<PAGE>
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 September 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
- ------------------------------------------------------------------------------
(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 September 30, 1998, there were 48,290,615 units of limited partner
interest issued and outstanding.
Page 1 of 31 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 September 30, 1998 and
December 31, 1997 15
Statements of Operations for the three months ended September 30,
1998 and July 31, 1997 and the nine months ended September 30,
1998 and July 31, 1997 16
Statements of Cash Flows for the nine months ended September 30,
1998 and July 31, 1997 17
Notes to Financial Statements 18
PIMCO Advisors L.P.
Consolidated Statements of Financial Condition as of September 30,
1998 and December 31, 1997 21
Consolidated Statements of Operations for the three months ended
September 30, 1998 and September 30, 1997 and the nine months
ended September 30, 1998 and September 30, 1997 22
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1997 23
Notes to Consolidated Financial Statements 24
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.
2
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
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of Operations General
- ---------------------
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 99.99% by its public limited
partners ("Unitholders"). PIMCO Holdings sole business is its ownership of
approximately a 44% interest (approximately 48.3 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 $225.9 billion under management at September 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 the PIMCO Funds, the PIMCO Advisors
family of 48 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.
- ----------------------------
Comparative Results of Operations
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Quarter And Nine Months Ended September 30, 1998 Compared To Pro Forma Quarter
And Nine Months Ended September 30, 1997
Because of the different ownership interests during the historical
reporting periods and the different fiscal quarter end dates 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.
4
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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 nine months ended
September 30, 1998 and the pro forma results of operations for the quarter and
nine months ended September 30, 1997 as if the acquisition discussed above had
occurred on January 1, 1996.
<TABLE>
<CAPTION>
PIMCO Advisors Holdings L.P.
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For The Three Months For The Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------------------------------------------------------
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. $22,740 $19,728 $66,440 $47,629
Other expenses 2,920 -- 10,721 --
------- ------- ------- -------
Net income $19,820 $19,728 $55,719 $47,629
======= ======= ======= =======
Basic net income per unit $ 0.41 $ 0.43 $ 1.18 $ 1.04
======= ======= ======= =======
Diluted net income per unit $ 0.39 $ 0.41 $ 1.11 $ 1.00
======= ======= ======= =======
Distributions declared per unit $ 0.55 N/A $ 1.61 N/A
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PIMCO Advisors L.P.
-------------------------------------------------------
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------------------------------------------------------
Actual Pro Forma Actual Pro Forma
(Dollars in thousands)
<S> <C> <C> <C> <C>
REVENUES
Investment advisory fees:
Private accounts $135,109 $123,601 $406,470 $344,868
Proprietary Funds 57,518 43,679 158,141 119,876
Distribution and servicing fees 21,310 17,752 59,795 45,953
-------- -------- -------- --------
Total revenues 213,937 185,032 624,406 510,697
-------- -------- -------- --------
EXPENSES
Compensation and benefits 88,898 78,489 262,990 214,634
Commissions 20,048 15,004 57,073 42,201
Amortization of intangible assets, Restricted
Unit and Option Plans 20,374 25,925 60,205 77,166
General and administrative 11,449 8,438 31,256 23,321
Occupancy and equipment 6,169 4,282 16,729 12,766
Other expense, net 15,747 5,831 42,999 26,989
-------- -------- -------- --------
Total expenses 162,685 137,969 471,252 397,077
-------- -------- -------- --------
Net income $ 51,252 $ 47,063 $153,154 $113,620
======== ======== ======== ========
</TABLE>
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
$149.5 million had been exchanged as of September 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 $22.7 million as its proportionate share of the
earnings of PIMCO Advisors (approximately 44%) during the quarter ended
September 30, 1998 as compared with $19.7 million pro forma during the quarter
ended September 30, 1997, an increase of $3.0 million (or 15.3%). PIMCO
Holdings' proportionate share of earnings of PIMCO Advisors for the nine months
ended September 30, 1998 was $66.4 million compared with $47.6 million pro forma
for the nine months ended September 30, 1997, an increase of $18.8 million (or
39.5%). 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 $77 to $81 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 $2.9 million in the quarter ended September 30, 1998. The current
quarter expense reflected a reversal of approximately $860,000 related to over
provision in the first two quarters of 1998 as the expected effective tax rate
has declined from levels anticipated earlier in the year.
