988,796 59.0%
Pacific Financial Asset Management
Corporation ("PFAMCo")(5).......... 0 0 58,988,796 59.0%
Pacific Investment Management Company
("PIMCO Inc.")(6).................. 0 0 54,157,107 56.9%
PIMCO Partners, LLC ("PPLLC")(7)..... 0 0 53,933,019 56.8%
Thomson Advisory Group, Inc.......... 0 0 14,380,217 26.0%
William R. Benz, II(8)............... 0 66,000 53,933,019 56.8%
David H. Edington(8)................. 0 184,000 53,933,019 56.9%
John L. Hague(8)..................... 0 184,000 53,933,019 56.9%
Dean S. Meiling(8)................... 0 184,000 53,933,019 56.9%
James F. Muzzy(8).................... 0 184,000 53,933,019 56.9%
William C. Powers(8)................. 0 184,000 53,933,019 56.9%
Frank B. Rabinovitch(8).............. 0 184,000 53,933,019 56.9%
Lee R. Thomas(8)..................... 0 38,000 53,933,019 56.8%
PIMCO ADVISORS MANAGEMENT BOARD
MEMBERS
Walter E. Auch, Sr................... 0 0 1,311 *
David B. Breed....................... 0 0 550,000 1.3%
Donald A. Chiboucas(9)............... 0 0 1,188,892 2.8%
William D. Cvengros.................. 0 320,000 200,000 1.3%
Walter B. Gerken..................... 0 0 1,971 *
William H. Gross(8)(10).............. 0 384,000 53,953,369 57.0%
Brent R. Harris(8)................... 0 184,000 53,933,019 56.9%
Donald R. Kurtz...................... 0 0 5,971 *
George A. Long....................... 320 320 0 *
James F. McIntosh.................... 0 0 5,971 *
Kenneth H. Mortenson................. *
William F. Podlich, III(8)........... 0 64,000 53,933,019 56.8%
Glenn S. Schafer..................... 0 0 0 *
Thomas C. Sutton..................... 0 0 0 *
William S. Thompson, Jr.(11)......... 0 184,000 53,939,019 56.9%
Benjamin L. Trosky(8)................ 0 73,000 53,933,019 56.8%
EXECUTIVE OFFICERS NOT INCLUDED ABOVE
Kenneth M. Poovey.................... 0 10,000 0 *
Stephen J. Treadway.................. 0 40,000 25,000 *
Robert M. Fitzgerald................. 0 20,000 0 *
James G. Ward........................ 0 10,000 500 *
Richard M. Weil...................... 0 10,800 0 *
All directors and executive officers
as a group (21 persons)............ 320 1,299,800 55,939,305 58.3%
</TABLE>
- ---------------
* Less than 1%
(1) Each of the persons and entities listed disclaims beneficial ownership of
any units except to the extent that it has a pecuniary interest in such
items.
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<PAGE> 87
(2) Assumes that all awards under the PIMCO Advisors L.P. 1993 Unit Option
Plan, the 1996 Unit Incentive Plan of PIMCO Advisors L.P. and the PIMCO
Advisors L.P. Restricted Unit Plan (collectively, the "PIMCO Advisors
Plans") have been assumed by the 1997 Plan. The 1997 Plan will assume the
awards under the PIMCO Advisors Plans as soon as practicable after the
Restructuring.
(3) Subject to certain transfer restrictions under the PIMCO Advisors
Partnership Agreement, PIMCO Advisors units are exchangeable semi-annually
on a one-to-one basis for Partnership Units. The percentage ownership
column assumes conversion of only those PIMCO Advisors units held by the
applicable person or entity.
(4) Includes (i) 39,410,322 PIMCO Advisors units held of record by PGP and (ii)
14,380,217 PIMCO Advisors units held by TAG over which PGP may be deemed to
have voting control. Does not reflect .01% general partner interest in the
Partnership.
(5) Includes (i) the 53,790,539 PIMCO Advisors units which may be deemed to be
beneficially owned by PGP, which may be deemed to be beneficially owned by
Pacific Life and PFAMCo, because PIMCO Inc. is a general partner of PGP and
is a wholly-owned subsidiary of PFAMCo, which is a wholly-owned subsidiary
of Pacific Life; and (ii) an aggregate of 5,198,257 PIMCO Advisors units
issued as follows: PIMCO Inc. (366,568 units), Cadence Inc. (32,652 units),
Cadence L.P. (2,665,000 units), NFJ Inc. (18,404 units), NFJ LP (1,057,211
units), Parametric Inc. (18,562 units), and Parametric LP (1,039,860 units)
which may be deemed beneficially owned by PFAMCo because PIMCO Inc.,
Cadence Inc., NFJ Inc., and Parametric Inc., are wholly owned subsidiaries
of PFAMCo and Cadence Inc., NFJ Inc., Parametric Inc., in turn are the
general partners of Cadence L.P., NFJ LP, and Parametric LP, respectively.
As general partners, Cadence Inc., NFJ Inc., and Parametric Inc., have
shared investment and disposition powers with respect to Units held by
Cadence L.P., NFJ LP, and Parametric LP, respectively. The address of each
of the above entities is: 700 Newport Center Drive, Newport Beach,
California 92660.
(6) Includes (i) 366,568 PIMCO Advisors units held of record by PIMCO Inc. and
(ii) the 53,790,539 PIMCO Advisors units which may be viewed to be
beneficially owned by PGP, which may be deemed to be owned by PIMCO Inc.
because PIMCO Inc. is a general partner of PGP.
(7) Includes (i) 142,480 PIMCO Advisors units held of record by PPLLC; and (ii)
53,790,539 PIMCO Advisors units which may be considered to be beneficially
owned by PGP and which may be deemed to be beneficially owned by PPLLC,
which is a general partner of PGP.
(8) Includes the following which may be deemed to be beneficially owned by the
individual as a member of PPLLC. (i) 142,480 PIMCO Advisors units of PIMCO
Advisors held of record by PPLLC; and (ii) 53,790,539 PIMCO Advisors units
which may be considered to be beneficially owned by PGP, and which may be
deemed to be beneficially owned by PPLLC as a general partner of PGP.
(9) Includes 826,082 PIMCO Advisors units which may be acquired upon exchange
of preferred stock of TAG in certain circumstances. The individual
disclaims beneficial ownership of any PIMCO Advisors units that may be
acquired upon exchange of Series B Preferred Stock of TAG.
(10) Includes 18,000 PIMCO Advisors units held by the individual and his spouse,
of which he has shared voting and investment power and 500 PIMCO Advisors
units held by his spouse of which he has no voting or investment power.
(11) Includes (i) 6,000 PIMCO Advisors units held in trusts of which the
individual is trustee and as to which he has sole voting and disposition
power.; and (ii) 142,480 PIMCO Advisors units held of record by PPLLC; and
(ii) 53,790,539 PIMCO Advisors units which may be considered to be
beneficially owned by PGP and which may be deemed to be beneficially owned
by PPLLC, which is a general partner of PGP.
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<PAGE> 88
DESCRIPTION OF THE PARTNERSHIP AGREEMENT
The following summarizes certain terms of the Partnership Agreement. The
summary is qualified in its entirety by the complete text of the Partnership
Agreement.
Organization and Duration. The Partnership was formed as a Delaware limited
partnership in 1987. PGP is the sole general partner of the Partnership. The
Partnership will dissolve on December 31, 2061 unless sooner dissolved pursuant
to the Partnership Agreement.
Purpose and Business. The purpose and business of the Partnership is
primarily to engage in the investment management and advisory business. The
Partnership may engage in all aspects of the financial services business,
including, but not limited to, the acquisition, development, ownership,
management and distribution of investment advisory businesses and development,
management and distribution of investment companies registered under the
Investment Company Act, as amended, and other pooled investment funds and in
investment, trading and financing activities of all kinds and carry on any
business relating thereto or arising therefrom, including entering into any
partnership, joint venture or other similar arrangement to engage in any of the
foregoing or the ownership of interests in any entity engaged in any of the
foregoing. The Partnership may also carry out any activities that are incidental
or necessary to such business which may lawfully be conducted by a limited
partnership organized under the Delaware Revised Uniform Limited Partnership Act
(the "DRULPA").
Management of the Partnership. As more fully discussed under "Management of
the Partnership," the general partner of the Partnership has full authority and
discretion to manage and control the business and affairs of the Partnership.
The general partner has delegated to the Partnership's management board
substantially all of the general partner's rights, powers and duties to manage
and control the day to day operations of the Partnership. See "Management of the
Partnership." Under the Partnership Agreement, the Limited Partners (as defined
in the Partnership Agreement) have no right or power to take part in the day-to-
day management, operation or control of the Partnership. The Limited Partners
have no rights other than those specifically provided in the Partnership
Agreement or the DRULPA.
The general partner may be removed with the vote of the holders of 80% of
the Partnership Units. Limited Partners have voting rights only on certain
limited matters. Further, approval of actions by or involving the Partnership
may be proposed by, and generally requires the consent of, the general partner.
Limited Partners generally have no right to propose amendments to the
Partnership Agreement or to propose any Partnership action.
Duties of the General Partner. The Partnership Agreement provides that the
general partner will not be liable to the Partnership or the Limited Partners
for breach of fiduciary duty (including breach of any duty of care or any duty
of loyalty) unless the breach involves actual fraud, gross negligence or willful
or wanton misconduct. In addition, the Partnership Agreement provides that
whenever a conflict of interest arises between the general partner or its
affiliates on the one hand, and the Partnership or any of its limited partners
on the other hand (including without limitation any such conflict arising out of
any transaction involving the Partnership and its affiliates), any resolution or
course of action in respect of such conflict of interest, in the absence of bad
faith, shall not be a breach of the Partnership Agreement, any other agreement,
or any duty expressed or implied by law or equity. Where the Partnership
Agreement requires the general partner to make a decision in its discretion or
requires the general partner to act in good faith, the general partner may make
any such decision, so long as such action or decision does not constitute
willful misconduct and is reasonably believed by the general partner to be
consistent with the best interests of the Partnership.
Withdrawal and Removal of General Partner. Except under certain limited
exceptions, the general partner has agreed that it may withdraw as general
partner of the Partnership only if (i) such withdrawal is approved by holders of
a majority of the Partnership Units and the general partner makes a Partnership
Assignment Determination, and (ii) counsel makes a Partnership Limited Liability
Determination, and makes a Partnership Tax Determination. The general partner
may be removed by a vote of Limited Partners holding 80% or more of all
outstanding limited partner units if a successor general partner is appointed,
counsel makes a Partnership Limited Liability Determination and a Partnership
Tax Determination, the
85
<PAGE> 89
general partner makes a Partnership Assignment Determination and such removal is
approved by the successor general partner. Also, interests in the general
partner may be sold or transferred without any prior approval or consent of the
holders of the Partnership Units.
Indemnification. The Partnership Agreement requires the Partnership to
indemnify the general partner, its affiliates and all of its officers,
directors, partners, employees and agents against any and all proceedings in
which the Indemnitees may be involved, or threatened to be involved, as a party
or otherwise by reason of their management of the affairs of the Partnership or
which relates to or arises out of the Partnership or related entities. The
Partnership Agreement provides that such Indemnitees are not entitled to
indemnification with respect to any claim, issue or matter in which it has been
adjudged liable for actual fraud, willful misconduct or gross negligence, unless
and only to the extent that the court in which such action was brought, or
another court of competent jurisdiction, determines upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnification
for such liabilities and expenses as the court may deem proper.
The Partnership Agreement also provides that the general partner will not
be liable to the Partnership or the Limited Partners for errors in judgment or
for breach of fiduciary duty (including breach of any duty of care or any duty
of loyalty) unless the general partner's action or failure to act involved an
act or omission that constitutes actual fraud, gross negligence or willful or
wanton misconduct.
Power of Attorney. Each Limited Partner and each person who executes a
Transfer Application grants to the general partner (and its successors) and the
Liquidating Trustee of the Partnership (as such term is defined in the
Partnership Agreement) an irrevocable power of attorney to execute and file
certain documents agreements and certificates in connection with, inter alia,
the formation, qualification, continuance or dissolution of the Partnership and
certain other matters.
Transfer of Units. Without the approval of the Limited Partners, the
general partner may sell or transfer its general partner interest in the
Partnership to any affiliate of the general partner that agrees to assume the
duties of the general partner and agrees to be bound by the provisions of the
Partnership Agreement. The general partner may also transfer its general partner
interest in the Partnership to a person who agrees to assume the duties of the
general partner and agrees to be bound by the provisions of the Partnership
Agreement in connection with any merger or consolidation of the general partner
or in connection with a transfer of all or substantially all of the general
partner's assets without the approval of the Limited Partners. The general
partner may not sell or transfer its general partner interest to any other
person or entity unless (i) such sale or transfer is approved by a majority of
the limited partnership unitholders, (ii) the purchaser or other transferee of
such interest is, or in connection therewith becomes, a general partner and
(iii) the general partner makes certain assignment, tax and limited liability
determinations.
Except upon the death of a Limited Partner or by operation of law, the
Partnership shall not recognize a transferee of limited partner units unless
such transferee has executed and delivered a transfer application to the general
partner. By executing and delivering a transfer application, the transferee of
limited partner units represents that it has, among other things, requested
admission as a Substituted Limited Partner (as defined by the Partnership
Agreement), executed and agreed to comply with and be bound by the Partnership
Agreement and granted the powers of attorney provided for in the Partnership
Agreement. A transferee shall be admitted to the Partnership as Limited Partner
only with the express consent of the general partner. Until and unless the
general partner consents to the transfer, the transferee will be an Assignee (as
defined by the Partnership Agreement). An Assignee shall receive allocations in
income, gains, credits, deductions, profits and losses of the Partnership
attributable to his interest in the Partnership, but shall not be entitled to
vote. After the general partner consents to the transferee, the Assignee will
become a Substituted Limited Partner.
Notwithstanding the foregoing, no transfer of any Partnership Units shall
be made if such transfer would violate applicable federal and state securities
laws or would affect the Partnership's existence or qualification as a limited
partnership under Delaware law.
Amendment of the Partnership Agreement. The general partner (pursuant to
the general partner's power of attorney) without the approval of any Record
Holder (as such term is defined by the Partnership
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Agreement), may amend the Partnership Agreement at any time to effect a broad
range of changes to the Partnership, including, among other matters, (i) changes
in its name or principal place of business, the admission, substitution or
withdrawal of partners, (ii) changes that are of an inconsequential nature and
do not adversely affect the Limited Partners in any material respect, (iii)
changes that are necessary or desirable to cure any ambiguity, to correct or
supplement any internally inconsistent provisions of the Partnership Agreement
so long as such changes do not adversely affect the Limited Partners, (iv)
changes necessary or desirable to satisfy any requirements of any opinion,
directive, order, ruling or regulation of any federal or state statute, so long
as such change is made in a manner which minimizes any adverse effect on the
Limited Partners, (v) changes necessary or desirable to facilitate the trading
of the Partnership Units or to comply with any rule, regulation, guideline or
requirement of any securities exchange, (vi) changes that are required or
contemplated by the Partnership Agreement, (vii) changes designed to promote
compliance with or continued exemption from various laws (including changes
designed to ensure that the Partnership is not treated as a corporation for
federal income tax purposes), (viii) changes in connection with the issuance of
any class or series of units or other securities of the Partnership and (ix)
other changes specified in the Partnership Agreement or those similar to those
types of changes specified therein.
Generally, if an amendment is proposed by the general partner, it shall be
effective upon its approval by a majority vote unless the Partnership Agreement
requires a greater percentage.
Certain other amendments to the Partnership Agreement require the unanimous
approval of the general and Limited Partners. Such approval is required if the
effect of any amendment would (i) result in the loss of limited liability of the
Limited Partners, (ii) have an effect on the provisions that allocate
distributions and profits and losses or on the voting rights of any of the
partners that is materially adverse to the Limited Partners or the general
partner or (iii) cause the Partnership to be treated as an association taxable
as a corporation for federal income tax purposes.
Voting; Meetings. Meetings of the unitholders may be called by the general
partner or by any Limited Partners holding at least 10% of the issued and
outstanding limited partnership units. Generally, no action may be taken by the
Limited Partners unitholders without a meeting duly called or without written
approval in accordance with the Partnership Agreement.
Unitholders of record on the record date set pursuant to the Partnership
Agreement will be entitled to notice of, and to vote in person or by proxy at,
Limited Partner meetings and to act with respect to matters as to which written
consents may be solicited. Any action that may be taken at a meeting of Limited
Partners may be taken without a meeting Limited Partners owning not less than
the number of Partnership Units that would be necessary to take such action at a
meeting at which all the Limited Partners were present and voted.
The holders of more than 50% of the issued and outstanding units will
constitute a quorum at such a meeting or by proxy, and, with certain exceptions,
matters submitted to Limited Partners will be determined by the affirmative vote
of the Limited Partners holding a majority of the units entitled to vote.
Issuance of Additional Partnership Units and Other Securities. The general
partner is authorized to cause the Partnership to issue Partnership Units or any
other types of securities at any time or from time to time to the general
partner, to Limited Partners or to other persons and to admit them to the
Partnership as additional Limited Partners, all without any consent or approval
of the Limited Partners. Generally, any such additional issuances shall be made
only after receipt of the opinion of an investment banking firm that such
issuance is fair to the Limited Partners from a financial point of view. The
general partner shall have sole and complete discretion to determine the rights,
powers and duties and the consideration and terms and conditions with respect to
any future issuance of such units or securities, without the consent of the
limited partners. However, the approval of holders of a majority of outstanding
Partnership Units held by persons who are not affiliates of the general partner
shall be required in order to issue Partnership Units which rank senior, with
respect to any right to receive distributions, to the units originally issued.
Additionally, under certain circumstances and conditions defined in the
Partnership Agreement, the general partner may make a distribution in
Partnership Units to Record Holders, or subdivide or split Partnership Units and
combine such units.
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Subject to certain exceptions involving changes in the tax laws, any
issuance under the foregoing provisions of the Partnership Agreement shall only
be permitted if the general partner makes an Assignment Determination and a Tax
Determination.
Right to Purchase Partnership Units. The general partner and its affiliates
have the right to purchase or otherwise acquire Partnership Units for their own
account and may, subject to certain provisions in the Partnership Agreement,
sell or otherwise dispose of such units.
