<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark One:
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM MAY 1 TO DECEMBER 31, 1997
COMMISSION FILE NO. 1-9597
PIMCO ADVISORS HOLDINGS L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3412614
- -------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
800 NEWPORT CENTER DRIVE, NEWPORT BEACH, CA 92660
- ---------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 714-717-7022
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
UNITS OF LIMITED PARTNER INTEREST NEW YORK STOCK EXCHANGE
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
- -------------------------------------------------------------------------------
(TITLE OF CLASS)
- -------------------------------------------------------------------------------
(TITLE OF CLASS)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the units of limited partner interest held by
non-affiliates of the registrant as of March 23, 1998 was $1,567,862,410,
based on the closing price of the units on the New York Stock Exchange on such
date.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FORWARD LOOKING STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-K 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 Holdings 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
Holdings undertakes no obligation to update any forward-looking statements to
reflect events or circumstances after the date of such statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
PIMCO Advisors Holdings L.P. ("PIMCO Holdings") is a Delaware limited
partnership which as its sole business holds approximately 46 million general
partnership units of PIMCO Advisors L.P. ("PIMCO Advisors"), representing an
approximate 43% equity interest in PIMCO Advisors. PIMCO Partners, G.P.
("PGP") 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 firms in the U.S.
with approximately $200 billion under management at December 31, 1997. PIMCO
Advisors' business 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 ("Pacific Investment Management") 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, including 59 of the largest 200 U.S. pension funds. Fixed income
management is led by Pacific Investment Management, 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 an enhanced index based strategy and a variety
of management styles, including value, growth, modified growth, quantitative
and international.
Institutional clients invest through separate accounts and pooled vehicles
such as the institutional share classes of the PIMCO Funds, PIMCO Advisors'
family of 45 proprietary mutual funds. PIMCO Advisors offers its investment
management services to institutional clients through client service
representatives at each of its investment managers.
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. They 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, 401(k) programs and various investment products through sponsored
trust companies.
PIMCO Advisors' strategy is to increase the amount and diversification of
its assets under management through (i) growth in the institutional market
through providing high levels of client service and entering new
1
<PAGE>
markets in the United States and overseas, (ii) growth in the retail market by
building brand awareness and direct 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 revenues of PIMCO Advisors consist principally of management fees based
on the value of assets under management and, in some cases, the performance of
the advisor. The following table sets forth the growth and composition of
PIMCO Advisors' assets under management over the last three years (as adjusted
to include the assets under management of Oppenheimer Capital):
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT
---------------------------
AS OF DECEMBER 31,
--------------------------- COMPOUND
1997 1996 1995 1994 ANNUAL GROWTH RATE
------ ------ ------ ------ ------------------
(IN BILLIONS)
<S> <C> <C> <C> <C> <C>
SOURCE
Institutional Separate
Accounts
Fixed Income............. $ 87.1 $ 63.4 $ 55.4 $ 42.6 26.9%
Equity................... 55.0 44.1 38.0 28.7 24.2%
Retail Products and Mutual
Funds..................... 57.4 50.7 39.0 29.4 25.0%
------ ------ ------ ------
TOTAL.................... $199.5 $158.2 $132.4 $100.7 25.6%
====== ====== ====== ======
ASSET MIX
Fixed Income............... $115.5 $ 86.3 $ 74.7 $ 57.0 26.5%
Equity..................... 81.2 69.0 54.9 41.2 25.4%
Money Market............... 2.8 2.9 2.8 2.5 3.9%
------ ------ ------ ------
TOTAL.................... $199.5 $158.2 $132.4 $100.7 25.6%
====== ====== ====== ======
</TABLE>
INVESTMENT PRODUCTS
PIMCO Advisors provides fixed income investment management to large and
medium-sized foreign and domestic corporate and public clients, including 59
of the largest 200 U.S. pension funds, offering impressive long-term
performance records across a diverse range of product offerings such as total
return, low duration and other duration or sector specific strategies. PIMCO
Advisors also provides equity investment management to institutional and
retail clients, offering investors a variety of management styles, including
value, growth, balanced and quantitative management styles, as well as an
enhanced equity based strategy.
Fixed Income Management
Primarily through Pacific Investment Management, PIMCO Advisors offers a
variety of strategies for clients with fixed income portfolios, designed to
reflect each particular client's investment objective. PIMCO Advisors believes
that its strength in the management of fixed income assets is derived from
Pacific Investment Management's investment philosophy, which stresses a long-
term or secular focus, active management, with measured risk taking, and the
application of strong analytical capabilities across all fixed income market
sectors. Under this philosophy, longer term macro-economic trends are key
inputs to portfolio strategy, and moderate portfolio duration ranges are
favored to reduce volatility relative to client-specified benchmarks. Pacific
Investment Management's investment strategy begins with an intensive review of
long-term and cyclical trends to anticipate interest rates, volatility, yield
curve shape and credit trends. These forecasts become the basis for the major
portfolio strategies. Pacific Investment Management then uses a quantitative
valuation framework to select specific portfolio investments. Fixed income
products include:
Total Return Portfolios. Total return portfolios are structured with the
objective of realizing maximum total return, consistent with the preservation
of capital and prudent investment management across the spectrum of fixed
income securities. This strategy generally results in a portfolio duration of
three to six years. Portfolios utilizing this strategy represented
approximately $71.7 billion of Pacific Investment Management's total assets
under management at December 31, 1997.
2
<PAGE>
Low Duration Portfolios. Pacific Investment Management has actively managed
low duration accounts since 1979 (overall portfolio duration one to three
years). The objectives in the low duration portfolios are to preserve
principal through investment in low-volatility instruments, while seeking to
achieve superior risk adjusted returns.
Other Duration Specific or Sector Specific Portfolios. Pacific Investment
Management also offers clients active management of portfolios based upon
specific duration targets (e.g., long duration portfolios or synthetic
guaranteed investment contracts) and sector emphases (e.g., international,
high-yield, or mortgages).
International and Other Portfolios. Pacific Investment Management, as
investment advisor to a series of offshore funds and separate accounts,
provides fixed income investment advice to non-U.S. investors. Assets under
management for these offshore funds totaled $6.5 billion at December 31, 1997.
Pacific Investment Management also serves as subadvisor for a series of term
trusts investing in mortgage related securities that are marketed to Japanese
investors. These trusts had assets of $2.5 billion at December 31, 1997.
Pacific Investment Management also serves as subadvisor for nine families of
U.S. mutual funds sponsored by other mutual fund complexes. Total assets under
management for these nonaffiliated funds at December 31, 1997 was $6.6
billion.
Equity Management
PIMCO Advisors offers clients a wide array of equity investment strategies
and products. PIMCO Advisors' investment professionals offer Value, Growth,
Modified Growth, Quantitative and International management styles, as well as
an enhanced index based strategy.
Value. PIMCO Advisors offers equity clients the highly respected investment
management professionals of Oppenheimer Capital, which seeks to adhere to a
disciplined, value-oriented investment philosophy, by identifying company-
specific, rather than industry-specific opportunities. By investing in quality
securities that are temporarily out of favor or have been overlooked,
Oppenheimer Capital seeks to preserve capital in falling markets, reduce
volatility compared to the overall market and produce superior returns. In
addition, PIMCO Advisors' NFJ Investment Group follows a disciplined value
oriented approach, specializing in investing in a combination of low P/E
stocks with high dividends selected through a proprietary screening model. At
December 31, 1997, $63.8 billion of PIMCO Advisors' assets under management
were advised by value oriented investment managers, with $61.4 billion advised
by Oppenheimer Capital. Value oriented investment products include large-cap,
mid-cap and small-cap portfolios and non-U.S. and global value portfolios.
Growth. PIMCO Advisors' Columbus Circle Investors follows an investment
philosophy based on the premise that companies producing results which exceed
the expectations of investors and Wall Street equity research analysts will
have rising stock prices, while companies with disappointing results will
experience stock price declines. This investment discipline focuses on the
potential for "positive momentum & positive surprise." The investment
professionals in this group monitor numerous factors, including political and
economic developments, secular trends, industry and group dynamics and
company-specific events, to determine which companies are best-positioned to
achieve revenue and earnings acceleration. Assets managed under this
investment style principally consist of large cap portfolios, but also include
small-cap, mid-cap, and equity income portfolios.
Modified Growth. PIMCO Advisors' Cadence Capital Management offers a "growth
at a reasonable price" equity investment philosophy. This investment
management group's philosophy is to participate in the long-term growth of the
equity markets by constructing fully invested portfolios of stocks selling at
reasonable valuations in relation to the fundamental prospects of the
underlying companies. The group uses a disciplined, "bottom-up" investment
process which utilizes quantitative screening for favorable fundamental and
valuation attributes, followed by "hands-on" qualitative research to confirm
the apparent business trends. These managers structure their portfolios to be
broadly based, typically including 80 to 100 issues. This investment strategy
involves the application of a proprietary investment management process to
different universes of equity securities which are usually differentiated by
market capitalization into four categories: large-cap, mid-cap, small-cap and
micro-cap.
3
<PAGE>
Quantitative. PIMCO Advisors offers active and indexed strategies which are
structured to meet client specific risk and return objectives. Active
portfolios seek superior returns relative to an assigned benchmark within a
risk controlled framework, while indexed portfolios are constructed to closely
track an appropriate index. In addition, the managers manage tax efficient
separate account strategies for taxable investors. The group uses quantitative
techniques in portfolio construction and management. The active portfolios are
designed to maintain economic sector allocations similar to the benchmark.
Security selection is based on a ranking system which evaluates each stock's
exposure to valuation, earnings and momentum factors. Portfolios are optimized
to achieve a diversified group of securities which have exposure to factors
associated with superior return and risk characteristics. The group manages a
wide variety of index funds which extend to both large and small
capitalizations and across value and growth styles. The international
assignments include allocations to developed countries and emerging markets.
StocksPLUS(R). In addition to its fixed income products, Pacific Investment
Management also manages an enhanced index based strategy, StocksPLUS, which
accounted for $12.0 billion of assets under management at December 31, 1997.
StocksPLUS represents a proprietary technique developed by Pacific Investment
Management that combines the active management of stock index futures (to
provide a proxy for equity market returns) with active management of a short-
term fixed income portfolio using much of the same analytics as is used by
Pacific Investment Management in its fixed income portfolios.
International. PIMCO Advisors' investment management groups, including
Oppenheimer Capital and Columbus Circle Investors, offer international equity
investment products that combine country selection strategies with the
systematic application of investment processes. These include the application
of fundamental valuation criteria to country allocations and then to stock
selection in order to enhance client returns over time.
MARKETS AND DISTRIBUTION CHANNELS
Institutional Investors
The Institutional Market. The institutional market for investment management
services includes corporate, government and multi-employer pension plans,
charitable endowments and foundations, and corporations purchasing investment
management services for their own account. The industry consists of two
primary institutional markets. The defined benefit pension plan market,
historically the largest component and primary market for investment managers,
is large, fragmented, performance sensitive and generally sophisticated. The
other principal component is the defined contribution plan market, consisting
of plans such as 401(k) plans which, while historically a smaller market, has
grown in the last decade to almost equal the defined benefit market in size.
At year end 1996, total U.S. pension and retirement assets were estimated at
approximately $7 trillion. Of that amount, corporate defined benefit plans
accounted for $1.5 trillion, growing at an average rate of 6.2% over the past
five years, and corporate defined contribution plans accounted for $1.4
trillion, growing at an average rate of 10.5% over the past five years. Other
sectors include insured assets (primarily group and other annuities) at $1.2
trillion, state and local government pension assets at $1.4 trillion, federal
government pension assets at $390 billion and IRA assets at $1.3 trillion.
While all sectors experienced significant growth in assets under management
during the period, the cash flow growth rate has been negative for defined
benefit plans, at (4.0%) per year during the period, while defined
contribution plans have seen positive cash inflows of 1.3% per year during the
period.
Distribution and Marketing. Each of PIMCO Advisors' investment management
groups serves the institutional market and conducts institutional marketing
activities directly. In general, each investment management group conducts its
own marketing, which generally targets Fortune 1,000 companies and other large
institutional investors. The investment managers seek to develop client
relationships through investment management performance and focused,
responsive client service. Business strategies also involve increasing assets
under management for non-U.S. clients, expanding the array of fixed income and
equity products offered
4
<PAGE>
to clients, seeking to expand market share with medium and smaller
institutional investors by offering pooled investment vehicles such as the
PIMCO Funds, and otherwise seeking to diversify and expand their businesses by
investment strategy, method of delivery and markets.
A principal component of PIMCO Advisors' marketing strategy is the
historical performance of its investment managers relative to benchmarks over
longer periods of time. For example, Pacific Investment Management stresses
its record in equaling or exceeding client-selected performance benchmarks
over long periods through a measured risk taking approach that emphasizes
preservation of capital and focus on total return. Over the last 5 years,
Pacific Investment Management's Total Return Full Authority composite,
representing approximately 24% of Pacific Investment Management's total assets
under management at December 31, 1997, outperformed the Lehman Brothers
Aggregate Bond Index by approximately 181 basis points (9.29% compared to
7.48%) annually on a compound basis, before fees. Oppenheimer Capital has
achieved a total return of 20.5% on its large cap value composite over the
last five years, which exceeds the benchmark S&P 500 index by 22 basis points
annually on a compound basis, before fees.
Retail Investors
The Retail Market. Like the institutional market for investment management
services, the mutual fund market has expanded rapidly in recent years. The
retail market is served in large part through mutual funds. The mutual fund
industry is highly competitive and is characterized by a high degree of
fragmentation and a large and rapidly increasing number of product offerings.
Marketing strategies, product development, business development, sales
expertise and servicing are increasingly important. The traditional channel
for the distribution of mutual funds (other than money market funds) is
through brokerage firms that are not affiliated with the funds' sponsor
organization and that are compensated primarily through front-end sales loads
deducted from the purchaser's investment at the time of the sale. Increasingly
other distribution arrangements and channels have become important. These
include "no-load" or "low-load" funds sold primarily through direct marketing
efforts or captive sales forces affiliated with the sponsor organization;
"private label" and "proprietary" funds managed by and offered primarily
through, or to customers of, a financial organization such as a brokerage
firm, insurance company or bank; and "back-end load" or "level load" funds
offered through brokerage and other third-party channels, but with
compensation to the selling brokers being funded through commission advances
from the funds' sponsor which are recovered through ongoing charges against
fund assets assessed under Rule 12b-1 under the Investment Company Act of
1940, as amended, contingent deferred sales charges assessed against
shareholders at the time they redeem their investments, or a combination of
such sources.
The PIMCO Funds. PIMCO Advisors and its investment management professionals
sponsor and manage the PIMCO Funds, a family of 45 mutual funds for both
institutional and retail investors. In January 1997, PIMCO Advisors
restructured its proprietary mutual funds into a single fund family called
"PIMCO Funds" which is comprised of 24 funds advised by Pacific Investment
Management, and 21 funds advised by PIMCO Advisors and subadvised by PIMCO
Advisors' other investment managers and one independent subadvisor. PIMCO
Funds are offered in up to five different share classes: institutional and
administrative share classes for institutional investors and, for retail
investors, Class A shares (which are "front end" load), Class B shares (which
are "back-end load"), and Class C shares (which are "level load"). The PIMCO
Funds now feature a "unified fee" structure which has specified advisory and
administrative fees per fund. As a result, PIMCO Advisors and Pacific
Investment Management (and not the PIMCO Funds) bear the risk of increases in
service costs (including third-party service providers such as transfer
agents) and will directly benefit from decreases in those costs.
5
<PAGE>
At December 31, 1997, PIMCO Funds had $29.9 billion under management, of
which $7.0 billion was represented by retail share classes. At February 28,
1998, sixteen of the PIMCO Funds had overall Morningstar ratings of 4 stars or
above. Set forth below is information regarding these funds:
<TABLE>
<CAPTION>
ASSETS UNDER
MANAGEMENT
AT 12/31/97 OVERALL
(IN MORNINGSTAR
PIMCO FUND MANAGEMENT STYLE MILLIONS) RANKING
- ---------- -------------------------- ------------ -----------
<S> <C> <C> <C>
Total Return(1)............. Fixed Income--Total Return $15,916 *****
Low Duration(1)............. Fixed Income 2,983 *****
High Yield(1)............... Fixed Income--High Yield 1,633 *****
Capital Appreciation(1)..... Growth 752 *****
Mid-Cap Growth(1)........... Growth 570 *****
StocksPLUS(1)............... Enhanced Equity 481 *****
Renaissance................. Growth 471 *****
Foreign Bond(1)............. Fixed Income--Int'l 411 *****
Total Return II(1).......... Fixed Income--Total Return 483 ****
Low Duration II(1).......... Fixed Income 352 ****
Total Return III(1)......... Fixed Income--Total Return 334 ****
Small Cap Value(1).......... Value 233 ****
Short Term(1)............... Fixed Income 208 ****
Value(1).................... Value 208 ****
Equity Income(1)............ Value 173 ****
Enhanced Equity(1).......... Quantitative 43 ****
</TABLE>
- --------
(1) Rating based on institutional class shares, as Class A, B and C shares
were initially offered on January 17, 1997. Institutional class shares
generally have a $5 million minimum investment. Had Class A, B and C
shares been in existence for the same period as the institutional class
shares they may have received different ratings due to Class A, B and C
shares' higher expense ratios and sales charges.
The above chart is based on February 28, 1998 Morningstar ratings. Overall
rating is a weighted average of the fund's 3, 5 and 10-year ratings (when
applicable). During those periods there were 2,402, 1,363 and 706 domestic
equity funds; 717, 306 and 107 international equity funds; 1,400, 826 and 335
taxable bond funds; and 1,502, 775 and 347 municipal bond funds rated,
respectively. Morningstar ratings reflect historical risk-adjusted performance
and are subject to monthly changes. Therefore, past ratings are not a
guarantee of future results. The ratings are calculated from a fund's average
annual total return with the appropriate sales charge adjustment and a risk
factor that reflects fund performance relative to three-month Treasury bill
returns. 5-star ratings are limited to the top 10% of funds in an investment
category, the next 22.5% earn 4 stars, the next 35% earn 3 stars, the next
22.5% earn 2 stars and the bottom 10% earn 1 star. Morningstar ratings are
based on a fund's oldest class of shares.
PFD, a wholly-owned subsidiary of PIMCO Advisors, is the distributor for the
PIMCO Funds. PIMCO Advisors uses PFD to distribute the retail share classes of
PIMCO Funds through a large, diversified network of unaffiliated retail
broker-dealers, including many leading full-service broker-dealers. PFD has
selling agreements with over 1,000 broker-dealers and banks. The sales and
marketing personnel develop and support sales and marketing strategies between
PIMCO Advisors and individual retail broker-dealers. Additionally, the
relationships fostered by this group allow PFD's wholesalers to have access to
the branch offices and sales representatives of the retail broker-dealers.
Other Aggregators and Intermediaries. PIMCO Advisors' strategy also involves
focusing on financial service aggregators of retail assets such as
unaffiliated sponsors of mutual funds and other registered investment advisors
(including fee-based financial planners) who recommend the use of "no-load"
mutual funds such as the institutional and administrative fee-only classes of
PIMCO Funds to their clients, and consultant alliances.
6
<PAGE>
In addition to the 45 PIMCO Funds, PIMCO Advisors' investment managers
subadvise third-party sponsored mutual funds. In particular, Opcap Advisors, a
subsidiary of Oppenheimer Capital, serves as subadvisor for six funds in the
Quest Series of OppenheimerFunds having $6.6 billion under management at
December 31, 1997. The Class A shares of five of these funds had overall
Morningstar ratings of four stars, based on February 28, 1998 Morningstar
ratings.
Wrap Fee Accounts. Oppenheimer Capital has become actively involved in
managing wrap fee accounts, or broker-sponsored asset management programs.
Wrap fee accounts have grown rapidly since their introduction, reaching nearly
$8.0 billion under management at December 31, 1997. Oppenheimer Capital's
success is attributable in large part to its strong long term track record
which brokers promote in marketing.
Through wrap fee programs, brokers offer their clients discretionary
portfolio management services. The services are provided through independent
investment managers selected by the broker and the client from the broker's
approved list of managers. The broker's client investment objectives are
analyzed and an investment manager is chosen whose investment philosophy
appears to be compatible with the client's goals. The client enters into an
investment advisory agreement with the broker which has a separate master
agreement with Oppenheimer Capital. The client pays a single, all-inclusive
fee which covers investment advisory services rendered, as well as custodial,
execution and other client-related services performed by the broker, exclusive
of exchange fees and transfer taxes mandated by law. The broker pays
Oppenheimer Capital a fee monthly or quarterly, from the all-inclusive fee
collected from the client. Oppenheimer Capital serves as wrap account manager
for 15 programs totalling $8.0 billion under management, with approximately
70% of those assets originated through the Salomon Smith Barney brokerage
network.
Variable Annuities. Oppenheimer Capital has developed a program managing
funds which support the variable annuity products of a number of insurance
companies. Since introduction, this program has grown to nearly $4.3 billion
in assets under management at December 31, 1997.
Asset growth is being driven by a combination of market appreciation,
investment performance and the development of relationships with additional
insurance companies. Oppenheimer Capital's largest fund supporting variable
annuities is the Enterprise Accumulation Trust, offered by the Mutual Life
Insurance Company of New York. The OCC Accumulation Trust is offered by twelve
insurance companies in support of their variable annuity products. Oppenheimer
Capital also manages portfolios for the variable annuity accounts of four
other insurance companies and is developing investment advisory relationships
with additional insurance companies to manage assets for both variable annuity
and variable life insurance products.
GROWTH STRATEGY
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 in the United
States and overseas, (ii) growth in the retail market by building brand
awareness and direct 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. PIMCO Advisors'
initiatives include:
Continued Institutional Growth. PIMCO Advisors works to build on the
strength of its institutional client base by providing high levels of client
service, penetration of new markets and new product offerings. In particular,
PIMCO Advisors is seeking to increase assets managed for overseas
institutional investors, and has recently established or expanded offices in
London, Tokyo, Singapore and Sydney. In addition, PIMCO Advisors formed a
Dublin trust as an additional vehicle for pooled investment by foreign
institutions and high net worth individuals.
Retail Base Expansion. PIMCO Advisors has commenced a significant initiative
to build its retail distribution through investing in its broker-dealer
network, increasing its participation in mutual fund "supermarkets", expanding
its presence in the 401(k) market by increasing the number of plan sponsors
offering PIMCO Advisors' investment products and building brand awareness both
at the broker-dealer level and the
7
<PAGE>
retail investor level through increased marketing and public relations
initiatives. In addition, PIMCO Advisors seeks growth through building on its
success in wrap fee accounts, variable annuity programs and sponsored trust
companies offering retail investment products.
New Product Offerings. PIMCO Advisors pursues growth in both the
institutional and retail markets through offering new products. By assessing
current product offerings, working with clients and monitoring market trends,
PIMCO Advisors identifies areas for new product placement. Leveraging off the
depth and expertise of its investment professionals, PIMCO Advisors has
recently developed several new funds to enhance its product line and expects
to continue to supplement its fund offerings. Recent new product offerings
include investments in international bonds and a "real return" fund, investing
in inflation indexed bonds.
PIMCO Advisors pursues these strategies both through internal investment and
through targeting existing investment managers and selectively acquiring those
that have demonstrated strong investment performance or provide complementary
products and investment philosophies to PIMCO Advisors' existing investment
management groups.
RECENT DEVELOPMENTS
Opgroup Transaction. On November 4, 1997, PIMCO Advisors acquired
Oppenheimer Group, Inc. ("Opgroup"), which owned through a subsidiary the
32.4% managing general partner interest in Oppenheimer Capital, a one percent
general partner interest in PIMCO Holdings, one percent general partner
interests in three subsidiaries of Oppenheimer Capital and 100% of Value
Advisors LLC, a newly formed limited liability company holding eight closed-
end investment fund management contracts formerly held by Advantage Advisers,
Inc. (the "Opgroup Acquisition"). 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. Following the merger, Opgroup
caused its investment advisory assets to be contributed to PIMCO Advisors in
exchange for PIMCO Advisors Class C units. See "Certain Relationships and
Transactions: Contribution Agreement." 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.
OpCap Merger. 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
25.5 million PIMCO Advisors Class A units. Concurrent with the merger, PIMCO
Holdings acquired an additional 0.6 million PIMCO Advisors Class A units for
$16.7 million in cash. 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
Holdings units, so that each PIMCO Holdings unit outstanding after the split
represented an economic interest in one PIMCO Advisors unit.
Public Ownership Restructuring. On December 31, 1997, the publicly held
limited partner interests of PIMCO Advisors and PIMCO Holdings were
consolidated through an exchange of publicly traded PIMCO Advisors units for
an equal number of PIMCO Holdings units. In addition, PIMCO Holdings changed
its name from Oppenheimer Capital, L.P. to PIMCO Advisors Holdings L.P., and
PIMCO Holdings units, which continued to be traded on the New York Stock
Exchange, became traded under the symbol "PA." As a result, all direct and
indirect public ownership interests in the business of PIMCO Advisors were
consolidated into one entity. In addition, PIMCO Advisors ceased to be
publicly traded, allowing it to become a private partnership not subject to
the tax on the gross income from active businesses of publicly traded
partnerships which became effective after December 31, 1997.
Change in Fiscal Year. 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.
8
<PAGE>
COMPETITION
The investment management business is highly competitive. PIMCO Advisors
competes with a large number of other domestic and foreign investment
management firms, commercial banks, insurance companies, broker-dealers and
other financial services providers. Some of these financial services companies
have greater resources, assets under management and administration than PIMCO
Advisors and offer a broader array of investment products and services.
PIMCO Advisors believes that the most important factors affecting its
success are the abilities, performance records and reputations of its
investment managers, and the development of new investment and marketing
strategies. The relative importance of these factors varies depending on the
type of investment management service involved. Client service is also an
important competitive factor. PIMCO Advisors' ability to increase and retain
client assets could be adversely affected if client accounts underperform the
market over time or if key investment managers leave the firms. The ability of
PIMCO Advisors to compete with other investment management firms is also
dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions. There are
relatively few barriers to entry by new investment management firms in the
institutional managed accounts business, which increases competitive pressure.
A large number of mutual funds are sold to the public by investment
management firms, broker-dealers, insurance companies and banks in competition
with mutual funds sponsored by PIMCO Advisors. Many competitors apply
substantial resources to advertising and marketing their mutual funds which
may adversely affect the ability of PIMCO Advisors-sponsored funds to attract
new retail clients and to retain retail assets under management.
FEE REVENUES
General Characteristics
Investment management agreements between PIMCO Advisors' investment
management groups and their clients typically provide for fees based on a
percentage of the assets under management, generally determined at least
quarterly and valued at current market levels. The percentage of the fee
applicable to a particular classification of assets under management is a
function of several factors. For example, investments or strategies which have
a higher degree of risk and uncertainty command a higher percentage fee.
Therefore, significant fluctuations in securities prices or in the investment
patterns of clients that result in shifts in assets under management can have
a material effect on PIMCO Advisors consolidated revenues and profitability.
Such fluctuations in asset valuations and client investment patterns may be
affected by overall economic conditions and other factors influencing the
capital markets and the net sales of mutual fund shares generally, including
interest rate fluctuations. Virtually all of PIMCO Advisors' revenues are
derived from investment management agreements with clients that are terminable
at any time or upon 30 to 60 days' notice, as is the case generally in the
investment management industry. Any termination of agreements representing a
significant portion of assets under management could have an adverse impact on
PIMCO Advisors' results of operations. The investment management business is
highly competitive and fees vary among investment managers. Some of PIMCO
Advisors' investment management groups' fees are higher than those of many
investment managers relative to the average size of accounts under management.
Each investment manager's ability to maintain its fee structure in the
competitive environment is dependent to a large extent on the ability of its
investment managers to provide clients with service and investment returns
that will cause clients to be willing to pay those fees. There can be no
assurance that PIMCO Advisors' investment management groups will be able to
retain their clients or sustain their fee structures in the future.
Performance-Based Fees
Approximately 4.6%, 4.0% and 4.0% of PIMCO Advisors' revenues (as adjusted
to combine with the revenues of Oppenheimer Capital) for the years ended
December 31, 1997, 1996 and 1995, respectively, were
9
<PAGE>
derived from performance-based fees. Most of these revenues are attributable
to Pacific Investment Management's operations. To earn a performance-based fee
with respect to an account, the relevant investment manager must generally
outperform a specific benchmark over a particular period. Performance-based
fee arrangements make revenues more volatile, but also provide an opportunity
to earn higher fees than could be obtained under fee arrangements based solely
on a percentage of assets under management. Pacific Investment Management's
StocksPLUS product, which accounted for $12.0 billion of assets under
management at December 31, 1997, is generally subject to a performance-based
arrangement in which under-performance relative to the S&P 500 over a
particular time period results in no fees being paid by clients, while
superior performance results in incentive fees that are generally not subject
to a cap. In addition to the StocksPLUS accounts, several large fixed income
accounts aggregating approximately $11.3 billion at December 31, 1997, also
have performance-based fee arrangements. Pacific Investment Management's
performance-based fee arrangements, including the StocksPLUS fee arrangement,
can materially affect Pacific Investment Management's revenues, and thus those
of PIMCO Advisors, from period to period.
ITEM 2. PROPERTIES
The principal offices of PIMCO Holdings and PIMCO Advisors are located at
(i) 800 Newport Center Drive, Newport Beach, California where they soon will
occupy approximately 15,000 square feet of space under a lease expiring in
2005 and (ii) 2187 Atlantic Street, Stanford, Connecticut where PIMCO Advisors
and PFD occupy approximately 17,200 square feet of space under a sublease
expiring in 2002. Pacific Investment Management's principal offices are
located at 800 and 840 Newport Center Drive and 5 Civic Plaza, Newport Beach,
California where it occupies approximately 85,000 square feet of space under
leases expiring in 1998 and 2005. Oppenheimer Capital currently maintains
office space at the following locations: approximately 40,000 square feet at
the Oppenheimer Tower, New York, New York; 39,800 square feet at the Merrill
Lynch Tower, New York, New York; and 44,000 square feet at 33 Maiden Lane, New
York, New York. Each location is a modern office building and the space is
adequate for PIMCO Holdings' and PIMCO Advisors' current operations, but more
space may be necessary should PIMCO Advisors business expand.
ITEM 3. LEGAL PROCEEDINGS
On November 10, 1997, Richard Buzby filed an action on behalf of a purported
class of limited partners of PIMCO Holdings against PIMCO Advisors and certain
individuals associated with the previous general partner of PIMCO Holdings in
the Court of Chancery of the State of Delaware, New Castle County. The
complaint alleges, among other things, various breaches of fiduciary duty,
conflicts of interest and unfair dealing in connection with the Oppenheimer
Capital Merger. The complaint seeks compensatory and/or rescissionary money
damages or, alternatively, injunctive relief or rescission of the
transactions. After that date, certain other complaints were filed in the
states of Delaware and New York, making similar allegations.
On December 17, 1997, PIMCO Advisors and PIMCO Holdings issued a press
release announcing that they reached an agreement to settle the various class
action lawsuits filed against them and other defendants in connection with the
Oppenheimer Capital Merger. As part of the settlement, the class will receive
$1 per PIMCO Holdings unit for each of the 15.4 million PIMCO Holdings units
outstanding for holders of record as of November 4, 1997, payable as a
distribution after reduction for court-awarded attorney's fees and costs.
PIMCO Advisors and PIMCO Holdings reported that the $15.4 million provides
material value to the members of the class. The settlement was recorded as
part of the purchase price and the resulting intangibles will be amortized
over 20 years and thus, PIMCO Advisors and PIMCO Holdings believe, will have
no material effect on earnings or distributions. The settlement is subject to
court approval.
Except as described above, there are no material legal proceedings pending
or, to the knowledge of management, threatened against PIMCO Holdings or PIMCO
Advisors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until December 31, 1997, PIMCO Holdings units (formerly Oppenheimer Capital,
L.P. units) were traded on the NYSE under the symbol "OCC" and the PIMCO
Advisors Class A limited partner units were traded on the NYSE under the
symbol "PA." Commencing January 1, 1998, following the combination of the
public ownership of PIMCO Holdings and PIMCO Advisors, the PIMCO Advisors
Class A units are no longer publicly traded and PIMCO Holdings units are
traded on the NYSE under the symbol "PA."
The following table sets forth, for the periods indicated, the high and low
trading prices for PIMCO Holdings units as reported on the NYSE and the total
cash distributions paid per PIMCO Holdings unit:
PIMCO HOLDINGS UNITS
(FORMERLY OPPENHEIMER CAPITAL, L.P. UNITS PRIOR TO JANUARY 1, 1998)
<TABLE>
<CAPTION>
TRADING PRICES(2)
------------------
TOTAL CASH
REPORTING PERIOD(1) HIGH LOW DISTRIBUTIONS
------------------- --------- -------- -------------
<S> <C> <C> <C>
Fiscal 1996
First Quarter................................ $14 5/8 $12 5/8 $0.329
Second Quarter............................... 16 3/4 14 3/8 0.374
Third Quarter................................ 17 5/8 16 1/8 0.704
Fourth Quarter............................... 18 3/8 16 5/8 0.494
------
Total...................................... $1.901
------
Fiscal 1997
First Quarter................................ $17 7/8 $15 3/4 $0.389
Second Quarter............................... 20 3/4 16 5/8 0.449
Third Quarter................................ 22 3/8 19 3/8 0.569
Fourth Quarter............................... 22 7/8 19 1/4 0.689
------
Total...................................... $2.096
------
Fiscal 1998
First Quarter................................ $25 7/8 $21 1/2 $0.569
Second Quarter............................... 34 5/8 26 3/4 0.569
Third Quarter (through December 31, 1997).... 32 9/16 28 3/16 0.904
------
Total...................................... $2.042
------
Calendar 1998
First Quarter (January 1, 1998 through March
23, 1998)................................... $35 11/16 $29 3/8 $0.580
------
Total...................................... $0.580
------
</TABLE>
- --------
(1) On December 1, 1997, PIMCO Holdings changed its fiscal year end to
December 31. The information displayed in this chart through December 31,
1997 is based on a fiscal year end of April 30.
(2) PIMCO Holdings unit prices and distributions prior to December 1, 1997
have been restated to reflect the 1.67-to-one unit split effective as of
that date.
On March 23, 1998, the closing price of PIMCO Holdings units was $34.125 per
unit and there were approximately 2,015 holders of record of PIMCO Holdings
units.
11
<PAGE>
DISTRIBUTION POLICY
PIMCO Holdings' policy is to distribute substantially all of its net cash
flow on an annual basis. Distributions are declared and paid to unitholders of
record within thirty days following the end of each calendar quarter on March
31, June 30, September 30 and December 31 of each year. Because PIMCO
Holdings' sole business is to hold an investment as a general partner of PIMCO
Advisors, the cash flow of PIMCO Holdings consists of distributions from PIMCO
Advisors. The Amended and Restated Agreement of Limited Partnership of PIMCO
Advisors Holdings L.P., as amended (the "PIMCO Holdings Partnership
Agreement") requires the general partner of PIMCO Holdings to declare
quarterly distributions to the record holders of PIMCO Holdings units (the
"Unitholders") in an amount equal to the cash distributions from PIMCO
Advisors, less expenses and reserves. 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.
PIMCO Advisors distributes on an annual basis cash in an amount equal to
Operating Profit Available for Distribution (as defined in the Amended and
Restated Agreement of Limited Partnership of PIMCO Advisors L.P. (the "PIMCO
Advisors Partnership Agreement")) less any amount deemed required for capital
expenditures, future payments of indebtedness, as reserves or otherwise in the
business of PIMCO Advisors. In general, the Management Board of PIMCO Advisors
evaluates distribution levels late in the fourth quarter of each year based on
expected year end earnings and the anticipated earnings for the ensuing year.
The Management Board of PIMCO Advisors has set a quarterly distribution rate
of $0.60 per PIMCO Advisors unit for the first three calendar quarters of
1998, which equates to a distribution rate at PIMCO Holdings (after taxes at
PIMCO Holdings) of $0.53 per unit.
Actual distribution levels will depend on the financial performance of PIMCO
Advisors, and there can be no assurance that the stated 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, which are beyond the control of PIMCO Holdings and
PIMCO Advisors. In addition, the general partners of PIMCO Advisors may, in
determining the amount of distributions, deduct any amount from Operating
Profit Available for Distribution the general partners deem may be required
for capital expenditures, reserves or otherwise in the business of PIMCO
Advisors. To the extent PIMCO Advisors or PIMCO Holdings retains profits in
any year, unitholders may have taxable income from PIMCO Holdings that exceeds
their cash distributions.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth summary financial data of PIMCO Holdings
(retroactively restated to reflect a 1.67 for 1 unit split effective December
1, 1997) and Oppenheimer Capital for the eight months ended December 31, 1997,
and each of the five years ended April 30, 1997 and selected consolidated
financial data of PIMCO Advisors for each of the five years ended December 31,
1997. In the fourth quarter of 1997, PIMCO Advisors acquired Oppenheimer
Capital, and PIMCO Holdings investment in Oppenheimer Capital was exchanged
for an interest in PIMCO Advisors. Accordingly, PIMCO Advisors data includes
the performance of Oppenheimer Capital from November 4, 1997, and PIMCO
Holdings data consists of the performance of PIMCO Advisors from December 1,
1997. In addition, PIMCO Advisors and its subsidiaries were formed on November
15, 1994, when Pacific Asset Management LLC 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"). Under
generally accepted accounting principles, the Consolidation was accounted for
as an acquisition of TAG LP by PFAMCo Group. Therefore, the historical
financial statements of PIMCO Advisors include the operations of PFAMCo Group,
in its corporate form, prior to the Consolidation and the combined results of
PIMCO Advisors in its partnership form, for the period since the
Consolidation. This information should be read in conjunction with the
financial statements of PIMCO Advisors Holdings L.P., the consolidated
financial statements of PIMCO Advisors L.P. and the consolidated financial
statements of Oppenheimer Capital, and the related notes thereto included
elsewhere in this report on Form 10K and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of PIMCO Advisors Holdings
L.P."
12
<PAGE>
<TABLE>
<CAPTION>
PIMCO ADVISORS HOLDINGS L.P.
-------------------------------------------------------------
FOR
THE EIGHT
MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED APRIL 30
------------ -----------------------------------------------
1997 1997 1996 1995 1994 1993
------------ -------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $ 45,737(3) $ 56,046(1) $ 61,316(1) $34,282 $35,091 $30,022
Expenses................ 1,605 2,720 2,720 3,461 4,038 3,704
-------- -------- -------- ------- ------- -------
Net income.............. $ 44,132(3) $ 53,326(1) $ 58,596(1) $30,821 $31,053 $26,318
======== ======== ======== ======= ======= =======
Diluted Net Income Per
Unit................... $ 1.68 $ 2.04 $ 2.27 $ 1.21 $ 1.22 $ 1.04
======== ======== ======== ======= ======= =======
Distributions declared
per unit............... $ 2.05(4) $ 2.10(2) $ 1.90(2) $ 1.30 $ 1.28 $ 1.16
======== ======== ======== ======= ======= =======
Weighted average number
of units outstanding... 25,768 25,663 25,457 25,277 25,122 25,065
FINANCIAL CONDITION AT
END OF PERIOD:
Total assets............ $438,964 $116,149 $110,099 $96,633 $98,116 $98,365
Total liabilities....... 30,627 17,858 12,713 10,321 10,319 9,683
-------- -------- -------- ------- ------- -------
Partners' capital....... $408,337 $ 98,291 $ 97,386 $86,312 $87,797 $88,682
======== ======== ======== ======= ======= =======
</TABLE>
- --------
(1) Includes revenues and a non recurring gain of $1.8 million, or $.07 per
unit in fiscal 1997 and $17.7 million, or $.69 per unit in fiscal 1996.
(2) Includes a special distribution related to the non recurring gain of $.06
per unit in fiscal 1997 and $.33 in fiscal 1996.
(3) Includes revenues and a non recurring gain of $2.8 million, or $.11 per
unit.
(4) Includes a special distribution related to the non recurring gain of $.07
per unit.
<TABLE>
<CAPTION>
PIMCO ADVISORS L.P.
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Total revenues............... $ 516,669 $392,024 $323,014 $180,263 $165,856
Operating expenses........... 346,686 261,978 215,271 145,220 131,447
Amortization of intangibles,
options and restricted
units....................... 51,676 41,171 42,723 6,202 --
---------- -------- -------- -------- --------
Operating income............. $ 118,307 $ 88,875 $ 65,020 $ 28,841 $ 34,409
========== ======== ======== ======== ========
Net Income................... $ 118,330 $ 91,128 $ 68,467 $ 19,255 $ 19,717
========== ======== ======== ======== ========
DILUTED NET INCOME PER UNIT
(1):
General Partner and Class A
Limited Partner units....... $ 1.45 $ 1.29 $ 1.16 $ 0.12
========== ======== ======== ======== ========
DIVIDENDS/DISTRIBUTIONS
DECLARED (2):............... $ 208,713 $131,604 $ 89,613 $ 24,384 $ 22,158
========== ======== ======== ======== ========
FINANCIAL CONDITION AT END OF
PERIOD:
Total assets (3)............. $1,343,036 $358,500 $369,592 $379,708 $ 70,388
Total liabilities............ 288,971 62,257 38,035 34,179 44,567
---------- -------- -------- -------- --------
Partners' capital (4)........ $1,054,065 $296,243 $331,557 $345,529 $ 25,821
========== ======== ======== ======== ========
OTHER STATISTICS:
Assets under management (in
billions)................... $ 199.5(5) $ 110.0 $ 95.2 $ 72.2 $ 57.2
Operating Profit Available
for Distribution (1)........ $ 173,166 $132,314 $111,205 $ 12,306 --
</TABLE>
- --------
(1) Computed on earnings following the Consolidation. Operating Profit
Available for Distribution is defined by the PIMCO Advisors Partnership
Agreement as the sum of net income plus non-cash charges from the
amortization of intangible assets, non-cash compensation expenses arising
from option and restricted unit plans, and losses of any subsidiary which
is not a flow-through entity for tax purposes.
(2) PIMCO Advisors accelerated its distribution declaration record date by one
month effective December 31, 1997, thus 1997 reflects five quarterly
declarations.
(3) Upon completion of the acquisition of Oppenheimer Capital, approximately
$897.5 million of intangible assets were recorded. Upon completion of the
Consolidation, approximately $284.9 million of intangible assets were
recorded. See Note 3 in the Notes to the Consolidated Financial Statements
of PIMCO Advisors L.P. and Subsidiaries.
(4) Stockholders' equity before the Consolidation.
(5) Includes Oppenheimer Capital.
13
<PAGE>
<TABLE>
<CAPTION>
OPPENHEIMER CAPITAL
---------------------------------------------------------------
FOR
THE EIGHT
MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED APRIL 30,
------------ -------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $148,937 $181,974 $158,215 $129,912 $112,290 $94,733
Expenses................ 83,951 103,064 95,551 83,066 64,683 54,707
-------- -------- -------- -------- -------- -------
Operating income........ 64,986 78,910 62,664 46,846 47,607 40,026
Gain on Quest sale...... 4,374(2) 2,806(1) 27,725(1) -- -- --
-------- -------- -------- -------- -------- -------
Income before income tax
expense and minority
interest............... $ 69,360 $ 81,716 $ 90,389 $ 46,846 $ 47,607 $40,026
======== ======== ======== ======== ======== =======
FINANCIAL CONDITION AT
END OF PERIOD:
Total assets............ $ 86,236 $ 93,019 $ 76,338 $ 56,129 $ 43,034 $37,677
Total liabilities....... 38,654 53,044 41,462 41,582 30,557 27,830
Minority interest....... 213 277 174 87 25 18
-------- -------- -------- -------- -------- -------
Partners' capital....... $ 47,369 $ 39,698 $ 34,702 $ 14,460 $ 12,452 $ 9,829
======== ======== ======== ======== ======== =======
OTHER STATISTICS:
Assets under management
(in billions).......... $ 61.4 $ 51.2 $ 40.6 $ 31.8 $ 29.4 $ 26.4
</TABLE>
- --------
(1) Reflects the gain realized on the sale of the investment advisory and
other contracts and business relationship for the twelve Quest for Value
mutual funds to OppenheimerFunds, Inc. in November 1995.
(2) Reflects the gain realized on the sale of the investment advisory and
other contracts and business relationship of the Quest Dual Purpose Fund
to OppenheimerFunds, Inc. in July 1997.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PIMCO ADVISORS HOLDINGS L.P.
GENERAL
PIMCO Advisors Holdings L.P. ("PIMCO Holdings") (formerly Oppenheimer
Capital, L.P.) is a publicly traded Delaware limited partnership. Until
November 30, 1997, PIMCO Holdings' primary sources of income were its
proportionate (67%) share of the net income of Oppenheimer Capital, an equity
oriented investment management firm, and interest income from a 10%, $32.2
million note receivable (the "Equities Note") from an affiliate. As a result
of the acquisition of Oppenheimer Capital by PIMCO Advisors L.P. ("PIMCO
Advisors") described below, commencing December 1, 1997, PIMCO Holdings'
primary source of income has been its proportionate share of the net income of
PIMCO Advisors. Currently, PIMCO Holdings holds approximately 46 million PIMCO
Advisors units, representing a 43% general partner interest in PIMCO Advisors.
The financial condition and results of operations of PIMCO Advisors are
discussed below under "--PIMCO ADVISORS L.P." The financial condition and
results of operations of Oppenheimer Capital are discussed below under "--
OPPENHEIMER CAPITAL."
COMBINATION OF OPPENHEIMER CAPITAL AND 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.
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. On
December 1, 1997, 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. Accordingly, the
period ending December 31, 1997 is a "stub" reporting period, eight months in
total, consisting of two three month periods and one two month period.
PRO FORMA FINANCIAL INFORMATION
Because of the different ownership interests during the historical reporting
periods and the different elapsed times of the historical reporting periods,
management has included below certain pro forma financial information
15
<PAGE>
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 24% of the consolidated results of PIMCO Advisors for December
of 1997 and 43% of such activities after December 31, 1997, and from certain
events effected in the transactions principally related to the creation and
amortization of intangible assets.
The following table summarizes the unaudited condensed pro forma results of
operations of PIMCO Advisors and PIMCO Holdings for the calendar years ended
December 31, 1997 and 1996 as if the above discussed acquisition transactions
had been completed on January 1, 1996.
<TABLE>
<CAPTION>
PIMCO ADVISORS HOLDINGS L.P.
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
REVENUES
Equity in earnings of PIMCO Advisors........ $ 66.0 $ 45.9
-------------- --------------
NET INCOME.................................... $ 66.0 $ 45.9
============== ==============
BASIC NET INCOME PER UNIT................... $ 1.44 $ 1.00
============== ==============
DILUTED NET INCOME PER UNIT................. $ 1.39 $ 0.98
============== ==============
<CAPTION>
PIMCO ADVISORS L.P.
FOR THE YEAR ENDED DECEMBER
31,
---------------------------
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
REVENUES...................................... $ 694.7 $ 567.1
-------------- --------------
EXPENSES
Compensation and related.................... 299.3 245.0
Other operating expenses.................... 134.9 111.0
Amortization of intangibles and restricted
units...................................... 103.2 101.7
-------------- --------------
Total..................................... 537.4 457.7
-------------- --------------
NET INCOME.................................... $ 157.3 $ 109.4
============== ==============
BASIC NET INCOME PER UNIT................... $ 1.44 $ 1.00
============== ==============
DILUTED NET INCOME PER UNIT................. $ 1.39 $ 0.98
============== ==============
ASSETS UNDER MANAGEMENT: (in billions)
Beginning of period ........................ $ 158.2 $ 132.4
End of period............................... $ 199.5 $ 158.2
</TABLE>
The foregoing 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 PIMCO Advisors Class A 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 $146.9 million had been exchanged as of December 31, 1997;
(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;
16
<PAGE>
(v) The addition of approximately $897.5 million of intangible assets at
PIMCO Advisors which arose on November 4, 1997 as a result of the OpCap
Merger 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.
17
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
COMPARATIVE RESULTS OF OPERATIONS
Calendar 1997 pro forma compared to Calendar 1996 pro forma
PIMCO Holdings realized $66 million as its proportionate share of pro forma
earnings of PIMCO Advisors (approximately 43%) as compared with $45.9 million
pro forma in 1996--an increase of $20.1 million or 43.8%. This increase was
the result of a comparable increase in the net income of PIMCO Advisors,
resulting from a $127.6 million, or 22.5%, pro forma increase in revenues
influenced predominantly by a pro forma 26.1% increase in managed assets as of
the end of the respective periods.
The pro forma increase in managed assets aggregated $41.3 billion, which was
comprised of $16.0 billion of net cash inflows and $25.3 billion of net market
appreciation. There can be no assurances that future cash flows or market
activity will occur at the rates experienced in recent years.
The operating expenses of PIMCO Advisors include compensation and related
costs, which increased a pro forma $54.3 million or 22.2%; other operating
expenses, which increased a pro forma $23.9 million or 21.5% and amortization
of intangibles and restricted units and options, which increased a pro forma
$1.4 million or 1.4%. Compensation and related costs are heavily influenced by
increased revenues because a substantial portion of such costs reflect
participation by key employees in the profitability of the investment advisor
subsidiaries. Other operating costs include occupancy and other costs and tend
to grow at a slower rate than revenues, however, as discussed below under
"PIMCO Advisors L.P. Overview", the implementation of a unified administrative
fee in the PIMCO Funds complex in 1997 resulted in costs previously borne by
the mutual funds directly being borne by the adviser with a corresponding new
revenue.
The amortization of intangibles and restricted units and options in 1996 and
1997 includes a charge of approximately $25.8 million related to the complete
amortization of the intangible value (approximately $80.7 million) of 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 has 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 will be no specific intangible
amortization related to this structure in the future. It is expected,
therefore, that amortization of the remaining intangibles will approximate $80
million annually after 1997. Further, based upon current operating margins,
the federal tax would amount 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.
Historical eight months ended December 31, 1997 compared to the fiscal year
ended April 30, 1997
PIMCO Holdings realized $43.8 million as its proportionate share of the
earnings of its investees during the eight months ended December 31, 1997.
This included $39.8 million representing its approximate 67% ownership of
Oppenheimer Capital through November 30, 1997 and $4.0 million representing
its approximate 24% ownership of PIMCO Advisors for the month of December
1997. Equity in earnings of Oppenheimer Capital for the period included $2.8
million representing the proportionate share of a gain recognized by
Oppenheimer Capital upon the sale of the investment advisory contracts and
business relationships of the Quest for Value Dual Purpose Fund, Inc. to
OppenheimerFunds, Inc. ("OFI"). This compares with fiscal 1997 recorded
results of $52.8 million of equity in earnings of Oppenheimer Capital, which
results also reflected a $1.8 million gain from the sale of the Quest for
Value Funds investment advisory contracts and business relationships to OFI.
These two sales are referred to as the Quest sales. The comparative reduction
in earnings is predominantly due to the shorter relative time frames (seven
months of ownership of Oppenheimer Capital as compared to 12 months of
ownership) offset by increased managed assets during that period. Variances in
interest income, amortization of intangibles and other expenses are all due to
the difference in length of the respective reporting periods.
Net income per unit amounted to $1.70 based upon a weighted average 25.8
million units outstanding.
Comparison of historical fiscal years ended April 30, 1997, 1996 and 1995
PIMCO Holdings recorded equity in earnings of Oppenheimer Capital for the
years ended April 30, 1997, 1996 and 1995 of $52.8 million, $58.1 million and
$31.1 million, respectively. Equity in earnings of
18
<PAGE>
Oppenheimer Capital for the 1997 and 1996 fiscal years included gains
recognized by Oppenheimer Capital on the Quest sales of $1.8 million and $17.7
million, respectively. Equity in earnings of Oppenheimer Capital, excluding
the Quest sales, increased 26.4% to $51.0 million for the year ended April 30,
1997 from $40.4 million for the year ended April 30, 1996, as a result of
higher operating income at Oppenheimer Capital. Equity in earnings of
Oppenheimer Capital, excluding the Quest sales, increased 30.0% for the year
ended April 30, 1996 from $31.1 million for the year ended April 30, 1995,
primarily due to higher operating income at Oppenheimer Capital. Interest
income on the Equities Note for each of the years ended April 30, 1997, 1996
and 1995 totaled $3.2 million.
Amortization of goodwill for each of the years ended April 30, 1997, 1996
and 1995 amounted to $2.6 million. Other expenses consist of New York City
unincorporated business tax ("UBT") computed at a rate of 4% of taxable
income. For the years ended April 30, 1997, 1996 and 1995, New York City UBT
amounted to $132,000, $132,000 and $873,000 respectively. The decline in New
York City UBT in fiscal 1996 reflects a change in the tax law effective on
January 1, 1995. As of that date, New York City UBT is imposed on the total
income of Oppenheimer Capital, and PIMCO Holdings is allowed to claim a credit
for its pro rata share of any New York City UBT paid by Oppenheimer Capital.
Previously, New York City UBT was assessed directly at the PIMCO Holdings
level.
Net income amounted to $53.3 million or $2.06 per unit based on an average
of 25.8 million units outstanding for the year ended April 30, 1997; $58.6
million or $2.28 per unit based on an average of 25.5 million units
outstanding for the year ended April 30, 1996; and $30.8 million or $1.21 per
unit based on an average of 25.3 million units outstanding for the year ended
April 30, 1995. Included in the net income for the years ended April 30, 1997
and 1996 are gains on the Quest sales, which amounted to $1.8 million, or
$.07 per unit and $17.7 million, or $.69 per unit, respectively.
Taxes
PIMCO Holdings is not subject to federal, state, or local income taxes,
which are the obligations of the 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 these
taxes 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 is subject to such taxes.
Liquidity and Capital Resources
PIMCO Holdings is dependent upon the operating cash flow of PIMCO Advisors
(Oppenheimer Capital before November 30, 1997) for its liquidity and capital
resources. The liquidity and capital resources of PIMCO Advisors is discussed
separately below.
For the eight months ended December 31, 1997, PIMCO Holdings declared total
distributions to holders of PIMCO Holdings units of $2.05 per unit, including
$.07 related to the Quest sales. For the years ended April 30, 1997, 1996 and
1995, PIMCO Holdings declared total distributions to holders of PIMCO Holdings
units of $2.10, $1.90 and $1.30 per unit, respectively. The total
distributions for the years ended April 30, 1997 and 1996 included special
distributions of $.06 and $.33, respectively, related to the Quest sales.
PIMCO Holdings' policy is to distribute substantially all of its net cash flow
on an annual basis. Distributions are declared and paid to unitholders of
record within thirty days following the end of each calendar quarter on March
31, June 30, September 30 and December 31 of each year. Because PIMCO
Holdings' sole business is to hold an investment as a general partner of PIMCO
Advisors, the cash flow of PIMCO Holdings consists of distributions from PIMCO
Advisors. The Amended and Restated Agreement of Limited Partnership of PIMCO
Advisors Holdings L.P., as amended (the "PIMCO Holdings Partnership
Agreement") requires the general partner of PIMCO Holdings to declare
quarterly distributions to the record holders of PIMCO Holdings units (the
"Unitholders") in an amount equal to the cash distributions from PIMCO
Advisors, less expenses and reserves. 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 (see "--PIMCO Advisors L.P.--Liquidity and Capital Resources"
and "--Distributions").
19
<PAGE>
PIMCO ADVISORS L.P.
GENERAL
PIMCO Advisors is one of the largest investment management firms in the U.S.
with approximately $200 billion under management at December 31, 1997. 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 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, including 59 or the largest 200 U.S. pension funds. Fixed income
management is led by Pacific Investment Management, 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 45 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-owed 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
trust companies.
PIMCO Advisors' strategy is to increase the amount and diversification of
its assets under management through (i) growth in the institutional market
through providing high levels of client service and entering new markets, (ii)
growth in the retail market by building brand awareness and direct 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.
REVENUES
PIMCO Advisors derives substantially all its revenues and net income from
advisory fees for investment management services provided through its
investment management subsidiaries to its institutional and individual
clients, and advisory, distribution and servicing fees for services provided
to the PIMCO Funds.
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 1997, managed assets increased $89.5 billion. The increase resulted from
the acquisition of Oppenheimer Capital, managing $61.4 billion, as well as
from net new assets from new and existing clients of $12.1 billion and net
market appreciation of $16.0 billion. In 1996 and 1995 net cash inflow of
managed assets amounted to
20
<PAGE>
$6.7 billion and $6.6 billion respectively, while net market appreciation
accounted for $8.1 billion and $16.4 billion respectively of the aggregate
growth in managed assets of $14.8 billion and $23.0 billion, respectively.
There can be no assurances that future cash flows or market activity will
occur at the rates experienced in recent years.
In addition, PIMCO Advisors has certain accounts which are subject to
performance based fee schedules wherein performance relative to the S&P 500
Index or other benchmarks over a particular time period can result in
additional fees. These fees accrue on a quarterly or annual basis, depending
upon the specific investment advisory contract. Quarterly fees generally are
calculated based upon a rolling twelve-month performance result. Annual fees
have historically been weighted towards second and fourth quarter billings
although beginning in 1997 the third quarter reflects certain new annual
account billings. As a result, there is a seasonality to the recognition of
such fees. Such performance based fees can have a significant effect on
revenues, but also provide an opportunity to earn higher fees (or lower fees)
than could be obtained under fee arrangements based solely on a percentage of
assets under management. While no assurances can be given that PIMCO Advisors
will continue to earn any performance fees, such fees have aggregated $31.6
million, $22.5 million, and $19.1 million, or 6.1%, 5.7%, and 5.9% of total
revenues in 1997, 1996 and 1995, respectively.
PIMCO Advisors' principal business units include Pacific Investment
Management, a fixed income manager, Oppenheimer Capital, a value based equity
manager, Columbus Circle Investors ("CCI"), a growth oriented equity manager,
Cadence Capital Management ("Cadence"), a growth oriented equity manager, NFJ
Investment Group ("NFJ"), a value based equity manager, Parametric Portfolio
Associates ("Parametric"), a quantitative based equity manager, and PFD, the
broker dealer distributing the PIMCO Funds. Revenues at each of these entities
are generally dependent upon the average levels of assets managed, and to a
lesser extent, the levels of net assets gathered in the case of PFD.
Accordingly, revenue impacts from growth, or declines, in managed assets are
more noticeable in periods subsequent to the change than in the period of
change itself.
As discussed above, PIMCO Advisors completed the acquisition of Oppenheimer
Capital and its subsidiaries in a two step transaction, wherein an approximate
one-third interest was acquired November 4, 1997 and the remaining interest
was acquired November 30, 1997. Because control of Oppenheimer Capital was
achieved in the first step, the results of Oppenheimer Capital have been
consolidated with those of PIMCO Advisors since November 4, 1997.
In January 1997, PIMCO Advisors restructured its proprietary mutual fund
operations into the single "PIMCO Funds" family of mutual funds. PIMCO Funds
are offered in up to five different share classes: Institutional and
administrative share classes primarily for institutional investors and, for
retail investors, front end load, back-end load and level load share classes.