6
<PAGE>
Quarter And Nine Months Ended September 30, 1998 Compared To The Historical
Fiscal Quarter And Nine Months Ended July 31, 1997
PIMCO Holdings recorded equity in earnings of PIMCO Advisors for the three
months ended September 30, 1998 of $22.7 million and $66.4 million for the nine
months ended September 30, 1998 compared to equity in earnings of $18.7 million
for the three months ended July 31, 1997 and $47.6 million for the nine months
ended July 31, 1997.
PIMCO Holdings recorded no amortization of intangible assets during the
three months and nine months ended September 30, 1998 compared to $652,000
during the three months ended July 31, 1997 and $1.9 million for the nine months
ended July 31, 1997. Other expenses amounted to $2.9 million during the quarter
ended September 30, 1998 and $10.7 million for the nine months ended September
30, 1998 compared to $33,000 for the quarter ended July 31, 1997 and $99,000 for
the nine months ended July 31, 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. As of September 30, 1998 PIMCO
Holdings anticipates an effective tax on gross income, including any state
imposed taxes, to approximate 4%.
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 September 30,
1998, PIMCO Holdings declared distributions to holders of PIMCO Holdings units
of $0.55 per unit compared to distributions declared during the quarter ended
July 31, 1997 of $0.57 per unit. 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 declared 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
- ---------------------------------
Quarter And Nine Months Ended September 30, 1998 Compared To Pro Forma Quarter
And Nine Months Ended September 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 as of September 30, 1998 compared to pro forma September 30, 1997:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
Actual Pro forma
------------------ ------------------
(Dollars in millions)
<S> <C> <C>
Assets under management by source:
Institutional separate accounts
Fixed income $102,119 $ 76,155
Equity 45,260 52,331
Retail products and mutual funds 78,507 63,062
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Total $225,886 $191,548
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Assets under management by type:
Fixed income $141,828 $102,981
Equity 80,981 85,254
Money market 3,077 3,313
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Total $225,886 $191,548
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</TABLE>
PIMCO Advisors' consolidated revenues, including those of its wholly-owned
subsidiary PIMCO Funds Distributors LLC ("PFD"), increased $28.9 million (15.6%)
to $213.9 million for the three months ended September 30, 1998 compared to
$185.0 million pro forma for the three months ended September 30, 1997. PIMCO
Advisors consolidated revenues for the nine months ended September 30, 1998
increased $113.7 million (22.3%) to $624.4 million compared to $510.7 million
pro forma for the nine months ended September 30, 1997. Advisory revenues
increased $25.3 million (15.2%) to $192.6 million for the three months ended
September 30, 1998 and $99.9 million (21.5%) to $564.6 million for the nine
months ended September 30, 1998 compared to $167.3 million and $464.7 million,
respectively, for the same pro forma periods in 1997. Distribution and
servicing revenues increased to $21.3 million for the three months ended
September 30, 1998 and to $59.8 million for the nine months ended
8
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September 30, 1998, compared to $17.8 million and $46.0 million, respectively,
for the same pro forma periods in 1997.
The increases in PIMCO Advisors' revenues for the quarter and nine months
ended September 30, 1998 resulted primarily from a pro forma $34.3 billion (or
17.9%) year-over-year increase in assets under management as of September 30,
1998, which included a pro forma $20.8 billion of net cash inflows. Assets
under management reached $225.9 billion at September 30, 1998. Assets under
management decreased by $2.9 billion during the three months ended September 30,
1998 and increased by $26.3 billion during the nine months ended September 30,
1998, including net cash inflows of $4.3 billion for the three months ended
September 30, 1998 and $15.6 billion for the nine months ended September 30,
1998. Performance based fees were $6.4 million for the three months ended
September 30, 1998 and $22.9 million for the nine months ended September 30,
1998 compared to $9.3 million and $20.8 million, respectively, during the same
pro forma periods in 1997. The increase in performance based fees for the nine
month period ended September 30, 1998 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 $88.9 million for the three months ended
September 30, 1998 and $263.0 million for the nine months ended September 30,
1998, which was $10.4 million (or 13.3%) higher and $48.4 million (or 22.5%)
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 $5.0 million to $20.0 million in the three months
ended September 30, 1998 and $14.9 million to $57.1 million in the nine months
ended September 30, 1998 compared to the same pro forma periods in 1997. These
increases reflect increased sales and asset levels in 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 $11.4 million for the three months
ended September 30, 1998, and $31.3 million for the nine months ended September
30, 1998, an increase of $3.0 million (35.7%) and $7.9 million (34.0%),
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 $1.9 million to $6.2 million for the three months
ended September 30, 1998 and increased $4.0 million to $16.7 million for the
nine months ended September 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 September 30, 1998 and $41.3 million for the nine months ended September
30, 1998 compared to $20.2 million and
9
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$60.6 million, respectively, for the same pro forma periods in 1997, a decrease
of $6.4 million (31.8%) and $19.3 million (31.9%) over the same pro forma
periods in 1997. The amortization of intangible assets in 1997 includes a
quarterly 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 $55.0
million annually.