Limited Liability. The liability of a Limited Partner who does not take
part in the control of the business of the Partnership and who acts in
conformity with the provisions of the Partnership Agreement will generally be
limited under Delaware law to the amount of such unitholders' capital
contribution to the Partnership in respect of such unitholder's Partnership
Units plus such unitholder's share of the Partnership's assets and undistributed
profits. Under certain circumstances, Limited Partners may also be liable under
Delaware law to return to the Partnership distributions from the Partnership to
the extent that at the time of the distributions after giving effect thereto,
all liabilities of the Partnership, other than liabilities to Limited Partners
on account of their interest in the Partnership, exceed the fair value of the
Partnership's assets. Generally, any such liability is not released by the sale
of limited partner units. Although the Partnership will conduct some level of
direct or indirect operations in several U.S. jurisdictions other than Delaware,
it is believed, but cannot be determined with certainty, that the limited
liability of the Limited Partners will be determined by reference to Delaware
law.
Books and Reports. The general partner is required to keep appropriate
books of the Partnership's business at the principal office of the Partnership.
The books will be maintained for financial reporting purposes on an accrual
basis in accordance with generally accepted accounting principles.
Each Limited Partner, and each Limited Partner's duly authorized
representatives, shall have the right upon reasonable notice and at reasonable
times and at such person's own expense, but only upon his written request and
for a purpose reasonably related to such person's interest as a Limited Partner,
and subject to any confidentiality limitations reasonably imposed by the general
partner in order to protect trade secrets and similar proprietary information
and to comply with applicable securities laws, to inspect and copy certain books
of the Partnership and to have access to certain other records and information
as specified in the Partnership Agreement.
As soon as practicable, but in no event later than 120 days after the close
of each year and 75 days after the close of each quarter, the general partner
shall mail to each record holder certain financial reports as specified in the
Partnership Agreement.
The general partner shall arrange for the preparation and timely filing of
all tax returns of the Partnership showing certain tax information specified in
the Partnership Agreement, and shall use all reasonable efforts to furnish such
tax information to the record holders within ninety days after the close of each
taxable year of the Partnership as is reasonably required by the record holders
for applicable income tax reporting purposes.
Events Causing Dissolution. The Partnership shall be dissolved and its
affairs wound up upon the occurrence of any of the following events: (i) the
expiration of the term of the Partnership; (ii) the withdrawal of the general
partner or the occurrence of any other event that results in the general partner
ceasing to be a general partner of the Partnership (other than by reason of a
transfer); (iii) the bankruptcy of the general partner; (iv) a written
determination by the general partner to dissolve the Partnership; or (v) the
sale by the Partnership of all or substantially all of the Partnership's assets.
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COMPARISON OF PIMCO ADVISORS LIMITED PARTNER UNITS
AND PARTNERSHIP UNITS
PIMCO ADVISORS THE PARTNERSHIP
FORM OF ORGANIZATION
PIMCO Advisors is a limited partnership formed under DRULPA.
The Partnership is a limited partnership formed under DRULPA.
BUSINESS
The PIMCO Advisors Partnership Agreement provides that the purpose of PIMCO
Advisors is (i) to carry on the investment management and advisory business and
(ii) to carry on any other lawful activities for which limited partnerships may
be formed under DRULPA.
The Partnership Agreement provides that the purpose of the Partnership is
(i) to, through an operating partnership, engage in investment advisory services
and (ii) to engage in all other aspects of the financial services business.
VOTING RIGHTS
Under DRULPA and/or the PIMCO Advisors Partnership Agreement, limited
partners have voting rights with respect to (i) the withdrawal, removal,
transfer and replacement of a general partner, (ii) the merger or consolidation
of PIMCO Advisors with another entity, (iii) the sale of all or substantially
all of the assets owned, directly or indirectly, by PIMCO Advisors, (iv) the
dissolution of PIMCO Advisors, (v) the domestication of PIMCO Advisors, (vi)
certain types of amendments to the PIMCO Advisors Partnership Agreement, (vii)
reconstitution, (viii) election, compensation, and approval of a successor
liquidating trustee, (ix) conversion or reorganization of PIMCO Advisors into
another type of legal entity, (x) distributions of publicly traded securities,
other than upon liquidation and (xi) issuance of units which rank senior to the
PIMCO Advisors Class A LP units.
Under DRULPA and/or the Partnership Agreement, limited partners have voting
rights with respect to (i) the withdrawal, removal, transfer and replacement of
a general partner, (ii) the merger or consolidation of the Partnership with
another entity, (iii) the sale of all or substantially all of the assets owned,
directly or indirectly, by the Partnership, (iv) the dissolution of the
Partnership, (v) the domestication of the Partnership, (vi) certain types of
amendments to the Partnership Agreement, (vii) reconstitution, (viii) election,
compensation, and approval of a successor liquidating trustee, (ix) conversion
or reorganization of the Partnership into another type of legal entity, (x)
distributions of publicly traded securities, other than upon liquidation, (xi)
issuance of units which rank senior to the units originally issued and (xii)
capital contribution by the Partnership to the operating partnership, if the
proceeds are to be lent by the operating partnership to an affiliate of the
general partner and if such funds are raised by the general partner causing the
partnership to issue additional units.
Each limited partner unit entitles each holder thereof who is admitted as a
limited partner of PIMCO Advisors to cast one vote on all matters presented to
limited partners.
Each Partnership Unit entitles each holder thereof who is admitted as a
limited partner of the Partnership to cast one vote on all matters presented to
limited partners.
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PIMCO ADVISORS THE PARTNERSHIP
Approval of any matter submitted to limited partners generally requires the
affirmative vote of limited partners holding more than 50% of the units then
outstanding, except that removal of a general partner requires the vote of 80%
of the outstanding units and amendments that would have a material and adverse
effect on a particular class of units must be approved by that class.
Approval of any matter submitted to limited partners generally requires the
affirmative vote of limited partners holding more than 50% of the units then
outstanding, except that removal of a general partner requires the vote of 80%
of the outstanding units, and amendments that would have (a) a material and
adverse effect on the limited partners, (b) would result in the loss of limited
liability of the limited partners or (c) would cause the Partnership to be
treated as an association taxable as a corporation require a unanimous vote of
the Partnership.
Only a general partner may propose amendments to the PIMCO Advisors
Partnership Agreement.
Only the general partner may propose amendments to the Partnership
Agreement.
Any action that may be taken at a meeting of unitholders may be taken by
written consent in lieu of a meeting executed by unitholders sufficient to
authorize such action at a meeting of unitholders.
Any action that may be taken at a meeting of unitholders may be taken by
written consent in lieu of a meeting executed by Unitholders sufficient to
authorize such action at a meeting of Unitholders.
DISTRIBUTIONS AND DIVIDENDS
From and after December 31, 1997, PIMCO Advisors is required to distribute
all Operating Profit Available for Distribution. Prior to December 31, 1997
PIMCO Advisors is required under the PIMCO Advisors Partnership Agreement to
distribute Operating Profit Available for Distribution to the partners of PIMCO
Advisors on a quarterly basis as follows: (i) first to the holders of PIMCO
Advisors Class A LP and GP Units until such holders have received $0.47 per Unit
per calendar quarter (aggregating to $1.88 per Unit per year) since the date of
the 1994 Consolidation, second to holders of PIMCO Advisors Class B LP Units
until such holders have received $0.47 per unit per calendar quarter on a
cumulative basis within a calendar year but not carried over from year to year
and third to all holders of units on a pro rata basis. The PIMCO Advisors Class
C LP Units (all of which are held by a subsidiary of PIMCO Advisors) have the
same rights to distributions as the PIMCO Advisors Class A LP Units, except that
distributions on the PIMCO Advisors Class C LP Units are subject to an annual
limit of $3.00 per unit. Effective January 1, 1998, the PIMCO Advisors
Partnership Agreement will be amended to entitle the Class C LP Units to a
minimum distribution of $2.75 per unit per year, commencing with the quarter
ending March 31, 1998, and to cause the Class C LP Units to be convertible at
the election of the holder into PIMCO Advisors Class A LP Units on a one-for-one
basis. All PIMCO Advisors Class C LP Units are held by a subsidiary of PIMCO
Advisors, and PIMCO Advisors has no present intention of converting such units.
The Partnership is required to distribute quarterly an amount equal to the
excess of (i) the cash distribution from the operating partnership plus the
interest on the Opfin Debt over (ii) the expenses of the Partnership. The
distributions shall be made in proportion to the ownership interest of each
partner.
Prior to the Oppenheimer Capital Merger, the Partnership's distributions
were dependent on the distributions of Oppenheimer Capital. Since the
Oppenheimer Capital Merger, the Partnership's distributions have been dependent
on the distributions of PIMCO Advisors. Because the Opfin Debt has been repaid
and PIMCO Advisors pays the expenses (other than taxes) of the Partnership,
distributions on the Partnership Units will be equal to the distributions on the
PIMCO Advisors units less taxes. Effective January 1, 1998, the Partnership will
be subject to tax on its gross income from active businesses.
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PIMCO ADVISORS THE PARTNERSHIP
TAXATION
Under current law, PIMCO Advisors is not a taxpaying entity. Rather, each
holder of units includes the holder's share of the income and gain and, subject
to certain limitations, the losses, deductions and credits of PIMCO Advisors in
computing taxable income without regard to the cash distributed to the holder.
Generally, cash distributions to holders of units are not taxable, unless
distributions exceed the holder's basis in the units. See "Certain Federal
Income Tax Consequences."
Like PIMCO Advisors, the Partnership is not a taxpaying entity. Rather,
each holder of units includes the holder's share of the income and gain and,
subject to certain limitations, the losses, deductions and credits of PIMCO
Advisors in computing taxable income without regard to the cash distributed to
the holder. Generally, cash distributions to holders of units are not taxable,
unless distributions exceed the holder's basis in the units. Due to recent
legislation, the Partnership will be subject to a 3.5% federal tax (and,
possibly, additional state taxes) on its gross income derived from active
businesses after December 31, 1997. See "Certain Federal Income Tax
Consequences."
A tax-exempt limited partner's share of PIMCO Advisors taxable income
constitutes unrelated business taxable income to the tax-exempt limited partner.
See "Certain Federal Income Tax Consequences."
A tax-exempt limited partner's share of the Partnership's taxable income
constitutes unrelated business taxable income to the tax-exempt limited partner.
See "Certain Federal Income Tax Consequences."
MANAGEMENT
PIMCO Advisors is managed by its general partners: PGP and the Partnership.
PGP has direct control of the Partnership, and therefore controls PIMCO
Advisors. Any difference arising as to any action connected with the business of
PIMCO Advisors, other than those requiring the unanimous consent of the general
partners, is decided by the general partners holding a majority of the
outstanding PIMCO Advisors GP Units.
The business and affairs of the Partnership are managed by its general
partner, PGP.
The general partners have jointly delegated substantially all of the
management and control of PIMCO Advisors to the PIMCO Advisors Management Board
which has delegated to an Executive Committee the authority to manage most
day-to-day operations and policies of PIMCO Advisors.
The general partner has delegated to the Partnership's Management Board
substantially all of the general partner's rights, powers and duties to manage
and control the Partnership.
The general partners may be removed only by vote of 80% of the outstanding
units.
The general partner may be removed only by vote of 80% of the outstanding
units.
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PIMCO ADVISORS THE PARTNERSHIP
POTENTIAL DILUTION
The general partners, generally without the approval of the unitholders,
have the authority to cause PIMCO Advisors to issue additional classes or series
of limited partners interests, and has discretion to determine rights, powers
and duties and the consideration in terms and conditions with respect to any
such issuance; provided, however, that a majority of outstanding limited
partners unaffiliated with the general partner must approve any issuance of
units which rank senior to the PIMCO Advisors Class A LP Units. PIMCO Advisors
will not issue any units or other equity securities unless PIMCO Advisors
receives an opinion of counsel to the effect that the issuance will not cause
PIMCO Advisors to be treated as a corporation for federal income tax purposes.
The general partner, generally without the approval of the Unitholders, has
the authority to cause the Partnership to issue additional classes or series of
limited partners' interests, and has discretion to determine the rights, powers
and duties and the consideration and terms and conditions with respect to any
such issuance; provided, however, that a majority of outstanding limited
partners unaffiliated with the general partner must approve any issuance of
units which rank senior, with respect to any right to receive distributions, to
the units originally issued. In addition, with certain exceptions, any
additional issuances shall be made only after receipt of an opinion of an
investment banking firm that such issuance is fair to the limited partners who
are not affiliates of the general partner from a financial point of view. The
Partnership will not issue any units or other equity securities unless the
general partner determines that the effect of the issuance will not cause the
Partnership to be treated as a corporation for federal income tax purposes, or
cause an "assignment" for regulatory purposes.
MEETINGS
Meetings of limited partners may be called by the general partner, any
liquidating trustee or limited partners holding at least 10% of the issued and
outstanding units.
Meetings of limited partners may be called by the general partner or
limited partners holding at least 10% of the issued and outstanding units.
CONVERSION/EXCHANGE RIGHTS
The units are not convertible into any other securities.
Following the Restructuring, Nonpublic Unitholders will have certain rights
to exchange their PIMCO Advisors units for Partnership Units from time to time.
The units are not convertible into any other securities.
RIGHT TO PURCHASE UNITS
If the general partners determine that there is a substantial risk of the
partnership becoming subject to taxation on its income, the general partners may
initiate redemption transactions which will permit the exchange of some or all
of the limited partner units for interests in one or more successor entities.
If less than 10% of issued and outstanding units are units held by limited
partners, the general partner will have the right to purchase all of the units
held by limited partners for a purchase price based on the recent trading price
of the units.
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PIMCO ADVISORS THE PARTNERSHIP
LIQUIDATION RIGHTS
In the event of the liquidation of the Partnership the assets of the
Partnership remaining after the satisfaction of all debts and liabilities of the
Partnership are distributed to limited partners pro rata in accordance with
their capital accounts.
In the event of the liquidation of the Partnership the assets of the
Partnership remaining after the satisfaction of all debts and liabilities of the
Partnership are distributed to limited partners pro rata in accordance with
their capital accounts.
RIGHT TO COMPEL DISSOLUTION
Under the DRULPA and the PIMCO Advisors Partnership Agreement, the limited
partners may only compel dissolution of PIMCO Advisors if all of the general and
limited partners consent in writing. An election by the general partners to
dissolve PIMCO Advisors may be made under certain circumstances or if approved
by limited partners holding more than 50% of the units held by persons other
than the general partners and their affiliates, voting as a single class.
Under the Partnership Agreement, limited partners may only compel
dissolution of the Partnership with the affirmative vote of 80% of the
outstanding limited partner units. A written determination by the general
partner to dissolve the Partnership will also compel liquidation.
LIMITED LIABILITY
In general, holders of units are limited partners in a Delaware limited
partnership, and do not have personal liability for obligations of PIMCO
Advisors.
In general, holders of units are limited partners in a Delaware limited
partnership, and do not have personal liability for obligations of the
Partnership.
LIQUIDITY AND MARKETABILITY
The units are transferable, provided that no transfer will be made if it
(i) would violate applicable federal and state securities laws, (ii) would cause
an "assignment" for regulatory purposes or would cause PIMCO Advisors to lose
its partnership tax treatment or (iii) would affect PIMCO Advisors' existence or
qualification as a limited partnership under the DRULPA. Following the
Restructuring, significant restrictions will be imposed on the right to transfer
units. Under the PIMCO Advisors Partnership Agreement, following the
Restructuring PIMCO Advisors units will not be transferable unless the transfer
is permitted under certain IRS regulatory safe-harbor rules for avoiding
"publicly traded partnership" tax status for PIMCO Advisors. Under such rules,
and subject to an annual volume limitation, Nonpublic Unitholders will be
entitled to exchange certain PIMCO Advisors units for Partnership Units. See
"Relationship Between the Partnership and PIMCO Advisors -- Operating
Agreement."
The units are transferable, provided that no transfer will be made if it
(i) would violate applicable federal and state securities laws or (ii) would
affect the Partnership's existence or qualification as a limited partnership
under the DRULPA.
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PIMCO ADVISORS THE PARTNERSHIP
CONTINUITY OF EXISTENCE
The PIMCO Advisors Partnership Agreement provides for PIMCO Advisors to
continue in existence until December 31, 2086, unless earlier dissolved in
accordance with the PIMCO Advisors Partnership Agreement.
The Partnership Agreement provides for the Partnership to continue in
existence until December 31, 2061, unless earlier dissolved in accordance with
the Partnership Agreement.
FINANCIAL REPORTING
Until the Effective Date, PIMCO Advisors is subject to the reporting
requirements of the Exchange Act and files annual and quarterly reports
thereunder. After the Restructuring, PIMCO Advisors will not be subject to the
reporting requirements of the Exchange Act and will not file such reports.
The Partnership is subject to the reporting requirements of the Exchange
Act and files annual and quarterly reports thereunder.
CERTAIN LEGAL RIGHTS
Delaware law allows a limited partner, under certain circumstances, to
institute legal action on behalf of a partnership (a partnership derivative
action) to recover damages from a third party or a general partner where the
general partner has failed to institute the action. In addition, a limited
partner may have rights to institute legal action on behalf of the limited
partner or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of fiduciary duties to the
limited partners. Limited partners may also have rights to bring actions in
federal courts to enforce federal rights.
Delaware law allows a limited partner, under certain circumstances, to
institute legal action on behalf of a partnership (a partnership derivative
action) to recover damages from a third party or a general partner where the
general partner has failed to institute the action. In addition, a limited
partner may have rights to institute legal action on behalf of the limited
partner or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of fiduciary duties to the
limited partners. Limited partners may also have rights to bring actions in
federal courts to enforce federal rights.
RIGHT TO LIST OF HOLDERS; INSPECTION OF BOOKS AND RECORDS
Under DRULPA, limited partners have a right, subject to reasonable
standards as may be established by the general partner, to obtain from the
general partner, from time to time upon reasonable demand for any purpose
reasonably related to the limited partner's interest as a limited partner,
certain information relating to the status of the business and financial
condition of PIMCO Advisors, tax returns, governing instruments of PIMCO
Advisors and a current list of the partners of PIMCO Advisors, provided that the
general partner may keep confidential any trade secrets or any other information
the disclosure of which could damage PIMCO Advisors or violate any agreement or
applicable law.
Under DRULPA, limited partners have a right, subject to reasonable
standards as may be established by the general partner, to obtain from the
general partner, from time to time upon reasonable demand for any purpose
reasonably related to the limited partner's interest as a limited partner,
certain information relating to the status of the business and financial
condition of the Partnership, tax returns, governing instruments of the
Partnership and a current list of the partners of the Partnership, provided that
the general partner may keep confidential any trade secrets or any other
information the disclosure of which could damage the Partnership or violate any
agreement or applicable law.
SUBORDINATION
Subordinated to claims of creditors of PIMCO Advisors.
