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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to __________________
Commission File Number 1-9597
PIMCO ADVISORS HOLDINGS L.P.
(Exact name of Registrant as specified in its charter)
Delaware 13-3412614
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Newport Center Drive
Newport Beach, California 92660
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(Address of principal executive offices)
(949) 717-7022
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 30, 1998, there were 46,643,169 publicly traded units of limited
partner interest issued and outstanding.
Page 1 of 28 pages
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PIMCO ADVISORS HOLDINGS L.P.
PART I--FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
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Page
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PIMCO Advisors Holdings L.P.
Statements of Financial Condition as of June 30, 1998 and December 31, 1997 13
Statements of Operations for the three months ended June 30, 1998 and
April 30, 1997 and the six months ended June 30, 1998 and April 30, 1997 14
Statements of Cash Flows for the six months ended June 30, 1998 and April 30, 1997 15
Notes to Financial Statements 16
PIMCO Advisors L.P.
Consolidated Statements of Financial Condition as of June 30, 1998 and
December 31, 1997 19
Consolidated Statements of Operations for the three months ended
June 30, 1998 and June 30, 1997 and the six months ended
June 30, 1998 and June 30, 1997 20
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and June 30, 1997 21
Notes to Consolidated Financial Statements 22
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FORWARD LOOKING STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
performance of financial markets, the investment performance of PIMCO Advisors
L.P.'s sponsored investment products and separately managed accounts, general
economic conditions, future acquisitions, competitive conditions and government
regulations, including changes in tax laws. PIMCO Advisors Holdings L.P.
cautions readers to carefully consider such factors. Further, such forward-
looking statements speak only as of the date on which such statements are made.
PIMCO Advisors Holdings L.P. undertakes no obligation to update any forward-
looking statements to reflect events or circumstances after the date of such
statements.
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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General
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PIMCO Advisors Holdings L.P. ("PIMCO Holdings") (formerly Oppenheimer
Capital, L.P.) is a publicly traded Delaware limited partnership owned .01% by
its general partner, PIMCO Partners, G.P. and 99.9% by its public limited
partners ("Unitholders"). PIMCO Holdings sole business is its ownership of a
43% interest (approximately 46.6 million General Partner units) in PIMCO
Advisors L.P. ("PIMCO Advisors"), an investment advisor registered under the
Investment Advisers Act of 1940. PIMCO Partners, G.P. and other private holders
hold the remaining interest in PIMCO Advisors. PIMCO Partners, G.P. is the sole
general partner of PIMCO Holdings and is the controlling general partner of
PIMCO Advisors.
PIMCO Advisors is one of the largest investment management companies in the
U.S. with approximately $228.8 billion under management at June 30, 1998. PIMCO
Advisors provides high quality fixed income and equity investment management to
institutional and retail clients, offering the investment management expertise,
performance record and reputations of its institutional investment managers,
which include the fixed income oriented Pacific Investment Management Company
and the equity oriented Oppenheimer Capital. PIMCO Advisors' business focuses
on:
Institutional Fixed Income. PIMCO Advisors provides fixed income
investment management to large and medium-sized foreign and domestic corporate
and public clients. Fixed income management is led by Pacific Investment
Management Company, which offers impressive long-term performance records across
a diverse range of product offerings such as total return, international and
other duration or sector specific strategies.
Institutional Equity. PIMCO Advisors provides equity investment management
to institutional clients offering the investment management expertise of six
equity management groups, including the highly regarded Oppenheimer Capital.
PIMCO Advisors offers investors a variety of management styles, including value,
growth, quantitative and international management styles, as well as an enhanced
index based strategy.
Institutional clients invest through separate accounts and pooled vehicles
such as the institutional share classes of PIMCO Funds, PIMCO Advisors family of
46 proprietary mutual funds. PIMCO Advisors offers its investment management
services to institutional clients through client service representatives of its
investment management groups.
Retail Distribution. PIMCO Advisors offers the investment expertise of its
institutional investment managers to retail investors through the retail share
classes of the PIMCO Funds, which are distributed primarily through broker
dealers including PIMCO Funds Distributors LLC ("PFD", formerly known as PIMCO
Funds Distribution Company), a wholly-owned broker-dealer which distributes and
markets shares of the retail mutual funds of PIMCO Advisors. In addition, PIMCO
Advisors offers retail investors wrap fee accounts, variable annuity products,
401K programs and various investment products through sponsored investment
companies.
PIMCO Advisors' strategy is to increase the amount and diversification of
its assets under management through (i) growth in the institutional market by
providing high levels of client service and entering new markets, (ii) growth in
the retail market by building brand awareness and marketing of the PIMCO Funds
through its broker dealer network and through penetrating additional
distribution channels and (iii) new product offerings to institutions and retail
investors.
The financial condition and results of operations of PIMCO Advisors are
discussed below under "PIMCO ADVISORS L.P."
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Combination of Oppenheimer Capital and PIMCO Advisors
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On November 4, 1997, PIMCO Advisors acquired Oppenheimer Group, Inc.
("Opgroup"), whose subsidiary Oppenheimer Financial Corp. ("Opfin") owned the
32.4% managing general partner interest in Oppenheimer Capital and the one
percent general partner interest in PIMCO Holdings. In the transaction, Opgroup
became a subsidiary of PIMCO Advisors, and the Opgroup stockholders received 2.1
million PIMCO Advisors Class A units and rights to exchange up to $230 million
of outstanding term notes of Opgroup for an additional 6.9 million PIMCO
Advisors Class A units at $33 1/3 per unit. In connection with the transaction,
PIMCO Advisors split the one percent general partner interest in PIMCO Holdings
into a .01% general partner interest and a .99% limited partner interest, and
sold the general partner interest to its general partner.
On November 30, 1997, Oppenheimer Capital merged with a subsidiary of PIMCO
Advisors, with Oppenheimer Capital surviving (the "OpCap Merger"). In the OpCap
Merger, PIMCO Advisors acquired from PIMCO Holdings its 67.6% general partner
interest in Oppenheimer Capital in exchange for 26.1 million PIMCO Advisors
Class A units, representing an approximate 24% general partner interest in PIMCO
Advisors. As a result, Oppenheimer Capital became a wholly-owned subsidiary of
PIMCO Advisors, and the limited partner units of PIMCO Holdings came to
represent an investment in the business of PIMCO Advisors. On December 1, 1997,
PIMCO Holdings effected a 1.67 for 1 split of the PIMCO Holdings units, so that
each PIMCO Holdings unit outstanding after the split represented an economic
interest in one PIMCO Advisors unit.