Restricted unit and option plan costs amounted to $6.6 million in the three
months ended September 30, 1998 and $18.9 million for the nine months ended
September 30, 1998 compared to $5.7 million and $18.9 million, respectively, for
the same pro forma periods in 1997. It is expected that such charges will
approximate $22 to $26 million annually.
Other expenses increased by $9.5 million to $15.7 million for the three
months ended September 30, 1998 and increased by $22.5 million to $43.0 million
for the nine months ended September 30, 1998 in comparison to the same pro forma
periods in 1997. The increases in other expenses are primarily due to market
losses on seed portfolios and increases in marketing and promotional costs,
interest expense and professional fees as well as other increases reflective of
increased staffing and slight inflation. In addition, the third quarter of 1997
reflected a non-recurring gain of approximately $4.4 million related to the sale
by Oppenheimer Capital of its Dual Purpose Fund.
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 $163.8 million of cash and cash
equivalents and short-term investments at September 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. 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 September 30, 1998, PIMCO Advisors declared
distributions to holders of PIMCO Advisors units of $0.63. PIMCO Advisors'
policy is to distribute substantially all of 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 declared 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 September
30, 1998, $149.5 million of that debt has been exchanged for units at a rate of
$33 1/3 per unit. The remaining $80.5 million 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.
10
<PAGE>
On May 12, 1998, PIMCO Advisors secured a syndicated $500 million 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 million five-year revolving credit facility and (ii) a Short-Term Credit
Facility, providing for a $250 million 364-day revolving credit facility. As of
September 30, 1998, $75.0 million was outstanding under the Long-Term Credit
Facility.
Other Factors
Performance Factors. During the quarter ended September 30, 1998, assets
under management for PIMCO Advisors and its subsidiaries decreased $2.9 billion
to $225.9 billion. The decline in assets is the result of $12.1 billion in
equity market depreciation, offset by $4.9 billion of bond market appreciation
and $4.3 billion of net inflows, consisting of inflows of $5.2 billion into the
Pacific Investment Management Company fixed income franchise less net outflows
of $900 million from the PIMCO Advisors' equity subsidiaries. While net cash
inflows for PIMCO Advisors, as a whole, were significant ($4.3 billion during
the three months ended September 30, 1998 and $15.6 billion during nine months
ended September 30, 1998), Columbus Circle Investors ("CCI") and Oppenheimer
Capital experienced net outflows. During the nine months ended September 30,
1998, CCI experienced net cash outflows of $1.7 billion, significantly slowing
the negative trend seen during 1997. Oppenheimer Capital experienced net cash
outflows of $3.0 billion during the nine months ended September 30, 1998,
including $840 million 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.
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.
European Monetary Unit
On January 1, 1999, a single currency for the European Economic and
Monetary Union (the "Euro") is scheduled to replace the national currency for
participating member countries which includes countries in which PIMCO Advisors
has offices, subsidiary locations or with which it does substantial business.
Many of PIMCO Advisors' managed funds and financial products have substantial
investments in countries whose currencies will be replaced by the Euro. Many
aspects of PIMCO Advisors and its subsidiaries investment processes, including
trading, foreign exchange, payments, settlements, cash accounts, custodial
accounts and accounting will be affected by the implementation of the Euro (the
"Euro Issue").
Pimco Advisors is in the process of determining changes that will be required in
connection with the Euro Issue in order to process transactions accurately with
minimal disruption to business activities. Pimco Advisors is also communicating
with its subsidiaries and vendors to assess their readiness to manage the Euro
Issue without disruption to PIMCO Advisors' or the PIMCO Funds' business or
operations.
11
<PAGE>
PIMCO Advisors is not presently able to assess the cost impact of the Euro
Issue, but does not presently anticipate that such impact will materially affect
the PIMCO Advisors cash flows, operations or operating results. Costs incurred
relating to the Euro Issue are generally being expensed by the Company during
the period in which they are incurred.
Year 2000 Readiness Disclosure
Many of the world's computer systems record years in a two-digit format.