Subordinated to claims of creditors of the Partnership.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain federal income tax consequences of
the Restructuring and the receipt, retention, and disposition of Partnership
Units. This discussion is based on the provisions of the Code, the Treasury
Regulations thereunder and rulings and court decisions as of the date hereof,
all of which are subject to change, possibly retroactively. Neither the
Partnership nor PIMCO Advisors has requested a ruling from the Internal Revenue
Service ("IRS") in connection with the Restructuring.
The following discussion is for general information and does not address
all federal income tax consequences that may affect the receipt, ownership or
disposition of Partnership Units, nor does the discussion specifically address
the effect of any applicable state, local, or foreign tax laws. ACCORDINGLY,
EACH PROSPECTIVE HOLDER OF PARTNERSHIP UNITS IS URGED TO CONSULT HIS OR HER TAX
ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX AND
REPORTING CONSEQUENCES ARISING FROM THE RECEIPT, OWNERSHIP AND DISPOSITION OF
PARTNERSHIP UNITS AS THEY MAY RELATE TO HIS OR HER TAX SITUATION.
TAX CONSEQUENCES OF THE RESTRUCTURING
The exchange of PIMCO Advisors LP Units for Partnership Units is intended
to be treated for federal income tax purposes as a contribution of property to a
partnership in exchange for an interest in the partnership. As such, under
Section 721 of the Code, no gain or loss will be recognized by the exchanging
party or the Partnership on the exchange. The exchanging party will have a tax
basis in its Partnership Units equal to the tax basis such party had in the
surrendered PIMCO Advisors LP Units and will have a holding period for the
Partnership Units that includes the holding period that it had for the
surrendered PIMCO Advisors LP Units. Furthermore, the Partnership will have a
tax basis in the contributed PIMCO Advisors LP Units equal to the tax basis of
such PIMCO Advisors LP Units in the hands of the exchanging party and will have
a holding period for the PIMCO Advisors LP Units that includes the holding
period for such PIMCO Advisors LP Units in the hands of the exchanging party.
TAX CLASSIFICATION OF THE PARTNERSHIP
Tax Classification of the Partnership Generally. At present the Partnership
is classified as a partnership for federal income tax purposes, and, as
discussed below under "Publicly Traded Partnership Status," it is intended that
following the Restructuring the Partnership will elect to continue to be treated
as such. In general, entities classified as partnerships under the Code are not
subject to federal income tax (however, as discussed below in "Publicly Traded
Partnership Status," commencing with the 1998 taxable year the Partnership will
be subject to a 3.5% federal tax on its gross income from the conduct of active
trades or businesses, including its share of such gross income derived through
PIMCO Advisors). Instead, all holders of partnership interests are taxable on
their allocable share of the partnership's income or gain, whether or not such
income or gain is distributed. If an entity formed as a partnership under state
law were classified for federal income tax purposes as a corporation, income
would be taxed at the entity level at the then applicable corporate rate of tax
(currently a maximum federal marginal rate of 35%), and distributions to the
partners of such partnership would constitute taxable dividends to the extent of
current or accumulated earnings and profits of the entity.
Publicly Traded Partnership Status. As a result of amendments to the Code
made by the Revenue Act of 1987, pursuant to Code Section 7704(a) "publicly
traded partnerships" are generally treated as corporations under the Code. The
Partnership Units are publicly traded and thus the Partnership constitutes a
"publicly traded partnership" for purposes of Code Section 7704. As discussed
below, since 1987 the Partnership has qualified for a temporary exception to the
application of Code Section 7704(a), and the Partnership believes that under
recent tax legislation it will qualify for an indefinite exception that will be
available for the 1998 and subsequent tax years. However, if the Partnership
were determined at any time to be subject to Section 7704(a) of the Code, the
Partnership would be taxable as a corporation. In this event, the income, gain,
loss, deductions and credits of the Partnership would be reflected only on its
tax return and
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would not be passed through to the holders of Partnership Units. If the
Partnership had positive taxable income for any period, it would be required to
pay tax on such income at applicable corporate rates. The imposition of such tax
would reduce the amount of distributions that would ultimately be made to
holders of Partnership Units. In addition, the amount of any distributions to
holders of Partnership Units would be taxable to them as ordinary dividend
income to the extent of the Partnership's current or accumulated earnings and
profits, regardless of the source from which they were generated. Distributions
in excess of the Partnership's current or accumulated earnings and profits would
be treated as a nontaxable return of capital to the extent of the holder's tax
basis in its Partnership Units and thereafter treated as gain from the sale of
such holder's Partnership Units.
Because the Partnership was publicly traded prior to the effective date of
the amendments made by the Revenue Act of 1987, the Partnership believes that
since 1987 it has qualified and at present continues to qualify for a temporary
(10-year) exception to tax treatment as a corporation under Code Section 7704(a)
(the "temporary exception"). Subject to certain ongoing qualification
requirements that the Partnership believes it satisfies, this temporary
exception permits the Partnership to continue to enjoy partnership status (and
not be treated as a corporation) until December 31, 1997, so long as the
Partnership does not otherwise cease to be taxed as a partnership without regard
to the publicly traded partnership rules before then.
Pursuant to legislation enacted as part of the Taxpayer Relief Act of 1997,
for tax years beginning after December 31, 1997, publicly traded partnerships
that have been covered by the temporary exception will be eligible to elect (an
"electing 1987 partnership") to be covered by another exception to tax treatment
as a corporation (the "elective exception"). Subject to the discussion below, an
"electing 1987 partnership" is exempt from the application of Code Section
7704(a) and therefore will continue to be taxed as a partnership and not a
corporation. An "electing 1987 partnership" is subject to a 3.5% annual tax on
its gross income from the active conduct of any trades or businesses (the "3.5%
PTP tax"). For an "electing 1987 partnership" holding interests in another
partnership, gross income includes the partnership's distributive share of any
gross income from the other partnership's active conduct of a trade or business.
The 3.5% PTP tax cannot be offset by any tax credits and will not be deductible
for federal or state income tax purposes. An "electing 1987 partnership" is a
publicly traded partnership that meets certain eligibility requirements
specified in Code Section 7704(g), properly elects to be subject to Code Section
7704(g), and consents to the application of the 3.5% PTP tax for its first
taxable year beginning after December 31, 1997. The election, once made, applies
to the tax year for which it has been made and for all subsequent tax years,
until revoked by the partnership. Consent of the IRS is not needed to revoke the
election, and, once revoked, the election cannot be reinstated. Notwithstanding
its election, an "electing 1987 partnership" will lose its partnership status as
of the first day after December 31, 1997 on which the partnership adds a
substantial new line of business (within the meaning of Code Section 7704(g)).
The Partnership believes that it will continue to qualify through December
31, 1997, for the temporary exception to corporate tax treatment, and the
Partnership intends to take all necessary action to qualify for the elective
exception commencing with its taxable year that begins on January 1, 1998.
Furthermore, the Partnership does not anticipate either revoking the election or
adding a substantial new line of business. However, because ongoing
qualification for the elective exception will depend in large part upon facts
existing in the future, there can be no assurances that the Partnership will
continue to qualify for the elective exception and could thereafter be subject
to tax as a corporation.
Flow-Through of Partnership Income. Except for the 3.5% PTP tax discussed
above, no federal income tax will be paid by the Partnership itself. Instead,
holders of Partnership Units will be required to report on their federal income
tax returns their allocable share of income, gains, losses, deductions and
credits of the Partnership. The Partnership uses the calendar year for its tax
year, and, as noted above, the Partnership's income, gains and other tax items
are calculated on a monthly basis and allocated for tax purposes to the holders
of Partnership Units as of the last day of each month. The characterization of
any item of profit or loss (e.g., as capital gain or loss rather than ordinary
income or loss) will generally be the same for a holder of Partnership Units as
it is for the Partnership. Tax allocations are discussed further below. Because
a holder of Partnership Units will be required to include Partnership income or
gain in gross income for tax purposes, without regard to whether there are any
distributions from the Partnership, a holder may become liable for
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taxes on Partnership income or gain in excess of the cash distributions received
by such holder. In this regard, because the 3.5% PTP tax will not be deductible
for purposes of calculating the Partnership's net taxable income, the imposition
of such tax will reduce the Partnership's ability to make distributions equal to
its net taxable income (in other words, Partnership net income used to pay the
3.5% PTP tax will be taxable to the Partnership's partners but not available for
distribution.)
Because the activities of the Partnership are expected to consist of
holding PIMCO Advisors GP Units, and the activities of PIMCO Advisors are
expected to consist primarily of holding interests in the Investment Management
Firms, the types of income that the Partnership may realize is expected to be
principally operating income from the operations of the Investment Management
Firms, which will be characterized for tax purposes as if such income were
realized directly by the holders of Partnership Units.
Tax Classification of PIMCO Advisors. At present the Class A LP Units of
PIMCO Advisors are publicly traded, and thus PIMCO Advisors is a publicly traded
partnership subject to the provisions of Section 7704 discussed above. As in the
case of the Partnership, since 1987 PIMCO Advisors has qualified for the
"temporary exception" to tax treatment as a corporation under Section 7704(a),
and PIMCO Advisors believes that under the temporary exception it will continue
to enjoy partnership status (and not be taxed as a corporation) until December
31, 1997. However, unlike the Partnership, PIMCO Advisors does not intend to
elect to be covered by the "elective exception" to corporate tax treatment in
1998 and subsequent years. Instead, effective as of January 1, 1998, the
partnership interests of PIMCO Advisors will no longer be listed or traded on
any securities exchange and PIMCO Advisors will impose significant restrictions
on the private transfer of such interests. Such cessation of public trading and
transfer restrictions are intended to cause PIMCO Advisors to cease, as of
December 31, 1997, to be a publicly traded partnership for purposes of Section
7704, with the result that it will continue to be classified as a partnership
(and not a corporation) for federal tax purposes. If PIMCO Advisors continues to
qualify as a partnership for tax purposes, it will not pay federal tax on its
income, it will not be subject to the 3.5% PTP tax, and its income, gains and
other tax items will be allocated to its partners, including the Partnership, in
the manner described above under "Flow-Through of Partnership Income." Since
PIMCO Advisors will not be eligible after January 1, 1998, to elect to be
covered by the elective exception, it will lose its classification as a
partnership for tax purposes (and thus be taxable as a corporation) if at any
time after January 1, 1998, its partnership interests are deemed to be "publicly
traded" for purposes of Code Section 7704. Because the tax characterization of
PIMCO Advisors partnership interests will depend upon facts existing in the
future, there can be no assurance that in the future the IRS will not attempt to
treat PIMCO Advisors partnership interests as publicly traded and PIMCO Advisors
as a publicly traded partnership taxable as a corporation. Because substantially
all of the Partnership's income is derived from PIMCO Advisors, if the IRS were
to successfully assert that PIMCO Advisors should be classified as a publicly
traded partnership taxable as a corporation, PIMCO Advisors would be taxed on
its income and its after-tax distributions to the Partnership would be taxed as
dividends. See "Tax Classification of the Partnership Generally." Such corporate
tax treatment of PIMCO Advisors would have a material adverse effect on the
Partnership's income and thus on its distributions to the holders of Partnership
Units.
Calculation of Adjusted Tax Basis and Treatment of Partnership
Distributions. In general, a holder's tax basis in his Partnership Units will be
equal to the tax basis such holder had in the PIMCO Advisors LP Units that were
exchanged by such holder for Partnership Units in the Restructuring (for holders
contributing PIMCO Advisors LP Units to the Partnership in exchange for
Partnership Units in the Restructuring), increased by the amount of any
contributions made by the holder to the Partnership and by the holder's
allocable share of any income of the Partnership, and decreased by the amount of
any distributions received by the holder from the Partnership and by the
holder's allocable share of any losses of the Partnership. Increases in a
holder's share of liabilities of the Partnership (if any) are treated as
contributions to the Partnership by such holder and decreases in a holder's
share of such liabilities (if any) are treated as distributions of cash by the
Partnership to such holder.
As described above, holders of Partnership Units are subject to tax on
their allocable share of Partnership income whether or not distributed.
Generally, the receipt of cash distributions from a partnership are not taxable
to the recipient partner except to the extent that such distributions exceed the
partner's tax basis in his
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interest in the partnership. Cash distributions (including deemed distributions
resulting from a decrease in a partner's share of liabilities of the
partnership) in excess of a partner's tax basis in his partnership interest are
treated as gain realized from the sale or other taxable disposition of the
partnership interest. Distributions of assets in kind to a partner from a
partnership generally are not taxable to either the partnership or the recipient
partner, although certain exceptions apply.
Under the Partnership Agreement, items of Partnership income, gain, loss,
deduction and credit are determined on a monthly basis and allocated to holders
who hold Partnership Units as of the last day of such monthly period.
Distributions are made to holders who hold Partnership Units on record dates
determined by the General Partner. As a result, holders who sell Partnership
Units between record dates may be allocated taxable income of the Partnership
without receiving a distribution in respect of such income. Such an allocation
would increase a holder's basis in his or her Partnership Units, however, and
thus to such extent would decrease any gain or increase any loss recognized on a
sale of such Partnership Units.
TAX ALLOCATIONS
Overview. As indicated above, each holder of Partnership Units must include
in taxable income his or her share of the taxable income of the Partnership.
Although the applicable tax rules are complex, it is anticipated that the
reported income of each holder of Partnership Units will generally consist of
two parts:
- first, a share of the taxable income of the Partnership calculated at the
Partnership level (using the Partnership's basis in its assets and
without the benefit of any deductions for goodwill and certain other
intangible assets that are eligible for amortization pursuant to Section
197 of the Code ("Section 197 Intangibles")), and
- second, a deduction taken ratably over 15 years for the amortization of
the portion of the original purchase price of the PIMCO Advisors LP Units
contributed to the Partnership in the Restructuring allocable to Section
197 Intangibles, or, for holders who purchase Partnership Units, the
portion of the original purchase price for such Partnership Units
allocable to Section 197 Intangibles (which generally will be
approximately equal to the excess of the purchase price over such
holder's proportionate share of PIMCO Advisors basis in its assets, in
the former case, or of the Partnership's basis in its assets, in the
latter case).
The treatment of Section 197 Intangibles is discussed further under
"Certain Additional Tax Considerations for Holders of Partnership Units." Set
forth below is a discussion of three of the principal tax rules that are
relevant in determining the taxable income allocable to any holder of
Partnership Units:
Code Sections 704(b). Under Code Section 704(b), taxable income of the
Partnership must be allocated among Partnership Units in a manner that reflects
the allocation of economic income. Thus, the basic allocation rule generally
followed by the partnership is that its taxable income will be allocated pro
rata among Partnership Units.
Section 704(c). If a partner acquires an interest in a partnership in
exchange for a contribution of property to the partnership, the partnership's
initial tax basis in the contributed property may differ from the property's
fair market value at the time of the contribution. In that event, the taxable
income earned by the partnership from such property would differ from the
partnership's "book income" from the property (which would be calculated under
tax accounting principles using as the property's initial book value the
property's fair market value at the time it was acquired by the partnership).
Under Code Section 704(c), the taxable income and deductions of a partnership
generally must be allocated to the partnership interests that were issued in
exchange for property in a way that eliminates the difference between the
partnership's book value and tax basis for the property for which such interest
was exchanged. Regulations allow a partnership to use any one of a number of
reasonable methods for making this adjustment. A similar principle applies when
the capital accounts for outstanding partnership interests are adjusted to fair
market value. The book/tax differences stemming from the capital account
adjustments must be allocated to the partnership interests for which the
adjustments are made. Special allocations of taxable income and deductions made
to a partnership interest under Code Section 704(c) continue to be made even
after the partnership interest is transferred to a
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new owner. The foregoing rules would apply to holders of PIMCO Advisors LP Units
contributing such Units to the Partnership in exchange for Partnership Units in
connection with the Restructuring, as well as to other persons contributing
property to the Partnership in exchange for Partnership Units.
Code Section 754. Finally, the Partnership and PIMCO Advisors each has in
effect, and each Investment Management Firm has made, Code Section 754
elections. As a result, each purchaser of a Partnership Unit will be allowed to
adjust the basis of the Partnership's assets, solely for purposes of computing
the taxable income of such purchaser, in an amount equal to the difference
between the price paid for the Unit and the share of the Partnership's basis in
its assets allocable to that Unit. Substantially all of this adjustment is
expected to be allocated to Section 197 Intangibles, with the result that
purchasers generally can deduct the amount of the adjustment ratably over 15
years. See "Certain Additional Tax Considerations for Holders of Partnership
Units" below.
Certain of the Partnership's allocation methods and assumptions are
designed to deal with some of the practical issues that arise from operating in
the form of a public partnership. While these methods and assumptions have not
been specifically approved by the IRS, and may not be in technical compliance
with Code Sections 704(c) and 754, the Partnership believes that they are
consistent with the purposes of those provisions. However, the IRS could
challenge the allocation methods and assumptions used by the Partnership, and if
such challenge were successful, the taxable income of some holders of
Partnership Units might be increased without any corresponding increase in cash
distributions.
CERTAIN LIMITATIONS ON LOSSES AND DEDUCTIONS.
Holders of Partnership Units are not expected to be allocated losses in
excess of income. However, if this occurs, federal tax law provides for certain
limitations (such as the "passive activity" and "at risk" rules) on a holder's
ability to deduct such losses against income from other sources. The deduction
of interest on debt used to purchase or carry Partnership Units may also be
limited. Holders of Partnership Units should consult their tax advisors with
regard to the possible application of such rules related to limitations on the
deductibility of Partnership losses and investment interest.
DISPOSITION OF PARTNERSHIP UNITS
Gain or loss from a sale or other disposition of a Partnership Unit will
generally be based on the difference between the amount realized and the
holder's adjusted tax basis for such Partnership Unit. The amount realized will
include the holder's share of Partnership liabilities. Any such gain or loss
will generally be taxable as either midterm or long-term capital gain or loss if
the holder has held the Partnership Unit for more than one year but not more
than eighteen months (in the case of mid-term capital gain or loss) or more than
eighteen months (in the case of longterm capital gain or loss). However, a
holder of Partnership Units may recognize ordinary income from sale proceeds
attributable to unrealized receivables and inventory of the Partnership
("Section 751 Assets"). Such ordinary income may exceed net gain realized upon
the sale of Units and may be recognized even if there is a net loss on the sale
of Units. Because amortization deductions with respect to Section 197
Intangibles will be treated as Section 751 Assets, if such Section 197
Intangibles maintain their value, sellers of Partnership Units who have been
allocated amortization deductions attributable to such Section 197 Intangibles
will recognize ordinary income on the sale equal to the amount of amortization
deductions previously taken. If, however, there is a loss on the sale of
Partnership Units and such loss is attributable to the decline in the value of
the Section 197 Intangibles, the loss in some circumstances might be deferred
until a holder disposes of all of his or her Partnership Units.