On December 31, 1997, PIMCO Advisors caused its 19.5 million publicly held
units to be contributed to PIMCO Holdings in exchange for an equal number of
PIMCO Holdings units. As a result, PIMCO Advisors ceased to be publicly traded,
and PIMCO Holdings' general partner interest in PIMCO Advisors increased to
approximately 43%.
Prior to the OpCap Merger, PIMCO Holdings reported its results of
operations and its financial position based on an April 30 fiscal year end.
Upon completion of the OpCap Merger, PIMCO Holdings changed its fiscal year to a
calendar year to correspond with that of PIMCO Advisors.
PIMCO ADVISORS HOLDINGS L.P.
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Comparative Results of Operations
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Quarter And Six Months Ended June 30, 1998 Compared To Pro Forma Quarter And Six
Months Ended June 30, 1997
Because of the different ownership interests during the historical
reporting periods and the different fiscal quarter ends of the historical
reporting periods, management has included below certain pro forma financial
information as if the above discussed transactions had been completed as of
January 1, 1996. Pro forma results eliminate the significant comparative
differences in the historical results of operations arising primarily from the
inclusion of 67% of Oppenheimer Capital's stand alone results prior to November
30, 1997 as compared with 43% of the consolidated results of PIMCO Advisors
after December 31, 1997, and from certain events effected in the transactions
principally related to the creation and amortization of intangible assets.
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The pro forma results of PIMCO Advisors are discussed separately under
"PIMCO Advisors L.P." The following tables compare actual results of operations
of PIMCO Holdings and PIMCO Advisors for the quarter and six months ended June
30, 1998 and the pro forma results of operations for the quarter and six months
ended June 30, 1997 as if the acquisition discussed above had occurred on
January 1, 1996.
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PIMCO Advisors Holdings L.P.
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For The Three Months Ended For The Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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Actual Pro Forma Actual Pro Forma
(Dollars in thousands, except per unit amounts)
<S> <C> <C> <C> <C>
Equity in earnings of PIMCO Advisors L.P. $23,662 $15,231 $43,700 $27,901
Other expenses 4,288 -- 7,801 --
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Net income $19,374 $15,231 $35,899 $27,901
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Basic net income per unit $ 0.42 $ 0.33 $ 0.78 $ 0.61
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Diluted net income per unit $ 0.39 $ 0.32 $ 0.73 $ 0.59
======= ======= ======= =======
Distributions declared per unit $ 0.53 N/A $ 1.06 N/A
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PIMCO Advisors L.P.
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For The Three Months Ended For The Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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Actual Pro Forma Actual Pro Forma
(Dollars in thousands)
REVENUES
Investment advisory fees:
Private accounts $142,211 $118,810 $271,361 $221,267
Proprietary Funds 53,810 39,218 100,623 76,197
Distribution and servicing fees 20,591 13,288 38,485 28,201
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Total revenues 216,612 171,316 410,469 325,665
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EXPENSES
Compensation and benefits 90,241 71,642 174,092 136,145
Commissions 19,784 13,666 37,025 27,197
Amortization of intangible assets, Restricted
Unit and Option Plans 20,173 25,789 39,831 51,241
General and administrative 10,876 7,921 19,807 14,883
Occupancy and equipment 5,438 4,316 10,560 8,484
Other expense, net 14,980 11,648 27,252 21,158
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Total expenses 161,492 134,982 308,567 259,108
-------- -------- -------- --------
Net income $ 55,120 $ 36,334 $101,902 $ 66,557
======== ======== ======== ========
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5
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The above pro forma operating results give effect to:
(i) Conversion of PIMCO Holdings to a calendar year reporting basis;
(ii) The issuance of 2.1 million restricted Class A limited partner units in
connection with the acquisition of the privately held 33% interest in
Oppenheimer Capital which occurred on November 4, 1997 ("Opgroup
Transaction");
(iii) The assumed exchange of $230 million of previously existing exchangeable
debt for an additional 6.9 million PIMCO Advisors Class A units, of which
$149.2 million had been exchanged as of June 30, 1998;
(iv) The contribution of the 67% interest in Oppenheimer Capital by PIMCO
Holdings for 26.1 million PIMCO Advisors Class A units which occurred on
November 30, 1997 in the OpCap Merger;
(v) The addition of approximately $897.5 million of intangible assets at
PIMCO Advisors which arose on November 4, 1997 as result of the Opgroup
Transaction and which will be amortized over 20 years;
(vi) The issuance of approximately 2.2 million restricted unit rights
resulting in a deferred compensation charge of $67.8 million to be
amortized over a 5 year period that occurred on November 4, 1997;
(vii) The elimination of the priority distribution structure related to pre -
December 31, 1997 rights of PIMCO Advisors Class A units; and
(viii) The repayment of the Equities Note in November 1997 and the resulting
elimination of interest income and related expense.
This pro forma information is not intended to reflect the results that
actually would have been obtained if the operations were consolidated during the
periods presented, nor is it an indication of future results.
PIMCO Holdings realized $23.7 million as its proportionate share of
earnings of PIMCO Advisors (approximately 43%) during the quarter ended June 30,
1998 as compared with $15.2 million pro forma during the quarter ended June 30,
1997, an increase of $8.5 million (or 55.4%). PIMCO Holdings' proportionate
share of earnings of PIMCO Advisors for the six months ended June 30, 1998 was
$43.7 million compared with $27.9 million pro forma for the six months ended
June 30, 1997, an increase of $15.8 million (or 56.6%). The increases in
earnings were the result of increases in the net income of PIMCO Advisors,
resulting principally from its increased managed assets and the related
revenues, offset by operating expense increases.
The amortization of intangible assets at PIMCO Advisors in 1997 includes
a charge of approximately $6.4 million per quarter related to the amortization
of the intangible value (approximately $80.7 million) assigned to PIMCO
Advisors' master limited partnership ("MLP") structure, originally scheduled to
expire on December 31, 1997. Under the change in the tax laws enacted in August
of 1997, PIMCO Holdings elected to continue to be treated as a publicly traded
partnership, subject to a 3.5% federal tax on allocable gross income from active
businesses, however, there is no specific intangible amortization related to
this structure in the future. It is expected, therefore, that amortization of
the remaining intangibles, including both the amortization of goodwill and
restricted unit and option plans, will approximate $80 million annually. Based
upon current operating margins, the newly enacted tax amounts to an approximate
17% to 18% reduction in otherwise reportable net income and an 11% to 12%
reduction in cash flow otherwise available for distribution, aggregating
approximately $4.3 million in the quarter ended June 30, 1998.