These systems may be unable to correctly recognize, interpret or use dates
beyond the year 1999. This inability to process date information might lead to
significant business disruptions. PIMCO Advisors and its subsidiaries are
taking steps to assure that their computer systems will function properly after
1999. PIMCO Advisors and its subsidiaries have designated a team of information
and business professionals to address the Year 2000 problem and developed a
written Year 2000 Plan to address Year 2000 issues. PIMCO Advisors presently
estimates that its Year 2000-related expenditures will be approximately $14.3
million and that Year 2000 will not have a material affect on its operations.
As of September 20, 1998, PIMCO Advisors and subsidiaries have expended $1.2
million on Year 2000 related expenses. PIMCO Advisors and its subsidiaries are
in various stages of reviewing, testing and making software repairs and upgrades
to those systems and programs that they believe will become affected by the Year
2000 problem. Because the Year 2000 project is an ongoing company-wide
endeavor, the state of progress changes daily. Year 2000 budget estimates are
subject to change and revision. See "Uncertainty" below. The PIMCO Advisors'
Year 2000 Plan consists of five general phases: Awareness, Assessment,
Remediation, Testing, and Implementation.
Awareness: During the Awareness phase, the Year 2000 team informed the
employees of PIMCO Advisors and its subsidiaries, including the highest levels
of PIMCO Advisors' management, about the Year 2000 problem. A written Year 2000
Plan was prepared and Year 2000 budget estimates were compiled. The Management
Board of PIMCO Advisors formally approved the proposed Year 2000 Plan and a
preliminary budget on July 21, 1998, and approved the amended Plan and revised
budget October 27, 1998.
Assessment: During the Assessment phase, the Year 2000 team prepares an
inventory of information technology ("IT") and non-IT systems used in PIMCO
Advisors and its subsidiaries business. Systems are classified as software,
hardware, and embedded chips. Separately, systems are also classified as
mission critical systems and non-mission critical systems. Except for security,
fire, electrical, voice, and data lines, PIMCO Advisors does not currently
believe that the failure of its non-IT systems would have a material adverse
effect upon its business. As the inventory is compiled and verified, each system
is preliminarily assessed for Year 2000 compliance. This preliminary assessment
is made by obtaining manufacturers' representations that a given product is Year
2000 compliant or other evidence of compliance. Systems for which no such
evidence can be obtained are identified as candidates for correction or
replacement ("Remediation"). With respect to its mission-critical systems, the
assessment phase is substantially complete. PIMCO Advisors and its subsidiaries
currently plan to substantially complete the Assessment phase with respect to
their non-mission-critical systems by December 3, 1998.
Remediation: During this phase, software, hardware, and embedded chips
identified during the Assessment phase to be non-Year 2000 compliant will be
corrected or replaced. PIMCO Advisors and its subsidiaries plan to
substantially complete Remediation of the mission-critical software, hardware,
and non-IT systems identified as non-compliant in the Assessment stage by
December 7, 1998, except with respect to the portfolio management and accounting
system utilized by Oppenheimer Capital, which is expected to be remediated by
June 7, 1999. Non-mission critical systems are anticipated to be substantially
completed by February 1, 1999. Necessarily, further corrections and replacements
may need to be made after the Remediation phase has been completed as a result
of problems identified during the Testing phase or otherwise.
12
<PAGE>
Testing: The testing phase includes internal testing, point-to-point
testing, and industry testing. Testing will be conducted on both existing and
new systems as they are added. PIMCO Advisors generally plans to test its
systems in order of criticality (mission critical, then non-mission critical).
PIMCO Advisors does not plan to test non-mission critical systems that are not
used in its business (e.g., software applications incidentally installed on PCs
with other software that is used in PIMCO Advisors and its subsidiaries'
business). PIMCO Advisors will design and implement internal, point-to-point,
and industry testing programs that use test scripts, portfolios, and various
hypothetical dates generated by PIMCO Advisors and its subsidiaries, vendors,
and industry groups. Some internal testing already has taken place at PIMCO
Advisors' major subsidiaries, Pacific Investment Management Company and
Oppenheimer Capital. PIMCO Advisors and each of its SEC-registered investment
advisory and brokerage subsidiaries intend to participate in an industry-wide
testing forum sponsored by the Securities Industry Association. Pacific
Investment Management Company has been at the forefront of this process through
its participation in the Bond Market Association's Asset Managers' Forum, a
committee which is advising the Securities Industry Association on issues
associated with investment managers and Year 2000 issues. PIMCO Advisors
currently expects that internal testing of its mission-critical systems will be
substantially complete by February 1, 1999; point-to-point testing will be
substantially complete by April 1, 1999; and industry testing may be
substantially complete by May 1, 1999. These dates may change significantly
depending upon whether PIMCO Advisors and its subsidiaries, their
counterparties, and the securities industry in general meet their anticipated
deadlines. PIMCO Advisors anticipates that it will conduct tests with as yet
unidentified third parties until December 31, 1999, as circumstances warrant.