In the reorganization, PIMCO Funds adopted a "unified fee" structure which has
specified advisory and administrative fees per fund. As a result, PIMCO
Advisors and Pacific Investment Management (and not the PIMCO Funds) bear the
risk of increases in service costs (including those of third-party service
providers such as transfer agents) and will directly benefit from any
decreases in those costs.
INTANGIBLE ASSETS
PIMCO Advisors and its subsidiaries were formed on November 15, 1994, when
Pacific Asset Management LLC (formerly Pacific Financial Asset Management
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"). As described above, PIMCO
Advisors acquired Oppenheimer Capital in the fourth quarter of 1997.
Intangible assets of approximately $284.9 million created by the
Consolidation represent the excess of the purchase price over the fair value
of net tangible assets of TAG LP deemed acquired by PFAMCo Group.
Approximately $80.7 million of the intangible assets represents the value
assigned to PIMCO Advisors MLP structure. Under previous tax law, an MLP was
exempt from federal and most state and local income taxes
21
<PAGE>
through December 31, 1997. As discussed elsewhere, the tax status for publicly
traded partnerships has been extended. However, the value attributed to the
MLP structure has been amortized through the period ended December 31, 1997.
In connection with the acquisition of Oppenheimer Capital in the fourth
quarter of 1997 approximately $897.5 million of intangible assets was
recorded, representing the excess of the purchase price over the fair value of
the net tangible assets acquired. The remainder of all intangibles is being
amortized over the estimated useful life of 20 years.
DISTRIBUTIONS
Net income per unit has historically been computed under the two-class
method which allocates net income to Class A and Class B units in proportion
to the Operating Profit Available for Distribution for each class. Operating
Profit Available for Distribution is defined by PIMCO Advisors partnership
agreement and is computed as the sum of net income plus non-cash charges from
the amortization of intangible assets, non-cash compensation expenses arising
from option and restricted unit plans, and losses of any subsidiary which is
not a flow-through entity for tax purposes. PIMCO Advisors Class A units were
entitled to a priority distribution of $1.88 per unit per year until December
31, 1997. Because of this, the amount of Operating Profit Available for
Distribution allocated to such units has been during some periods greater than
the amount allocated to PIMCO Advisors Class B units. As a result, prior to
1997 the net income allocated per Class A unit was greater than the net income
allocated per Class B unit. In addition, because of the priority distribution,
the initial dilution to net income per unit from the assumed exercise of unit
options was applied entirely to PIMCO Advisors Class B units. However, growth
in both net income and Operating Profit Available for Distribution in 1997
beyond the priority levels has resulted in the allocations of income and
distributions per unit to be equal across all classes. Distributions are
declared and paid to unitholders of record (including PIMCO Holdings) within
thirty days following the end of each calendar quarter. The Class A unit
distribution preference ended with the payment of the distribution for the
fourth quarter of 1997, and on March 1, 1998, all PIMCO Advisors Class B units
were converted into Class A units.
PIMCO Advisors distributes on an annual basis cash in an amount equal to
Operating Profit Available for Distribution (as defined in the Amended and
Restated Agreement of Limited Partnership of PIMCO Advisors L.P. (the "PIMCO
Advisors Partnership Agreement")) less any amount deemed required for capital
expenditures, future payments of indebtedness, as reserves or otherwise in the
business of PIMCO Advisors. In general, the Management Board of PIMCO Advisors
evaluates distribution levels late in the fourth quarter of each year based on
expected year end earnings and the anticipated earnings for the ensuing year.
The Management Board of PIMCO Advisors has set a quarterly distribution rate
of $0.60 per PIMCO Advisors unit for the first three calendar quarters of
1998, which equates to a distribution rate at PIMCO Holdings (after taxes at
PIMCO Holdings) of $0.53 per unit.
Actual distribution levels will depend on the financial performance of PIMCO
Advisors, and there can be no assurance that the stated 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, which are beyond the control of PIMCO Holdings and
PIMCO Advisors. In addition, the general partners of PIMCO Advisors may, in
determining the amount of distributions, deduct any amount from Operating
Profit Available for Distribution the general partners deem may be required
for capital expenditures, reserves or otherwise in the business of PIMCO
Advisors. To the extent PIMCO Advisors or PIMCO Holdings retains profits in
any year, unitholders may have taxable income from PIMCO Holdings that exceeds
their cash distributions.
COMPARATIVE RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
PIMCO Advisors consolidated 1997 revenues, including those of its wholly-
owned distributor, PFD, were $516.7 million, compared to revenues of $392.0
million in 1996. Advisory revenues in this comparison increased
22
<PAGE>
$114.9 million to $453.2 million in 1997. PFD's revenues increased $9.8
million to $63.5 million in 1997. The acquisition of Oppenheimer Capital
during the fourth quarter of 1997 accounts for a portion of the individual
increases in the respective operational line items on a year over year basis.
Most significantly, approximately $39.0 million of revenues, $14.5 million in
compensation and related expenses, and $2.8 million of restricted unit
amortization arose in the post acquisition period. The impact of Oppenheimer
Capital on other cost categories for the post acquisition period was generally
not material because of the short time period involved. In addition to the
revenues from Oppenheimer Capital, for most operating entities revenue
increases resulted from the commitment of new assets primarily by
institutional clients and increases in the market value of existing assets
under management. These increases were further enhanced by an increase in
performance based fees, which amounted to $31.6 million in 1997 as compared to
$22.5 million in 1996. The increase in performance based fees occurred
principally in equity index portfolio products seeking to outperform the S&P
500 Index. CCI continued to experience net outflows of managed assets,
principally in large-cap separate accounts, aggregating $6.1 billion in 1997,
resulting in a decrease in its revenues of $6.1 million or 9.6%.
Compensation and benefit expenses in 1997 of $225.8 million were $52.3
million higher than 1996, reflecting additional staffing at virtually all
subsidiaries, and increased profit sharing at the investment management
subsidiaries due to improved profitability as well as the aforementioned
impact of the Oppenheimer Capital acquisition. The total number of employees
increased from 547 as of December 31, 1996 to 980 as of December 31, 1997,
inclusive of 365 employees at Oppenheimer Capital.
Commission expenses increased by $9.0 million or 23.9% in 1997 as compared
with 1996. 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. Therefore, at any given time, trail and service fee
commissions will be paid on only the mutual fund assets that qualify for such
payments. In 1997, trail and service fee commissions increased to $35.6
million, an increase of $5.3 million or 17.5%, compared to 1996. This increase
is related to an increase in the underlying qualifying assets. Up-front
commissions increased from $7.4 million in 1996 to $11.1 million in 1997, an
increase of $3.7 million or 50.0%. This is a result of increases in total
sales volume and the mix of share classes sold.
Restricted unit and option plan costs increased $3.0 million, or 58.6% from
1996. This is predominantly due to the award of restricted units in the
Oppenheimer Capital acquisition that will result in an annual charge of
approximately $14 million in this cost category over the five year vesting
period. Coupled with existing charges to this line item, the 1998 charge is
expected to aggregate approximately $24.4 million.
Marketing and promotional costs increased $5.6 million or 51.1% in 1997
compared to 1996. Increases commensurate with increased activities occurred at
most entities, including the effects of Oppenheimer Capital of approximately
$1.4 million. In addition, the retail fund complex adopted a unified
administrative fee structure in 1997 which results in costs previously borne
directly by the funds to be borne by the advisor with a concurrent revenue
received by the advisor. The majority of those newly borne costs are reflected
in the marketing and promotional and general and administrative cost
categories.
Occupancy and equipment costs increased $2.6 million or 28.3% in 1997
compared to 1996. The increase relates to increased depreciation of equipment
and inflationary facilities cost increases at all entities, as well as the
impact of Oppenheimer Capital of approximately $1.5 million during the period
following the acquisition.
General and administrative costs increased $9.8 million or 55.5% in 1997
compared to 1996. As noted above, the retail fund complex adopted a fixed
administrative fee basis in 1997 resulting in increases to this cost category
for expenses previously borne directly by the funds.
23
<PAGE>
Other expense includes such items as interest expense, consulting costs,
reimbursement agreements and other, and reflects a net increase of $4.5
million in 1997 compared to 1996. Interest expense on debt assumed in the
Oppenheimer Capital acquisition of approximately $2 million, as well as
increased activities at PIMCO Advisors related to acquisition analysis, and
generally expanded activities at all of the operating subsidiaries accounts
for this increase.
Amortization of intangibles increased $7.5 million due to the intangibles
created in the Oppenheimer Capital acquisition. The future annual charges
associated with those intangible assets are expected to approximate
$45 million. However, as noted earlier, the completed amortization of the
originally established intangible asset allocable to the MLP status of PIMCO
Advisors will result in other intangible amortization reducing to
approximately $10 million annually commencing in 1998, for a future aggregate
annual charge of approximately $55 million.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
PIMCO Advisors consolidated 1996 revenues, including those of its wholly-
owned distributor, PFD, were $392.0 million, compared to revenues of $323.0
million in 1995. Advisory revenues in this comparison increased $56.7 million
to $338.3 million in 1996. PFD's revenues increased $12.3 million to $53.7
million in 1996. Revenue increases resulted from the commitment of new assets
primarily by institutional clients and increases in the market value of
existing assets under management. These increases were further enhanced by an
increase in performance based fees, which amounted to $22.5 million in 1996 as
compared to $19.1 million in 1995. The increase in performance based fees
occurred principally in fixed income portfolio products seeking to outperform
relative benchmarks.
Compensation and benefit expenses in 1996 of $173.5 million were $24.4
million higher than 1995, reflecting additional staffing at virtually all
subsidiaries, and increased profit sharing at the investment management
subsidiaries due to improved profitability. The total number of employees
increased 5.0% from 521 as of December 31, 1995 to 547 as of December 31,
1996.
Commission expenses increased by $9.0 million or 31.3% in 1996 as compared
with 1995. In 1996, trail and service fee commissions increased to $30.3
million, an increase of $6.1 million or 25.2%, compared to 1995. This increase
is related to an increase in the underlying qualifying assets. Up-front
commissions increased from $4.5 million in 1995 to $7.4 million in 1996, an
increase of $2.9 million or 64.4%. This is a result of increases in total
sales volume and the mix of share classes sold.
Marketing and promotional costs increased $1.9 million or 20.9% in 1996
compared to 1995. This increase occurred at most entities, but primarily at
PFD and Pacific Investment Management. At PFD, increased mutual fund share
sales correlate to the increase. At Pacific Investment Management, increased
travel costs comprise the majority of the increase.
General and administrative costs increased $6.2 million or 54.4% in 1996
compared to 1995. Pacific Investment Management converted its institutional
fund family to a fixed administrative fee basis in October 1995 resulting in
increases to this cost category for expenses previously borne directly by the
funds. There is a corresponding increase in revenues related to this
conversion. These incremental costs account for approximately $6.0 million of
the increase.
Professional fees increased $2.3 million or 71.9% in 1996 compared to 1995.
This increase resulted primarily from the costs associated with the
restructuring of the three mutual fund "families" in December of 1996.
Other expense includes such items as consulting costs, reimbursement
agreements and other, and reflects a net increase of $2.6 million in 1996
compared to 1995. This increase is comprised principally of lower levels of
reimbursement under agreements with Pacific Life that became effective in
November 1994.
24
<PAGE>
Amortization of intangibles, options and restricted units decreased $1.5
million principally due to the accelerated vesting in 1995 of outstanding
options and restricted units for certain employees terminating during 1995.
Liquidity and Capital Resources
PIMCO Advisors business has not historically been capital intensive. In
general, working capital requirements have been satisfied out of operating
cash flow or short-term borrowings. PIMCO Advisors will make quarterly profit-
sharing payments to employees and distributions to its unitholders. PIMCO
Advisors may need to finance profit sharing payments using short-term
borrowings.
PIMCO Advisors had approximately $67.9 million of cash and cash equivalents
and short-term investments at December 31, 1997 compared to approximately
$52.8 million at December 31, 1996, and compared to approximately $46.5
million at December 31, 1995. The increases were due to the timing of payment
of certain liabilities offset by the funding of "B" Share commissions to
brokers. "B" Shares involve the payment of commissions to the selling broker
by the distributor at the time of sale of mutual fund shares. Through deferred
sales charges to the investor, or 12-b1 plans with the mutual fund, these
"front-end" commissions are recouped by the distributor over a period of
years. PIMCO Advisors excess liquidity, after distributions to its
unitholders, is used for general corporate purposes including profit-sharing
payments and brokers' commissions on sales of mutual fund shares distributed
without a front-end sales load. To the extent that the level of such
commissions may increase due to the introduction of new products and mutual
fund pricing structures, an alternate financing source may be needed. However,
PIMCO Advisors has made no decision as to the source or necessity of such
financing.
PIMCO Advisors distributes substantially all of its Operating Profit
Available for Distribution, after appropriate reserves, to its partners.
Distributions have been paid quarterly, in arrears, on the units outstanding
to unitholders of record on the thirtieth day of the first month following
each quarter-end. Effective December 31, 1997, such distributions are payable
to unitholders of record on the last day of the quarter. Distribution
declarations in 1997 were $2.570 for the PIMCO Advisors Class A limited and
general partner units and $2.564 for the PIMCO Advisors Class B limited
partner units. These amounts reflect Operating Profit Available for
Distribution for the fourth quarter of 1996 and the four quarters of 1997. The
declaration of $.58 per unit for all classes related to the fourth quarter of
1997 was payable subsequent to year end. Actual cash distributions per unit in
1996 were $1.88 for the PIMCO Advisors Class A limited and general partner
units and were $1.658 for the PIMCO Advisors Class B limited partner units.
These amounts reflect Operating Profit Available for Distribution for the
fourth quarter of 1995 and for the first three quarters of 1996. The Class A
unit distribution preference ended with the payment of the distribution for
the fourth quarter of 1997, and on March 1, 1998, all PIMCO Advisors Class B
units were converted into Class A units.
PIMCO Advisors assumed $230.0 million of 6% exchangeable debt in connection
with the Oppenheimer Capital acquisition in November 1997. In December of
1997, $146.9 million of that debt was exchanged for Class A units at a rate of
$33 1/3 per unit. The remaining $83.1 million of such debt is expected to be
exchanged for units on the same terms upon the expiration of certain tax
contingencies over the next 6 to 7 years. In November 1997, PIMCO Advisors
amended its April 1996, four year revolving line of credit to increase the
available amount for working capital purposes from $25 million to $75 million.
As of year end, $30 million was outstanding under this facility. PIMCO
Advisors is currently negotiating an expanded, syndicated five year revolving
credit facility, expected to be finalized early in 1998.
ECONOMIC AND OTHER 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. In addition, general market conditions, or
corrections in the equity markets could also have a
25
<PAGE>
material impact on the operations of PIMCO Advisors. PIMCO Advisors advisory
business is generally not capital intensive and therefore any effect of
inflation, other than on interest rates, is not expected to have a significant
impact on its operations or financial condition. Client responses to the
economy, including decisions as to the amount of assets deposited may also
impact the operations of PIMCO Advisors. Any resulting revenue fluctuations
may or may not be recoverable in the pricing of services offered by PIMCO
Advisors.
During 1997, assets under management for PIMCO Advisors and its
subsidiaries, excluding the impact of Oppenheimer Capital, increased $28.1
billion. During 1996 and 1995, assets under management for PIMCO Advisors and
its subsidiaries increased $14.8 billion and $23.0 billion, respectively.
While net cash inflows in 1997, 1996 and 1995 for PIMCO Advisors, as a whole,
were significant ($12.1 billion in 1997, $6.7 billion 1996 and $6.6 billion in
1995), CCI experienced substantial net cash outflows in the same periods
(including $6.1 billion in 1997) predominantly from its "large cap" separate
account clients, attributable in large part to underperformance measured
against relevant benchmarks. As of December 31, 1997, "large cap" separate
accounts at CCI aggregated approximately $1.6 billion.
PIMCO Advisors and its subsidiaries are aware of and addressing the issues
surrounding technology and the year 2000. The major subsidiaries have made
most internal modifications and the remaining systems to be tested and or
modified are not expected to result in any material cost or impact on
operations.
26
<PAGE>
OPPENHEIMER CAPITAL
OVERVIEW
Oppenheimer Capital's results of operations include those of its
institutional investment management business and those of its subsidiary
entities; OpCap Advisors, OCC Distributors ("Distributors"), Oppenheimer
Capital Limited, Oppenheimer Capital Trust Company ("Opcap Trust"), and 225
Liberty Street Advisers, L.P., formerly AMA Investment Advisers, L.P. ("AMA
Advisers"). The results for the year ended April 30, 1997 also include
Saratoga Capital Management ("Saratoga"), which was sold on April 29, 1997.
For the periods presented, Oppenheimer Capital's operations have been
characterized by substantial increases in assets under management. This growth
has been from four principal sources. First, new clients have entered into
investment management agreements and existing clients have added funds to
their accounts under management, offset in part by net outflows from
institutional accounts. Second, rising securities price levels have increased
the market values of investment portfolios. Third, mutual funds and variable
annuities managed by OpCap Advisors have added to assets under management due
to increased sales and market appreciation. Fourth, wrap fee assets have
increased due to new accounts opened, expanded distribution to broker-dealers
and market appreciation. The growth in assets under management has been
tempered by Oppenheimer Capital's withdrawal from the low fee rate option
management business in fiscal 1996 in order to concentrate on businesses
offering higher returns. For the periods presented, the option management
business had no material effect on revenues or profitability. Revenues are
generally derived from charging a fee based on the net assets of clients'
portfolios. Revenues for all periods presented consist principally of
investment management fees.
In fiscal 1996, Oppenheimer Capital began to implement a strategic decision
to withdraw from selling directly to the retail market, and to instead market
directly to institutions with strong retail distribution capabilities. In
November 1995, Oppenheimer Capital withdrew from the open-end mutual fund
distribution business (see "Gain on Quest Sale" below) and began to eliminate
retail operations at AMA Advisers, completing this process in the first
quarter of fiscal 1997. Oppenheimer Capital also reduced the losses incurred
by Saratoga throughout fiscal 1997, and during the fourth quarter of fiscal
1997 sold its interest in Saratoga. Additionally, Oppenheimer Capital
terminated the distribution of unit investment trusts during the fourth
quarter of fiscal 1997.
The value of total assets under management increased 19.9% to $61.4 billion
at December 31, 1997 from $51.2 billion at April 30, 1997. For eight months
ended December 31, 1997, assets under management for separately managed
accounts increased 12.9% to $37.5 billion, mutual fund and other commingled
products increased 32.9% to $16.0 billion, and wrap fee accounts increased
31.8% to $7.9 billion. The growth of separately managed accounts was tempered
by net outflows from existing accounts as clients rebalanced their portfolios
and shifted equity assets to other asset classes.
The value of total assets under management increased 26.3% to $51.2 billion
at April 30, 1997 from $40.6 billion at April 30, 1996. The growth of assets
under management was tempered by the loss of $530 million in mutual fund
assets as a result of the closed-end Quest for Value Dual Purpose Fund
redeeming all income fund shares and converting to an open end fund. For the
year ended April 30, 1997, assets under management for separately managed
accounts increased 18.1% to $33.2 billion, mutual fund and other commingled
products increased 33.4% to $12.0 billion, and wrap fee accounts increased
73.7% to $6.0 billion.
The value of total assets under management increased 27.6% to $40.6 billion
at April 30, 1996 from $31.8 billion at April 30, 1995. The growth of assets
under management was tempered by the loss of $1.5 billion in option management
accounts with a low effective fee rate and a reduction of $300 million in
fixed income mutual fund assets as a result of the Quest sale. For the year
ended April 30, 1996, assets under management for separately managed accounts
increased 25.8% to $28.1 billion from $22.3 billion, mutual fund and other
commingled products increased 43.9% to $9.0 billion from $6.3 billion, and
wrap fee accounts increased 92.3% to $3.5 billion from $1.8 billion.
27
<PAGE>
GAIN ON QUEST SALE
On November 22, 1995, Oppenheimer Capital completed the Quest sale to OFI,
which is unrelated to Oppenheimer Capital, for an initial purchase price
payment of $41.7 million. In December 1996, a deferred purchase price payment
of $3.8 million was received by Oppenheimer Capital as a result of the assets
of the six merged fixed income funds being at stated levels. The gains on the
sale, before New York City UBT and minority interest, amounted to $2.8 million
for the year ended April 30, 1997, and $27.7 million for the year ended
April 30, 1996.
Total assets of the twelve funds were $1.7 billion at November 21, 1995. The
six equity funds involved, representing $1.4 billion of those assets, continue
to be managed by Advisors under a subadvisory contract with OFI, which allows
the current portfolio management teams to remain in place. The six equity
funds were renamed the Oppenheimer Quest for Value funds (the "Quest funds").
The six fixed income funds, representing approximately $300 million of those
assets, were merged into comparable funds managed by OFI.
The overall impact of the Quest sale on Oppenheimer Capital's results has
been highly positive. Although the fee rate as a subadviser is less than the
previous fee rate, assets in the six equity funds have increased more than
fourfold to $6.7 billion at January 31, 1998 as a result of the extensive
distribution capabilities of OFI and market appreciation. In addition,
Oppenheimer Capital has eliminated distribution expenses related to these
funds. Reflecting the impact of these various factors, the profitability of
Oppenheimer Capital's mutual fund business has increased since the Quest sale.
Oppenheimer Capital implemented a portion of the mutual fund distribution
cost savings prior to the close of the Quest sale, and results for the quarter
ended April 30, 1996 reflected those savings. In addition, as a result of the
sale, significant expenditures that would have been made in systems,
technology, sales and marketing capabilities, and new product development have
not been necessary.
On January 31, 1997, the closed-end Quest for Value Dual Purpose Fund (the
"Dual Purpose Fund") redeemed all of its income shares as required by its
Articles of Incorporation, and on February 28, 1997, the Fund converted to an
open-end fund. The investment contracts and other business relationships were
sold to OFI (the "Dual Purpose Fund sale"), and OpCap Advisors now serves as
subadviser to the Dual Purpose Fund under an agreement with OFI. The
subadvisory fee is significantly lower than the management fee previously
earned by Oppenheimer Capital. Annual subadvisory fees related to the Dual
Purpose Fund are expected to approximate $1.0 million annually, while
Oppenheimer Capital received $5.0 million of investment management fees for
the fiscal year ended April 30, 1997.
On July 18, 1997, Oppenheimer Capital received an initial payment of $7.0
million related to the Dual Purpose Fund sale, and recorded a pre-tax gain of
$4.4 million
COMPARATIVE RESULTS OF OPERATIONS
As a result of the change in the year end to a calendar year end, the period
ended December 31, 1997 is only eight months, a 33% shorter time frame than
all other periods being compared. Therefore, revenue, expense and net income
generally show overall decreases as a result of the shorter time period ended
December 31, 1997 compared to the year ended April 30, 1997, while generally
showing annualized increases.
Operating Revenues--Eight Months Ended December 31, 1997 and Years Ended
April 30, 1997, 1996 and 1995
Total operating revenues decreased 18.2% for eight months (a 33% shorter
time frame) ended December 31, 1997 to $148.9 million from $182.0 million for
the year ended April 30, 1997, increased 15.0% for the year ended April 30,
1997 from $158.2 million for the year ended April 30, 1996 and increased 21.8%
for the year ended April 30, 1996 from $129.9 million for the year ended April
30, 1995. Total operating revenues include investment management fees, net
distribution assistance and commission income, and interest and dividends.
28
<PAGE>
Investment management fees decreased 17.6% to $144.8 million for the eight
months ended December 31, 1997 from $175.8 million for the year ended April
30, 1997. This decrease is due to the eight month period being compared to a
twelve month period, and was offset in part by a 27.6% increase in average
assets under management, which increased to $58.4 billion for the eight months
ended December 31, 1997 compared to $45.8 billion for the year ended April 30,
1997.
Investment management fees increased 16.2% to $175.8 million for the year
ended April 30, 1997 from $151.3 million for the year ended April 30, 1996.
This increase is a result of average assets under management increasing 24.7%
to $45.8 billion for the year ended April 30, 1997 from $36.7 billion for the
year ended April 30, 1996. Investment management fee revenue grew less than
assets under management due to the lower subadvisory fee rates earned on the
Quest funds than the advisory fee rate prior to the Quest sale. These lower
fee rates were more than offset by asset growth for these funds and the
elimination of mutual fund distribution expenses. Annual subadvisory fees
would be $19.3 million, based on assets under management at January 31, 1998
and current fee arrangements--higher than the previous $15.7 million of annual
fees for the twelve Quest for Value Funds at November 22, 1995. Assets in the
six equity funds have increased more than fourfold to $6.7 billion at January
31, 1998 from $1.4 billion on November 22, 1995, reflecting record fund sales
and market appreciation.
In addition, investment management fee revenue grew less than the increase
in assets under management due to a decline in performance fees earned in
fiscal 1997 to $1.2 million from $3.0 million in fiscal 1996. These decreases
were offset in part by investment management fees increasing due to higher fee
realizations resulting from a continued shift in the asset mix toward higher
effective fee rate businesses such as variable annuities and wrap fee
accounts.
Investment management fees increased 26.9% for the year ended April 30, 1996
from $119.2 million for the year ended April 30, 1995, primarily as a result
of average assets under management increasing 23.8% for the year ended April
30, 1996 from $29.7 billion for the year ended April 30, 1995. This increase
also reflects higher fee realizations as a result of a shift in the asset mix
toward higher fee rate businesses including mutual funds, variable annuities
and wrap fee accounts, and the withdrawal from the option management business,
which had very low fee rates. Offsetting the increase in part was the lower
fee rate earned subadvising the Quest funds as a result of the Quest sale.
Net distribution assistance and commission income decreased 39.1% to $3.0
million for the eight months ended December 31, 1997 from $4.9 million for the
year ended April 30, 1997. This decrease is primarily due to eight months
being compared to twelve months, as well as lower unit investment trust
commission income as Oppenheimer Capital exited this business in April 1997.
Net distribution assistance and commission income decreased 18.9% for the
year ended April 30, 1997 from $6.1 million for the year ended April 30, 1996.
This decrease reflects reduced commission and distribution income as a result
of the Quest sale and lower unit investment trust commission income due to
reduced demand for fixed income unit investment trusts. This decrease was
offset in part by a $1.3 million increase in certificate of deposit commission
income as a result of increased demand for funds by banks.
Net distribution assistance and commission income decreased 42.1% for the
year ended April 30, 1996 from $10.4 million for the year ended April 30, 1995
primarily as a result of a $3.5 million decline in certificate of deposit
commission income as a result of lower demand for funds by banks, decreased
unit investment trust commission income, and reduced commission and
distribution income as a result of the Quest sale in November 1995.
Interest and dividend income decreased 7.6% to $1.2 million for the eight
months ended December 31, 1997 from $1.3 million for the year ended April 30,
1997. This decrease is due to the comparison of eight months to twelve months
which was offset in part by higher average cash balances.
29
<PAGE>
Interest and dividend income increased 39.7% for year ended April 30, 1997
from $.9 million for the year ended April 30, 1996. This increase can be
attributed to higher average cash balances.
Interest and dividend income increased to $.9 million for the year ended
April 30, 1996 from $275,000 for the year ended April 30, 1995. This increase
can be primarily attributed to the interest earned on the proceeds received
from the Quest sale.
Operating Expenses--Eight Months Ended December 31, 1997, and Years Ended
April 30, 1997, 1996 and 1995
Total operating expenses decreased 18.5% for the eight months (a 33% shorter
time frame) ended December 31, 1997 to $84.0 million from $103.1 million for
the year ended April 30, 1997, increased 7.9% for the year ended April 30,
1997 from $95.6 million for the year ended April 30, 1996 and increased 15.0%
for the year ended April 30, 1996 from $83.1 million for the year ended April
30, 1995.
Oppenheimer Capital's most significant expense category is compensation and
benefits, which includes salaries, bonuses, sales commissions, incentive
compensation and other payroll related expenses. Compensation and benefits
expenses decreased 14.6% to $66.3 million for the eight months ended December
31, 1997 from $77.7 million for the year ended April 30, 1997, increased 12.9%
for the year ended April 30, 1997 from $68.8 million for the year ended April
30, 1996 and increased 24.2% for the year ended April 30, 1996 from $55.4
million for the year ended April 30, 1995. For the eight months ended December
31, 1997 compared to the year ended April 30, 1997, the decrease was due to
the shorter time period which was offset by the following increases: For the
eight month period and for both years, compensation and benefits increased
primarily due to higher incentive compensation costs due to increased new
business, higher operating profits and increased participation by key
executives in incentive compensation plans as a result of industry competitive
pressures and their individual contributions to firm profitability. In
addition, compensation and benefits expense increased due to staff salary
increases and additions to staff to support expanding businesses. These
increases were offset in part by significant staff reductions at OCC
Distributors, AMA Advisers, and in mutual fund accounting in fiscal 1996 with
most staff reductions occurring after the Quest sale in November 1995. In
fiscal 1997, staff size was reduced as a result of the sale of Oppenheimer
Capital's 50% interest in Saratoga and the termination of the unit investment
trust distribution effort during the fourth fiscal quarter. Reflecting these
reductions, staff size declined to 344 at April 30, 1997 from 348 at April 30,
1996, and from 417 at April 30, 1995.
Occupancy expense decreased 28.3% for the eight months December 31, 1997 to
$4.7 million from $6.6 million for the year ended April 30, 1997, decreased
4.4% for the year ended April 30, 1997 from $6.9 million for the year ended
April 30, 1996 and increased 6.8% for the year ended April 30, 1996 from
$6.4 million for the year ended April 30, 1995. The decrease for the eight
month period ending December 31, 1997 reflects the shorter time period
involved, as well as adjustments made to rent escalation accruals during the
period. The decrease for the year ended April 30, 1997 reflects reduced rent
expense as a result of the termination of leases at AMA Advisers as well as
adjustments made to rent escalation accruals during the fiscal year. For the
year ended April 30, 1996, the increase was attributable to increased
amortization expense relating to leasehold improvements and increased
equipment rental costs.
Oppenheimer Capital subleases a portion of its space at the Oppenheimer
Tower, World Financial Center, from CIBC Oppenheimer Corp. ("Opco"), a former
affiliated broker-dealer, paying a pro rata share of Opco's lease payments,
based on the percentage of total space leased. Oppenheimer Capital is
currently reviewing its space needs to house its growing business.
General and administrative expenses decreased 29.9% for the eight months
ended December 31, 1997 to $8.8 million from $12.5 million for the year ended
April 30, 1997, increased 1.6% for the year ended April 30, 1997 from $12.3
million for the year ended April 30, 1996 and increased 15.4% for the year
ended April 30, 1996 from $10.7 million for the year ended April 30, 1995. The
decrease in general and administrative expenses in the eight month period
ended December 31, 1997 compared to the year ended April 30, 1997 is due to
the
30
<PAGE>
shorter time period involved, and was partially offset by increased
investments in computer technology described below. The rate of growth of
general and administrative expenses slowed in fiscal 1996 and continued in
fiscal 1997 as Oppenheimer Capital realized cost savings from the Quest sale
and cost reductions at AMA Advisers. As a result of the Quest sale in November
1995, Oppenheimer Capital was able to eliminate all of its outstanding bank
loans and related interest expense. Offsetting these reductions in both fiscal
1997 and 1996 were increased costs incurred in connection with the development
of new businesses and increased investments in computer equipment and software
as a result of increased technical support for professional and administrative
staff and higher professional services expense due to the expansion of
Oppenheimer Capital's business.
Promotional expenses decreased 34.1% for the eight months ended December 31,
1997 to $4.2 million from $6.3 million for the year ended April 30, 1997;
decreased 16.7% for the year ended April 30, 1997, from $7.6 million for the
year ended April 30, 1996 and decreased 28.3% for the year ended April 30,
1996 from $10.6 million for the year ended April 30, 1995. The decrease in
promotional expenses for the eight months ended December 31, 1997 compared to
the year ended April 30, 1997 was due to the shorter time period involved. The
decrease in promotional expenses for both fiscal years was due primarily to a
reduction in expenses incurred by OCC Distributors as a result of the
elimination of the open-end mutual fund distribution effort, and the retail
operations of AMA Advisers, and was offset in part by increased expenses in
Oppenheimer Capital's new businesses due to increased travel and entertainment
expenses as a result of new business activities. In addition, promotional
expenses decreased in fiscal 1997 due in part to decreased promotional
activities at Saratoga.
Operating Income--Eight Months Ended December 31, 1997 and Years Ended April
30, 1997, 1996 and 1995
Operating income decreased 17.6% for the eight months (a 33% shorter time
frame) ended December 31, 1997 to $65.0 million from $78.1 million for the
year ended April 30, 1997; increased 25.9% for the year ended April 30, 1997
from $62.7 million for the year ended April 30, 1996 and increased 33.8% for
the year ended April 30, 1996 from $46.8 million for the year ended April 30,
1995. For the eight months ended December 31, 1997, the operating profit
margin rose to 43.6% from 43.4% for the year ended April 30, 1997; for the
year ended April 30, 1997, the operating profit margin expanded from 39.6% for
the year ended April 30, 1996; and in the year ended April 30, 1996, the
operating profit margin increased from 36.1% for the year ended April 30,
1995. Operating income decreased for the eight months ended December 31, 1997
compared to the year ended April 30, 1997 due to the shorter time period
involved while operating profit margins continued to improve. The increase in
operating income and operating profit margins for all annualized periods
presented is due to rising securities price levels, strong new business growth
and the resultant revenue increase combined with Oppenheimer Capital
controlling the rate of expense growth. In both fiscal 1997 and fiscal 1996,
the operating revenue growth rate exceeded the operating expense growth rate.
This was accomplished primarily from the decision to withdraw from the mutual
fund distribution business (the Quest sale), which was completed in the final
quarter of fiscal 1996, and the suspension of retail sales activities at AMA
Advisers. This process, which began in fiscal 1996, was completed in the first
quarter of fiscal 1997. In addition, losses from Saratoga were reduced to $1.4
million in fiscal 1997 from $2.5 million in fiscal 1996, and during the fourth
quarter of fiscal 1997, Oppenheimer Capital sold its 50% interest in Saratoga.
Taxes
Oppenheimer Capital is not subject to federal, state, or local income taxes,
which are the obligations of the individual partners. Oppenheimer Capital was,
however, subject to New York City UBT of $3.0 million, $3.2 million, $3.6
million and $1.2 million, respectively, for the eight months ended December
31, 1997 and for the years ended April 30, 1997, 1996 and 1995. The decrease
in New York City UBT expense for the eight month period ended December 31,
1997 compared to the fiscal year ended April 30, 1997 is due to the shorter
time period involved , and was offset in part by the gain recorded on the Dual
Purpose Fund sale. The decrease in New York City UBT expense in fiscal 1997
compared to fiscal 1996 is due to a decline in net income in fiscal 1997 as a
result of the $27.7 million gain recorded for the Quest sale in fiscal 1996,
compared with the $2.8 million gain in fiscal 1997. This decline was offset in
part by higher operating income in fiscal 1997 than in fiscal 1996.
31
<PAGE>
The increase in New York City UBT expense in fiscal 1996 from fiscal 1995
was due to a change in the tax law effective January 1, 1995 imposing taxes on
the total income of Oppenheimer Capital and allowing PIMCO Holdings a credit
for its pro rata share of any New York City UBT paid by Oppenheimer Capital.
Prior to January 1, 1995, New York City UBT was assessed directly at PIMCO
Holdings. A second reason for the increase was Oppenheimer Capital's higher
earnings, including the gain realized on the Quest sale.
A corporate subsidiary of Oppenheimer Capital is subject to federal, state
and local income taxes. A foreign corporate subsidiary is subject to taxes in
the foreign jurisdiction in which it is located.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
PIMCO ADVISORS HOLDINGS L.P.
Report of Independent Accountants.................................... 34
Statements of Financial Condition as of December 31, 1997, April 30,
1997 and 1996....................................................... 35
Statements of Operations for the eight months ended December 31, 1997
and for the years ended April 30, 1997, 1996 and 1995............... 36
Statements of Changes in Partners' Capital for the eight months ended
December 31, 1997 and for the years ended April 30, 1997, 1996 and
1995................................................................ 37
Statements of Cash Flows for the eight months ended December 31, 1997
and for the years ended April 30, 1997, 1996 and 1995............... 38
Notes to Financial Statements........................................ 39
PIMCO ADVISORS L.P.
Report of Independent Accountants.................................... 46
Independent Auditors' Report......................................... 47
Consolidated Statements of Financial Condition as of December 31,
1997 and 1996....................................................... 48
Consolidated Statements of Operations for the years ended December
31, 1997, 1996 and 1995............................................. 49
Consolidated Statements of Changes in Partners' Capital for the years
ended December 31, 1997, 1996 and 1995.............................. 50
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995............................................. 52
Notes to Consolidated Financial Statements........................... 53
OPPENHEIMER CAPITAL
Report of Independent Accountants.................................... 65
Consolidated Statements of Financial Condition as of December 31,
1997, April 30, 1997 and 1996....................................... 66
Consolidated Statements of Operations for the eight months ended
December 31, 1997 and for the years ended April 30, 1997, 1996 and
1995................................................................ 67
Consolidated Statements of Changes in Partners' Capital for the eight
months ended December 31, 1997 and for the years ended April 30,
1997, 1996 and 1995................................................. 68
Consolidated Statements of Cash Flows for the eight months ended
December 31, 1997 and for the years ended April 30, 1997, 1996 and
1995................................................................ 69
Notes to Consolidated Financial Statements........................... 70
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Board and Partners of
PIMCO Advisors Holdings L.P.
In our opinion, the accompanying statements of financial condition and the
related statements of operations, of changes in partners' capital and of cash
flows present fairly, in all material respects, the financial condition of
PIMCO Advisors Holdings L.P., formerly Oppenheimer Capital, L.P. (the
"Partnership") at December 31, 1997, April 30, 1997 and April 30, 1996, and
the results of its operations and its cash flows for the eight month period
ended December 31, 1997 and for each of the three years in the period ended
April 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
Los Angeles, California
January 30, 1998
34
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
APRIL 30,
DECEMBER 31, -----------------
1997 1997 1996
------------ -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 15,522 $ 91 $ 35
Distribution receivable....................... 15,172 17,090 11,950
Other current assets.......................... 15 608 666
-------- -------- --------
Total current assets........................ 30,709 17,789 12,651
Investment in operating partnership............. 408,137 26,796 23,362
Note receivable................................. -- 32,193 32,193
Intangible assets--Net of accumulated
amortization of $25,388 and $22,800............ -- 39,305 41,893
Other non current assets........................ 118 66 --
-------- -------- --------
TOTAL ASSETS.................................... $438,964 $116,149 $110,099
======== ======== ========
<CAPTION>
LIABILITIES
<S> <C> <C> <C>
Distribution payable............................ $ 15,112 $ 17,858 $ 12,713
Other current liabilities....................... 15,515 -- --
-------- -------- --------
TOTAL LIABILITIES............................... 30,627 17,858 12,713
-------- -------- --------
PARTNERS' CAPITAL
General Partner................................. 41 996 987
Limited Partners (45,531,586; 25,673,889 and
25,475,967 units issued and outstanding)....... 408,296 97,295 96,399
-------- -------- --------
TOTAL PARTNERS' CAPITAL......................... 408,337 98,291 97,386
-------- -------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL......... $438,964 $116,149 $110,099
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS FOR THE YEARS ENDED
ENDED APRIL 30,
DECEMBER 31, -----------------------
1997 1997 1996 1995
------------ ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER
UNIT AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Equity in earnings of operating
partnerships:
Operating earnings.................... $41,036 $51,022 $40,359 $31,054
Gain on Quest sales................... 2,809 1,800 17,734 --
------- ------- ------- -------
Total equity in earnings of operating
partnerships......................... 43,845 52,822 58,093 31,054
Interest................................ 1,892 3,224 3,223 3,228
------- ------- ------- -------
Total revenues...................... 45,737 56,046 61,316 34,282
------- ------- ------- -------
EXPENSES:
Amortization of intangible assets....... 1,517 2,588 2,588 2,588
Other................................... 88 132 132 873
------- ------- ------- -------
Total expenses...................... 1,605 2,720 2,720 3,461
------- ------- ------- -------
NET INCOME................................ $44,132 $53,326 $58,596 $30,821
======= ======= ======= =======
BASIC NET INCOME PER UNIT................. $ 1.70 $ 2.06 $ 2.28 $ 1.21
======= ======= ======= =======
DILUTED NET INCOME PER UNIT............... $ 1.68 $ 2.04 $ 2.27 $ 1.21
======= ======= ======= =======
DISTRIBUTIONS DECLARED PER UNIT........... $ 2.05 $ 2.10 $ 1.90 $ 1.30
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
GENERAL ------------------- PARTNERS'
PARTNER UNITS AMOUNTS CAPITAL
------- ---------- -------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
BALANCES AT MAY 1, 1994................. $ 892 25,122,092 $ 86,905 $ 87,797
Net income............................ 308 30,513 30,821
Distributions declared................ (332) (32,923) (33,255)
Amortization of restricted unit
compensation expense................. 8 851 859
Capital contributions................. -- 156,426 90 90
----- ---------- -------- --------
BALANCES AT APRIL 30, 1995.............. 876 25,278,518 85,436 86,312
Net income............................ 586 58,010 58,596
Distributions declared................ (489) (48,416) (48,905)
Amortization of restricted unit
compensation expense................. 11 1,127 1,138
Capital contributions................. 3 197,449 242 245
----- ---------- -------- --------
BALANCES AT APRIL 30, 1996.............. 987 25,475,967 96,399 97,386
Net income............................ 533 52,793 53,326
Distributions declared................ (543) (53,790) (54,333)
Amortization of restricted unit
compensation expense................. 15 1,476 1,491
Capital contributions................. 4 197,922 417 421
----- ---------- -------- --------
BALANCES AT APRIL 30, 1997.............. 996 25,673,889 97,295 98,291
Net income............................ 355 43,777 44,132
Distributions declared................ (413) (68,481) (68,894)
Amortization of restricted unit
compensation expense................. 22 2,236 2,258
Revaluation of Partners' Capital upon
receipt of interests in PIMCO
Advisors L.P......................... 14 139,391 139,405
Reduction of general partner's
interest from 1% to .01%............. (942) 257,774 942 --
Capital contributions................. 9 118,529 891 900
Contribution of investment in PIMCO
Advisors L.P. by public holders...... -- 19,481,394 192,245 192,245
----- ---------- -------- --------
BALANCES AT DECEMBER 31, 1997........... $ 41 45,531,586 $408,296 $408,337
===== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS FOR THE YEARS ENDED APRIL
ENDED 30,
DECEMBER 31, ----------------------------
1997 1997 1996 1995
------------ -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income......................... $ 44,132 $ 53,326 $ 58,596 $ 30,821
Adjustments to reconcile net income
to net cash provided
by operating activities:
Distributions received greater
than (less than) the
equity in earnings of operating
partnerships.................... 9,997 (6,662) (14,677) (60)
Amortization of intangibles...... 1,517 2,588 2,588 2,588
Change in operating assets and
liabilities:
Change in other assets......... 541 (8) (19) (109)
-------- -------- -------- --------
Net cash provided by operating ac-
tivities.......................... 56,187 49,244 46,488 33,240
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Investment in operating
partnerships...................... (33,217) (530) (300) (86)
-------- -------- -------- --------
Net cash used in investing
activities........................ (33,217) (530) (300) (86)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Cash distributions declared........ (56,207) (49,188) (46,513) (33,255)
Change in other liabilities........ 15,515 -- -- --
Note receivable payment............ 32,193 -- -- --
Capital contribution from General
Partner........................... 60 -- -- --
Issuance of limited partnership
units on exercise of
restricted options................ 900 530 300 86
-------- -------- -------- --------
Net cash used in financing
activities........................ (7,539) (48,658) (46,213) (33,169)
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents.................. 15,431 56 (25) (15)
Cash and cash equivalents,
beginning of period............... 91 35 60 75
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................ $ 15,522 $ 91 $ 35 $ 60
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE:
New York City unincorporated
business tax paid............... $ 70 $ 140 $ 151 $ 985
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
PIMCO Advisors Holdings L.P ("PIMCO Holdings") (formerly Oppenheimer
Capital, L.P) 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 45.5 million GP Units) in PIMCO
Advisors L.P. ("PIMCO Advisors"), a registered investment advisor. PIMCO
Partners, GP and other private holders hold the remaining interest 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, 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
Holdings units, so 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.
2. SIGNIFICANT ACCOUNTING POLICIES
a. FINANCIAL STATEMENT PRESENTATION--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 authorized and
outstanding, and per unit amounts have been restated to reflect the
split of the PIMCO Holdings units.
39
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
b. CHANGE OF FISCAL YEAR--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, the period ending December 31, 1997
is a "stub" reporting period, eight months in total, consisting of two
three month periods and one two month period.
c. CASH AND CASH EQUIVALENTS--PIMCO Holdings invests certain cash balances
in money market funds. At December 31, 1997, this investment is
approximately $15.5 million which is invested in non affiliate money
market funds, of which $15.4 million is restricted as a distribution
payable to holders of PIMCO Holdings units on November 4, 1997, pending
resolution of certain legal proceedings (see Note 8). At April 30, 1997
and 1996, this investment was approximately $91 thousand and $35
thousand, respectively, substantially invested in affiliated money
market funds. Management considers investments in money market funds to
be cash equivalents for purposes of the Statements of Cash Flows. These
investments are carried at cost, which approximates market.
d. INVESTMENT IN PARTNERSHIPS--PIMCO Holdings accounts for its investment
in PIMCO Advisors (and Oppenheimer Capital prior to November 30, 1997)
in accordance with the equity method of accounting. PIMCO Holdings
records as income its proportionate share of the net income of its
investee partnerships and credits distributions from such partnerships
to its investment in partnerships. At December 31, 1997, PIMCO Holdings
had a distribution receivable of $15.2 million from PIMCO Advisors. At
April 30, 1997 and 1996, PIMCO Holdings had a distribution receivable of
$17.1 million and $12.0 million, respectively, from Oppenheimer Capital.
e. INCOME TAXES--PIMCO Holdings, as a partnership, generally is not subject
to federal or state income taxes. However, effective January 1, 1998,
PIMCO Holdings is subject to a 3.5% federal tax on its gross income from
active businesses. PIMCO Holdings is subject to an unincorporated
business tax in a certain jurisdiction in which it operates. All
partners of PIMCO Holdings are responsible for taxes, if any, on their
proportionate share of PIMCO Holdings taxable income.
f. NET INCOME PER UNIT--Basic net income per unit is computed based on the
weighted average number of units outstanding. Diluted net income per
unit is computed based on the weighted average number of units
outstanding, assuming the exercise of dilutive unit options. Proceeds
from the exercise of such unit options are assumed to be used to
repurchase outstanding limited partner units under the treasury stock
method. Net income per unit is computed as follows:
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED APRIL 30,
------------- -----------------------------
1997 1997 1996 1995
------------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C>
BASIC NET INCOME PER UNIT:
Net income..................... $44,132 $ 53,326 $ 58,596 $ 30,821
Less net income applicable to
General Partner............... 355 533 586 308
------- --------- --------- ---------
Net income available to Limited
Partners...................... $43,777 $ 52,793 $ 58,010 $ 30,513
======= ========= ========= =========
Weighted average units
outstanding................... 25,768 25,663 25,457 25,277
------- --------- --------- ---------
Basic per unit amount.......... $ 1.70 $ 2.06 $ 2.28 $ 1.21
======= ========= ========= =========
</TABLE>
40
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED APRIL 30,
------------- -----------------------------
1997 1997 1996 1995
------------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C>
DILUTED NET INCOME PER UNIT:
Net income..................... $44,132 $ 53,326 $ 58,596 $ 30,821
Less net income applicable to
General Partner............... 355 533 586 308
------- --------- --------- ---------
Net income available to Limited
Partners...................... $43,777 $ 52,793 $ 58,010 $ 30,513
======= ========= ========= =========
Weighted average units
outstanding................... 25,768 25,663 25,457 25,277
Effect of dilutive options..... 249 178 72 --
------- --------- --------- ---------
Total average units
outstanding................... 26,017 25,841 25,529 25,277
======= ========= ========= =========
Diluted per unit amount........ $ 1.68 $ 2.04 $ 2.27 $ 1.21
======= ========= ========= =========
</TABLE>
G. OTHER--Certain items have been reclassified to conform with the current
year presentation.
H. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
financial statements have been prepared in accordance with generally
accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
3. INTANGIBLE ASSETS
The excess of the initial contributions of capital to Oppenheimer Capital
over the fair value of the net assets acquired had been amortized on a
straight-line basis over a period of 25 years at an annual rate of
approximately $2.6 million. Following the OpCap Merger, this intangible was
eliminated in establishing the investment in PIMCO Advisors.
4. SUPPLEMENTARY FINANCIAL DATA
The following table summarizes the unaudited condensed pro forma results of
operations of PIMCO Holdings for the calendar years ended December 31, 1997
and 1996 as if the above acquisition transactions had been completed on
January 1, 1996. The 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 PIMCO Advisors Class A 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 $146.9 million had been exchanged as of December
31, 1997;
(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 which will be amortized over 20 years;
41
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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.
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(PRO FORMA) (PRO FORMA)
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C>
REVENUES
Equity in earnings of operating partnerships. $ 65,963 $ 45,872
------------ ------------
NET INCOME............................. $ 65,963 $ 45,872
============ ============
Basic net income per unit.................... $ 1.44 $ 1.00
============ ============
Diluted net income per unit.................. $ 1.39 $ 0.98
============ ============
</TABLE>
The pro forma information above is not intended to reflect the results that
actually would have been obtained if the operations were consolidated during
the periods presented, nor is it an indication of future results.
5. NOTE RECEIVABLE
Prior to the OpCap Merger, PIMCO Holdings held a $32.2 million, 10% par
value note due 2012 from Oppenheimer Equities, Inc., a direct wholly owned
subsidiary of Opfin. In connection with the OpCap Merger, this note was repaid
in November 1997.
6. BENEFIT PLANS
PIMCO Advisors and PIMCO Holdings jointly adopted the 1997 Unit Incentive
Plan (the "1997 Plan") effective January 1, 1998. The 1997 Plan is intended to
further the financial success of PIMCO Holdings and PIMCO Advisors through
obtaining and retaining the services of members of their respective management
boards, key employees and consultants who will contribute to their growth,
development and financial success, by offering such members, key employees and
consultants the opportunity to own, or have the right to share in the
appreciation of, PIMCO Holdings units, and, if they are "qualified persons"
within the meaning of 1997 Plan, PIMCO Advisors units. The 1997 Plan is
currently administered by the Management Board of PIMCO Holdings and the Unit
Incentive Committee of the Management Board of PIMCO Advisors. The aggregate
number of PIMCO Holdings and PIMCO Advisors units that may be issued upon
exercise of awards under the 1997 Plan may not exceed 30 million. Pursuant to
an arrangement between PIMCO Advisors and PIMCO Holdings, PIMCO Advisors will
issue to PIMCO Holdings a number of PIMCO Advisors units equal to the number
of PIMCO Holdings units issued under the 1997 Plan.
Concurrent with the effective date of the 1997 Plan, awards for an aggregate
of 12,525,069 Partnership Units (including 3,203,850 restricted unit rights)
granted under plans sponsored by PIMCO Advisors and Oppenheimer Capital were
assumed under the 1997 Plan. In this regard, each option outstanding under the
1993 Unit Option Plan of PIMCO Advisors L.P. (the "1993 Plan") was, to the
extent the holder consented thereto,
42
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
replaced by an option granted under the 1997 Plan, each option outstanding
under the 1996 Unit Incentive Plan of PIMCO Advisors L.P. (the "1996 Plan")
was replaced by an option granted under the 1997 Plan, each option outstanding
under the Oppenheimer Capital Amended and Restated Restricted Option Plan (the
"OpCap Option Plan") was replaced by an option granted under the 1997 Plan and
each right to receive PIMCO Holdings units outstanding under the Oppenheimer
Capital Amended and Restricted Unit Plan ("OpCap Rights Plan") was replaced by
an award of deferred units under the 1997 Plan. Each such award covered the
same number of limited partnership units and had the same term and vesting
schedule as the award which it replaced.
The 1997 Plan, and the awards thereunder other than those assumed from
previously existing PIMCO Advisors and Oppenheimer Capital plans, are subject
to the approval of the unitholders of PIMCO Holdings.
Prior to effectiveness of the 1997 Plan, PIMCO Holdings and Oppenheimer
Capital maintained the OpCap Option Plan and the OpCap Rights Plan for the
benefit of certain key employees. Pursuant to these plans, an eligible
employee was granted the right to receive a number of units of PIMCO Holdings
at no cost to the employee ("Rights"), in the case of the OpCap Rights Plan,
and/or the right to purchase a number of units at the fair market value of
such units on the date of grant ("Options"), in the case of the OpCap Option
Plan. The right to receive or purchase units vests 33 1/3% per year at the end
of each of the third, fourth and fifth years from the date of grant. PIMCO
Holdings transferred to Oppenheimer Capital the proceeds from the exercise of
Options in exchange for an increase in its general partner interest in
Oppenheimer Capital. Opfin and the limited partners of PIMCO Holdings incurred
dilution, in accordance with their respective percentage interest in
Oppenheimer Capital, upon the vesting of Rights and the exercise of Options.
No compensation cost is recognized in the statements of income by
Oppenheimer Capital for the Options granted under the OpCap Option Plan
because the exercise price of the Options approximates the market price of the
units on the date of the grant. For the same reason no compensation cost is
recognized in the statements of operations of PIMCO Advisors for its fixed
unit option plans. Had compensation cost been recognized based on the fair
value of the awards at the date of grant, PIMCO Holdings net income would have
been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED FOR THE YEARS
DECEMBER 31, ENDED APRIL 30,
------------- ---------------
1997 1997 1996
------------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Net income
As reported.................................. $44,132 $53,326 $58,596
Pro forma.................................... $44,060 $53,214 $58,554
Net income per unit
As reported.................................. $ 1.70 $ 2.06 $ 2.28
Pro forma.................................... $ 1.70 $ 2.05 $ 2.27
</TABLE>
For the purpose of the above disclosure, the fair value of each award
granted is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for the
grants in the eight months ended December 31, 1997, fiscal 1997 and fiscal
1996, respectively: 1) For the OpCap Option Plan--distribution yield of 5.8%,
7.3% and 8.0%; expected volatility of 19%, 21% and 22%; risk free interest
rate of 6.62%, 6.36% and 6.96%; and expected lives of 6, 6 and 7 years; 2) For
the 1997 Plan--distribution yield of 7.3%, 7.7% and 3.5%; expected volatility
of 21%, 14% and 10%; risk free interest rate of 6.52%, 6.30% and 6.80%; and
expected lives of 5, 6 and 7 years.
43
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. GAIN ON QUEST SALE
Included in "Equity in earnings of partnerships" for the fiscal years ended
April 30, 1997 and 1996 are gains resulting from Oppenheimer Capital's sale of
the investment advisory and other contracts and business relationships for its
twelve Quest for Value mutual funds to OppenheimerFunds, Inc. ("OFI"), which
is unrelated to Oppenheimer Capital. For the years ended April 30, 1997 and
1996, PIMCO Holdings recognized gains of $1.8 million, or $.07 per unit, and
$17.7 million, or $.69 per unit, respectively.
The Quest for Value Dual Purpose Fund was sold to OFI in July 1997, and
PIMCO Holdings recognized a gain on the sale of $2.8 million, or $.11 per
unit.
8. LEGAL PROCEEDINGS
On November 30, 1997, Richard Buzby filed an action on behalf of a purported
class of limited partners of PIMCO Holdings against PIMCO Advisors and certain
individuals associated with the previous general partner of PIMCO Holdings in
the Court of Chancery of the State of Delaware, New Castle County. The
complaint alleges, among other things, various breaches of fiduciary duty,
conflicts of interest and unfair dealing in connection with the OpCap Merger.
The complaint seeks compensatory and/or recissionary money damages or,
alternatively, injunctive relief or recission of the transactions. Since that
date, certain other complaints have been filed in the states of Delaware and
New York, making similar allegations. These cases were consolidated in the
Court of Chancery of the State of Delaware, New Castle County.
A tentative settlement has been reached, pending approval of the court,
wherein $15.4 million, less court and attorney costs, will be distributed to
the class. As of December 31, 1997, this amount has been funded to a
segregated cash account, and is included in other current liabilities.
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results for the periods indicated were as follows:
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED DECEMBER 31,
------------------------------------------------
FIRST QUARTER SECOND QUARTER TWO MONTHS
ENDED ENDED ENDED
JULY 31, 1997 OCTOBER 31, 1997 DECEMBER 31, 1997
------------- ---------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Revenues.................. $19,585(1) $17,025 $ 9,127
======= ======= ========
Net income................ $18,900(1) $16,340 $ 8,892
======= ======= ========
Basic net income per unit. $ 0.71(1) $ 0.65 $ 0.34
======= ======= ========
Diluted net income per
unit..................... $ 0.70(1) $ 0.64 $ 0.34
======= ======= ========
Distribution declared per
unit..................... $ 0.57 $ 0.90 $ 0.58
======= ======= ========
Trading market price per
unit
Low..................... $21.500 $26.750 $28.1875
High.................... $25.875 $34.625 $32.5625
</TABLE>
- --------
(1) Includes a gain on the Quest sale of $2.8 million, or $0.11 per unit (see
Note 7).
44
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30, 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................ $ 12,280 $ 13,308 $ 16,196(1) $ 14,262
=========== =========== =========== ===========
Net income.............. $ 11,595 $ 12,622 $ 15,511(1) $ 13,598
=========== =========== =========== ===========
Basic net income per
unit................... $ 0.45 $ 0.48 $ 0.60(1) $ 0.53
=========== =========== =========== ===========
Diluted net income per
unit................... $ 0.45 $ 0.48 $ 0.59(1) $ 0.52
=========== =========== =========== ===========
Distribution declared
per unit............... $ 0.39 $ 0.45 $ 0.57(2) $ 0.69
=========== =========== =========== ===========
Trading market price per
unit
Low................... $ 15.750 $ 16.625 $ 19.375 $ 19.250
High.................. $ 17.875 $ 20.750 $ 22.375 $ 22.875
</TABLE>
- --------
(1) Includes a gain on the Quest sale of $1.8 million, or $0.07 per unit (see
Note 7).
(2) Includes a special distribution related to the Quest sale of $0.06 per
unit.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30, 1996
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................ $ 9,862 $ 10,527 $ 29,322(1) $ 11,605
=========== =========== =========== ===========
Net income.............. $ 9,177 $ 9,841 $ 28,637(1) $ 10,941
=========== =========== =========== ===========
Basic net income per
unit................... $ 0.36 $ 0.38 $ 1.11(1) $ 0.43
=========== =========== =========== ===========
Diluted net income per
unit................... $ 0.36 $ 0.38 $ 1.10(1) $ 0.43
=========== =========== =========== ===========
Distribution declared
per unit............... $ 0.33 $ 0.38 $ 0.70(2) $ 0.49
=========== =========== =========== ===========
Trading market price per
unit
Low................... $ 12.625 $ 14.375 $ 16.125 $ 16.625
High.................. $ 14.625 $ 16.750 $ 17.625 $ 18.375
</TABLE>
- --------
(1) Includes a gain on the Quest sale of $17.7 million, or $0.69 per unit (see
Note 7).