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Quarter And Six Months Ended June 30, 1998 Compared To The Historical Fiscal
Quarter And Six Months Ended April 30, 1997
PIMCO Holdings recorded equity in earnings of PIMCO Advisors for the three
months ended June 30, 1998 of $23.7 million and $43.7 million for the six months
ended June 30, 1998 compared to equity in earnings of $13.5 million for the
three months ended April 30, 1997 and $28.9 million for the six months ended
April 30, 1997.
PIMCO Holdings recorded no amortization of intangible assets during the
three months and six months ended June 30, 1998 compared to $632,000 during the
three months ended April 30, 1997 and $1.3 million for the six months ended
April 30, 1997. Other expenses amounted to $4.3 million during the quarter
ended June 30, 1998 and $7.8 million for the six months ended April 30, 1998
compared to $32,000 for the quarter April 30, 1997 and $65,000 for the six
months ended April 30, 1997. The increase in other expenses was primarily a
result of the newly enacted federal and state taxes imposed on publicly traded
master limited partnerships starting in January 1998.
Taxes
PIMCO Holdings is not subject to federal, state, or local income taxes,
which are the obligations of individual partners. However, beginning in
calendar year 1998, PIMCO Holdings elected to be subject to a 3.5% federal tax
on its share of PIMCO Advisors' gross income from the active conduct of a trade
or business in order to retain its partnership status. The imposition of this
tax will reduce both net income and cash available for distribution to partners
from levels that would otherwise be available. Similar taxes may be imposed by
states in which PIMCO Holdings operates.
Liquidity And Capital Resources
PIMCO Holdings is dependent upon the operating cash flow of PIMCO Advisors
for its liquidity and capital resources. For the quarter ended June 30, 1998,
PIMCO Holdings declared distributions to holders of PIMCO Holdings units of
$0.53 per unit compared to distributions declared during the quarter ended April
30, 1997 of $0.69 per unit. The prior year distribution included the scheduled
distribution of $0.51 and $0.18 of previously retained operating cash flow.
PIMCO Holdings' policy is to distribute substantially all its net operating cash
flow on an annual basis. Distributions are declared to unitholders of record on
March 31, June 30, September 30 and December 31 and paid within thirty days
following the end of each calendar quarter. Because PIMCO Holdings' sole
business is to hold an investment as a general partner of PIMCO Advisors, the
operating cash flow of PIMCO Holdings consists of distributions from PIMCO
Advisors. Because PIMCO Advisors currently pays all expenses of PIMCO Holdings
other than taxes, PIMCO Holdings' per unit distributions generally equal the
PIMCO Advisors distributions, less applicable taxes. Effective with the third
quarter distribution in September, the Management Board of PIMCO Advisors has
indicated its intent to evaluate the distribution rate on a quarterly basis.
Distribution levels will depend on the financial performance of PIMCO
Advisors. There can be no assurance that current distribution rates will be
maintained. Distributions made by PIMCO Holdings will depend on the
profitability of the investment management business of PIMCO Advisors, which is
affected in part by overall economic conditions and other factors affecting
capital markets generally, which are beyond the control of PIMCO Holdings and
PIMCO Advisors.
7
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PIMCO ADVISORS L.P.
Comparative Results of Operations
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Quarter And Six Months Ended June 30, 1998 Compared To Pro Forma Quarter And Six
Months Ended June 30, 1997
Revenues
PIMCO Advisors derives substantially all its revenues 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 principally to the PIMCO
Funds.
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. Such performance based fees can have a significant effect on revenues,
and provide an opportunity to earn higher fees (as well as lower) than could be
obtained under fee arrangements based solely on a percentage of assets under
management.
The following table sets forth the composition of PIMCO Advisors assets under
management for the quarter ended June 30, 1998 compared to pro forma June 30,
1997:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
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Actual Pro forma
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(Dollars in millions)
<S> <C> <C>
Assets under management by source:
Institutional separate accounts
Fixed income $ 96,317 $ 68,834
Equity 53,433 50,446
Retail products and mutual funds 79,004 57,621
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Total $ 228,754 $ 176,901
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Assets under management by type:
Fixed income $ 132,338 $ 94,775
Equity 93,639 78,887
Money market 2,777 3,239
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Total $ 228,754 $ 176,901
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PIMCO Advisors' consolidated revenues, including those of its wholly-owned
subsidiary PIMCO Funds Distributors LLC ("PFD"), increased $45.3 million (26.4%)
to $216.6 million for the three months ended June 30, 1998 compared to $171.3
million pro forma for the three months ended June 30, 1997. PIMCO Advisors
consolidated revenues for the six months ended June 30, 1998 increased $84.8
million (26.0%) to $410.5 million compared to $325.7 million pro forma for the
six months ended June 30, 1997. Advisory revenues increased $38.0 million
(24.1%) to $196.0 million for the three months ended June 30, 1998 and $74.5
million (25.0%) to $372.0 million for the six months ended June 30, 1998
compared to $158.0 million and $297.5 million, respectively, for the same pro
forma periods in 1997. Distribution and servicing revenues increased to $20.6
million for the three
8
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months ended June 30, 1998 and to $38.5 million for the six months ended June
30, 1998, compared to $13.3 million and $28.2 million, respectively, for the
same pro forma periods in 1997.
The increases in PIMCO Advisors' revenues for the quarter and six months
ended June 30, 1998 resulted primarily from a pro forma $51.9 billion (or 29.3%)
year-over-year increase in assets under management as of June 30, 1998, which
included $22.9 billion of net cash inflows. Assets under management reached
$228.8 billion at June 30, 1998. Assets under management increased by $11.1
billion during the three months ended June 30, 1998 and by $29.3 billion during
the six months ended June 30, 1998, including net cash inflows of $5.8 billion
for the three months ended June 30, 1998 and $11.3 billion for the six months
ended June 30, 1998. Performance based fees were $11.7 million for the three
months ended June 30, 1998 and $16.5 million for the six months ended June 30,
1998 compared to $9.9 million and $11.5 million, respectively, during the same
pro forma periods in 1997. The increase in performance based fees occurred
principally in an equity product seeking to outperform the S&P 500 Index. There
can be no assurances that future increases in assets under management, cash
flows or performance based fees will occur at the rates experienced recently.
Expenses
Compensation and benefits were $90.2 million for the three months ended
June 30, 1998 and $174.1 million for the six months ended June 30, 1998, which
was $18.6 million (or 26.0%) higher and $37.9 million (or 27.9%) higher,
respectively, than the same pro forma periods in 1997. This increase reflects
additional staffing, including substantial additions at both Pacific Investment
Management Company and Oppenheimer Capital, as well as higher profit sharing
expenses due to increased profits of the investment management subsidiaries.