Implementation: During the Implementation phase, systems that have been
tested and identified as being Year 2000 Compliant will be put into normal
business operation. PIMCO Advisors and its subsidiaries currently plan to
complete Implementation with respect to their mission critical systems by March
1, 1999 (with the exception of the portfolio management system utilized by
Oppenheimer Capital), and of other systems as soon as possible thereafter, but
in any event by June 1, 1999. PIMCO Advisors and its subsidiaries are in the
process of developing written contingency plans addressing possible failures of
technology and services in their various business operations. PIMCO Advisors
anticipates that its contingency plans will be substantially complete by June 1,
1999. PIMCO Advisors also anticipates that it will continuously revise its
contingency plans until December 31, 1999, as new risks become apparent.
Although PIMCO Advisors and its subsidiaries are preparing plans, no assurance
can be given that contingency plans can be developed that would avoid all
problems in the event of the failure of certain mission-critical systems,
counterparties, and third-party providers.
Third Parties: PIMCO Advisors and its subsidiaries' business operations are
heavily dependent upon a complex worldwide network of systems that contain date
fields, including data feeds to trading systems, securities transfer agent
operations and stock markets. PIMCO Advisors and its subsidiaries' ability to
assess the effects of the Year 2000 Problem upon their clients is highly
dependent upon the efforts of third parties, particularly brokers, dealers, and
clients' custodians. The failure of third party organizations to resolve their
own processing issues with respect to the Year 2000 Problem in a timely manner
could have a material adverse effect on PIMCO Advisors' business. PIMCO
Advisors and its subsidiaries are taking steps to verify the Year 2000 readiness
of material third parties with which they do business. PIMCO Advisors and its
subsidiaries have substantially completed an inventory of brokers, dealers,
custodians, and other material third parties with which they have direct,
significant business relationships. PIMCO Advisors and its subsidiaries have
sent written questionnaires to the identified third parties inquiring about the
status of their Year 2000 compliance programs. The results of these
questionnaires will be collected, analyzed, and distributed to appropriate
internal personnel. Follow-up or additional questionnaires and inquiries will
be sent to third parties that did not respond satisfactorily to the initial
questionnaire. PIMCO Advisors currently anticipates that its efforts with
respect to assessing the Year 2000 status of its counterparties and other third
parties will continue into the Year 2000.
Uncertainty: This discussion of PIMCO Advisors and its subsidiaries Year
2000 program contains forward-looking statements. At present, the management of
PIMCO Advisors believes that
13
<PAGE>
costs associated with the Year 2000 problem will not have a material adverse
effect on PIMCO Advisors' business or operations. However, PIMCO Advisors
expects that its Year 2000 expense estimates will change as the Year 2000
approaches and PIMCO Advisors and its subsidiaries execute the Testing and
Implementation phases. Although PIMCO Advisors' efforts and expenditures on Year
2000 issues are substantial, there can be no assurances that its clients,
unitholders, counterparties or others will not suffer from disruptions or
adverse results arising as a consequence of entering Year 2000. PIMCO Advisors'
current expectations regarding its and its counterparties transition to Year
2000 are based upon unfinished remediation and testing, and are subject to a
number of uncertainties and factors that are beyond its control and which could
cause actual costs to differ materially from those currently expected.
Furthermore, although management currently anticipates that its expenditures and
efforts are appropriate, complications as yet unidentified in internal or
external systems, with data providers, with other securities firms or
institutions, with other counterparties, and with general economic conditions
related to the Year 2000 in general may trigger significantly greater expenses
or losses.