(2) Includes a special distribution related to the Quest sale of $0.33 per
unit.
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Board and Partners of PIMCO Advisors L.P.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of changes in
partners' capital and of cash flows present fairly, in all material respects,
the financial position of PIMCO Advisors L.P. and Subsidiaries (the
"Partnership") at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Los Angeles, California
January 30, 1998
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
PIMCO Advisors L.P. and subsidiaries:
We have audited the consolidated statements of operations, cash flows, and
changes in owners' equity of PIMCO Advisors L.P. and Subsidiaries (the
Partnership) for the year ended December 31, 1995. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of the
Partnership for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 2, 1996
47
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
---------- --------
(DOLLARS IN
THOUSANDS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 34,301 $ 41,311
Investment advisory fees receivable:
Private accounts..................................... 132,280 52,261
Proprietary Funds.................................... 10,631 9,629
Distribution and servicing fees receivable............. 5,372 4,382
Notes receivable....................................... 1,750 1,570
Receivable from affiliates............................. 536 463
Short term investments................................. 33,611 11,521
Other current assets................................... 5,758 3,925
---------- --------
Total current assets............................... 224,239 125,062
Investment in partnerships............................... 4,336 2,630
Fixed assets--Net of accumulated depreciation and
amortization of $10,630 and $6,980...................... 15,418 10,561
Intangible assets--Net of accumulated amortization of
$121,019 and $76,519.................................... 1,060,869 207,823
Other non current assets................................. 38,174 12,424
---------- --------
TOTAL ASSETS............................................. $1,343,036 $358,500
========== ========
<CAPTION>
LIABILITIES
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses.................. $ 22,803 $ 13,841
Commissions payable.................................... 10,930 8,435
Accrued compensation................................... 50,033 26,028
Distribution payable................................... 61,786 --
Short term borrowings.................................. 30,000 --
Other current liabilities.............................. 12,525 11,537
---------- --------
Total current liabilities............................ 188,077 59,841
Long term notes.......................................... 83,129 --
Other non current liabilities............................ 17,765 2,416
---------- --------
TOTAL LIABILITIES........................................ 288,971 62,257
---------- --------
<CAPTION>
PARTNERS' CAPITAL
<S> <C> <C>
General Partners (46,336,184 and 800,000 units issued and
outstanding)............................................ 812,884 2,987
Class A Limited Partners (27,201,200 and 40,146,155 units
issued and outstanding)................................. 246,950 205,421
Class B Limited Partners (32,993,050 and 32,960,826 units
issued and outstanding)................................. 65,662 98,369
Unamortized compensation................................. (71,431) (10,534)
---------- --------
TOTAL PARTNERS' CAPITAL.................................. 1,054,065 296,243
---------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL.................. $1,343,036 $358,500
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
REVENUES
Investment advisory fees:
Private accounts............................... $291,890 $213,852 $192,703
Proprietary Funds.............................. 165,829 128,856 90,773
Distribution and servicing fees.................. 56,769 48,182 38,240
Other............................................ 2,181 1,134 1,298
-------- -------- --------
Total revenues............................... 516,669 392,024 323,014
-------- -------- --------
EXPENSES
Compensation and benefits........................ 225,831 173,526 149,164
Commissions...................................... 46,739 37,739 28,743
Restricted Unit and Option Plans................. 8,188 5,162 6,714
Marketing and promotional........................ 16,592 10,982 9,066
Occupancy and equipment.......................... 11,800 9,195 8,662
General and administrative....................... 27,406 17,630 11,434
Insurance........................................ 2,576 2,621 2,800
Professional fees................................ 6,426 5,473 3,165
Amortization of intangible assets................ 43,488 36,009 36,009
Other............................................ 9,316 4,812 2,237
-------- -------- --------
Total expenses............................... 398,362 303,149 257,994
-------- -------- --------
OPERATING INCOME................................... 118,307 88,875 65,020
Equity in (loss)/income of partnerships.......... (361) 271 225
Other income, net................................ 2,853 3,183 3,739
-------- -------- --------
Income before income tax expense................. 120,799 92,329 68,984
Income tax expense............................... 2,469 1,201 517
-------- -------- --------
NET INCOME......................................... $118,330 $ 91,128 $ 68,467
======== ======== ========
NET INCOME PER UNIT:
Basic net income per General Partner and Class A
Limited Partner unit............................ $ 1.54 $ 1.29 $ 1.16
======== ======== ========
Diluted net income:
General Partner and Class A Limited Partner
unit.......................................... $ 1.45 $ 1.29 $ 1.16
======== ======== ========
Class B Limited Partner unit................... $ 1.45 $ 1.05 $ 0.59
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A LIMITED
GENERAL PARTNERS PARTNERS
------------------- ----------------------
UNITS AMOUNT UNITS AMOUNTS
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995......... 800,000 $ 3,863 40,018,155 $ 248,374
Net income...................... 913 45,743
Distributions................... (1,319) (66,111)
Exercise of unit options........ 103,000 375
Balance of proceeds--Primary
offering....................... 85
Vesting of options and
restricted units...............
---------- -------- ----------- ---------
BALANCES, DECEMBER 31, 1995....... 800,000 3,457 40,121,155 228,466
Net income...................... 1,034 51,882
Distributions................... (1,504) (75,451)
Restricted Unit Plan grants..... 25,000 525
Vesting of options and
restricted units...............
---------- -------- ----------- ---------
BALANCES, DECEMBER 31, 1996....... 800,000 2,987 40,146,155 205,422
Net income...................... 5,115 62,038
Distributions................... (17,166) (106,967)
Exercise of unit options........ 15,030 208 10,689 326
Issuance for acquisition........ 26,037,766 629,436 2,119,608 63,661
Restricted Unit Plan grants..... 67,844
Issuance of restricted units in
lieu of director fees..........
Issuance of units............... 1,994 59
Exchange of notes............... 4,406,142 146,871
Vesting of options and
restricted units...............
Exchange of PIMCO Advisors L.P.
public units for PIMCO Advisors
Holdings L.P. units............ 19,481,394 192,245 (19,481,394) (192,245)
---------- -------- ----------- ---------
BALANCES, DECEMBER 31, 1997....... 46,336,184 $812,884 27,201,200 $ 246,950
========== ======== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF PARTNERS' CAPITAL--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B LIMITED
PARTNERS TOTAL
-------------------- UNAMORTIZED PARTNERS'
UNITS AMOUNTS COMPENSATION CAPITAL
---------- -------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995....... 32,960,826 $115,177 $(21,885) $ 345,529
Net income.................... 21,812 68,468
Distributions................. (22,183) (89,613)
Exercise of unit options...... 375
Balance of proceeds--Primary
offering..................... 85
Vesting of options and
restricted units............. 6,713 6,713
---------- -------- -------- ----------
BALANCES, DECEMBER 31, 1995..... 32,960,826 114,806 (15,172) 331,557
Net income.................... 38,212 91,128
Distributions................. (54,649) (131,604)
Restricted Unit Plan grants... (525) --
Vesting of options and
restricted units............. 5,162 5,162
---------- -------- -------- ----------
BALANCES, DECEMBER 31, 1996..... 32,960,826 98,369 (10,535) 296,243
Net income.................... 51,177 118,330
Distributions................. (84,580) (208,713)
Exercise of unit options...... 534
Issuance for acquisition...... 693,097
Restricted Unit Plan grants... 25,000 545 (68,389) --
Issuance of restricted units
in lieu of director fees..... 7,224 151 151
Issuance of units............. 59
Exchange of notes............. 146,871
Vesting of options and
restricted units............. 7,493 7,493
Exchange of PIMCO Advisors
L.P. public
units for PIMCO Advisors
Holdings L.P. units.......... --
---------- -------- -------- ----------
BALANCES, DECEMBER 31, 1997..... 32,993,050 $ 65,662 $(71,431) $1,054,065
========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
51
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 118,330 $ 91,128 $ 68,467
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 51,262 40,916 38,972
Deferred income taxes.................. -- 735 270
Issuance of restricted units in lieu of
directors fees........................ 151 -- --
Restricted Unit and Option Plans....... 8,188 5,162 6,714
Equity in loss (income) of
unconsolidated partnerships........... 361 54 (198)
Unrealized loss (gain) on investments.. (1,171) (272) (225)
Change in operating assets and
liabilities, excluding net effects of
acquired entities:
Change in fees receivable............. (21,050) (8,920) (28,217)
Change in receivable from Proprietary
Funds................................ (73) (125) 865
Change in other assets................ (25,953) (11,676) (3,399)
Change in accounts payable and accrued
expenses............................. 6,332 5,710 941
Change in other liabilities........... 10,358 17,778 2,729
Other................................. (34) (44) 2
----------- ----------- ----------
Net cash provided by operating
activities.............................. 146,701 140,446 86,921
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments................. (46,122) (695) (11,334)
Proceeds from sales of investments....... 47,186 784 --
Return of investment in partnerships..... -- 1,600 --
Investment in partnerships............... (2,815) (700) (400)
Proceeds from sale of fixed assets....... 3 645 310
Purchase of fixed assets................. (4,856) (3,446) (5,982)
Notes receivable advances................ (699) (634) (365)
Cash of acquired entities................ 36,300 -- --
----------- ----------- ----------
Net cash provided by (used in) investing
activities.............................. 28,997 (2,446) (17,771)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowings.................... 30,000 -- --
Long term debt paid off.................. (32,193) -- --
Unit options exercised................... -- -- 375
Change in distribution payable........... 28,198 -- --
Cash distributions declared.............. (208,713) (131,604) (89,613)
----------- ----------- ----------
Net cash used in financing activities.... (182,708) (131,604) (89,238)
----------- ----------- ----------
Net (decrease) increase in cash and cash
equivalents............................. (7,010) 6,396 (20,088)
Cash and cash equivalents, beginning of
year.................................... 41,311 34,915 55,003
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR... $ 34,301 $ 41,311 $ 34,915
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid...................... $ 316 $ 448 $ 406
=========== =========== ==========
Interest paid.......................... $ 1,102 $ -- $ 19
=========== =========== ==========
Fair value of non-cash assets acquired. $ 982,459
===========
Liabilities assumed.................... $ 330,889
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
52
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
PIMCO Advisors L.P. ("PIMCO Advisors") is an investment management firm
providing 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 ("Pacific
Investment Management") and the equity oriented Oppenheimer Capital. PIMCO
Advisors operates in one industry segment--investment management services.
PIMCO Advisors offers its investment management services to institutional
clients through client service representatives of its investment management
groups. Institutional clients invest through separate accounts and pooled
vehicles such as the institutional share classes of the PIMCO Funds, PIMCO
Advisors' family of 45 proprietary mutual funds. 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.
PIMCO Advisors and its subsidiaries were formed on November 15, 1994, when
Pacific Asset Management LLC (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. As explained further in Note 3, 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, 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. As a
result, the consolidated statement of operations includes the operations of
Oppenheimer Capital since November 4, 1997, also reflecting a minority
interest expense of $2.4 million for the month of November, included in other
income, net. 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".
53
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying consolidated financial statements include the accounts of
PIMCO Advisors and its subsidiaries. The investment advisor subsidiaries
included in these consolidated financial statements are as follows:
. PACIFIC INVESTMENT MANAGEMENT COMPANY manages a variety of predominantly
fixed income portfolios primarily for institutions and mutual funds;
. OPPENHEIMER CAPITAL is a value-oriented manager of equity securities
primarily for institutions and mutual funds;
. COLUMBUS CIRCLE INVESTORS ("CCI") manages primarily equity securities
using a Positive Momentum/Positive Surprise approach, principally for
institutions and mutual funds;
. CADENCE CAPITAL MANAGEMENT ("Cadence") specializes in disciplined,
growth-oriented management of equity securities primarily for
institutions and mutual funds;
. PARAMETRIC PORTFOLIO ASSOCIATES ("Parametric") specializes in highly
quantitative management of domestic and international equity portfolios
primarily for institutions and mutual funds;
. NFJ INVESTMENT GROUP ("NFJ") is a value-oriented manager of equity
securities primarily for institutions and mutual funds; and
. BLAIRLOGIE CAPITAL MANAGEMENT ("Blairlogie") specializes in
international equity securities from its office in Edinburgh, Scotland,
primarily for institutions and mutual funds.
The investment advisor subsidiaries are supported by additional
subsidiaries:
. VALUE ADVISORS LLC ("Value"), a registered investment adviser and wholly
owned subsidiary of PIMCO Advisors, acting principally as the
administrator of eight closed end funds;
. PIMCO FUNDS DISTRIBUTORS LLC ("PFD") serves as the distributor of
institutional and retail mutual funds (the "Proprietary Funds") for
which PIMCO Advisors and the investment advisor subsidiaries provide
investment management and administrative services;
. STOCKSPLUS MANAGEMENT, INC. ("StocksPLUS"), a wholly-owned subsidiary of
Pacific Investment Management, owns approximately 0.125 percent interest
in, and is the general partner of StocksPLUS, L.P. (Note 12);
. COLUMBUS CIRCLE TRUST COMPANY ("CCTC"), a non bank trust company and
wholly owned subsidiary of CCI, established in November 1995, which
commenced business in January 1996;
. OPCAP ADVISORS, a value oriented manager and 99% owned subsidiary of
Oppenheimer Capital, with 1% owned by Value;
. OCC DISTRIBUTORS ("Distributors"), a registered broker/dealer and 99%
owned subsidiary of Oppenheimer Capital, with 1% owned by Value;
. 225 LIBERTY STREET ADVISERS L. P.("225") a registered investment adviser
and 99% owned subsidiary of Oppenheimer Capital, with 1% owned by Value;
. OPPENHEIMER CAPITAL TRUST COMPANY ("Trust Co."), a non bank trust
company and wholly owned subsidiary of Oppenheimer Capital; and
. OPPENHEIMER CAPITAL LIMITED ("Limited"), a registered investment adviser
in the United Kingdom and wholly owned subsidiary of Oppenheimer
Capital.
Pacific Investment Management, Oppenheimer Capital, CCI, Cadence,
Parametric, NFJ, Blairlogie, Value, OpCap Advisors, 225 and Limited are
registered investment advisors. PFD and Distributors are registered
broker/dealers with the Securities and Exchange Commission and members of the
National Association of Securities Dealers, Inc.
54
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to January 17, 1997, institutional mutual funds managed consisted of
two open-end investment management companies. One series is predominantly
fixed income funds. The other series is predominantly equity funds. The retail
mutual funds managed were included within two open-end investment management
companies, the PIMCO Advisors Funds ("PAF"), formerly the Thomson Funds, and
the Cash Accumulation Trust ("CAT"). With Trustee and shareholder approval,
the fund groups (excluding CAT) were combined into a single mutual fund
complex, the PIMCO Funds ("Proprietary Funds"), in January 1997, consisting of
45 funds offering retail and institutional share classes as of December 31,
1997.
2. SIGNIFICANT ACCOUNTING POLICIES
a. CASH AND CASH EQUIVALENTS--PIMCO Advisors invests certain cash balances
in money market funds. At December 31, 1997, this investment is
approximately $28,949,000, of which approximately $330,000 is invested
in the National Money Market Fund of CAT, approximately $627,000 is
invested in the PIMCO Advisors Money Market Fund, approximately
$3,528,000 is invested in the OCC Cash Reserves Primary Portfolio and
approximately $24,464,000 is invested in non affiliate money market
funds. At December 31, 1996, this investment was approximately
$25,429,000, of which approximately $814,000 was invested in the
National Money Market Fund of CAT, approximately $595,000 was invested
in the PIMCO Advisors Money Market Fund and approximately $24,020,000
was invested in non affiliate money market funds. Management considers
investments in money market funds to be cash equivalents for purposes of
the Consolidated Statements of Cash Flows. These investments are carried
at cost, which approximates market.
b. INVESTMENT ADVISORY FEES--PIMCO Advisors records investment advisory
fees on an accrual basis. Investment advisory fees receivable for
private and separate accounts consist primarily of accounts billed on a
quarterly basis. Private accounts may also generate a fee based on
investment performance, which is recorded as income when earned and not
subject to forfeiture. Investment advisory fees for the Proprietary
Funds are received monthly.
c. SHORT-TERM INVESTMENTS--The short term investments, as of December 31,
1997 and 1996, are primarily invested in the PIMCO Funds with a short-
term duration objective. The investments are carried at market value.
Cost approximated market value as of December 31, 1997 and 1996.
d. DEPRECIATION AND AMORTIZATION--Office equipment, furniture and fixtures
are depreciated on a straight line basis over their estimated useful
lives, generally five years. Automobiles are depreciated on a straight-
line basis over their estimated lives, generally three years. Leasehold
improvements are amortized on a straight-line basis over the remaining
terms of the related leases or the useful lives of such improvements,
whichever is shorter.
e. OTHER ASSETS--Effective May 29, 1995, PFD commenced sale of a "B" class
of mutual fund shares. Under this share structure PFD advances
commissions to independent brokers and is entitled to recoup its
marketing costs through an ongoing fee stream from the respective funds
or through contingent deferred sales charges collected from the share
purchaser. Such fees are capitalized as deferred sales charges and
amortized on a straight line basis as commission expense over a period
of 60 months. Deferred unamortized marketing costs of approximately
$22,700,000 and $11,100,000 are included in other non current assets at
December 31, 1997 and 1996, respectively.
f. INCOME TAXES--Subsequent to the Consolidation, PIMCO Advisors and its
subsidiaries are predominantly partnerships and, as a result, are
generally not subject to federal or state income taxes. PIMCO Advisors
is subject to an unincorporated business tax in a certain jurisdiction
in which it operates. All partners of PIMCO Advisors are responsible for
taxes, if any, on their proportionate share of PIMCO Advisors' taxable
income. Certain corporate subsidiaries are subject to federal and state
income taxes and file separate tax returns. The provision for income
taxes is determined using the
55
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liability method which gives recognition to deferred tax assets and
liabilities based on the expected future tax consequences of events that
have been recognized in the financial statements or tax returns.
g. FOREIGN CURRENCY TRANSLATION--The assets and liabilities of Blairlogie
have been translated into U.S. dollars at the current rate of exchange
existing at year-end. Revenues and expenses were translated at the
average of the monthly exchange rates then in effect.
h. NET INCOME ALLOCATION--Net income is allocated in accordance with the
Amended and Restated Agreement of Limited Partnership of PIMCO Advisors.
Net income is allocated among unit holders in the same proportions as
cash distributions. For each of the periods presented, PIMCO Advisors
cash distribution policy provided for a first priority distribution to
General Partner and Class A Limited Partner units ($1.88 per year
through December 31, 1997) followed by a second priority distribution to
Class B Limited Partner units. During the years ended December 31, 1996
and 1995, the second priority distribution was less than the first
priority distribution. For the year ended December 31, 1997, the
distribution was equal for all classes of units. The Class A unit
distribution preference will end with the payment of the distribution
for the fourth quarter of 1997, and on March 1, 1998, all PIMCO Advisors
Class B units will be converted into Class A units.
i. NET INCOME PER UNIT--Basic net income per unit is computed based on the
weighted average number of units outstanding. Diluted net income per
unit assumes the exercise of dilutive unit options. Proceeds from the
exercise of such unit options are assumed to be used to repurchase
outstanding limited partner units under the treasury stock method. The
weighted average number of units used to compute basic and diluted net
income per unit was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
BASIC
General Partner and Class A Limited
Partner Units.......................... 43,773,904 42,501,469 42,127,833
DILUTED
General Partner and Class A Limited
Partner Units.......................... 45,701,026 42,501,469 42,127,833
Class B Limited Partner Units........... 35,662,779 34,513,573 33,425,537
</TABLE>
j. OTHER--Certain items have been reclassified to conform with the current
year presentation. All significant intercompany items have been
eliminated in the accompanying consolidated financial statements.
k. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
financial statements have been prepared in accordance with generally
accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
3. INTANGIBLE ASSETS
The acquisition of Opgroup in November 1997 has been recorded under the
purchase accounting method. Intangible assets of approximately $897.5 million
represented the excess of the purchase price over the fair value of the net
tangible assets of Oppenheimer Capital acquired. This amount will be amortized
on a straight line basis over 20 years. For accounting purposes, the
Consolidation between PFAMCo Group and TAG LP in 1994 was treated as a
purchase and recapitalization of TAG LP by PFAMCo Group, or a "reverse
acquisition." Intangible assets of approximately $284.9 million represented
the excess of the purchase price over the fair value of the net tangible
assets of TAG LP deemed acquired in the Consolidation. A portion of these
intangible assets represents the value assigned to PIMCO Advisors Master
Limited Partnership ("MLP") structure. Under prior Internal Revenue Code
guidelines, an MLP was exempt from federal and most state and local income
taxes through December 31, 1997. The value attributed to the MLP structure has
been amortized over the period ending December 31, 1997. The remainder is
amortized on a straight-line basis over its estimated life of 20 years.
56
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUPPLEMENTARY FINANCIAL DATA
The following table summarizes the unaudited condensed pro forma results of
operations of PIMCO Advisors for the calendar years ended December 31, 1997
and 1996 as if the above acquisition transactions had been completed on
January 1, 1996. The pro forma operating results give effect to:
(i)Conversion of Oppenheimer Capital to a calendar year reporting basis;
(ii) The issuance of 2.1 million restricted PIMCO Advisors Class A 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 $146.8 million had been exchanged as of
December 31, 1997;
(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 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;
and
(vii) The elimination of the priority distribution structure related to
pre December 31, 1997 rights of PIMCO Advisors Class A units.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1997 1996
----------- ----------
(PRO FORMA) (PRO FORMA)
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C>
REVENUES
Investment advisory.............................. $626,959 $509,124
Distribution and servicing....................... 67,750 57,949
-------- --------
694,709 567,073
-------- --------
EXPENSES
Compensation and related expense................. 299,286 245,028
Other operating expense.......................... 134,906 111,017
Amortization of intangibles, options and
restricted units................................ 103,157 101,635
-------- --------
537,349 457,680
-------- --------
Net income....................................... $157,360 $109,393
======== ========
Basic net income per unit........................ $ 1.44 $ 1.00
======== ========
Diluted net income per unit...................... $ 1.39 $ 0.98
======== ========
</TABLE>
The pro forma information above is not intended to reflect the results that
actually would have been obtained if the operations were consolidated during
the periods presented, nor is it an indication of future results.
57
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES RECEIVABLE
PIMCO Advisors and certain subsidiaries have granted loans to certain
employees as part of programs designed to ensure the long-term retention of
those employees. These loans are primarily non-interest bearing and are
generally due within one year of issuance.
6. FIXED ASSETS
The major classifications of fixed assets are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Office equipment, furniture and fixtures............. $ 19,102 $ 12,827
Automobiles.......................................... 31 9
Leasehold improvements............................... 6,915 4,705
----------- -----------
Total fixed assets................................... 26,048 17,541
Less accumulated depreciation and amortization....... 10,630 6,980
----------- -----------
Fixed assets, net.................................... $ 15,418 $ 10,561
=========== ===========
</TABLE>
7. INCOME TAXES
Only certain subsidiaries are subject to income taxes directly and they file
separate tax returns. The total income tax provision for the affected
subsidiaries is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------
1997 1996 1995
------ ------ ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Current expense:
State................................................... $ 872 $ 164 $106
Federal................................................. 156 295 159
Deferred expense:
State................................................... 293 198 68
Federal................................................. 1,148 544 184
------ ------ ----
$2,469 $1,201 $517
====== ====== ====
</TABLE>
8. BENEFIT PLANS
a. PROFIT SHARING AND INCENTIVE PROGRAMS--PIMCO Advisors and its
subsidiaries have several profit sharing and incentive programs that
compensate participants on the basis of profitability and discretionary
bonuses. Compensation under these programs was approximately $152.9
million, $114.1 million, and $94.5 million for the years ended December
31, 1997, 1996 and 1995, respectively.
b. EXECUTIVE DEFERRED COMPENSATION PLAN--PIMCO Advisors and its
subsidiaries have a nonqualified deferred compensation plan pursuant to
which a portion of the compensation otherwise payable to certain
eligible employees will be mandatorily deferred, and pursuant to which
such eligible employees may elect to defer additional amounts of
compensation. The plan is unfunded and is maintained primarily for the
purpose of providing deferred compensation for a select group of
management or
58
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
highly compensated employees, within the meaning of Sections 201(2),
301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act
of 1974, as amended. Amounts deferred under the plan are used to acquire
units of PIMCO Advisors and are held in the trust for the employees. As
of December 31, 1997 and 1996, the balance related to PIMCO Advisors and
its subsidiaries in the trust and the related deferred compensation
obligations was approximately $15.1 million and $1.0 million,
respectively.
c. SAVINGS AND INVESTMENT PLANS--PIMCO Advisors and its subsidiaries have
several defined contribution employee benefit plans covering
substantially all employees. PIMCO Advisors and Pacific Investment
Management are the sponsors of certain defined contribution employee
savings and investment plans. The plans qualify under Section 401(k) of
the Internal Revenue Code and allow eligible employees of PIMCO Advisors
and certain of its subsidiaries, to contribute up to ten percent of
their annual compensation as defined, and subject to a maximum dollar
amount determined from time to time under the provisions of the Internal
Revenue Code. Employees are generally eligible following the later of
attainment of age 21 or the completion of one year of credited service.
For 1997, 1996 and 1995, PIMCO Advisors and certain of its subsidiaries
matched and contributed an amount up to the first six percent of annual
compensation, subject to Internal Revenue Code limits, contributed by
the employees. In addition, PIMCO Advisors and certain of its
subsidiaries, may elect to make a discretionary contribution to all
participants. The amount expensed by PIMCO Advisors and its subsidiaries
related to these plans during the year ended December 31, 1997, 1996 and
1995 was approximately $2.2 million, $2.0 million and $1.9 million,
respectively.
Pacific Investment Management has several defined contribution
employee benefit plans covering substantially all of its employees and
made contributions to the plans ranging from five percent to eleven
percent of covered individuals' base compensation. The aggregate expense
recorded is approximately $1.1 million, $.9 million and $1.0 million in
1997, 1996 and 1995, respectively.
d. UNIT BASED INCENTIVE PLANS--PIMCO Advisors and PIMCO Holdings jointly
adopted the 1997 Unit Incentive Plan (the "1997 Plan") effective January
1, 1998. The 1997 Plan is intended to further the financial success of
PIMCO Holdings and PIMCO Advisors through obtaining and retaining the
services of members of their respective management boards, key employees
and consultants who will contribute to their growth, development and
financial success, by offering such members, key employees and
consultants the opportunity to own, or have the right to share in the
appreciation of, PIMCO Holdings units, and, if they are "qualified
persons" within the meaning of 1997 Plan, PIMCO Advisors units. The 1997
Plan is currently administered by the Management Board of PIMCO Holdings
and the Unit Incentive Committee of the Management Board of PIMCO
Advisors. The aggregate number of PIMCO Holdings and PIMCO Advisors
units that may be issued upon exercise of awards under the 1997 Plan may
not exceed 30 million. Pursuant to an arrangement between PIMCO Advisors
and PIMCO Holdings, PIMCO Advisors will issue to PIMCO Holdings a number
of PIMCO Advisors units equal to the number of PIMCO Holdings units
issued under the 1997 Plan.
Concurrent with the effective date of the 1997 Plan, awards granted
under plans sponsored by PIMCO Advisors and Oppenheimer Capital were
assumed under the 1997 Plan. In this regard, each option outstanding
under the 1993 Unit Option Plan of PIMCO Advisors L.P. (the "1993 Plan")
was, to the extent the holder consented thereto, replaced by an option
granted under the 1997 Plan, each option outstanding under the 1996 Unit
Incentive Plan of PIMCO Advisors L.P. (the "1996 Plan") was replaced by
an option granted under the 1997 Plan, each option outstanding under the
Oppenheimer Capital Amended and Restated Restricted Option Plan (the
"OpCap Option Plan") was replaced by an option granted under the 1997
Plan and each right to receive PIMCO Holdings units
59
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding under the Oppenheimer Capital Amended and Restricted Unit
Plan ("OpCap Rights Plan") was replaced by an award of deferred units
under the 1997 Plan. Each such award covered the same number of limited
partnership units and had the same term and vesting schedule as the
award which it replaced.
The 1997 Plan, and the awards thereunder other than those assumed
from previously existing PIMCO Advisors and Oppenheimer Capital plans,
are subject to the approval of the unitholders of PIMCO Holdings.
Prior to the adoption of the 1997 Plan, PIMCO Advisors maintained a
restricted unit plan and two unit options plans for the benefit of
certain key employees. A total of 150,000 Class A limited partner units
and 150,000 Class B limited partner units have been awarded under the
plan. In addition, under the OpCap Rights Plan, approximately 2,177,000
Class A limited partner deferred units were awarded. Under these plans,
units generally vest over a five-year period; however, accelerated
vesting occurred in 1995 upon the departure of a key employee. The
expense under these plans was approximately $3.8 million, $.8 million
and $2.0 million during 1997, 1996 and 1995, respectively.
In addition, PIMCO Advisors maintained two unit-option plans, which
are described below. No compensation cost is recognized for these fixed
unit option plans where the option price approximated the market price
on the date of grant. Had compensation cost for PIMCO Advisors two unit
option plans been determined based on the fair value at the grant
dates, PIMCO Advisors net income and earnings per unit would have been
reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1997 1996 1995
------- ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C>
NET INCOME
As reported.................................... $ 118.3 $ 91.1 $ 68.5
Pro forma...................................... $ 116.5 $ 90.9 $ 68.4
DILUTED NET INCOME PER UNIT
Diluted net income per General Partner and Class
A Limited Partner unit
As reported.................................... $ 1.45 $ 1.29 $ 1.16
Pro forma...................................... $ 1.43 $ 1.29 $ 1.16
</TABLE>
For the above disclosure purposes, the fair value of each option
granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions
used for grants in 1997, 1996 and 1995, respectively: dividend yield of
7.3%, 7.7% and 3.5%; expected volatility of 21%, 14% and 10%; risk-free
interest of 6.52%, 6.30% and 6.80%; and expected lives of 5, 6 and 7
years, respectively.
The unit option plans were administered by the Unit Incentive
Committee of the Management Board of PIMCO Advisors, which determines
the key employees and the terms of the options to be granted. Under the
1993 Plan, PIMCO Advisors could grant options to its employees for up
to 3,090,000 Class A units. Under the 1996 Plan, PIMCO Advisors could
grant options to its employees for up to 10,000,000 Class B units. At
December 31, 1997, there were 3,933,133 Class B Limited Partner unit
options available for future grants. The expense under the option plans
was approximately
60
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$4.4 million, $4.4 million and $4.7 million during 1997, 1996 and 1995,
respectively. Under the 1996 Plan, the exercise price for each option
reported herein has not been less than the average trading price of
PIMCO Advisors units for the 20 trading day period prior to the grant
date and each option's maximum term is 10 years. There was no material
difference between the option price and the market price on the grant
date. The outstanding options vest over a period of not more than five
years and vested options are generally exercisable after January 1,
1998. As noted above, effective January 1, 1998, all such awards, and
those under the OpCap Option Plan and OpCap Rights Plan, were assumed
under the 1997 Plan. Following is a summary of the status of the awards
under the unit option plans:
<TABLE>
<CAPTION>
UNITS RANGE PER UNIT
--------- ----------------
<S> <C> <C>
Outstanding, January 1, 1995................. 7,739,130 $ 2.425--$13.53
Class A Limited Partner units exercised...... (103,000) $ 2.425--$ 4.85
Class B Limited Partner units
Granted.................................... 109,000 $12.700--$14.68
Cancelled.................................. (174,200) $13.53
---------
Outstanding, December 31,1995................ 7,570,930 $ 2.425--$14.68
---------
Class B Limited Partner units
Granted.................................... 227,000 $17.72 --$18.81
Cancelled.................................. (29,200) $12.78 --$13.53
---------
Outstanding, December 31,1996................ 7,768,730 $ 2.425--$18.81
---------
Class B Limited Partner units
Granted.................................... 794,600 $21.40 --$26.77
Exercised.................................. (30,000) $13.53
Cancelled.................................. (212,720) $ 2.425--$22.87
Assumed options.............................. 1,000,609 $12.35 --$21.63
---------
Outstanding, December 31,1997................ 9,321,219 $ 2.425--$26.77
=========
Exercisable:
Class A Limited Partner units.............. 915,554 $ 2.425
Class B Limited Partner units.............. 200,000 $13.53
Assumed options............................ 89,339 $12.35 --$14.97
---------
Exercisable, December 31, 1997............... 1,204,893
=========
</TABLE>
9. LONG TERM NOTES
In connection with the OpCap Merger, as discussed in Note 1, PIMCO Advisors
acquired Opgroup, the issuer of $230 million principal amount of notes. The
notes are exchangeable into Class A limited partner units at $33 1/3 per unit.
The notes bear interest at 6% per annum with a maturity date of December 1,
2037. As of December 31, 1997, approximately $146.9 million had been exchanged
for approximately 4.4 million Class A limited partner units. At December 31,
1997, the outstanding balance on the notes was $83.1 million. Interest expense
related to these notes was approximately $1.7 million in 1997.
61
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS
a. LEASE AGREEMENTS--PIMCO Advisors and its subsidiaries lease office space
and certain office equipment under noncancelable leases with terms in
excess of one year. Future minimum payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1998............................................... $ 6,776
1999............................................... 6,054
2000............................................... 5,207
2001............................................... 4,302
2002............................................... 4,092
Thereafter......................................... 7,463
-------
Total............................................ $33,894
=======
</TABLE>
Rent expense in connection with these agreements was approximately $4.6
million, $3.8 million and $3.6 million for the years ended December 31,
1997, 1996 and 1995, respectively.
b. LETTER OF CREDIT--PIMCO Advisors is contingently liable for a letter of
credit in the amount of approximately $665,000 related to PIMCO Advisors
membership in an insurance program.
c. REVOLVING LINE OF CREDIT--PIMCO Advisors has a $75 million, 4 year
revolving credit facility, originated in April of 1996 and amended in
November 1997. The facility permits short term borrowings at a floating
rate of interest. The terms of the agreement include an interest
coverage ratio, a fixed charge coverage ratio and a minimum operating
cash flow ratio. At December 31, 1997, the balance outstanding was $30
million and PIMCO Advisors was in compliance with the required ratios.
11. NET CAPITAL
PFD and OCC Distributors are subject to the Uniform Net Capital Rule (Rule
15c3-1) under the Securities and Exchange Act of 1934, which requires the
maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1. At
December 31, 1997, PFD had net capital of $2.7 million, which was $1.7 million
in excess of its required net capital of $1.0 million. PFD's net capital ratio
was 5.32 to 1. At December 31, 1996, PFD had net capital of $3.1 million,
which was $2.2 million in excess of its required net capital of $.9 million.
PFD's net capital ratio was 3.73 to 1. At December 31, 1997, OCC Distributors
had net capital of $1.0 million, which was $.9 million in excess of its
required net capital of $.1 million. OCC Distributors' net capital ratio was
.38 to 1.
12. INVESTMENT IN PARTNERSHIPS
Included in investment in partnerships is an investment by StocksPLUS in
StocksPLUS, L.P. StocksPLUS accounts for its investment in StocksPLUS, L.P.
under the equity method because StocksPLUS is the general partner in, and
exercises significant influence over the operating and financial policies of
StocksPLUS, L.P. (Note 1). The underlying investments of StocksPLUS, L. P. are
carried at fair value. StocksPLUS, L. P. has made its investments with the
intent to have its performance exceed that of the S & P 500 Index.
StocksPLUS has mitigated the effects of its pro rata investment in
StocksPLUS, L.P.'s investments through the use of short futures positions.
Gains and losses related to these positions are settled daily. Included in
"Short term investments" in the accompanying Consolidated Statements of
Financial Condition are securities which are used as necessary for deposits
made in connection with the futures positions and are recorded at fair value.
The
62
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
notional amounts of the contracts do not necessarily represent future cash
requirements, as the contracts are intended to be closed prior to their
expiration. As of December 31, 1997 and 1996, the notional amounts of futures
contracts approximated $2.9 million and $2.9 million, respectively.
Condensed financial information for StocksPLUS, L.P. is as follows:
SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments at fair value.......................... $ 3,288,830 $ 2,306,673
Other assets....................................... 24,845 26,481
----------- -----------
Total assets..................................... $ 3,313,675 $ 2,333,154
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Liabilities.......................................... $ 222,738 $ 136,880
StocksPLUS' Partner Capital.......................... 2,915 2,629
Limited Partners' Capital............................ 3,088,022 2,193,645
---------- ----------
Total liabilities and partners' capital............ $3,313,675 $2,333,154
========== ==========
</TABLE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net trading gains on futures.................... $575,696 $292,185 $326,096
Net gain in fair value of securities............ 13,140 12,040 31,266
Interest income................................. 164,175 126,535 92,260
Fees and commissions............................ (6,119) (4,631) (3,822)
-------- -------- --------
Net income.................................... $746,892 $426,129 $445,800
======== ======== ========
</TABLE>
63
<PAGE>
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results for the periods indicated were as follows:
<TABLE>
<CAPTION>
THREE
MONTHS THREE THREE
ENDED MONTHS THREE MONTHS MONTHS
MARCH ENDED ENDED ENDED
31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
-------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues......................... $103,898 $117,192 $126,368 $174,111
Expenses......................... 80,156 89,879 93,536 137,200
-------- -------- -------- --------
Income before taxes.............. 23,742 27,313 32,832 36,911
Income tax expense............... 553 (101) 773 1,243
-------- -------- -------- --------
Net income....................... $ 23,189 $ 27,414 $ 32,059 $ 35,668
======== ======== ======== ========
Diluted net income per General
Partner and Class A Limited
Partner unit.................... $ 0.32 $ 0.34 $ 0.40 $ 0.39
======== ======== ======== ========
Closing market price per Class A
Limited Partner unit
Low............................ $ 20.750 $ 21.250 $ 24.625 $ 30.000
======== ======== ======== ========
High........................... $ 26.125 $ 25.750 $ 31.438 $ 34.313
======== ======== ======== ========
<CAPTION>
THREE
MONTHS THREE THREE
ENDED MONTHS THREE MONTHS MONTHS
MARCH ENDED ENDED ENDED
31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
-------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues......................... $ 91,220 $ 98,842 $ 97,099 $104,863
Expenses......................... 71,468 74,827 73,131 80,269
-------- -------- -------- --------
Income before taxes.............. 19,752 24,015 23,968 24,594
Income tax expense............... 389 207 238 367
-------- -------- -------- --------
Net income....................... $ 19,363 $ 23,808 $ 23,730 $ 24,227
======== ======== ======== ========
Diluted net income per General
Partner and Class A Limited
Partner unit.................... $ 0.31 $ 0.33 $ 0.32 $ 0.33
======== ======== ======== ========
Closing market price per Class A
Limited Partner unit
Low............................ $ 20.625 $ 20.250 $ 20.250 $ 19.625
======== ======== ======== ========
High........................... $ 23.250 $ 22.000 $ 22.750 $ 23.625
======== ======== ======== ========
</TABLE>
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The General Partners of
Oppenheimer Capital
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, changes in
partners' capital and cash flows present fairly, in all material respects, the
financial position of Oppenheimer Capital and its subsidiaries (the
"Partnership") at December 31, 1997 and April 30, 1997 and 1996, and the
results of their operations and their cash flows for the eight month period
ended December 31, 1997 and for each of the three years in the period ended
April 30, 1997, in conformity with generally accepted accounting principles.
These consolidated financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
New York, New York
January 30, 1998
65
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
APRIL 30,
---------------
DECEMBER 31,
1997 1997 1996
------------ ------- -------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and short term investments................. $19,644 $27,123 $19,744
Investment management fees receivable........... 55,616 52,357 43,016
Investments in affiliated mutual funds and other
sponsored investment products.................. 3,304 4,347 4,644
------- ------- -------
Total current assets.......................... 78,564 83,827 67,404
Furniture, equipment and leasehold improvements at
cost less accumulated depreciation and
amortization of $3,288; $2,812 and $2,179........ 3,885 3,795 3,515
Intangible assets, less accumulated amortization
of $1,030; $565 and $377......................... 1,170 1,511 1,699
Other non current assets.......................... 2,617 3,886 3,720
------- ------- -------
TOTAL ASSETS...................................... $86,236 $93,019 $76,338
======= ======= =======
<CAPTION>
LIABILITIES, MINORITY INTEREST AND
PARTNERS' CAPITAL
<S> <C> <C> <C>
Accrued employee compensation and benefits........ $17,820 $13,914 $12,873
Accrued expenses and other liabilities............ 11,556 8,880 7,168
Note payable...................................... -- 400 800
Deferred investment management fees............... 9,278 4,532 2,870
Distribution payable to partners.................. -- 25,318 17,751
------- ------- -------
Total liabilities................................. 38,654 53,044 41,462
------- ------- -------
Minority interest................................. 213 277 174
Partners' Capital................................. 47,369 39,698 34,702
------- ------- -------
TOTAL LIABILITIES, MINORITY INTEREST AND PARTNERS'
CAPITAL.......................................... $86,236 $93,019 $76,338
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
66
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS FOR THE YEARS ENDED APRIL
ENDED 30,
DECEMBER 31, ----------------------------
1997 1997 1996 1995
------------ -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Investment management fees......... $144,790 $175,814 $151,269 $119,194
Net distribution assistance and
commission income................. 2,992 4,910 6,051 10,443
Interest and dividends............. 1,155 1,250 895 275
-------- -------- -------- --------
Total revenues................... 148,937 181,974 158,215 129,912
-------- -------- -------- --------
EXPENSES
Compensation and benefits.......... 66,312 77,664 68,781 55,367
Occupancy.......................... 4,713 6,572 6,873 6,436
General and administrative......... 8,753 12,494 12,293 10,652
Promotional........................ 4,173 6,334 7,604 10,611
-------- -------- -------- --------
Total expenses................... 83,951 103,064 95,551 83,066
-------- -------- -------- --------
OPERATING INCOME..................... 64,986 78,910 62,664 46,846
Gain on Quest sales................ 4,374 2,806 27,725 --
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST................... 69,360 81,716 90,389 46,846
Income tax expense ................ 2,985 3,198 3,627 1,201
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST...... 66,375 78,518 86,762 45,645
Minority interest.................. (251) (254) (452) --
-------- -------- -------- --------
NET INCOME........................... $ 66,124 $ 78,264 $ 86,310 $ 45,645
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
67
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands)
<TABLE>
<S> <C>
BALANCE AT MAY 1, 1994................................................ $ 12,452
Net income.......................................................... 45,645
Amortization of restricted unit compensation expense................ 1,280
Distributions declared to partners:
Oppenheimer Financial Corp........................................ (14,313)
Oppenheimer Capital, L.P.......................................... (30,690)
Contributions by Oppenheimer Capital, L.P........................... 86
--------
BALANCE AT APRIL 30, 1995............................................. 14,460
Net income.......................................................... 86,310
Amortization of restricted unit compensation expense................ 1,691
Distributions declared to partners:
Oppenheimer Financial Corp........................................ (22,247)
Oppenheimer Capital, L.P.......................................... (45,812)
Contributions by Oppenheimer Capital, L.P........................... 300
--------
BALANCE AT APRIL 30, 1996............................................. 34,702
Net income.......................................................... 78,264
Amortization of restricted unit compensation expense................ 2,209
Distributions declared to partners:
Oppenheimer Financial Corp........................................ (24,707)
Oppenheimer Capital, L.P.......................................... (51,300)
Contributions by Oppenheimer Capital, L.P........................... 530
--------
BALANCE AT APRIL 30, 1997............................................. 39,698
Net income.......................................................... 66,124
Amortization of restricted unit compensation expense................ 2,677
Distributions declared to partners:
Oppenheimer Financial Corp........................................ (17,624)
Oppenheimer Capital, L.P.......................................... (36,752)
Value Advisors LLC................................................ (7,447)
PIMCO Advisors L.P................................................ (58)
Contributions by Oppenheimer Capital, L.P........................... 751
--------
BALANCE AT DECEMBER 31, 1997.......................................... $ 47,369
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
68
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED APRIL 30,
------------- -------------------------------
1997 1997 1996 1995
------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 66,124 $ 78,264 $ 86,310 $ 45,645
Adjustments to reconcile net
income to net cash provided by
operating activities:
Amortization of restricted
unit compensation............ 3,808 2,209 1,691 1,280
Depreciation and
amortization................. 623 1,019 2,413 1,082
Minority interest, net of
distributions................ (64) 103 87 62
Change in operating assets
and liabilities:
Change in investment
management fees receivable. (3,259) (9,341) (9,839) (4,517)
Change in other assets...... 731 (182) (1,195) 1,300
Change in accrued employee
compensation and benefits.. 3,906 1,041 4,549 1,637
Change in accrued expenses
and other liabilities...... 2,676 1,712 290 2,144
Change in deferred
investment management fees. 4,746 1,662 1,154 93
-------- --------- --------- ---------
Net cash provided by operating
activities.................... 79,291 76,487 85,460 48,726
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of fixed assets...... (566) (1,111) (498) (1,634)
Intangible assets resulting
from acquisitions............. (500) -- -- (1,689)
Proceeds from sales of mutual
funds shares and other
investments................... 1,485 3,132 7,296 2,048
Purchases of mutual funds
shares and other investments.. (340) (2,819) (7,844) (4,384)
-------- --------- --------- ---------
Net cash provided by (used in)
investing activities.......... 79 (798) (1,046) (5,659)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net (repayments of) proceeds
from bank loans............... -- -- (9,182) 6,446
Issuance (repayment) of note
payable....................... (400) (400) (400) 1,200
Distributions to partners:
Oppenheimer Financial Corp.... (25,853) (22,280) (21,187) (14,898)
Oppenheimer Capital, L.P...... (53,842) (46,160) (43,415) (30,995)
Value Advisors LLC............ (7,447) -- -- --
PIMCO Advisors L.P............ (58) -- -- --
Contributions by Oppenheimer
Capital, L.P.................. 751 530 300 86
-------- --------- --------- ---------
Net cash (used in) financing
activities.................... (86,849) (68,310) (73,884) (38,161)
-------- --------- --------- ---------
Net increase (decrease) in cash
and short term investments.... (7,479) 7,379 10,530 4,906
Cash and short term investments
at beginning of period........ 27,123 19,744 9,214 4,308
-------- --------- --------- ---------
CASH AND SHORT TERM INVESTMENTS
AT END OF PERIOD.............. $ 19,644 $ 27,123 $ 19,744 $ 9,214
======== ========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid................. $ 45 $ 112 $ 638 $ 738
======== ========= ========= =========
New York City unincorporated
business tax paid............ $ 1,730 $ 3,376 $ 3,701 $ 1,049
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
69
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. ORGANIZATION AND CONSOLIDATION--Oppenheimer Capital is a general
partnership wholly owned by PIMCO Advisors L.P. ("PIMCO Advisors")
directly and indirectly through PIMCO Advisors wholly owned subsidiary
Value Advisors LLC. Oppenheimer Capital is a registered investment
adviser and is part of an affiliated group of companies operating in the
financial services industry.
The consolidated financial statements include the accounts of
Oppenheimer Capital and its subsidiaries, Opcap Advisors, OCC
Distributors ("Distributors") and 225 Liberty Street Advisers, L.P.
(formerly AMA Investment Advisers, L.P.) (collectively, the
"Subpartnerships"), Oppenheimer Capital Limited and Oppenheimer Capital
Trust Company. All material intercompany balances and transactions have
been eliminated in consolidation.
b. CASH AND SHORT TERM INVESTMENTS--Short term investments are recorded at
cost, which approximates market value, and include holdings in money
market mutual funds and highly-liquid investments with maturities of
three months or less.
c. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS--Furniture and equipment
are depreciated on a straight-line basis over five to seven year
periods. Amortization of leasehold improvements is on a straight-line
basis over the lesser of their economic useful life or the term of the
lease.
d. INVESTMENT MANAGEMENT FEES--Investment management fees are based on
written contracts and are generally computed on the net assets of the
managed accounts and recognized in the period earned.
e. STATEMENTS OF CASH FLOWS--For purposes of reporting cash flows, cash and
short term investments include highly liquid investments with maturities
of three months or less.
f. INTANGIBLE ASSETS--Impairment of intangible assets is measured on the
basis of anticipated undiscounted cash flows. At December 31, 1997 and
April 30, 1997, 1996 and 1995, Oppenheimer Capital determined that there
was no impairment of intangible assets.
g. USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
2. SALE OF OPFIN INTEREST
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 L.P. ("PIMCO Holdings")
(formerly, Oppenheimer Capital, L.P.). 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
70
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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. LONG TERM LEASE COMMITMENTS
Oppenheimer Capital occupies office premises at various locations, including
the Oppenheimer Tower under an agreement to sublease with CIBC Oppenheimer
Corp., ("Opco"), a broker-dealer which was affiliated with Oppenheimer Capital
until November 4, 1997. Oppenheimer Capital's lease commitments for office
space under operating leases having noncancelable lease terms in excess of one
year provide for the following minimum annual rentals:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1998............................................... $ 4,140
1999............................................... 4,140
2000............................................... 4,140
2001............................................... 3,387
2002............................................... 3,554
Thereafter......................................... 7,130
-------
Total.............................................. $26,491
=======
</TABLE>
The agreements expire at various dates through the calendar year ending
December 31, 2005 and contain provisions for additional charges (e.g., ground
rent, real estate taxes and operating expenses). Office rent expense for the
eight month period ended December 31, 1997 was $3,785,000, and for the years
ended April 30, 1997, 1996 and 1995 was $5,046,000, $5,348,000 and $5,100,000,
respectively.
4. COMPENSATION PLANS
Oppenheimer Capital has established a Restricted Unit Plan and a Restricted
Option Plan (the "OpCap Plans") for the benefit of certain key employees.
Pursuant to the OpCap Plans, an eligible employee is granted the right to
receive a number of units of PIMCO Holdings or, in certain cases after
December 31, 1997, PIMCO Advisors, at no cost to the employee ("Rights"), in
the case of the Restricted Unit Plan, and/or the right to purchase a number of
units at the fair market value of such units on the date of grant ("Options"),
in the case of the Restricted Option Plan. Obligations under the OpCap Plans
have been assumed by PIMCO Advisors and PIMCO Holdings effective January 1,
1998. The right to receive or purchase units vests 33 1/3% per year at the end
of each of the third, fourth and fifth years from the date of grant. A total
of 6,304,250 restricted units and/or restricted options have been authorized
under the OpCap Plans. The following table shows the Rights granted and the
Options granted with exercise prices of $12.35 to $21.63 (all reflective of a
1.67 for 1 split effective December 1, 1997) at December 31, 1997. As a result
of the grant of Rights, Oppenheimer Capital recorded
71
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
deferred restricted unit compensation expense in partners' capital of
$8,574,000 for the eight month period ended December 31, 1997 and $5,977,000,
$4,738,000 and $343,000 for the fiscal years ended April 30, 1997, 1996 and
1995, respectively, which amounts are amortized over a five year period. In
addition, approximately $67.8 million was recorded as deferred compensation
expense in partners' capital of PIMCO Advisors for special grants made in
November of 1997 associated with the completion of sale of the Opfin interest.
Amortization of $2,677,000 for the eight month period ended December 31, 1997
and $2,209,000, $1,691,000, and $1,280,000 for the fiscal years ended April
30, 1997, 1996 and 1995, respectively, has been recorded. This amortization
results in a charge to compensation and benefits and a corresponding credit to
partners' capital.
<TABLE>
<CAPTION>
RIGHTS OPTIONS
OUTSTANDING OUTSTANDING PRICE PER OPTION
----------- ----------- ----------------
<S> <C> <C> <C>
BALANCES AT APRIL 30, 1994............ 539,326 236,307 $ 6.811--$16.841
Rights granted...................... 27,221
Rights cancelled.................... (5,566)
Units issued with respect to Rights. (147,239)
Options granted..................... 234,635 $14.147--$14.895
Options exercised................... (9,187) $ 6.811--$14.296
Options canceled.................... (16,144) $ 6.811--$14.970
--------- ---------
BALANCES AT APRIL 30, 1995............ 413,742 445,611 $ 8.084--$16.841
Rights granted...................... 314,862
Rights cancelled.................... (13,916)
Units issued with respect to Rights. (172,344)
Options granted..................... 255,510 $12.425
Options exercised................... (25,105) $ 8.084--$14.970
Options canceled.................... (50,656) $12.350--$14.970
--------- ---------
BALANCES AT APRIL 30, 1996............ 542,344 625,360 $10.853--$16.841
Rights granted...................... 346,553
Rights cancelled.................... (23,562)
Units issued with respect to Rights. (160,071)
Options granted..................... 281,395 $17.590--$20.210
Options exercised................... (37,851) $10.853--$17.590
Options canceled.................... (40,080) $12.425--$17.590
--------- ---------
BALANCES AT APRIL 30, 1997............ 705,264 828,824 $10.853--$20.210
Rights granted...................... 2,553,453
Rights cancelled.................... (5,979)
Units issued with respect to Rights. (48,888)
Options granted..................... 283,900 $21.632
Options exercised................... (92,075) $10.853--$14.970
Options canceled.................... (20,040) $12.425--$17.590
--------- ---------
BALANCES AT DECEMBER 31, 1997......... 3,203,850 1,000,609 $12.350--$21.632
========= =========
</TABLE>
72
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No compensation cost is recognized in the consolidated statements of
operations for Options granted under the OpCap Plans because the exercise
price of the Options approximates the market price of the units on the date of
grant. Had compensation cost for the Options been recognized based on the fair
value of the Options at the date of the grant, Oppenheimer Capital's net
income would have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS FOR THE YEARS
ENDED ENDED APRIL 30,
DECEMBER 31, ---------------
1997 1997 1996
------------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME
As reported................................ $66,124 $78,264 $86,310
Pro forma.................................. $66,017 $78,098 $86,248
</TABLE>
For the purpose of the above disclosure, the fair value of each Option
granted is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
for the eight month period ended December 31, 1997 and for the fiscal years
ended April 30, 1997 and 1996, respectively: distribution yield of 5.8%, 7.3%
and 8.0%; expected volatility of 19%, 21% and 22%; risk-free interest rate of
6.62%, 6.36% and 6.96%; and expected life of 6, 6 and 7 years.
5. TRANSACTIONS WITH AFFILIATED COMPANIES
a. CASH AND SHORT TERM INVESTMENTS--Oppenheimer Capital invests excess
funds in OCC Cash Reserves Primary Portfolio, a money market fund
managed by OpCap Advisors. Included in cash and short term investments
at December 31, 1997, April 30, 1997 and April 30, 1996 was $2,685,000,
$1,567,000 and $1,675,000, respectively, invested in this fund. Also
included in cash and short term investments at April 30, 1997 and 1996
was $35,000 and $275,000, respectively, on deposit with Opco.
b. INVESTMENTS IN AFFILIATED MUTUAL FUNDS AND OTHER SPONSORED INVESTMENT
PRODUCTS--Investments in affiliated mutual funds and other sponsored
investment products are carried at market value.
c. DISTRIBUTION ASSISTANCE FEES AND EXPENSES--Oppenheimer Capital receives
distribution assistance fees from various mutual funds and has entered
into agreements with various broker-dealers including Opco to obtain
sales-related services in rendering distribution assistance. Payments to
Opco for the Quest for Value equity and fixed income mutual funds for
the years ended April 30, 1996 and 1995 were recorded as distribution
assistance expenses and for financial statement purposes were netted
against distribution assistance fees (see note 7). Payments to Opco for
OCC Cash Reserves are netted against investment management fees. During
the eight month period ended December 31, 1997, such payments to Opco
totaled $4,602,000, and totaled $8,902,000, $9,522,000 and $8,496,000
for the years ended April 30, 1997, 1996 and 1995, respectively.
d. AFFILIATED MUTUAL FUNDS AND COMMINGLED PRODUCTS--INVESTMENT MANAGEMENT
FEES--Oppenheimer Capital provides investment management services to
affiliated mutual funds and other commingled products. For the eight
month period ended December 31, 1997 the amount earned for these
services totaled $9,797,000, and for the years ended April 30, 1997,
1996 and 1995 the amounts totaled $15,382,000, $22,778,000 and
$23,088,000, respectively.
73
<PAGE>
OPPENHEIMER CAPITAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Although Oppenheimer Capital is not otherwise subject to federal, state, or
local income taxes, it was subject to New York City unincorporated business
tax of $2,906,000 for the eight month period ended December 31, 1997, and
$3,143,000, $3,667,000 and $1,201,000, respectively, for the years ended April
30, 1997, 1996 and 1995.
A domestic corporate subsidiary of Oppenheimer Capital is subject to
federal, state and local income taxes. A foreign corporate subsidiary is
subject to taxes in the foreign jurisdiction in which it is located.
7. GAIN ON QUEST SALE
On November 22, 1995, Oppenheimer Capital sold the investment advisory and
other contracts and business relationships for its twelve Quest for Value
mutual funds to OppenheimerFunds, Inc. ("OFI"), which is unrelated to
Oppenheimer Capital. In fiscal 1997 and 1996, Oppenheimer Capital received
payments of $3.8 million and $41.7 million, respectively, related to the sale,
and recognized pre-tax gains of $2.8 million and $27.7 million, respectively.
8. GAIN ON DUAL PURPOSE SALE
On July 18, 1997, Oppenheimer Capital completed the sale of the investment
advisory and other contracts and business relationships of the Quest for Value
Dual Purpose Fund to OFI. Oppenheimer Capital received a payment of $7.0
million and recorded a pre-tax gain of $4.4 million.
9. SALE OF AMA LICENSE
On May 12, 1997, Oppenheimer Capital sold its exclusive license to market
financial products to members of the American Medical Association for $1
million. The proceeds received from this transaction were used to purchase the
remaining 19.9% interest of AMA Advisers, L.P. not owned by Oppenheimer
Capital and Opfin, and to repay the balance of the original acquisition debt
incurred to purchase AMA Advisers, L.P. AMA Advisers, L.P. has been renamed
225 Liberty Street Advisers, L.P.
74
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF PIMCO HOLDINGS
The PIMCO Holdings Partnership Agreement provides that PIMCO Holdings is
managed by its general partner, PIMCO Partners, G.P. ("PGP"). PGP has
delegated the day to day management of PIMCO Holdings to a Management Board
which has appointed executive officers of PIMCO Holdings. The board members
and executive officers of PIMCO Holdings are comprised of the following
persons, who also serve as executive officers of PIMCO Advisors:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
William D. Cvengros......... 49 Board Member and Chief Executive Officer
Kenneth M. Poovey........... 66 Board Member, Chief Operating Officer and
General Counsel
Robert M. Fitzgerald........ 46 Board Member, Senior Vice President and
Chief Financial Officer
James G. Ward............... 43 Senior Vice President and Director of
Human Resources
Richard M. Weil............. 34 Senior Vice President and Secretary
</TABLE>
Biographical information with respect to the above-listed individuals is set
forth below. Because the sole business of PIMCO Holdings is that of owning
PIMCO Advisors units, information relating to the management of PIMCO Advisors
is set forth below.