Commission expenses related to sales and servicing of retail mutual funds
and similar products, increased $6.1 million to $19.8 million in the three
months ended June 30, 1998 and $9.8 million to $37.0 million in the six months
ended June 30, 1998 compared to the same pro forma periods in 1997. These
increases reflect strong performance by our proprietary PIMCO Funds mutual fund
family, both through higher "trail" commissions due to an increased level of
qualifying assets, as well as through increased "up front" commissions on higher
current sales levels. Commission expenses are primarily 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.
General and administrative expenses were $10.9 million for the three months
ended June 30, 1998, and $19.8 million for the six months ended June 30, 1998,
an increase of $3.0 million (or 37.3%) and $4.9 million (or 33.1%),
respectively, over the same pro forma periods in 1997. This increase can be
primarily attributed to the 1997 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 and a
corresponding increase in such asset levels since last year. Occupancy and
equipment costs increased by $1.1 million to $5.4 million for the three months
ended June 30, 1998 and increased $2.1 million to $10.6 million for the six
months ended June 30, 1998 in comparison to the same pro forma period in 1997.
The increase can be attributed primarily to additional office space and
equipment as a result of recently increased staffing and preparation for future
growth.
Amortization of intangible assets was $13.8 million for the three months
ended June 30, 1998 and $27.5 million for the six months ended June 30, 1998
compared to $20.2 million and $40.4 million, respectively, for the same pro
forma periods in 1997, a decrease of $6.4 million (or 31.9%) and $12.8
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million (or 31.9%) over the same pro forma periods in 1997. The amortization of
intangible assets in 1997 includes a charge of approximately $6.4 million
related to the amortization of the intangible value (approximately $80.7
million) assigned to PIMCO Advisors' MLP structure, originally scheduled to
expire on December 31, 1997. It is expected that amortization of the remaining
intangibles will approximate $55 million annually.
Restricted unit and option plan costs amounted to $6.4 million in the three
months ended June 30, 1998 and $12.3 million for the six months ended June 30,
1998 compared to $5.6 million and $10.9 million, respectively, for the same pro
forma periods in 1997. It is expected that such charges will approximate $24 to
$25 million annually.
Other cash expenses increased by $3.3 million for the three months ended
June 30, 1998 and $6.1 million for the six months ended June 30, 1998 in
comparison to the same pro forma periods in 1997. The increases in other cash
expenses are primarily due to increases in marketing and promotional costs and
professional fees as well as other increases reflective of increased staffing
and slight inflation.
Liquidity and Capital Resources
PIMCO Advisors and its predecessor entities' combined business have not
historically been capital intensive. In general, working capital requirements
have been satisfied out of operating cash flow or short-term borrowings. PIMCO
Advisors' policy is to make quarterly distributions to its unitholders.
PIMCO Advisors had approximately $154.7 million of cash and cash
equivalents and short-term investments at June 30, 1998 compared to
approximately $67.9 million at December 31, 1997. PIMCO Advisors' liquidity not
otherwise used for quarterly distributions will be used for general purposes
including profit-sharing payments, seed money for new mutual funds and brokers'
commissions on sales of mutual fund shares distributed without a front-end sales
load. PIMCO Advisors believes that the level of such commissions may increase
in the future due to the introduction of new products and mutual fund pricing
structures which may require an alternate financing source.
For the quarter ended June 30, 1998, PIMCO Advisors declared distributions
to holders of PIMCO Advisors units of $0.60. PIMCO Advisors' policy is to
distribute substantially all its net cash flow on an annual basis after
establishing reasonable reserves for prudent operation of its business.
Distributions are declared and paid to unitholders within thirty days following
the end of each calendar quarter to holders of record on March 31, June 30,
September 30 and December 31 of each year. Effective with the third quarter
distribution in September, the Management Board of PIMCO Advisors has indicated
its intent to evaluate the distribution rate on a quarterly basis. Actual
distribution levels will depend on the financial performance of PIMCO Advisors.
There can be no assurance that previous distribution rates will be achieved.
Distributions made by PIMCO Holdings will depend on the profitability of the
investment management business of PIMCO Advisors, which is affected in part by
overall economic conditions and other factors affecting capital markets
generally, many of which are beyond the control of PIMCO Holdings and PIMCO
Advisors.
PIMCO Advisors assumed $230.0 million of 6% exchangeable debt in connection
with the Oppenheimer Capital acquisition in November 1997. Through June 30,
1998, $149.2 million of that debt has been exchanged for units at a rate of
$33 1/3 per unit. The remaining $80,820,000 of such debt is expected (but is not
required) to be exchanged for units on the same terms upon the expiration of
certain tax contingencies over the next 6 to 7 years.
On May 12, 1998, PIMCO Advisors secured a syndicated $500,000,000 credit
facility to provide liquidity for working capital and strategic opportunities.
This credit facility consists of (i) a Long-Term Credit Facility, providing for
a $250,000,000 five-year revolving credit facility, and (ii) a Short-Term Credit
Facility, providing for a $250,000,000 364-day revolving credit facility. As of
June 30, 1998, $75.0 million was outstanding under the Long-Term Credit
Facility.
10
<PAGE>
Other Factors
Performance Factors. During the quarter ended June 30, 1998, assets under
management for PIMCO Advisors and its subsidiaries increased $11.1 billion.
While net cash inflows for PIMCO Advisors, as a whole, were significant ($5.8
billion during the three months ended June 30, 1998 and $11.3 billion during six
months ended June 30, 1998), Columbus Circle Investors ("CCI") and Oppenheimer
Capital experienced net outflows. During the six months ended June 30, 1998,
CCI experienced net cash outflows of $1.1 billion significantly slowing the
trend seen during 1997. Oppenheimer Capital experienced net cash outflows of
$2.2 billion during the six months ended June 30, 1998, including $1.6 billion
in the current quarter. Net cash flows are dependent on external factors such
as popularity of investment style, general asset allocation trends among
clients, as well as internal factors like performance, dispersion and client
service, which are being addressed at these subsidiaries. There can be no
assurance that these efforts will be successful at reversing, halting or
reducing these negative cash flows.
Year 2000 Factors. Many computer systems and applications process
transactions using two digit date fields for the year of the transaction, rather
than the full four digits. If these systems are not modified or replaced, these
systems could become inaccurate or inoperable by or at Year 2000. PIMCO
Advisors and its subsidiaries utilize a number of significant computer systems
and applications that are either developed internally or purchased from third-
party suppliers. In addition PIMCO Advisors is dependent on a number of third
parties for certain significant systems, applications and for provision of
electronic data critical to its business. Should PIMCO Advisors' significant
computer systems, applications or electronic data sources be unable to process
date sensitive material, the ability of PIMCO Advisors to conduct its operations
and service its clients could be significantly impaired.