14
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ ------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,579 $ 15,522
Distribution receivable and other current assets 30,516 15,187
-------- --------
Total current assets 53,095 30,709
Investment in operating partnership 467,936 408,137
Other non current assets 153 118
-------- --------
TOTAL ASSETS $521,184 $438,964
======== ========
LIABILITIES
Distribution payable $ 26,563 $ 15,112
Other current liabilities 26,742 15,515
-------- --------
Total liabilities 53,305 30,627
-------- --------
PARTNERS' CAPITAL
General Partner 52 41
Limited Partners (48,290,615 units issued and outstanding
at September 30, 1998 and 45,531,583 units issued and
outstanding at December 31, 1997) 467,827 408,296
-------- --------
Total Partners' Capital 467,879 408,337
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $521,184 $438,964
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The For The For The For The
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, July 31, September 30, July 31,
------------- ------------ ------------- -----------
1998 1997 1998 1997
------------- ------------ ------------- -----------
(Dollars in thousands, except per unit amounts)
<S> <C> <C> <C> <C>
REVENUES:
Equity in earnings of operating partnership:
Operating earnings $22,740 $15,963 $66,440 $43,022
Gain on Quest sales -- 2,809 -- 4,609
------- ------- ------- -------
Total equity in earnings of operating
partnership 22,740 18,772 66,440 47,631
Interest -- 813 -- 2,412
------- ------- ------- -------
Total revenues 22,740 19,585 66,440 50,043
------- ------- ------- -------
EXPENSES:
Amortization of intangible assets -- 652 -- 1,936
Other 2,920 33 10,721 98
------- ------- ------- -------
Total expenses 2,920 685 10,721 2,034
------- ------- ------- -------
Net income $19,820 $18,900 $55,719 $48,009
======= ======= ======= =======
Basic net income per unit $ 0.41 $ 0.73 $ 1.18 $ 1.85
======= ======= ======= =======
Diluted net income per unit $ 0.39 $ 0.73 $ 1.11 $ 1.84
======= ======= ======= =======
Distributions declared per unit $ 0.55 $ 0.57 $ 1.61 $ 1.82
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The For The
Nine Months Nine Months
Ended Ended
September 30, July 31,
------------- -----------
1998 1997
------------- -----------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,719 $ 48,009
Adjustments to reconcile net income to net cash
provided by operating activities:
Distributions received greater (less) than the
equity in earnings of operating partnerships 4,495 (5,646)
Amortization of intangibles 1,936
Change in operating assets and liabilities:
Change in other assets (64) (6)
Change in other liabilities 11,226 --
-------- --------
Net cash provided by operating activities 71,376 44,293
-------- --------
Cash Flows from Investing Activities:
Investment in operating partnerships (120) (781)
-------- --------
Net cash used in investing activities (120) (781)
-------- --------
Cash Flows from Financing Activities:
Cash distributions paid (64,336) (44,247)
Capital contribution from General Partner 17
Issuance of limited partnership units on
Exercise of options 120 781
-------- --------
Net cash used in financing activities (64,199) (43,466)
-------- --------
Net increase in cash and cash equivalents 7,057 46
Cash and cash equivalents, beginning of period 15,522 55
-------- --------
Cash and cash equivalents, end of period $ 22,579 $ 101
======== ========
Supplemental disclosure
New York City unincorporated business tax paid $ 106 $ 104
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<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 September 30,
1998 and December 31, 1997, (b) the results of operations for the three and
nine month periods ended September 30, 1998 and July 31, 1997, and (c) the
cash flows for the nine-month periods ended September 30, 1998 and July 31,
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 44% interest (approximately 48.3 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
18
<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.
19
<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.