The IRS has ruled that a partner acquiring multiple interests in a
partnership in separate transactions at different prices must maintain an
aggregate adjusted tax basis in a single partnership interest consisting of the
combined interests in the partnership. Upon a disposition of a portion of such
single interest, the partner would, under the ruling, be required to apportion
equitably his or her aggregate tax basis between the interest sold and the
interest retained. Under this ruling, a holder of Partnership Units that had
acquired PIMCO Advisors LP Units at different prices would in effect be
precluded from selecting which Partnership Units to sell, and thereby from
selectively controlling the recognition of gain or loss.
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Certain Reporting Requirements. In order to comply with Code requirements
and avoid imposition of potentially significant penalties, holders of
Partnership Units transferring any such Units, other than through a broker
subject to the provisions of Code Section 6045, must report such transfer to the
Partnership. In addition, under Code Sections 1060, 755 and related provisions,
transferors and transferees of Partnership Units must report the amount of any
basis adjustment allocated to Section 197 Intangibles. The Partnership intends
to provide holders of Partnership Units with sufficient basis allocation
information to comply substantially with applicable reporting requirements.
Any person who holds Partnership Units as a nominee for another person is
required to furnish to the Partnership: (i) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (ii) certain
information relating to the status of the beneficial owner; (iii) the amount and
description of the Partnership Units held, acquired or transferred for the
beneficial owner; and (iv) certain other information including the dates of
acquisitions and transfers, means of acquisitions and transfers and the
acquisition cost for purposes, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish certain additional
information on Partnership Units they acquire, hold or transfer for their own
accounts including the amount of net proceeds from sale.
BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments to
noncorporate holders of the proceeds of a sale of Partnership Units and "backup
withholding" at a rate of 31% will apply to such payments if the holder fails to
provide an accurate taxpayer identification number. In addition, distributions
made to or on behalf of a noncorporate holder whose Partnership Units are held
by a broker may be subject to a backup withholding tax unless the holder
complies with certain reporting requirements.
CERTAIN ADDITIONAL TAX CONSIDERATIONS FOR HOLDERS OF PARTNERSHIP UNITS
Section 197 of the Code added by the Revenue Reconciliation Act of 1993,
generally allows an amortization deduction with respect to any Section 197
Intangible acquired by the taxpayer after August 10, 1993 and held in connection
with the conduct of a trade or business. The amount of such deduction is
determined by amortizing the taxpayer's adjusted tax basis in such intangible
ratably over 15 years. Section 197 Intangibles generally include goodwill and
going concern value, among other items.
The portion of the purchase price of an interest in a partnership that is
allocable to Section 197 Intangibles will generally equal the excess of the
purchase price over a partner's proportionate share of the fair market value of
the partnership's assets that are not Section 197 Intangibles, as determined
based on the allocation methods employed by the partnership. In the present
case, the per-Partnership Unit value of such other assets could be affected by a
number of factors, including the issuance of new Partnership Units by the
Partnership. The amount allocated to Section 197 Intangibles by any holder of
Partnership Units could be reduced if the IRS were to challenge the allocation
methods used by the Partnership. See "-- Tax Allocations." Deductions from
amortization of Section 197 Intangibles will decrease the holder's tax basis in
his Partnership Units, and such deductions will be recaptured as ordinary income
upon a taxable disposition of the Partnership Units to the extent that
amortization deductions are not matched by a decline in the fair market value of
the relevant intangible assets. See "-- Disposition of Units."
SPECIAL STATUS TAXPAYERS
The foregoing is a general discussion of federal tax laws related to the
Restructuring and the ownership and disposition of Partnership Units that apply
in the case of most United States taxpayers. Under federal tax laws, however,
additional or different tax rules may apply to persons or entities having a
special status for tax purposes, such as tax-exempt entities, foreign
individuals and entities, regulated investment companies and real estate
investment trusts. A Public Unitholder that is such a special status person or
entity should consult his, her or its tax advisor with regard to the tax
consequences to such holder of the Restructuring and the ownership and
disposition of Partnership Units.
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STATE AND LOCAL TAXES
The above discussion does not address the tax consequences, under
applicable state and local income tax laws, of the Restructuring and the
ownership or disposition of Partnership Units. In this regard, holders of
Partnership Units should note that California has enacted legislation that will
impose a 1% tax on the gross income from active trades and businesses derived
from California sources by electing 1987 partnerships, with such 1% tax to
remain applicable to an electing 1987 partnership so long as it is subject to
the 3.5% PTP tax. It is possible that other states may at some time impose
similar taxes on income derived from such states by an electing 1987 partnership
such as the Partnership. Public Unitholders are urged to consult their tax
advisors with regard to the tax consequences, under state and local income tax
laws, of the Restructuring and the ownership and disposition of Partnership
Units.
LEGAL MATTERS
Richards, Layton & Finger, P.A. has delivered an opinion to the effect
that, upon the consummation of the Restructuring, the Partnership Units offered
pursuant to this Prospectus will be validly issued, fully paid and
nonassessable.
EXPERTS
The consolidated financial statements of PIMCO Advisors L.P. as of December
31, 1996 and for the year then ended and the financial statements of Oppenheimer
Capital, L.P. and the consolidated financial statements of Oppenheimer Capital
as of April 30, 1997 and 1996 and for each of the three fiscal years in the
period ended April 30, 1997, included in this Prospectus have been so included
in reliance on the reports of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of PIMCO Advisors L.P., as of
December 31, 1995 and for each of the two years in the period then ended,
included in this Prospectus have been so included in reliance on the report of
Deloitte & Touche LLP, independent auditors, given on the authority of said firm
as experts in auditing and accounting.
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AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration Statement"
which term shall encompass all exhibits, annexes and schedules thereto) pursuant
to the Securities Act and the rules and regulations promulgated thereunder, with
respect to the Partnership Units described in this Prospectus and the exchange
of PIMCO Advisors LP Units for the Partnership Units in the Restructuring. This
Prospectus constitutes the Prospectus of the Partnership filed as part of the
Registration Statement. Pursuant to the rules and regulations of the Commission,
this Prospectus omits certain information contained in the Registration
Statement. Statements contained in this Prospectus as to the contents of any
agreement or other document are not necessarily complete, and in each instance,
reference is made to the copy of the document filed as an exhibit to the
Registration Statement, each such statement being qualified by such reference.
The Partnership is, and, following the Restructuring, will be, subject to
the informational requirements of the Exchange Act and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Partnership, and
the Registration Statement, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 7 World
Trade Center, New York, New York 10048 and Northwest Atrium Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Partnership's LP
Units are traded on the New York Stock Exchange and, therefore, reports, proxy
statements and other information concerning the Partnership can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
ADDITIONAL INFORMATION CONCERNING THE PARTNERSHIP AND A COPY OF THE
REGISTRATION STATEMENT MAY BE OBTAINED VIA THE INTERNET WEB SITE MAINTAINED BY
THE COMMISSION AT HTTP://WWW.SEC.GOV.
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INDEX TO FINANCIAL STATEMENTS
PIMCO ADVISORS L.P.
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants.................................................... F-2
Independent Auditors' Report......................................................... F-3
Consolidated Statements of Financial Condition of PIMCO Advisors L.P. and
Subsidiaries as of September 30, 1997, December 31, 1996 and 1995.................. F-4
Consolidated Statements of Operations of PIMCO Advisors L.P. and Subsidiaries for the
nine months ended September 30, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994................................................................ F-5
Consolidated Statements of Changes in Owners' Equity of PIMCO Advisors L.P. and
Subsidiaries for the nine months ended September 30, 1997 and for the years ended
December 31, 1996, 1995 and 1994................................................... F-6
Consolidated Statements of Cash Flows of PIMCO Advisors L.P. and Subsidiaries for the
nine months ended September 30, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994................................................................ F-8
Notes to Consolidated Financial Statements........................................... F-9
OPPENHEIMER CAPITAL, L.P.
Report of Independent Accountants.................................................... F-20
Statements of Financial Condition of Oppenheimer Capital, L.P. as of July 31, 1997,
April 30, 1997 and 1996............................................................ F-21
Statements of Income of Oppenheimer Capital, L.P. for the three months ended July 31,
1997 and 1996 and for the years ended April 30, 1997, 1996 and 1995................ F-22
Statements of Changes in the Partners' Capital of Oppenheimer Capital, L.P. for the
three months ended July 31, 1997 and for the years ended April 30, 1997, 1996 and
1995............................................................................... F-23
Statements of Cash Flows of Oppenheimer Capital, L.P. for the three months ended July
31, 1997 and 1996 and for the years ended April 30, 1997, 1996 and 1995............ F-24
Notes to Financial Statements of Oppenheimer Capital, L.P............................ F-25
OPPENHEIMER CAPITAL
Report of Independent Accountants.................................................... F-29
Consolidated Statements of Financial Condition of Oppenheimer Capital as of July 31,
1997, April 30, 1997 and 1996...................................................... F-30
Consolidated Statements of Income of Oppenheimer Capital for the three months ended
July 31, 1997 and 1996 and for the years ended April 30, 1997, 1996 and 1995....... F-31
Consolidated Statements of Changes in the Partners' Capital of Oppenheimer Capital
for the three months ended July 31, 1997 and for the years ended April 30, 1997,
1996 and 1995...................................................................... F-32
Consolidated Statements of Cash Flows of Oppenheimer Capital for the three months
ended July 31, 1997 and 1996 and for the years ended April 30, 1997, 1996 and
1995............................................................................... F-33
Notes to Consolidated Financial Statements of Oppenheimer Capital.................... F-34
</TABLE>
F-1
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
To the Equity Board and Partners
of PIMCO Advisors L.P.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of changes in
owners' equity and of cash flows present fairly, in all material respects, the
financial position of PIMCO Advisors L.P. and subsidiaries (the "Partnership")
at December 31, 1996, and the results of their operations and their cash flows
for the year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Los Angeles, California
February 14, 1997
F-2
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
PIMCO Advisors L.P. and subsidiaries:
We have audited the accompanying consolidated statement of financial
condition of PIMCO Advisors L.P. and subsidiaries (the "Partnership") as of
December 31, 1995, and the related consolidated statements of operations, cash
flows, and changes in owners' equity for each of the two years ended December
31, 1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial condition of the Partnership as of December
31, 1995, and the results of their operations and their cash flows for each of
the two years ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 2, 1996
F-3
<PAGE> 109
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------
1997 1996 1995
-------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 33,172,652 $ 41,311,545 $ 34,915,170
Fees receivable.................................. 81,617,543 -- --
Investment advisory fees receivable:
Private accounts.............................. -- 52,261,212 45,344,158
Proprietary Funds............................. -- 9,629,075 8,413,302
Distribution and servicing fees receivable....... -- 4,382,154 3,594,534
Notes receivable................................. 1,715,071 1,569,950 1,230,168
Receivable from PIMCO Advisors Funds............. -- 462,616 337,744
Short term investments........................... 24,934,892 11,520,726 11,531,226
Other current assets............................. 2,747,079 3,924,592 2,282,895
------------ ------------ ------------
Total current assets..................... 144,187,237 125,061,870 107,649,197
Investment in StocksPLUS, L.P...................... 3,398,144 2,629,864 3,384,237
Fixed assets -- Net of accumulated depreciation and
amortization of $9,520,277, $6,979,756 and
$4,415,199....................................... 10,801,603 10,561,346 10,743,184
Intangible assets -- Net of accumulated
amortization of $103,526,109, $76,519,260 and
$40,510,128...................................... 180,815,838 207,822,687 243,831,819
Other non current assets........................... 26,525,291 12,424,534 3,983,358
------------ ------------ ------------
Total assets............................. $ 365,728,113 $358,500,301 $369,591,795
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses............ $ 24,187,295 $ 13,841,641 $ 8,132,005
Commissions payable.............................. -- 8,435,048 6,450,407
Payable to affiliates............................ -- -- --
Accrued compensation............................. 53,085,409 26,027,732 21,246,685
Other current liabilities........................ -- 11,537,236 1,457,800
------------ ------------ ------------
Total current liabilities................ 77,272,704 59,841,657 37,286,897
Other non current liabilities...................... 9,479,234 2,415,883 748,265
------------ ------------ ------------
Total liabilities........................ 86,751,938 62,257,540 38,035,162
------------ ------------ ------------
Partners' Capital:
General Partner (800,000 units issued and
outstanding).................................. 2,708,585 2,986,983 3,456,973
Class A Limited Partners (40,146,155, 40,146,155
and 40,121,155 units issued and
outstanding).................................. 193,293,648 205,420,612 228,465,440
Class B Limited Partners (32,992,531, 32,960,826
and 32,960,826 units issued and
outstanding).................................. 90,060,799 98,369,570 114,806,204
Unamortized compensation......................... (7,086,857) (10,534,404) (15,171,984)
------------ ------------ ------------
Total Partners' Capital.................. 278,976,175 296,242,761 331,556,633
------------ ------------ ------------
Total Liabilities and Partners'
Capital................................ $ 365,728,113 $358,500,301 $369,591,795
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 110
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
ENDED ENDED FOR THE YEARS ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, --------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Investment advisory fees:
Private accounts....................... $ 182,364,963 $ 156,571,557 $213,852,081 $192,702,939 $126,913,420
Proprietary Funds...................... 119,875,646 94,575,782 128,855,694 90,772,988 48,822,835
Distribution and servicing fees.......... 40,316,623 35,185,219 48,182,499 38,240,015 4,288,702
Other.................................... 1,652,823 828,408 1,134,108 1,297,933 238,208
------------ ------------ ------------ ------------ ------------
Total revenues.................... 344,210,055 287,160,966 392,024,382 323,013,875 180,263,165
------------ ------------ ------------ ------------ ------------
Expenses:
Compensation and benefits................ 151,560,373 128,119,778 173,526,137 149,163,906 117,197,986
Amortization of intangibles, Restricted
Unit and Option Plans.................. 30,999,737 30,852,315 -- -- --
Commissions.............................. 32,188,873 27,480,251 37,738,954 28,743,396 2,877,497
Restricted Unit and Option Plans......... -- -- 5,162,268 6,713,664 1,162,143
Marketing and promotional................ -- -- 10,981,804 9,066,414 6,594,546
Occupancy and equipment.................. 7,482,631 6,932,010 9,195,606 8,662,499 4,342,777
General and administrative............... 18,834,411 13,019,473 17,629,876 11,433,726 5,842,962
Insurance................................ -- -- 2,621,086 2,799,795 1,118,651
Professional fees........................ -- -- 5,472,729 3,164,410 3,899,758
Amortization of intangible assets........ -- -- 36,009,132 36,009,132 5,039,680
Other.................................... 22,505,987 15,423,389 4,812,078 2,236,996 3,345,535
------------ ------------ ------------ ------------ ------------
Total expenses.................... 263,572,012 221,827,216 303,149,670 257,993,938 151,421,535
------------ ------------ ------------ ------------ ------------
Operating income........................... 80,638,043 65,333,750 88,874,712 65,019,937 28,841,630
Equity in income of StocksPLUS, L.P...... (350,614) 173,556 271,187 225,670 10,722
Other income, net........................ 3,599,429 2,227,716 3,183,699 3,738,980 1,072,221
------------ ------------ ------------ ------------ ------------
Income before income tax expense......... 83,886,858 67,735,022 92,329,598 68,984,587 29,924,573
Income tax expense....................... 1,225,610 833,554 1,201,417 517,133 10,669,295
------------ ------------ ------------ ------------ ------------
Net income................................. $ 82,661,248 $ 66,901,468 $ 91,128,181 $ 68,467,454 $ 19,255,278
============ ============ ============ ============ ============
Net income allocated to:
General Partner.......................... $ 849,602 $ 770,361 $ 1,034,010 $ 912,890 $ 97,522
Class A Limited Partner units............ 44,479,115 38,651,130 51,881,756 45,742,775 4,878,336
Class B Limited Partner units............ 37,332,531 27,479,977 38,212,415 21,811,789 1,128,234
Pre-Consolidation........................ -- -- -- -- 13,151,186
------------ ------------ ------------ ------------ ------------
Total............................. $ 82,661,248 $ 66,901,468 $ 91,128,181 $ 68,467,454 $ 19,255,278
============ ============ ============ ============ ============
Net income per unit (Post-Consolidation):
Net income per General Partner and Class A
Limited Partner units.................... $ 1.06 $ 0.96 $ 1.29 $ 1.16 $ 0.12
============ ============ ============ ============ ============
Net income per Class B Limited Partner
unit..................................... $ 1.06 $ 0.76 $ 1.05 $ 0.59 $ 0.03
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 111
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN GENERAL PARTNER
---------------- PAID-IN RETAINED CURRENCY ---------------------
SHARES AMOUNT CAPITAL EARNINGS TRANSLATION UNITS AMOUNT
------ ------- ------------ ------------ ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994......... 1,000 $ 1,000 $ 10,843,146 $ 14,978,001 $ (812) -- --
Net income...................... 13,151,186 $ 97,522
PFAMCo Group capital
contributions................. 7,775,000
Dividends....................... (9,200,000)
Translation adjustment.......... (50,427)
Deemed dividend, net............ (6,559,420) (8,625,011)
Conversion to partnership....... (1,000) (1,000) (12,058,726) (10,304,176) 51,239 800,000 318,182
TAG contributed capital.........
Goodwill from acquisition....... 3,447,579
Proceeds from Primary
Offering......................
Amended Option Plan grants
(total award).................
Restricted Unit Plan grants
(total award).................
Vesting of options and
restricted units..............
------ ------- ------------ ------------ -------- ------- -----------
Balances, December 31, 1994....... -- -- -- -- -- 800,000 3,863,283
Net income...................... 912,890
Distributions................... (1,319,200)
Exercise of unit options........
Balance of proceeds -- Primary
offering......................
Vesting of options and
restricted units..............
------ ------- ------------ ------------ -------- ------- -----------
Balances, December 31, 1995....... -- -- -- -- -- 800,000 3,456,973
Net income...................... 1,034,010
Distributions................... (1,504,000)
Restricted Unit Plan grants.....
Vesting of options and
restricted units..............
------ ------- ------------ ------------ -------- ------- -----------
Balances, December 31, 1996....... -- -- -- -- -- 800,000 2,986,983
(unaudited)
Net income...................... 849,602
Distributions................... (1,128,000)
Restricted Unit Plan grants.....
Vesting of options and
restricted units..............