PIMCO Advisors began to address the issues surrounding the Year 2000 in
1997, and formed a Year 2000 task force of employees reporting directly to the
Management Board in early 1998. This task force has established a procedure for
assessment of significant hardware and software systems and applications, and
has coordinated assessment of most significant systems. PIMCO Advisors
currently expects that the assessment and any required modifications for most of
its significant systems will be complete by the start of 1999, with testing to
continue throughout 1999. In addition, PIMCO Advisors is communicating with
third party service providers and vendors to assess their readiness to manage
Year 2000 issues. PIMCO Advisors is in the process of developing contingency
plans to address failures of internal hardware and software systems, as well as
failure by third party service providers and software. In light of the
difficulty in assessing the broad range of possible internal and external risks,
there can be no assurance that any such plans will be effective or adequate.
The task force reported on their plans and activities to the Management Board of
PIMCO Advisors in July 1998 and will continue to make quarterly reports through
the Year 2000. The Management Board approved a budget for resolving Year 2000
issues to cover all identified costs and authorized management to make any
further expenditures reasonably necessary or desirable to address these issues.
PIMCO Advisors currently has identified cash costs of approximately $8
million associated with modifying, replacing and testing hardware and software
systems and applications. These currently identified costs do not include (i)
costs associated with replacement of hardware and software systems and
applications which is being undertaken primarily for reasons other than Year
2000 issues (including approximately $4.5 million associated with the
replacement of portfolio management and portfolio accounting systems at
Oppenheimer Capital, to be completed during 1999), (ii) costs associated with
the allocation of employees working on these issues, and (iii) costs associated
with retaining any outside consultants, auditors or other service providers
which may become necessary if significant problems are discovered during future
testing or if the project falls behind schedule. In addition, PIMCO Advisors'
current expectations regarding the Year 2000 are based upon unfinished
assessment and testing and are subject to a number of uncertainties and factors
which are beyond its control and which could cause actual costs to differ
materially from those currently expected. At this time management of PIMCO
11
<PAGE>
Advisors believes that costs associated with the Year 2000 assessment, testing
and replacement will not have a material adverse effect on PIMCO Advisors'
results of operations, liquidity or capital resources.
General 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.
12
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------- -----------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,061 $ 15,522
Distribution receivable and other current assets 28,065 15,187
----------------- -----------------
Total current assets 47,126 30,709
Investment in operating partnership 454,304 408,137
Other non current assets 153 118
----------------- -----------------
TOTAL ASSETS $ 501,583 $ 438,964
================= =================
LIABILITIES
Distribution payable $ 24,723 $ 15,112
Other current liabilities 23,627 15,515
----------------- -----------------
Total liabilities 48,350 30,627
----------------- -----------------
PARTNERS' CAPITAL
General Partner 50 41
Limited Partners (46,643,169 units issued and
outstanding at June 30, 1998 and 45,531,583 units
issued and outstanding at December 31, 1997) 453,183 408,296
----------------- -----------------
Total Partners' Capital 453,233 408,337
----------------- -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 501,583 $ 438,964
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The For The Three For The For The
Three Months Ended Months Ended Six Months Ended Six Months Ended
June 30, 1998 April 30, 1997 June 30, 1998 April 30, 1997
------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per unit amounts)
REVENUES:
Equity in earnings of operating partnership:
Operating earnings $23,662 $13,475 $43,700 $27,059
Gain on Quest sales -- -- -- 1,800
------------------ ----------------- ----------------- -------------------
Total equity in earnings of operating
partnership 23,662 13,475 43,700 28,859
Interest -- 787 -- 1,599
------------------ ----------------- ----------------- -------------------
Total revenues 23,662 14,262 43,700 30,458
------------------ ----------------- ----------------- -------------------
EXPENSES:
Amortization of intangible assets -- 632 -- 1,284
Other 4,288 32 7,801 65
------------------ ----------------- ----------------- -------------------
Total expenses 4,288 664 7,801 1,349
------------------ ----------------- ----------------- -------------------
Net income $19,374 $13,598 $35,899 $29,109
================== ================= ================= ===================
Basic net income per unit $0.42 $0.53 $0.78 $1.12
================== ================= ================= ===================
Diluted net income per unit $0.39 $0.52 $0.73 $1.11
================== ================= ================= ===================
Distributions declared per unit $0.53 $0.69 $1.06 $1.25
================== ================= ================= ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The For The
Six Months Six Months
Ended Ended
June 30, 1998 April 30, 1997
----------------- ----------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,899 $ 29,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Distributions received less than the equity in
earnings of operating partnerships (824) (3,964)
Amortization of intangibles 1,284
Change in operating assets and liabilities:
Change in other assets (52) (4)
Change in other liabilities 8,112 --
----------------- ----------------
Net cash provided by operating activities 43,135 26,425
----------------- ----------------
Cash Flows from Investing Activities:
Investment in operating partnerships (120) (150)
----------------- ----------------
Net cash used in investing activities (120) (150)
----------------- ----------------
Cash Flows from Financing Activities:
Cash distributions paid (39,613) (26,389)
Capital contribution from General Partner 17
Issuance of limited partnership units on
Exercise of options 120 150
----------------- ----------------
Net cash used in financing activities (39,476) (26,239)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 3,539 36
Cash and cash equivalents, beginning of period 15,522 55
----------------- ----------------
Cash and cash equivalents, end of period $ 19,061 $ 91
================= ================
Supplemental disclosure
New York City unincorporated business tax paid $ 106 $ 69
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) The condensed financial statements included herein have been prepared
without audit in accordance with the instructions to Form 10-Q pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of PIMCO Partners, G.P., the General Partner,
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of (a) the financial condition at June 30, 1998 and
December 31, 1997, (b) the results of operations for the three and six
month periods ended June 30, 1998 and April 30, 1997, and (c) the cash
flows for the six-month periods ended June 30, 1998 and April 30, 1997, for
PIMCO Advisors Holdings L.P. ("PIMCO Holdings") (formerly Oppenheimer
Capital, L.P) have been made. It is suggested that these unaudited
condensed financial statements be read in conjunction with the financial
statements and notes included in PIMCO Holdings' Annual Report on Form 10-K
for the year ended December 31, 1997. Certain reclassifications have been
made to conform the prior period presentation to the current period
presentation. These interim results may not be indicative of the results
which may occur in the future. (See - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Comparative Results of
Operations).
(2) PIMCO Holdings is a publicly traded limited partnership owned .01% by its
general partner, PIMCO Partners, G.P. and 99.99% by its public limited
partners ("Unitholders"). PIMCO Holdings' sole business is its ownership
of an approximate 43% interest (approximately 46.6 million GP Units) in
PIMCO Advisors L.P. ("PIMCO Advisors"), a registered investment advisor.