MANAGEMENT OF PIMCO ADVISORS
PIMCO Advisors is managed by its general partners, PGP and PIMCO Holdings.
PGP has direct control of PIMCO Holdings, and therefore controls PIMCO
Advisors. The general partners have the equal right, power and authority to
manage and control the business and affairs of PIMCO Advisors and, except as
otherwise provided in the PIMCO Advisors Partnership Agreement, may take any
action deemed necessary or desirable by them in connection with the business
of PIMCO Advisors. Any difference arising as to any action connected with the
business of PIMCO Advisors, other than those requiring the unanimous consent
of the general partners, is decided by the general partners holding a majority
of the outstanding general partner units.
While the general partners must pursuant to the PIMCO Advisors Partnership
Agreement retain and exercise certain powers, generally relating to
extraordinary transactions or events, the general partners have delegated all
other management and control of PIMCO Advisors to a 16 member management board
(the "PIMCO Advisors Management Board"), comprised of the Chief Executive
Officer of PIMCO Advisors, representatives of the general partners,
representatives of the investment management subsidiaries, and three
"disinterested" members not otherwise affiliated with PIMCO Advisors or the
general partners. The PIMCO Advisors Management Board generally acts by
majority vote, however, certain significant actions require a three-quarters
majority vote. The delegation to the PIMCO Advisors Management Board may be
revoked by the general partners (by PGP as the controlling general partner) at
any time.
The PIMCO Advisors Management Board has, in turn, constituted a five member
Executive Committee and delegated to it much of the functions of the PIMCO
Advisors Management Board. In addition, PIMCO Advisors has an Audit Committee,
a Compensation Committee, a Nominating Committee and a Unit Incentive
Committee, each comprised of members of the PIMCO Advisors Management Board.
75
<PAGE>
The members of the PIMCO Advisors Management Board, the Executive Committee
and the executive officers of PIMCO Advisors are as set forth below. The
initial terms of all PIMCO Advisors Management Board members expire on April
30, 1999. PIMCO Advisors Management Board members thereafter will be appointed
to one year terms.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
Walter E. Auch, Sr....... 76 Board Member
David B. Breed........... 50 Board Member
Donald A. Chiboucas...... 53 Board Member
William D. Cvengros...... 49 Board Member, Chief Executive Officer,
Executive Committee Member
Walter B. Gerken......... 75 Board Member and Chairman
William H. Gross......... 53 Board Member
Brent R. Harris.......... 38 Board Member, Executive Committee Member
Donald R. Kurtz.......... 67 Board Member
George A. Long........... 56 Board Member, Executive Committee Member
James F. McIntosh........ 57 Board Member
Kenneth H. Mortenson..... 51 Board Member
William F. Podlich, III.. 53 Board Member
Glenn S. Schafer......... 48 Board Member, Executive Committee Member
Thomas C. Sutton......... 55 Board Member
William S. Thompson, Jr.. 52 Board Member, Executive Committee Member
Benjamin L. Trosky....... 37 Board Member
Kenneth M. Poovey........ 66 Chief Operating Officer and General Counsel
Stephen J. Treadway...... 50 Executive Vice President
Robert M. Fitzgerald..... 46 Senior Vice President and Chief Financial
Officer
Ernest L. Schmider....... 40 Senior Vice President
James G. Ward............ 43 Senior Vice President and Director of Human
Resources
Richard M. Weil.......... 34 Senior Vice President and Secretary
</TABLE>
Set forth below is certain biographical information with respect to the
persons who are the members of the PIMCO Advisors Management Board or who
serve as executive officers of PIMCO Advisors or PIMCO Holdings:
Walter E. Auch, Sr. Mr. Auch has served as a member of the PIMCO Advisors
Management Board as an independent member and as a member of the Audit
Committee and Unit Incentive Committee since November 1994. He currently is a
management consultant. Mr. Auch was a Director of Thomson Advisory Group, Inc.
("TAG"), the former general partner of PIMCO Advisors from October 1990 until
November 1994. He was previously the Chairman and Chief Executive Officer of
the Chicago Board Options Exchange from 1979 to 1986. He is also a Director of
Geotek Industries, Inc., Fort Dearborn Fund, Shearson VIP Fund, Shearson
Advisors Fund, Shearson TRAK Fund, Banyan Strategic Land Trust, Banyan
Strategic Land Fund II, Banyan Mortgage Investment Fund, Express American
Holding Corporation and Nicholas/Applegate Funds.
David B. Breed. Mr. Breed has served as a member of PIMCO Advisors
Management Board and the Chief Executive Officer and a Managing Director of
Cadence since the consolidation of Pacific Financial Asset Management
Corporation and TAG LP in November 1994 (the "Consolidation"). From February
1988 to July 1993, he was a Managing Director and Director of Cadence Capital
Management Corporation, and he was Chief Executive Officer and Chief
Investment Officer thereof until November 1994.
Donald A. Chiboucas. Mr. Chiboucas has served as a member of the PIMCO
Advisors Management Board and the President and a Managing Director of
Columbus Circle Investors since the Consolidation in
76
<PAGE>
November 1994. Mr. Chiboucas was Senior Executive Vice President of TAG and
PIMCO Advisors, a member of PIMCO Advisors Executive Operating Committee and
President of Columbus Circle Investors from October 1990 until November 1994.
William D. Cvengros. Mr. Cvengros serves as Chief Executive Officer and a
member of the Management Board of PIMCO Holdings and PIMCO Advisors and is
currently a member of the Executive Committee of the Management Board. He has
served in his positions with PIMCO Advisors since the Consolidation in
November 1994, and in his positions with PIMCO Holdings since November 1997.
He was associated with Pacific Life Insurance Company from 1972 to November
1994, most recently as Vice Chairman and Chief Investment Officer. He is a
Director of Furon Corporation and Remedy Temp.
Robert M. Fitzgerald. Mr. Fitzgerald serves as Senior Vice President, Chief
Financial Officer and Chief Accounting Officer of PIMCO Holdings and PIMCO
Advisors, and as a member of the Management Board of PIMCO Holdings. He has
served in his positions with PIMCO Advisors since February 1995, and in his
positions with PIMCO Holdings since November 1997. From April 1994 through
January 1995, he served as a consultant to various companies, including
Pacific Investment Management Company. From October 1991 until April 1994, he
served in various senior executive positions, including President, at
Mechanics National Bank.
Walter B. Gerken. Mr. Gerken has served as Chairman of the PIMCO Advisors
Management Board since the Consolidation in November 1994. Mr. Gerken is the
former Chairman of the Board and CEO of Pacific Life Insurance Company.
William H. Gross. Mr. Gross has served as a member of the PIMCO Advisors
Management Board since the Consolidation in November 1994 and is currently a
member of the Compensation Committee of the Management Board. Mr. Gross joined
Pacific Investment Management Company in June 1971, and has served there as a
Managing Director since February 1982.
Brent R. Harris. Mr. Harris has served as a member of the PIMCO Advisors
Management Board since the Consolidation in November 1994 and is currently a
member of the Executive Committee of the Management Board. Mr. Harris joined
Pacific Investment Management Company in June 1985, and has served there as a
Managing Director since April 1993. Mr. Harris is Chairman and Director of the
PIMCO Commercial Mortgage Securities Trust, Inc.
Donald R. Kurtz. Mr. Kurtz has served on the PIMCO Advisors Management Board
as an independent member and as a member of the Audit Committee, Nominating
Committee and Unit Incentive Committee since the Consolidation in November
1994. Mr. Kurtz was a Director of Thomson Advisory Group, Inc. from May 1992
until November 1994. From December 1994 until October 1995, he was acting
Managing Director of Domestic Equity Investments at General Motors Investment
Management Corp. Prior thereto, he served as Vice President or Director,
Internal Asset Management at General Motors Investment Management Corp. from
January 1990.
George A. Long. Mr. Long has served as a member of the PIMCO Advisors
Management Board since November 1997 and is currently a member of the
Executive Committee of the Management Board. He also has served as the
Chairman and Chief Executive Officer of Oppenheimer Capital since July 1997,
the President of Oppenheimer Capital since May 1996 and the Chief Investment
Officer of Oppenheimer Capital since 1987. Mr. Long has been a Managing
Director of Oppenheimer Capital since 1992.
James F. McIntosh. Mr. McIntosh has served as a member of the PIMCO Advisors
Management Board as an independent member and as a member of the Audit
Committee, Compensation Committee and Unit Incentive Committee since the
Consolidation in November 1994. He is currently the Executive Director of
Allen, Matkins, Leck, Gamble & Mallory LLP, a law firm, which position he has
held from October 1994. From January 1981 to October 1994, he was Executive
Director of Paul, Hastings, Janofsky & Walker LLP, a law firm.
Kenneth H. Mortenson. Mr. Mortenson has served as a member of the PIMCO
Advisors Management Board since November 1997. He is a Managing Director of
Oppenheimer Capital, a position that he has held since 1987.
77
<PAGE>
William F. Podlich, III. Mr. Podlich has served as a member of the PIMCO
Advisors Management Board since the Consolidation in November 1994 and is
currently a member of the Nominating Committee of the Management Board. Mr.
Podlich joined Pacific Investment Management Company in August 1969, and has
served there as a Managing Director since 1982.
Kenneth M. Poovey. Mr. Poovey serves as Chief Operating Officer and General
Counsel of PIMCO Holdings and PIMCO Advisors, and as a member of the
Management Board of PIMCO Holdings. Mr. Poovey has served as Chief Operating
Officer of PIMCO Holdings and PIMCO Advisors since January 1998, as General
Counsel and a member of the Management Board of PIMCO Holdings since November
1997 and as General Counsel of PIMCO Advisors since November 1994. Mr. Poovey
was a partner with the law firm of Latham & Watkins from 1980 to March 1997.
Glenn S. Schafer. Mr. Schafer has served as a member of the PIMCO Advisors
Management Board since the Consolidation in November 1994 and is currently a
member of the Executive Committee of the Management Board. He currently serves
as a Director and the President of Pacific Life Insurance Company. Mr. Schafer
was the Executive Vice President and Chief Financial Officer of Pacific Life
Insurance Company from April 1991 until January 1995.
Ernest L. Schmider. Mr. Schmider has served as Senior Vice President of
PIMCO Advisors since January 1998. Mr. Schmider joined Pacific Investment
Management Company in March 1994, where he served as Senior Vice President
until his appointment to Executive Vice President and Chief Administrative
Officer in April 1997. Mr. Schmider was affiliated with the law firm of Latham
& Watkins from 1983 to 1994.
Thomas C. Sutton. Mr. Sutton has served as a member of the PIMCO Advisors
Management Board since the Consolidation in November 1994 and is currently a
member of the Compensation Committee and Nominating Committee of the
Management Board. Mr. Sutton has been the Chairman and Chief Executive Officer
of Pacific Life Insurance Company since January 1990. Mr. Sutton is also a
Director of Edison International, Newhall Land and Farming Company and The
Irvine Company.
William S. Thompson, Jr. Mr. Thompson has served as a member of the PIMCO
Advisors Management Board since the Consolidation in November 1994 and is
currently a member of the Compensation Committee, Nominating Committee and
Executive Committee of the Management Board. Mr. Thompson joined Pacific
Investment Management Company in April 1993, where he has served as a Managing
Director and Chief Executive Officer since that time. Mr. Thompson is Director
of Spieker Properties, a real estate investment trust.
Stephen J. Treadway. Mr. Treadway has served as an Executive Vice President
of PIMCO Advisors, Chairman and President of PIMCO Funds Distributors LLC
since joining PIMCO Advisors in May 1996. Prior thereto, he was associated
with Smith Barney, Inc. for eighteen years and served in various senior
positions, including Executive Vice President.
Benjamin L. Trosky. Mr. Trosky has served as a member of the PIMCO Advisors
Management Board since December 1997. Mr. Trosky joined Pacific Investment
Management Company in October 1990, and has served there as a Managing
Director since February 1996.
James G. Ward. Mr. Ward is Senior Vice President and Director of Human
Resources of PIMCO Holdings and PIMCO Advisors. Mr. Ward has served in his
positions at PIMCO Holdings and PIMCO Advisors since November 1997 and April
1995, respectively. Prior to that time, he served as Vice President and
Director of Human Resources for Pacific Investment Management Company, a
position he held beginning October 1994. From November 1987 through October
1994, he served as Vice President and Director of Human Resources for Salomon
Brothers Inc.
Richard M. Weil. Mr. Weil is Senior Vice President and Secretary of PIMCO
Holdings and PIMCO Advisors. Mr. Weil has served as an officer of PIMCO
Advisors since joining PIMCO Advisors in March 1996, and as an officer of
PIMCO Holdings since November 1997. Mr. Weil was a Vice President in the
Global Asset Management Group of Bankers Trust Company from December 1994
through February 1996 and was associated with the law firm of Simpson,
Thatcher & Bartlett from September 1989 through November 1994.
78
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Prior to November 1997, PIMCO Holdings did not have any employees. During
such time, the officers of Oppenheimer Capital performed the management
functions on behalf of PIMCO Holdings. The current executive officers of PIMCO
Holdings are also executive officers of PIMCO Advisors. The compensation of
the executive officers will be allocated between PIMCO Advisors and PIMCO
Holdings based on the amount of services provided to each entity. The
following table sets forth the cash compensation paid or allocated with
respect to the three years ended December 31, 1997 for services rendered to
PIMCO Advisors in all capacities by the Chief Executive Officer of PIMCO
Holdings and each of the four most highly compensated executive officers of
PIMCO Holdings or PIMCO Advisors (the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL
--------------------------- OTHER ANNUAL UNIT UNDERLYING OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/UAR COMPENSATION
UNDERLYING POSITION(1) YEAR ($) ($) ($) ($) (#) ($)
---------------------- ---- -------- ---------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William D. Cvengros..... 1997 $500,000 $1,200,000 $9,500(2) -- -- $ 3,324(3)
Chief Executive Officer 1996 500,000 950,000 9,500(2) -- -- 3,444(3)
1995 500,000 800,000 4,600 -- -- --
Kenneth M. Poovey....... 1997 $225,000(4) -- -- $756,250(5) 50,000 $1,101,202(3)(6)
Chief Operating Officer 1996 -- -- -- -- -- --
and General Counsel 1995 -- -- -- -- -- --
Stephen J. Treadway..... 1997 $309,000(7) $ 500,000 -- -- -- $ 303,324(3)(6)
Executive Vice 1996 196,730(4) 250,000 -- $562,500(5) 100,000 303,444(3)(6)
President 1995 -- -- -- -- -- --
Robert M. Fitzgerald.... 1997 $234,500(7) $ 339,000 -- -- 10,000 $ 187,102(3)(6)
Senior Vice President 1996 209,500(8) 220,000 -- -- -- 30,000(6)
and Chief Financial 1995 175,000(4) 175,000 -- -- 30,000 --
Officer
Richard M. Weil......... 1997 $234,500(7) $ 200,000 -- -- 10,000 $ 226,602(3)(6)
Senior Vice President 1996 166,667(4) 91,167 -- -- 22,000 75,000(6)
1995 -- -- -- -- -- --
</TABLE>
- --------
(1) During fiscal year 1997, George L. Long served as the Chairman and Chief
Executive and Investment Officer of Oppenheimer Capital. In such
capacities, Mr. Long performed management functions on behalf of PIMCO
Holdings. Mr. Long's salary for his services in such capacities in the
fiscal years ended April 30, 1997, 1996 and 1995 was $350,000, $350,000
and $350,000, respectively, and his bonus compensation during such periods
was $3,573,000, $3,825,000 and $2,000,000, respectively.
(2) Represents a bonus paid in lieu of the employer contribution to the PIMCO
Advisors 401(k) Savings and Investment Plan.
(3) Includes the premiums on term life insurance and long-term disability.
(4) Mr. Treadway joined PIMCO Advisors in May 1996, and his salary reflects a
partial year of service. Mr. Fitzgerald joined PIMCO Advisors in February
1995, and his 1995 salary reflects a partial year of service. Mr. Weil
joined PIMCO Advisors in March 1996, and his salary reflects a partial
year of service. Mr. Poovey joined PIMCO Advisors in April 1997, and his
salary reflects a partial year of service.
(5) Mr. Poovey was awarded 25,000 PIMCO Advisors restricted units. These units
vest over a three-year period, pay distributions quarterly and had an
aggregate value of $756,250 at December 31, 1997. Mr. Treadway was awarded
25,000 PIMCO Advisors units. These units vest over a five year period, pay
distributions quarterly and had an aggregate value of $562,500 at December
31, 1996.
(6) Includes amounts deferred under PIMCO Holdings' Executive Deferred
Compensation Plan.
(7) The salary and bonus amounts include amounts deferred in the PIMCO
Advisors 401(k) Savings and Investment Plan of $9,500 for Mr. Fitzgerald
and Mr. Weil and $9,000 for Mr. Treadway for 1997.
(8) The salary and bonus amounts for Mr. Fitzgerald include amounts deferred
in the PIMCO Advisors 401(k) Savings and Investment Plan of $9,500 for
1996.
Compensation to key employees who are not executive officers may exceed the
compensation paid to executive officers in any given year.
79
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1997
The following table provides information concerning individual grants of
options in 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF UNIT PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------- -----------------------
OPTIONS PERCENT OF
GRANTED TOTAL OPTIONS EXERCISE PER EXPIRATION
NAME (#) GRANTED IN 1997 UNIT PRICE DATE 5% 10%
---- ------- --------------- ------------ ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
William D. Cvengros..... -- -- -- -- -- --
Kenneth M. Poovey....... 50,000 4.8% $21.81 4/1/2007 $ 685,925 $ 1,738,257
Steven J. Treadway...... -- -- -- -- -- --
Robert M. Fitzgerald.... 10,000 1.0 22.87 3/14/2007 143,852 364,548
Richard M. Weil......... 10,000 1.0 22.87 3/14/2007 143,852 364,548
</TABLE>
AGGREGATED OPTION/UAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/UAR VALUES
The following table provides information on option exercises in 1997 by the
Named Executive Officers, and the value of unexercised options held by each
Named Executive Officer at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF UNITS
UNDERLYING UNEXERCISED IN-THE-MONEY
UNITS OPTIONS/UARS OPTIONS/UARS
ACQUIRED VALUE AT-FY-END(#) AT FY-END($)
ON EXERCISE REALIZED EXERCISABLE(E)/ EXERCISABLE(E)/
NAME (#) ($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- -------- ---------------------- ----------------
<S> <C> <C> <C> <C>
William D. Cvengros..... -- -- 400,000(U) $6,688,000(U)
Kenneth M. Poovey....... -- -- 50,000(U) 422,200(U)
Stephen J. Treadway..... -- -- 100,000(U) 1,228,000(U)
Robert M. Fitzgerald.... -- -- 40,000(U) 563,400(U)
Richard M. Weil......... -- -- 32,000(U) 358,700(U)
</TABLE>
COMPENSATION OF BOARD MEMBERS
PIMCO Advisors pays members of the PIMCO Advisors Management Board who are
not employees of PIMCO Holdings, PIMCO Advisors, one of the investment
management group subsidiaries or Pacific Life Insurance Company a $20,000
annual retainer plus $750 per in-person meeting ($250 per conference call
meeting) of the Management Board attended and for each meeting of a committee
of the Management Board. Members who are employees of PIMCO Holdings, PIMCO
Advisors, one of its investment management group subsidiaries or Pacific Life
Insurance Company are not entitled to any additional compensation for their
services as Management Board members. Pursuant to the terms of the 1997 Plan,
the non-employee members of the Management Board may elect to receive
restricted PIMCO Holdings units or PIMCO Advisor Units in lieu of such
retainer, with such restricted units valued at 91% of fair market value on the
date of issuance.
COMPENSATION OF GENERAL PARTNER
The general partners of PIMCO Holdings and PIMCO Advisors receive no
compensation from PIMCO Holdings or PIMCO Advisors for services rendered to
PIMCO Holdings or PIMCO Advisors as a general partner. Rather, the general
partners' interests in profits and losses of PIMCO Holdings and PIMCO Advisors
are based on their interest in PIMCO Holdings and PIMCO Advisors,
respectively. Upon liquidation, the liquidating distributions to the general
partners will be based on the number of PIMCO Holdings units and PIMCO
Advisors units each holds. Each general partner is reimbursed for all direct
expenses paid by it on behalf
80
<PAGE>
of PIMCO Advisors, for all expenses incurred by it in connection with the
business and affairs of PIMCO Advisors and, in the case of a Public General
Partner (as defined in the PIMCO Advisors Partnership Agreement), for all
expenses (other than taxes) of the Public General Partner. PIMCO Holdings is a
Public General Partner and, therefore, all of its expenses (other than taxes)
are paid by PIMCO Advisors.
COMPENSATION PURSUANT TO CONTRACT
William D. Cvengros, the Chief Executive Officer of PIMCO Holdings and PIMCO
Advisors and a member of the PIMCO Advisors Management Board and the Executive
Committee, is party to an employment agreement with PIMCO Advisors, the term
of which was extended through December 31, 1998 by the Management Board of
PIMCO Advisors in January 1997. Under the agreement, Mr. Cvengros receives an
annual base salary of $500,000 and a guaranteed annual bonus of $500,000. Mr.
Cvengros is also eligible to receive a discretionary bonus in the target range
of $200,000 to $500,000 (which amount may be increased or decreased upon the
recommendation of the Executive Committee and the approval of the PIMCO
Advisors Management Board). PIMCO Advisors granted Mr. Cvengros options to
purchase up to 400,000 PIMCO Advisors units under the PIMCO Advisors 1994 Unit
Option Plan. In 1994, Mr. Cvengros was also granted 200,000 restricted
PIMCO Advisors units which are forfeitable to PGP upon certain events of
termination. If his contract is terminated without cause between December 31,
1996 and December 31, 1998, he is entitled to accrued and unpaid salary and
bonus payments totaling $500,000 and immediate vesting of all of his options
and restricted units.
Kenneth M. Poovey, Chief Operating Officer of PIMCO Holdings and PIMCO
Advisors, and PIMCO Advisors have agreed to a compensation arrangement,
pursuant to which Mr. Poovey receives an annual base salary of $300,000. Mr.
Poovey is also eligible to receive a bonus in the target range of $300,000 to
$900,000. In May 1997, PIMCO Advisors granted Mr. Poovey 25,000 restricted
PIMCO Advisors units vesting over a three year period, and Mr. Poovey is
eligible, based on performance, for a second grant of up to 25,000 restricted
PIMCO Advisors units in the first quarter of 1998, which will also vest over a
three year period. PIMCO Advisors granted Mr. Poovey options to purchase up to
50,000 PIMCO Advisors units, which will vest over a period of five years.
PIMCO Advisors also paid Mr. Poovey a $100,000 relocation loan which will be
forgiven over five years subject to certain conditions. At December 31, 1997,
the loan had an outstanding balance of $100,000.
In July 1996, PIMCO Advisors made a $250,000 relocation loan to Robert M.
Fitzgerald, Senior Vice President and Chief Financial Officer of PIMCO
Advisors and PIMCO Holdings. The loan bears interest at 8% per annum, and
$200,000 of the principal and interest thereon will be forgiven over three
years subject to continued employment. At December 31, 1997, the loan had an
outstanding principal balance of $133,333.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Compensation awards for executive officers of PIMCO Holdings are determined
by the PIMCO Advisors Compensation Committee. The members of the Compensation
Committee are Messrs. Gross, McIntosh, Sutton and Thompson. Equity-based
awards for the executive officers of PIMCO Holdings are determined by the
PIMCO Advisors Unit Incentive Committee. The members of the Unit Incentive
Committee are Messrs. Auch, Kurtz, and McIntosh, each of whom were appointed
to the Unit Incentive Committee of PIMCO Advisors in November 1997. None of
the members of the Compensation Committee or the Unit Incentive Committee have
served as an officer or otherwise been engaged as an employee of PIMCO
Holdings.
81
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
PIMCO Holdings units by each person who, to PIMCO Holdings' knowledge, is the
beneficial owner of more than 5% of PIMCO Holdings units and the Named
Executive Officers. Except as indicated, the address of each person or entity
listed below is 800 Newport Center Drive, Suite 100, Newport Beach, California
92660.
<TABLE>
<CAPTION>
PERCENTAGE OF PIMCO
PIMCO PIMCO ADVISORS PERCENTAGE OF
HOLDINGS UNITS HOLDINGS UNITS PIMCO HOLDINGS
BENEFICIALLY UNITS BENEFICIALLY UNITS
OWNED(1)(2) OUTSTANDING OWNED(1)(3) OUTSTANDING(4)
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
FIVE PERCENT HOLDERS
PIMCO Partners, G.P.
("PGP") (5)............ 0 -- 53,790,538 54.0%
Pacific Life Insurance
Company ("Pacific
Life") (6)............. 0 -- 58,905,813 56.2
Pacific LifeCorp
("LifeCorp") (6)....... 0 -- 58,905,813 56.2
Pacific Mutual Holding
Company ("PMHC") (6)... 0 -- 58,905,813 56.2
Pacific Asset Management
LLC ("PAM") (6)........ 0 -- 58,905,813 56.2
PIMCO Holding LLC
("PIMCO LLC") (7)...... 0 -- 54,143,742 54.1
PIMCO Partners, LLC
("PPLLC") (8).......... 0 -- 53,933,018 54.0
Thomson Advisory Group,
Inc. ("TAG")........... 0 -- 14,380,217 23.9
William R. Benz, II (9). 66,000 * 53,933,018 54.1
David H. Edington (9)... 184,000 * 53,933,018 54.1
William H. Gross
(9)(10)................ 384,000 * 53,953,018 54.1
John L. Hague (9)....... 184,000 * 53,933,018 54.1
Brent R. Harris (9)..... 184,000 * 53,933,018 54.1
Dean S. Meiling (9)..... 184,000 * 53,933,018 54.1
James F. Muzzy (9)...... 184,000 * 53,933,018 54.1
William F. Podlich, III
(9).................... 64,000 * 53,933,018 54.1
William C. Powers (9)... 184,000 * 53,933,018 54.1
Frank B. Rabinovitch
(9).................... 164,689 * 53,933,018 54.1
Lee R. Thomas (9)....... 38,000 * 53,933,018 54.1
William S. Thompson, Jr.
(9)(11)................ 184,000 * 53,933,018 54.1
Benjamin L. Trosky (9).. 73,000 * 53,933,018 54.1
EXECUTIVE OFFICERS NOT
INCLUDED ABOVE
William D. Cvengros..... 320,000 * 200,000 1.1
Robert M. Fitzgerald.... 12,664 * 0 *
Kenneth M. Poovey....... 10,000 * 113,459 *
Stephen J. Treadway..... 40,000 * 5,000 *
Richard M. Weil......... 10,800 * 0 *
All directors and
executive officers as a
group persons (6
persons)............... 399,151 * 318,459 2.3
</TABLE>
- --------
*Less than 1%
(1) Each of the persons and entities listed disclaims beneficial ownership of
any units except to the extent that it has a pecuniary interest in such
units.
(2) Includes options exercisable within 60 days of February 1, 1998.
(3) Does not include units underlying options which may be exercised for
either units of limited partner interest in PIMCO Advisors or PIMCO
Holdings units, which are reflected in the column titled "PIMCO Holdings
Units Beneficially Owned."
(4) Assumes exchange of all units of limited partner interest in PIMCO
Advisors for PIMCO Holdings units.
(5) Includes 39,410,321 PIMCO Advisors units held of record by PGP and
14,380,217 PIMCO Advisors units held by TAG over which PGP may be deemed
to have voting control. Does not include non-unitized 0.01% general
partner interest in PIMCO Holdings.
(6) Includes (i) 53,790,538 PIMCO Advisors units which may be deemed to be
beneficially owned by PGP, which may be deemed to be beneficially owned by
Pacific Life and PAM, because PIMCO LLC is a general partner of PGP and is
a wholly-owned subsidiary of PAM, which is a wholly-owned subsidiary of
Pacific Life and (ii) an aggregate of 5,115,275 PIMCO Advisors units
issued as follows: PIMCO LLC (353,204 units), Cadence Partners LP
(2,665,000 units), NFJ Partners L.P. (1,057,211 units), and Parametric
Partners L.P. (1,039,860 units), which may be deemed beneficially owned by
PAM because PIMCO LLC, CCM LLC, NFJ LLC, and PPA LLC, are wholly-owned
subsidiaries of PAM and CCM LLC, NFJ LLC, PPA LLC, in turn are the general
partners of Cadence Partners L.P., NFJ Partners L.P., and Parametric
Partners L.P., respectively. As general partners, CCM LLC, NFJ LLC and PPA
LLC have shared investment and disposition powers with respect to units
held by Cadence Partners L.P., NFJ Partners L.P., and Parametric Partners
L.P., respectively. Also reflects all of the above for LifeCorp and PMHC
because Pacific Life is a wholly-owned subsidiary of LifeCorp, which, in
turn, is a majority-owned subsidiary of PMHC. The address of each of the
above entities is: 700 Newport Center Drive, Newport Beach, California
92660.
82
<PAGE>
(7) Includes (i) 353,204 PIMCO Advisors units held of record by PIMCO LLC and
(ii) 53,790,538 PIMCO Advisors units which may be viewed to be
beneficially owned by PGP, which may be deemed to be owned by PIMCO LLC
because PIMCO LLC is a general partner of PGP.
(8) Includes (i) 142,480 PIMCO Advisors units held of record by PPLLC and
(ii) 53,790,538 PIMCO Advisors units which may be considered to be
beneficially owned by PGP and which may be deemed to be beneficially
owned by PPLLC, which is a general partner of PGP.
(9) Includes the following which may be deemed to be beneficially owned by
the individual as a member of PPLLC: (i) 142,480 PIMCO Advisors units of
PIMCO Advisors held of record by PPLLC and (ii) 53,790,538 PIMCO Advisors
units which may be considered to be beneficially owned by PGP, and which
may be deemed to be beneficially owned by PPLLC as a general partner of
PGP.
(10) Includes 68,900 PIMCO Advisors units held in the Gross Family Foundation
of which the individual is director and as to which he has shared voting
and disposition power, 18,000 PIMCO Advisors units held by him and his
spouse, of which he has shared voting and investment power, 500 PIMCO
Advisors units held by his spouse of which he has no voting or investment
power, and 1,850 held by his children of which he has voting and
investment power.
(11) Includes 6,000 PIMCO Advisors units held in trusts of which the
individual is trustee and as to which he has sole voting and disposition
power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP BETWEEN PIMCO HOLDINGS AND PIMCO ADVISORS
OPERATING AGREEMENT
PIMCO Holdings and PIMCO Advisors are party to an Operating Agreement (the
"Operating Agreement") which, together with the PIMCO Advisors Partnership
Agreement, governs the ongoing relationship of PIMCO Holdings and PIMCO
Advisors. Pursuant to the Operating Agreement, PIMCO Holdings has agreed to
take actions from time to time so as to ensure that the number of outstanding
units is at all times equal to the number of PIMCO Advisors units held by
PIMCO Holdings and its subsidiaries which are allocable to the limited partner
interests in PIMCO Holdings. The Operating Agreement provides that upon any
issuance of PIMCO Holdings units, PIMCO Holdings shall contribute the
consideration, if any, received by PIMCO Holdings for such PIMCO Holdings
units to PIMCO Advisors in exchange for PIMCO Advisors units equal in number
to the number of such PIMCO Holdings units.
The Operating Agreement provides that PIMCO Holdings shall at the request of
PIMCO Advisors adopt and maintain one or more unit incentive plans covering
PIMCO Holdings units or PIMCO Advisors units for the benefit of individuals
providing services to PIMCO Holdings, PIMCO Advisors and their respective
subsidiaries. In addition, the Operating Agreement provides that PIMCO
Holdings assumes and agrees to perform the obligations of PIMCO Advisors
under: (i) the PIMCO Advisors unit-based incentive plans (the 1993 Unit Option
83
<PAGE>
Plan and 1996 Unit Incentive Plan (but with regard to options outstanding
immediately after giving effect to the Restructuring, only to the extent such
options are exercisable to purchase PIMCO Holdings units), the awards of which
were assumed under PIMCO Holdings' 1997 Unit Incentive Plan); (ii) the
Exchange Right issued by PIMCO Advisors in the Opgroup Transaction; and (iii)
the 1994 Registration Rights Agreement and the 1997 Registration Rights
Agreement (each as described under "--Registration Rights Agreements").
The Operating Agreement provides that PIMCO Holdings may not, without the
consent of PIMCO Advisors, (a) carry on any business except in connection with
or incidental to (i) the performance of its duties as a general partner under
the PIMCO Advisors Partnership Agreement, (ii) the direct or indirect
acquisition, ownership or disposition of PIMCO Advisors units, and (iii) its
governance and existence; (b) merge or consolidate with or into any other
person, or sell or otherwise dispose of all or substantially all of its
assets, or effect a recapitalization with respect to PIMCO Holdings units, or
issue or agree to issue any equity securities other than PIMCO Holdings units;
or (c) create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to any
indebtedness. Finally, in the Operating Agreement PIMCO Holdings agrees to
exchange PIMCO Holdings units for PIMCO Advisors units as described below.
EXCHANGE OPPORTUNITIES FOR PIMCO ADVISORS UNITHOLDERS
PIMCO Holdings intends, twice each year at such times as may be permitted
under the PIMCO Advisors Partnership Agreement, to offer certain holders of
PIMCO Advisors units the opportunity to exchange those units for PIMCO
Holdings units on a one for one basis. PIMCO Holdings anticipates effecting
this exchange in a manner which will result in the issuance and resale (in the
case of affiliates of PIMCO Holdings) of the newly issued PIMCO Holdings units
being registered under the Securities Act of 1933, as amended. In addition,
under the Operating Agreement, PIMCO Holdings has agreed from time to time to
exchange PIMCO Holdings units for PIMCO Advisors units on a one for one basis
if the transfer would qualify as an "exempt transfer" under the PIMCO Advisors
Partnership Agreement.
EXPENSE REIMBURSEMENT
In accordance with the PIMCO Advisors Partnership Agreement, PIMCO Advisors
pays all of the expenses (other than taxes) of PIMCO Holdings. See "Executive
Compensation--Compensation of General Partner."
PGP INDEBTEDNESS
The operations of PIMCO Advisors may be affected by the terms of the $130
million of indebtedness owed by PGP. Although this indebtedness does not
constitute an obligation of PIMCO Advisors or any of its subsidiaries, and the
documents governing the indebtedness are not binding on PIMCO Advisors or any
of its subsidiaries, the businesses of PIMCO Advisors have been and are
anticipated to continue to be conducted in compliance with the operating
restrictions in the documents governing the indebtedness in order to avoid a
default thereunder even though contrary courses of action may be in the best
interests of PIMCO Advisors. The operating restrictions, which remain in
effect until the debt matures in 2001 if the debt is not prepaid, include,
among other things, cash flow and interest coverage requirements and
restrictions on incurrence of indebtedness and liens, investments, asset
sales, mergers and consolidations, affiliate transactions, issuance of
additional PIMCO Advisors units and amendment of the PIMCO Advisors
Partnership Agreement. In particular, financial covenants relating to this
indebtedness could have the effect of inhibiting PIMCO Advisors' use of cash
for any purpose other than for distributions. The indebtedness is non-recourse
to PGP and is secured by, among other things, a pledge of certain PIMCO
Advisors units owned by PGP. In the event of a default under the indebtedness,
the lenders could foreclose upon the pledged PIMCO Advisors units which would
reduce the economic interests in PIMCO Advisors of PGP and its beneficial
owners. Management of PIMCO Advisors is currently in discussions with PGP and
its lenders concerning a modification to such indebtedness wherein PIMCO
Advisors would guarantee such indebtedness in exchange for a fee from PGP and
the release of certain of the restrictions relating to PIMCO Advisors in such
indebtedness. Also, PIMCO Advisors has obtained a commitment from a group of
lenders for a $500 million credit facility and has considered borrowing under
the
84
<PAGE>
facility and lending to PGP an amount sufficient for PGP to repay its lenders,
thereby eliminating all restrictions relating to PIMCO Advisors under the PGP
indebtedness. There can be no assurances that any agreement with respect to
these matters will be reached, or as to the terms of any such possible
arrangements if an agreement were reached.
WITHDRAWAL AND REMOVAL OF A GENERAL PARTNER OF PIMCO HOLDINGS OR PIMCO
ADVISORS
The PIMCO Holdings Partnership Agreement provides that, except under certain
limited exceptions, the general partner of PIMCO Holdings may withdraw as
general partner of PIMCO Holdings only if (i) such withdrawal is approved by
holders of a majority of PIMCO Holdings units and the general partner makes a
Partnership Assignment Determination, and (ii) counsel renders a Partnership
Limited Liability Determination and a Partnership Tax Determination. The
general partner may be removed by a vote of holders of PIMCO Holdings units
holding 80% or more of all outstanding PIMCO Holdings units if a successor
general partner is appointed, counsel makes a Partnership Limited Liability
Determination and a Partnership Tax Determination, the general partner makes a
Partnership Assignment Determination and such removal is approved by the
successor general partner. Also, interests in the general partner may be sold
or transferred without any prior approval or consent of the holders of PIMCO
Holdings units.
The PIMCO Advisors Partnership Agreement provides that any general partner
may withdraw as a general partner of PIMCO Advisors only if (a) the general
partner transfers all of its PIMCO Advisors GP Units to an affiliate of such
general partner, and the affiliate is admitted as a general partner of PIMCO
Advisors in accordance with the PIMCO Advisors Partnership Agreement or (b)
such withdrawal is approved by holders of a majority of the units of limited
partner interest (other than those held by the general partners and their
affiliates) and if counsel renders an opinion that the limited partners do not
lose their limited liability pursuant to Delaware law or the PIMCO Advisors
Partnership Agreement (a "PIMCO Advisors Limited Liability Determination"),
and provides certain other opinions relating to the status of PIMCO Advisors
as a partnership for federal income tax purposes (a "PIMCO Advisors Tax
Determination") and the continuation of PIMCO Advisors advisory agreements (a
"PIMCO Advisors Assignment Determination"). The general partners may be
removed by a vote of unitholders holding 80% or more of all outstanding units
if PIMCO Advisors receives a PIMCO Advisors Limited Liability Determination, a
PIMCO Advisors Tax Determination and a PIMCO Advisors Assignment Determination
with respect to such removal and (ii) if such general partner is the sole
general partner, a person qualified to be general partner, which has agreed in
writing to carry on the business of PIMCO Advisors, is approved by the
partners of PIMCO Advisors as the successor general partner. However, by
virtue of PGP's and PIMCO Holdings' ownership of units, either of the general
partners can veto any such removal. Also, interests in a general partner may
be sold or transferred without any prior approval or consent of the holders of
PIMCO Advisors limited partnership units.
In the event of withdrawal or removal of a general partner of PIMCO
Advisors, the departing general partner will become a limited partner and its
PIMCO Advisors GP Units will be converted into PIMCO Advisors limited
partnership units. At the time of such conversion, the departing general
partner must pay to PIMCO Advisors any negative balance in its capital
account. If PIMCO Advisors is indebted to the departing general partner at the
time of its withdrawal or removal, PIMCO Advisors will repay the general
partner, within 60 days, the amount of such indebtedness, subject to reduction
for damages incurred if the general partner withdraws in violation of the
PIMCO Advisors Partnership Agreement. All outstanding obligations incurred by
the departing general partner as general partner of PIMCO Advisors will be
assumed by the successor to the general partner, or if there is no successor,
by the remaining general partners.
INDEMNIFICATION
The PIMCO Holdings Partnership Agreement requires PIMCO Holdings to
indemnify the general partner, its affiliates and all of its officers,
directors, partners, employees and agents (collectively, the "Indemnitees")
against any and all proceedings in which the Indemnitees may be involved, or
threatened to be involved, as a party or otherwise by reason of their
management of the affairs of PIMCO Holdings or which relates to or arises
85
<PAGE>
out of PIMCO Holdings or related entities. The PIMCO Holdings Partnership
Agreement provides that such Indemnitees are not entitled to indemnification
with respect to any claim, issue or matter in which they have been adjudged
liable for actual fraud, willful misconduct or gross negligence, unless and
only to the extent that the court in which such action was brought, or another
court of competent jurisdiction, determines upon application that, despite the
adjudication of liability, but in view of all the circumstances of the case,
the Indemnitee is fairly and reasonably entitled to indemnification for such
liabilities and expenses as the court may deem proper.
The PIMCO Holdings Partnership Agreement also provides that the general
partner will not be liable to PIMCO Holdings or the holders of PIMCO Holdings
units for errors in judgment or for breach of fiduciary duty (including breach
of any duty of care or any duty of loyalty) unless the general partner's
action or failure to act involved an act or omission that constitutes actual
fraud, gross negligence or willful or wanton misconduct.
The PIMCO Advisors Partnership Agreement provides that PIMCO Advisors will
indemnify (i) any general partner, (ii) any former general partner, (iii) any
person which is or was an affiliate of any general partner or any former
general partner, (iv) any person which is or was an Associate (as defined in
the PIMCO Advisors Partnership Agreement) of any general partner, former
general partner, affiliate of a general partner or former general partner, or
PIMCO Advisors or its subsidiaries and (v) any person which is or was serving
at the request of PIMCO Advisors or any of its subsidiaries, any general
partner or any former general partner as an Associate of another person.
The PIMCO Advisors Partnership Agreement also provides that neither a
general partner nor any indemnitee will be liable to PIMCO Advisors or the
unitholders for errors in judgment or for breach of fiduciary duty (including
breach of any duty of care or any duty of loyalty) unless it is proved by
clear and convincing evidence that the general partner's action or failure to
act involved an act or omission undertaken with deliberate intent to cause
injury to PIMCO Advisors or was undertaken with reckless disregard for the
best interests of PIMCO Advisors.
CONTRIBUTION AGREEMENT
In connection with the acquisition of the investment advisory assets of
Opgroup, Opfin, Opgroup, PIMCO Advisors and Value Advisors LLC entered into a
contribution agreement (the "Contribution Agreement") pursuant to which
Opgroup, then a subsidiary of PIMCO Advisors, caused its subsidiary Opfin to
contribute (i) the ownership of Value Advisors LLC and the one percent general
partner interest in PIMCO Holdings to PIMCO Advisors, and then (ii) Opfin's
32.4% managing general partner interest in Oppenheimer Capital and the one
percent general partner interests in three subsidiaries of Oppenheimer Capital
to Value Advisors LLC (then a subsidiary of PIMCO Advisors). In exchange for
these contributions, Opfin received 6.0 million PIMCO Advisors Class C units
of limited partner interest. Each PIMCO Advisors Class C unit of limited
partner interest is entitled to the same proportionate share of profits,
losses and distributions as a PIMCO Advisors Class A unit of limited partner
interest, but with a minimum priority distribution of $2.75 per year and a
maximum distribution of $3.00 per year, or $0.75 per quarter subject to a
catch-up on an annual basis.
Under the terms of the Contribution Agreement, if PIMCO Advisors or its
direct or indirect subsidiaries (other than Opgroup or Opfin) incurs a loss
relating to or arising from Opfin's investment advisory businesses or which is
otherwise attributable to the Opgroup merger agreement, and, as a result of
such loss, Opgroup receives an indemnification payment in excess of any loss
incurred by Opgroup or Opfin attributable to the same loss event (the excess
portion thereof, an "Excess Indemnification Payment"), then (i) if the
indemnification payment is in the form of a reduction of the face amount of
the Indemnity Certificate, Opfin shall return to PIMCO Advisors a number of
PIMCO Advisors units equal to the quotient of (x) 6,000,000 multiplied by the
principal amount of the reduction constituting such Excess Indemnification
Payment divided by (y) $265 million, or (ii) if the Excess Indemnification
Payment is in cash, Opgroup shall distribute the cash to PIMCO Advisors.
86
<PAGE>
In addition, PIMCO Advisors agreed that if Opgroup or Opfin incurs a loss
for which Opgroup does not receive an indemnification payment in cash, PIMCO
Advisors will loan to Opgroup an amount equal to the loss. PIMCO Advisors
further agreed to loan Opgroup an amount sufficient to pay the remaining
principal and interest payments on the Opfin Debt. Accordingly, following the
closing of the Opgroup Transaction, PIMCO Advisors loaned $35 million to
Opgroup, which used a portion of the proceeds of this loan to retire the
indebtedness owed by Opfin to PIMCO Holdings.
REGISTRATION RIGHTS AGREEMENTS
PIMCO Advisors is a party to (i) that certain Registration Rights Agreement
dated November 4, 1997 between PIMCO Advisors and former Opgroup stockholders
(the "1997 Registration Rights Agreement"), and (ii) that certain Registration
Rights Agreement dated as of November 15, 1994 between PIMCO Advisors and
certain of its unitholders (the "1994 Registration Rights Agreement").
Following the Restructuring, PIMCO Advisors was no longer obligated to effect
registrations under these agreements. However, pursuant to the Operating
Agreement, PIMCO Holdings has agreed to perform the obligations of PIMCO
Advisors under the 1997 Registration Rights Agreement and the 1994
Registration Rights Agreement, and PIMCO Holdings intends to provide
registration rights with respect to PIMCO Holdings units comparable to those
described below.
The holders of registration rights under the 1997 Registration Rights
Agreement were granted (i) the right to initiate up to two registrations of
their registerable securities (subject to customary limitations, a minimum
sale requirement and priority rights of holders of registration rights under
the 1994 Registration Rights Agreement) and (ii) certain piggyback
registration rights in respect of registrations initiated by the partnership
or by other holders of registration rights granted pursuant to a separate
agreement, subject to approval of the managing underwriter. In the case of a
registration initiated by the partnership, participation in such registration
by the holders of registration rights under the 1997 Registration Rights
Agreement and other registration rights agreements could not be reduced to
less than 40%. The holders of registration rights under the 1994 Registration
Rights Agreement were granted (i) the right to initiate up to five demand
registrations on Form S-1 and an unlimited number of demand registrations on
Form S-3 (subject to customary limitations and a minimum sale requirement) and
(ii) piggy-back registration rights in respect of primary offerings by the
partnership similar to those held by the holders under the 1997 Registration
Rights Agreement. The holders under the 1994 Registration Rights Agreement
generally have priority over the holders under the 1997 Registration Rights
Agreement with respect to management of the registration process and inclusion
of shares in registrations initiated by holders of registration rights.
87
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
Financial Statements of the registrant are listed in "Index to Financial
Statements" on page 33 and are filed as part of this Report.
(2) Financial Statement Schedules.
There are no Financial Statement Schedules of the registrant filed as part of
this Report.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Agreement of Limited Partnership of PIMCO
Advisors Holdings L.P. dated March 14, 1991 (Incorporated by reference
to Exhibit 3.1 of PIMCO Advisors Holdings L.P.'s Registration
Statement No. 333-39585 on Form S-1)
3.1.1 Amendment to Amended and Restated Agreement of Limited Partnership of
PIMCO Advisors Holdings L.P. dated November 4, 1997 (Incorporated by
reference to Exhibit 3.1.1 of PIMCO Advisors Holdings L.P.'s
Registration Statement No. 333-39585 on Form S-1)
3.1.2 Assignment of General Partner Interest and Amendment to Amended and
Restated Agreement of Limited Partnership of PIMCO Advisors Holdings
L.P. dated November 4, 1997 (Incorporated by reference to Exhibit
3.1.2 of PIMCO Advisors Holdings L.P.'s Registration Statement No.
333-39585 on Form S-1)
3.1.3 Assignment of General Partner Interest and Amendment to Amended and
Restated Agreement of Limited Partnership of PIMCO Advisors Holdings
L.P. dated November 4, 1997 (Incorporated by reference to Exhibit
3.1.3 of PIMCO Advisors Holdings L.P.'s Registration Statement No.
333-39585 on Form S-1)
3.1.4 Amendment to Amended and Restated Agreement of Limited Partnership
Agreement of PIMCO Advisors Holdings L.P. dated November 4, 1997
(Incorporated by reference to Exhibit 3.1.4 of PIMCO Advisors Holdings
L.P.'s Registration Statement No. 333-39585 on Form S-1)
3.1.5 Amendment to Amended and Restated Limited Partnership Agreement of
PIMCO Advisors Holdings L.P. dated December 1, 1997 (Incorporated by
reference to Exhibit 3.1.5 of PIMCO Advisors Holdings L.P.'s
Registration Statement No. 333-39585 on Form S-1)
3.1.6 Amendment to Amended and Restated Limited Partnership Agreement of
PIMCO Advisors Holdings L.P. dated December 1, 1997 (Incorporated by
reference to Exhibit 3.1.6 of PIMCO Advisors Holdings L.P.'s
Registration Statement No. 333-39585 on Form S-1)
4.1 Form certificate of Limited Partnership Units
10.1 Acquisition Agreement dated August 17, 1995 among Oppenheimer Capital,
Quest for Value Advisors, Quest for Value Distributors and Oppenheimer
Management Corporation (Incorporated by reference to Exhibit 10.1 of
the PIMCO Advisors Holdings L.P.'s Form 10-Q for the fiscal quarter
ended October 31, 1995)
10.2 Form of Indemnification Agreement executed by certain officers of the
Registrant and certain directors of Thomson McKinnon Asset Management
Inc. (Incorporated by reference to Exhibit 10.21 of Thomas McKinnon
Asset Management L.P.'s Report No. 33-17227 on Form 10-Q for the
fiscal quarter ended June 30, 1990)
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.3 Form of Indemnification Agreement executed by certain directors of
Thomson Advisory Group, Inc. (Incorporated by reference to Exhibit
10.22 of Thomson Advisory Group L.P.'s Report No. 33-17227 on Form 10-
Q for the quarter ended September 30, 1990)
10.3.1 Form of Amendment No. 1 to Indemnification Agreement (Incorporated by
reference to Exhibit 10.46 of Thomson Advisory Group L.P.'s Report No.
33-17227 on Form 10-Q for the fiscal quarter ended March 31, 1991)
10.4 Credit Agreement dated as of April 12, 1996 between PIMCO Advisors
L.P. as borrower and Citicorp USA, Inc. as initial lender and agent
(Incorporated by reference to Exhibit 10.23 of PIMCO Advisors L.P.'s
Report on Form 10-Q for the fiscal quarter ended March 31, 1996)
10.4.1 Waiver, Consent and Amendment No. 1 to the Credit Agreement dated as
of November 3, 1997 between PIMCO Advisors L.P., the banks, financial
institutions and other institutional lenders parties to the Credit
Agreement and Citicorp USA, Inc.
10.4.2 Amendment No. 2 to the Credit Agreement between PIMCO Advisors L.P.,
the banks, financial institutions and other institutional lenders
parties to the Credit Agreement and Citicorp USA, Inc.
10.5 Registration Rights Agreement dated as of November 15, 1994, among the
Funds, PFAMCo Partners and Individuals (as such terms are defined
therein) (Incorporated by reference to PIMCO Partners G.P.'s Schedule
13D filed November 25, 1994)
10.6 Amended and Restated Operating Agreement between PIMCO Advisors L.P.
and PIMCO Advisors Holdings L.P. dated January 1, 1998
10.7 Amended and Restated Agreement of Limited Partnership of PIMCO
Advisors L.P. dated December 31, 1997
10.8 Agreement and Plan of Merger dated November 4, 1997 (Opgroup
Transaction) (Incorporated by reference to Exhibit 10.1 of PIMCO
Advisors L.P.'s Report on Form 8-K/A dated November 4, 1997)
10.9 Put Right dated November 4, 1997 (Incorporated by reference to Exhibit
10.2 of PIMCO Advisors L.P.'s Report on Form 8-K/A dated November 4,
1997)
10.10 Exchange Right dated November 4, 1997 (Incorporated by reference to
Exhibit 10.3 of PIMCO Advisors L.P.'s Report on Form 8-K/A dated
November 4, 1997)
10.11 Note Agreement dated November 4, 1997 (Incorporated by reference to
Exhibit 10.4 of PIMCO Advisors L.P.'s Report on Form 8-K/A dated
November 4, 1997)
10.12 Contribution Agreement dated November 4, 1997 (Incorporated by
reference to Exhibit 10.5 of PIMCO Advisors L.P.'s Report on Form 8-
K/A dated November 4, 1997)
10.13 Certificate of Long Term Indemnity Indebtedness dated November 4, 1997
(Incorporated by reference to Exhibit 10.6 of PIMCO Advisors L.P.'s
Report on Form 8-K/A dated November 4, 1997)
10.14 Amended and Restated Release and Indemnity Agreement dated November 4,
1997 (Incorporated by reference to Exhibit 10.65 of PIMCO Advisors
Holdings L.P.'s Registration Statement No. 333-39585 on Form S-1)
10.15 Amended and Restated Tax Indemnity Agreement dated November 4, 1997
(Incorporated by reference to Exhibit 10.66 of PIMCO Advisors Holdings
L.P.'s Registration Statement No. 333-39585 on Form S-1)
10.16 Registration Rights Agreement dated November 4, 1997 (Incorporated by
reference to Exhibit 10.7 of PIMCO Advisors L.P.'s Report on Form 8-
K/A dated November 4, 1997)
10.17 Agreement and Plan of Merger dated November 4, 1997 (Oppenheimer
Capital Merger) (Incorporated by reference to Exhibit 10.68 of PIMCO
Advisors Holdings L.P.'s Registration Statement No. 333-39585 on Form
S-1)
10.18 First Amendment to Agreement and Plan of Merger dated as of November
4, 1997 (Oppenheimer Capital Merger) (Incorporated by reference to
Exhibit 10.69 of PIMCO Advisors Holdings L.P.'s Registration Statement
No. 333-39585 on Form S-1)
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.19 Amended and Restated Unit Purchase Agreement dated November 4, 1997
(Incorporated by reference to Exhibit 10.70 of PIMCO Advisors Holdings
L.P.'s Registration Statement No. 333-39585 on Form S-1)
10.20 Restructuring Contribution and Issuance Agreement dated December 31,
1997
10.21 Written Action dated November 4, 1997 (Delegation to the Management
Board of PIMCO Advisors Holdings L.P.)
10.22 Written Action dated November 28, 1997 (Delegation to the Management
Board of PIMCO Advisors L.P.)
10.24 PIMCO Advisors L.P. Executive Deferred Compensation Plan (Incorporated
by reference to Exhibit 10.24 of PIMCO Advisors L.P.'s Annual report
on Form 10-K for the fiscal year ended December 31, 1996)
10.24.1 First Amendment to the PIMCO Advisors L.P. Executive Deferred
Compensation Plan (Incorporated by reference to Exhibit 10.6.2 of
PIMCO Advisors Holdings L.P.'s Registration Statement No. 333-39585 on
Form S-1)
10.24.2 Second Amendment to the PIMCO Advisors L.P. Executive Deferred
Compensation Plan (Incorporated by reference to Exhibit 10.6.3 of
PIMCO Advisors Holdings L.P.'s Registration Statement No. 333-39585 on
Form S-1)
10.25 1997 Unit Incentive Plan of PIMCO Advisors Holdings L.P. and PIMCO
Advisors L.P. (Incorporated by reference to Exhibit 10.1 of PIMCO
Advisors Holdings L.P.'s Registration Statement No. 333-43201 on Form
S-8)
10.26 Profit Sharing Plan for Pacific Investment Management Company
(Incorporated by reference to Exhibit 10.5 of PIMCO Advisor's Report
on Form 10-K for the fiscal year ended December 31, 1994)
10.27 Profit Sharing Plan for Columbus Circle Investors (Incorporated by
reference from Thomson Advisory Group L.P.'s Report on Form 8-K dated
July 11, 1994)
10.28 Form of Profit Sharing Plan for Investment Management Firms
(Incorporated by reference from Thomson Advisory Group L.P.'s Report
on Form 8-K dated July 11, 1994)
10.29 Blairlogie Loss Reimbursement and Recapture Agreement (Incorporated by
reference from Thomson Advisory Group L.P.'s Report on Form 8-K dated
July 11, 1994)
10.30 Form of Class I Option Amendment Agreement (Incorporated by reference
from Thomson Advisory Group L.P.'s Report on Form 8-K dated July 11,
1994)
10.31 Form of Class II Option Amendment Agreement (Incorporated by reference
from Thomson Advisory Group L.P.'s Report on Form 8-K dated July 11,
1994)
10.32 Form of Option Agreement (Incorporated by reference to Exhibit 2.13 of
Thomson Advisory Group L.P.'s Registration Statement No. 33-84914 on
Form S-4)
10.33 PIMCO Advisors L.P. 401(k) Savings and Investment Plan (Incorporated
by reference to Exhibit 10.10 of Thomson Advisory Group L.P.'s Report
on Form 10-K for the fiscal year ended December 31, 1991)
10.33.1 First Amendment to the PIMCO Advisors L.P. 401(k) Savings and
Investment Plan (Incorporated by reference to Exhibit 10.10(b) of
Thomson Advisory Group L.P.'s Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.33.2 PIMCO Advisors L.P. 401(k) Savings and Investment Plan Submitter
Amendment (Incorporated by reference to Exhibit 10.10(c) of Thomson
Advisory Group L.P.'s Report on Form 10-K for the fiscal year ended
December 31, 1993)
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.33.3 Third Amendment to the PIMCO Advisors L.P. 401(k) Savings and
Investment Plan (Incorporated by reference to Exhibit 10.18(E) of
PIMCO Advisors L.P.'s Report on Form 10-K for the fiscal year ended
December 31, 1994)
10.33.4 Fourth Amendment to the PIMCO Advisors L.P. 401(k) Savings and
Investment Plan (Incorporated by reference to Exhibit 10.18(F) of
PIMCO Advisor L.P.'s Report on Form 10-K for the fiscal year ended
December 31, 1994)
10.34 Employment Agreement: David B. Breed (Incorporated by reference to
Exhibit 10.25 of PIMCO Advisors L.P.'s Report on Form 10-K for the
fiscal year ended December 31, 1996)
10.35 Employment Agreement: William D. Cvengros (Incorporated by reference
from Thomson Advisory Group L.P.'s Report on Form 8-K dated July 11,
1994)
10.36 Employment Agreement: Donald A. Chiboucas (Incorporated by reference
from Thomson Advisory Group L.P.'s Report on Form 8-K dated July 11,
1994)
10.37 Employment Agreement: William H. Gross (Incorporated by reference to
Exhibit 10.26 of PIMCO Advisors L.P.'s Report on Form 10-K for the
fiscal year ended December 31, 1996)
10.38 Employment Agreement: Brent R. Harris (Incorporated by reference to
Exhibit 10.28 of PIMCO Advisors L.P.'s Report on Form 10-K for the
fiscal year ended December 31, 1996)
10.39 Employment Agreement: William F. Podlich, III (Incorporated by
reference to Exhibit 10.31 of PIMCO Advisors L.P.'s Report on Form 10-
K for the fiscal year ended December 31, 1996)
10.40 Employment Agreement: William S. Thompson, Jr. (Incorporated by
reference to Exhibit 10.32 of PIMCO Advisors L.P.'s Report on Form 10-
K for the fiscal year ended December 31, 1996)
10.41 Employment Agreement: Benjamin L. Trosky (Incorporated by reference to
Exhibit 10.33 of PIMCO Advisors L.P.'s Report on Form 10-K for the
fiscal year ended December 31, 1996)
10.42 Form of Manager Employer Agreement (Incorporated by reference from
Thomson Advisory Group L.P.'s Report on Form 8-K dated July 11, 1994)
10.43 Office Lease dated as of February 19, 1998 by and between California
State Teachers Retirement System and Pacific Investment Management
Company
10.44 Lease with respect to premises at 33 Maiden Lane, New York
(Incorporated by reference from exhibit 10.9 on Form 10-K of
Oppenheimer Capital, L.P. for its fiscal year ended April 30, 1994)
10.45 Lease with respect to premises at World Financial Center, Tower B, New
York (Incorporated by reference in the Annual Report on Form 10-K of
Oppenheimer Capital, L.P. for its fiscal year ended April 30, 1993)
21 Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. The registrant filed the following reports on Form
8-K during the final quarter of 1997.