------ ------- ------------ ------------ -------- ------- -----------
Balances, September 30, 1997...... -- $ -- $ -- $ -- $ -- 800,000 $ 2,708,585
====== ======= ============ ============ ======== ======= ===========
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 112
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CLASS A LIMITED PARTNERS CLASS B LIMITED PARTNERS
------------------------- ------------------------- UNAMORTIZED TOTAL
UNITS AMOUNT UNITS AMOUNT COMPENSATION OWNER'S EQUITY
---------- ------------ ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994....... -- -- -- -- -- $ 25,821,335
Net income.................... $ 4,878,336 $ 1,128,234 19,255,278
PFAMCo Group capital
contributions............... 7,775,000
Dividends..................... (9,200,000)
Translation adjustment........ (50,427)
Deemed dividend, net.......... (15,184,431)
Conversion to partnership..... 23,775,000 13,088,231 24,575,000 8,906,250 --
TAG contributed capital....... 14,918,155 9,644,238 8,260,826 1,990,739 11,634,977
Goodwill from acquisition..... 167,285,821 101,459,864 272,193,264
Proceeds from Primary
Offering.................... 1,200,000 19,972,951 19,972,951
Amended Option Plan grants
(total award)............... 31,135,761 $(18,987,077) 12,148,684
Restricted Unit Plan grants
(total award)............... 125,000 2,368,750 125,000 1,691,964 (4,060,714) --
Vesting of options and
restricted units............ 1,162,143 1,162,143
---------- ------------ ---------- ------------ ------------ -------------
Balances, December 31, 1994..... 40,018,155 248,374,088 32,960,826 115,177,051 (21,885,648) 345,528,774
Net income.................... 45,742,775 21,811,789 68,467,454
Distributions................. (66,110,962) (22,182,636) (89,612,798)
Exercise of unit options...... 103,000 374,920 374,920
Balance of proceeds -- Primary
offering.................... 84,619 84,619
Vesting of options and
restricted units............ 6,713,664 6,713,664
---------- ------------ ---------- ------------ ------------ -------------
Balances, December 31, 1995..... 40,121,155 228,465,440 32,960,826 114,806,204 (15,171,984) 331,556,633
Net income.................... 51,881,756 38,212,415 91,128,181
Distributions................. (75,451,272) (54,649,049) (131,604,321)
Restricted Unit Plan grants... 25,000 524,688 (524,688) --
Vesting of options and
restricted units............ 5,162,268 5,162,268
---------- ------------ ---------- ------------ ------------ -------------
Balances, December 31, 1996..... 40,146,155 205,420,612 32,960,826 98,369,570 (10,534,404) 296,242,761
(unaudited)
Net income.................... 44,479,115 37,332,531 82,661,248
Distributions................. (56,606,079) (46,307,763) (104,041,842)
Restricted Unit Plan grants... -- 31,705 666,461 (545,342) 121,119
Vesting of options and
restricted units............ -- 3,992,889 3,992,889
---------- ------------ ---------- ------------ ------------ -------------
Balances, September 30, 1997.... 40,146,155 $193,293,648 32,992,531 $ 90,060,799 $ (7,086,857) $ 278,976,175
========== ============ ========== ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 113
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
ENDED ENDED FOR THE YEARS ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 82,661,248 $ 66,901,468 $ 91,128,181 $ 68,467,454 $ 19,255,278
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 32,315,605 29,553,183 40,916,431 38,972,101 6,339,107
Issuance of restricted units in lieu of directors
fees............................................ 121,119 -- -- -- --
Deferred income taxes............................. -- -- 734,836 270,000 804,116
Amortization of compensation plan................. -- -- -- -- 663,697
Restricted Unit and Option Plans.................. 3,992,888 3,845,466 5,162,268 6,713,664 1,162,143
Unrealized loss (gain) on investments............. (1,256,708) 150,348 53,879 (198,396) (135,376)
Equity in income of StocksPLUS, L.P............... 350,614 (173,556) (271,187) (225,670) (10,722)
Change in operating assets and liabilities:
Change in fees receivable......................... (15,345,101) (5,622,393) (8,920,447) (28,217,386) 7,919,554
Change in receivable from PIMCO Advisors Funds.... -- -- (124,872) 865,614 (618,123)
Change in other assets............................ (14,843,417) (5,495,334) (11,676,643) (3,398,979) (10,838,869)
Change in accounts payable and accrued expenses... (9,626,630) 13,492,355 5,709,636 941,302 (660,816)
Change in commissions payable..................... -- -- 1,984,641 1,714,200 2,413,750
Change in accrued compensation.................... 27,057,677 17,330,853 4,781,047 7,859,345 8,423,141
Change in other liabilities....................... 7,063,351 (56,243) 11,012,219 (1,003,184) (649,686)
Change in payable to affiliates................... -- -- -- (5,841,256) (6,877,311)
Other............................................. 10,910 (43,687) (43,686) 1,811 (1,337,755)
------------ ------------ ------------ ----------- -----------
Net cash provided by operating activities........... 112,501,556 119,882,460 140,446,303 86,920,620 25,852,128
------------ ------------ ------------ ----------- -----------
Cash flows from investing activities:
Purchases of investments.......................... (45,712,557) (517,227) (694,498) (11,334,021) (52,601,192)
Proceeds from sales of investments................ 35,201,306 783,570 783,570 -- 62,247,248
Return of investment in StocksPLUS, L.P........... -- -- 1,600,000 -- --
Investment in StocksPLUS, L.P..................... (2,765,100) (800,000) (700,000) (400,000) --
Cash of acquired entities......................... -- -- -- -- 14,698,855
Proceeds from sale of fixed assets................ 3,000 621,387 644,978 309,575 --
Purchase of fixed assets.......................... (2,804,725) (2,394,268) (3,446,152) (5,982,054) (1,826,800)
Notes receivable advances......................... (520,531) (676,737) (633,505) (364,823) (117,232)
------------ ------------ ------------ ----------- -----------
Net cash (used in) provided by investing
activities........................................ (16,598,607) (2,983,275) (2,445,607) (17,771,323) 22,400,879
------------ ------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from primary offering.................... -- -- -- -- 19,972,951
Cash distributions................................ (104,041,842) (97,560,217) (131,604,321) (89,612,798) --
Unit options exercised............................ -- -- -- 374,920 --
Dividends......................................... -- -- -- -- (22,521,573)
------------ ------------ ------------ ----------- -----------
Net cash used in financing activities............... (104,041,842) (97,560,217) (131,604,321) (89,237,878) (2,548,622)
------------ ------------ ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (8,138,893) 19,338,968 6,396,375 (20,088,581) 45,704,385
Cash and cash equivalents, beginning of year........ -- -- 34,915,170 55,003,751 9,299,366
Cash and cash equivalents, beginning of period...... 41,311,545 34,915,170 -- -- --
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents, end of year.............. -- -- $ 41,311,545 $ 34,915,170 $ 55,003,751
Cash and cash equivalents, end of period............ $ 33,172,652 $ 54,254,138 -- -- --
============ ============ ============ =========== ===========
Supplemental schedule of non-cash financing
activities:
Reduction of payable to affiliates by capital
contribution.................................... $ -- $ -- $ -- $ -- $ 7,775,000
============ ============ ============ =========== ===========
Deemed dividend................................... $ -- $ -- $ -- $ -- $ 1,862,858
============ ============ ============ =========== ===========
Supplemental disclosures:
Income taxes paid................................. $ 279,710 356,232 $ 447,724 $ 405,542 $ 15,004,148
============ ============ ============ =========== ===========
Interest paid..................................... $ 67,083 $ -- $ -- $ 18,750 $ 209,171
============ ============ ============ =========== ===========
Fair value of non-cash assets acquired............ $ -- $ -- $ -- $ -- $ 27,995,376
============ ============ ============ =========== ===========
Liabilities assumed............................... $ -- $ -- $ -- $ -- $ 24,642,727
============ ============ ============ =========== ===========
Non-cash assets excluded from the consolidation... $ -- $ -- $ -- $ -- $ 46,431,262
============ ============ ============ =========== ===========
Liabilities transferred excluded from the
consolidation................................... $ -- $ -- $ -- $ -- $ 31,748,537
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 114
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
PIMCO Advisors L.P. ("PIMCO Advisors") is a registered investment advisor
that provides a broad array of investment management and advisory services to
institutional and retail mutual funds and to separate accounts of institutional
clients. PIMCO Advisors operates in one industry segment, that of investment
management services.
PIMCO Advisors was formed on November 15, 1994, when Pacific Financial
Asset Management Group ("PFAMCo Group") merged (the "Consolidation") certain of
its investment management businesses and substantially all of its assets into
Thomson Advisory Group L.P. ("TAG"). The PFAMCo Group comprised Pacific
Financial Asset Management Corporation ("PFAMCo"), a wholly-owned subsidiary of
Pacific Mutual Life Insurance Company ("Pacific Mutual"), and certain of its
wholly-owned investment management subsidiaries. The businesses of PFAMCo Group
contributed to PIMCO Advisors were then contributed to newly formed subsidiaries
of PIMCO Advisors.
For the period after the Consolidation, the accompanying consolidated
financial statements include the accounts of PIMCO Advisors and its
subsidiaries. The investment advisor subsidiaries included in these consolidated
financial statements are as follows:
- PACIFIC INVESTMENT MANAGEMENT COMPANY ("Pacific Investment Management")
manages a variety of predominantly fixed income portfolios primarily for
institutions and mutual funds;
- COLUMBUS CIRCLE INVESTORS ("CCI") manages primarily equity securities
using a Positive Momentum/Positive Surprise approach, principally for
institutions and mutual funds;
- CADENCE CAPITAL MANAGEMENT ("Cadence") specializes in disciplined,
growth oriented management of equity securities primarily for
institutions and mutual funds;
- PARAMETRIC PORTFOLIO ASSOCIATES ("Parametric") specializes in highly
quantitative management of domestic and international equity portfolios
primarily for institutions and mutual funds;
- NFJ INVESTMENT GROUP ("NFJ") is a value-oriented manager of equity
securities primarily for institutions and mutual funds; and
- BLAIRLOGIE CAPITAL MANAGEMENT ("Blairlogie") specializes in
international equity securities from its office in Edinburgh, Scotland,
primarily for institutions and mutual funds.
The investment advisor subsidiaries are supported by additional
incorporated subsidiaries:
- PIMCO FUNDS DISTRIBUTION COMPANY (formerly PIMCO Advisors Distribution
Company) ("PFD") serves as the distributor of institutional and retail
mutual funds (the "Proprietary Funds") for which PIMCO Advisors and the
investment advisor subsidiaries provide investment management and
administrative services;
- STOCKSPLUS MANAGEMENT, INC. ("StocksPLUS"), a wholly-owned subsidiary of
Pacific Investment Management, owns approximately 0.125 percent interest
in, and is the general partner of StocksPLUS, L.P. (Note 12); and
- COLUMBUS CIRCLE TRUST COMPANY ("CCTC"), a non bank trust company and
wholly owned subsidiary of CCI, established in November 1995, which
commenced business in January 1996.
Pacific Investment Management, CCI, Cadence, Parametric, NFJ and Blairlogie
are registered investment advisors. PFD is a registered broker/dealer with the
Securities and Exchange Commission and a member of the National Association of
Securities Dealers, Inc.
F-9
<PAGE> 115
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prior to January 17, 1997, institutional mutual funds managed consisted of
two open-end investment management companies. One series included 18
predominantly fixed income funds. The other series included 12 predominantly
equity funds. The retail mutual funds managed consisted of 17 funds included
within two open-end investment management companies, the PIMCO Advisors Funds
("PAF"), formerly the Thomson Funds, and the Cash Accumulation Trust ("CAT").
With Trustee and shareholder approval, the fund groups were combined into a
single mutual fund complex, the PIMCO Funds, in January 1997, consisting of 41
funds offering retail and institutional share classes.
The accompanying consolidated financial statements for the period prior to
the Consolidation include the accounts of PFAMCo and its wholly-owned
subsidiaries, reflected on a combined basis.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Cash And Cash Equivalents -- PIMCO Advisors invests certain cash
balances in money market funds. At December 31, 1996, this investment is
approximately $25,429,000, of which approximately $814,000 is invested in the
National Money Market Fund of CAT, approximately $595,000 is invested in the
PIMCO Advisors Money Market Fund and approximately $24,020,000 is invested in
non affiliate money market funds. At December 31, 1995, this investment was
approximately $20,844,000, of which approximately $5,738,000 was invested in the
National Money Market Fund of CAT, approximately $4,284,000 was invested in the
PIMCO Advisors Money Market Fund and approximately $10,822,000 was invested in
non affiliate money market funds. Management considers investments in money
market funds to be cash equivalents for purposes of the Consolidated Statements
of Cash Flows. These investments are carried at cost, which approximates market.
b. Investment Advisory Fees -- PIMCO Advisors records investment advisory
fees on an accrual basis. Investment advisory fees receivable for private and
separate accounts consist primarily of accounts billed on a quarterly basis.
Private accounts may also generate a fee based on investment performance, which
is recorded as income when earned and not subject to forfeiture. Investment
advisory fees for the Proprietary Funds are received monthly.
c. Short Term Investments -- The short term investments, as of December
31, 1996 and 1995, are primarily invested in the PIMCO Funds with a short-term
duration objective. The investments are carried at market value. Cost
approximated market value as of December 31, 1996 and 1995.
d. Depreciation and Amortization -- Office equipment, furniture and
fixtures are depreciated on a straight-line basis over their estimated useful
lives, generally five years. Automobiles are depreciated on a straight-line
basis over their estimated lives, generally three years. Leasehold improvements
are amortized on a straight-line basis over the remaining terms of the related
leases or the useful lives of such improvements, whichever is shorter.
e. Other Assets -- Effective May 29, 1995, PFD commenced sale of a "B"
class of mutual fund shares. Under this share structure PFD advances commissions
to independent brokers and is entitled to recoup its marketing costs through an
ongoing fee stream from the respective funds or contingent deferred sales
charges collected from the share purchaser. Such fees are capitalized as
deferred sales charges and amortized on a straight line basis as commission
expense over a period of 60 months. Deferred unamortized marketing costs of
approximately $11,100,000 and $3,600,000 are included in other assets at
December 31, 1996 and 1995, respectively.
f. Income Taxes -- Subsequent to the Consolidation, PIMCO Advisors and its
subsidiaries are predominantly partnerships and, as a result, are generally not
subject to Federal or state income taxes. PIMCO Advisors is subject to an
unincorporated business tax in a certain jurisdiction in which it operates. All
partners of PIMCO Advisors are responsible for taxes, if any, on their
proportionate share of Pimco Advisors' taxable income. Certain corporate
subsidiaries are subject to Federal and state income taxes and file separate tax
F-10
<PAGE> 116
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
returns and account for income taxes under Statement of Financial Accounting
Standards No. 109 ("FASB 109"). The provision for income taxes is determined
using the liability method which gives recognition to deferred tax assets and
liabilities based on the expected future tax consequences of events that have
been recognized in the financial statements or tax returns. In estimating future
tax consequences, FASB 109 generally requires the consideration of all expected
future events other than enactments of changes in the tax law or rates.
g. Foreign Currency Translation -- The assets and liabilities of
Blairlogie, PFAMCo UK Limited and Blairlogie's predecessor company have been
translated into U.S. dollars at the current rate of exchange existing at
year-end. Revenues and expenses were translated at the average of the monthly
exchange rates then in effect.
h. Net Income Allocation -- Net income is allocated in accordance with the
Amended and Restated Agreement of Limited Partnership of PIMCO Advisors. Net
income is allocated among unit holders in the same proportions as cash
distributions. PIMCO Advisors cash distribution policy provides for a first
priority distribution to General Partner and Class A Limited Partner Units
($1.88 per year through December 31, 1997) followed by a second priority
distribution to Class B Limited Partner Units. During the years ended December
31, 1996 and 1995, the second priority distribution was less than the first
priority distribution.
i. Earnings Per Unit -- Earnings per unit are computed based on the
weighted average number of units outstanding, assuming the exercise of dilutive
unit options. Proceeds from the exercise of such unit options are assumed to be
used to repurchase outstanding Limited Partner units under the treasury stock
method. The weighted average number of units used to compute earnings per unit
was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
General Partner and Class A Limited Partner
units........................................ 42,501,469 42,127,833 41,802,420
Class B Limited Partner units.................. 34,513,573 33,425,537 32,960,826
</TABLE>
j. Other -- Certain items have been reclassified to conform with the
current year presentation. All significant intercompany items have been
eliminated in the accompanying consolidated financial statements.
k. Use of Estimates in the Preparation of Financial Statements -- The
financial statements have been prepared in accordance with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
3. INTANGIBLE ASSETS
For accounting purposes, the Consolidation between PFAMCo Group and TAG is
treated as a purchase and recapitalization of TAG by PFAMCo Group, or a "reverse
acquisition." Intangible assets of approximately $284.9 million represented the
excess of the purchase price over the fair value of the net tangible assets of
TAG deemed acquired in the Consolidation. A portion of the intangible assets
represents the value assigned to PIMCO Advisor's Master Limited Partnership
("MLP") structure. Under current Internal Revenue code guidelines, an MLP is
exempt from Federal and most state and local income taxes through December 31,
1997. The value attributed to the MLP structure will be amortized over the
period ending December 31, 1997. The remainder will be amortized on a straight-
line basis over its estimated life of twenty years. During the years ended
December 31, 1996, 1995 and 1994, approximately $36,000,000, $36,000,000 and
$5,000,000 of amortization have been charged to expense, respectively.
F-11
<PAGE> 117
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUPPLEMENTARY FINANCIAL DATA
The following supplementary financial data presents the actual results of
operations for 1996 and 1995 and the unaudited pro forma results of operations
for 1994 as if the Consolidation discussed in Note 1 had occurred on January 1,
1993, except for the period from November 15, 1994 through December 31, 1994
which reflects actual results. The 1994 pro forma operating results give effect
to:
(a) The Consolidation of PFAMCo Group and TAG;
(b) The amendment of existing options under TAG's 1993 Unit Option Plan;
(c) The adoption of the Class B Limited Partnership Unit Option Plan;
(d) The contribution of PFD to PIMCO Advisors in exchange for Class A
Limited Partner Units; and
(e) Certain transactions effected by PFAMCo Group and TAG in connection
with the Consolidation, primarily related to intangible amortization
and profit sharing.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
(ACTUAL) (ACTUAL) (PRO FORMA)
-------- -------- -----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Revenues:
Investment advisory............................. $338,341 $281,610 $ 231,475
PFD............................................. 53,683 41,404 37,629
-------- -------- --------
392,024 323,014 269,104
-------- -------- --------
Expenses:
Investment advisory............................. 207,203 171,272 137,246
PFD............................................. 52,522 40,552 36,435
Amortization of intangibles, options and
restricted units............................. 41,171 42,723 40,713
-------- -------- --------
300,896 254,547 214,394
-------- -------- --------
Net income........................................ $ 91,128 $ 68,467 $ 54,710
======== ======== ========
Net income per General Partner and Class A Limited
Partner unit.................................... $ 1.29 $ 1.16 $ 1.08
======== ======== ========
</TABLE>
The pro forma information above is not intended to reflect the results that
actually would have been obtained if the operations were consolidated during the
periods presented.