PIMCO Partners, G.P. and other private holders hold the remaining interests
in PIMCO Advisors. The financial statements of PIMCO Holdings should be
read in conjunction with the consolidated financial statements of PIMCO
Advisors.
On November 4, 1997, PIMCO Advisors acquired Oppenheimer Group, Inc.
("Opgroup"), whose subsidiary Oppenheimer Financial Corp. ("Opfin") owned
the 32.4% managing general partner interest in Oppenheimer Capital and the
one percent general partner interest in PIMCO Holdings. In the
transaction, Opgroup became a subsidiary of PIMCO Advisors, and the Opgroup
stockholders received 2.1 million PIMCO Advisors Class A units and rights
to exchange up to $230 million of outstanding term notes of Opgroup for an
additional 6.9 million PIMCO Advisors Class A units at $33 1/3 per unit.
In connection with the transaction, PIMCO Advisors split the one percent
general partner interest in PIMCO Holdings into a .01% general partner
interest and a .99% limited partner interest, and sold the general partner
interest to its general partner for $80,000, its approximate book value.
The purchase method of accounting was used by PIMCO Advisors to record the
acquisition of Opgroup.
On November 30, 1997, Oppenheimer Capital merged with a subsidiary of PIMCO
Advisors, with Oppenheimer Capital surviving (the "OpCap Merger"). In the
OpCap Merger, PIMCO Advisors acquired from PIMCO Holdings its 67.6% general
partner interest in Oppenheimer Capital in exchange for 26.1 million PIMCO
Advisors Class A units, representing an approximate 24% general partner
interest in PIMCO Advisors. As a result, Oppenheimer Capital became a
wholly-owned subsidiary of PIMCO Advisors and the limited partner units of
PIMCO Holdings came to represent an indirect investment in the business of
PIMCO Advisors. On December 1, 1997, PIMCO Holdings effected a 1.67 for 1
split of the PIMCO Holding units, so
16
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(continued)
that each PIMCO Holdings unit outstanding after the split represented an
economic interest in one PIMCO Advisors unit. The transaction was
accounted for at book value of PIMCO Advisors, as a transaction between
related parties.
On December 31, 1997, PIMCO Advisors caused its 19.5 million publicly held
units to be contributed to PIMCO Holdings in exchange for an equal number
of PIMCO Holdings units. As a result, PIMCO Advisors ceased to be publicly
traded, and PIMCO Holdings' general partner interest in PIMCO Advisors
increased to approximately 43%. Concurrently, PIMCO Holdings New York
Stock Exchange trading symbol was changed from "OCC" to "PA".
Prior to November 4, 1997, PIMCO Holdings was a publicly traded limited
partnership owned 1% by its general partner, Opfin and 99% by its public
limited partners. PIMCO Holdings sole business was its ownership of a
67.6% interest in Oppenheimer Capital, a registered investment adviser.
Opfin held the remaining 32.4% interest in Oppenheimer Capital.
(3) Effective December 1, 1997, PIMCO Holdings effected a 1.67 for 1 unit split
of PIMCO Holdings units. For purposes of these financial statements, all
units outstanding, and all per unit amounts, have been restated to reflect
the split of the PIMCO Holdings units.
Prior to the OpCap Merger, PIMCO Holdings reported its results of
operations and its financial position based on an April 30 fiscal year end.
Upon completion of the OpCap Merger, PIMCO Holdings changed its fiscal year
to a calendar year to correspond with that of PIMCO Advisors. Accordingly,
current calendar quarter information is reported and compared with the
historical quarterly information for the fiscal quarter ending within the
corresponding calendar quarter of the prior year.
(4) Basic net income per unit is computed based on the weighted average number
of units outstanding. Diluted net income per unit is computed assuming the
exercise of dilutive unit options at the operating partnership and the
resulting impact on the equity in earnings of that partnership attributable
to PIMCO Holdings. See Exhibit 11 for the computation of the effect of the
dilution at the operating partnership on PIMCO Holdings' net income per
unit during the periods.
Distributions on the units outstanding are paid quarterly in arrears 30
days after the end of the quarter to unitholders of record as of the last
day of the quarter.
(5) As a result of the Omnibus Budget Reconciliation Act of 1993 and a special
tax election which PIMCO Holdings has made, units purchased in the open
market after August 10, 1993 have a substantial portion of the purchase
price amortized over a fifteen year period. Taking into account such
amortization tax benefits (which depend in part on the particular
unitholder's purchase price), partnership distributions are expected to
significantly exceed net taxable income for units purchased after August
10, 1993. Amortization deductions will decrease the unitholder's tax basis
of such units, and will likely be recaptured as ordinary income upon
disposition of the units.
17
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(continued)
Each year, a Schedule K-1 is sent to each unitholder identifying their
amortization tax benefit, if applicable. Under federal tax law, a
unitholder is required to pay tax on their allocable share of the
partnership's income regardless of the amount of distributions made by the
partnership. As individual tax situations may vary, each prospective
purchaser of units is urged to consult their tax advisor.