(1) Registrant's report on Form 8-K dated November 6, 1997.
(2) Registrant's report on Form 8-K/A dated November 20, 1997.
(3) Registrant's report on Form 8-K dated December 12, 1997.
(4) Registrant's report on Form 8-K dated December 19, 1997.
91
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
PIMCO ADVISORS HOLDINGS L.P.
/s/ William D. Cvengros
By: _________________________________
William D. Cvengros,
Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William D. Cvengros Board Member, Chief Executive March 30, 1998
- --------------------------- Officer (Principal Executive
William D. Cvengros Officer)
/s/ Robert M. Fitzgerald Board Member, Senior Vice President, March 30, 1998
- --------------------------- Chief Financial Officer (Principal
Robert M. Fitzgerald Financial and Accounting Officer)
/s/ Kenneth M. Poovey Board Member, Chief Operating March 30, 1998
- --------------------------- Officer, General Counsel
Kenneth M. Poovey
</TABLE>
92
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
TPA 0006
UNITS OF LIMITED PARTNERSHIP INTEREST IN
PIMCO ADVISORS HOLDINGS L.P.
CUSIP 69338P 10 2
SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that
is the registered holder of UNITS
representing limited partnership interest in PIMCO Advisors Holdings L.P., a
limited partnership formed under the laws of the State of Delaware (the
"Partnership"), transferable on the books of the Partnership, by the holder
hereof in person or by duly authorized attorney, upon surrender of this
Certificate properly endorsed and accepted. This Certificate and the Units
evidenced hereby are issued and shall in all respects be subject to all the
provisions of the Amended and Restated Agreement of Limited Partnership of the
Partnership, as amended or restated from time to time, to all of which the
holder, by acceptance hereof, assents, and to the additional terms and
provisions on the reverse side hereof. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile signatures of the duly authorized officers of the
Partnership.
PIMCO ADVISORS HOLDINGS L.P.
Dated:
By: /s/ WILLIAM D. CVENGROS
---------------------------
William D. Cvengros
Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT
AND REGISTRAR,
BY By: /s/ RICHARD M. WEIL
---------------------------
Richard M. Weil
AUTHORIZED SIGNATURE Secretary
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
PIMCO Advisors Holdings L.P., a limited partnership formed under the laws
of the State of Delaware (the "Partnership"), will furnish to the holder and
each assignee of this Certificate and the Units evidenced hereby, without
charge, on written request to the Partnership at its principal place of
business, 800 Newport Center Drive, Newport Beach, California 92660, a copy of
the Amended and Restated Agreement of Limited Partnership of the Partnership, as
amended or restated from time to time (the "Partnership Agreement").
The holder and each assignee hereof adopts the terms and provisions of the
Power of Attorney granted in Article XVII of the Partnership Agreement and
agrees that such Power of Attorney shall be deemed to be coupled with an
interest, shall be irrevocable and shall survive and not be affected by his
subsequent death, disability, incapacity, incompetency, or bankruptcy, if an
individual, or its bankruptcy or termination of existence, if a corporation,
partnership or other entity.
The holder and each assignee hereof hereby adopts the terms and provisions
of the Partnership Agreement, including those provisions of Article XVIII of the
Partnership Agreement granting to the General Partner and its Affiliates a right
to purchase Units in the event that less than 10% of the total number of Units
then outstanding are held by Persons other than the General Partner and its
Affiliates.
The holder and each assignee hereof hereby further agree to execute and
deliver such documents as the Partnership may require to evidence his title to
the Units evidenced by this Certificate or to complete the exchange and transfer
of such Units. The holder of a Certificate representing Units who is not a
United States Person (as defined below) may be subject to withholding with
respect to the Units evidenced by this Certificate.
ASSIGNMENT
For value received, _________________________________________ hereby sells,
assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
| |
|____________________________________|__________________________________________
________________________________________________________________________________
Please Print or Type Name and Address of Transferee
________________________________________________________________________________
__________________________________________________________________________ Units
representing limited partnership interest evidenced by this Certificate and do
hereby irrevocably constitute and appoint
________________________________________________________________________________
to transfer the said Units on the books of the Partnership with full power of
substitution in the premises.
________________________________________________________________________________
Dated:___________________________________
______________________________________
(Signature)
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NEW YORK STOCK
EXCHANGE OR BY A COMMERCIAL BANK OR
TRUST COMPANY
______________________________________
(Signature)
NOTICE: The Signature(s) to this
Assignment must correspond with the
Name(s) as written upon the face of
this Certificate in every particular,
without alteration or enlargement or
any change whatsoever.
________________
APPLICATION TO PIMCO ADVISORS HOLDINGS L.P. FOR TRANSFER OF UNITS OF
LIMITED PARTNERSHIP INTEREST IN PIMCO ADVISORS HOLDINGS L.P.
No assignment of the Units of limited partnership interest evidenced by
this Certificate will be registered on the books of the Partnership until an
Application for Transfer of the Units has been executed by the Applicant and
delivered to the Transfer Agent and Registrar, either (1) on the Application set
forth below or (2) on a separate Application in substantially the form set forth
below.
The undersigned ("Applicant") hereby (i) applies for transfer to the name
of the Applicant of the Units of limited partnership interest in the partnership
evidenced by this Certificate, (ii) requests admission to the Partnership as a
substituted limited partner, (iii) certifies that the Applicant has authority to
enter into and hereby executes and agrees to be bound by the Partnership
Agreement, (iv) grants the Power of Attorney and makes the consents and waivers
set forth in the Partnership Agreement and (v) certifies to the Partnership and
to the Transfer Agent and Registrar that the Applicant (including any person for
whom the Applicant will hold the Units)
(check one of the following) is [_] is not [_] a United States Person./1/
The Applicant agrees to be bound by the terms and conditions of this
Application and the Partnership Agreement. The holder of a Certificate
representing Units who is not a United States Person may be subject to
withholding with respect to the Units evidenced by this Certificate.
Date:___________________________________ _______________________________________
Signature of Applicant
___________
/1/ The term "United States Person" shall mean a citizen or resident of the
United States, a domestic partnership, a domestic corporation, or any
estate or trust (other than a foreign estate or foreign trust), as those
terms are defined in Section 7701 of the Internal Revenue Code of 1986, as
amended, or any successor section thereto and any Income Tax Regulations
thereunder.
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED
OPERATING AGREEMENT
This Amended and Restated Operating Agreement (this "Agreement") is entered
into as of 12:01 a.m. Pacific Standard Time on January 1, 1998 by and between
PIMCO Advisors Holdings L.P., a Delaware limited partnership formerly named
Oppenheimer Capital, L.P. ("Holdings"), and PIMCO Advisors L.P., a Delaware
limited partnership ("Advisors"). Capitalized terms not otherwise defined herein
are defined in the Amended and Restated Agreement of Limited Partnership of
Advisors dated December 31, 1997 (the "Advisors Partnership Agreement").
RECITALS
1. On November 30, 1997, the general partner of Advisors admitted Holdings
as an additional general partner of Advisors.
2. On November 30, 1997, Advisors issued 26,037,935 Class A GP Units to
Holdings in exchange for (i) its interest in Oppenheimer Capital, a Delaware
general partnership, and (ii) cash in the amount of approximately $16,757,000.
3. On December 31, 1997, the general partners of Advisors effected a
restructuring (the "Restructuring") pursuant to which all Class A LP Units held
by the public unitholders of Advisors were exchanged for units of limited
partner interest in Holdings (each, a "Holdings Unit").
4. Immediately following the Restructuring, the trading of the Class A LP
Units on the New York Stock Exchange ceased, and Holdings became the sole
publicly traded company through which Partnership Interests in Advisors are
held.
5. The parties wish to confirm their mutual understanding with regard to
their relationship following the Restructuring.
AGREEMENT
Section 1. Definitions.
Advisors is defined in the preamble to this Agreement.
Advisors Partnership Agreement is defined in the preamble to this
Agreement.
Advisors Units means Advisors GP Units or LP Units.
<PAGE>
Holdings is defined in the preamble to this Agreement.
Holdings Unit is defined in the Recitals to this Agreement.
Restructuring is defined in the Recitals to this Agreement.
Unit Incentive Plan means a plan (including without limitation a deferred
compensation plan) providing for the issuance of Units, options or rights to
acquire Units, or rights based upon the value of Units or otherwise relating to
Units, to or for the benefit of individuals providing services to the Persons
specified therein.
Units means Advisors LP Units or Holdings Units.
Section 2. Unit Parity.
(a) Holdings shall take such actions as shall be required from time to
time so as to ensure that the number of outstanding Holdings Units is at all
times equal to the number of Advisors Units held by Holdings and its
Subsidiaries which are allocable to the Holdings Units.
(b) Upon any issuance of Holdings Units, Holdings shall immediately
contribute the consideration, if any, received by Holdings for such Holdings
Units to Advisors in exchange for Class A GP Units equal in number to the number
of such Holdings Units.
Section 3. Assumption of Certain Obligations of Advisors.
Holdings hereby assumes and agrees to perform the obligations of Advisors
under:
(i) the 1993 Unit Option Plan, 1994 Class B LP Unit Option
Plan and 1996 Unit Incentive Plan of Advisors, but with regard to options
outstanding immediately after giving effect to the Restructuring, only to the
extent such options are exercisable to purchase Holdings Units;
(ii) that certain Exchange Right issued by Advisors on
November 4, 1997;
(iii) that certain Registration Rights Agreement made effective
as of November 15, 1994 between Advisors and certain holders of Advisors Units;
and
(iv) that certain Registration Rights Agreement made effective
as of November 4, 1997 between Advisors and certain holders of Advisors
Units.
Section 4. Unit Incentive Plans.
2
<PAGE>
Holdings shall, at the request of Advisors from time to time, adopt and
maintain one or more Unit Incentive Plans for the benefit of individuals
providing services to Holdings, Advisors and their respective Subsidiaries.
Section 5. Exchange of Private Units for Holdings Units.
(a) An Advisors Unitholder shall have the right at any time and from
time to time, at its option, to transfer, in an Exempt Transfer, any or all of
its Class A LP Units to Holdings in exchange for Holdings Units, at the rate of
one Holdings Unit for each Class A LP Unit surrendered for exchange. In order to
exercise this right, such Unitholder shall surrender the certificates evidencing
the Class A LP Units to be exchanged, duly endorsed to the order of Holdings, at
the principal office of Holdings, accompanied by a duly completed and executed
notice of exchange, a statement of facts demonstrating that the transfer is an
Exempt Transfer, and such other duly completed and executed documents and
instruments in such form as shall be reasonably prescribed from time to time by
Holdings.
(b) As promptly as practicable after a surrender of Class A LP Units
for exchange pursuant to Section 5(a), Holdings shall issue and deliver to the
exchanging Unitholder at the principal office of Holdings, or if requested, by
mail to the exchanging Unitholder at its address noted on the notice of
exchange, a certificate for the number of Holdings Units to be issued and
delivered in the exchange.
(c) Holdings Units issued and delivered in an exchange pursuant to
Section 5(b) shall be duly authorized, validly issued, fully paid and
nonassessable.
(d) An exchanging Unitholder will become the holder of record of the
Holdings Units issued to it as of the close of business on the Business Day a
Certificate evidencing its Class A LP Units surrendered for exchange is issued
to Holdings and registered in Holding's name on the books and record of the
Transfer Agent.
(e) The rights given to Advisors Unitholders by this Section 5 are
subject to, and shall be limited by, any transfer restrictions in the Advisors
Partnership Agreement or imposed from time to time by Advisors pursuant to the
terms of the Advisors Partnership Agreement.
Section 6. Negative Covenants.
Without the prior written consent of Advisors, Holdings shall not, and
shall not permit any of its Subsidiaries to:
(i) carry on any business except in connection with or
incidental to (A) the performance of its duties as a general partner under the
Advisors Partnership Agreement, (B) the direct or indirect acquisition,
ownership or disposition of Advisors Units, and (C) its governance and
existence;
3
<PAGE>
(ii) merge or consolidate with or into any other Person, or sell
or otherwise dispose of all or substantially all of its assets, or effect a
Recapitalization with respect to the Holdings Units, or issue or agree to issue
any Equity Securities other than Holdings Units; or
(iii) create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
any Indebtedness.
Section 7. Miscellaneous.
(a) This Agreement may not be amended, modified or waived except by
written instrument executed by the parties hereto.
(b) This Agreement constitutes the entire agreement of the parties
hereto, and supersedes all prior agreements and understandings, written and
oral, among the parties with respect to the subject matter hereof.
(c) When a reference is made in this Agreement to a Section, such
reference shall be to a Section of this Agreement unless otherwise indicated.
The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
(d) All notices and other communications hereunder shall be in
writing and shall be deemed given (i) when delivered in person, (ii) when
transmitted by telecopy (with written confirmation), (iii) on the third Business
Day following the mailing thereof by certified or registered mail (return
receipt requested) or (iv) when delivered by an express courier (with written
confirmation) to the parties at their respective principal offices.
(e) This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement is intended or shall be construed to confer upon any
Person other than the parties hereto and their respective successors and
permitted assigns any right, remedy or claim under or by reason of this
Agreement or any part hereof. This Agreement may not be assigned by any party
hereto without the prior written consent of the other party hereto.
(f) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same agreement, it being understood that all of the
parties need not sign the same counterpart.
(g) This Agreement, the legal relations between the parties and the
adjudication and the enforcement thereof, shall be governed by and interpreted
and construed in accordance with the substantive laws of the state of Delaware,
without regard to choice of law principles.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
PIMCO ADVISORS HOLDINGS L.P.
By: /s/ KENNETH M. POOVEY
------------------------------------
Kenneth M. Poovey
Executive Vice President
PIMCO ADVISORS L.P.
By: /s/ KENNETH M. POOVEY
------------------------------------
Kenneth M. Poovey
Executive Vice President
5
<PAGE>
EXHIBIT 10.7
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
PIMCO ADVISORS L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I Definitions.............................................. 1
ARTICLE II The Partnership and the Partners......................... 15
Section 2.1 Continuation of the Partnership.......................... 15
Section 2.2 Name..................................................... 15
Section 2.3 Names and Addresses of the Partners...................... 15
Section 2.4 Principal Office, Registered Agent and Registered Office. 15
Section 2.5 Term..................................................... 16
ARTICLE III Purpose and Powers....................................... 16
Section 3.1 Purpose.................................................. 16
Section 3.2 Powers................................................... 16
ARTICLE IV Units and Other Partnership Securities................... 16
Section 4.1 Classification and Conversion of Units................... 16
Section 4.2 New Classes or Series of Units or Other Securities....... 17
Section 4.3 Issuance of Units and Other Securities................... 18
Section 4.4 No Preemptive Rights..................................... 18
Section 4.5 Recapitalizations........................................ 18
ARTICLE V Certificates for Units................................... 19
Section 5.1 Issuance of Certificates................................. 19
Section 5.2 Lost, Stolen, Destroyed or Mutilated Certificates........ 20
Section 5.3 Registered Owner......................................... 20
ARTICLE VI Transfer of Units........................................ 21
Section 6.1 Transfer................................................. 21
Section 6.2 Transfer of GP Units..................................... 21
Section 6.3 Transfer of LP Units..................................... 21
Section 6.4 Regulation of Block Transfers............................ 21
Section 6.5 Semiannual Transfers..................................... 22
Section 6.6 Additional Restrictions on Transfers..................... 23
Section 6.7 Covenant and Agreement of the Partners................... 24
Section 6.8 Remedies and Penalties for Noncompliance................. 24
<PAGE>
ARTICLE VII Capital Accounts......................................... 24
Section 7.1 Capital Accounts......................................... 24
Section 7.2 Adjustments Affecting Net Income or Net Loss............. 24
ARTICLE VIII Distributions and Allocations............................ 26
Section 8.1 Cash Distributions....................................... 26
Section 8.2 General Rules with Respect to Distributions.............. 27
Section 8.3 Allocations of Net Income and Net Loss................... 27
Section 8.4 Special Provisions Governing Capital Account Allocations. 29
Section 8.5 Special Provisions Governing Tax Allocations............. 30
Section 8.6 Allocations Upon Dissolution............................. 31
Section 8.7 Changes in Allocation Methods............................ 31
ARTICLE IX Accounting and Tax Matters............................... 32
Section 9.1 Books and Records........................................ 32
Section 9.2 Fiscal Year.............................................. 32
Section 9.3 Taxable Year............................................. 32
Section 9.4 Preparation of Tax Returns............................... 32
Section 9.5 Tax Elections............................................ 32
Section 9.6 Other Tax Matters........................................ 33
Section 9.7 Withholding.............................................. 33
Section 9.8 Tax Controversies........................................ 33
Section 9.9 Tax Opinions............................................. 34
ARTICLE X Concerning the General Partners.......................... 34
Section 10.1 Management of Partnership Business....................... 34
Section 10.2 Delegation............................................... 35
Section 10.3 Reimbursement of the General Partners.................... 36
Section 10.4 Outside Activities....................................... 36
Section 10.5 Certain Transactions..................................... 36
Section 10.6 Conflicts of Interest.................................... 37
Section 10.7 Notice of Event of Withdrawal............................ 37
Section 10.8 Operating Board.......................................... 37
ARTICLE XI Concerning the Limited Partners.......................... 38
Section 11.1 Participation in Control of Partnership Business......... 38
Section 11.2 Reports.................................................. 38
Section 11.3 Access and Confidentiality............................... 38
Section 11.4 Authority of General Partners to Effect Exchanges and
Redemptions............................................. 39
iii
<PAGE>
ARTICLE XII Admission of Partners.................................... 40
Section 12.1 Admission of General Partners............................ 40
Section 12.2 Admission of Limited Partners............................ 41
ARTICLE XIII Withdrawal or Removal of Partners........................ 41
Section 13.1 Withdrawal or Removal of General Partners................ 41
Section 13.2 Interest of Departing General Partner.................... 42
Section 13.3 Business May Be Carried On After Event of Withdrawal..... 43
Section 13.4 No Withdrawal of Limited Partners........................ 43
ARTICLE XIV Partnership Meetings; Amendments......................... 43
Section 14.1 Partnership Meetings..................................... 43
Section 14.2 Record Date.............................................. 44
Section 14.3 Notice of Meeting........................................ 44
Section 14.4 Adjournment.............................................. 44
Section 14.5 Waiver of Notice; Consent to Meeting; Approval of
Minutes................................................. 45
Section 14.6 Quorum and Required Vote................................. 45
Section 14.7 Conduct of Meeting....................................... 46
Section 14.8 Action Without a Meeting................................. 46
Section 14.9 Voting and Approval Rights............................... 47
Section 14.10 Amendments to Be Adopted Solely by the General Partners.. 47
Section 14.11 Amendment Procedures..................................... 48
ARTICLE XV Indemnification and Related Matters...................... 49
Section 15.1 Indemnification.......................................... 49
Section 15.2 Indemnification Agreements............................... 49
Section 15.3 Indemnification Procedures............................... 50
Section 15.4 Insurance................................................ 51
Section 15.5 Source of Payment........................................ 51
Section 15.6 Scope of Indemnification................................. 51
Section 15.7 Effect of Amendments..................................... 52
Section 15.8 Limitations on Liability of Indemnitees.................. 52
ARTICLE XVI Restructuring............................................ 53
Section 16.1 Power of General Partners to Effect a Restructuring...... 53
Section 16.2 Consent to Actions Taken in Connection with
Restructuring........................................... 55
iv
<PAGE>
ARTICLE XVII Dissolution and Liquidation.............................. 55
Section 17.1 Dissolution.............................................. 55
Section 17.2 Reconstitution........................................... 56
Section 17.3 Liquidator; Liquidation and Distribution................. 56
Section 17.4 Reports Following Termination............................ 57
ARTICLE XVIII General Provisions....................................... 58
Section 18.1 Addresses and Notices.................................... 58
Section 18.2 Titles and Captions...................................... 58
Section 18.3 Pronouns and Plurals..................................... 58
Section 18.4 Further Action........................................... 58
Section 18.5 Binding Effect........................................... 58
Section 18.6 Integration.............................................. 58
Section 18.7 Creditors................................................ 59
Section 18.8 Waiver................................................... 59
Section 18.9 Counterparts............................................. 59
Section 18.10 Applicable Law........................................... 59
Section 18.11 Invalidity of Provisions................................. 59
Section 18.12 Merger................................................... 59
v
<PAGE>
TABLE OF EXHIBITS
Exhibit A Certificate for Class A LP Units
Exhibit B Admission Application
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
PIMCO ADVISORS L.P.
This Amended and Restated Agreement of Limited Partnership of PIMCO
Advisors L.P. (this "Agreement"), which is dated and shall be effective as of
12:00 midnight Pacific Standard Time on December 31, 1997 (the "Effective
Time"), is by and among PIMCO Partners, G.P., a California general partnership,
PIMCO Advisors Holdings, L.P., a Delaware limited partnership, all Persons which
are Limited Partners as of the Effective Time, and all Persons which become
Limited Partners after the Effective Time. Capitalized terms used in this
Agreement shall have the meanings ascribed to such terms in this Agreement.
This Agreement amends and completely restates that certain Amended and
Restated Agreement of Limited Partnership of PIMCO Advisors L.P. dated as of
October 31, 1997.
In consideration of the covenants, conditions and agreements contained
herein, the parties agree as follows:
ARTICLE I
Definitions
The terms defined in this Article I shall, for the purposes of this
Agreement, have the meanings set forth herein.
Adjusted Property shall mean a Partnership Asset the Carrying Value of
which has been adjusted pursuant to Section 7.4.
Admission Application shall mean a written application executed and
delivered to the Partnership by a Person which (i) proposes to make a
Contribution to the Partnership and receive LP Units in exchange for such
Contribution, or (ii) proposes to acquire LP Units by Transfer from a
Unitholder, by which such Person requests admission as a Limited Partner,
requests that the records of the Partnership reflect such admission, and agrees
to comply with and be bound by this Agreement. Except as otherwise determined by
the General Partners, such Admission Application shall be in substantially the
form of Exhibit B attached to this Agreement.
Adverse Partnership Event shall mean (i) an Adverse Partnership Tax
Event or (ii) the Partnership being required to register any class of LP Units
pursuant to Section 12(g) of the Exchange Act.
<PAGE>
Adverse Partnership Tax Event shall mean (i) the Partnership (A) being
treated as an association taxable as a corporation, (B) being reconstituted as a
corporation, or (C) otherwise becoming subject to federal taxation on its
income, or (ii) the occurrence of an event which would have caused one of the
foregoing to occur but for the occurrence of a Restructuring.
Affiliate of a Person shall mean any Person directly or indirectly
controlling, controlled by or under common control with such Person. As used in
this definition of Affiliate, the term "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
Agreement shall mean this Amended and Restated Agreement of Limited
Partnership of the Partnership, as it may be amended, supplemented or restated
from time to time.
Approved by the Unitholders shall mean, with respect to a meeting of
Unitholders, approved by Unitholders holding a majority of the outstanding Units
present at such meeting in person or by proxy and entitled to vote, voting as a
single class, and with respect to an action of Unitholders without a meeting,
approved by Unitholders holding a majority of the outstanding Units entitled to
vote, voting as a single class.
Assignment Event shall mean an event which would cause the assignment
(within the meaning of the Investment Advisers Act of 1940, as amended, or the
Investment Company Act of 1940, as amended) of advisory contracts representing
more than 15% of the assets under management by the Partnership and its
Subsidiaries.
Assignment Opinion shall mean an Opinion of Counsel to the effect that
a specified event is not an Assignment Event, or that based upon the consents
which have been obtained from clients, such event would not result in the
termination of advisory contracts representing more than 15% of the assets under
management by the Partnership and its Subsidiaries.
Associate of a Person shall mean any person who is a stockholder,
partner, member, director, manager, trustee, member of any Delegate or other
board or committee, officer, employee, agent or fiduciary of such Person.
Block Transfer shall mean a Transfer described in Section 1.7704-
1(e)(2) of the Treasury Regulations, by a Partner and any related Persons
(within the meaning of Section 267(b) or Section 707(b)(1) of the Code), to one
or more Qualified Persons in one or more transactions during any 30 calendar day
period, of Units representing in the aggregate more than 2% of the outstanding
Units.
2
<PAGE>
Book-Tax Disparities shall mean the differences between a Partner's
Capital Account balance, as maintained pursuant to Article VII, and such balance
had the Capital Account been maintained strictly in accordance with tax
accounting principles (such disparities reflecting the differences between the
Carrying Value of either Contributed Property or Adjusted Property, as adjusted
from time to time, and the adjusted basis thereof for federal income tax
purposes).
Business Day shall mean any day other than a Saturday, Sunday or legal
holiday recognized or declared as such by the Government of the United States or
the State of New York.
Business Entity shall mean a corporation, a business trust or
association, a real estate investment trust, a common-law trust, a limited
liability company or an unincorporated business, including a general or limited
partnership or registered limited liability partnership.
CCI shall mean Columbus Circle Investors, a Delaware general
partnership, or its Successor.
Capital Account shall mean a capital account established and
maintained pursuant to Article VII.
Carrying Value shall mean (i) with respect to Contributed Property,
the fair market value of such Contributed Property at the time of contribution
as determined by the General Partners, reduced (but not below zero) by all
amortization, depreciation and cost recovery deductions taken into account in
determining Net Income or Net Loss pursuant to Section 7.2 with respect to such
Contributed Property, and (ii) with respect to any other Partnership Asset, the
adjusted basis of such Partnership Asset for federal income tax purposes, as of
the time of determination. The Carrying Value of any Partnership Asset may be
adjusted from time to time in accordance with Sections 7.4 and 7.5, and to
reflect changes, additions or other adjustments to the Carrying Value for
dispositions, acquisitions or improvements of Partnership Assets, in a manner
consistent with federal income tax principles.
Certificate shall mean a certificate of Partnership Interest issued by
the Partnership, evidencing ownership of one or more Units, such certificate to
be in such form or forms as may be adopted by the General Partners, and which,
in the case of Class A LP Units, shall initially be in substantially the form of
Exhibit A attached to this Agreement.
Certificate of Cancellation shall mean a certificate of cancellation
within the meaning of Section 17-203 of the Delaware Act.
Certificate of Limited Partnership shall mean the Certificate of
Limited Partnership of the Partnership, and any and all amendments thereto and
restatements thereof, filed as required under the Delaware Act.
3
<PAGE>
Class A Carryover Amount shall mean, with respect to each Class A Unit
or Class B Unit and with respect to each fiscal quarter or Short Period ending
after March 31, 1998, the positive amount, if any, by which (i) the Class A
Quarterly Priority Amount for the immediately preceding fiscal quarter exceeded
(ii) the amount distributed with respect to each Class A Unit and Class B Unit
for such immediately preceding fiscal quarter; provided, however, that with
respect to the first fiscal quarter, or Short Period within the first fiscal
quarter, of any fiscal year, the Class A Carryover Amount shall be zero.
Class A Quarterly Priority Amount shall mean, with respect to each
Class A Unit and Class B Unit and with respect to each fiscal quarter ending
after December 31, 1997, the sum of (i) $0.6875 (subject to adjustment in the
case of a Recapitalization), plus (ii) any Class A Carryover Amount applicable
to such Class A Unit or Class B Unit with respect to such fiscal quarter. In the
case of any Short Period ending after December 31, 1997, the Class A Quarterly
Priority Amount shall mean, with respect to each Class A Unit and Class B Unit
and with respect to such Short Period, the sum of (i) an amount equal to the
product of $0.0075 (subject to adjustment in the case of a Recapitalization)
multiplied by the number of days in such Short Period, plus (ii) any Class A
Carryover Amount applicable to such Class A Unit or Class B Unit with respect to
such Short Period.
Class A Unit shall mean a GP Unit or an LP Unit having those special
rights and obligations specified in this Agreement as being appurtenant to a
"Class A Unit" and shall include the Class A Units outstanding prior to the
Effective Time and all GP Units and LP Units issued after the Effective Time
which are designated as Class A Units pursuant to Section 4.3.
Class B Unit shall mean a GP Unit or an LP Unit having those special
rights and obligations specified in this Agreement as being appurtenant to a
"Class B Unit" and shall include the Class B Units outstanding prior to the
Effective Time and all GP Units and LP Units issued after the Effective Time
which are designated as Class B Units pursuant to Section 4.3.
Class C Carryover Amount shall mean, with respect to each Class C Unit
and with respect to each fiscal quarter or Short Period ending after March 31,
1998, the positive amount, if any, by which (i) the Class C Quarterly Priority
Amount for the immediately preceding fiscal quarter exceeded (ii) the amount
distributed with respect to each Class C Unit for such immediately preceding
fiscal quarter.
Class C Carryover Cap shall mean, with respect to each Class C Unit
and with respect to each fiscal quarter or Short Period ending after March 31,
1998, the positive amount by which (i) the Class C Quarterly Cap for the
immediately preceding fiscal quarter exceeded (ii) the amount distributed with
respect to each Class C Unit for such immediately preceding fiscal quarter;
provided, however, that with respect to the first fiscal quarter, or Short
Period within the first fiscal quarter, of any fiscal year, the Class C
Carryover Cap shall be zero.
4
<PAGE>
Class C Quarterly Cap shall mean, with respect to each Class C Unit
and with respect to each fiscal quarter ending after December 31, 1997, the sum
of (i) $0.75 (subject to adjustment in the case of a Recapitalization), plus
(ii) any Class C Carryover Cap applicable to such Class C Unit with respect to
such fiscal quarter. In the case of any Short Period ending after December 31,
1997, the Class C Quarterly Cap shall mean, with respect to each Class C Unit
and with respect to such Short Period, the sum of (i) an amount equal to the
product of $0.0082 (subject to adjustment in the case of a Recapitalization)
multiplied by the number of days in such Short Period, plus (ii) any Class C
Carryover Cap applicable to such Class C Unit with respect to such Short Period.
Class C Quarterly Priority Amount shall mean, with respect to each
Class C Unit and with respect to each fiscal quarter ending after December 31,
1997, the sum of (i) $0.6875 (subject to adjustment in the case of a
Recapitalization), plus (ii) any Class C Carryover Amount applicable to such
Class C Unit with respect to such fiscal quarter. In the case of any Short
Period ending after December 31, 1997, the Class C Quarterly Priority Amount
shall mean, with respect to each Class C Unit and with respect to such Short
Period, the sum of (i) an amount equal to the product of $0.0075 (subject to
adjustment in the case of a Recapitalization) multiplied by the number of days
in such Short Period, plus (ii) any Class C Carryover Amount applicable to such
Class C Unit with respect to such Short Period.
Class C Unit shall mean an LP Unit having those special rights and
obligations specified in this Agreement as being appurtenant to a "Class C Unit"
and shall include the Class C Units outstanding prior to the Effective Time and
all LP Units issued after the Effective Time which are designated as Class C
Units pursuant to Section 4.3.
Code shall mean the Internal Revenue Code of 1986, as in effect from
time to time, and applicable rules and regulations thereunder. Any reference
herein to a specific section or sections of the Code shall be deemed to include
a reference to any corresponding provision of future law.
Commission shall mean the Securities and Exchange Commission.
Compliant Block Transfer shall mean a Block Transfer which complies
with the provisions of Section 6.5.
Consolidation Date shall mean November 15, 1994.
Contributed Property shall mean any Contribution other than cash.
Contribution shall mean any cash, property, services rendered or a
promissory note or other obligation to contribute cash or property or to perform
services, which a Partner contributes to the Partnership in its capacity as a
Partner.
5
<PAGE>
Delaware Act shall mean the Delaware Revised Uniform Limited
Partnership Act, as it may be amended from time to time, and any successor to
such Act.
Defense Notice is defined in Section 15.3.
Delegate is defined in Section 10.2.
Departing General Partner shall mean the Person which, as of the
effective date of any withdrawal or removal of a General Partner pursuant to
Section 13.1, has as of such date so withdrawn or been removed as a General
Partner.
Designated Member is defined in Section 10.8.
Distributable Cash for a fiscal quarter shall mean cash equal to the
Partnership's Operating Profit Available for Distribution for such fiscal
quarter less the amount, if any, required for expenses, for capital
expenditures, for future payments on Partnership indebtedness, as reserves, or
otherwise in the business of the Partnership, as determined by the General
Partners.
Effective Time is defined in the preamble to this Agreement.
Eligible Person shall mean (i) any member of the Management Board,
executive officer of the Partnership or managing director of an Investment
Management Company, or any corporation, partnership, limited liability company
or trust in which such person is a controlling shareholder, general partner,
manager or trustee, or (ii) any Person designated as an Eligible Person in a
Written Consent, which in each case has qualified for admission as a Limited
Partner pursuant to Section 12.2(c).
Equity Security shall mean a share of capital stock, a partnership or
limited liability company interest, or other equity interest, or any security
convertible or exchangeable, with or without consideration, into any such
security or interest, or carrying any warrant, option or right to subscribe to
or purchase any such security or interest or any such convertible or
exchangeable security, or any such warrant, option or right.
Event of Withdrawal with respect to a General Partner shall mean (i)
its withdrawal as a General Partner pursuant to Section 13.1; (ii) its
withdrawal as a General Partner in violation of this Agreement; (iii) its
removal as a General Partner pursuant to Section 13.1; (iv) an Insolvency Event
with respect to such General Partner; or (v) a Termination Event with respect to
such General Partner.
Exchange is defined in Section 11.4.
6
<PAGE>
Exchange Act shall mean the Securities Exchange Act of 1934, as
amended, and any successor to such statute.
Exempt Transfer shall mean (i) a Transfer described in Section 1.7704-
1(e)(1)(iv) of the Treasury Regulations, involving the issuance of Partnership
Interests by or on behalf of the Partnership to a Qualified Person in exchange
for cash, property or services; (ii) a Transfer described in Section 1.7704-
1(e)(1)(ii) of the Treasury Regulations, by an individual Unitholder at his
death, or by his estate or testamentary trust, of Units to a Partner, (iii) a
Foreclosure Block Transfer, (iv) a Compliant Block Transfer, (v) a Noncompliant
Block Transfer, but only to the extent of two Noncompliant Block Transfers in
any calendar year, or (vi) a Permitted Lien Transfer.
Expenses is defined in Section 15.1.
Foreclosure Block Transfer shall mean a Block Transfer in connection
with the foreclosure of a Permitted Lien.
Former General Partner shall mean (i) Thomson or (ii) any other Person
which has withdrawn or been removed as, or otherwise ceased to be, a General
Partner.
General Partner shall mean (i) PIMCO Partners GP or Holdings LP in its
capacity as a general partner of the Partnership, or (ii) any other Person which
has been admitted as a successor or additional general partner of the
Partnership pursuant to this Agreement, in each case so long as such Person has
not withdrawn or been removed as, or otherwise ceased to be, a general partner
of the Partnership. References in this Agreement to the "General Partners" shall
be deemed to be references to the "General Partner" if there is only one General
Partner.
GP Unit shall mean a Unit representing a portion or all of a General
Partner's Partnership Interest, and shall include all GP Units held by PIMCO
Partners GP and Holdings LP immediately prior to the Effective Time, and Units
acquired by a General Partner after the Effective Time, whether by contribution,
conversion or transfer, which are designated as GP Units.
Holdings LP shall mean PIMCO Advisors Holdings L.P., a Delaware
limited partnership, or its Successor.
Indebtedness shall mean with respect to any Person, (i) any liability,
contingent or otherwise, of such Person (A) for borrowed money (whether or not
recourse of the lender is to the whole of the assets of such Person or only to a
portion thereof), (B) evidenced by a note, debenture or similar instrument
(including a purchase money obligation) given in connection with the acquisition
of any property or assets, (C) for any letter of credit or performance bond in
favor of such Person, or (D) for the payment of money relating to a capitalized
lease obligation; (ii) any liability of any other Person of the kind described
in the preceding clause (i), which such
7
<PAGE>
Person has guaranteed or which is otherwise its legal liability, contingent or
otherwise; (iii) any obligation secured by a lien to which the property or
assets of such Person are subject, whether or not the obligations secured
thereby shall have been assumed by or shall otherwise be such Person's legal
liability; (iv) all other items, which in accordance with generally accepted
accounting principles, would be included as a liability on the balance sheet of
such Person on the date of determination; and (v) any and all deferrals,
renewals, extensions or refinancing of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv).
Indemnitee shall mean any General Partner, any Former General Partner,
any Person which is or was an Affiliate of any General Partner or any Former
General Partner, any Person which is or was an Associate of any General Partner
or any Former General Partner or any such Affiliate, any Person which is or was
serving at the request of the Partnership or any of its Subsidiaries, any
General Partner or any Former General Partner as an Associate of another Person,
or any Person which is or was an Associate of the Partnership or any of its
Subsidiaries. A Person shall be deemed to be serving as a fiduciary of an
employee benefit plan at the request of the Partnership whenever the performance
by such Person of his duties to the Partnership or any Subsidiary of the
Partnership also imposes duties on him or otherwise involves services by him to
such plan or the participants or beneficiaries of such plan.
Insolvency Event with respect to a Person shall be deemed to have
occurred (i) when it (A) makes an assignment for the benefit of creditors; (B)
files a voluntary petition in bankruptcy; (C) is adjudged a bankrupt or
insolvent, or has entered against it an order for relief in any bankruptcy or
insolvency proceeding; (D) files a petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation; (E) files an answer or
other pleading admitting or failing to contest the material allegations of a
petition failed against it in any proceeding of this nature; or (F) seeks,
consents to or acquiesces in the appointment of a trustee, receiver or
liquidator of such Person or of all or any substantial part of its properties;
or (ii) (A) 120 days after the commencement of any proceeding against such
Person seeking reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law or regulation,
if the proceeding is not dismissed, or (B) 90 days after the appointment without
such Person's consent or acquiescence of a trustee, receiver or liquidator of
such Person or of all or any substantial part of its properties, if the
appointment is not vacated or stayed, or 90 days after the expiration of any
such stay, if the appointment is not vacated.
Investment Management Company shall mean any division or Subsidiary of
the Partnership which is principally engaged in the investment advisory
business.
Limited Liability Opinion shall mean an Opinion of Counsel to the
effect that a specified event would not cause the Limited Partners to lose their
limited liability under the Delaware Act.
8
<PAGE>
Limited Partner shall mean any Person which is a Limited Partner at
the Effective Time, or is admitted as a Limited Partner pursuant to Section
12.2, and which has not ceased to be a Limited Partner.
Liquidator shall mean the Person serving as Liquidator pursuant to
Section 17.3(a).
LP Unit shall mean a Unit representing a portion or all of a Partner's
Partnership Interest, and shall include all LP Units held by any Partner
immediately prior to the Effective Time, Units acquired by a General Partner
after the Effective Time, whether by contribution, conversion or transfer, which
are designated as LP Units, and all Units held by any Person other than a
General Partner at any time.
Management Board shall mean the Management Board of the Partnership or
any successor board established by the General Partners.
Minimum Gain shall have the meaning set forth in Treasury Regulations
Section 1.704-2(b) and (d).
National Securities Exchange shall mean (i) an exchange registered
with the Commission under Section 6(a) of the Exchange Act, or (ii) the National
Association of Securities Dealers Automated Quotations System.
Net Income or Net Loss for a fiscal year shall mean an amount equal to
the Partnership's taxable income or taxable loss for such fiscal year determined
in accordance with Section 703(a) of the Code (for this purpose, all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), as
adjusted as provided in Section 7.2, and as further adjusted to reflect any
adjustments resulting from amended returns, claims for refund and tax audits.
Net Value shall mean (i) in the case of any Contribution, the fair
market value of such Contribution reduced by the outstanding balance of any
indebtedness either assumed by the Partnership upon such Contribution or to
which such Contribution is subject when contributed; and (ii) in the case of a
distribution of Partnership Assets to a Partner, the fair market value of such
Partnership Assets reduced by the outstanding balance of any indebtedness either
assumed by such Partner upon such distribution or to which such Partnership
Assets are subject when distributed. In each case, fair market value shall be
determined by the General Partners.
Nominee shall mean a Partner which holds Units of record which are
owned beneficially by another Person.
Noncompliant Block Transfer shall mean a Block Transfer which is not a
Compliant Block Transfer.
9
<PAGE>
Operating Profit Available for Distribution shall mean, for any
period, the net income of the Partnership (determined in accordance with
generally accepted accounting principles); provided, that Operating Profit
Available for Distribution for any period as so determined shall be adjusted in
accordance with the following special rules and/or clarifications:
(i) Operating Profit Available for Distribution shall be
determined without regard to losses of any Subsidiary of the Partnership which
is not treated as a partnership, branch or division for federal income tax
purposes.
(ii) Operating Profit Available for Distribution shall be
determined without regard to accrued revenues from performance fees unless such
fees are not subject to forfeiture.
(iii) Operating Profit Available for Distribution shall be
determined without regard to any income or deductions attributable to the grant,
amendment, vesting or exercise of any option or other right to purchase or
receive Units or other Equity Securities, whether directly or indirectly through
a Public General Partner.
(iv) Operating Profit Available for Distribution shall be
determined without regard to any amortization of goodwill and other intangible
assets.
Opinion of Counsel shall mean a written opinion of counsel selected by
the General Partners, who may be regular counsel to the Partnership, a General
Partner, a Limited Partner or any of their Affiliates, but may not be in-house
counsel to any of such Persons.
Participating Public General Partner is defined in Section 6.5(b).
Partner shall mean any General Partner or Limited Partner.
Partnership shall mean the limited partnership heretofore formed and
continued pursuant to this Agreement and the Delaware Act.
Partnership Accountants shall mean such nationally recognized firm of
independent public accountants as is selected from time to time by the General
Partners to act as the Partnership's independent public accountants.
Partnership Assets shall mean all assets and property, whether
tangible or intangible and whether real, personal or mixed, at any time owned by
the Partnership or its Subsidiaries.
Partnership Interest shall mean, as to any Partner, such Partner's
share of the profits and losses of the Partnership and the right to receive
distributions of Partnership Assets.
10
<PAGE>
Percentage Interest shall mean, as to each Partner, the quotient of
(i) the Partnership Interest of such Partner divided by (ii) the total
Partnership Interests of all Partners
Permitted Lien shall mean (i) the pledge by PIMCO Partners GP of
21,875,000 Class B LP Units to secure that certain 9.01% Note in the amount of
$130,000,000 due December 31, 2001, or (ii) any hypothecation or pledge of, or
other creation of a lien, encumbrance or security interest in or upon Units to
further secure such Note or to secure any refunding or refinancing of such Note.
Permitted Lien Transfer shall mean a Transfer of Units by PIMCO
Partners GP which creates a Permitted Lien.
Person shall mean a natural person, general or limited partnership,
limited liability company, trust, estate, association, corporation, custodian,
nominee or any other person or entity in its own or any representative capacity.
PIMCO shall mean Pacific Investment Management Company, a California
general partnership, or its Successor.
PIMCO Partners GP shall mean PIMCO Partners, G.P., a California
general partnership, or its Successor.
Proceedings is defined in Section 15.1.
Public Company shall mean a Business Entity which has at least one
class of Equity Security outstanding which is registered under Section 12 of the
Exchange Act and listed or admitted to trading on a National Securities
Exchange.
Public General Partner shall mean a General Partner which is a Public
Company and which, if it were not a General Partner, would be required to
register as an investment company under the Investment Company Act of 1940, as
amended. References in this Agreement to the "Public General Partners" shall be
deemed to be references to the "Public General Partner" if there is only one
Public General Partner.
Qualified Person shall mean (i) the Partnership, (ii) any Partner or
(iii) any Eligible Person.
Recapitalization is defined in Section 4.5.
Recapture Income shall mean any gain recognized by the Partnership
(but computed without regard to any adjustment required by Section 734 or 743 of
the Code) upon the disposition of any Partnership Asset that does not constitute
capital gain for federal income
11
<PAGE>
tax purposes because such gain represents the recapture of deductions or
reductions in basis for tax credits previously taken with respect to such
Partnership Asset.
Reconstituted Partnership shall mean a new limited partnership formed
in the manner described in Section 17.2.
Record Date shall mean the date as of which the identity of, and Units
held by, the Unitholders will be determined for purposes of (i) receiving notice
of and voting at any meeting of Unitholders, (ii) receiving notice of any
proposed action by written approval and giving or withholding approval, (iii)
exercising any other rights with respect to any action or proposed action of
Unitholders, or (iv) receiving any distribution or report.
Redemption is defined in Section 11.4.
Restructuring shall mean any action, event, transaction or series of
actions, events or transactions that the General Partners determine in good
faith is reasonable likely to prevent or avoid the occurrence of an Adverse
Partnership Tax Event or a Tax Realization Event or both.
Securities Act shall mean the Securities Act of 1933, as amended, and
any successor to such statute.
Semiannual Exchange Period is defined in Section 6.5(a).
Semiannual Transfer shall mean a Transfer of Units to a Qualified
Person, including an Exempt Transfer, which complies with the provisions of
Section 6.5.
Semiannual Transfer Period shall mean a period beginning at the
beginning of a Semiannual Exchange Period and ending ten Business Days after the
end of such Semiannual Exchange Period.
Short Period means any period which is less than a fiscal quarter.
Subsidiary of a Person shall mean a subsidiary of such Person within
the meaning of Regulation S-X under the Securities Act.
Successor of a Person shall mean the Business Entity, if any, which
succeeds to the ownership of all or substantially all of its assets.
Successor Entity shall mean a Business Entity described in clause (ii)
or (iii) of Section 16.1(a).
Tax Opinion shall mean an Opinion of Counsel to the effect that a
specified event would not cause an Adverse Partnership Tax Event.
12
<PAGE>
Tax Realization Event shall mean any one or more events, conditions or
circumstances in which, or as a result of which, any Partner or any of its
Affiliates realizes or is reasonably likely to be treated as realizing, either
directly or through allocations of Partnership income, income for federal income
tax purposes (including without limitation capital gain income), with respect to
all or any part of the difference between (i) the value of any property
contributed (or deemed contributed under applicable law) by such Partner or
Affiliate to the Partnership, determined either as of the time of such
contribution (or deemed contribution) or the time of such realization, and (ii)
such Partner's or Affiliate's or the Partnership's basis, for federal income tax
purposes, in such property, other than as a result of a sale of such property by
the Partnership exclusively for cash.
10% Limit is defined in Section 6.5(f).
Termination Event with respect to a General Partner shall mean, (i) if
such General Partner is an individual, his death or the entry by a court of
competent jurisdiction of an order adjudicating him incompetent to manage his
person or his property; (ii) if such General Partner is acting as a General
Partner by virtue of being a trustee of a trust, the termination of the trust
(but not merely the substitution of a new trustee); (iii) if such General
Partner is a partnership, the dissolution and commencement of winding up of the
partnership; (iv) if such General Partner is a corporation, the filing of a
certificate of dissolution or its equivalent for the corporation or the
revocation of its charter and the expiration of 90 days after the date of notice
to the corporation of revocation without a reinstatement of its charter; (v) if
such General Partner is an estate, the distribution by the fiduciary of the
estate's entire Partnership Interest; or (vi) if such General Partner is not an
individual, partnership, corporation, trust or estate, the termination of the
General Partner.
Thomson shall mean Thomson Advisory Group Inc., a Delaware
corporation.
Total Contributed Income of an Investment Management Company shall
mean the aggregate net income of such Investment Management Company (calculated
in accordance with generally accepted accounting principles applied consistently
for all Investment Management Companies and excluding extraordinary items) for
the then most recent three complete fiscal years of the Partnership (or, for
three years following the Consolidation Date, the number of complete Partnership
fiscal years which have elapsed since the Consolidation Date). Total Contributed
Income for each Investment Management Company shall be recalculated annually
based on, and upon receipt of, the Partnership's annual audited consolidated
financial statements.
Transfer (and related words) with respect to Units shall mean or refer
to a transaction by which a Unitholder transfers one or more Units or an
interest in one or more Units to another Person, including a Nominee, and shall
include a sale, assignment, transfer, gift (outright or in trust), exchange,
redemption, hypothecation or pledge of, or other creation of a lien, encumbrance
or security interest in or upon, or other disposition of, Units or any interest
in
13
<PAGE>
Units, whether voluntarily, involuntarily, by operation of law or otherwise, but
shall not include any change in the ownership of such Unitholder.
Transfer Agent, with respect to any class or series of Units, shall
mean the Person (which may be a General Partner or an Affiliate of a General
Partner) appointed to act as transfer agent or registrar for such class or
series of Units. The books and records of a Transfer Agent pertaining to
Unitholders shall be deemed to be books and records of the Partnership.
Treasury Regulations shall mean the federal income tax and procedure
and administration regulations as promulgated by the U.S. Treasury Department,
as such regulations may be in effect from time to time. All references in this
Agreement to provisions of the Treasury Regulations shall be deemed to refer to
successor regulatory provisions to the extent appropriate in light of the
context in which such Treasury Regulations references are used.
Unit shall mean a portion or all of the Partnership Interest of a
Partner representing such fractional part of the Partnership Interests of all of
the Partners as shall be determined by the General Partners in connection with
the issuance of Units; provided, however, that each Unit shall represent the
same fractional part of the Partnership Interests represented by all of the
outstanding Units as is represented by each other Unit. The relative rights,
powers and duties appurtenant to a Unit of any class and series and those
appurtenant to the Partnership Interest represented by such Unit shall be
identical, and such terms are used interchangeably in this Agreement.
Unitholder shall mean a General Partner or a Limited Partner. For
purposes of Articles VII and VIII only, the term "Unitholder" shall also mean
the beneficial owner of one or more Units held by a Nominee in any case in which
such Nominee has furnished the identity of such owner to the Partnership
pursuant to Section 6031(c) of the Code.
Unit Price of a Unit of a given class or series as of any date of
determination shall mean the fair market value of such Unit as of such date of
determination as determined in good faith by the General Partners.
Unrealized Gain, as of any date of determination, shall mean the
excess, if any, of the fair market value of a Partnership Asset (as determined
under Section 7.4 or 7.5 as of such date of determination) over the Carrying
Value of such Partnership Asset as of such date of determination (prior to any
adjustment to be made pursuant to Section 7.4 or 7.5 as of such date).
Unrealized Loss, as of any date of determination, shall mean the
excess, if any, of the Carrying Value of a Partnership Asset as of such date of
determination (prior to any adjustment to be made pursuant to Section 7.4 or 7.5
as of such date) over the fair market value of such Partnership Asset (as
determined under Section 7.4 or 7.5 as of such date of determination).
14
<PAGE>
Written Action shall mean (i) an action by written consent of the
General Partner, or if there is more than one General Partner, an action by
written consent of General Partners holding a majority of the GP Units, or (ii)
if a Delegate has the rights and powers to take such action, a written action of
such Delegate.
Written Consent shall mean an action by written consent of the General
Partner, or if there is more than one General Partner, an action by unanimous
written consent of the General Partners.
ARTICLE II
The Partnership and the Partners
Section 2.1 Continuation of the Partnership.
The General Partners and the Limited Partners hereby continue the
Partnership as a limited partnership pursuant to the provisions of the Delaware
Act.
Section 2.2 Name.
The name of the Partnership shall be "PIMCO Advisors L.P." The
business of the Partnership shall be carried on under such name or under such
other name as the General Partners may from time to time determine. "Limited
Partnership," "Ltd" or "L.P." (or similar words or letters) shall be included in
the Partnership's name where necessary or appropriate to maintain the limited
liability of the Limited Partners or otherwise for the purpose of complying with
the laws of any jurisdiction.
Section 2.3 Names and Addresses of the Partners.
The General Partners of the Partnership are PIMCO Partners GP and
Holdings LP, and the address of the General Partners is 800 Newport Center
Drive, Newport Beach, California 92660. The names and last known business,
residence or mailing addresses of the Limited Partners are set forth in the
books and records of the Partnership.
Section 2.4 Principal Office, Registered Agent and Registered Office.
(a) The principal office of the Partnership is located at 800
Newport Center Drive, Newport Beach, California 92660. The General Partners may
change the location of the Partnership's principal office within or without the
State of Delaware and may establish such additional offices of the Partnership
within or without the State of Delaware as they may from time to time determine.
15
<PAGE>
(b) The name of the registered agent for service of process on the
Partnership in the State of Delaware is The Corporation Trust Company. The
address of the registered agent and the address of the registered office of the
Partnership in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801.
Section 2.5 Term.
The Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until December 31, 2086, unless earlier terminated in accordance with
the Delaware Act or this Agreement.
ARTICLE III
Purpose and Powers
Section 3.1 Purpose.
The purpose of the Partnership is (i) to carry on an investment
management and investment advisory business and (ii) to carry on any other
business which limited partnerships may carry on under the Delaware Act.
Section 3.2 Powers.
The Partnership shall have and may exercise any and all powers and
authority conferred by the laws of Delaware upon limited partnerships formed
under the Delaware Act, including any and all powers and authority that may be
exercised by the General Partners pursuant to the Delaware Act or this
Agreement.
ARTICLE IV
Units and Other Partnership Securities
Section 4.1 Classification and Conversion of Units.
(a) The Partnership Interests of the Partners are divided into GP
Units and LP Units, the GP Units are further divided into Class A Units and
Class B Units, and the LP Units are further divided into Class A Units, Class B
Units and Class C Units.
(b) A General Partner, other than a Public General Partner, shall
have the right, at such General Partner's option, at any time to convert a
portion, but not all, of the GP Units held by such General Partner into LP Units
of the same class. The rate at which LP Units shall be delivered upon conversion
of GP Units shall initially be one LP Unit for each GP Unit, and shall be
adjusted to reflect any Recapitalization occurring after the Effective Time. LP
Units
16
<PAGE>
issued on conversion of GP Units shall be deemed to have been issued, and such
GP Units shall be deemed to be canceled and retired, as of the close of business
on the date Certificates evidencing such GP Units are surrendered to the
Partnership for conversion.
(c) If a General Partner ceases for any reason to be a Public
General Partner, 99% of the GP Units held by such General Partner shall be
converted into and exchanged for LP Units of the same class, without any action
on the part of such General Partner. The rate at which LP Units shall be
delivered upon such conversion of GP Units shall initially be one LP Unit for
each GP Unit, and shall be adjusted to reflect any Recapitalization occurring
after the Effective Time. LP Units issued on such conversion of GP Units shall
be deemed to have been issued, and such GP Units shall be deemed to be canceled
and retired, as of the close of business on the date such General Partner ceases
to be a Public General Partner.
(d) A General Partner, other than a General Partner which has
ceased for any reason to be a Public General Partner, shall have the right, at
such General Partner's option, at any time to convert a portion or all of the
Class A LP Units or Class B LP Units held by such General Partner into GP Units
of the same class. The rate at which GP Units shall be delivered upon conversion
of LP Units shall initially be one GP Unit for each LP Unit, and shall be
adjusted to reflect any Recapitalization occurring after the Effective Time. GP
Units issued on conversion of LP Units shall be deemed to have been issued, and
such LP Units shall be deemed to be canceled and retired, as of the close of
business on the date Certificates evidencing such LP Units are surrendered to
the Partnership for conversion.
(e) A Partner shall have the right, at such Partner's option, at
any time to convert a portion or all of the Class C LP Units held by such
Partner into Class A LP Units. The rate at which Class A LP Units shall be
delivered upon conversion of Class C LP Units shall initially be one Class A LP
Unit for each Class C LP Unit, and shall be adjusted to reflect any
Recapitalization occurring after the Effective Time. Class A LP Units issued on
conversion of Class LP Units shall be deemed to have been issued, and such Class
C LP Units shall be deemed to be canceled and retired, as of the close of
business on the date Certificates evidencing such Class C LP Units are
surrendered to the Partnership for conversion.
(f) As of the close of business on March 1, 1998, each Class B GP
Unit shall be converted into and exchanged for one Class A GP Unit, and each
Class B LP Unit shall be converted into and exchanged for one Class A LP Unit,
adjusted in each case to reflect any Recapitalization occurring after the
Effective Time, without any action on the part of the holders of Class B Units.
Section 4.2 New Classes or Series of Units or Other Securities.
The General Partners may create a class or series of Units, other
Equity Securities or other Partnership securities that was not previously
outstanding, without the approval of the Limited Partners. Any such class or
series of Units or other securities shall have such
17
<PAGE>
designations, preferences and relative participating, optional or other special
rights, powers and duties, including preferences, rights and powers senior to
existing classes or series of Units or other securities, as shall be determined
by the General Partners, including without limitation: (i) the rights of such
class or series of Units or other securities to share in profits and losses of
the Partnership and the allocation, for federal income and other tax purposes,
to such class or series of Units or other securities of items of Partnership
income, gain, loss, deduction and credit; (ii) the rights of such class or
series of Units or other securities to share in distributions of Partnership
Assets; (iii) the rights of such class or series of Units or other securities
upon dissolution and liquidation of the Partnership; (iv) whether such class or
series of Units or other securities is redeemable by the Partnership and, if so,
the price at which, and the terms and conditions on which, such class or series
of Units or other securities may be redeemed by the Partnership; (v) whether
such class or series of Units or other securities is issued with the right of
conversion into or exchange for any other class or series of Units or other
securities and, if so, the rate at and the terms and conditions upon which such
class or series of Units or other securities may be converted into or exchanged
for such other class or series of Units or other securities; and (vi) the rights
of such class or series of Units or other securities to vote on matters relating
to the Partnership and this Agreement. The designations, preferences and
relative participating, optional or other special rights, powers and duties of
any such class or series of Units or other securities shall be set forth in an
amendment to this Agreement.
Section 4.3 Issuance of Units and Other Securities.
(a) The Partnership may issue Units of any class or series, other
Equity Securities, or other Partnership securities, in amounts, for
consideration and on terms and conditions determined by the General Partners,
without the approval of the Limited Partners.
(b) The Partnership shall not issue fractional Units; instead,
each fractional Unit shall be rounded to the nearest whole Unit or an amount
equal to the product of such fraction and the Unit Price on the date of issuance
shall be paid in cash by the Partnership, as may be determined by the General
Partners.
Section 4.4 No Preemptive Rights.
No Partner or other Person shall have any preemptive, preferential or
other similar rights with respect to any additional Contributions or any offer,
issuance or sale of Units, other Equity Securities or other Partnership
securities.
Section 4.5 Recapitalizations.
(a) The Partnership may make a distribution of Units with respect
to outstanding Units, effect a subdivision or combination of outstanding Units,
or take a like action (each, a "Recapitalization"). The Partnership shall not
effect a Recapitalization unless the
18
<PAGE>
respective Percentage Interests of the Partners immediately after the
Recapitalization are the same as their respective Percentage Interests
immediately before the Recapitalization.