5. NOTES RECEIVABLE
Pacific Investment Management and PIMCO Advisors have granted loans to
certain employees as part of programs designed to ensure the long-term retention
of those employees. These loans are primarily non-interest bearing and are
generally due within one year of issuance.
F-12
<PAGE> 118
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FIXED ASSETS
The major classifications of fixed assets are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Office equipment, furniture and fixtures.................. $12,827,368 $ 9,548,212
Automobiles............................................... 9,069 836,152
Leasehold improvements.................................... 4,704,665 4,774,019
----------- -----------
Total fixed assets........................................ 17,541,102 15,158,383
Less accumulated depreciation and amortization............ 6,979,756 4,415,199
----------- -----------
Fixed assets, net......................................... $10,561,346 $10,743,184
=========== ===========
</TABLE>
Fixed assets of certain of the subsidiaries were revalued at their
estimated fair market value in connection with the Consolidation.
7. INCOME TAXES
Subsequent to the Consolidation, only certain subsidiaries are subject to
income taxes directly. The total income tax provision for the affected
subsidiaries is as follows:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED DECEMBER
31,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Current expense:
State...................................................... $ 163,669 $105,724
Federal.................................................... 295,215 159,440
Deferred expense:
State...................................................... 197,970 68,378
Federal.................................................... 544,563 183,591
---------- --------
$1,201,417 $517,133
========== ========
</TABLE>
Prior to the Consolidation, PFAMCo's operations and those of its domestic
subsidiaries were included in the combined domestic Federal income tax returns
of Pacific Mutual. PFAMCo's operations and its domestic subsidiaries were
included in the combined California franchise tax return of Pacific Financial
Holding Company ("PFHC"), the parent of PFAMCo. Certain subsidiaries filed
separate state income or franchise tax returns. PFAMCo and its domestic
subsidiaries were allocated an expense or a benefit based principally on the
effect of including their operations in the combined provision as if the
companies filed a separate return in accordance with a tax sharing agreement
between PFAMCo and PFHC.
The provision for taxes prior to the Consolidation was as follows:
<TABLE>
<CAPTION>
PERIOD
ENDED
NOVEMBER
15,
1994
-----------
<S> <C>
Current expense:
State................................................................. $ 2,140,509
Federal............................................................... 7,705,429
Deferred expense:
State................................................................. 156,960
Federal............................................................... 647,147
-----------
$10,650,045
===========
</TABLE>
F-13
<PAGE> 119
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
After the Consolidation, PIMCO Advisors incurred a tax liability of $19,250
in 1994 principally related to the activities of a corporate subsidiary.
Reconciliations of the statutory Federal income tax rates to the effective
income tax rates prior to the Consolidation are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 15,
1994
------------
<S> <C>
Statutory Federal income tax rate applied to income before
Federal income taxes.......................................... 35.0%
State taxes, net of Federal benefit............................. 6.1
Foreign operations.............................................. 3.1
Other........................................................... 0.5
----
Effective income tax rate....................................... 44.7%
====
</TABLE>
8. RELATED-PARTY TRANSACTIONS
Pacific Mutual provided certain support services to PFAMCo Group prior to
the Consolidation. Services for certain of PFAMCo Group's employees include
participation in a pension plan maintained by Pacific Mutual (Note 9g). Charges
for support services, including pension plan participation, amounted to
approximately $2,335,000 for the period ended November 15, 1994.
9. BENEFIT PLANS
a. Profit Sharing and Incentive Programs -- PIMCO Advisors and its
subsidiaries have several profit sharing and incentive programs that compensate
participants on the basis of profitability and discretionary bonuses.
Compensation under these programs was approximately $114,139,000 and $94,487,000
for the years ended December 31, 1996 and 1995, respectively, and was
approximately $10,091,000 for the period from the Consolidation through December
31, 1994. PFAMCo Group had nonqualified profit sharing plans (the "Profit
Sharing Plans") covering certain key employees and other employees. The Profit
Sharing Plans provided for awards based on the profitability of the respective
subsidiary. Such profitability was primarily based on income before income taxes
and before profit sharing. The awards ranged from 40% to 80% of such amounts
depending on the level of profitability. Profit sharing awards were fully vested
at the date of the Consolidation. Profit sharing expense relating to the Profit
Sharing Plans of approximately $68,387,000 is included in compensation and
benefits in the accompanying Consolidated Statements of Operations for the
period ended November 15, 1994.
b. Long Term Compensation -- Long term compensation includes amounts
payable to certain officers of a subsidiary in connection with the discretionary
bonuses discussed above. The amounts payable will be paid on specified dates and
are subject to cancellation upon the occurrence of certain events. In addition,
certain key employees of the PFAMCo subsidiaries participated in Long-Term
Incentive Plans that provided compensation under the Profit Sharing Plans for a
specified period of time subsequent to their termination of employment. These
plans were terminated as of the Consolidation.
c. Executive Deferred Compensation Plan -- PIMCO Advisors and its
subsidiaries have a nonqualified deferred compensation plan pursuant to which a
portion of the compensation otherwise payable to certain eligible employees will
be mandatorily deferred, and pursuant to which such eligible employees may elect
to defer additional amounts of compensation. The plan is unfunded and is
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees, within the meaning
of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income
Security Act of 1974, as amended. Amounts deferred under the plan are held in a
trust and invested by the trustee in Class A Limited Partner Units. PIMCO
Advisors will contribute additional funds or Class A Limited Partner Units to
the trust such that the average purchase price of all units acquired at that
date is not
F-14
<PAGE> 120
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
greater than 85% of the then current market price for such units. No expense was
incurred in 1996 related to this plan.
d. Savings and Investment Plans -- PIMCO Advisors and its subsidiaries
have several defined contribution employee benefit plans covering substantially
all employees. PIMCO Advisors and Pacific Investment Management are the sponsors
of certain defined contribution employee savings and investment plans. The plans
qualify under Section 401(k) of the Internal Revenue Code and allow eligible
employees of PIMCO Advisors and certain of its subsidiaries, to contribute up to
ten percent of their annual compensation as defined, and subject to a maximum
dollar amount determined from time to time by the Internal Revenue Service
("IRS"). Employees are generally eligible following the later of attainment of
age 21 or the completion of one year of credited service. For 1996 and 1995,
PIMCO Advisors and certain of its subsidiaries, matched and contributed an
amount equal to the first five or six percent of annual compensation, subject to
IRS Internal Revenue Service limits, contributed by the employees. In addition,
PIMCO Advisors and certain of its subsidiaries, may elect to make a
discretionary contribution to all participants. The amount expensed by PIMCO
Advisors and its subsidiaries related to this plan during the year ended
December 31, 1996, 1995 and 1994 was approximately $2,017,000, $1,851,000 and
$50,000, respectively.
For 1994, PIMCO Advisors and certain of its subsidiaries, matched and
contributed an amount equal to one half of the first six percent of annual
compensation, subject to IRS limits, contributed by the employees. In addition,
PIMCO Advisors and certain of its subsidiaries, elected to make a discretionary
contribution to all participants. Contributions fully vest to employees after
five years of credited service.
Pacific Investment Management has several defined contribution employee
benefit plans covering substantially all of its employees and made contributions
to the plans ranging from five percent to eleven percent of covered individuals'
base compensation. The aggregate expense recorded is approximately $989,000,
$950,000 and none in 1996, 1995 and 1994, respectively.
e. Restricted Unit Plan -- PIMCO Advisors adopted a restricted unit plan
for the benefit of certain key employees. A total of 150,000 Class A Limited
Partner Units and 125,000 Class B Limited Partner Units have been awarded under
the plan. The units generally vest over a five-year period; however, accelerated
vesting occurred in 1995 upon the departure of a key employee. There are no
additional units available for grants under the plan. The expense under this
plan was approximately $755,000, $2,010,000 and $101,000 during 1996, 1995 and
1994, respectively.
f. Unit Option Plans -- PIMCO Advisors has two unit-option plans, which
are described below. No compensation cost has been recognized for these fixed
unit option plans because the option price approximated the market price on the
date of grant. Had compensation cost for PIMCO Advisors two unit option plans
been determined based on the fair value rather than market value at the grant
dates, PIMCO Advisors net income and earnings per unit would have been reported
as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net income:
As reported.......................................... $91,128,181 $68,467,454
Pro forma............................................ $90,839,243 $68,368,057
Net income per unit:
Net income per General Partner and
Class A Limited Partner unit:
As reported.......................................... $1.29 $1.16
Pro forma............................................ $1.29 $1.16
Net income per Class B Limited Partner unit:
As reported.......................................... $1.05 $0.59
Pro forma............................................ $1.05 $0.59
</TABLE>
F-15
<PAGE> 121
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the above disclosure purposes, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1996 and 1995,
respectively: dividend yield of 7.7% and 3.5%; expected volatility of 14% and
10%; risk-free interest of 6.30% and 6.80%; and expected lives of 6 and 7 years.
The unit option plans are administered by the Unit Incentive Committee of
the Equity Board of PIMCO Advisors, which determines the key employees and the
terms of the options to be granted. Under the 1993 Unit Option Plan (as
amended), PIMCO Advisors may grant options to its employees up to 3,090,000
Class A Limited Partner Units. Under the 1994 Unit Option Plan, PIMCO Advisors
may grant options to its employees up to 5,600,000 Class B Limited Partner
Units. There are 270,400 Class B Limited Partner Units options available for
future grants at December 31, 1996. The expense under the option plans was
approximately $4,408,000, $4,704,000 and $1,061,000 during 1996, 1995 and 1994,
respectively.
Under both plans, the exercise price for each option reported herein has
been not less than the average trading price of PIMCO Advisor's units for the 20
trading day period prior to the grant date and each option's maximum term is 10
years. There was no material difference between the option price and the market
price on the grant date. The outstanding options vest over a period of not more
than five years and vested options are generally exercisable after January 1,
1998. Following is a summary of the status of both unit option plans:
<TABLE>
<CAPTION>
OPTION PRICE
UNITS RANGE PER UNIT
--------- --------------
<S> <C> <C>
Outstanding, January 1, 1994.............................. -- --
Class A Limited Partner units
Granted................................................. 2,442,130 $2.425-$ 4.85
Class B Limited Partner units
Granted................................................. 5,297,000 $13.53
---------
Outstanding, December 31, 1994............................ 7,739,130 $2.425-$13.53
---------
Class A Limited Partner units
Exercised............................................... (103,000) $2.425-$ 4.85
Class B Limited Partner units
Granted................................................. 109,000 $12.70-$14.68
Canceled................................................ (174,200) $13.53
---------
Outstanding, December 31, 1995............................ 7,570,930 $2.425-$14.68
---------
Class B Limited Partner units
Granted................................................. 227,000 $17.72-$18.81
Canceled................................................ (29,200) $12.78-$13.53
---------
Outstanding, December 31, 1996............................ 7,768,730 $2.425-$18.81
---------
Exercisable:
Class A Limited Partner units........................... 801,110 $2.425
Class B Limited Partner units........................... 200,000 $13.53
---------
Exercisable, December 31, 1996............................ 1,001,110
=========
</TABLE>
g. Other Benefit Plans -- Certain of PFAMCo Group's eligible employees
were included in a Pacific Mutual sponsored defined benefit pension plan, and
health care and life insurance plans that provide post-retirement benefits.
PFAMCo Group was charged an immaterial amount by Pacific Mutual for these plans
prior to the Consolidation. Subsequent to the Consolidation, PIMCO Advisors has
no expense associated with these plans.
F-16
<PAGE> 122
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS
a. Lease Agreements -- PIMCO Advisors and its subsidiaries lease office
space and certain office equipment under noncancelable leases with terms in
excess of one year. Future minimum payments are as follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997.......................................................... $3,560,785
1998.......................................................... 2,523,057
1999.......................................................... 1,705,000
2000.......................................................... 821,122
2001.......................................................... 759,837
Thereafter.................................................... 375,054
----------
Total.................................................... $9,744,855
==========
</TABLE>
Rent expense in connection with these agreements was approximately
$3,772,000, $3,641,000 and $2,379,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
b. Letter Of Credit -- PIMCO Advisors is contingently liable for a letter
of credit in the amount of $738,548 related to PIMCO Advisors membership in a
captive insurance program.
c. Revolving Line of Credit -- PIMCO Advisors has a $25 million, 4 year
revolving credit facility, originated in April of 1996. The facility permits
short term borrowings at a floating rate of interest. The terms of the agreement
include an interest coverage ratio, a fixed charge coverage ratio and a minimum
operating cash flow ratio. The partnership did not utilize this facility in
1996, but was in compliance with the required ratios.
11. NET CAPITAL
PFD is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities and Exchange Act of 1934, which requires the maintenance of minimum
net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. At December 31, 1996, PFD
had net capital of $3,058,237, which was $2,238,261 in excess of its required
net capital of $819,976. PFD's net capital ratio was 3.73 to 1. At December 31,
1995, PFD had net capital of $1,049,818, which was $515,116 in excess of its
required net capital of $534,702. PFD's net capital ratio was 7.64 to 1. At
December 31, 1994, PFD had $1,156,876 in excess of its required net capital of
$579,935. PFD's net capital ratio was 5.01 to 1 at that time.
12. INVESTMENT IN STOCKSPLUS, L.P.
StocksPLUS accounts for its investment in StocksPLUS, L.P. under the equity
method because StocksPLUS is the general partner in, and exercises significant
influence over the operating and financial policies of StocksPLUS, L.P. (Note
1). The underlying investments of StocksPLUS, L.P. are carried at fair value.
The effect of such accounting does not have a material effect on PIMCO Advisors
consolidated financial statements. StocksPLUS, L.P. has made its investments
with the intent to have its performance exceed that of the S & P 500 Index.
StocksPLUS has mitigated the effects of its pro rata investment in
StocksPLUS, L.P.'s investments through the use of short futures positions. Gains
and losses related to these positions are settled daily. Included in "Short term
investments" in the accompanying Consolidated Statements of Financial Condition
are securities which are used as necessary for deposits made in connection with
the futures positions and are recorded at fair value. The notional amounts of
the contracts do not necessarily represent future cash
F-17
<PAGE> 123
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
requirements, as the contracts are intended to be closed prior to their
expiration. As of December 31, 1996 and 1995, the notional amounts of futures
contracts approximated $2,932,000 and $3,401,000, respectively.
Condensed financial information for StocksPLUS, L.P. is as follows:
SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Assets:
Investments -- at fair value....................... $2,306,673,000 $1,893,770,000
Other assets....................................... 26,481,000 18,685,000
-------------- --------------
Total assets.................................... $2,333,154,000 $1,912,455,000
============== ==============
Liabilities and Partners' Capital:
Liabilities........................................ $ 136,880,000 $ 219,072,000
StocksPLUS' Partner Capital........................ 2,629,000 3,384,000
Limited Partners' Capital.......................... 2,193,645,000 1,689,999,000
-------------- --------------
Total liabilities and partners' capital......... $2,333,154,000 $1,912,455,000
============== ==============
</TABLE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net trading gains (losses) on futures.... $292,185,000 $326,096,000 $(30,291,000)
Net gain (loss) in fair value of
securities............................. 12,040,000 31,266,000 (21,278,000)
Interest income.......................... 126,535,000 92,260,000 58,383,000
Fees and commissions..................... (4,631,000) (3,822,000) (878,000)
------------ ------------ ------------
Net income............................... $426,129,000 $445,800,000 $ 5,936,000
============ ============ ============
</TABLE>
13. SUBSEQUENT EVENT
On February 13, 1997, PIMCO Advisors and its affiliate, Thomson Advisory
Group Inc. ("TAG Inc."), and Oppenheimer Group, Inc. and its subsidiary,
Oppenheimer Financial Corp. signed a definitive agreement for TAG Inc. to
acquire a one-third, managing general partner interest in Oppenheimer Capital (a
general partnership), the 1 percent general partner interest in Oppenheimer
Capital, L.P. and 100% of the stock of Advantage Advisers, an affiliate of
Oppenheimer Group, which manages eight closed-end funds. The transaction covers
only the private interests Oppenheimer Group holds in Oppenheimer Capital and
Oppenheimer Capital, L.P. and does not include the publicly traded units of
Oppenheimer Capital, L.P. The acquisition is subject to certain client, lender,
IRS and other approvals, and is expected to take up to six months to complete.
The agreement provides for the acquisition by TAG Inc. of the above listed
assets through a merger with Oppenheimer Group, Inc. in exchange for total
consideration of approximately $233 million in convertible preferred stock to be
issued by TAG Inc. and the assumption of approximately $32 million of debt.
Subsequently, TAG Inc. will contribute the general partner interest in
Oppenheimer Capital to PIMCO Advisors, in exchange for approximately $233
million of newly issued Class A Limited Partner Units, at $25.50 per unit.
F-18
<PAGE> 124
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PIMCO Advisors may be obligated in certain circumstances to purchase such
convertible preferred stock for its issue price. PIMCO Advisors will account for
this transaction using the purchase method. After the closing, operating results
for PIMCO Advisors will include its proportionate share of the operating results
of Oppenheimer Capital.
14. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results for the periods indicated were as follows:
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $91,220,000 $98,842,000 $ 97,099,000 $104,863,000
Expenses................................... 71,468,000 74,827,000 73,131,000 80,269,000
----------- ----------- ----------- ------------
Income before taxes........................ 19,752,000 24,015,000 23,968,000 24,594,000
Income tax expense......................... 389,000 207,000 238,000 367,000
----------- ----------- ----------- ------------
Net income................................. $19,363,000 $23,808,000 $ 23,730,000 $ 24,227,000
=========== =========== =========== ============
Net income per General Partner and Class A
Limited Partner unit..................... $ 0.31 $ 0.33 $ 0.32 $ 0.33
=========== =========== =========== ============
Net income per Class B Limited Partner
unit..................................... $ 0.19 $ 0.29 $ 0.28 $ 0.29
=========== =========== =========== ============
Market price per Class A Limited Partner
unit:
Low...................................... $20 5/8 $20 1/4 $20 1/4 $19 5/8
High..................................... $23 1/8 $22 $22 3/4 $23 5/8
</TABLE>
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $71,118,000 $75,465,000 $ 83,203,000 $ 93,228,000
Expenses................................... 57,934,000 61,158,000 65,799,000 69,139,000
----------- ----------- ----------- ------------
Income before taxes........................ 13,184,000 14,307,000 17,404,000 24,089,000
Income tax expense......................... 44,000 198,000 263,000 12,000
----------- ----------- ----------- ------------
Net income................................. $13,140,000 $14,109,000 $ 17,141,000 $ 24,077,000
=========== =========== =========== ============
Net income per General Partner and Class A
Limited Partner unit..................... $ 0.26 $ 0.26 $ 0.29 $ 0.35
=========== =========== =========== ============
Net income per Class B Limited Partner
unit..................................... $ 0.07 $ 0.10 $ 0.14 $ 0.28
=========== =========== =========== ============
Market price per Class A Limited Partner
unit:
Low...................................... $16 7/8 $17 3/8 $19 $19 5/8
High..................................... $18 1/4 $20 5/8 $21 1/4 $21 1/4
</TABLE>
F-19
<PAGE> 125
REPORT OF INDEPENDENT ACCOUNTANTS
To The General Partner and Limited Partners of
Oppenheimer Capital, L.P.