18
<PAGE>
PIMCO ADVISORS L. P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------- -------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 76,335 $ 34,301
Short term investments 78,327 33,611
Fees receivable 159,695 148,283
Other current assets 10,104 8,044
---------- ----------
Total current assets 324,461 224,239
Investment in unconsolidated partnerships 4,893 4,336
Fixed assets--net of accumulated depreciation and amortization 16,519 15,418
Intangible assets--net of accumulated amortization 1,033,343 1,060,869
Other non-current assets 71,721 38,174
---------- ----------
Total assets $1,450,937 $1,343,036
========== ==========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 50,380 $ 46,258
Accrued compensation 84,860 50,033
Distribution payable 66,060 61,786
Short term borrowings 75,000 30,000
---------- ----------
Total current liabilities 276,300 188,077
Long term notes 80,820 83,129
Other non current liabilities 34,815 17,765
---------- ----------
Total liabilities 391,935 288,971
---------- ----------
PARTNERS' CAPITAL
General Partner (47,443,168 units issued and outstanding at June 30,
1998 and 46,336,184 units issued and outstanding at December 31,
1997) 803,518 812,884
Class A Limited Partners (61,289,302 units issued and outstanding at
June 30, 1998 and 27,201,200 units issued and outstanding at
December 31, 1997) 342,592 246,950
Class B Limited Partners (no units outstanding at June 30, 1998 and
32,993,050 units issued and outstanding at December 31, 1997) -- 65,662
Unamortized compensation (87,108) (71,431)
---------- ----------
Total Partners' Capital 1,059,002 1,054,065
---------- ----------
Total liabilities and partners' capital $1,450,937 $1,343,036
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
PIMCO ADVISORS L. P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
REVENUES
Investment advisory fees:
Private accounts $142,211 $ 63,282 $271,361 $115,815
Proprietary Funds 53,810 39,217 100,623 76,197
Distribution and servicing fees 20,591 13,288 38,485 27,081
-------- -------- -------- --------
Total revenues 216,612 115,787 410,469 219,093
-------- -------- -------- --------
EXPENSES
Compensation and benefits 90,241 50,849 174,092 96,027
Commissions 19,784 10,286 37,025 20,534
Amortization of intangible assets, Restricted Unit and
Option Plans 20,173 10,354 39,831 20,647
General and administrative 10,876 6,404 19,807 11,895
Occupancy and equipment 5,438 2,570 10,560 5,030
Other 14,980 7,911 27,252 14,358
-------- ------- -------- --------
Total expenses 161,492 88,374 308,567 168,491
-------- ------- -------- --------
Net income $ 55,120 $27,413 $101,902 $ 50,602
======== ======= ======== ========
Net income per unit:
Basic net income per General Partner and Class A
Limited Partner Unit $ 0.51 $ 0.34 $ 0.95 $ 0.66
======== ======= ======== ========
Diluted net income per General Partner and Class A
Limited Partner Unit $ 0.48 $ 0.34 $ 0.90 $ 0.66
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
PIMCO ADVISORS L. P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The Six For The Six
Months Months
Ended Ended
June 30, 1998 June 30, 1997
---------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 101,902 $ 50,602
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization 34,164 21,484
Restricted unit & Option Plans 12,305 2,642
Equity in loss of unconsolidated partnership 58 227
Unrealized gain on investments (703) (765)
Issuance of restricted units in lieu of directors fees 21 121
Change in operating assets and liabilities:
Change in fees receivable (11,412) (5,746)
Change in other assets (37,706) (7,742)
Change in accrued liabilities and other current
liabilities 4,121 (10,571)
Change in accrued compensation 34,827 22,555
Change in other long term liabilities 17,048 3,404
--------- --------
Net cash provided by operating activities 154,625 76,211
--------- --------
Cash Flows from Investing Activities:
Purchase of fixed assets (3,878) (1,493)
Notes receivable advances (943) (234)
Purchase of investments (51,419) (35,400)
Sale of investments 7,406 19,601
Investment in unconsolidated limited partnership (615) (2,465)
--------- --------
Net cash used in investing activities (49,449) (19,991)
--------- --------
Cash Flows From Financing Activities:
Short term borrowings 45,000 --
Cash distributions paid (126,625) (68,136)
Issuance of limited partnership units to deferred
compensation plan trust 14,826 --
Capital contribution from General Partner 16 --
Issuance of limited partnership units on exercise of options 3,641 --
--------- --------
Net cash used in financing activities (63,142) (68,136)
--------- --------
Net increase (decrease) in cash and cash equivalents 42,034 (11,916)
Cash and cash equivalents, beginning of period 34,301 41,312
--------- --------
Cash and cash equivalents, end of period $ 76,335 $ 29,396
========= ========
Supplemental disclosures
Income tax paid $ 6,469 $ 239
========= ========
Interest paid $ 3,660 $ 67
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
PIMCO ADVISORS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The condensed consolidated financial statements included herein have been
prepared without audit in accordance with the instructions to Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the general partners, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of (a) the financial condition at June 30, 1998 and December 31,
1997, (b) the results of operations for the three and six month periods
ended June 30, 1998 and 1997, and (c) the cash flows for the six-month
periods ended June 30, 1998 and 1997, for PIMCO Advisors L.P. ("PIMCO
Advisors") have been made. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes included in PIMCO Advisors
Holdings' Annual Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to conform the prior period
presentation to the current period presentation. These interim results may
not be indicative of the results which may occur in the future. (See Item 2
- Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations).
(2) PIMCO Advisors and its subsidiaries were formed on November 15, 1994, when
Pacific Asset Management Company (a subsidiary of Pacific Life Insurance
Company) merged certain of its investment management businesses and
substantially all of its assets (the "PFAMCo Group") into Thomson Advisory
Group L.P. ("TAG LP") (the "Consolidation").
On November 4, 1997, PIMCO Advisors acquired Oppenheimer Group, Inc.
("Opgroup"), whose subsidiary Oppenheimer Financial Corp. ("Opfin") owned
the 32.4% managing general partner interest in Oppenheimer Capital and the
one percent general partner interest in PIMCO Advisors Holdings L.P.
(formerly Oppenheimer Capital, L.P.) ("PIMCO Holdings"). In the
transaction, Opgroup became a subsidiary of PIMCO Advisors, and the Opgroup
stockholders received 2.1 million PIMCO Advisors Class A units and rights
to exchange up to $230 million of outstanding term notes of Opgroup for an
additional 6.9 million PIMCO Advisors Class A units at $33 1/3 per unit. In
connection with the transaction, PIMCO Advisors split the one percent
general partner interest in PIMCO Holdings into a .01% general partner
interest and a .99% limited partner interest, and sold the general partner
interest to its general partner for $80,000, its approximate book value.
The purchase method of accounting was used by PIMCO Advisors to record the
acquisition of Opgroup. As a result, the consolidated statement of
operations includes the operations of Oppenheimer Capital since November 4,
1997.
On November 30, 1997, Oppenheimer Capital merged with a subsidiary of PIMCO
Advisors, with Oppenheimer Capital surviving (the "OpCap Merger"). In the
OpCap Merger, PIMCO Advisors acquired from PIMCO Holdings its 67.6% general
partner interest in Oppenheimer Capital in exchange for 26.1 million PIMCO
Advisors Class A units, an approximate 24% general partner interest in
PIMCO Advisors. As a result, Oppenheimer Capital became a wholly-owned
subsidiary of PIMCO Advisors and the limited partner units of PIMCO
Holdings came to represent an indirect investment in the business of PIMCO
Advisors. The transaction was accounted for at book value of PIMCO
Advisors, as a transaction between related parties.
22
<PAGE>
PIMCO ADVISORS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
On December 31, 1997, PIMCO Advisors caused its 19.5 million publicly held
units to be contributed to PIMCO Holdings in exchange for an equal number
of PIMCO Holdings units. As a result, PIMCO Advisors ceased to be publicly
traded, and PIMCO Holdings general partner interest in PIMCO Advisors
increased to approximately 43%. Concurrently, PIMCO Holdings' New York
Stock Exchange trading symbol was changed from "OCC" to "PA".
(3) Basic net income per unit is computed based on the weighted average number
of units outstanding. Diluted net income per unit is computed assuming the
exercise of dilutive unit options. See Exhibit 11 for the computation of
the effect of the dilution per unit during the periods.