(b) The General Partners shall select a Record Date as of which a
Recapitalization shall be effective and shall notify each Unitholder of the
Recapitalization. The Partnership may issue to the Unitholders as of the Record
Date new Certificates representing the additional Units issued in the
Recapitalization, and may implement such other procedures to reflect the
Recapitalization as may be determined by the General Partners.
ARTICLE V
Certificates for Units
Section 5.1 Issuance of Certificates.
(a) Upon the issuance of Units to any Partner or other Person, the
Partnership shall issue and deliver to such Partner, or if such other Person has
qualified for admission as a Partner pursuant to Article XII, to such other
Person, one or more Certificates in the name of such Partner or other Person
evidencing such Units, in such denominations as such Partner or other Person may
request. Such Partner or other Person shall become a Unitholder with respect to
such Units at the close of business on the Business Day on which Certificates
evidencing such Units are issued to such Partner or other Person and registered
in its name on the books and records of the Transfer Agent.
(b) Upon the written request of any Transferee of Units,
accompanied by one or more Certificates properly endorsed and cash in the amount
of any applicable transfer tax, the Partnership shall, if (i) such Units were
Transferred to such Transferee in compliance with the provisions of Article VI
or Article XVI, as applicable, and (ii) such Transferee, if not a Partner, has
qualified for admission as a Partner pursuant to Article XII, issue and deliver
to such Transferee replacement Certificates in the name of such Transferee in
such denominations as such Transferee may request. Such Transferee shall become
a Unitholder with respect to such Units at the close of business on the Business
Day on which Certificates evidencing such Units are issued to such Transferee
and registered in its name on the books and records of the Transfer Agent.
(c) Upon the written request of any Unitholder accompanied by one
or more Certificates properly endorsed, the Partnership shall issue and deliver
to such Unitholder replacement Certificates in the name of such Unitholder in
such denominations as such Unitholder may request, in accordance with such
procedures as the Partnership may reasonably establish.
19
<PAGE>
Section 5.2 Lost, Stolen, Destroyed or Mutilated Certificates.
(a) The Partnership shall issue a new Certificate in place of any
Certificate previously issued if the registered owner of the Units evidenced by
the Certificate:
(i) makes proof by affidavit, in form and substance
satisfactory to the Partnership, that a previously issued Certificate has been
lost, stolen or destroyed;
(ii) requests the issuance of a new Certificate before the
Partnership has notice that the Certificate is subject to an adverse claim by
another Person or has been acquired by a purchaser for value in good faith and
without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the
Partnership a bond, in form and substance satisfactory to the Partnership, with
such surety or sureties and with fixed or open penalty as the Partnership may
direct, to indemnify the Partnership against any claim that may be made on
account of the alleged loss, theft or destruction of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by
the Partnership.
(b) When a Certificate has been lost, stolen or destroyed, and the
owner fails to notify the Partnership within a reasonable time after he has
notice of it, and a Transfer of the Units represented by the Certificate is
registered before the Partnership receives such notification, the owner shall be
precluded from making any claim against the Partnership or any Transfer Agent
for such Transfer or for a new Certificate.
(c) If a mutilated Certificate is surrendered to the Partnership,
the Partnership shall execute and deliver in exchange therefor a new Certificate
evidencing the same number of Units as did the Certificate so surrendered.
(d) As a condition to the issuance of any new Certificate under
this Section 5.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Transfer
Agent) connected therewith.
Section 5.3 Registered Owner.
The Partnership shall be entitled to treat a Unitholder, including a
Nominee, as the owner of the Units registered in such Unitholder's name on the
books and records of the Partnership for all purposes, and accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
Units on the part of any other Person, including any Person for whom such
Nominee is acting as Nominee, regardless of whether the Partnership shall have
actual or other notice thereof.
20
<PAGE>
ARTICLE VI
Transfer of Units
Section 6.1 Transfer.
Except as provided in Article XVI, no Units shall be Transferred
except in accordance with the terms and conditions set forth in this Article VI.
Any purported Transfer of Units not made in accordance with this Article VI or
Article XVI shall be null and void, and the purported Transferee shall not (i)
be admitted as a Partner, (ii) be deemed to be an assignee of the Units
purported to be Transferred within the meaning of Section 17-702 of the Delaware
Act, or (iii) have any rights to share in profits and losses, to receive any
distributions, or to receive any allocations of income, gain, loss, deduction,
or credit or similar item, with respect to the Units purported to be
Transferred.
Section 6.2 Transfer of GP Units.
GP Units may be Transferred by a General Partner (i) to an Affiliate
of such General Partner which has been admitted as a successor or additional
General Partner pursuant to Section 12.1(a), or (ii) to a General Partner in an
Exempt Transfer or a Semiannual Transfer.
Section 6.3 Transfer of LP Units.
LP Units may be Transferred by a Partner in an Exempt Transfer or a
Semiannual Transfer.
Section 6.4 Regulation of Block Transfers.
(a) The General Partners may by Written Consent adopt such rules
consistent with Section 1.7704 of the Treasury Regulations with regard to Block
Transfers, including the calculation of the minimum number of Units qualifying
as a Block Transfer and the number of Units that should be counted against such
minimum number, as they shall determine in good faith are appropriate.
(b) If any Partner or group of related Partners (within the
meaning of Section 267(b) or Section 707(b)(1) of the Code) desires to effect a
Noncompliant Block Transfer, such Partner or group of Partners shall, as
promptly as practicable, give notice to the Partnership of such proposed
Noncompliant Block Transfer, including the names of the proposed Transferees and
the number of Units proposed to be Transferred to each such Transferee. If
several Partners or groups of related Partners give notices to the Partnership
that they desire to effect Noncompliant Block Transfers in the same calendar
year, and the number of such Noncompliant Block Transfers exceeds the number
which would qualify as Exempt Transfers in such calendar year, after taking into
account any prior Noncompliant Block Transfers during such calendar year, the
General Partners shall by Written Consent determine in good faith which of such
21
<PAGE>
Partners or groups shall be permitted to effect Noncompliant Block Transfers in
such calendar year.
(c) The power and authority of the General Partners to determine
which Partners or groups of Partners may effect Noncompliant Block Transfers in
a calendar year may result in benefits to the Partners or groups permitted to
effect such Noncompliant Block Transfers (including certain General Partners or
their Affiliates) and disadvantages to the Partners or groups which are not
permitted to effect such Noncompliant Block Transfers (including other General
Partners or their Affiliates). No Partner shall have any cause of action
against, or right to receive any compensation from, the Partnership, the General
Partners or their Affiliates or any other Limited Partner or its Affiliates, as
a result of or in respect of any such determination or the disparate effects
thereof on any one or more Partners if the General Partners which consented to
the Written Consent made their determination in good faith.
Section 6.5 Semiannual Transfers.
(a) There shall, if practicable, be two periods each year (each, a
"Semiannual Exchange Period"), each comprising twenty Business Days or such
greater number of Business Days as may be required under the Exchange Act,
during which the Public General Partners shall make registered exchange offers
to the Partners pursuant to which the Partners may exchange their Units for
publicly traded shares of a corporate Public General Partner, if any, or
publicly traded units of limited partner interest of a partnership Public
General Partner, if any, or both. The first Semiannual Exchange Period in a
year, if any, shall begin no earlier than March 15 and end no later than July 31
of such year, and the second Semiannual Exchange Period in a year, if any, shall
begin no earlier than August 15 and end no later than December 31 of such year.
(b) If one or more of the Public General Partners (each, a
"Participating Public General Partner") determines to make a registered exchange
offer in the period prescribed for a Semiannual Exchange Period, such Semiannual
Exchange Period shall begin on a date determined by the Participating Public
General Partners, which, if such Semiannual Exchange Period is in the first half
of the year, shall be as soon as practicable following the issuance of the last
to be issued of the Public General Partners' financial statements for the
immediately preceding year, or if such Semiannual Exchange Period is in the
second half of the year, shall be as soon as practicable following the issuance
of the last to be issued of the Public General Partners' financial statements
for the first six months of such year. If there is more than one Participating
Public General Partner, they shall cooperate in good faith to coordinate such
registered exchange offers.
(c) If there is no Public General Partner, or if the Public
General Partners determine not to make a registered exchange offer in the period
prescribed for a Semiannual Exchange Period, the General Partners shall
determine the date, if any, on which such Semiannual Exchange Period shall
begin.
22
<PAGE>
(d) The General Partners shall endeavor in good faith to provide
two Semiannual Exchange Periods each year as provided in this Section 6.5;
provided, however, that no Partner shall have any cause of action against, or
right to receive any compensation from, any General Partner or its Affiliates as
a result of or in respect of a determination (i) by a Public General Partner to
not make a registered exchange offer in the period prescribed for a Semiannual
Exchange Period, or (ii) by the General Partners to provide less than two
Semiannual Exchange Periods in a year, if such Public General Partner or General
Partners made its or their determination in good faith.
(e) During a Semiannual Exchange Period, a Partner may Transfer
Units to a Public General Partner pursuant to its registered exchange offer, and
during the last five of the ten Business Days immediately following the end of
such Semiannual Exchange Period, a Partner may Transfer Units to any Qualified
Person. Any such Transfer shall comply with the provisions of Sections 6.3 and
6.5(f).
(f) If a Partner proposes to Transfer Units in a Semiannual
Transfer to a Qualified Person other than a Public General Partner pursuant to
its registered exchange offer, such Partner shall, at least five Business Days
prior to the end of the corresponding Semiannual Exchange Period, give notice to
the Partnership of such proposed Transfer, including the name of the proposed
Transferee and the number of Units proposed to be Transferred. If the total
number of Units either tendered pursuant to a registered exchange offer or
proposed to be Transferred in Semiannual Transfers during a Semiannual Transfer
Period, plus the total number of Units Transferred in Semiannual Transfers
during the preceding Semiannual Transfer Period, if any, in the same year,
exceeds 10% of the total number of outstanding Units (the "10% Limit"), the
number of Units tendered pursuant to registered exchange offers and proposed to
be Transferred in Semiannual Transfers during such Semiannual Transfer Period
shall be reduced pro rata such that the 10% Limit is not exceeded. The
Partnership shall immediately give notice of such reduction to each Public
General Partner and each Partner which gave notice to the Partnership of a
proposed Transfer. Exempt Transfers shall not be counted against the 10% Limit.
(g) The General Partners may by Written Consent adopt such rules
consistent with Section 1.7704 of the Treasury Regulations with regard to the
calculation of the 10% Limit as they shall determine in good faith are
appropriate.
Section 6.6 Additional Restrictions on Transfers.
A Partner shall not Transfer any of its Units if such Transfer would
(i) violate then applicable federal and state securities laws or rules and
regulations of the Commission, any state securities commission or any other
governmental authorities with jurisdiction over such Transfer, (ii) result in an
Adverse Partnership Event or an Assignment Event, or (iii) affect the
Partnership's existence or qualification as a limited partnership under the
Delaware Act.
23
<PAGE>
Section 6.7 Covenant and Agreement of the Partners.
Each of the Partners covenants and agrees to comply in all respects
with the provisions of this Agreement regarding Transfers and proposed Transfers
of Units.
Section 6.8 Remedies and Penalties for Noncompliance.
In addition to any other remedies which may be available at law or in
equity for a breach or attempted breach by a Partner of the provisions of this
Article VI, (i) the Partnership shall be entitled to injunctive relief and to
specific performance of such provisions, and (ii) the General Partners may
impose penalties on such Partner(including forfeiture of all or part of its
Units) for such breach or attempted breach. Any Units forfeited pursuant to this
Section 6.8 shall be canceled and retired.
ARTICLE VII
Capital Accounts
Section 7.1 Capital Accounts.
(a) The Partnership shall maintain for each Unitholder a separate
Capital Account in accordance with Section 704 of the Code. Such Capital Account
shall be increased by (i) the cash amount or Net Value of all actual and deemed
Contributions made by such Unitholder to the Partnership and (ii) Net Income
allocated to such Unitholder pursuant to Article VIII and decreased by (i) the
cash amount or Net Value of all actual and deemed distributions of Partnership
Assets made to such Partner and (ii) Net Loss allocated to such Unitholder
pursuant to Article VIII.
(b) Upon the issuance of any Units to or for the benefit of any
Associate of the Partnership or any of its Subsidiaries, or any successor to
such Associate, as compensation for services rendered or to be rendered to a
General Partner, the Partnership or any of its Subsidiaries by such Associate,
the Person receiving such Units shall be deemed to have made a Contribution to
the Partnership in an amount equal to the product of (i) the number of Units so
issued, and (ii) the Unit Price on the date of such issuance.
Section 7.2 Adjustments Affecting Net Income or Net Loss.
(a) In accordance with the requirements of Section 704(c) of the
Code and Treasury Regulations Section 1.704-1(b)(2)(iv)(d), any deductions for
depreciation, cost recovery or amortization attributable to Contributed Property
shall be determined as if the adjusted basis of such Contributed Property on the
date it was acquired by the Partnership was equal to the Carrying Value of such
Contributed Property. Upon an adjustment pursuant to Section 7.4 to the Carrying
Value of any Partnership Asset subject to depreciation, cost recovery or
amortization, any further deductions for such depreciation, cost recovery
24
<PAGE>
or amortization attributable to such Partnership Asset shall be determined as if
the adjusted basis of such Partnership Asset was equal to the Carrying Value of
such Partnership Asset immediately following such adjustment.
(b) Any income, gain or loss attributable to the disposition of
any Partnership Asset shall be determined by the Partnership as if the adjusted
basis of such Partnership Asset as of such date of disposition was equal in
amount to the Partnership's Carrying Value with respect to such Partnership
Asset as of such date.
(c) The computation of all items of income, gain, loss and
deduction shall be made, as to those items described in Section 705(a)(1)(B) or
705(a)(2)(B) of the Code, without regard to the fact that such items are not
includable in gross income or are neither currently deductible nor capitalizable
for federal income tax purposes. For this purpose, amounts paid or incurred to
organize the Partnership or to promote the sale of Partnership Interests that
are neither deductible nor amortizable under Section 709 of the Code, and
deductions for any losses incurred in connection with the sale or exchange of
Partnership Assets disallowed pursuant to Section 267(a)(1) or 707(b) of the
Code, shall be treated as expenditures described in Section 705(a)(2)(B) of the
Code.
Section 7.3 Adjustments for Transfers.
If a General Partner Transfers LP Units, and if immediately prior to
such Transfer such General Partner has a negative Capital Account balance, the
Transferee shall be credited with a zero balance in its Capital Account relating
to such LP Units, and such General Partner shall retain its negative Capital
Account balance.
Section 7.4 Adjustments for Contributions or Redemptions.
In accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(f),
in connection with either (i) a Contribution (other than a de minimis amount) by
a new or existing Partner in consideration for a Partnership Interest or (ii) a
distribution of Partnership Assets (other than a de minimis amount) in
consideration for a Partnership Interest, the Capital Accounts of all Partners
and the Carrying Values of all Partnership Assets shall be adjusted upwards or
downwards to reflect any Unrealized Gain or Unrealized Loss attributable to each
Partnership Asset, as if such Unrealized Gain or Unrealized Loss had been
recognized upon an actual sale of such Partnership Asset at such time and had
been allocated to the Partners pursuant to Article VIII. For purposes of
determining such Unrealized Gain or Unrealized Loss, the fair market value of
Partnership Assets shall be determined by the General Partners.
25
<PAGE>
Section 7.5 Adjustments for Distributions in Kind.
In accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(e),
immediately prior to the actual or deemed distribution of any Partnership Asset
in kind, the Capital Accounts of all Partners and the Carrying Values of such
Partnership Asset shall be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such Partnership Asset as if such
Unrealized Gain or Unrealized Loss had been recognized upon an actual sale of
such Partnership Asset immediately prior to such distribution and had been
allocated to the Partners at such time pursuant to Article VIII. For purposes of
determining such Unrealized Gain or Unrealized Loss, the fair market value of
Partnership Assets shall be determined by the General Partners.
ARTICLE VIII
Distributions and Allocations
Section 8.1 Cash Distributions.
With respect to each fiscal quarter, commencing with the fiscal
quarter ending March 31, 1998, the Partnership shall distribute an amount in
cash equal to the Distributable Cash for such quarter. Such distributions shall
be made to Unitholders of record as of the close of business on the last day of
each such fiscal quarter, and shall be paid not more than 30 days after the last
day of each such fiscal quarter. Such distributions shall be made in accordance
with the following priorities:
(i) First, to such Unitholders holding Class C Units, pro
rata in accordance with their Class C Units, until the cash distributions made
pursuant to this clause (i) with respect to each Class C Unit equal the Class C
Quarterly Priority Amount;
(ii) Second, to such Unitholders holding Class A Units and
Class B Units, pro rata in accordance with their Class A Units and Class B
Units, without regard to whether such Units are Class A Units or Class B Units,
until the cash distributions made pursuant to this clause (ii) with respect to
each Class A Unit and Class B Unit equal the Class A Quarterly Priority Amount;
(iii) Third, to such Unitholders holding Class A Units, Class
B Units or Class C Units, pro rata in accordance with their Class A Units, Class
B Units and Class C Units, without regard to whether such Units are Class A
Units, Class B Units or Class C Units, until the cash distributions made
pursuant to the preceding clauses (i) and (ii) and this clause (iii) with
respect to each Class A Unit, Class B Unit and Class C Unit equal the Class C
Quarterly Cap;
26
<PAGE>
(iv) Fourth, to such Unitholders holding Class A Units or
Class B Units, pro rata in accordance with their Class A Units and Class B
Units, without regard to whether such Units are Class A Units or Class B Units;
provided, however, that the Partnership may withhold distributions to the
holders of Class A Units and Class B Units to protect the distributions in
respect of the Class C Units in future fiscal quarters.
Section 8.2 General Rules with Respect to Distributions.
(a) The General Partners are authorized to distribute Partnership
Assets in kind. Any Partnership Asset distributed in kind shall be valued at its
fair market value on the date of distribution and shall be distributed in
accordance with Section 8.1. Capital Accounts and Carrying Values shall be
adjusted in accordance with Section 7.2(e).
(b) The General Partners shall specify a Record Date for any
distribution other than a quarterly distribution, and any Partnership Assets
distributed shall be distributed to the Unitholders of the relevant class or
series as of the Record Date.
(c) Any amount of taxes withheld pursuant to Section 9.7, and any
amount of taxes, interest or penalties paid by the Partnership to any
governmental entity, with respect to amounts allocated or distributable to a
Unitholder shall be deemed to be a distribution or payment to such Unitholder
and shall reduce the amount otherwise distributable to such Unitholder pursuant
to this Article VIII.
(d) Distributions made to Unitholders shall be made to
"Unitholders" as defined in Article I without regard to the last sentence of the
definition of "Unitholder".
(e) The Partnership shall not make a distribution to any Partner
on account of its Partnership Interest if such distribution would violate
Section 17-607 of the Delaware Act or other applicable law.
Section 8.3 Allocations of Net Income and Net Loss.
(a) Net Income and Net Loss shall be determined for each fiscal
year and allocated annually. Except as otherwise provided in Section 8.4, Net
Income and Net Loss for a fiscal year shall be allocated as set forth in this
Section 8.3.
(b) If the Partnership has Net Income for a fiscal year, one-
twelfth of such Net Income shall be treated as earned in each fiscal month of
such fiscal year. Net Income so treated as earned in a fiscal quarter of such
fiscal year shall first be allocated to the Class C Units in the amount of the
distributions made to the Class C Unitholders with respect to such fiscal
quarter; any remaining Net Income shall be allocated to the Class A Units and
Class B Units in
27
<PAGE>
proportion to the respective distributions made to the Class A Unitholders and
Class B Unitholders with respect to such fiscal quarter. Net Income for a fiscal
quarter which is allocated to the Class C Units shall be further allocated to
the Class C Unitholders as of the close of business on the last day of each of
the three fiscal months in such fiscal quarter, in proportion to the number of
Class C Units held by such Unitholders as of the close of business on each such
day. One-third of the Net Income for a fiscal quarter which is allocated to the
Class A Units or Class B Units shall be further allocated to the Unitholders of
such class of Units as of the close of business on the last day of each fiscal
month in such fiscal quarter, in proportion to the number of Units of such class
held by each such Unitholder as of the close of business on such day.
(c) If the Partnership has a Net Loss for a fiscal year, one-
twelfth of such Net Loss shall be treated as incurred in each fiscal month of
such fiscal year. Net Loss so treated as incurred in a fiscal month shall first
be allocated to the Unitholders having positive Capital Account balances so as
to cause their respective Capital Account balances to be in (or, if not
possible, closer to) the same proportion to each other as their respective
Percentage Interests and then in accordance with their respective Percentage
Interests until all such positive balances have been eliminated; any remaining
Net Loss shall be allocated to the General Partners in respect of their GP
Units. To the extent subsequent Net Income of the Partnership does not exceed
Net Loss previously allocated pursuant to this Section 8.3(c), such Net Income
shall first be allocated to the General Partners in respect of their GP Units
until such allocated Net Income equals Net Loss previously allocated to the
General Partners pursuant to this Section 8.3(c); any remaining Net Income shall
be allocated to the Unitholders in the same proportions and amounts as Net Loss
was previously allocated pursuant to this Section 8.3(c). For purposes of this
Section 8.3(c), the determination of Capital Account balances shall be made
after giving effect to all distributions of cash made with respect to fiscal
quarters before the fiscal month in question pursuant to Section 8.1.
(d) If the Partnership has an item of extraordinary income during
a fiscal month which results in an extraordinary distribution to the Class A
Unitholders and Class B Unitholders with respect to the fiscal quarter which
includes such fiscal month, such item of extraordinary income shall be allocated
to the Class A Units and Class B Units in proportion to the respective
extraordinary distributions made to the Class A Unitholders and Class B
Unitholders with respect to the fiscal quarter which includes such fiscal month,
and shall be further allocated to the Class A Unitholders and Class B
Unitholders as of the close of business on the last day of such fiscal month, in
proportion to the number of Units of each such class held by each such
Unitholder as of the close of business on such day. The General Partners shall
determine whether an item of Partnership income is extraordinary and results in
an extraordinary distribution, and the amount of such extraordinary
distribution.
(e) Except as otherwise provided in Section 8.5, items of income,
gain, loss and deduction shall be allocated among the Unitholders in the same
proportion as items
28
<PAGE>
comprising Net Income or Net Loss, as the case may be, are allocated among the
Unitholders, and credits shall be allocated as provided in Treasury Regulations
Section 1.704-1(b)(4)(ii).
Section 8.4 Special Provisions Governing Capital Account Allocations.
(a) In the event that any Partner has a deficit Capital Account at
the end of any Partnership fiscal year which is in excess of such Partner's
obligation (including any deemed obligation under Treasury Regulations or
temporary Treasury Regulations), if any, to restore an amount to the
Partnership, and such excess deficit exists following the allocations referred
to in Sections 8.3(b) and (c), such Partner shall be allocated Net Income in
proportion to such remaining excess deficit amounts.
(b) If any Partner unexpectedly receives any adjustments,
allocations or distributions described in Treasury Regulations Section 1.704-
1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), Net
Income or items of income and gain shall be specially allocated to such Partner
in an amount and manner sufficient to eliminate, to the extent required by the
Treasury Regulations, a deficit in its Capital Account (computed as provided in
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(3)) as quickly as possible.
This Section 8.4(b) is intended to constitute a "qualified income offset" within
the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(3) and shall be
interpreted to comply with the requirements of such regulation. Any special
allocations of items of income or gain pursuant to this Section 8.4(b) shall be
taken into account in computing subsequent allocations of Net Income or Net Loss
so that the net amounts of any items subsequently so allocated shall, to the
extent possible, be equal to the net amounts that would have been allocated to
each Partner if such special allocations had not occurred.
(c) In the event there is a net decrease in Minimum Gain during a
Partnership taxable year, the Partners shall be allocated items of income and
gain in accordance with Treasury Regulations Section 1.704-2(f). Any Partner's
share of Minimum Gain shall be determined in accordance with Treasury
Regulations Section 1.704-2(g). This Section 8.4(c) is intended to comply with
the minimum gain chargeback requirement of Treasury Regulations Section 1.704-2
and shall be interpreted to comply with the requirements of such regulation. Any
special allocations of items of income or gain pursuant to this Section 8.4(c)
shall be taken into account in computing subsequent allocations of Net Income or
Net Loss so that the net amounts of any items subsequently so allocated and the
special allocations shall, to the extent possible, be equal to the net amounts
that would have been allocated to each Partner if such special allocations had
not occurred.
(d) To the extent required by Treasury Regulations Section 1.704-
2(i), any tax items of the Partnership that are attributable to a non-recourse
debt of the Partnership that constitutes "partner non-recourse debt" as defined
in Treasury Regulations Section 1.704-2(b)(4) shall be allocated in accordance
with the provisions of Treasury Regulations Section 1.704-2(i). This Section
8.4(d) is intended to satisfy the requirements of Treasury Regulations Section
29
<PAGE>
1.704-2(i) (including the partner nonrecourse minimum gain chargeback
requirements) and shall be interpreted to comply with the requirements of such
regulation. Any special allocations pursuant to this Section 8.4(d) shall be
taken into account in computing subsequent allocations of Net Income or Net Loss
so that the net amounts of any items subsequently so allocated and the special
allocations shall, to the extent possible, be equal to the net amounts that
would have been allocated to each Partner if such special allocations had not
occurred.
(e) The General Partners shall make special allocations of Net
Income or Net Loss or items of income, gain, loss or deduction to GP Units as
may be necessary to permit conversion of such Units to LP Units in accordance
with Section 4.1. For purposes of allocating income, gain, loss or deduction to
LP Units that were converted from GP Units for periods following such
conversion, the Units shall be deemed as of the effective date of such
conversion to have been allocated the same amount of income, gain, loss and
deductions and to have received the same distributions as the LP Units
outstanding prior to such conversion.
(f) If and to the extent that any Partner is deemed to recognize
income as a result of any transaction between such Partner and the Partnership
pursuant to Section 482, Section 483, Sections 1272-1274 or Section 7872 of the
Code, or any similar provision now or hereafter in effect, any corresponding
loss or deduction of the Partnership shall be allocated to the Partner who was
charged with such income. In addition, if all or part of the deductions claimed
by the Partnership for compensation to its employees is disallowed, the income
attributable to such disallowed deductions will be specially allocated to the
General Partners, and any subsequent deductions related to such compensation
will be specially allocated to the General Partners.
(g) In addition to the other special allocations that the General
Partners may make under this Section 8.4, to preserve uniformity of Units
(subject to the priority distribution rights of certain classes of Units) the
General Partners may make special allocations of Net Income or Net Loss or items
of income, gain, loss or deduction, but only if such allocations would not have
a material adverse effect on the Unitholders (other than the General Partners)
and if they are consistent with the principles of Section 704 of the Code.
Section 8.5 Special Provisions Governing Tax Allocations.
(a) In the case of Contributed Property, items of income, gain,
loss, depreciation, amortization and cost recovery deductions attributable to
such property shall be allocated among the Partners in a manner consistent with
the principles of Section 704(c) of the Code that takes into account the
variation between the Net Value of such property and its adjusted basis, at the
time of contribution, to the extent such allocation reduces Book-Tax
Disparities.
(b) Items of income, gain, loss, depreciation and cost recovery
deductions attributable to Adjusted Property shall (i) first, be allocated among
the Partners in a manner
30
<PAGE>
consistent with the principles of Section 704(c) of the Code to take into
account the Unrealized Gain or Unrealized Loss attributable to such property and
the allocation thereof pursuant to Section 8.3(b) or 8.3(c) to the extent such
allocation reduces Book-Tax Disparities, and (ii) second, in the event such
property was originally Contributed Property, be allocated among the Partners in
a manner consistent with Section 8.5(a).
(c) To the extent permissible under applicable Treasury
Regulations, the amount of any gain from a disposition of property allocated to
a Partner pursuant to Section 8.5(a) or 8.5(b) shall be deemed to be Recapture
Income to the extent such Partner has been allocated or has claimed any
deduction directly or indirectly giving rise to the treatment of such gain as
Recapture Income.
(d) All items of income, gain, loss, deduction and credit
recognized by the Partnership and allocated to the Partners in accordance with
this Article VIII shall be determined without regard to any adjustment made
pursuant to Section 743 of the Code; provided, however, that such allocations,
once made, shall, if an election under Section 754 of the Code is in effect, be
adjusted as necessary or appropriate to take into account those adjustments
permitted by Section 743 of the Code, and any adjustments made pursuant to
Section 734 of the Code shall be allocated to the extent permitted under and in
accordance with the rule of Treasury Regulations Section 1.704-1(b)(2)(iv)(m).
Section 8.6 Allocations Upon Dissolution.
If upon dissolution of the Partnership pursuant to Article XVII, and
after taking into account all allocations of Net Income and Net Loss (and other
tax items) under this Article VIII, distributions, if they were to be made to
Unitholders in accordance with their respective Capital Accounts, would result
in unequal distributions on their Units, then (i) gross items of income and gain
(and other tax items) for the taxable year of final distribution, and, to the
extent permitted under Section 761(c) of the Code, gross items of income and
gain (and other tax items) for the immediately preceding taxable year, shall be
allocated first to the Class C Unitholders until the Capital Account balance
allocable to each Class C Unit is equal, and (ii) the same procedure shall be
followed with respect to Class A Units and Class B Units until the Capital
Account balance allocable to each Class A Unit and Class B Unit is equal.
Section 8.7 Changes in Allocation Methods.
The General Partners may revise, alter or otherwise modify the
allocation methods set forth in this Article VIII (i) to the extent that they
determine that the application of such methods would result in a substantial
mismatching of the allocation of Net Income or Net Loss attributable to a period
and the distribution of cash attributable to the same period as between the
Transferor and Transferee of a Unit that could be minimized by the application
of an alternative tax allocation method, or (ii) to the extent necessary to
conform the Partnership's tax allocations to the requirements of the Code or any
Treasury Regulations.
31
<PAGE>
ARTICLE IX
Accounting and Tax Matters
Section 9.1 Books and Records.
The Partnership shall maintain complete and accurate books and records
with respect to the Partnership's business, and such books and records shall at
all times be kept at the principal office of the Partnership. The Partnership
may maintain its books and records in other than written form, if such form is
capable of conversion into written form within a reasonable time. The
classification, realization and recognition of income, gains, losses,
deductions, credits and other items for financial reporting purposes shall be on
the accrual basis in accordance with generally accepted accounting principles.
Section 9.2 Fiscal Year.
The fiscal year of the Partnership shall be the same as its taxable
year for federal income tax purposes.
Section 9.3 Taxable Year.
The taxable year of the Partnership shall be the calendar year. The
General Partners may change the taxable year of the Partnership to another year
permitted by the Code.
Section 9.4 Preparation of Tax Returns.
The Partnership shall prepare and timely file such returns relating to
Partnership income, gains, losses, deductions and credits, as may be required
for federal, state and local income tax purposes, and within 90 days after the
close of the taxable year, the Partnership shall mail to the Limited Partners
the tax information reasonably required for their federal, state and local
income tax reporting purposes. The classification, realization and recognition
of income, gains, losses, deductions, credits and other items for federal income
tax purposes shall be on the accrual basis.
Section 9.5 Tax Elections.
(a) The General Partners may make the election under Section 754
of the Code in accordance with applicable regulations thereunder. In the event
the General Partners make such election, the General Partners reserve the right
to seek to revoke such election upon their determination that such revocation is
in the best interests of the Unitholders.
(b) The General Partners shall determine whether to make any other
elections available under the Code or under any state's tax laws on behalf of
the Partnership.
32
<PAGE>
Section 9.6 Other Tax Matters.
(a) The General Partners shall make special allocations to the
Partners of Net Income or Net Loss or items of income, gain, loss, deduction or
credit that are consistent with the principles of Section 704(c) of the Code and
shall amend the provisions of this Agreement as appropriate to reflect the
proposal or promulgation of Treasury Regulations under Subchapter K of the Code
or otherwise to cause allocations under Article VIII to be respected for federal
income tax purposes.
(b) The General Partners may adopt and employ such methods and
procedures for (i) the maintenance of book and tax capital accounts, (ii) the
determination and allocation of adjustments under Sections 704(c), 734 and 743
of the Code, (iii) the determination and allocation of Net Income, Net Loss,
taxable income, taxable loss and items thereof under this Agreement and pursuant
to the Code, (iv) the determination of the identities and tax classification of
Unitholders, (v) the provision of tax information and reports to Partners, (vi)
the adoption of reasonable conventions and methods for the valuation of assets
and the determination of tax basis, (vii) the allocation of asset values and tax
basis, (viii) conventions for the determination of cost recovery, depreciation
and amortization deductions and the maintenance of inventories, (ix) the
recognition of the Transfer of Units, and (x) compliance with other tax-related
requirements, including without limitation the use of filing and reporting
procedures similar to those employed by other publicly-traded partnerships, as
they determine are necessary and appropriate to execute the provisions of this
Agreement, to comply with federal and state tax laws, and to achieve uniformity
and fungibility of Units (subject to the priority distribution rights of Class C
Units).
(c) If the General Partners determine that no reasonable allowable
convention or other method is available to preserve the uniformity of Units
(subject to the priority distribution rights of certain classes of Units) or the
General Partners so elect, Units may be separately identified as distinct
classes to reflect differences in tax consequences.
Section 9.7 Withholding.
The General Partners are authorized to take any action that they
determine to be necessary and appropriate to cause the Partnership to comply
with any withholding and reporting obligations imposed by law, including
pursuant to Sections 1441, 1442, 1445 and 1446 of the Code.
Section 9.8 Tax Controversies.
PIMCO Partners GP is the Tax Matters Partner (as defined in Section
6231 of the Code) and is authorized to represent the Partnership in connection
with all examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial
33
<PAGE>
proceedings, and to expend Partnership funds for professional services and costs
associated therewith. Each Partner agrees to cooperate with PIMCO Partners GP
and to do or to refrain from doing any or all things reasonably required by the
PIMCO Partners GP to conduct such proceedings.
Section 9.9 Tax Opinions.
The requirement, as a condition to any action proposed to be taken
under this Agreement, that the Partnership be furnished a Tax Opinion (i) shall
not be applicable if the Partnership is at such time treated in all material
respects as an association taxable as a corporation for federal income tax
purposes, and (ii) shall be deemed satisfied by an Opinion of Counsel containing
such conditions, limitations and qualifications as are acceptable to the General
Partners.
ARTICLE X
Concerning the General Partners
Section 10.1 Management of Partnership Business.
(a) The General Partners (i) shall have the exclusive right and
full power and authority to manage and control the business and affairs of the
Partnership and to take any action deemed necessary or desirable by them in
connection with the business of the Partnership, and (ii) except as otherwise
provided in this Agreement, may take any action, including without limitation
the amendment of this Agreement, without the approval of the Limited Partners.
(b) If there is more than one General Partner, the General
Partners shall have equal rights, power and authority in the management and
control of the business and affairs of the Partnership, and each of them shall
have the rights, power and authority of the General Partners specified in
Section 10.1(a); provided, however, that any difference arising as to any action
connected with the business of the Partnership, other than those actions
specified in Section 10.1(c), shall be decided by General Partners holding a
majority of the outstanding GP Units.
(c) The following actions may be taken only by Written Consent:
(i) any merger or consolidation of the Partnership with or
into any other Business Entity in which the Partnership is not the surviving
entity;
(ii) any sale or transfer of all or substantially all of the
Partnership Assets;
34
<PAGE>
(iii) any incurrence of Indebtedness by the Partnership or
any of its Subsidiaries except in the ordinary course of business;
(iv) initiation, consent to or acquiescence in any
Insolvency Event with respect to the Partnership;
(v) any other action which would make it impossible for the
General Partners to carry on the ordinary business of the Partnership;
(vi) any determination or election pursuant to Section 17.1;
(vii) any determination, after the occurrence of an Event of
Withdrawal with respect to a General Partner, to carry on the business of the
Partnership;
(viii) any determination or action pursuant to Article XVI;
(ix) any action which would cause an Assignment Event, an
Adverse Partnership Event, a Tax Realization Event or a Termination Event;
(x) any determination or action pursuant to Section 11.4;
or
(xi) any other action which, by reason of any provision of
this Agreement, requires Written Consent.
Section 10.2 Delegation.
(a) The General Partners shall have the power and authority by
Written Consent to constitute one or more boards or committees, to delegate any
or all of the General Partners' rights and powers to manage and control the
business and affairs of the Partnership to one or more of such boards or
committees (each, a "Delegate"), and to revise or revoke any such constitution
or delegation. Such delegation by the General Partners shall not cause any
General Partner to cease to be a general partner of the Partnership.
(b) The General Partners may not delegate their rights and powers
with respect to any of the following actions:
(i) admission of any successor or additional General
Partner;
(ii) any amendment of this Agreement;
(iii) any action which would require the approval of Partners
other than the General Partners; or
35
<PAGE>
(iv) any action which, by reason of any provision of this
Agreement, requires Written Consent.
(c) Except as otherwise provided in a Written Consent constituting
a Delegate and delegating rights and powers to such Delegate, such Delegate has
the power and authority to constitute and appoint one or more committees or
subcommittees of such Delegate and to provide for, prescribe the duties of, and
appoint one or more persons as officers of the Partnership, and to delegate to
one or more of such committees or subcommittees or one or more of such officers
any or all of the rights and powers delegated to it by the General Partners.
Section 10.3 Reimbursement of the General Partners.
(a) Each General Partner shall be reimbursed on a monthly or such
other basis as the General Partners shall determine (i) for all direct expenses
paid by it on behalf of the Partnership (including amounts paid by it to any
Person to perform services for the Partnership), (ii) for all expenses (other
than taxes) incurred by it in connection with the business and affairs of the
Partnership, and (iii) in the case of a Public General Partner, for all expenses
(other than taxes) incurred by it.
(b) The General Partners shall not receive any compensation from
the Partnership for services provided to the Partnership as General Partners.
Section 10.4 Outside Activities.
Except as provided in a Written Consent, no General Partner shall
carry on any business except in connection with or incidental to (i) the
performance of its duties as a General Partner under this Agreement, (ii) the
direct or indirect acquisition, ownership or disposition of Units and other
Partnership Interests, and (iii) its governance and existence.
Section 10.5 Certain Transactions.
(a) A General Partner or its Affiliate may make a loan to the
Partnership on terms that are fair to the Partnership. The Partnership shall
reimburse such General Partner or Affiliate for any reasonable out-of-pocket
costs incurred by it in connection with the borrowing of funds obtained by such
General Partner or Affiliate and loaned to the Partnership.
(b) The Partnership may make a loan to a General Partner or its
Affiliate on terms that are fair to the Partnership. Such General Partner or
Affiliate shall reimburse the Partnership for any reasonable out-of-pocket costs
incurred by it in connection with the borrowing of funds obtained by the
Partnership and loaned to such General Partner or Affiliate.
(c) A General Partner or its Affiliate may render services to the
Partnership on terms that are fair to the Partnership.
36
<PAGE>
(d) A General Partner or its Affiliate may sell, transfer or
convey assets or property to, or purchase Partnership Assets from, the
Partnership, or use or lease Partnership Assets, on terms that are fair to the
Partnership.
(e) Before entering into any transaction described in this Section
10.5, such transaction shall be determined to be fair to the Partnership by (i)
a committee of members of the Management Board, appointed by the Management
Board, who are independent with respect to such transaction, or (ii) the General
Partners. A determination made by such a committee, or made in good faith by the
General Partners, shall be conclusive and binding on the Partners and the
Partnership.
Section 10.6 Conflicts of Interest.
Any conflict of interest between a General Partner or any of its
Affiliates, on the one hand, and the Partnership or any other Partner, on the
other hand, other than a transaction described in Section 10.5, shall be
resolved by (i) a committee of members of the Management Board, appointed by the
Management Board, who are independent with respect to such conflict of interest,
or (ii) the General Partners. A resolution determined by such a committee, or
determined in good faith by the General Partners, shall be conclusive and
binding on the Partners and the Partnership.
Section 10.7 Notice of Event of Withdrawal.
A General Partner which suffers an event that is, or with the passage
of a period specified in the definition of "Insolvency Event" or "Termination
Event" in Article I would become, an Event of Withdrawal, shall immediately
notify each other General Partner, or if there is no other General Partner, each
Limited Partner, of the occurrence of the event.
Section 10.8 Operating Board.
(a) As soon as practicable on or after November 15, 1994, the
General Partners shall establish an Operating Board of the Partnership which,
prior to the date which is four (4) months after the earlier of January 1, 1998,
or the first Restructuring, shall consist of twelve (12) members as follows: (i)
the Chief Executive Officer from time to time of PIMCO, who shall serve as the
Chairperson of the Operating Board, (ii) six (6) managing directors of PIMCO
designated by PIMCO from time to time, (iii) three (3) managing directors of CCI
designated by CCI from time to time, (iv) one (1) managing director of any
Investment Management Company other than PIMCO or CCI designated by a majority
in Total Contributed Income of all such Investment Management Companies, and (v)
the Chief Executive Officer from time to time of the Partnership. Members of the
Operating Board designated by the Investment Management Companies are referred
to as "Designated Members." Notwithstanding
37
<PAGE>
the provisions of Article XIV, this subsection (a) may not be amended prior to
the date which is four (4) months after the earlier of January 1, 1998 or the
first Restructuring.
(b) This Section 10.8 and the defined terms referred to only in
this Section 10.8 shall be deleted in their entirety on the date which is four
(4) months after the earlier of January 1, 1998, or the first Restructuring, and
this Agreement shall be restated to reflect such deletion.
ARTICLE XI
Concerning the Limited Partners
Section 11.1 Participation in Control of Partnership Business.
A Limited Partner shall not participate in the control of the business
of the Partnership within the meaning of the Delaware Act.
Section 11.2 Reports.
(a) Not later than 90 days after the close of each fiscal year,
the Partnership shall mail to each Partner an annual report containing financial
statements of the Partnership for the fiscal year, including a balance sheet and
statements of operations, partners' equity and changes in financial position,
prepared in accordance with generally accepted accounting principles and
accompanied by the opinion of the Partnership Accountants, and such other
information as the General Partners may deem appropriate.
(b) Not later than 45 days after the close of each fiscal quarter,
except the last fiscal quarter of each fiscal year, the Partnership shall mail
to each Partner a quarterly report for the fiscal quarter containing financial
statements of the Partnership for the fiscal quarter prepared in accordance with
generally accepted accounting principles, and such other information as the
General Partners may deem appropriate.
(c) The Partnership may, in lieu of delivering an annual or
quarterly report, deliver to each Limited Partner a copy of the Form 10-K or 10-
Q, as the case may be, filed by the Partnership pursuant to the Exchange Act.
Section 11.3 Access and Confidentiality.
(a) Each Partner has the right, subject to such reasonable
standards, including standards governing what information and documents are to
be furnished, at what time and location and at whose expense, as may be
established by the Partnership, to obtain from the Partnership from time to time
upon reasonable demand for any purpose reasonably related to the Partner's
interest as a Partner:
38
<PAGE>
(i) True and full information regarding the status of the
business and financial condition of the Partnership;
(ii) Promptly after becoming available, a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) A current list of the name and last known business,
residence or mailing address of each Partner;
(iv) A copy of this Agreement, the Certificate of Limited
Partnership and all amendments thereto, together with executed copies of any
written powers of attorney pursuant to which this Agreement, any Certificate of
Limited Partnership and all amendments thereto have been executed;
(v) True and full information regarding the amount of cash
and a description and statement of the Net Value of any Contribution made by
each Partner and which each Partner has agreed to make in the future, and the
date on which each Partner became a Partner; and
(vi) Other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partners shall have the right to keep confidential
from the Limited Partners for such period of time as the General Partners deem
reasonable, any information which the General Partners reasonably believe to be
in the nature of trade secrets or other information the disclosure of which the
General Partners determine in good faith is not in the best interest of the
Partnership or could damage the Partnership or its business or which the
Partnership is required by law or by agreement with a third party to keep
confidential.
(c) Any demand under this Section 11.3 shall be in writing and
shall state the purpose of such demand.
Section 11.4 Authority of General Partners to Effect Exchanges and
Redemptions.
(a) If at any time the General Partners determine that as a result
of the cumulative effect of admissions of additional Limited Partners or
Transfers of Units or for any other reason, there is a substantial risk of an
Adverse Partnership Event, the General Partners may, without the approval of any
Limited Partner, (i) automatically effect an exchange (each, an "Exchange") of
some or all outstanding LP Units for Equity Securities of one or more Public
General Partners, or (ii) effect the redemption by the Partnership (each, a
"Redemption") of some or all outstanding LP Units for an amount in cash per
redeemed LP Unit equal to the Unit Price as of the close of business on the
Business Day next preceding the date of redemption.
39
<PAGE>
(b) If a Limited Partner who was an Eligible Person as of December
31, 1997 or the date on which it was admitted as a Limited Partner, whichever is
later, ceases for any reason to be an Eligible Person, the General Partners may
effect an Exchange or Redemption of the LP Units held by such Limited Partner.
(c) Any Exchange or Redemption shall comply with the provisions of
Article VI.
(d) The power and authority of the General Partners to effect (or
not to effect) Exchanges and Redemptions includes the power and authority to
effect one or more Exchanges or Redemptions that result in benefits to one or
more Partners or their Affiliates (including without limitation the General
Partners or their Affiliates) that are not enjoyed by all Partners, and that may
result in disadvantageous consequences to one or more Partners that are not
suffered by all Partners or their Affiliates (including without limitation the
General Partners or their Affiliates). No Limited Partner shall have any cause
of action against, or right to receive any compensation from, the Partnership,
the General Partners or their Affiliates or any other Limited Partner or its
Affiliates, as a result of or in respect of (i) any Exchange or Redemption or
the disparate effects thereof on any one or more Partners, (ii) the failure of
the General Partners to effect any one or more Exchanges or Redemptions, or
(iii) the General Partners' determination to effect an Exchange or Redemption of
LP Units held by one or more particular Unitholders instead of any other
Unitholders, unless it is proved by clear and convincing evidence that the
action or failure to act of the General Partners involved an act or omission
undertaken with deliberate intent to cause injury to the Partnership or was
undertaken with reckless disregard for the best interests of the Partnership.
ARTICLE XII
Admission of Partners
Section 12.1 Admission of General Partners.
(a) If a General Partner proposes to Transfer any or all of its GP
Units to an Affiliate of such General Partner pursuant to Section 6.2, such
Affiliate shall be admitted as a General Partner without the approval of any
other Partner.
(b) Except as provided in Sections 12.1(a), 13.1(b), 13.1(c), 17.1
or 17.2, a Person shall be admitted as a General Partner only if such admission
is proposed by the General Partners and Approved by the Unitholders.
(c) A Person shall not be admitted as a General Partner unless the
Partnership receives (i) a Limited Liability Opinion, a Tax Opinion and an
Assignment Opinion with respect to such admission, (ii) a copy of this Agreement
amended to reflect the admission of such Person
40
<PAGE>
as a General Partner, (iii) the written agreement of such Person to carry on the
business of the Partnership, and (iv) such other documents or instruments as may
be required under this Agreement and applicable law in order to effect the
admission of such Person as a General Partner.
Section 12.2 Admission of Limited Partners.
(a) A Person which is not a Partner and which proposes to make a
Contribution to the Partnership and receive LP Units in exchange for such
Contribution shall apply to be admitted as a Limited Partner by executing and
delivering an Admission Application to the Partnership prior to such
Contribution.
(b) A Person which is not a Partner and which proposes to acquire
one or more LP Units by Transfer from a Unitholder shall apply to be admitted as
a Limited Partner by executing and delivering an Admission Application to the
Partnership prior to such Transfer.
(c) A Person shall be admitted as a Limited Partner only if (i) it
is an Eligible Person, (ii) it delivers a properly completed and executed
Admission Application to the Partnership, and (iii) its admission would not (A)
violate then applicable federal and state securities laws or rules and
regulations of the Commission, any state securities commission or any other
governmental authorities with jurisdiction over such Transfer, (B) result in an
Assignment Event or an Adverse Partnership Event or (C) affect the Partnership's
existence or qualification as a limited partnership under the Delaware Act.
(d) A Person which qualifies for admission as a Limited Partner
pursuant to Section 12.2(c) shall be admitted as a Limited Partner and shall
become bound by this Agreement as a Limited Partner at the close of business on
the Business Day on which Certificates evidencing the LP Units issued to such
Person in exchange for its Contribution or Transferred to such Person are issued
to such Person and registered in its name on the books and records of the
Transfer Agent.
ARTICLE XIII
Withdrawal or Removal of Partners
Section 13.1 Withdrawal or Removal of General Partners.
(a) A General Partner may withdraw from the Partnership as a
General Partner without the approval of any other Partner if it Transfers all of
its GP Units to an Affiliate of such General Partner as provided in Section 6.2,
and such Affiliate is admitted as a General Partner as provided in Section 12.1.
41
<PAGE>
(b) Except as provided in Section 13.1(a), a General Partner shall
not voluntarily withdraw from the Partnership as a General Partner unless (i)
such General Partner gives notice to the Partnership of its intent to withdraw
as a General Partner, (ii) the Partnership receives a Limited Liability Opinion,
a Tax Opinion and an Assignment Opinion with respect to such withdrawal, and
(iii) such withdrawal is approved by Unitholders holding a majority of the
outstanding Units, other than the Units held by such General Partner and its
Affiliates, voting as a single class. The General Partners shall call and hold a
meeting of the Unitholders to consider the withdrawal of the General Partner no
sooner than 60 days after the date of such notice, or if there is only one
General Partner, no sooner than 180 days after the date of such notice. If there
is only one General Partner, any Unitholder may, by notice to the Partnership at
least 120 days prior to the date of the meeting, propose a successor General
Partner. Any proposed successor General Partner shall be a candidate for
successor General Partner at such meeting only if it is qualified to be a
General Partner and has agreed in writing to carry on the business of the
Partnership. If there is only one General Partner and its withdrawal is
approved, but no successor General Partner is Approved by the Unitholders on the
first ballot of such meeting, a second ballot shall be held as soon as
practicable thereafter in order to consider the approval of the candidate that
received the most votes in the first ballot, and if such candidate is not
Approved by the Unitholders on the second ballot, the General Partner shall be
entitled to withdraw, and upon such withdrawal the Partnership shall be
dissolved and liquidated pursuant to Article XVII. If a candidate is Approved by
the Unitholders as successor General Partner, it shall be admitted to the
Partnership as the General Partner as provided in Section 12.1 immediately prior
to the withdrawal of the Departing General Partner.
(c) A General Partner may be removed as a General Partner by vote
of Unitholders holding 80% or more of the outstanding Units, voting as a single
class. A General Partner may not be removed unless (i) the Partnership receives
a Limited Liability Opinion, a Tax Opinion and an Assignment Opinion with
respect to such removal, and (ii) if such General Partner is the sole General
Partner, a Person qualified to be General Partner, which has agreed in writing
to carry on the business of the Partnership, is Approved by the Unitholders as
successor General Partner. Such Person shall be admitted to the Partnership as a
General Partner as provided in Section 12.1 immediately prior to the removal of
the Departing General Partner.
Section 13.2 Interest of Departing General Partner.
(a) A Departing General Partner shall become a Limited Partner,
and its GP Units, if any, shall be converted into LP Units pursuant to Section
4.1(b). At the time of such conversion, the Departing General Partner shall pay
to the Partnership an amount equal to any negative balance in its Capital
Account.
(b) If the Partnership is indebted to the Departing General
Partner at the effective date of its withdrawal or removal for funds advanced,
properties sold or services rendered to the Partnership by the Departing General
Partner, the Partnership shall, within 60 days after such date, pay to the
Departing General Partner the full amount of such indebtedness;
42
<PAGE>
provided, however, that if the Departing General Partner has withdrawn as a
General Partner in violation of this Agreement, the Partnership may offset
against the amount of such indebtedness any damages resulting from such breach.
(c) If the Departing General Partner has withdrawn or been removed
as a General Partner in accordance with Section 13.1 without dissolution of the
Partnership, the successor to the Departing General Partner, or if there is no
successor, the remaining General Partners, shall (i) assume all outstanding
obligations incurred by the Departing General Partner as a General Partner of
the Partnership, and (ii) take all such action as shall be necessary to
terminate any guarantees of the Departing General Partner and any of its
Affiliates of any obligations of the Partnership. If for whatever reason the
creditors of the Partnership will not consent to such termination of guarantees,
the successor to the Departing General Partner, or if there is no successor, the
remaining General Partners, shall indemnify the Departing General Partner for
any costs and expenses incurred by the Departing General Partner on account of
such guarantees pursuant to an agreement reasonably satisfactory in form and
substance to the Departing General Partner.
Section 13.3 Business May Be Carried On After Event of Withdrawal.
Upon the occurrence of an Event of Withdrawal, the business of the
Partnership may be carried on by any remaining or newly-admitted General
Partners.
Section 13.4 No Withdrawal of Limited Partners.
A Limited Partner may not withdraw from the Partnership as a Limited
Partner; provided, however, that upon a Transfer of Units by a Limited Partner
in accordance with Section 6.3 and the admission of the Transferee as a Limited
Partner, the Transferor Limited Partner shall cease to be a Limited Partner with
respect to the Units so Transferred.
ARTICLE XIV
Partnership Meetings; Amendments
Section 14.1 Partnership Meetings.
Meetings of Unitholders may be called by the General Partners or the
Liquidator or by Unitholders holding at least 10% of the outstanding Units. Any
Unitholder calling a meeting shall specify the number of Units as to which the
Unitholder is exercising the right to call a meeting, and only those Units shall
be counted for the purpose of determining whether the 10% standard of the
preceding sentence has been met. Unitholders shall call a meeting by delivering
a notice to the Partnership stating that the signing Unitholders wish to call a
meeting and indicating the specific purposes for which the meeting is to be
called. Action at the meeting shall be limited to those matters specified in
such notice, and no Unitholder may propose, at such
43
<PAGE>
meeting, any other matter to be considered by the Unitholders. Within 60 days
after receipt of such a notice from Unitholders or within such greater time as
may be reasonably necessary for the Partnership to comply with any statutes,
rules, regulations, listing agreements or similar requirements governing the
holding of a meeting or the solicitation of proxies for use at such a meeting,
the Partnership shall send a notice of the meeting to the Unitholders, stating
the specific purposes for which the meeting is called. A meeting shall be held
at a reasonable time and convenient place determined by the General Partners or
the Liquidator, as the case may be, on a date not more than 60 days after the
mailing of notice of the meeting. No action shall be taken at a meeting which is
opposed by the General Partners or the Liquidator unless the Partnership has
received a Limited Liability Opinion, a Tax Opinion and an Assignment Opinion
with respect to such action.
Section 14.2 Record Date.
The General Partners or the Liquidator, if any, shall set a Record
Date for the determination of the Unitholders entitled to notice of and to vote
at a meeting or adjourned meeting of Unitholders, which shall not be less than
10 days nor more than 60 days before the date of the meeting (unless such
requirement conflicts with any law, rule, regulation, guideline or requirement,
in which case such law, rule, regulation, guideline or requirement shall
govern).
Section 14.3 Notice of Meeting.
Notice of a meeting called pursuant to Section 14.1 shall be given in
writing either personally or by mail or other means of written communication
addressed to each Unitholder of record as of the close of business on the Record
Date for the meeting at the address of such Unitholder appearing on the books of
the Transfer Agent. An affidavit or certificate of mailing of any notice in
accordance with the provisions of this Section 14.3 executed by an officer of
the Partnership, the Transfer Agent or a mailing organization shall be prima
facie evidence of the giving of notice. If any notice addressed to a Unitholder
at its address is returned to the Partnership by the United States Postal
Service marked to indicate that the United States Postal Service is unable to
deliver it, such notice and any subsequent notices shall be deemed to have been
duly given without further mailing if they are available for the Unitholder at
the principal executive office of the Partnership for a period of one year from
the date of the giving of the notice to all other Unitholders.
Section 14.4 Adjournment.
When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting and a new Record Date need not be fixed if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 60 days. At the adjourned
meeting, the Partnership may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than 60 days
44
<PAGE>
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with Section 14.3.
Section 14.5 Waiver of Notice; Consent to Meeting; Approval of Minutes.
The transactions of any meeting of Unitholders, however called and
noticed, and wherever held, are as valid as though effected at a meeting duly
held after regular call and notice if a quorum is present either in person or by
proxy and if, either before or after the meeting, each of the Unitholders
entitled to vote who is not present in person or by proxy, signs a written
waiver of notice or a consent to the holding of the meeting or an approval of
the minutes thereof. All waivers, consents and approvals shall be filed with the
Partnership records or made a part of the minutes of the meeting. Attendance of
a Unitholder at a meeting shall constitute a waiver of notice of the meeting,
except when the Unitholder objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened; provided, that attendance at a meeting shall not be deemed to
constitute a waiver of any right to object to the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the objection is expressly made at the meeting.
Section 14.6 Quorum and Required Vote.
(a) The presence in person or by proxy of a majority of the Units
entitled to vote shall constitute a quorum at a meeting of Unitholders;
provided, that if a separate vote by certain Unitholders or by a class or series
of Units is required by this Agreement, the presence in person or by proxy of a
majority of Units held by such Unitholders or a majority of the outstanding
Units of such class or series, present in person or by proxy and entitled to
vote, shall constitute a quorum with respect to that vote.
(b) At any meeting of the Unitholders duly called and held in
accordance with this Agreement at which a quorum is present, the affirmative
vote of the majority of Units present in person or by proxy and entitled to
vote, or such different or higher percentage as may be required by this
Agreement, shall be the act of the Unitholders; provided, that if a separate
vote of certain Unitholders or by a class or series of Units is required by this
Agreement, the affirmative vote of the majority of Units held by such
Unitholders or a majority of the outstanding Units or such class or series,
present in person or by proxy and entitled to vote, or such different or higher
percentage as may be required by this Agreement, shall be the act of such
Unitholders or such class or series
(c) The Unitholders present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough Unitholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by Unitholders
holding the requisite percentage of Units specified in this Agreement. In the
absence of a quorum, any meeting of Unitholders may be adjourned from time to
time by the General Partners or upon the affirmative vote of Unitholders holding
a
45
<PAGE>
majority of the Units represented either in person or by proxy and entitled to
vote, but no other business may be transacted.
Section 14.7 Conduct of Meeting.
The General Partners or the Liquidator, if any, shall have the
exclusive right and full power and authority to conduct any meeting of
Unitholders, and shall determine the Persons entitled to vote, the existence of
a quorum, the satisfaction of the requirements of this Article XIV, the conduct
of voting, the validity and effect of any proxies, and the determination of any
controversies, votes or challenges arising in connection with or during the
meeting or voting. The General Partners or the Liquidator, as the case may be,
shall designate a person to serve as chairman of the meeting, and shall further
designate a person to serve as secretary and to take the minutes of the meeting,
in either case including, without limitation, a Partner, an employee or agent of
a General Partner, or an officer of the Partnership. All minutes shall be kept
with the records of the Partnership maintained by the General Partners. The
General Partners or the Liquidator, as the case may be, may make such other
regulations consistent with applicable law and this Agreement as they may deem
advisable concerning the conduct of any meeting of the Unitholders, including
regulations in regard to the appointment of proxies, the appointment and duties
of inspectors of election, and the submission and examination of proxies and
other evidence of the right to vote.