In our opinion, the accompanying statements of financial condition and the
related statements of income, changes in partners' capital and cash flows
present fairly, in all material respects, the financial position of Oppenheimer
Capital, L.P. (the "Partnership") at April 30, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. 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 provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
New York, New York
July 22, 1997, except as to Note 2(a) which is as of December 1, 1997
F-20
<PAGE> 126
OPPENHEIMER CAPITAL, L.P.
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT APRIL 30,
JULY 31, ---------------------
1997 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash and short term investments (Note 4).................. $ 101 $ 91 $ 35
Investment in Oppenheimer Capital (Note 2)................ 32,640 26,796 23,362
Distribution receivable (Note 2).......................... 14,050 17,090 11,950
10% note due 2012 from Oppenheimer Equities, Inc. (Note
4)...................................................... 32,193 32,193 32,193
Interest receivable....................................... 538 538 538
Other assets.............................................. 138 136 128
Goodwill, net (Note 2).................................... 38,653 39,305 41,893
-------- -------- --------
Total Assets.................................... $ 118,313 $116,149 $110,099
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Distribution payable to partners.......................... $ 14,806 $ 17,858 $ 12,713
-------- -------- --------
Total Liabilities............................... 14,806 17,858 12,713
-------- -------- --------
General partner's capital................................. 1,049 996 987
Limited partners' capital; 28,306,500 Units authorized;
25,766,928; 25,673,889 and 25,475,967 Units outstanding,
respectively............................................ 102,458 97,295 96,399
-------- -------- --------
Total Partners' Capital......................... 103,507 98,291 97,386
-------- -------- --------
Total Liabilities and Partners' Capital......... $ 118,313 $116,149 $110,099
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 127
OPPENHEIMER CAPITAL, L.P.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------- FOR THE YEARS ENDED APRIL 30,
JULY 31, JULY 31, -------------------------------
1997 1996 1997 1996 1995
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equity in earnings of Oppenheimer
Capital (Note 2):
Operating earnings.................. $15,963 $11,468 $51,022 $40,359 $31,054
Gain on Quest sale (Note 8)......... 2,809 -- 1,800 17,734 --
------- ------- ------- ------- -------
Total equity in earnings of
Oppenheimer Capital............... 18,772 11,468 52,822 58,093 31,054
Interest............................ 813 812 3,224 3,223 3,228
------- ------- ------- ------- -------
Total Revenues................. 19,585 12,280 56,046 61,316 34,282
------- ------- ------- ------- -------
Expenses:
Amortization of goodwill (Note 2)...... 652 652 2,588 2,588 2,588
Other expenses (Note 2)................ 33 33 132 132 873
------- ------- ------- ------- -------
Total Expenses................. 685 685 2,720 2,720 3,461
------- ------- ------- ------- -------
Net income............................... $18,900 $11,595 $53,326 $58,596 $30,821
======= ======= ======= ======= =======
Net income per unit (Note 3)............. $ 0.72 $ 0.45 $ 2.06 $ 2.28 $ 1.21
======= ======= ======= ======= =======
Distributions declared per unit.......... $ 0.57 $ 0.39 $ 2.10 $ 1.90 $ 1.30
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 128
OPPENHEIMER CAPITAL, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED TOTAL
PARTNER'S PARTNERS' PARTNERS'
CAPITAL CAPITAL CAPITAL
------ -------- --------
<S> <C> <C> <C>
BALANCES AT APRIL 30, 1994................................... $ 892 $ 86,905 $ 87,797
Net income................................................. 308 30,513 30,821
Distributions declared..................................... (332) (32,923) (33,255)
Amortization of restricted unit compensation expense....... 8 851 859
Capital contributions...................................... -- 90 90
------ -------- --------
BALANCES AT APRIL 30, 1995................................... 876 85,436 86,312
Net income................................................. 586 58,010 58,596
Distributions declared..................................... (489) (48,416) (48,905)
Amortization of restricted unit compensation expense....... 11 1,127 1,138
Capital contributions...................................... 3 242 245
------ -------- --------
BALANCES AT APRIL 30, 1996................................... 987 96,399 97,386
Net income................................................. 533 52,793 53,326
Distributions declared..................................... (543) (53,790) (54,333)
Amortization of restricted unit compensation expense....... 15 1,476 1,491
Capital contributions...................................... 4 417 421
------ -------- --------
BALANCES AT APRIL 30, 1997................................... 996 97,295 98,291
(unaudited)
Net income................................................. 189 18,711 18,900
Distributions declared..................................... (148) (14,658) (14,806)
Amortization of restricted unit compensation expense....... 7 655 662
Capital contributions...................................... 5 455 460
------ -------- --------
BALANCES AT JULY 31, 1997.................................... $1,049 $102,458 $103,507
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 129
OPPENHEIMER CAPITAL, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED FOR THE YEARS ENDED APRIL 30,
JULY 31, JULY 31, ----------------------------------
1997 1996 1997 1996 1995
------------ ------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income...................... $ 18,900 $ 11,595 $ 53,326 $ 58,596 $ 30,821
Adjustments to reconcile net
income to net cash provided
by operating activities:
Distributions received (less
than) the equity in
earnings of Oppenheimer
Capital.................... (1,682) 482 (6,662) (14,677) (60)
Amortization of goodwill..... 652 652 2,588 2,588 2,588
(Increase) in other assets... (2) (2) (8) (19) (109)
-------- -------- -------- -------- --------
Net cash provided by operating
activities...................... 17,868 12,727 49,244 46,488 33,240
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital contributions to
Oppenheimer Capital............. (631) (273) (530) (300) (86)
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Distributions to partners:
General partner................. (179) (127) (492) (465) (332)
Limited partners................ (17,679) (12,586) (48,696) (46,048) (32,923)
Issuance of limited partnership
units on exercise of
restricted options........... 631 273 530 300 86
-------- -------- -------- -------- --------
Net cash (used in) financing
activities...................... (17,227) (12,440) (48,658) (46,213) (33,169)
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and short term investments...... 10 14 56 (25) (15)
Cash and short term investments at
beginning of period............. 91 35 35 60 75
-------- -------- -------- -------- --------
Cash and short term investments at
end of period................... $ 101 $ 49 $ 91 $ 35 $ 60
======== ======== ======== ======== ========
Supplemental disclosure of cash
flow information (Note 6):
New York City unincorporated
business tax paid............ $ 35 $ 35 $ 140 $ 151 $ 985
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 130
OPPENHEIMER CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Oppenheimer Capital, L.P. (the "Partnership"), is a publicly traded limited
partnership owned 1% by its general partner, Oppenheimer Financial Corp.
("Opfin") and 99% by its public limited partners ("Unitholders"). The
Partnership's sole business is its holding of a 67.5% interest in Oppenheimer
Capital (the "Operating Partnership"), a registered investment adviser. Opfin
holds the remaining 32.5% interest in the Operating Partnership. The Operating
Partnership is part of an affiliated group of companies operating in the
financial services industry. The financial statements of the Partnership should
be read in conjunction with the consolidated financial statements of the
Operating Partnership.
NOTE 2 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Financial Statement Presentation
Effective December 1, 1997, the Partnership effected a 1.67 for 1 unit
split of Partnership units. For purposes of these financial statements, all
units authorized and outstanding, and per unit amounts have been restated to
reflect the split of the Partnership units.
(b) Investment in Oppenheimer Capital
The Partnership accounts for its investment in the Operating Partnership in
accordance with the equity method of accounting. The Partnership records as
income its proportionate share of the net income of the Operating Partnership
and credits distributions from the Operating Partnership to its investment in
Oppenheimer Capital. At April 30, 1997, the Partnership had a distribution
receivable of $17.1 million from the Operating Partnership that was received on
May 30, 1997.
(c) Goodwill
The excess of the initial contribution of capital to the Operating
Partnership over fair value of the net assets acquired is being amortized on a
straight-line basis over a period of 25 years. Accumulated amortization at April
30, 1997 and 1996 was $25,388,000 and $22,800,000, respectively. Impairment of
goodwill is measured on the basis of anticipated undiscounted cash flows. At
April 30, 1997, 1996 and 1995, the Partnership determined there was no
impairment of goodwill.
(d) Other Expenses
Other expenses consist of New York City unincorporated business tax at a
rate of 4% of taxable income. The Partnership is not subject to Federal or local
income taxes which are obligations of the individual partners. However, under
current tax law, the Partnership will be taxed as a corporation beginning in
1998.
(e) Statements of Cash Flows
For purposes of reporting cash flows, cash and short term investments
include highly- liquid investments with maturities of three months or less.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-25
<PAGE> 131
OPPENHEIMER CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- NET INCOME PER UNIT
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED FOR THE YEARS ENDED APRIL 30,
JULY 31, -----------------------------
1997 1997 1996 1995
------------ ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
FOR PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Net income.................................... $ 18,900 $53,326 $58,596 $30,821
Less 1% applicable to the General Partner..... 189 533 586 308
------- ------- ------- -------
Net income available to the Limited
Partners.................................... $ 18,711 $52,793 $58,010 $30,513
======= ======= ======= =======
Weighted average number of units
outstanding................................. 25,763 25,663 25,457 25,277
Net income per unit........................... $0.72 $2.06 $2.28 $1.21
</TABLE>
NOTE 4 -- TRANSACTIONS WITH AFFILIATED COMPANIES
(a) Cash and Short Term Investments
On occasion the Partnership deposits excess funds with an affiliate and
receives interest at money market rates. In addition, excess funds are also
invested in a money market fund managed by an affiliate. Included in cash and
short term investments at April 30, 1997 and 1996 was $1,000 and $34,000,
respectively, on deposit with Oppenheimer & Co., Inc. ("Opco"), an affiliated
broker-dealer, and $90,000 and $1,000, respectively, invested in the OCC Cash
Reserves Primary Portfolio, which is managed by Opcap Advisors, an affiliated
investment adviser.
(b) 10% par value Note due 2012 from Oppenheimer Equities, Inc.
The Partnership has a $32,193,000, 10% par value note due 2012 from
Oppenheimer Equities, Inc., ("Equities"), a direct wholly-owned subsidiary of
Opfin.
The summary financial position of Equities is as follows:
<TABLE>
<CAPTION>
APRIL 30,
1997
-------------
(IN MILLIONS)
<S> <C>
Total assets.................................................... $ 5,277
Total liabilities, exclusive of subordinated liabilities........ 4,900
Liabilities subordinated to claims of general creditors......... 3
Total shareholder's equity...................................... 374
------
Total liabilities and shareholder's equity...................... $ 5,277
======
</TABLE>
For the year ended April 30, 1997, Equities' net income was $52 million on
total revenues of $974 million.
F-26
<PAGE> 132
OPPENHEIMER CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30, 1997
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues.................................... $12,280 $13,308 $16,196(1) $14,262
Net income........................................ $11,595 $12,622 $15,511(1) $13,598
Net income per unit............................... $ .45 $ .48 $ .60(1) $ .53
Distributions declared per unit................... $ .39 $ .45 $ .57(2) $ .69
Market price:
High............................................ $17.964 $20.659 $22.380 $22.904
Low............................................. $16.243 $16.766 $19.910 $19.461
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30, 1996
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 9,862 $10,527 $29,322(1) $11,605
Net income........................................ $ 9,177 $ 9,841 $28,637(1) $10,941
Net income per unit............................... $ .36 $ .38 $ 1.11(1) $ .43
Distributions declared per unit................... $ .33 $ .38 $ .70(2) $ .49
Market price:
High............................................ $14.671 $16.766 $17.665 $18.413
Low............................................. $12.650 $14.371 $16.168 $16.617
</TABLE>
- ---------------
(1) Includes a gain on the Quest sale of $1.8 million, or $.07 per unit in
fiscal 1997 and $17.7 million, or $.69 per unit in fiscal 1996 (see Note 8).
(2) Includes a special distribution related to the Quest sale of $.06 per unit
in fiscal 1997 and $.33 per unit in fiscal 1996 (see Note 8).
NOTE 6 -- SUPPLEMENTAL CASH FLOW INFORMATION
Oppenheimer Capital, L.P. issued 197,922, 197,449 and 156,426 units of
limited partner interest under the Restricted Unit and Restricted Option Plans
in exchange for an additional .18%, .18% and .14% general partner interest in
Oppenheimer Capital for the fiscal years ended April 30, 1997, 1996 and 1995,
respectively.
NOTE 7 -- COMPENSATION PLANS
The Operating Partnership has established a Restricted Unit Plan and a
Restricted Option Plan (the "Plan") for the benefit of certain key employees.
Pursuant to the Plan, an eligible employee is granted the right to receive a
number of units of the Partnership at no cost to the employee ("Rights"), in the
case of the Restricted Unit Plan, and/or the right to purchase a number of units
at the fair market value of such units on the date of grant ("Options"), in the
case of the Restricted Option Plan. The right to receive or purchase units vests
33 1/3% per year at the end of each of the third, fourth and fifth years from
the date of grant. The Partnership transfers to the Operating Partnership the
proceeds from the exercise of Options in exchange for an increase in its general
partner interest in the Operating Partnership. Opfin and the limited partners of
the Partnership incur dilution, in accordance with their respective percentage
interests in the Operating Partnership, upon the vesting of Rights and the
exercise of Options.
No compensation cost is recognized in the statements of income by the
Operating Partnership for Options granted under the Plan because the exercise
price of the Options approximates the market price of the
F-27
<PAGE> 133
OPPENHEIMER CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
units on the date of grant. Had compensation cost for the Options been
recognized based on the fair value of the Options at the date of grant, the
Partnership's net income would have been reported as the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
APRIL 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net Income
As reported............................................ $53,326 $58,596
Pro forma.............................................. $53,214 $58,554
Net Income per unit
As reported............................................ $ 2.06 $ 2.28
Pro forma.............................................. $ 2.05 $ 2.27
</TABLE>
For the purpose of the above disclosure, the fair value of each Option
granted is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in fiscal
1997 and fiscal 1996, respectively: distribution yield of 7.3% and 8.0%;
expected volatility of 21% and 22%; risk-free interest rate of 6.36% and 6.96%;
and expected lives of 6 and 7 years.
NOTE 8 -- GAIN ON QUEST SALE
Included in "Equity in earnings of Oppenheimer Capital" for the fiscal
years ended April 30, 1997 and 1996 are gains resulting from the Operating
Partnership's sale of the investment advisory and other contracts and business
relationships for its twelve Quest for Value mutual funds to OppenheimerFunds,
Inc. ("OFI"), which is unrelated to the Operating Partnership. For the years
ended April 30, 1997 and 1996, the Partnership recognized gains of $1.8 million,
or $.07 per unit, and $17.7 million, or $.69 per unit, respectively.
NOTE 9 -- SUBSEQUENT EVENTS
(a) Quest Dual Purpose Fund Sale
On February 28, 1997, the Operating Partnership entered into an agreement
to sell its investment contracts and other business relationships of the Quest
for Value Dual Purpose Fund to OFI. On July 18, 1997, the sale was consummated
and the Partnership recognized a gain on the sale of $2.8 million, or $0.11 per
unit.
(b) Sale of Opfin Interest
On July 22, 1997, Oppenheimer Group, Inc. ("OGI") and its subsidiary,
Opfin, entered into an Amended and Restated Agreement and Plan of Merger,
providing for PIMCO Advisors and its affiliate, Thomson Advisory Group Inc., to
acquire, among other things, Opfin's current 32.4% managing general partner
interest in the Operating Partnership, and Opfin's 1% general partner interest
in the Partnership and in the various subpartnerships of the Operating
Partnership. The transaction covers only the private interests OGI holds in the
Operating Partnership and the Partnership, does not include the publicly traded
units of the Partnership, and is subject to certain conditions being satisfied
prior to closing, including the closing of the sale of the stock of Oppenheimer
Holdings, Inc., an affiliate, to a third party, and consents of certain clients.
It is anticipated that the transaction will close no later than the first
quarter of calendar 1998.
Upon consummation of the transaction, the Operating Partnership will
function as an indirect subsidiary of PIMCO Advisors. PIMCO Advisors has advised
OGI that it anticipates that the senior portfolio management team of the
Operating Partnership will continue in their present capacities.