23
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
PIMCO Holdings held a Special Meeting of the Unitholders (the "Unitholder
Meeting") on June 30, 1998. At the Unitholder Meeting, the unitholders approved
the adoption of the Amended and Restated Agreement of Limited Partnership of
PIMCO Advisors Holdings L.P. The number of units voting in favor of the
proposal was 25,564,724, the number of units voting against or withheld were
485,490 and the number of units which abstained were 739,767.
Item 5. Other Information
On June 30, 1998, PIMCO Advisors and PIMCO Holdings completed the Exchange
Offer pursuant to the PIMCO Advisors Amended and Restated Agreement of Limited
Partnership and a Registration Statement pursuant to the Securities Act of 1933,
as amended. The Exchange Offer offered to exchange one Holdings Unit for each
Advisors Unit tendered. A total of 1,555,378 Holdings Units were issued as of
July 7, 1998 in exchange for Advisors Units tendered in this Exchange Offer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
11 Computations of Net Income Per Unit.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K as filed with the Commission on May 20,
1998 reporting that on May 12, 1998 PIMCO Advisors entered into
$500,000,000 credit facility consisting of (i) a Long-Term Credit
Agreement, dated as of May 12, 1998 among PIMCO Advisors, NationsBank,
N.A. ("Administrative Agent"), Deutsche Bank A.G., New York Branch
("Documentation Agent") Union Bank of California, N.A. and CitiBank,
N.A. ("Co-Agents") and the financial institutions whose names are set
forth on the signature pages thereof, and (ii) a Short-Term Credit
Agreement, dated as of May 12, 1998 among PIMCO Advisors, the
Administrative Agent, the Documentation Agent, the Co-Agents and the
financial institutions whose names are set forth on the signature
pages thereto.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIMCO Advisors Holdings L.P.
By: /s/ William D. Cvengros
-----------------------
William D. Cvengros
Chief Executive Officer
By: /s/ Robert M. Fitzgerald
-------------------------
Robert M. Fitzgerald
Principal Accounting Officer
Date: August 13, 1998
25
<PAGE>
EXHIBIT 11
PIMCO Advisors Holdings L.P.
Computation of Basic Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Six For The Six
Months Ended Months Ended
June 30, 1998 April 30, 1997
------------- --------------
(Dollars in thousands,
except per unit amounts)
<S> <C> <C>
Net income $35,899 $29,109
Less net income applicable to the General Partner (4) (291)
------- -------
Net income available to the Limited Partners $35,895 $28,818
======= =======
Weighted average number of units outstanding 46,182 25,667
Basic net income per unit $ 0.78 $ 1.12
======= =======
</TABLE>
Computation of Diluted Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Six For The Six
Months Ended Months Ended
June 30, 1998 April 30, 1997
------------- --------------
(Dollars in thousands,
except per unit amounts)
<S> <C> <C>
Net income $35,899 $29,109
Effect on the recognized equity in earnings of the
operating partnership resulting from the dilution
of earnings per unit at the operating partnership (2,250) --
------- -------
Net income after effect of dilution 33,649 29,109
Less net income applicable to the General Partner (4) (291)
------- -------
Diluted net income available to the Limited Partners $33,645 $28,818
======= =======
Weighted average number of units outstanding 46,182 25,667
Weighted average effect of limited partnership unit
options -- 205
------- --------
Weighted average number of units and unit
equivalents 46,182 25,872
======= ========
Diluted net income per unit $ 0.73 $ 1.11
======= ========
</TABLE>
26
<PAGE>
EXHIBIT 11
PIMCO Advisors Holdings L.P.
Computation of Basic Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Three For The Three
Months Ended Months Ended
June 30, 1998 April 30, 1997
------------- --------------
(Dollars in thousands, except per unit amounts)
<S> <C> <C>
Net income $19,374 $13,598
Less net income applicable to the General Partner (2) (136)
------- -------
Net income available to the Limited Partners $19,372 $13,462
======= =======
Weighted average number of units outstanding 46,430 25,670
Basic net income per unit $ 0.42 $ 0.53
======= =======
</TABLE>
Computation of Diluted Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Three For The Three
Months Ended Months Ended
June 30, 1998 April 30, 1997
------------- --------------
(Dollars in thousands, except per unit amounts)
<S> <C> <C>
Net income $19,374 $13,598
Effect on the recognized equity in earnings of the
operating partnership resulting from the dilution
of earnings per unit at the operating partnership (1,118) --
------- -------
Net income after effect of dilution 18,256 13,598
Less net income applicable to the General Partner (2) (136)
------- -------
Diluted net income available to the Limited Partners $18,254 $13,462
======= =======
Weighted average number of units outstanding 46,430 25,670
Weighted average effect of limited partnership unit
options -- 228
------- -------
Weighted average number of units and unit
equivalents 46,430 25,898
======= =======
Diluted net income per unit $ 0.39 $ 0.52
======= =======
</TABLE>
27
<PAGE>
EXHIBIT 11
(continued)
PIMCO ADVISORS L.P.
COMPUTATION OF NET INCOME PER UNIT
(Unaudited)
The weighted average number of units used to compute basic and diluted net
income per unit was as follows:
<TABLE>
<CAPTION>
For The Three Months Ended
June 30 June 30
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Basic
General Partner and Class A Limited Partner Units 108,395 40,946
Diluted
General Partner and Class A Limited Partner Units 113,756 42,605
Class B Limited Partner Units 34,636
<CAPTION>
For The Six Months Ended
June 30 June 30
1998 1997
------- -------
(in thousands)
Basic
General Partner and Class A Limited Partner Units 107,824 40,946
Diluted
General Partner and Class A Limited Partner Units 113,625 42,638
Class B Limited Partner Units 34,837
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PIMCO
ADVISORS HOLDINGS L.P. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,061
<SECURITIES> 0
<RECEIVABLES> 28,065
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,126
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 501,583
<CURRENT-LIABILITIES> 48,350
<BONDS> 0
0
0
<COMMON> 453,233<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 501,583
<SALES> 0<F2>
<TOTAL-REVENUES> 43,700
<CGS> 0<F2>
<TOTAL-COSTS> 0<F2>
<OTHER-EXPENSES> 7,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 35,899
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,899
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.73
<FN>
<F1>ENTITY IS A PARTNERSHIP. AMOUNT SHOWN REPRESENTS PARTNERS' CAPITAL.
<F2>THE PARTNERSHIP IS IN THE SERVICE BUSINESS AND HAS NO SALES OR COST OF GOOD
SOLD ON TANGIBLE PRODUCTS.
</FN>
</TABLE>