20
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,918 $ 34,301
Short term investments 73,917 33,611
Fees receivable 161,381 148,283
Other current assets 11,323 8,044
---------- ----------
Total current assets 336,539 224,239
Investment in unconsolidated partnerships 4,005 4,336
Fixed assets net of accumulated depreciation and amortization 18,566 15,418
Intangible assets net of accumulated amortization 1,019,580 1,060,869
Other non current assets 52,643 30,022
---------- ----------
Total assets $1,431,333 $1,334,884
========== ==========
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 52,349 $ 46,258
Accrued compensation 88,087 50,033
Distribution payable 69,691 61,786
Short term borrowings 75,000 30,000
---------- ----------
Total current liabilities 285,127 188,077
Long term notes 80,484 83,129
Other non current liabilities 8,091 9,613
---------- ----------
Total liabilities 373,702 280,819
---------- ----------
PARTNERS' CAPITAL
General Partner (49,095,713 units issued and outstanding at
September 30, 1998 and 46,336,184 units issued and outstanding at
December 31, 1997) 795,969 812,884
Class A Limited Partners (60,087,422 units issued and outstanding at
September 30, 1998 and 27,201,200 units issued and outstanding at
December 31, 1997) 344,245 246,950
Class B Limited Partners (no units outstanding at September 30, 1998
and 32,993,050 units issued and outstanding at December 31, 1997) -- 65,662
Unamortized compensation (82,583) (71,431)
---------- ----------
Total Partners' Capital 1,057,631 1,054,065
---------- ----------
Total liabilities and partners' capital $1,431,333 $1,334,884
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands
except per unit amounts)
<S> <C> <C> <C> <C>
REVENUES
Investment advisory fees:
Private accounts $135,109 $ 66,550 $406,470 $182,365
Proprietary Funds 57,518 43,679 158,141 119,876
Distribution and servicing fees 21,310 14,888 59,795 41,969
-------- -------- -------- --------
Total revenues 213,937 125,117 624,406 344,210
-------- -------- -------- --------
EXPENSES
Compensation and benefits 88,898 55,533 262,990 151,560
Commissions 20,048 11,654 57,073 32,189
Amortization of intangible assets, Restricted Unit
and Option Plans 20,374 10,353 60,205 30,999
General and administrative 11,449 6,939 31,256 18,834
Occupancy and equipment 6,169 2,452 16,729 7,483
Other 15,747 6,127 42,999 20,484
-------- ------- -------- --------
Total expenses 162,685 93,058 471,252 261,549
-------- ------- -------- --------
Net income $ 51,252 $32,059 $153,154 $ 82,661
======== ======= ======== ========
Net income per unit:
Basic net income per General Partner and Class A
Limited Partner Unit
$ 0.47 $ 0.40 $ 1.42 $ 1.06
======== ======= ======== ========
Diluted net income per General Partner and Class A
Limited Partner Unit $ 0.45 $ 0.40 $ 1.35 $ 1.06
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The Nine For The Nine
Months Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997
---- ----
(Dollars in thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $153,154 $ 82,661
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization
Restricted Unit & Option Plans 18,916 3,993
Equity in loss of unconsolidated partnership 71 351
Unrealized loss (gain) on investments 811 (1,257)
Gain on sale of securities (195) --
Issuance of restricted units in lieu of directors fees 40 121
Change in operating assets and liabilities:
Change in fees receivable (13,098) (15,345)
Change in other assets (31,250) (14,843)
Change in accrued liabilities and other current
liabilities 6,091 (9,626)
Change in accrued compensation 38,054 27,058
Change in other long term liabilities (1,522) 7,073
--------- ---------
Net cash provided by operating activities 223,148 112,502
--------- ---------
Cash Flows from Investing Activities:
Purchase of fixed assets (7,520) (2,805)
Proceeds from sale of fixed assets 33 3
Notes receivable advances (1,096) (521)
Purchase of investments (57,340) (45,713)
Sale of investments 16,955 35,201
Distribution from (Investment in) unconsolidated
limited partnership 603 (2,764)
--------- ---------
Net cash used in investing activities (48,365) (16,599)
--------- ---------
Cash Flows from Financing Activities:
Short term borrowings 45,000 --
Cash distributions paid (192,687) (104,042)
Issuance of limited partnership units to deferred
compensation plan trust 23,898 --
Capital contribution from General Partner 16 --
Issuance of limited partnership units on exercise of
options 4,607 --
--------- ---------
Net cash used in financing activities (119,166) (104,042)
--------- ---------
Net increase (decrease) in cash and cash equivalents 55,617 (8,139)
Cash and cash equivalents, beginning of period 34,301 41,312
--------- ---------
Cash and cash equivalents, end of period $ 89,918 $ 33,173
========= =========
Supplemental disclosures
Income tax paid $ 7,110 $ 279
========= =========
Interest paid $ 5,941 $ 67
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<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 September 30, 1998 and December
31, 1997, (b) the results of operations for the three and nine month
periods ended September 30, 1998 and 1997, and (c) the cash flows for the
nine-month periods ended September 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.
24
<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.
25
<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. None
Item 5. Other Information.
Sale of Blairlogie Capital Management.
PIMCO Advisors L.P. entered into a Purchase and Sale Agreement, dated as of
October 24, 1998 with a subsidiary of Alleghany Asset Management, providing for
the sale of Blairlogie Capital Management to Alleghany. Blairlogie Capital
Management is an Edinburgh, Scotland based investment management subsidiary of
PIMCO Advisors, which currently manages approximately $800 million in assets,
principally in non-U.S. equities. The transaction is subject to regulatory and
other conditions including approval of Blairlogie's clients. The transaction is
scheduled to close in the first quarter of 1999.
Settlement of Class Action.