F-28
<PAGE> 134
REPORT OF INDEPENDENT ACCOUNTANTS
To The General Partners of
Oppenheimer Capital
In our opinion, the accompanying statements of financial condition and the
related statements of income, changes in partners' capital and cash flows
present fairly, in all material respects, the financial position of Oppenheimer
Capital and its subsidiaries (the "Partnership") at April 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended April 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. 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 provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
New York, New York
July 22, 1997
F-29
<PAGE> 135
OPPENHEIMER CAPITAL
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT APRIL 30,
AT JULY 31, -------------------
1997 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash and short term investments (Notes 1 and 4)............. $ 32,869 $27,123 $19,744
Investment management fees receivable....................... 57,990 52,357 43,016
Investments in affiliated mutual funds and other sponsored
investment products (Note 4).............................. 3,371 4,347 4,644
Furniture, equipment and leasehold improvements at cost less
accumulated depreciation and amortization of $2,812 and
$2,179 (Note 1)........................................... 3,752 3,795 3,515
Intangible assets, less accumulated amortization of $565 and
$377 (Note 1)............................................. 1,213 1,511 1,699
Other assets................................................ 3,860 3,886 3,720
------- ------- -------
Total Assets...................................... $ 103,055 $93,019 $76,338
======= ======= =======
LIABILITIES, MINORITY INTEREST AND PARTNERS' CAPITAL
LIABILITIES
Accrued employee compensation and benefits.................. $ 18,933 $13,914 $12,873
Accrued expenses and other liabilities...................... 9,152 8,880 7,168
Note payable (Note 8)....................................... -- 400 800
Deferred investment management fees......................... 5,482 4,532 2,870
Distribution payable to partners............................ 20,789 25,318 17,751
------- ------- -------
Total Liabilities......................................... 54,356 53,044 41,462
------- ------- -------
Minority interest........................................... 396 277 174
Partners' capital........................................... 48,303 39,698 34,702
------- ------- -------
Total Liabilities, Minority Interest and Partners'
Capital......................................... $ 103,055 $93,019 $76,338
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 136
OPPENHEIMER CAPITAL
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS THREE MONTHS FOR THE YEARS ENDED APRIL 30,
ENDED ENDED ----------------------------------
JULY 31, 1997 JULY 31, 1996 1997 1996 1995
--------------- --------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Investment management fees (Note
1)............................. $ 53,093 $39,433 $175,814 $151,269 $119,194
Net distribution assistance and
commission income (Note 4)..... 1,599 1,405 4,910 6,051 10,443
Interest and dividends........... 351 237 1,250 895 275
------- ------- -------- -------- --------
TOTAL OPERATING REVENUES......... 55,043 41,075 181,974 158,215 129,912
------- ------- -------- -------- --------
OPERATING EXPENSES:
Compensation and benefits (Note
3)............................. 23,991 17,610 77,664 68,781 55,367
Occupancy........................ 1,757 1,493 6,572 6,873 6,436
General and administrative....... 3,124 2,787 12,494 12,293 10,652
Promotional...................... 1,430 1,551 6,334 7,604 10,611
------- ------- -------- -------- --------
TOTAL OPERATING EXPENSES......... 30,302 23,441 103,064 95,551 83,066
------- ------- -------- -------- --------
OPERATING INCOME................. 24,741 17,634 78,910 62,664 46,846
Gain on Quest sale (Note 6)...... 4,374 -- 2,806 27,725 --
------- ------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST.............. 29,115 17,634 81,716 90,389 46,846
Income taxes (Note 5)............ (1,218) (585) (3,198) (3,627) (1,201)
------- ------- -------- -------- --------
INCOME BEFORE MINORITY
INTEREST....................... 27,897 17,049 78,518 86,762 45,645
Minority interest................ (119) (56) (254) (452) --
------- ------- -------- -------- --------
NET INCOME....................... $ 27,778 $16,993 $ 78,264 $ 86,310 $ 45,645
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 137
OPPENHEIMER CAPITAL
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT APRIL 30, 1994................................................. $ 12,452
Net income.............................................................. 45,645
Amortization of restricted unit compensation expense.................... 1,280
Distributions declared to partners:
Oppenheimer Financial Corp........................................... (14,313)
Oppenheimer Capital, L.P............................................. (30,690)
Contributions by Oppenheimer Capital, L.P............................... 86
-------
BALANCE AT APRIL 30, 1995................................................. 14,460
Net income.............................................................. 86,310
Amortization of restricted unit compensation expense.................... 1,691
Distributions declared to partners:
Oppenheimer Financial Corp........................................... (22,247)
Oppenheimer Capital, L.P............................................. (45,812)
Contributions by Oppenheimer Capital, L.P............................... 300
-------
BALANCE AT APRIL 30, 1996................................................. 34,702
Net income.............................................................. 78,264
Amortization of restricted unit compensation expense.................... 2,209
Distributions declared to partners:
Oppenheimer Financial Corp........................................... (24,707)
Oppenheimer Capital, L.P............................................. (51,300)
Contributions by Oppenheimer Capital, L.P............................... 530
-------
BALANCE AT APRIL 30, 1997................................................. 39,698
(unaudited):
Net income.............................................................. 27,778
Amortization of restricted unit compensation expense.................... 980
Distributions declared to partners:
Oppenheimer Financial Corp........................................... (6,754)
Oppenheimer Capital, L.P............................................. (14,030)
Contributions by Oppenheimer Capital, L.P............................... 631
-------
BALANCE AT JULY 31, 1997.................................................. $ 48,303
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 138
OPPENHEIMER CAPITAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS THREE MONTHS FOR THE YEARS ENDED APRIL 30,
ENDED ENDED ------------------------------
JULY 31, 1997 JULY 31, 1996 1997 1996 1995
--------------- --------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 27,778 $ 16,993 $ 78,264 $ 86,310 $ 45,645
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of restricted unit compensation
expense.......................................... 980 535 2,209 1,691 1,280
Depreciation and amortization...................... 247 230 1,019 2,413 1,082
Minority interest, net of distributions............ 119 87 103 87 62
(Increase) in investment management fees
receivable....................................... (5,633) 830 (9,341) (9,839) (4,517)
(Increase) decrease in other assets................ (197) 381 (182) (1,195) 1,300
Increase in accrued employee compensation and
benefits......................................... 5,019 (3,731) 1,041 4,549 1,637
Increase in accrued expenses and other
liabilities...................................... 272 1,859 1,712 290 2,144
Increase in deferred investment management fees.... 950 308 1,662 1,154 93
--------- --------- -------- -------- --------
Net cash provided by operating activities............ 29,535 17,492 76,487 85,460 48,726
--------- --------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets............................ (178) (350) (1,111) (498) (1,634)
Sale of AMA license.................................. 1,000 -- -- -- --
Intangible assets resulting from acquisitions........ (500) -- -- -- (1,689)
Proceeds from sales of mutual funds shares and other
investments........................................ 976 -- 3,132 7,296 2,048
Purchases of mutual funds shares and other
investments........................................ -- (35) (2,819) (7,844) (4,384)
--------- --------- -------- -------- --------
Net cash provided by (used in) investing
activities......................................... 1,298 (385) (798) (1,046) (5,659)
--------- --------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from bank loans......... -- -- (9,182) 6,446
Issuance (repayment) of note payable................. (400) (400) (400) (400) 1,200
Distributions to partners:
Oppenheimer Financial Corp......................... (8,228) (5,801) (22,280) (21,187) (14,898)
Oppenheimer Capital, L.P........................... (17,090) (11,950) (46,160) (43,415) (30,995)
Contributions by Oppenheimer Capital, L.P............ 631 273 530 300 86
--------- --------- -------- -------- --------
Net cash (used in) financing activities.............. (25,087) (17,878) (68,310) (73,884) (38,161)
--------- --------- -------- -------- --------
Net increase in cash and short term investments...... 5,746 (771) 7,379 10,530 4,906
Cash and short term investments at beginning of
period............................................. 27,123 21,019 19,744 9,214 4,308
--------- --------- -------- -------- --------
Cash and short term investments at end of period..... $ 32,869 $ 20,248 $ 27,123 $ 19,744 $ 9,214
========= ========= ======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid...................................... $ 22 $ 38 $ 112 $ 638 $ 738
========= ========= ======== ======== ========
New York City unincorporated business tax paid..... $ 983 $ 661 $ 3,376 $ 3,701 $ 1,049
========= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 139
OPPENHEIMER CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Consolidation
Oppenheimer Capital (the "Operating Partnership") is a general partnership
owned 32.5% by Oppenheimer Financial Corp. ("Opfin") and 67.5% by Oppenheimer
Capital, L.P. (the "Partnership"). The Operating Partnership is a registered
investment adviser and is part of an affiliated group of companies operating in
the financial services industry.
The consolidated financial statements include the accounts of the Operating
Partnership and its subsidiaries, Opcap Advisors ("Advisors"), OCC Distributors
("Distributors") and AMA Investment Advisers, L.P. ("AMA Advisers, L.P.")
(collectively, the "Subpartnerships"), Oppenheimer Capital Limited and
Oppenheimer Capital Trust Company. All material intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and Short Term Investments
Short term investments are recorded at cost which approximates market value
and include holdings in money market mutual funds and highly-liquid investments
with maturities of three months or less.
(c) Furniture, Equipment and Leasehold Improvements
Furniture and equipment are depreciated on a straight-line basis over five
to seven year periods. Amortization of leasehold improvements is on a
straight-line basis over the lesser of their economic useful life or the term of
the lease.
(d) Investment Management Fees
Investment management fees are based on written contracts and are generally
computed on the net assets of the managed accounts and recognized in the period
earned.
(e) Statements of Cash Flows
For purposes of reporting cash flows, cash and short term investments
include highly-liquid investments with maturities of three months or less.
(f) Intangible Assets
Impairment of intangible assets is measured on the basis of anticipated
undiscounted cash flows. At April 30, 1997, 1996 and 1995, the Operating
Partnership determined that there was no impairment of the intangible assets.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(h) Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
F-34
<PAGE> 140
OPPENHEIMER CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- LONG TERM LEASE COMMITMENTS
The Operating Partnership occupies office premises at various locations,
including the Oppenheimer Tower under an agreement to sublease with Oppenheimer
& Co., Inc. ("Opco"), an affiliated broker-dealer. The Operating Partnership' s
lease commitments for office space under operating leases having noncancelable
lease terms in excess of one year provide for the following minimum annual
rentals:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
----------------------------------------------------------------
<S> <C>
1998....................................................... $ 3,919,000
1999....................................................... 3,919,000
2000....................................................... 3,919,000
2001....................................................... 3,640,000
2002....................................................... 3,310,000
Thereafter................................................. 8,685,000
-----------
Total minimum lease payments.................................... $27,392,000
==========
</TABLE>
The agreements expire at various dates through the fiscal year ending April
30, 2006 and contain provisions for additional charges (e.g., ground rent, real
estate taxes and operating expenses). Office rent expense for the years ended
April 30, 1997, 1996 and 1995 was $5,046,000, $5,348,000 and $5,100,000,
respectively.
NOTE 3 -- COMPENSATION PLANS
The Operating Partnership has established a Restricted Unit Plan and a
Restricted Option Plan (the "Plan") for the benefit of certain key employees.
Pursuant to the Plan, an eligible employee is granted the right to receive a
number of units of the Partnership at no cost to the employee ("Rights"), in the
case of the Restricted Unit Plan, and/or the right to purchase a number of units
at the fair market value of such units on the date of grant ("Options"), in the
case of the Restricted Option Plan. The right to receive or purchase units vests
33 1/3% per year at the end of each of the third, fourth and fifth years from
the date of grant. The Partnership transfers to the Operating Partnership the
proceeds from the exercise of Options in exchange for an increase in its general
partner interest in the Operating Partnership. Opfin and the limited partners of
the Partnership incur dilution, in accordance with their respective percentage
interests in the Operating Partnership, upon the vesting of Rights and the
exercise of Options. A total of 2,475,000 restricted units and/or restricted
options have been authorized under the Plan. The following table shows the
Rights granted and the Options granted with exercise prices of $18.125 to $33.75
at April 30, 1997. As a result of the grant of Rights, the Operating Partnership
recorded deferred restricted unit compensation expense in partners' capital of
$5,977,000, $4,738,000 and $343,000 for the fiscal years ended April 30, 1997,
1996 and 1995, respectively, which amounts are amortized over a five year
period. Amortization of $2,209,000, $1,691,000, and $1,280,000 has been recorded
for the years ended April 30, 1997, 1996 and 1995, respectively. This
amortization results in a charge to compensation and benefits and a
corresponding credit to partners' capital.
F-35
<PAGE> 141
OPPENHEIMER CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
RIGHTS OPTIONS EXERCISE PRICE
OUTSTANDING OUTSTANDING PER OPTION
-------- -------- ---------------
<S> <C> <C> <C>
Balances at April 30, 1994........................... 322,950 141,501 $11.375-$28.125
Rights granted..................................... 16,300 -- --
Rights canceled.................................... (3,333) -- --
Units issued with respect to Rights................ (88,167) -- --
Options granted.................................... -- 140,500 $23.625-$24.875
Options exercised.................................. -- (5,501) $11.375-$23.875
Options canceled................................... -- (9,667) $11.375-$ 25.00
------- ------- ---------------
Balances at April 30, 1995........................... 247,750 266,833 $ 13.50-$28.125
Rights granted..................................... 188,540 -- --
Rights canceled.................................... (8,333) -- --
Units issued with respect to Rights................ (103,200) -- --
Options granted.................................... -- 153,000 $ 20.75
Options exercised.................................. -- (15,033) $ 13.50-$ 25.00
Options canceled................................... -- (30,333) $20.625-$ 25.00
------- ------- ---------------
Balances at April 30, 1996........................... 324,757 374,467 $18.125-$28.125
Rights granted..................................... 207,517 -- --
Rights canceled.................................... (14,109) -- --
Units issued with respect to Rights................ (95,851) -- --
Options granted.................................... -- 168,500 $29.375-$ 33.75
Options exercised.................................. -- (22,665) $18.125-$29.375
Options canceled................................... -- (24,000) $ 20.75-$29.375
------- ------- ---------------
Balances at April 30, 1997........................... 422,314 496,302 $18.125-$ 33.75
======= ======= ===============
</TABLE>
No compensation cost is recognized in the consolidated statements of income
for Options granted under the Plan because the exercise price of the Options
approximates the market price of the units on the date of grant. Had
compensation cost for the Options been recognized based on the fair value of the
Options at the date of the grant, the Operating Partnership's net income would
have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
APRIL 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net Income
As reported............................................ $78,264 $86,310
Pro forma.............................................. $78,098 $86,248
</TABLE>
For the purpose of the above disclosure, the fair value of each Option
granted is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in fiscal
1997 and fiscal 1996, respectively: distribution yield of 7.3% and 8.0%;
expected volatility of 21% and 22%; risk-free interest rate of 6.36% and 6.96%;
and expected lives of 6 and 7 years.
NOTE 4 -- TRANSACTIONS WITH AFFILIATED COMPANIES
(a) Cash and Short Term Investments
On occasion the Operating Partnership deposits excess funds with an
affiliate and receives interest at money market rates. In addition, excess funds
are also invested in a money market fund managed by Advisors.
F-36
<PAGE> 142
OPPENHEIMER CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in cash and short term investments at April 30, 1997 and 1996 was
$35,000 and $275,000, respectively, on deposit with Opco and $1,567,000 and
$1,675,000, respectively, invested in the OCC Cash Reserves Primary Portfolio,
for which Advisors acts as investment adviser.
(b) Investments in Affiliated Mutual Funds and Other Sponsored Investment
Products
Investments in affiliated mutual funds and other sponsored investment
products are carried at market value.
(c) Distribution Assistance Fees and Expenses
The Operating Partnership receives distribution assistance fees from
various mutual funds and has entered into agreements with various broker-dealers
including Opco to obtain sales-related services in rendering distribution
assistance. Payments to Opco for the Quest for Value equity and fixed income
mutual funds for the years ended April 30, 1996 and 1995 were recorded as
distribution assistance expenses and for financial statement purposes were
netted against distribution assistance fees (see note 6). Payments to Opco for
OCC Cash Reserves are netted against investment management fees. Such payments
totaled $8,902,000, $9,522,000 and $8,496,000 for the years ended April 30,
1997, 1996 and 1995, respectively.
(d) Other Services
Opco provides various services to the Operating Partnership and its
subsidiaries at its cost. Charges pursuant to these agreements are not material.
(e) Affiliated Mutual Funds and Commingled Products -- Investment Management
Fees
The Operating Partnership provides investment management services to
affiliated mutual funds and other commingled products. For the years ended April
30, 1997, 1996 and 1995 amounts earned for these services totaled $15,382,000,
$22,778,000 and $23,088,000, respectively.
NOTE 5 -- INCOME TAXES
Although the Operating Partnership is not otherwise subject to Federal,
state, or local income taxes, it was subject to New York City unincorporated
business tax of $3,143,000, $3,667,000 and $1,201,000, respectively, for the
years ended April 30, 1997, 1996 and 1995.
A domestic corporate subsidiary of the Operating Partnership is subject to
Federal, state and local income taxes. A foreign corporate subsidiary is subject
to taxes in the foreign jurisdiction in which it is located.
NOTE 6 -- GAIN ON QUEST SALE
On November 22, 1995, the Operating Partnership sold the investment
advisory and other contracts and business relationships for its twelve Quest for
Value mutual funds to OppenheimerFunds, Inc. ("OFI"), which is unrelated to the
Operating Partnership. In fiscal 1997 and 1996, the Operating Partnership
received payments of $3.8 million and $41.7 million, respectively, related to
the sale, and recognized pre-tax gains of $2.8 million and $27.7 million,
respectively.
NOTE 7 -- SALE OF SARATOGA CAPITAL MANAGEMENT
On April 29, 1997, the Operating Partnership completed the sale of its 50%
interest in Saratoga Capital Management. The proceeds, which are not
significant, will be paid annually to the Operating Partnership over a five year
period, ending May 1, 2001. The Operating Partnership continues to manage two
portfolios of the Saratoga Advantage Trust, for which it receives subadvisory
fees.
F-37
<PAGE> 143
OPPENHEIMER CAPITAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- SUBSEQUENT EVENTS
(a) Sale of AMA License
On May 12, 1997, the Operating Partnership sold its exclusive license to
market financial products to members of the American Medical Association for $1
million. The proceeds received from this transaction were used to purchase the
remaining 19.9% interest of AMA Advisers, L.P. not owned by the Operating
Partnership and Opfin, and to repay the balance of the original acquisition debt
incurred to purchase AMA Advisers, L.P. AMA Advisers, L.P. has been renamed 225
Liberty Street Advisers, L.P.
(b) Quest Dual Purpose Fund Sale
On February 28, 1997, the Operating Partnership entered into an agreement
to sell its investment advisory and other contracts and business relationships
of the Quest for Value Dual Purpose Fund to OFI. On July 18, 1997, the sale was
consummated and the Operating Partnership received a payment of $7.0 million and
recorded a net gain of $4.2 million.
(c) Sale of Opfin Interest
On July 22, 1997, Oppenheimer Group, Inc. ("OGI") and its subsidiary,
Opfin, entered into an Amended and Restated Agreement and Plan of Merger,
providing for PIMCO Advisors and its affiliate, Thomson Advisory Group Inc., to
acquire, among other things, Opfin's current 32.4% managing general partner
interest in the Operating Partnership, and Opfin's 1% general partner interest
in the Partnership and in the various subpartnerships of the Operating
Partnership. The transaction covers only the private interests OGI holds in the
Operating Partnership and the Partnership, does not include the publicly traded
units of the Partnership, and is subject to certain conditions being satisfied
prior to closing, including the closing of the sale of the stock of Oppenheimer
Holdings, Inc., an affiliate, to a third party, and consents of certain clients.
It is anticipated that the transaction will close no later than the first
quarter of calendar 1998.
Upon consummation of the transaction, the Operating Partnership will
function as an indirect subsidiary of PIMCO Advisors. PIMCO Advisors has advised
OGI that it anticipates that the senior portfolio management team of the
Operating Partnership will continue in their present capacities.
F-38