Section 14.8 Action Without a Meeting.
(a) Any action that may be taken at a meeting of the Unitholders
may be taken without a meeting if written approvals setting forth the action so
taken are given by Unitholders holding not less than the minimum number of Units
that would be necessary to take such action at a meeting at which all the
Unitholders were present and voted. Prompt notice of the taking of an action
without a meeting shall be given to the Unitholders who have not approved such
action.
(b) If the General Partners or the Liquidator, if any, submit an
action or actions to the Partners for written approval, the General Partners or
the Liquidator, as the case may be, shall set a Record Date for the
determination of the Unitholders entitled to give or withhold written approval
of such action or actions, which shall not precede the date on which the Record
Date is determined and shall not be more than ten days after such date (unless
such requirement conflicts with any law, rule, regulation, guideline or
requirement, in which case such law, rule, regulation, guideline or requirement
shall govern).
(c) If any Person other than the General Partners or the
Liquidator, if any, submits an action or actions to the Partners for written
approval, the Record Date for the determination of the Unitholders entitled to
give or withhold written approval of such action or actions shall be the date on
which the first duly executed written approval setting forth the action or
actions taken or proposed to be taken is delivered to the Partnership at its
principal office by hand or by registered or certified mail, return receipt
requested (unless such requirement conflicts
46
<PAGE>
with any law, rule, regulation, guideline or requirement, in which case such
law, rule, regulation, guideline or requirement shall govern).
(d) No written approval shall be effective unless (i) such
written approval sets forth the action or actions taken or proposed to be taken,
and is delivered to the Partnership within 90 days after the Record Date for the
determination of the Unitholders entitled to give or withhold written approval
of such action or actions and (ii) if such action or actions were not submitted
to the Partners for written approval by the General Partners or the Liquidator,
the Partnership receives a Limited Liability Opinion, a Tax Opinion and an
Assignment Opinion with respect to such action or actions.
Section 14.9 Voting and Approval Rights.
(a) Unless otherwise specified in this Agreement, Unitholders
shall have one vote for each Unit held by them.
(b) Only Unitholders who are Unitholders on the Record Date
determined pursuant to Section 14.2 shall be entitled to notice of, or to vote
at, a meeting of Unitholders. Only Unitholders who are Unitholders on the Record
Date determined pursuant to Section 14.8 shall be entitled to notice of, or to
give or withhold written approval of, any action for which written approvals are
solicited.
(c) With respect to Units that are held by a Nominee, such
Nominee shall, in exercising any voting or approval rights in respect of such
Units on any matter, vote such Units or give or withhold written approval with
respect to such Units at the direction of the Person which beneficially owns
such Units, and the Partnership shall be entitled to assume such Nominee is so
acting without further inquiry.
(d) Each Unitholder entitled to vote at a meeting of Unitholders
or to give or withhold written approval of any action may authorize another
Person to act for such Unitholder by proxy. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only so long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
proxy may be made irrevocable regardless of whether the interest with which it
is coupled is an interest in the Unit itself or an interest in the Partnership
generally.
Section 14.10 Amendments to Be Adopted Solely by the General Partners.
The General Partners, without the approval of any Limited Partner, may
amend any provision of this Agreement to reflect:
(i) a change in the name of the Partnership or the location
of the principal place of business of the Partnership;
47
<PAGE>
(ii) the admission, substitution, withdrawal or removal of
Partners in accordance with this Agreement;
(iii) a change that the General Partners determine is appropriate
in order to qualify the Partnership as a limited partnership or a partnership in
which the Limited Partners have limited liability under the laws of any state or
to ensure that the Partnership will not be treated as a corporation or as an
association taxable as a corporation for federal income tax purposes;
(iv) a change that the General Partners determine: (A) does not
adversely affect the holders of any class or series of Units in any material
respect, (B) is appropriate in order to satisfy any requirement, condition or
guideline contained in any federal or state statute or any rule, regulation,
requirement, condition or guideline of any federal or state agency, (C) is
appropriate in order to facilitate the listing or trading of the Units on or
otherwise to comply with any rule, regulation, requirement, condition or
guideline of any National Securities Exchange, or (D) is necessary in order to
effect the purposes of this Agreement, or to cure or otherwise correct any
ambiguity, error or omission in any provision of this Agreement;
(v) the designations, preferences and relative participating,
optional or other special rights, powers and duties of any newly created class
or series of Units;
(vi) a change that the General Partners determine is appropriate
in connection with the creation or issuance of any class or series of Units,
other Equity Securities, or other Partnership securities; or
(vii) a change that the General Partners determine is appropriate
in connection with any action taken pursuant to Article XVI.
Section 14.11 Amendment Procedures.
(a) All amendments to this Agreement, except those described in
Section 14.10, shall be adopted as follows:
(i) Any such amendment shall be proposed by the General Partners.
(ii) Any such amendment proposed by the General Partners shall be
effective upon its approval by Unitholders holding a majority of the outstanding
Units, voting as a single class; provided, however, that if (A) the proposed
amendment would materially and adversely affect the rights or preferences of
holders of any class or series of Units or other Partnership Interests, it must
also be approved by Partners holding a majority of the outstanding Units of such
class or series, or a majority in interest of such Partnership Interests, as the
case may be; or (B) the proposed amendment would change the percentage of Units
or other Partnership Interests required to take any action, it must also be
approved by Partners holding at
48
<PAGE>
least the percentage of Units or other Partnership Interests which would be
changed by the proposed amendment.
(b) The General Partners shall notify all Unitholders upon final
approval or disapproval of any amendment proposed by the General Partners.
ARTICLE XV
Indemnification and Related Matters
Section 15.1 Indemnification.
(a) The Partnership shall indemnify each Indemnitee and hold it
harmless from and against any and all losses, claims, damages, liabilities,
expenses (including legal fees and expenses), judgments, fines, settlements and
other amounts, whether joint or several (collectively "Expenses"), arising from,
based upon or incurred in connection with any and all claims, demands, actions,
suits or proceedings, civil, criminal, administrative or investigative, in which
the Indemnitee may be involved, or threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee (collectively
"Proceedings"), if the Indemnitee acted or failed to act in good faith and in a
manner it reasonably believed to be in, or not opposed to, the best interests of
the Partnership and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. The termination of any Proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not, of itself, create a presumption that the Indemnitee
acted in a manner contrary to that specified in the preceding sentence;
provided, however, that neither Thomson nor any of its Affiliates shall be
entitled to indemnification hereunder to the extent that such Person shall be
entitled to indemnity under Section 11.2(a) of the Purchase and Option Agreement
dated as of July 24, 1990 by and among Thomson, Thomson McKinnon Inc., a
Delaware corporation, Thomson McKinnon Holdings Inc., a Delaware corporation,
Thomson McKinnon Securities Inc., a Delaware corporation, Thomson McKinnon Asset
Management Inc., a Delaware corporation, Thomson McKinnon Fund Distributors
Inc., a Delaware corporation, and the Partnership.
(b) Excise taxes assessed on an Indemnitee with respect to an employee
benefit plan are Expenses, and any action or failure to act by such Indemnitee
in a manner it reasonably believed to be in, or not opposed to, the best
interests of such plan shall be conclusively deemed to be in, or not opposed to,
the best interests of the Partnership.
Section 15.2 Indemnification Agreements.
The Partnership may enter into an indemnification agreement with any
Indemnitee, which agreement may include, without limitation, some or all of the
following provisions:
49
<PAGE>
(i) that such Indemnitee shall be indemnified as provided in
Section 15.1;
(ii) that if such Person is successful, on the merits or
otherwise, in any Proceeding, it shall be indemnified against all Expenses
actually and reasonably incurred by it or on its behalf in connection with any
Proceeding; that if such Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Partnership shall
indemnify such Person against all Expenses actually and reasonably incurred by
it or on its behalf in connection with each successfully resolved claim, issue
or matter; and that, for these purposes, and without limitation, the termination
of any claim, issue or matter in such Proceeding by dismissal with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter;
(iii) that the Partnership shall from time to time advance all
Expenses actually and reasonably incurred by or on behalf of such Indemnitee in
connection with any Proceeding, and that each such advance shall be made within
20 days after the receipt by the Partnership of a statement listing Expenses
incurred by such Person since the date of the last statement;
(iv) that such Indemnitee shall be presumed to be entitled to
indemnification under such agreement if such Person has properly submitted a
request for indemnification and that the Partnership shall have the burden of
proof to overcome that presumption; and
(v) that if the Person empowered or selected to determine whether
such Indemnitee is entitled to indemnification shall not have made such
determination within a stated period, such Indemnitee shall be entitled to such
indemnification, with such exceptions as may be provided in such agreement.
Section 15.3 Indemnification Procedures.
Except as otherwise provided in any agreement for indemnification
entered into pursuant to Section 15.2:
(i) If an Indemnitee receives notice of any Proceeding with respect
to which the Indemnitee may be entitled to indemnification under Section 15.1 or
such agreement, the Indemnitee shall promptly give notice to the Partnership of
such Proceeding. To the extent that delay in giving such notice, or failure to
give such notice, materially prejudices the Partnership, the Indemnitee shall
not be entitled to indemnification.
(ii) The Partnership shall from time to time advance all Expenses
actually and reasonably incurred by or on behalf of an Indemnitee in connection
with any Proceeding, upon receipt by the Partnership of an undertaking by or on
behalf of the Indemnitee
50
<PAGE>
to repay such advances if it shall be determined that the Indemnitee is not
entitled to be indemnified under Section 15.1 or such agreement.
(iii) The Partnership may assume the defense of any Proceeding,
with counsel reasonably acceptable to the Indemnitee, by giving notice to the
Indemnitee (a "Defense Notice") of the Partnership's election to do so. In the
event that the Partnership so elects to assume the defense of a Proceeding, the
Partnership will not be liable to the Indemnitee for any attorney's fees or
expenses incurred by the Indemnitee with respect to the defense of such
Proceeding after the date of the Indemnitee's receipt of the Defense Notice,
provided that:
(A) The Indemnitee shall continue to have the right to employ
counsel in any such Proceeding at the Indemnitee's own expense; and
(B) If (1) the employment of counsel by the Indemnitee has
previously been authorized in writing by the Partnership, or (2) the Partnership
shall have reasonably concluded, and shall have given notice to the Indemnitee,
that there may be a conflict of interest between the Partnership and the
Indemnitee in the conduct of such defense, or (3) the Partnership shall not, in
fact, have employed counsel to assume the defense of such Proceeding, then the
fees and expenses of the Indemnitee's counsel shall be paid by the Partnership
in accordance with Section 15.1 or such agreement.
(iv) The Partnership may, without the consent of the Indemnitee,
settle any claim in any Proceeding for which it is obligated to provide
indemnification under Section 15.1 or such agreement, and, as a condition to the
Indemnitee's receipt of such indemnification, the Indemnitee shall take all such
actions required to cooperate in effecting such settlement; provided, however,
that the Partnership shall not settle any claim in any manner that would impose
any penalty or limitation on the Indemnitee without the Indemnitee's written
consent (which may not be unreasonably withheld or delayed).
Section 15.4 Insurance.
The Partnership may purchase and maintain insurance for the benefit of
one or more Indemnitees against any Expenses incurred by them, regardless of
whether the Partnership would have the power to indemnify such Indemnitees
against such Expenses under this Agreement.
Section 15.5 Source of Payment.
Any indemnification under this Article XV shall be paid solely out of
any insurance purchased pursuant to Section 15.4, or Partnership Assets, and the
General Partners, Limited Partners and their Affiliates, shall have no liability
for any such indemnification.
Section 15.6 Scope of Indemnification.
51
<PAGE>
The indemnification provided by Section 15.1 (i) shall be in addition
to any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the Unitholders, as a matter of law or otherwise, (ii)
shall continue as to an Indemnitee which has ceased to serve in a capacity for
which the Indemnitee is entitled to indemnification, (iii) shall inure to the
benefit of the heirs, successors, assigns, administrators and personal
representatives of the Indemnitee, and (iv) shall not be deemed to create any
right to indemnification for the benefit of any other Persons.
Section 15.7 Effect of Amendments.
No amendment of this Agreement shall limit or otherwise adversely
affect the right of any Indemnitee to indemnification for any act, or failure to
act, which occurred prior to the adoption and effectiveness of the amendment
Section 15.8 Limitations on Liability of Indemnitees.
(a) The General Partners shall not be liable to the Partnership or any
Partner for any action or failure to act on the part of any Delegate or any
committee, subcommittee or officer appointed by such Delegate, so long as the
General Partners appointed such Delegate in good faith and with reasonable care.
Neither a Delegate nor its members, if any, shall be liable to the Partnership
or any Partner for any action or failure to act on the part of any committee,
subcommittee or officer appointed by such Delegate in good faith and with
reasonable care.
(b) An Indemnitee shall not be liable to the Partnership or any
Partner for breach of fiduciary duty (including breach of any duty of care or
any duty of loyalty) to the Partnership or any Partner unless it is proved by
clear and convincing evidence that the Indemnitee's action or failure to act was
undertaken with deliberate intent to cause injury to the Partnership or was
undertaken with reckless disregard for the best interests of the Partnership.
(c) An Indemnitee may rely upon and shall be protected and shall incur
no liability in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties. An
Indemnitee shall not be liable to the Partnership, any Partner or any other
Indemnitee for, and shall be protected in, acting or refraining from acting, in
reliance in good faith on the provisions of this Agreement, and the exercise in
good faith of any of the powers or rights granted to an Indemnitee by this
Agreement or pursuant to the delegation of power and authority permitted by this
Agreement, shall not constitute a breach of fiduciary duty to the Partnership,
any Partner or any other Indemnitee.
(d) An Indemnitee may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it,
52
<PAGE>
and any opinion of any such Person as to matters that such Indemnitee reasonably
believes to be within such Person's professional or expert competence shall be
full and complete authorization and protection in respect to any action taken or
suffered or omitted in good faith and in accordance with such opinion.
(e) In taking an action or making a determination pursuant to this
Agreement, the General Partners or their Delegates shall take into account such
factors as they consider to be appropriate in the circumstances and shall have
no duty or obligation to take any other factors into account. If any such action
or determination is required to be taken or made in "good faith," or under
another express standard, the General Partners or their Delegates shall take
such action or make such determination under such express standard and shall not
be subject to any other or different standards. Any action or determination
required to be taken or made by the General Partners or their Delegates in "good
faith" shall be presumed to meet that standard unless it is proved by clear and
convincing evidence that such action or determination was taken or made in bad
faith.
(f) If any transaction contemplated by this Agreement is required to
be "fair" to the Partnership, the fairness of such transaction shall be
determined in context with all similar or related transactions and with all
other transactions and relationships among the Persons involved and their
respective Affiliates.
ARTICLE XVI
Restructuring
Section 16.1 Power of General Partners to Effect a Restructuring.
(a) If at any time the General Partners determine that as a result
of (i) the enactment (or imminent enactment) of any legislation, (ii) the
publication of any temporary or final regulation by the United States Department
of the Treasury or any ruling by the Internal Revenue Service, (iii) a judicial
decision, or (iv) otherwise (including the cumulative effect of Transfers of
Units or admissions of additional Limited Partners), there is a substantial risk
of an Adverse Partnership Tax Event or a Tax Realization Event, then the General
Partners may take any and all actions that the General Partners deem appropriate
to accomplish one or more Restructurings. Such actions authorized pursuant to
this Section 16.1(a) include, but are not limited to:
(i) The creation of one or more Business Entities controlled by
the General Partners, Affiliates of the General Partners or Affiliates of the
Partnership.
(ii) The transfer of all or any part of the business of the
Partnership or the Partnership Assets to one or more existing or newly-created
Business Entities in exchange for
53
<PAGE>
interests in such Business Entities, which interests may be subject to
substantial restrictions on transfer.
(iii) The initiation of exchange or redemption transactions which
will permit and may automatically effect, without the consent of any Limited
Partner, the exchange of some or all outstanding LP Units for interests in one
or more existing or newly-created Business Entities which hold, directly or
indirectly, Partnership Interests or interests in all or any part of the
business of the Partnership or the Partnership Assets, including without
limitation one or more Public General Partners.
(iv) The imposition of substantial restrictions on the
transferability of some or all of the LP Units (or interests in one or more
Successor Entities) for both limited and extended periods of time, which
restrictions may provide for penalties (including forfeiture of Units) for
attempted or purported Transfers in violation of such restrictions.
(v) Causing the Partnership and any one or more Successor
Entities to enter into agreements governing their relationships following the
Restructuring, on terms and conditions determined by the General Partners,
including without limitation agreements providing for (A) the issuance and sale
by a Successor Entity of its securities and the contribution of the proceeds of
such issuance and sale to the Partnership, in exchange for Units or other
Partnership securities; (B) the acquisition by a Successor Entity of businesses
or assets and the contribution of such businesses or assets to the Partnership
in exchange for Units; (C) the adoption by a Successor Entity of one or more
employee benefit plans involving the issuance of its securities, the assumption
by such Successor Entity of the outstanding employee benefit plans of the
Partnership, and contribution of the proceeds of issuance and sale of securities
under any employee benefit plans of such Successor Entity to the Partnership, in
exchange for Units; and (D) the exchange of outstanding Units for securities of
a Successor Entity upon request by the holders of such Units, the registration
of such securities under federal and state securities laws in connection with a
public offering, and the concomitant listing of such securities on a National
Securities Exchange.
(b) The power and authority of the General Partners to effect (or not
to effect) one or more Restructurings was a bargained-for and material condition
of the willingness of the General Partners and their Affiliates to enter into
the Partnership Agreement. The power and authority of the General Partners to
effect (or not to effect) one or more Restructurings includes the power and
authority to effect one or more Restructurings that result in benefits to one or
more Partners or their Affiliates (including without limitation the General
Partners or their Affiliates) that are not enjoyed by all Partners, and that may
result in disadvantageous consequences to one or more Partners that are not
suffered by all Partners or their Affiliates (including without limitation the
General Partners or their Affiliates). No Limited Partner shall have any cause
of action against, or right to receive any compensation from, the Partnership,
the General Partners or their Affiliates or any other Limited Partner or its
Affiliates, as a result of or in respect of (i) any Restructuring or the
disparate effects thereof on any one or more Partners, (ii) the failure of
54
<PAGE>
the General Partners to effect any one or more Restructurings, or (iii) the
General Partners' determination to effect a particular Restructuring or
Restructurings instead of any other Restructuring or Restructurings, unless it
is proved by clear and convincing evidence that the action or failure to act of
the General Partners involved an act or omission undertaken with deliberate
intent to cause injury to the Partnership or was undertaken with reckless
disregard for the best interests of the Partnership.
Section 16.2 Consent to Actions Taken in Connection with Restructuring.
Each of the Limited Partners approves, ratifies and confirms the
execution, delivery and performance by the General Partners of all documents and
instruments, and the taking of all actions and the doing of all things, deemed
appropriate or necessary by the General Partners in connection with any
Restructuring pursuant to this Article XVI, and agrees that the General Partners
are authorized to execute, deliver and perform such documents and instruments,
and to take such actions and do such things, without the approval of the Limited
Partners.
ARTICLE XVII
Dissolution and Liquidation
Section 17.1 Dissolution.
The Partnership shall be dissolved and its affairs shall be wound up
upon:
(i) the expiration of its term as provided in Section 2.5;
(ii) the written determination by the General Partners that
projected future revenues of the Partnership will be insufficient to enable
payment of projected Partnership costs and expenses or, if sufficient, will be
such that continued operation of the Partnership is not in the best interests of
the Partners;
(iii) the written election of the General Partners to dissolve
the Partnership following the occurrence of an Adverse Partnership Tax Event;
(iv) the written election of the General Partners to dissolve
the Partnership, which is approved by Unitholders holding a majority of the
outstanding Units held by Persons other than the General Partners and their
Affiliates, voting as a single class;
(v) the sale of all or substantially all of the Partnership
Assets, other than in connection with a Restructuring;
(vi) the written consent of all of the Partners;
55
<PAGE>
(vii) the occurrence of an Event of Withdrawal, unless (A) the
remaining General Partners carry on the business of the Partnership, or (B)
within 90 days after such Event of Withdrawal, not less than a majority in
interest of the remaining Partners agree in writing to continue the business of
the Partnership and to the appointment, effective as of the date of such Event
of Withdrawal, of one or more additional General Partners if necessary or
desired, and the Partnership receives a Limited Liability Opinion, a Tax Opinion
and an Assignment Opinion with respect to such continuation: or
(viii) entry of a decree of dissolution under the Delaware Act.
Section 17.2 Reconstitution.
Within 180 days following an Event of Withdrawal that results in the
dissolution of the Partnership, a majority in interest of the remaining Partners
may agree in writing to reconstitute and continue the business of the
Partnership by forming a Reconstituted Partnership on the same terms as are set
forth in this Agreement and to appoint one or more general partners of the
Reconstituted Partnership; provided, however, that no such agreement shall be
effective unless the Partnership has received a Limited Liability Opinion, a Tax
Opinion and an Assignment Opinion with respect to such reconstitution and
continuance. If such an agreement is duly and timely made, all of the Limited
Partners of the Partnership shall continue as limited partners of the
Reconstituted Partnership.
Section 17.3 Liquidator; Liquidation and Distribution.
(a) Upon dissolution of the Partnership, unless the Partnership is
reconstituted pursuant to Section 17.2, the remaining General Partners, if any,
or if there is no remaining General Partner, the Former General Partner, if any,
whose withdrawal as a General Partner pursuant to Section 13.1(b) resulted in
the dissolution, or if there is no such Former General Partner, a liquidator or
liquidating committee Approved by the Unitholders, shall be the Liquidator. The
Liquidator (if not a General Partner) shall be entitled to receive such
compensation for its services as may be Approved by the Unitholders. The
Liquidator shall agree not to resign at any time without 15 days' prior written
notice and (if not a General Partner or Former General Partner) may be removed
at any time, with or without cause, by notice of removal Approved by the
Unitholders. Upon resignation or removal of the Liquidator, a successor
Liquidator (who shall have and succeed to all rights, powers and duties of the
original Liquidator) shall within 30 days thereafter be Approved by the
Unitholders.
(b) Upon dissolution of the Partnership and until the filing of a
Certificate of Cancellation, the Liquidator may, in the name of and for and on
behalf of the Partnership, prosecute and defend suits, whether civil, criminal
or administrative, gradually settle and close the business of the Partnership,
dispose of and convey the Partnership Assets, discharge or make reasonable
provision for all Partnership liabilities, and distribute to the Partners any
remaining Partnership Assets, all without affecting the liability of the Limited
Partners and without
56
<PAGE>
imposing the liability of a general partner on the Liquidator (if not a General
Partner). A reasonable time shall be allowed for the winding up of the
Partnership so as to minimize any losses otherwise attendant upon such winding
up.
(c) Upon the winding up of the Partnership, the Partnership Assets
shall be distributed in the following order of priority, unless otherwise
provided by law:
(i) to creditors of the Partnership, including Partners who
are creditors, to the extent otherwise permitted by law, in satisfaction of
Partnership liabilities (whether by payment or the making of reasonable
provision for payment) other than liabilities for which reasonable provision for
payment has been made and liabilities for distributions to Partners and former
Partners pursuant to Section 8.1 or 8.3 with respect to fiscal quarters ending
before the dissolution of the Partnership;
(ii) to the creation of a reserve of cash or other Partnership
Assets for contingent liabilities in an amount, if any, determined by the
Liquidator;
(iii) to Partners and former Partners in satisfaction of
liabilities for distributions pursuant to Section 8.1 with respect to fiscal
quarters ending before the dissolution of the Partnership; and
(iv) to the Unitholders in accordance with their respective
Capital Accounts.
(d) If upon dissolution of the Partnership the Liquidator determines
that immediate liquidation of any or all of the Partnership Assets would be
impracticable or would cause undue loss to the Partners, the Liquidator may
defer for a reasonable time the liquidation of any such Partnership Assets
except those necessary to satisfy the liabilities of the Partnership to its
creditors, and may distribute to the Unitholders, in lieu of cash, as tenants in
common and in accordance with the provisions of Section 17.3(c), undivided
interests in such Partnership Assets. Any such distribution in kind shall be
subject to such conditions relating to the management and disposition of the
Partnership Assets so distributed as may be determined by the Liquidator and to
any agreements governing the operation of such Partnership Assets. The
Liquidator shall determine the fair market value of any Partnership Assets
distributed in kind.
Section 17.4 Reports Following Termination.
Within a reasonable time following the termination of the Partnership,
the Liquidator shall deliver to each of the Partners financial statements
setting forth the assets and liabilities of the Partnership as of the date of
liquidation, the amount retained as reserves pursuant to Section 17.3(c), and
each Partner's share of the distributions made pursuant to Section 17.3(c).
57
<PAGE>
ARTICLE XVIII
General Provisions
Section 18.1 Addresses and Notices.
The address of the Partnership for all purposes, until changed by
notice to the Partners, is 800 Newport Center Drive, Newport Beach, CA 92660.
The address of each Partner for all purposes shall be the address set forth on
the books and records of the Partnership. Any notice, demand, request or report
required or permitted to be given by or made to the Partnership or a Partner
under this Agreement shall be in writing and shall be deemed given or made when
delivered in person or when sent to the Partnership or such Partner at such
address by first class mail or by other means of written communication.
Section 18.2 Titles and Captions.
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Section 18.3 Pronouns and Plurals.
Whenever the context may require, any pronoun used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the plural and vice
versa.
Section 18.4 Further Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking all actions as may be necessary or
appropriate to achieve the purpose of this Agreement.
Section 18.5 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 18.6 Integration.
This Agreement and the Exhibits hereto constitute the entire agreement
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements and understandings pertaining thereto.
58
<PAGE>
Section 18.7 Creditors.
Except for the provisions of Section 8.4(e) and Section 17.3(c), none
of the provisions of this Agreement shall be for the benefit of, or shall be
enforceable by, any creditor of the Partnership.
Section 18.8 Waiver.
No failure by any party hereto to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute a waiver
of any such breach or any other covenant, duty, agreement or condition.
Section 18.9 Counterparts.
This Agreement may be executed in counterparts, all of which together
shall constitute one agreement binding on all the parties hereto. Each party
shall become bound by this Agreement immediately upon affixing its signature
hereto or agreeing to become bound hereby, independently of the signature or
agreement to be bound of any other party.
Section 18.10 Applicable Law.
The parties agree that all of the terms and provisions of this
Agreement shall be construed under and governed by the substantive laws of the
State of Delaware, without regard to the principles of conflict of laws.
Section 18.11 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the remaining provisions of this Agreement shall
be construed and enforced so as to carry out the purpose of this Agreement.
Section 18.12 Merger.
The Partnership may merge with, or consolidate into, one or more
Delaware limited partnerships or other business entities (as defined in Section
17-211(a) of the Delaware Act), if such merger or consolidation is approved by
the General Partners and Approved by the Unitholders. In accordance with Section
17-211 of the Delaware Act (including Section 17-211(g)), an agreement of merger
or consolidation approved by the General Partners and Approved by the
Unitholders, may (i) effect any amendment to this Agreement, or (ii) effect the
adoption of a new partnership agreement for the Partnership if it is the
surviving or resulting limited partnership of the merger or consolidation. Any
amendment to this Agreement or adoption of a new partnership agreement made
pursuant to the foregoing sentence shall be
59
<PAGE>
effective at the effective time or date of the merger or consolidation. The
provisions of this Section 18.12 shall not be construed to limit the
accomplishment of a merger or of any of the matters referred to herein by any
other means otherwise permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
GENERAL PARTNERS
PIMCO PARTNERS, G.P.
By: PIMCO PARTNERS LLC,
a California limited liability company,
General Partner
By: /s/ WILLIAM S. THOMPSON
----------------------------------------
Title: CEO
-------------------------------------
By: PACIFIC HOLDING LLC,
a Delaware limited liability company,
General Partner
By: PACIFIC ASSET MANAGEMENT LLC,
a Delaware limited liability company
Member
By: PACIFIC LIFE INSURANCE COMPANY,
a California life insurance company
Member
By: /s/ KHAN T. TRAN
--------------------------------
Title: CFO
-----------------------------
By: /s/ AUDREY MILFS
--------------------------------
Title: Corporate Secretary
-----------------------------
60
<PAGE>
PIMCO ADVISORS HOLDINGS L.P.
By: PIMCO PARTNERS, G.P.,
a California general partnership,
General Partner
By: PIMCO PARTNERS LLC,
a California limited liability company,
General Partner
By: /s/ WILLIAM S. THOMPSON
------------------------------------
Title: CEO
---------------------------------
By: PACIFIC HOLDING LLC,
a Delaware limited liability company,
General Partner
By: PACIFIC ASSET MANAGEMENT LLC,
a Delaware limited liability company
Member
By: PACIFIC LIFE INSURANCE COMPANY,
a California life insurance company
Member
By: /s/ KHAN T. TRAN
--------------------------------
Title: CFO
-----------------------------
By: /s/ AUDREY MILFS
--------------------------------
Title: Corporate Secretary
-----------------------------
61
<PAGE>
LIMITED PARTNERS
All Limited Partners that have been, or are hereafter, admitted as limited
partners of the Partnership, pursuant to powers of attorney or other
authorizations recited in favor of or granted to the General Partners
By: PIMCO PARTNERS, G.P.,
a California general partnership,
General Partner
By: PIMCO PARTNERS LLC,
a California limited liability company,
General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------------
Title: CEO
------------------------------------
By: PACIFIC HOLDING LLC,
a Delaware limited liability company,
General Partner
By: PACIFIC ASSET MANAGEMENT LLC,
a Delaware limited liability company
Member
By: PACIFIC LIFE INSURANCE COMPANY,
a California life insurance company
Member
By: /s/ KHAN T. TRAN
-----------------------------------------
Title: CFO
--------------------------------------
By: /s/ AUDREY MILFS
-----------------------------------------
Title: Corporate Secretary
--------------------------------------
62
<PAGE>
By: PIMCO ADVISORS HOLDINGS L.P.,
a Delaware limited partnership,
General Partner
By: PIMCO PARTNERS, G.P.,
a California general partnership,
General Partner
By: PIMCO PARTNERS LLC,
a California limited liability company,
General Partner
By: /s/ WILLIAM S. THOMPSON
--------------------------------------------
Title: CEO
-----------------------------------------
By: PACIFIC HOLDING LLC,
a Delaware limited liability company,
General Partner
By: PACIFIC ASSET MANAGEMENT LLC,
a Delaware limited liability company
Member
By: PACIFIC LIFE INSURANCE COMPANY,
a California life insurance company
Member
By: /s/ KHAN T. TRAN
----------------------------------------
Title: CFO
-------------------------------------
By: /s/ AUDREY MILFS
----------------------------------------
Title: Corporate Secretary
-------------------------------------
63
<PAGE>
EXHIBIT A
CERTIFICATE FOR
CLASS A LP UNITS
IN
PIMCO ADVISORS LP
<PAGE>
EXHIBIT B
ADMISSION APPLICATION
The undersigned hereby requests admission as a Limited Partner of PIMCO
Advisors L.P., a Delaware limited partnership (the "Partnership"), and requests
that the records of the Partnership reflect such admission.
The undersigned hereby agrees to comply with and be bound by the Amended
and Restated Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement"), as the same may be amended from time.
The undersigned hereby appoints and authorizes the General Partners from
time to time of the Partnership to act as its representatives for the purpose of
executing amendments or restatements of the Partnership Agreement and any
certificates required to be filed under the Delaware Revised Uniform Limited
Partnership Act.
Executed at _______________________________ on______________________.
(City and State) (Date)
--------------------------------------
(Signature)
--------------------------------------
(Printed Name)
--------------------------------------
(Address)
--------------------------------------
(Address)
--------------------------------------
(City, State and Zip Code)
--------------------------------------
(Social Security No. or TIN)
<PAGE>
Exhibit 10.20
-------------
RESTRUCTURING CONTRIBUTION AND ISSUANCE AGREEMENT
This Restructuring Contribution and Issuance Agreement dated as of
December 31, 1997 (this "Agreement"), is entered into by and between the Public
Unitholders of PIMCO Advisors L.P., a Delaware limited partnership ("PIMCO
Advisors"), Oppenheimer Capital, L.P., a Delaware limited partnership ("Opcap
LP"), and PIMCO Advisors. Initially capitalized terms used herein and not
otherwise defined herein are defined in the Amended and Restated Agreement of
Limited Partnership of PIMCO Advisors L.P. dated October 31, 1997 (the "PIMCO
Advisors Partnership Agreement").
RECITALS:
WHEREAS, pursuant to Section 16.1 of the PIMCO Advisors Partnership
Agreement, if the General Partners of PIMCO Advisors determine that as a result
of, among other things, the enactment of legislation, there is a substantial
risk of an Adverse Partnership Tax Event or a Tax Realization Event, the General
Partners have the authority to effect one or more Restructurings of PIMCO
Advisors, including, but not limited to, (a) the creation of one or more
Business Entities controlled by the General Partners, Affiliates of the General
Partners or Affiliates of PIMCO Advisors, (b) the transfer of all or any part of
the business or assets of PIMCO Advisors to one or more existing or newly-
created Business Entities in exchange for interests in such Business Entities,
(c) the initiation of exchange or redemption transactions which will permit and
may automatically effect, without the consent of any Limited Partner, the
exchange of some or all of the PIMCO Advisors LP Units for interests in one or
more existing or newly-created Business Entities, (d) the imposition of
substantial restrictions on the transferability of some or all of the PIMCO
Advisors LP Units, and (e) causing PIMCO Advisors and any one or more Successor
Entities to enter into agreements governing their relationships following the
restructuring, on terms and conditions determined by the General Partners,
including agreements relating to the issuance of and sale of securities of the
Successor Entity, the acquisition by a Successor Entity of businesses or assets
and the contribution of such businesses or assets to PIMCO Advisors in exchange
for PIMCO Advisors Units, the adoption by a Successor Entity of employee benefit
plans for the benefit of PIMCO Advisors employees and the exchange of
outstanding PIMCO Advisors units for securities of the Successor Entity upon
request by the holders of PIMCO Advisors Units;
WHEREAS, pursuant to Section 16.3 of the PIMCO Advisors Partnership
Agreement, the General Partners have the authority to execute, deliver and
perform all documents and instruments, and to take all actions and do such
things that the General Partners deem necessary and appropriate in connection
with any Restructuring pursuant to Article XVI of the PIMCO Advisors Partnership
Agreement, without the approval of the Limited Partners, including the Public
Unitholders (the "Authorization");
WHEREAS, the General Partners of PIMCO Advisors have determined that
as a result of legislation enacted as part of the Taxpayer Relief Act of 1997,
there will be an Adverse Partnership Tax Event unless the PIMCO Advisors Class A
LP Units cease to be publicly traded prior to January 1, 1998, and have
determined it appropriate to effect a Restructuring of PIMCO Advisors wherein
each Public Unitholder will contribute its PIMCO Advisors LP Units to Opcap LP
in exchange for an equal number of units of limited partner interest in Opcap LP
("Opcap LP Units");
<PAGE>
WHEREAS, the restructuring will result in each Public Unitholder
ceasing to be a Limited Partner of PIMCO Advisors and being admitted as a
limited partner of Opcap LP;
WHEREAS, pursuant to Sections 9.01 and 13.06 of the Amended and
Restated Agreement of Limited Partnership of Oppenheimer Capital, L.P. dated
March 14, 1991, as amended (the "Opcap LP Partnership Agreement"), the General
Partner of Opcap LP has the authority to issue additional limited partner
interests to Opcap LP and admit additional limited partners to Opcap LP upon
making an Assignment Determination and a Tax Determination, as those terms are
defined in the Opcap LP Partnership Agreement, and upon obtaining an opinion of
a nationally recognized investment banking firm that such issuance is fair to
the limited partners who are not affiliates of the General Partner from a
financial point of view (a "Fairness Opinion");
WHEREAS, the General Partner of Opcap LP has made an Assignment
Determination and a Tax Determination, and has obtained a Fairness Opinion from
Lazard Freres & Company LLC;
WHEREAS, PIMCO Partners G.P., a California General Partnership
("PGP"), and Opcap LP, as General Partners of PIMCO Advisors and pursuant to the
power, authority and authorization granted to them under the PIMCO Advisors
Partnership Agreement including, without limitation, Sections 16.1 and 16.3,
desire to cause the PIMCO Advisors LP Units held by the Public Unitholders to be
contributed to Opcap LP in exchange for an equal number of Opcap LP Units; and
WHEREAS, PGP, as the General Partner of Opcap LP, desires to cause
Opcap LP to accept contributions from the Public Unitholders of their PIMCO
Advisors LP Units in exchange for issuance of an equal number of Opcap LP Units
and to admit the Public Unitholders as limited partners of Opcap LP;
NOW, THEREFORE, the undersigned, in consideration of the premises,
covenants and agreements contained herein, do hereby agree as follows:
1. Contribution. Pursuant to the Authorization, in exchange for an
------------
equal number of Opcap LP Units, each Public Unitholder, individually, and the
Public Unitholders, collectively, upon the execution and delivery of this
Agreement by the parties hereto as of the date hereof and effective 11:59 p.m.
on December 31, 1997 (the "Effective Time"), do hereby contribute, transfer,
assign and convey all their PIMCO Advisors LP Units to Opcap LP. At the
Effective Time, all certificates for the PIMCO Advisors LP Units held by the
Public Unitholders shall be deemed surrendered and canceled. Upon execution of
this Agreement, Opcap LP does hereby receive and accept such units, which shall
become units of general partner interest in PIMCO Advisors upon their transfer
to Opcap LP, and Opcap LP does hereby assume the rights and obligations assigned
to such units in the PIMCO Advisors Partnership Agreement. At the Effective
Time, all right, title and interest in and to such units of general partner
interest shall vest in Opcap LP. A certificate for the PIMCO Advisors general
partner units shall be issued to Opcap LP as of the Effective Time.
2. Issuance and Admission. In exchange for the contribution to Opcap
----------------------
LP of the PIMCO Advisors LP Units, Opcap LP does hereby issue to each Public
Unitholder a number of Opcap LP Units equal to the number of PIMCO Advisors LP
Units contributed by such Public Unitholder pursuant to Section 1. Concurrent
with the contribution and issuance of the units of
2
<PAGE>
limited partner interest herein, each Public Unitholder is hereby admitted as a
limited partner of Opcap LP. Upon the issuance of the Opcap LP Units as set
forth herein, PGP in its capacity as General Partner of Opcap LP shall cause
Opcap LP to issue one or more certificates evidencing the number of Opcap LP
Units so issued. PGP shall also cause the registration of the issuance of Opcap
LP Units issued hereunder.
3. Acceptance and Binding. Pursuant to the Authorization, each
----------------------
Public Unitholder does hereby become a limited partner of Opcap LP, accepts all
of the terms and conditions of the Opcap LP Partnership Agreement and agrees to
comply with and be bound by the Opcap LP Partnership Agreement, as the same may
be amended from time to time, and hereby grants the power of attorney in
accordance with Article XVII of the Opcap LP Partnership Agreement.
4. Books and Records. The parties hereto shall take all actions
-----------------
necessary under the Delaware Revised Uniform Limited Partnership Act, the PIMCO
Advisors Partnership Agreement and the Opcap LP Partnership Agreement to
evidence the contribution of the PIMCO Advisors LP Units to Opcap LP, the
issuance of the Opcap LP Units to the Public Unitholders, and the admission of
the Public Unitholders as limited partners in Opcap LP.
5. Binding Effect. This Agreement shall be binding upon, and shall
--------------
inure to the benefit of, the parties hereto and their respective successors and
assigns.
6. Execution in Counterparts. This Agreement may be executed in
-------------------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
7. Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the State of Delaware, all rights
and remedies being governed by such laws, without regard to its conflict of laws
rules.
[Signatures Follow]
3
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed as of the day and year first above written.
PUBLIC UNITHOLDERS
All Public Unitholders of PIMCO Advisors
L.P. pursuant to authorizations recited
in favor of or granted to the General
Partner under Section 16.3 of the Amended
and Restated Agreement of Limited
Partnership of PIMCO Advisors L.P. dated
October 31, 1997, as amended
By: PIMCO PARTNERS, G.P.,
General Partner
By: PACIFIC INVESTMENT
MANAGEMENT COMPANY,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
4
<PAGE>
OPPENHEIMER CAPITAL, L.P.
By: PIMCO PARTNER, G.P.,
General Partner
By: Pacific Investment Management
Company, a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
PIMCO ADVISORS L.P.
By: PIMCO PARTNERS, G.P.,
General Partner
By: PACIFIC INVESTMENT
MANAGEMENT COMPANY,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
5
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed as of the day and year first above written.
PUBLIC UNITHOLDERS
All Public Unitholders of PIMCO Advisors
L.P. pursuant to authorizations recited
in favor of or granted to the General
Partner under Section 16.3 of the Amended
and Restated Agreement of Limited
Partnership of PIMCO Advisors L.P. dated
October 31, 1997, as amended
By: PIMCO PARTNERS, G.P.,
General Partner
By: PACIFIC INVESTMENT
MANAGEMENT COMPANY,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ ERNEST L. SCHMIDER
---------------------------------
Name: Ernest L. Schmider
Title: Secretary
4
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed as of the day and year first above written.
PUBLIC UNITHOLDERS
All Public Unitholders of PIMCO Advisors
L.P. pursuant to authorizations recited
in favor of or granted to the General
Partner under Section 16.3 of the Amended
and Restated Agreement of Limited
Partnership of PIMCO Advisors L.P. dated
October 31, 1997, as amended
By: PIMCO PARTNERS, G.P.,
General Partner
By: PACIFIC INVESTMENT
MANAGEMENT COMPANY,
a General Partner
By: /s/ KHANH T. TRAN
---------------------------------
Name: Khanh T. Tran
Title: Chief Financial Officer
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
4
<PAGE>
OPPENHEIMER CAPITAL, L.P.
By: PIMCO PARTNERS, G.P.,
General Partner
By: Pacific Investment Management
Company, a General Partner
By: /s/ KHANH T. TRAN
---------------------------------
Name: Khanh T. Tran
Title: Chief Financial Officer
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
PIMCO ADVISORS L.P.
By: PIMCO PARTNERS, G.P.,
General Partner
By: PACIFIC INVESTMENT
MANAGEMENT COMPANY,
a General Partner
By: /s/ KHANH T. TRAN
---------------------------------
Name: Khanh T. Tran
Title: Chief Financial Officer
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
5
<PAGE>
OPPENHEIMER CAPITAL, L.P.
By: PIMCO PARTNER, G.P.,
General Partner
By: Pacific Investment Management
Company, a General Partner
By: /s/ KHAN T. TRAN
---------------------------------
Name: Khan T. Tran
Title: CFO
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ ERNEST L. SCHMIDER
---------------------------------
Name: Ernest L. Schmider
Title: Secretary
PIMCO ADVISORS L.P.
By: PIMCO PARTNERS, G.P.,
General Partner
By: PACIFIC INVESTMENT
MANAGEMENT COMPANY,
a General Partner
By: /s/ WILLIAM S. THOMPSON
---------------------------------
Name: William S. Thompson
Title: CEO
By: PIMCO PARTNERS LLC,
a General Partner
By: /s/ ERNEST L. SCHMIDER
---------------------------------
Name: Ernest L. Schmider
Title: Secretary
5
<PAGE>
EXHIBIT 10.21
-------------
WRITTEN ACTION
This action by written consent (this "Written Action") is taken by PIMCO
Partners, G.P., a California general partnership, in its capacity as the sole
general partner (the "General Partner") of0ppenheimer Capital, L.P., a Delaware
limited partnership (the "Partnership"), pursuant to Section 7.02(h) of the
Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement") of the Partnership. Capitalized terms used in this Written Action
which are not defined herein are defined in the Partnership Agreement.
Section 1. Management Board.
(a) The General Partner hereby constitutes the Management Board of the
Partnership and delegates to the Management Board all of the General Partner's
rights, powers and duties to manage and control the business and affairs of the
Partnership, except the rights, powers and duties enumerated in Section 3.03 of
the Partnership Agreement.
(b) The initial members of the Management Board are William D. Cvengros,
Robert M. Fitzgerald and Kenneth M. Poovey. The General Partner may appoint
additional members of the Management Board from time to time.
(c) The initial terms of office of the members of the Management Board
shall end on April30, 1999, and thereafter the terms of office of the members of
the Management Board shall be one year. The members of the Management Board
shall be reappointed or their successors shall be appointed in April of each
year, beginning in 1999, to take office as members upon the expiration of such
terms.
(d) A member of the Management Board may be removed at any time by the
General Partner. The members of the Management Board shall continue to be
members until the expiration of their terms of office and the appointment of
their successors, or until they resign, are removed, or die. Any member of the
Management Board may resign as a member at any time by delivering his or her
written resignation to the Partnership. Such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event. Upon the resignation, removal or death of a
member of the Management Board, his or her successor shall be appointed by the
General Partner.
(e) The Chairperson of the Management Board shall be appointed by, and
may be removed at any time by, the Management Board.
(f) Regular meetings of the Management Board may be held without notice at
such time, date and place as the Management Board may, from time to time
determine. Special meetings of the Management Board may be called, orally or in
writing, by the Chairperson of the Management Board, the Chief Executive Officer
of the Partnership, or two or more appointed members, which call shall specify
the time, date and place thereof Members of the Management Board may participate
in meetings by means of conference telephone or similar communications equipment
by means of which all members participating in the meeting can hear each other,
and participation in a meeting by such means shall constitute presence in person
at such meeting.
<PAGE>
(g) Notice of the time, date and place of all special meetings of the
Management Board shall be given to each member in person or by telephone, by
facsimile transmission or by telegram sent to his business or home address at
least two business days in advance of the meeting or by written notice mailed to
his business or home address at least five business days in advance of the
meeting. Notice need not be given to any member if a written waiver of notice is
executed by him or her before or after the meeting.
(h) At any meeting of the Management Board, presence in person of a
majority of the members shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice. At any meeting of the Management Board at which a quorum
is present, a majority of the members present may take any action on behalf of
the Management Board.
Section 2. Officers.
The Management Board shall provide for, prescribe the powers and duties of,
and appoint a Chief Executive Officer, a Chief Financial Officer, a Chief
Accounting Officer, a General Counsel and a Secretary of the Partnership, and
may provide for, prescribe the powers and duties of, and appoint other officers
of the Partnership. The Management Board may delegate to any one or more of such
officers any or all of rights, powers and duties of the Management Board.
Executed in New York, New York on November 4, 1997.
PIMCO Partners, G.P.
By Pacific Investment Management Company,
a California corporation,
Its general partner
By: /s/ SHARON CHEEVER
------------------
Sharon Cheever
Its Vice President
--------------
By PIMCO Partners, LLC,
a California limited liability company,
Its general partner
By: /s/ WILLIAM S. THOMPSON, JR.
----------------------------
William S. Thompson, Jr.
Its ____________________________________
2
<PAGE>
EXHIBIT 10.22
-------------
WRITTEN ACTION
This action by written consent (this "Written Action") is taken by PIMCO
Partners, G.P., a California general partnership, in its capacity as the sole
general partner of PIMCO Advisors L.P., a Delaware limited partnership (the
"Partnership"), pursuant to Section 10.2 of the Amended and Restated Agreement
of Limited Partnership (the "Partnership Agreement") of the Partnership.
Capitalized terms used in this Written Action which are not defined herein are
defined in the Partnership Agreement.
Section 1. Management Board.
(a) The General Partners hereby constitute the Management Board of the
Partnership and delegate to the Management Board all of the General Partners'
rights, powers and duties to manage and control the business and affairs of the
Partnership, except the rights, powers and duties enumerated in Section 10.2(b)
of the Partnership Agreement.
The Management Board is the successor to the Operating Board and Equity
Board of the Partnership, and as such shall have the rights, powers and duties
accorded to the Operating Board and Equity Board in any agreement, plan or other
instrument which refers to such Boards or either of them. References in any
such agreement, plan or other instrument to the Operating Board or the Equity
Board shall be deemed to be a reference to the Management Board for all purposes
of such agreement, plan or other instrument.
(b) The Management Board shall constitute and appoint or provide for the
appointment of an Executive Committee, an Audit Committee, a Compensation
Committee, a Nominating Committee and a Unit Incentive Committee, and may
constitute and appoint or provide for the appointment of other committees or
subcommittees (collectively, the "Committees"). The Management Board may
delegate to any one or more of the Committees any or all of the rights, powers
and duties of the Management Board.
The Executive Committee is the successor to the Operating Committee of the
Partnership, and as such shall have the rights, powers and duties accorded to
the Operating Committee in any agreement, plan or other instrument which refers
to such Committee. References in any such agreement, plan or other instrument
to the Operating Committee shall be deemed to be a reference to the Executive
Committee for all purposes of such agreement, plan or other instrument.
(c) The Management Board shall provide for, prescribe the powers and
duties of, and appoint a Chief Executive Officer, a Chief Financial Officer, a
Chief Accounting Officer, a General Counsel and a Secretary of the Partnership,
and may provide for, prescribe the powers and duties of, and appoint other
officers of the Partnership. The Management Board may delegate to any one or
more of such officers any or all of the rights, powers and duties of the
Management Board.
<PAGE>
(d) The Management Board shall consist of the Chief Executive Officer
of the Partnership and fifteen other members appointed as follows:
(i) PIMCO Partners or its successor as general partner of the
Partnership shall appoint six members.
(ii) The Public General Partners, if any, in proportion to their
ownership of GP Units, or if there is no Public General Partner, PIMCO Partners
or its successor as general partner of the Partnership, shall appoint three
Independent Persons as members.
(iv) Each of the two Investment Management Companies having the
greatest Total Income, determined as of the date of appointment, shall appoint
its chief executive officer and one of its Managing Directors, or of its chief
executive officer is appointed pursuant to Section 1 (d)(i), two of its Managing
Directors, as members. During the period ending April 30, 1999, such two
Investment Management Companies are Pacific Investment Management Company and
Oppenheimer Capital.
(v) Each of two other Investment Management Companies designated
from time to time by the Management Board, upon the recommendation of the
Nominating Committee, shall appoint one of its Managing Directors as a member.
During the period ending April 30, 1999, such two Investment Management
Companies are Cadence Capital and Columbus Circle Investors..
(e) The initial terms of office of the appointed members of the Management
Board shall end on April 30, 1999, and thereafter the terms of office of the
appointed members of the Management Board shall be one year. The appointed
members of the Management Board shall be reappointed or their successors shall
be appointed in April of each year, beginning in 1999, to take office as members
upon the expiration of such terms.
(f) An appointed member of the Management Board may be removed at any
time by the Person or Persons which appointed him or her. The Chief Executive
Officer of the Partnership shall continue to be a member of the Management Board
until he or she shall cease for any reason to occupy such office. The appointed
members of the Management Board shall continue to be members until the
expiration of their terms of office and the appointment of their successors, or
until they resign, are removed, or die. Any appointed member of the Management
Board may resign as a member at any time by delivering his or her written
resignation to the Partnership. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event. Upon the resignation, removal or death of an appointed
member of the Management Board, his or her successor shall be appointed by the
Person or Persons which appointed him or her.
(g) The Chairperson of the Management Board, who shall be an appointed
member, shall be appointed by, and may be removed at any time by, the Management
Board.
2
<PAGE>
(h) Regular meetings of the Management Board may be held without notice
at such time, date and place as the Management Board may from time to time
determine. Special meetings of the Management Board may be called, orally or in
writing, by the Chairperson of the Management Board, the Chief Executive Officer
of the Partnership, or two or more appointed members, which call shall specify
the time, date and place thereof Members of the Management Board may participate
in meetings by means of conference telephone or similar communications equipment
by means of which all members participating in the meeting can hear each other,
and participation in a meeting by such means shall constitute presence in person
at such meeting.
(i) Notice of the time, date and place of all special meetings of the
Management Board shall be given to each member in person or by telephone, by
facsimile transmission or by telegram sent to his business or home address at
least two business days in advance of the meeting or by written notice mailed to
his business or home address at least five business days in advance of the
meeting. Notice need not be given to any member if a written waiver of notice is
executed by him or her before or after the meeting.
(j) An agenda for each regular and special meeting of the Management Board
shall be given to each member by sending such agenda to his business or home
address by air express or next-day mail at least five business days in advance
of the meeting.
(k) At any meeting of the Management Board, presence in person of twelve
or more members shall constitute a quorum. Less than a quorum may adjourn any
meeting from time to time and the meeting may be held as adjourned without
further notice. At any meeting of the Management Board at which a quorum is
present, a majority of the members present may take any action on behalf of the
Management Board except the following, which shall require the affirmative vote
of at least 75% of the members present if the proposed action was described in
the agenda for the meeting, and which shall otherwise require the favorable vote
of at least twelve members:
(i) Constitution of a Committee, delegation to such Committee of any
or all of the rights, powers and duties of the Management Board, revision or
revocation of any such constitution or delegation, and appointment,
reappointment or removal of any individual as a member of such Committee (to the
extent the members of such Committee may be appointed, reappointed or removed by
the Management Board pursuant to the action constituting such Committee).
(ii) Provision for, or prescription of the powers and duties of, any
officer of the Partnership, and revision or revocation of any such provision or
prescription.
(iii) Appointment, reappointment or removal of any individual as an
officer of the Partnership, unless such appointment, reappointment or removal
has been recommended by the Nominating Committee; provided, that the Management
Board may not appoint or reappoint an officer of the Partnership for a term
exceeding one year.
3
<PAGE>
(iv) Provision of any salary or bonus for any officer of the
Partnership, unless such salary or bonus has been recommended by the
Compensation Committee.
(v) Approval of the partnership agreement, operating agreement or
profit sharing plan of an Investment Management Company, any amendment of any
such agreement or plan, and any increase in the compensation of any Managing
Director of an Investment Management Company.
(vi) Removal of a Managing Director of an Investment Management
Company.
(vii) Any issuance of units or any other Equity Security if the Units
issued or subject to issuance upon conversion, exchange or exercise of such
Equity Security exceed 20% of the outstanding Units.
(viii) Any incurrence of Indebtedness by the Partnership or any
Partnership Subsidiary other than an unsecured line of credit with a maturity of
not more than one year or unsecured investment grade debt.
(ix) Any acquisition or disposition by the Partnership of a business,
whether by way of purchase or sale of assets or securities, merger or
consolidation, or Contribution, if such business, if carried on by a Partnership
Subsidiary, would cause such Subsidiary to be a Significant Subsidiary.
(1) Any action required or permitted to be taken at any meeting of the
Management Board may be taken without a meeting if a written consent thereto is
signed by all the members and filed with the records of the meetings of the
Management Board. Such consent shall be treated as a vote of the Management
Board for all purposes.
Section 2. Constructive Termination Committee.
There is a Constructive Termination Committee of the Partnership which
consists of Walter E. Auch, Sr. and Donald R. Kurtz (the "Initial Members"), and
a third member, James F. McIntosh. The Initial Members of the Constructive
Termination Committee shall continue to be members until they resign or die.
Upon the resignation or death of an Initial Member prior to January 1, 1998, the
first such Initial Member shall be replaced by Mr. Gerald Segel (who shall
thereafter be considered an Initial Member), and the second such Initial Member
shall be replaced by Mr. Robert P. Henderson (who shall thereafter be considered
an Initial Member), and thereafter such Initial Member shall be replaced by an
individual appointed by the Constructive Termination Committee (who shall be
considered an Initial Member), including, for that purpose, the member, if any,
whose resignation created the vacancy. Upon the resignation or death of an
Initial Member after January 1, 1998, such Initial Member shall be replaced by a
Disinterested Person appointed by the Management Board (who shall not be
considered an Initial Member).
4
<PAGE>
Upon the resignation, removal or death of a member who is not an Initial Member,
or upon his ceasing to be a Disinterested Person, such member shall be replaced
by a Disinterested Person appointed by the Management Board. Any member may
resign as a member at any time by delivering his or her written resignation to
the Partnership. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event. Any member other than an Initial Member may be removed at any time by the
Management Board.
Section 3. Definitions.
Disinterested Person shall mean an individual who is not and has not,
within the prior five years, been an officer or employee of the Partnership or
an officer, employee or partner of a General Partner or an Affiliate of the
Partnership or a more than 5 % Unit holder, partner or stockholder of the
Partnership, a General Partner or any of their Affiliates.
Independent Person shall mean an individual who would qualify as a member
of the Audit Committee of the Partnership under the rules of the New York Stock
Exchange applicable to listed companies.
Significant Subsidiary shall mean a Subsidiary of the Partnership which is
a significant subsidiary within the meaning of regulation S-X under the
Securities Act.
Total Income of an Investment Management Company shall mean the aggregate
net income of the Investment Management Company, calculated in accordance with
generally accepted accounting principles applied consistently for all Investment
Management Companies and excluding extraordinary items, for the three full
Fiscal Years immediately preceding the date of determination for which audited
financial statements have been prepared. In the case of an Investment Management
Company whose business was acquired by the Partnership during such period of
three full Fiscal Years, Total Income shall be determined on a pro forma basis
as though such business had been acquired at the beginning of such period of
three full Fiscal Years.
Section 3. Revocation of prior Written Action.
That certain Written Action dated as of October 31, 1997, is hereby revoked.
Section 4. Termination.
Unless extended by Written Action of the General Partners, this Written
Action shall terminate on April 30, 2005.
5
<PAGE>
Executed in Newport Beach, California, on November 28, 1997.
PIMCO Partners, G.P.
By Pacific Investment Management Company,
a California corporation,
Its general partner
By: /s/ SHARON CHEEVER
-------------------
Sharon Cheever
Its: Vice President
----------------
By PIMCO Partners, LLC,
a California limited liability company,
Its general partner
By /s/ WILLIAM S. THOMPSON, JR.
----------------------------
William S. Thompson, Jr.
Its President and Chief Executive Officer
---------------------------------------
6
<PAGE>
EXHIBIT 10.4.1
EXECUTION COPY
WAIVER, CONSENT AND
AMENDMENT NO. 1 TO THE
CREDIT AGREEMENT
Dated as of November 3, 1997
WAIVER, CONSENT AND AMENDMENT NO. 1 TO THE CREDIT AGREEMENT (this
"Agreement") between PIMCO ADVISORS L.P., a Delaware limited partnership (the
---------
"Borrower"), the banks, financial institutions and other institutional lenders
--------
parties to the Credit Agreement referred to below (collectively, the "Lenders")
-------
and CITICORP USA, INC., as agent (the "Agent") for the Lenders.
-----
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Agent have entered into a Credit
Agreement dated as of April 12, 1996 (the "Credit Agreement"). Capitalized terms
----------------
not otherwise defined in this Amendment have the same meanings as specified in
the Credit Agreement.