On October 20, 1998, the Court of Chancery of the State of Delaware
approved the agreed upon settlement of the Oppenheimer Capital, L.P. Unitholders
Litigation in settlement of class action suits filed last year in connection
with the acquisition of Oppenheimer Capital. Members of the class (comprising
generally beneficial owners of units of Oppenheimer Capital, L.P. at the close
of business on November 4, 1997) are receiving a special distribution of $0.777
per unit rounded down to the nearest penny per unitholder, which funds were
delivered to the transfer agent on October 30, 1998.
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. None
26
<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: November 12, 1998
27
<PAGE>
EXHIBIT 11
PIMCO Advisors Holdings L.P.
Computation of Basic Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Nine For The Nine
Months Ended Months Ended
September 30, 1998 July 31, 1997
------------------ -------------
(In thousands, except per unit amounts)
<S> <C> <C>
Net income $55,719 $48,009
Less net income applicable to the General Partner (6) (480)
------- -------
Net income available to the Limited Partners $55,713 $47,529
======= =======
Weighted average number of units outstanding 47,233 25,699
======= =======
Basic net income per unit $ 1.18 $ 1.85
======= =======
</TABLE>
Computation of Diluted Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Nine For The Nine
Months Ended Months Ended
September 30, 1998 July 31, 1997
------------------ -------------
(In thousands, except per unit amounts)
<S> <C> <C>
Net income $55,719 $48,009
Effect on the recognized equity in earnings of the
operating partnership resulting from the dilution
of earnings per unit at the operating partnership (3,363) --
------- -------
Net income after effect of dilution 52,356 48,009
Less net income applicable to the General Partner (6) (480)
------- -------
Diluted net income available to the Limited Partners $52,350 $47,529
======= =======
Weighted average number of units outstanding 47,233 25,699
Weighted average effect of limited partnership unit
options -- 215
------- -------
Weighted average number of units and unit
equivalents 47,233 25,914
======= =======
Diluted net income per unit $ 1.11 $ 1.83
======= =======
</TABLE>
<PAGE>
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
September 30, 1998 July 31, 1997
------------------ -------------
(In thousands, except per unit amounts)
<S> <C> <C>
Net income $19,820 $18,900
Less net income applicable to the General Partner (2) (189)
------- -------
Net income available to the Limited Partners $19,818 $18,711
======= =======
Weighted average number of units outstanding 48,291 25,763
======= =======
Basic net income per unit $ 0.41 $ 0.73
======= =======
</TABLE>
Computation of Diluted Net Income Per Unit
(Unaudited)
<TABLE>
<CAPTION>
For The Three For The Three
Months Ended Months Ended
September 30, 1998 July 31, 1997
------------------ -------------
(In thousands, except per unit amounts)
<S> <C> <C>
Net income $19,820 $18,900
Effect on the recognized equity in earnings of the
operating partnership resulting from the dilution
of earnings per unit at the operating partnership (1,029) --
------- -------
Net income after effect of dilution 18,791 18,900
Less net income applicable to the General Partner (2) (189)
------- -------
Diluted net income available to the Limited Partners $18,789 $18,711
======= =======
Weighted average number of units outstanding 48,291 25,763
Weighted average effect of limited partnership unit
options -- 233
------- -------
Weighted average number of units and unit
equivalents 48,291 25,996
======= =======
Diluted net income per unit $ 0.39 $ 0.72
======= =======
</TABLE>
<PAGE>
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
--------------------------
September 30, September 30,
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Basic
General Partner and Class A Limited Partner Units 109,008 40,946
Diluted
General Partner and Class A Limited Partner Units 114,184 42,771
Class B Limited Partner Units 35,785
<CAPTION>
For The Three Months Ended
--------------------------
September 30, September 30,
1998 1997
------------ ------------
(in thousands)
Basic
General Partner and Class A Limited Partner Units 108,223 40,946
Diluted
General Partner and Class A Limited Partner Units 113,824 42,683
Class B Limited Partner Units 35,153
</TABLE>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,579
<SECURITIES> 0
<RECEIVABLES> 30,516
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,095
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 521,184
<CURRENT-LIABILITIES> 53,305
<BONDS> 0
0
0
<COMMON> 467,879<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 521,184
<SALES> 0<F2>
<TOTAL-REVENUES> 66,440
<CGS> 0<F2>
<TOTAL-COSTS> 0<F2>
<OTHER-EXPENSES> 10,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 55,719
<INCOME-TAX> 0
<INCOME-CONTINUING> 55,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,719
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.11
<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>