(2) The Borrower has proposed to enter into a transaction described on
Annex A hereto (the "Transaction") pursuant to which, among other things, the
-----------
Borrower will acquire all of the outstanding common stock of Oppenheimer Group,
Inc. ("OGI") for consideration consisting of 2,119,608 Class A units of the
---
Borrower and rights which entitle the holders of an aggregate principal amount
of $230,000,000 notes issued by OGI (the "OGI Notes") to exchange their OGI
---------
Notes for Class A units of the Borrower. The OGI Notes are secured by 6,000,000
newly issued Class C units of the Borrower upon consummation of the Transaction.
(3) The Borrower and the Lenders have agreed to waiver certain provisions
of the Credit Agreement and consent to the Transaction, and to amend the Credit
Agreement, in each case as hereinafter set forth.
SECTION 1. Waiver and Consent. Subject to the satisfaction of the
------------------
conditions precedent set forth in Section 3, the Required Lenders hereby
consent to the consummation of the Transaction and, in furtherance thereof,
agree to waive Sections 5.02(a), (b) and (d) of the Credit Agreement and to
exclude the OGI Notes from the definition of "Indebtedness" for purposes of
Sections 5.03(a) and (b) of the Credit Agreement.
<PAGE>
2
SECTION 2. Amendments to Credit Agreement. The Credit Agreement is,
------------------------------
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 3, hereby amended as follows:
(a) The definition of "Clean-Up Period" in Section 1.01 is hereby
---------------
deleted.
(b) Section 2.01 is amended (i) by deleting the designation "(a)",
(ii) by deleting the phrase "the amount set forth opposite such Lender's
name on the signature pages hereof" and substituting therefor the phrase
"the amount set forth opposite such Lender's name on Schedule I hereto" and
(iii) by deleting clause (b) in its entirety.
(c) Section 2.09(b) is amended in full to read "(b) Intentionally
Omitted".
(d) Schedule I to the Credit Agreement is amended in full to read as
set forth as Schedule I to this Amendment.
SECTION 3. Conditions of Effectiveness. This Amendment is subject to
---------------------------
the provisions of Section 8.01 of the Credit Agreement. This Amendment shall
become effective as of the date first above written when, and only when the
Agent shall have received counterparts of this Amendment executed by the
Borrower and all of the Lenders or, as to any of the Lenders, advice
satisfactory to the Agent that such Lender has executed this Amendment when the
Agent shall have additionally received all of the following documents, each such
document (unless otherwise specified) dated the date of receipt thereof by the
Agent (unless otherwise specified) and in sufficient copies for each Lender, in
form and substance satisfactory to the Agent (unless otherwise specified) and in
sufficient copies for each Lender:
(a) Notes to the order of each of the Lenders in a principal amount
equal to each such Lender's Commitment after giving effect to this
Amendment.
(b) Certified copies of (i) the resolutions of the Board of
Directors of the Borrower approving the incurrence of the Indebtedness
contemplated by this Amendment and the Notes and the matters contemplated
hereby and thereby and (ii) all documents evidencing other necessary
corporate action and governmental approvals, if any, with respect to this
Amendment, the Notes and the matters contemplated hereby and thereby.
(c) A certificate of the Secretary or an Assistant Secretary of the
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign this Amendment, the Notes and the other
documents to be delivered hereunder and thereunder.
<PAGE>
3
(d) A copy of a certificate of the Secretary of State of the State of
Delaware, dated reasonably near the date hereof, listing the certificate of
limited partnership of the Borrower and each amendment thereto on file in
his or her office and certifying that (A) such amendments are the only
amendments to the Borrower's certificate of limited partnership on file in
his or her office, (B) the Borrower has paid all franchise taxes to the
date of such certificate and (C) the Borrower is duly organized and in good
standing under the laws of the State of Delaware.
(e) A certified copy of the Partnership Agreement, duly executed.
(f) A favorable opinion of Richard M. Weil, Esq., Senior Vice
President--Legal for the Borrower, substantially in the form of Exhibit D
to the Credit Agreement and as to such other matters as any Lender through
the Agent may reasonably request.
(g) A certificate signed by a duly authorized officer of the Borrower
stating that:
(i) The representations and warranties contained in Section 4
hereof are correct on and as of the date of such certificate as though
made on and as of such date; and
(ii) No event has occurred and is continuing that constitutes a
Default.
SECTION 4. Representations and Warranties of the Borrower. The
----------------------------------------------
Borrower represents and warrants as follows:
(a) The Borrower has been duly formed and is validly existing in good
standing as a limited partnership under the laws of the State of Delaware.
(b) The execution, delivery and performance by the Borrower of this
Amendment, the Notes and the Credit Agreement, as amended hereby, are
within the Borrower's partnership powers, have been duly authorized by all
necessary partnership action and do not contravene (i) the Partnership
Agreement or (ii) law or any contractual restriction binding on or
affecting the Borrower.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery or performance by
the Borrower of this Amendment, the Notes or the Credit Agreement, as
amended hereby.
<PAGE>
4
(d) This Amendment and the Notes have been duly executed and delivered by
the Borrower. This Amendment, the Notes and the Credit Agreement, as amended
hereby, are legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms.
(e) There is no pending or threatened action, suit, investigation,
litigation or proceeding affecting the Borrower or any of its Subsidiaries
before any court, governmental agency or arbitrator that (i) could have a
Material Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Amendment, the Notes or the Credit Agreement, as amended
hereby.
SECTION 5. Reference to and Effect on the Credit Agreement and the Notes.
-------------------------------------------------------------
(a) On and after the effectiveness of this Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the Notes to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement, shall mean and be a reference to the Credit
Agreement, as amended by this Amendment.
(b) The Credit Agreement and the Notes, as specifically amended by this
Amendment, are and shall continue to be in full force and effect and are hereby
in all respects ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any right, power or
remedy of any Lender or the Agent under the Credit Agreement nor constitute a
waiver of any provision of the Credit Agreement.
SECTION 6. Costs and Expenses. The Borrower agrees to pay on demand all
------------------
costs and expenses of the Agent in connection with the preparation, execution,
delivery and administration, modification and amendment of this Amendment and
the other instruments and documents to be delivered hereunder (including,
without limitation, the reasonable fees and expenses of counsel for the Agent)
in accordance with the terms of Section 8.04 of the Credit Agreement.
SECTION 7. Execution in Counterparts. This Amendment may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
<PAGE>
5
SECTION 8. Governing Law. This Amendment shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
PIMCO ADVISORS L.P.
/s/ ROBERT M. FITZGERALD
By_________________________________
Title: Senior Vice President
and Chief Financial Officer
CITICORP USA, INC.,
as Agent and as Lender
/s/ ALEXANDER DUKA
By________________________________
Title: Attorney-in-Fact
<PAGE>
SCHEDULE I
COMMITMENTS AND
APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
=======================================================================================
Name of Lender Commitment Eurodollar Lending Office Domestic Lending Office
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Citicorp USA, Inc. $75,000,000 399 Park Avenue 399 Park Avenue
New York, NY 10043 New York, NY 10043
=======================================================================================
</TABLE>
<PAGE>
Exhibit 10.4.2
EXECUTION COPY
AMENDMENT NO. 2 TO THE
CREDIT AGREEMENT
Dated as of December 1, 1997
AMENDMENT NO. 1 TO THE CREDIT AGREEMENT (this "Agreement") between
---------
PIMCO ADVISORS L.P., a Delaware limited partnership (the "Borrower"), the
--------
banks, financial institutions and other institutional lenders parties to the
Credit Agreement referred to below (collectively, the "Lenders") and CITICORP
-------
USA, INC., as agent (the "Agent") for the Lenders.
-----
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Agent have entered into a Credit
Agreement dated as of April 12, 1996 (as amended to date, the "Credit
------
Agreement"). Capitalized terms not otherwise defined in this Amendment have the
- ---------
same meanings as specified in the Credit Agreement.
(2) The Borrower and the Lenders have agreed to amend the Credit
Agreement as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. Section 5.02(d) of the Credit
-----------------------------
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 2, hereby amended by deleting the
ratio ".67 to 1" and substituting therefor the ratio "2 to 1".
SECTION 2. Conditions of Effectiveness. This Amendment is subject to the
---------------------------
provisions of Section 8.01 of the Credit Agreement. This Amendment shall become
effective as of the date first above written when, and only when the Agent shall
have received counterparts of this Amendment executed by the Borrower and the
Required Lenders or, as to any of the Lenders, advice satisfactory to the Agent
that such Lender has executed this Amendment when the Agent shall have
additionally received a certificate signed by a duly authorized officer of the
Borrower stating that:
(a) The representations and warranties contained in Section 3
hereof are correct on and as of the date of such certificate as though made
on and as of such date; and
(b) No event has occurred and is continuing that constitutes a
Default.
<PAGE>
2
SECTION 3. Representations and Warranties of the Borrower. The
----------------------------------------------
Borrower represents and warrants as follows:
(a) The Borrower has been duly formed and is validly existing in good
standing as a limited partnership under the laws of the State of Delaware.
(b) The execution, delivery and performance by the Borrower of this
Amendment and the Credit Agreement, as amended hereby, are within the
Borrower's partnership powers, have been duly authorized by all necessary
partnership action and do not contravene (i) the Partnership Agreement or
(ii) law or any contractual restriction binding on or affecting Borrower.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery or performance by
the Borrower of this Amendment or the Credit Agreement, as amended hereby.
(d) This Amendment has been duly executed and delivered by the
Borrower. This Amendment and the Credit Agreement, as amended hereby, are
legal, valid and binding obligations of the Borrower, enforceable against
the Borrower in accordance with their respective terms.
(e) There is no pending or threatened action, suit, investigation,
litigation or proceeding affecting the Borrower or any of its Subsidiaries
before any court, governmental agency or arbitrator that (i) could have a
Material Adverse Effect or (ii) purports to affect the legality, validity
or enforceability of this Amendment, the Notes or the Credit Agreement, as
amended hereby.
SECTION 4. Reference to and Effect on the Credit Agreement and the
-------------------------------------------------------
Notes.
- ------
(a) On and after the effectiveness of this Amendment, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words
of like import referring to the Credit Agreement, and each reference in the
Notes to "the Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to
the Credit Agreement, as amended by this Amendment.
(b) The Credit Agreement, as specifically amended by this Amendment,
is and shall continue to be in full force and effect and are hereby in all
respects ratified and confirmed.
<PAGE>
3
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Agent under the Credit
Agreement nor constitute a waiver of any provision of the Credit Agreement.
SECTION 5. Costs and Expenses. The Borrower agrees to pay on demand
------------------
all costs and expenses of the Agent in connection with the preparation,
execution, delivery and administration, modification and amendment of this
Amendment and the other instruments and documents to be delivered hereunder
(including, without limitation, the reasonable fees and expenses of counsel for
the Agent) in accordance with the terms of Section 8.04 of the Credit Agreement.
SECTION 6. Execution in Counterparts. This Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 7. Governing Law. This Amendment shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
PIMCO ADVISORS L.P.
By /s/ ROBERT M. FITZGERALD
---------------------------------
Title: Sr. V.P.-CFO
CITICORP USA, INC.,
as Agent and as Lender
By
---------------------------------
Title:
<PAGE>
CERTIFICATE OF OFFICER OF PIMCO ADVISORS L.P.
I, Robert M. Fitzgerald, Senior Vice President and Chief Financial Officer
of PIMCO Advisors L.P. hereby certify that:
(i) the representations and warranties contained in Section 3 of that certain
Amendment No. 2 to the Credit Agreement, dated as of April 12, 1996 among
the Partnership as Borrower, CITICORP USA, INC. as agent and certain
lenders a party thereto are true and correct on and as of the date of this
certificate as though made on and as of this date; and
(ii) No event has occurred and is continuing that constitutes a Default (as such
term is defined in such Credit Agreement).
/s/ ROBERT M. FITZGERALD
-------------------------------------------------
Robert M. Fitzgerald
Senior Vice President and Chief Financial Officer
November 25, 1997
<PAGE>
EXHIBIT 10.43
PACIFIC FINANCIAL PLAZA
OFFICE LEASE
------------
CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM,
a retirement system created under the laws
of the State of California,
as Landlord,
and
PACIFIC INVESTMENT MANAGEMENT COMPANY,
a Delaware general partnership
as Tenant
<PAGE>
SUMMARY OF BASIC LEASE INFORMATION
The undersigned hereby agree to the following terms of this Summary of
Basic Lease Information (the "Summary"). This Summary is hereby incorporated
into and made a part of the attached Office Lease (this Summary and the Office
Lease to be known collectively as the "Lease") which pertains to the "Project,"
as that term is defined in the Office Lease, commonly known as "Pacific
Financial Plaza" located in Newport Beach, California. Each reference in the
Office Lease to any term of this Summary shall have the meaning as set forth in
this Summary for such term. In the event of a conflict between the terms of this
Summary and the Office Lease, the terms of the Office Lease shall prevail. Any
initially capitalized terms used herein and not otherwise defined herein shall
have the meaning as set forth in the Office Lease.
TERMS OF LEASE
(References are to
the Office Lease) DESCRIPTION
---------------- -----------
1. Dated as of: February 19, 1998
2. Landlord: CALIFORNIA STATE TEACHERS
RETIREMENT SYSTEM, a retirement system created
under the laws of the State of California.
3. Address of Landlord c/o Compass Management and Leasing, Inc.
(Section 29.14): 840 Newport Center Drive
------------- Suite 690
Newport Beach, California 92660
Attn: Property Manager
Telephone: (714) 640-3840
and
California State Teachers Retirement System
c/o Equitable Real Estate Investment Management Inc.
19800 MacArthur Boulevard
Suite 1000
Irvine, California 92612
Attn: Asset Manager
and
Voss, Cook & Thel LLP
840 Newport Center Drive, Suite 700
Newport Beach, California 92660
Attn: Mr. Albert J. Thel, Jr.
(i)
<PAGE>
4. Tenant: PACIFIC INVESTMENT MANAGEMENT COMPANY,
a Delaware general partnership
5. Address of Tenant 840 Newport Center Drive, Suite 300
(Section 29.14): Newport Beach, California 92660
------------- Attention: Ernest L. Schmider, General Counsel
Telephone: (714) 640-3160
6. Premises (Article 1).
---------
6.1 Building: 800 and 840, Newport Center Drive, Newport Beach,
California, sometimes referred to herein
individually as the "800 Building" and the "840
Building," respectively, and collectively as the
"Building."
6.2 Premises: An aggregate of approximately 94,571 rentable square
feet of space located in the Building, inclusive, of
all Must Take Space, and having the rentable square
footage and Suite Numbers, as set forth below:
<TABLE>
<CAPTION>
Rentable
Building Square Footage Suite No.
---------- -------------- ---------
<S> <C> <C>
840 17,185 100
840 18,810 200
840 18,810 300
800 4,316 105
------
Subtotal 59,121
------
<CAPTION>
Must-Take Space
Rentable
Building Square Footage Suite No.
---------- -------------- ---------
<S> <C> <C>
TO BE TAKEN IN 1998:
800 8,150 550
800 18,682 600
TO BE TAKEN UPON EXPIRATION
OF CAL FED LEASE:
800 5,609 100
800 3,009 150
------
Subtotal 35,450
------
TOTAL 94,571
======
</TABLE>
(ii)
<PAGE>
The Premises are depicted on Exhibit "A"
attached hereto and incorporated herein
by this reference.
6.3 Number of rentable square
feet in Building: 279,474
7. Term (Article 2).
---------
7.1 Lease Term: 7 years
7.2 Lease Commencement Date: April 1, 1998.
7.3 Lease Expiration Date: March 31, 2005.
8. Base Rent (Article 3) (Based on
---------
square footage of Premises
exclusive of Must-Take Space and
First Offer Space):
<TABLE>
<CAPTION>
Months Monthly Annual Rental
Following Lease Annual Installment Rate per Rentable
Commencement Date Base Rent of Base Rent Square Foot
- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C>
1-12 $1,702,684.80 $141,890.40 $28.80
13-24 1,738,157.40 144,846.45 29.40
25-36 1,773,630.00 147,802.50 30.00
37-48 1,844,575.20 153,714.60 31.20
49-60 1,880,047.80 156,670.65 31.80
61-72 1,950,993.00 162,582.75 33.00
73-84 2,021,938.20 168,494.85 34.20
</TABLE>
9. Additional Rent (Article 4).
---------
9.1 Base Year: The calendar year of 1998.
9.2 Tenant's Share: Approximately 21.15% exclusive of Must-
Take Space and approximately 30.76%
inclusive of Must-Take Space I and
approximately 33.84% inclusive of all
Must-Take Space.
(iii)
<PAGE>
10. Security Deposit An amount equal to the monthly installment of
(Article 21): Base Rent payable for the calendar month of
---------- September, 2004, based on the size of the
Premises then leased hereunder. See Article 21.
11. Number of Parking Spaces Tenant shall be entitled to purchase a maximum
(Article 28): number of parking passes equal to an aggregate
---------- of four (4) automobile parking spaces for each
one thousand (1,000) usable square feet of the
Premises from time to time leased hereunder.
Based on the Premises initially leased
hereunder excluding all Must-Take Space, having
fifty-three thousand five hundred sixteen
(53,516) usable square feet, the aggregate
number of parking spaces available for purchase
by Tenant is two hundred fourteen (214) spaces,
of which up to seventy-five (75) are Covered
Reserved, up to one hundred (100) are Covered
Unreserved and the balance are Surface
Unreserved parking permits. Of Tenant's
seventy-five (75) Covered Reserved parking
permits, fourteen (14) are VIP Reserved. Such
VIP Reserved parking spaces are located as
depicted on Exhibit A attached hereto. Tenant's
---------
additional parking passes for the Must-Take
Space shall be allocated as follows: 14%
Covered Reserved, 25% Covered Unreserved and
the balance Surface Unreserved parking spaces.
The monthly parking charges applicable to the
parking passes which Tenant is initially
entitled to purchase hereunder, including
spaces applicable to the Must-Take Space, is as
set forth below for the periods indicated:
<TABLE>
<CAPTION>
Months
Following
Lease Pooled
Commencement Covered Covered Surface
Date Reserved Unreserved Unreserved
------------ -------- ---------- ----------
<S> <C> <C> <C>
1-30 $ 85.00 $65.00 $50.00
31-60 $105.00 $75.00 $60.00
61-84 Prevailing rate (See Article 28)
</TABLE>
The monthly parking charge for the fourteen
(14) VIP Reserved parking passes shall be equal
to the applicable rate set forth above for
Covered Reserved parking passes for the first
thirty-six (36) months after the Lease
Commencement Date and thereafter shall be at
the prevailing rate in the Building for VIP
Reserved parking passes. The monthly charge for
additional parking passes, if any, shall be at
the prevailing rate as set forth in Article 28
----------
hereof.
(iv)
<PAGE>
12. Brokers (Section 29.19): Landlord's Broker: Cushman & Wakefield of
------------- California, Inc.
Tenant's Broker: Cushman Realty Corporation
The foregoing terms of this Summary are hereby agreed to by Landlord and Tenant.
"Landlord":
CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM, a
retirement system created under the laws of the
State of California
By: ERE Yarmouth Inc., Its investment advisor
By: /s/ WILLIAM VINCENT
-------------------------------------
Its: Senior Vice President
-------------------------------------
"Tenant"
PACIFIC INVESTMENT MANAGEMENT COMPANY,
a Delaware general partnership
By: PIMCO Management, Inc., a Delaware
corporation, Managing General Partner
By: /s/ ERNEST L. SCHMIDER
------------------------------------
Its: Executive Vice President
------------------------------------
(v)
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
SUBJECT MATTER PAGE
-------------- ----
<S> <C> <C>
ARTICLE 1 PROJECT, BUILDING AND PREMISES 1
ARTICLE 2 LEASE TERM 4
ARTICLE 3 BASE RENT 6
ARTICLE 4 ADDITIONAL RENT 6
ARTICLE 5 USE OF PREMISES 12
ARTICLE 6 SERVICES AND UTILITIES 13
ARTICLE 7 REPAIRS 14
ARTICLE 8 ADDITIONS AND ALTERATIONS 14
ARTICLE 9 COVENANT AGAINST LIENS 16
ARTICLE 10 INSURANCE 16
ARTICLE 11 DAMAGE AND DESTRUCTION 17
ARTICLE 12 NONWAIVER 18
ARTICLE 13 CONDEMNATION 19
ARTICLE 14 ASSIGNMENT AND SUBLETTING 19
ARTICLE 15 SURRENDER OF PREMISES; REMOVAL OF TRADE FIXTURES 22
ARTICLE 16 HOLDING OVER 22
ARTICLE 17 ESTOPPEL CERTIFICATES 23
ARTICLE 18 SUBORDINATION 23
ARTICLE 19 DEFAULTS; REMEDIES 23
ARTICLE 20 ATTORNEYS' FEES 25
ARTICLE 21 SECURITY DEPOSIT 25
ARTICLE 22 ROOFTOP USE/SATELLITES; ACCESS 26
ARTICLE 23 SIGNS 28
ARTICLE 24 COMPLIANCE WITH LAW 28
ARTICLE 25 LATE CHARGES 29
ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT 29
ARTICLE 27 ENTRY BY LANDLORD 29
ARTICLE 28 TENANT PARKING 30
ARTICLE 29 MISCELLANEOUS PROVISIONS 30
</TABLE>
EXHIBITS
A OUTLINE OF PREMISES
B RULES AND REGULATIONS
C FORM OF NOTICE OF LEASE TERM DATES
D TENANT WORK LETTER
E ESTOPPEL CERTIFICATE
F JANITORIAL SPECIFICATIONS
G BUILDING STANDARD COMPONENT SPECIFICATIONS
H HVAC STANDARDS
<PAGE>
INDEX OF MAJOR DEFINED TERMS
----------------------------
<TABLE>
<CAPTION>
LOCATION
OF DEFINITION
DEFINED TERMS IN OFFICE LEASE
- ------------- ---------------
<S> <C>
Additional Rent Section 4.1
Base Rent Article 3
Base Year Section 4.2.1
Building Section 1.1.1
Economic Concessions Section 14.3
Estimate Section 4.4.3
Estimated Excess Section 4.4.3
Estimate Statement Section 4.4.3
Excess Section 4.4.1
Expense Year Section 4.2.2
Force Majeure Section 29.13
Holidays Section 6.1.1
Lease Commencement Date Section 2.1
Lease Expiration Date Section 2.1
Lease Term Section 2.1
Lease Year Section 2.1
Notices Section 29.14
Operating Expenses Section 4.2.3
Premises Section 1.1.1
Project Section 1.1.2
Project Expenses Section 4.2.4
Rent Section 4.1
Security Deposit Article 21
Statement Section 4.4.2
Tax Expenses Section 4.2.5
Tenant's Share Section 4.2.6
Transfer Notice Section 14.1
Transfer Premium Section 14.3
Transferee Section 14.1
Transfers Sections 14.1, 14.6 and 14.7
</TABLE>
<PAGE>
OFFICE LEASE
------------
This Office Lease, which includes the preceding Summary of Basic Lease
Information (the "Summary") attached hereto as pages (i) through (iv) and
incorporated herein by this reference (the Office Lease and Summary to be known
sometimes collectively hereafter as the "Lease"), dated as of the date set forth
in Section 1 of the Summary, is made by and between CALIFORNIA STATE TEACHERS
---------
RETIREMENT SYSTEM, a retirement system created under the laws of the State of
California ("Landlord") and PACIFIC INVESTMENT MANAGEMENT COMPANY, a Delaware
general partnership ("Tenant").
ARTICLE 1
---------
PROJECT, BUILDING AND PREMISES
------------------------------
1.1 Premises, Building, Project and Common Areas.
--------------------------------------------
1.1.1 The Premises. Upon and subject to the terms, covenants and
------------
conditions hereinafter set forth in this Lease, Landlord hereby leases to Tenant
and Tenant hereby leases from Landlord the premises set forth in Section 6.2 of
-----------
the Summary (the "Premises"), which Premises are located in the building set
forth in Section 6.1 of the Summary (the "Building"), reserving, however to
-----------
Landlord: (i) the sole and exclusive right to consent to the use or occupancy
of the Premises by any person other than Tenant, whether by sublease, assignment
or otherwise, and all right, title and interest in the economic value of the
leasehold estate in the Premises for the Lease Term, all as more fully set forth
in Article 14 of this Lease, (ii) all of the Building, except for the space
----------
within the inside surfaces bounding the Premises, and except as provided below
in this Article 1, and (iii) the rights, interests and estates reserved to
---------
Landlord by provisions of this Lease or operation of law. The outline of the
Premises is set forth in Exhibit A attached hereto. The rentable square
---------
footages of the Premises and the Building are set forth in Section 6 of the
---------
Summary.
1.1.2 The Building and the Project. The Building is part of an
----------------------------
office project known as "Pacific Financial Plaza" which contains two seven-story
office buildings and a two-level detached commercial structure (individually,
the other buildings shall be a "Project Building" or collectively, the "Project
Buildings"). The term "Project," as used in this Lease, shall mean (i) the
Building, the Project Buildings and the "Common Areas," as that term is defined
in Section 1.1.3 below, (ii) the land (which is improved with landscaping,
-------------
parking facilities and other improvements) upon which the Building, the Project
Buildings and the Common Areas are located and (iii) at Landlord's discretion,
any additional real property, areas, buildings or other improvements added
thereto. Tenant acknowledges that Landlord has made no representation or
warranty regarding the condition of the Project except as specifically set forth
in the Lease.
1.1.3 Common Areas. Tenant shall have the non-exclusive right to
------------
use in common with other tenants in the Project, and subject to the rules,
regulations and restrictions attached hereto as Exhibit B (the "Rules and
---------
Regulations"), those portions of the Project which are provided, from time to
time, for use in common by Landlord, Tenant and any other tenants of the Project
(such areas designated by Landlord, in its discretion, are collectively referred
to herein as the "Common Areas"). The Common Areas shall consist of the
"Project Common Areas" and the "Building Common Areas." The term "Project
Common Areas," as used in this Lease, shall mean all common areas in the Project
other than the Building
1
<PAGE>
Common Areas, including, without limitation, any parking facilities, fixtures,
systems, signs, facilities, gardens, parks or other landscaping used in
connection with the Project, and may include any city sidewalks adjacent to the
Project, pedestrian walkway system, whether above or below grade, park or other
facilities open to the general public and roadways, sidewalks, walkways,
parkways, driveways and landscape areas appurtenant to the Project. The term
"Building Common Areas," as used in this Lease, shall mean the portions of the
Common Areas located within the Building and may include, without limitation,
the common entrances, lobbies, restrooms, elevators, stairways and accessways,
loading docks, ramps, drives, platforms, passageways, serviceways, common pipes,
conduits, wires, equipment, loading and unloading areas, and trash areas
servicing the Building. The manner in which the Common Areas are maintained and
operated shall be at the discretion of Landlord, but shall be maintained in a
condition consistent with a class A office project. Landlord reserves the right
without notice to Tenant to make alterations or additions to or to change the
location of elements of the Project and the Common Areas; provided however,
Landlord shall not make any such alterations, additions or changes to the Common
Areas which prevent access to the Premises for Tenant's employees and invitees
or Tenant's use of the Premises for the uses permitted hereunder.
1.1.4 Partial Termination Option. Notwithstanding any provision of
--------------------------
this Lease to the contrary but subject to the conditions set forth below, Tenant
shall have the one-time option ("Termination Option") to terminate the Lease as
to the "Termination Portion" of the Premises (as defined below), which
termination shall, subject to the conditions set forth in this Section 1.1.4, be
-------------
effective as of March 31, 2002 (the "Termination Date"). The term "Termination
Portion" of the Premises shall mean that portion of the Premises designated as
the "Termination Portion" on Exhibit A attached hereto, which is located within
---------
Suite 550 of the 800 Building. Conditions to Tenant's exercise of the
Termination Option shall be that (i) Tenant must provide Landlord with written
notification ("Termination Notice") of Tenant's exercise of said Termination
Option at least twelve (12) months prior to the Termination Date, and (ii)
Tenant shall pay to Landlord concurrently with Tenant's delivery of the
Termination Notice, in consideration of Landlord's agreement to so terminate
this Lease as to the Termination Portion, an amount ("Termination Fee") equal to
the sum of (a) six (6) monthly installments of Annual Basic Rent for the
Termination Portion of the Premises (calculated at Two Dollars and Sixty-Five
Cents ($2.65) per rentable square foot of the Termination Portion per month),
plus (b) the unamortized balance, as of the Termination Date, of the leasing
fees allocable to the Termination Portion paid by Landlord to the Brokers
referenced in Section 12 of the Summary, with such amortization to be calculated
on a straight line basis over the initial eighty-four (84) month Lease Term,
plus (c) the unamortized balance, as of the Termination Date, of the Thirty
Dollar ($30.00) per usable square foot Tenant Improvement Allowance allocable to
the Termination Portion, with such amortization to be calculated over the
eighty-four (84) month period from April 1, 1998 until March 30, 2005, based
upon equal monthly payments of principal and interest for such amortization
period, with interest imputed on the outstanding principal balance at twelve
percent (12%) per annum. If Tenant properly and timely exercises the
Termination Option, the Lease shall expire as to the Termination Portion of the
Premises as of the Termination Date.
1.1.5 Must-Take Space. Effective upon the applicable "Must-Take
---------------
Space Commencement Date" (as defined below), the "Must-Take Space" (as defined
below) shall be added to and become and be deemed a part of the Premises for all
purposes of this Lease. The "Must Take Space" consists of "Must-Take Space I"
and "Must-Take Space II." "Must-Take Space I" means an aggregate of twenty-six
thousand eight hundred thirty-two (26,832) rentable square feet of space
consisting of Suites 550 and 600 in the 800 Building, containing eight thousand
one hundred fifty (8,150) and eighteen thousand six hundred eighty-two (18,682)
rentable square feet, respectively. "Must-Take Space II" means an aggregate of
eight thousand six hundred eighteen (8,618) rentable square feet of space
consisting of Suite 100 (5,609 rentable square feet) and Suite 150 (3,009
rentable square feet), each of which Suites is located in the 800 Building.
2
<PAGE>
As of the date of execution of this Lease, Must-Take Space I is
leased by Federal Express Corporation under a lease (the "Fed Ex Lease") having
an expiration date of August 31, 1998 and Must-Take Space II is leased by
California Federal Bank (the "Cal Fed Lease"), a portion of which (Suite 100) is
occupied by an affiliate of Tenant, and the balance of which is occupied by a
subtenant not affiliated with Tenant, each under a sublease under the Cal Fed
Lease. The expiration date of the Cal Fed Lease is June 1, 2002, subject to an
option to extend the term of the Cal Fed Lease to May 31, 2012. Landlord agrees
to use Landlord's commercially reasonable efforts to terminate the Fed Ex Lease
as soon as reasonably practicable. The parties do not contemplate that Landlord
will be able to terminate the Cal Fed Lease. Assuming that Landlord is
successful in arranging an early termination of the Fed Ex Lease, the estimated
"Must-Take Space Commencement Date" (that is, the date Landlord tenders
possession of the applicable Must-Take Space to Tenant) is (i) April 15, 1998
for Must-Take Space I. The estimated "Must-Take Space Commencement Date" for
Must-Take Space II is immediately upon termination of the Cal Fed Lease with
respect to the applicable Must-Take Space II. Tenant acknowledges and agrees
that Tenant shall accept the Must Take Space in its OAS ISO condition and that
Tenant may construct improvements in the Must Take Space pursuant to the
terms of the Tenant Work Letter attached hereto as Exhibit D; provided
---------
however, that the Tenant Improvement Allowance shall be Thirty Dollars
($30.00) for all Must-Take Space other than Suite 100 of Must-Take Space II, for
----- ----
which Suite 100 the Tenant Improvement Allowance shall be Five Dollars ($5.00)
per usable square foot.
1.1.5.1 Must-Take Space Rent Commencement Date. Tenant's
--------------------------------------
obligation to pay Base Rent for the Must-Take Space shall commence on the
applicable "Must-Take Space Rent Commencement Date" (as defined below), provided
that Landlord hereby agrees to waive the payment of Base Rent for five thousand
nine hundred forty-six (5,946) rentable square feet of Must Take Space I for the
first six (6) months after the Must-Take Space Rent Commencement Date for Must
Take Space I. The "Must-Take Space Rent Commencement Date" shall be that date
which is the earlier to occur of the date Tenant commences to conduct business
in the applicable Must-Take Space or sixty (60) days after the Must-Take Space
Commencement Date (that is, the date Landlord tenders possession of the
applicable Must-Take Space to Tenant vacant and free of the existing leases with
respect thereto).
1.1.5.2 Must-Take Terms. Effective as of the Must-Take Space
---------------
Commencement Date, the Must-Take Space shall be added to and become and be
deemed a part of the Premises, and all adjustments shall be made in the Lease
which are appropriate to reflect such addition to the Premises; provided
however, that Tenant's obligation to pay Base Rent, the proportionate increase
in Tenant's Share and the number of Tenant's parking passes which Tenant is
entitled to purchase shall not occur until the applicable Must-Take Space Rent
Commencement Date. The term for the Must-Take Space shall be coterminous with
the remaining Term of the Lease and the monthly Base Rent applicable to the
Must-Take Space shall be the Base Rent on a per rentable square foot basis which
is applicable to the Premises, from time to time, during the remaining Lease
Term. All other terms and provisions of the Lease shall also be applicable to
the Must-Take Space.
1.1.6 Right of First Offer. Tenant shall have the right of first
--------------------
offer during the Lease Term to lease any available space other than space leased
to Tenant consisting of: (i) at least two thousand (2,000) rentable square feet
in the 840 Building (the "840 First Offer Space"); and (ii) any space on the
third (3rd), fourth (4th), or fifth (5th) floors of the 800 Building (the "800
First Offer Space"), pursuant to the following terms of this Section 1.1.6.
-------------
Space in the Building shall be considered to be "available" if no other tenant
is leasing such space, has the right to lease such space, to expand into such
space, or to extend the term of its lease for such space and with regard to
space which is leased by a tenant, such space shall be considered to become
available upon expiration of the term of such tenant's lease of such space only
if Landlord and such tenant fail to reach agreement for the extension of the
term of such tenant's lease, whether pursuant to a formal extension option
contained within such tenant's lease or, with respect to space in the Building
other than space located on the fifth floor of the 800 Building, otherwise, in
either case within thirty (30) days after such expiration date or such longer
period of time as
3
<PAGE>
may be necessary in order to complete any arbitration, appraisal or similar
procedure set forth in a formal extension option. The 840 First Offer Space and
the 800 First Offer Space are sometimes referred to herein collectively as the
"First Offer Space." If Tenant objects to Landlord's determination of the Fair
Market Rental Value for any First Offer Space within the applicable time period
set forth below, then Tenant may elect to lease such space within such period
and the Fair Market Rental Value shall be determined by arbitration in the
manner provided in Section 2.2.3.1 through Section 2.2.3.7 hereof. Landlord and
--------------- ---------------
Tenant agree to use their good faith efforts to agree upon the Fair Market
Rental Value for the applicable First Offer Space during the applicable period
prior to arbitration being instituted.
1.1.6.1 Procedure for Offer.
-------------------
1.1.6.1.1 840 First Offer Space. Landlord agrees that
---------------------
during the Lease Term, Landlord shall deliver written notice to Tenant (the "840
First Offer Notice") prior to the first time that any 840 First Offer Space
-----
shall hereafter become available for lease to third parties. The 840 First
Offer Notice shall describe the space which is available (including, without
limitation, Landlord's determination of the rentable square footage thereof),
and shall set forth (i) the anticipated date on which the applicable 840 First
Offer Space will be available for lease by Tenant and the commencement date
therefor, and (ii) Landlord's determination of Fair Market Rental Value for such
840 First Offer Space. If Tenant is interested in leasing the 840 First Offer
Space, Landlord and Tenant shall, for a period of ten (10) days after the date
of Tenant's receipt of the 840 First Offer Notice with respect to such space,
attempt to reach agreement as to the terms for Tenant's lease of such space. If
Landlord and Tenant are unable to reach agreement within such ten (10) day
period, then Landlord shall be free to lease all or a portion of such space to
any third party upon any terms; provided however, with respect only to space
located on the fourth floor of the 840 Building, if Landlord does not enter into
a lease with a third party within one hundred twenty (120) days following the
expiration of such ten (10) day period, or if Landlord is not pursuing lease
negotiations with a third party tenant at the next time Tenant exercises its
First Offer right under this Section 1.1.6.1.1, then Tenant's First Offer right
-----------------
set forth herein shall be reinstated and the procedures of this Section
-------
1.1.6.1.1 shall be repeated.
- ---------
1.1.6.1.2 800 First Offer Space. Landlord agrees that during
---------------------
the Lease Term, Landlord shall deliver written notice to Tenant (the "800
First Offer Notice") up to eight (8) months but not less than ninety (90) days
prior to each time that any 800 First Offer Space shall hereafter become
available for lease to third parties. The 800 First Offer Notice shall describe
the space which is available (including, without limitation, Landlord's
determination of the rentable square footage thereof, the anticipated date on
which the 800 First Offer Space will be available for lease by Tenant and the
commencement date therefor), and shall set forth Landlord's determination of
Fair Market Rental Value with respect to such space. Within sixty (60) days
after Tenant's receipt of each 800 First Offer Notice (the "800 First Offer
Response Date"), Tenant must give Landlord written notice pursuant to which
Tenant either (i) elects to lease the 800 First Offer Space at Fair Market
Rental Value for a term coterminous with the Term hereof; or (ii) elects not to
lease such 800 First Offer Space. If Tenant does not so respond in writing to
Landlord's notice on or before the 800 First Offer Response Date, or has
responded in accordance with clause (ii) above, Landlord may lease the 800 First
Offer Space to any third party on terms comparable to those offered to Tenant,
as conclusively evidenced by execution of a lease with a third party tenant;
provided however, if Landlord does not enter into a lease with a third party
within one hundred twenty (120) days following the earlier of Landlord's receipt
of Tenant's response to Landlord's notice or the 800 First Offer Response Date,
or if Landlord is not pursuing lease negotiations with a third party tenant at
the next time Tenant exercises its First Offer right under this Section
-------
1.1.6.1.2, then Tenant's First Offer right set forth herein shall be reinstated
- ---------
and the procedures of this Section 1.1.6.1.2 shall be repeated. Tenant's
-----------------
obligation to pay Rent for the First Offer Space shall commence upon the earlier
of the sixtieth (60th) day following the date Landlord tenders possession of the
applicable First Offer Space to Tenant or the date Tenant commences to do
business in such space. Notwithstanding
4
<PAGE>
anything contained herein to the contrary, the 800 First Offer Right may not be
exercised during the last twelve (12) months of the Term (as adjusted and
extended from time to time).
1.1.6.2 Suspension of Right of First Offer. At Landlord's
----------------------------------
option, Tenant shall not have the right to lease the First Offer Space as
provided in this Section 1.1.6 so long as Tenant, as of the date of receipt of
-------------
the First Offer Notice by Tenant, or as of the date of delivery of such
First Offer Space to Tenant, is in material, monetary default under this Lease
after expiration of all applicable cure periods.
1.1.6.3 First Offer Right Personal to Tenant. Tenant's First
------------------------------------
Offer Right set forth in this Section 1.1.6 is personal to, and shall only be
-------------
exercised by, the originally named Tenant under this Lease or a permitted
assignee pursuant to Section 14.7 hereof (and may not be exercised by any other
------------
assignee, subtenant or other transferee of Tenant's interest in this Lease or
the premises leased by Tenant), and shall only be available to Tenant when
Tenant is in actual possession and physical occupancy of at least ninety-five
percent (95%) of the entire space leased by Tenant within the Building other
than the Termination Portion in the event Tenant has exercised Tenant's
Termination Option pursuant to Section 1.1.4 of this Lease.
-------------
1.1.6.4 No Additional Expansion Rights. Tenant shall not have
------------------------------ ---
the right to lease greater than an aggregate total of ninety-nine thousand
(99,000) rentable square feet in the Building, including without limitation, any
space which has been assigned to or subleased by Tenant or Affiliates of Tenant,
but excluding all storage space held by Tenant in the Building. This Section
-------
1.1.6 constitutes all of the rights of Tenant to expand the Premises.
- -----
1.2 Verification of Rentable Square Feet of Premises and Building. For
-------------------------------------------------------------
purposes of this Lease, "rentable square feet" shall be calculated using as a
guideline the Standard Method for Measuring Floor Area in Office Buildings, ANSI
Z65.1 - 1996 as reasonably modified by Landlord ("BOMA"), provided that the
rentable square footage of the Building and other buildings in the Project shall
include all of (and the rentable square footage of the Premises therefore shall
include a portion of) (i) the Building Common Areas and (ii) the occupied space
of the portion of the Project dedicated to the service of the Project. The
rentable square feet of the Premises, Building and the Project have been
measured by Landlord's space accountant and are set forth in the Summary and the
measurements set forth in the Summary shall be conclusive and binding upon the
parties and not subject to remeasurement.
ARTICLE 2
---------
LEASE TERM
----------
2.1 Term. The terms and provisions of this Lease shall be effective as of
----
the date of this Lease. The term of this Lease (the "Lease Term") shall be as
set forth in Section 7.1 of the Summary and shall commence on the date (the
-----------
"Lease Commencement Date") set forth in Section 7.2 of the Summary, and shall
-----------
terminate on the date (the "Lease Expiration Date") set forth in Section 7.3 of
-----------
the Summary, unless this Lease is sooner terminated or extended as hereinafter
provided. For purposes of this Lease, the term "Lease Year" shall mean each
consecutive twelve (12) month period during the Lease Term; provided, however,
that the first Lease Year shall commence on the Lease Commencement Date and end
on the last day of the twelfth month thereafter and the second and each
succeeding Lease Year shall commence on the first day of the next calendar
month; and further provided that the last Lease Year shall end on the Lease
Expiration Date. At any time during the Lease Term, Landlord may deliver to
Tenant a notice in the form as set forth in Exhibit C, attached hereto, which
---------
Tenant shall execute and return to Landlord within fifteen (15) days of receipt
thereof.
5
<PAGE>
2.2 Extension of Initial Term. Tenant shall have the right, at Tenant's
-------------------------
option, to extend the Lease Term for one (1) renewal term of five (5) years
commencing on April 1, 2005 and expiring on March 31, 2010 (the "Option Term").
Tenant's option to extend the term of the Lease shall apply to the entire
Premises leased by Tenant as of the last day of the initial Lease Term,
including without limitation all Must-Take Space and First Offer Space actually
added to the Premises in such Building, exclusive of the Termination Portion if
Tenant has exercised Tenant's Termination Option pursuant to Section 1.1.4 of
-------------
this Lease; provided however, Tenant, in Tenant's sole discretion, may elect to
extend the term of this Lease only with respect to all of such Premises leased
by Tenant as of the last day of the initial Lease Term in either the 800
Building or the 840 Building. The total rent (collectively, "Rent") payable by
Tenant during the Option Term (the "Option Rent") shall be equal to the "Fair
Market Rental Value" for the Premises. The term "Fair Market Rental Value" shall
mean the per rentable square foot rental rate per month (including operating
cost and tax payments and considering any "base year" or "expense stop"
applicable thereto), including all escalations at which, as of the commencement
of the Option Term, landlords are leasing non-renewal, non-sublease, non-
encumbered, non-equity space comparable in size, quality and location to the
Premises for a comparable term, which comparable space is located in the
Building and in office buildings of comparable size, location, amenities,
services and quality of construction in the Newport Center area of Newport
Beach, California area, taking into consideration all monetary concessions being
granted in connection with such comparable space, including, without limitation,
the following concessions (collectively, the "Rent Consessions"): (a) rental
abatement concessions, if any, being granted in connection with such comparable
space, (b) tenant improvements or allowances being given in connection with such
comparable space, provided that such rent shall take into account, and deduct
the value of, the existing improvements in the Premises, with such value to be
based upon the age, quality and layout of the improvements and the extent to
which they can be utilized by Tenant and acknowledging that the precise tenant
improvements in the Premises are specifically suitable to Tenant, (c) all other
monetary concessions, if any, being granted such tenants in connection with such
comparable space, including without limitation any lease buy-outs, and (d) with
respect to any First Offer Space, Landlord's payment of broker's fees and
commissions (if any), moving allowances, buy-outs of prior leases, Landlord's
payment or reimbursement of termination fees for prior leases, the value of
extraordinary services, free or reduced-rate parking privileges, reduced rent or
free rent, options to extend at fixed or below market rates, and all other
concessions having economic value granted to tenants; provided, however, that in
calculating the Fair Market Rental Value with respect to space other than First
Offer Space, no consideration shall be given to (x) any rental abatement granted
such tenants in connection with the construction of improvements in the
comparable space, or (y) the fact that Landlord is not required to pay a real
estate brokerage commission in connection with such transaction and landlords
are or are not paying a commission in connection with such comparable
transactions.
2.2.1 If in determining the Fair Market Rental Value, Rent
Concessions are granted as provided above, Landlord may, at Landlord's sole
option, elect any or a portion of the following: (A) to grant the Rent
Concessions to Tenant in the form as described above (e.g., as free rent and/or
an improvement allowance), and/or (B) to grant Tenant the present value of any
or all of the Rent Concessions in the form of free rent or reduced "face" or
"stated" rental, which reduction in rental shall be calculated on a dollar-for-
dollar basis over a period and in installments as determined by Landlord (in
which case the Rent Concession(s) converted into free rent or rental deduction
shall not be granted to Tenant).
2.2.2 Tenant shall have the right, but not the obligation, to
deliver written notice to Landlord after January 1, 2004 but in any event no
--
later than June 30, 2004, stating that Tenant is interested in exercising its
- ----- ----
option to extend the Lease Term ("Tenant's Notice of Interest"). In the event
that Tenant shall timely deliver to Landlord Tenant's Notice of Interest,
Landlord, within the later to occur of sixty (60) days after Landlord's receipt
of Tenant's notice of Interest or May 31, 2004, shall deliver to Tenant a notice
("Option Rent Notice"), setting forth the Landlord's determination of the Option
Rent. In no event shall Tenant's delivery of Tenant's Notice of Interest be a
condition precedent to Tenant's
6
<PAGE>
exercise of the extension option, but shall instead only be a condition
precedent to Landlord's obligation to deliver the Option Rent Notice. Regardless
of whether Tenant delivers Tenant's Notice of Interest, Tenant shall exercise
the extension option only by delivery to Landlord of written notice of such
exercise on or before June 30, 2004, but not before April 1, 2004.
2.2.3 Upon Tenant's exercise of Tenant's extension right hereunder
or expansion right with respect to any First Offer Space, Landlord and Tenant
shall attempt to agree upon the Fair Market Rental Value using their good-faith
efforts. If Landlord and Tenant fail to reach agreement within thirty (30) days
following Tenant's exercise of such right (the "Outside Agreement Date"), then
each party shall make a separate determination of the Fair Market Rental Value
within five (5) days after the Outside Agreement Date, and such determinations
shall be submitted to arbitration in accordance with Section 2.2.3.1 through
---------------
Section 2.2.3.7 below.
- ---------------
2.2.3.1 Landlord and Tenant shall each appoint one arbitrator
who shall by profession be a certified real estate appraiser who shall have been
active over the five (5) year period ending on the date of such appointment in
the appraisal of first-class commercial high-rise properties in the Newport
Center area of Newport Beach, California. The determination of the arbitrators
shall be limited solely to the issue as to whether Landlord's or Tenant's
submitted Fair Market Rental Value is the closest to the actual Fair Market
Rental Value as determined by the arbitrators, taking into account the
requirements of Section 2.2 above. Each such arbitrator shall be appointed
-----------
within fifteen (15) days after the applicable Outside Agreement Date.
2.2.3.2 The two arbitrators so appointed shall within ten
(10) days of the date of the appointment of the last appointed arbitrator agree
upon and appoint a third arbitrator who shall be qualified under the same
criteria set forth hereinabove for qualification of the initial two arbitrators.
2.2.3.3 The three arbitrators shall within thirty (30) days
of the appointment of the third arbitrator reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted Fair Market Rental Value, and
shall notify Landlord and Tenant thereof.
2.2.3.4 The decision of the majority of the three arbitrators
shall be binding upon Landlord and Tenant.
2.2.3.5 If either Landlord or Tenant fails to appoint an
arbitrator within fifteen (15) days after the applicable Outside Agreement Date,
the arbitrator appointed by one of them shall reach a decision, notify Landlord
and Tenant thereof, and such arbitrator's decision shall be binding upon
Landlord and Tenant.
2.2.3.6 If the two arbitrators fail to agree upon and appoint
a third arbitrator, or both parties fail to appoint an arbitrator, then the
appointment of the third arbitrator or any arbitrator shall be dismissed and the
matter to be decided shall be forthwith submitted to arbitration under the
provisions of the American Arbitration Association, but subject to the
instruction set forth in this Section 2.2.3.
-------------
2.2.3.7 Landlord shall be responsible for the cost of the
arbitrator appointed by Landlord, Tenant shall be responsible for the cost of
the arbitrator appointed by Tenant, and Landlord and Tenant shall equally share
the cost of the third arbitrator and all other costs of the arbitration
proceeding.
2.3 Termination of Prior Lease. Tenant currently leases a portion of the
--------------------------
Premises from Landlord under that certain Lease Agreement dated May 4, 1984, as
amended by a First Amendment to
7
<PAGE>
Lease dated March 23, 1987, Second Amendment to Lease dated August 19, 1987,
Third Amendment to Lease dated January 8, 1988, Fourth Amendment to Lease dated
March 31, 1989, Fifth Amendment to Lease dated June 30, 1989, Sixth Amendment to
Lease dated December 21, 1990, Seventh Amendment to Lease dated January 30,
1991, Eighth Amendment to Lease dated January 1, 1994, and a Ninth Amendment to
Lease dated September 1, 1994 and a letter agreement dated August 26, 1988
(collectively, the "Original Lease"), and the term of the Original Lease expires
on March 31, 1998. In addition, PIMCO Advisors L.P., a Delaware limited
partnership and an Affiliate of Tenant ("PIMCO Advisors") currently leases a
portion of the Premises consisting of Suite 105 of the 800 Building from
Landlord under that certain Office Lease dated July 19, 1995 (the "Advisors
Lease"), and the term of the Advisors Lease expires on May 31, 2002. By
execution of this Lease by Landlord and Tenant, Tenant acknowledges and agrees
that the term under the Original Lease expires on March 31, 1998 and that the
Original Lease shall be of no further force or effect whatsoever on and after
March 31, 1998, except for any indemnification obligations of Landlord or Tenant
and except for other provisions of the Original Lease which specifically state
that such provisions are to survive the expiration or termination of the
Original Lease. Landlord and Tenant agree that the Storage Space Agreements
between Landlord and Tenant dated February 28, 1989, August 23, 1991 and March
9, 1994 (collectively, the "Storage Space Agreements") shall remain in full
force and effect and survive termination of the Original Lease and the Advisors
Lease. Concurrently with execution of this Lease, Tenant shall cause PIMCO
Advisors to enter into a lease termination agreement with Landlord with respect
to the Advisors Lease, which lease termination agreement shall provide that the
Advisors Lease shall terminate on, and be of no further force or effect after,
March 31, 1998, except for any indemnification obligations of PIMCO Advisors and
except for other provisions of the Advisors Lease which specifically state that
such provisions are to survive the expiration or termination of the Advisors
Lease. Tenant acknowledges that Tenant is familiar with the condition of the
Premises since Tenant and PIMCO Advisors have been and are currently occupying
the Premises under the Original Lease and the Advisors Lease. Tenant also
acknowledges that Landlord is not obligated to make any leasehold improvements
to the Premises under this Lease and that Tenant is accepting possession of the
Premises under the OAS ISO condition of the Premises, subject to Landlord's
payment to Tenant of the Tenant Improvement Allowance pursuant to Section 2.1
-----------
of the Work Letter attached hereto as Exhibit D.
---------
ARTICLE 3
---------
BASE RENT
---------
Tenant shall pay, without notice or demand, to Landlord at a lockbox
designated by Landlord, or at such other place as Landlord may from time to time
designate in writing, in the form of a check (which is drawn upon a bank which
is located in the State of California) or currency which, at the time of
payment, is legal tender for private or public debts in the United States of
America, base rent ("Base Rent") as set forth in Section 8 of the Summary
---------
(subject to any adjustment pursuant to Section 1.2), payable in equal monthly
installments as set forth in Section 8 of the Summary in advance on or before
---------
the first day of each and every calendar month during the Lease Term, without
any setoff or deduction whatsoever except as expressly permitted herein. If any
"Rent," as that term is defined in Section 4.1, below, payment date (including
-----------
the Lease Commencement Date) falls on a day of a calendar month other than the
first day of such calendar month or if any Rent payment is for a period which is
shorter than one calendar month, the Rent for any fractional calendar month
shall accrue on a daily basis for the period from the date such payment is due
to the end of such calendar month or to the end of the Lease Term at a rate per
day which is equal to 1/365 of the Rent. All other payments or adjustments
required to be made under the terms of this Lease that require proration on a
time basis shall be prorated on the same basis.
8
<PAGE>
ARTICLE 4
---------
ADDITIONAL RENT
---------------
4.1 Additional Rent. In addition to paying the Base Rent specified in
---------------
Article 3 of this Lease, commencing on the first (1st) day of the thirteenth
- ---------
(13th) month after (i) the Lease Commencement Date (including the Must-Take
Space then leased hereunder), or (ii) the applicable Must-Take Space
Commencement Date with respect to other Must-Take Space, Tenant shall pay as
additional rent "Tenant's Share" of the annual "Project Expenses," as those
terms are defined in Sections 4.2.6 and 4.2.4 of this Lease, respectively, to
------------------------
the extent such Project Expenses are in excess of Tenant's share of Project
Expenses applicable to the "Base Year," as that term is defined in Section 4.2.1
-------------
of this Lease. Such additional rent, together with any and all other amounts
payable by Tenant to Landlord, as additional rent or otherwise, pursuant to the
terms of this Lease, shall be hereinafter collectively referred to as the
"Additional Rent." The Base Rent and Additional Rent are herein collectively
referred to as the "Rent." All amounts due under this Article 4 as Additional
---------
Rent shall be payable for the same periods and in the same manner, time and
place as the Base Rent. Without limitation on other obligations of Tenant which
shall survive the expiration of the Lease Term, the obligations of Tenant to pay
the Additional Rent provided for in this Article 4 shall survive the expiration
---------
of the Lease Term.
4.2 Definitions. As used in this Article 4, the following terms shall
----------- ---------
have the meanings hereinafter set forth:
4.2.1 "Base Year" shall mean the period set forth in Section 9.1 of
-----------
the Summary.
4.2.2 "Expense Year" shall mean each calendar year in which any
portion of the Lease Term falls, through and including the calendar year in
which the Lease Term expires.
4.2.3 "Operating Expenses" shall mean all expenses, costs and
amounts of every kind and nature which Landlord shall pay or incur during any
Expense Year because of or in connection with the ownership, management,
maintenance, repair, replacement, restoration or operation of the Project,
including, without limitation, any amounts paid or incurred for (i) the cost of
supplying all utilities, the cost of operating, maintaining, repairing,
replacing, renovating and managing the utility systems, mechanical systems,
sanitary and storm drainage systems, and escalator and elevator systems, and the
cost of supplies, tools, and equipment and maintenance and service contracts in
connection therewith; (ii) the cost of licenses, certificates, permits and
inspections and the cost of contesting the validity or applicability of any
governmental enactments which may affect Operating Expenses, and the costs
incurred in connection with the implementation and operation of a transportation
system management program or similar program; (iii) the cost of insurance
carried by Landlord in connection with the Project, in such amounts as Landlord
may reasonably determine; (iv) the cost of landscaping, relamping, and all
supplies, tools, equipment and materials used in the operation, repair and
maintenance of the Project; (v) the cost of parking area repair and maintenance,
including, but not limited to, resurfacing, repainting, restriping, and
cleaning; (vi) fees, charges and other costs, including management fees (or
amounts in lieu thereof), consulting fees, legal fees and accounting fees, of
all persons engaged by Landlord or otherwise reasonably incurred by Landlord in
connection with the management, operation, maintenance and repair of the
Project; (vii) any equipment rental agreements or management agreements
(including the cost of any management fee and the fair rental value of any
office space provided thereunder); (viii) wages, salaries and other compensation
and benefits of all persons engaged in the operation, maintenance or security of
the Project, and employer's Social Security taxes, unemployment taxes or
insurance, and any other taxes which may be levied on such wages, salaries,
compensation and benefits; provided, that if any employees of Landlord provide
services for more than one building of Landlord, then a prorated portion of such
employees' wages, benefits and taxes shall be included in Operating Expenses
based on the portion of their working time devoted to the Project; (ix)
9
<PAGE>
payments under any easement, license, operating agreement, declaration,
restrictive covenant, or instrument pertaining to the sharing of costs by the
Project; (x) amortization (including interest on the unamortized cost at a rate
equal to the floating commercial loan rate announced from time to time by Bank
of America, a national banking association, as its prime rate, plus 2% per annum
[the "Interest Rate"]) of the cost of acquiring or the rental expense of
personal property used in the maintenance, operation and repair of the Project;
and (xi) the cost of capital improvements incurred in connection with the
Project (A) which relate to the operation, repair, maintenance and replacement
of all systems, equipment or facilities which serve the Project in the whole or
in part, (B) which are intended as a labor-saving device or to effect other
economies in the operation or maintenance of the Project, or any portion
thereof, or (C) that are required under any governmental law or regulation;
provided however, Operating Expenses shall not include such costs for compliance
with the Americans with Disabilities Act of 1990 (the "ADA"), except to the
extent of modifications or amendments to the ADA or regulations promulgated
thereunder hereinafter enacted or adopted, as the case may be, and further
provided that Operating Expenses shall not include costs of compliance with the
ADA to the extent such costs are incurred by the specific unconventional, unique
or exceptional use of another tenant of the Building; provided further, however,
that each such permitted capital expenditure shall be amortized (including
interest on the unamortized cost) over its useful life as determined in
accordance with generally accepted accounting principles consistently applied.
If the Project is not fully occupied during all or a portion of any Expense
Year, Landlord shall make an appropriate adjustment to the variable components
of Operating Expenses for such Expense Year as reasonably determined by Landlord
employing sound real estate management principles, to determine the amount of
Operating Expenses that would have been paid had the Project been ninety-five
percent (95%) occupied, and the amount so determined shall be deemed to have
been the amount of Operating Expenses for such Expense Year. Notwithstanding the
foregoing, for purposes of this Lease, Operating Expenses shall not, however,
include (A) except as otherwise set forth above in this Section 4.2,
-----------
depreciation, interest and amortization on mortgages, or ground lease payments,
if any; (B) legal fees incurred in negotiating and enforcing tenant leases; (C)
real estate brokers' leasing commissions; (D) initial improvements or
alterations to tenant spaces; (E) the cost of providing any service directly to
and paid directly by any tenant; (F) any costs expressly excluded from Operating
Expenses elsewhere in this Lease; and (G) costs of any items to the extent
Landlord receives reimbursement from insurance proceeds (such proceeds to be
excluded from Operating Expenses in the year in which received, except that any
deductible amount under any insurance policy shall be included within Operating
Expenses) or from a third party. Except as specifically permitted within the
definition of "Operating Expenses" set forth above, Operating Expenses shall
also exclude the following: (i) any ground lease rental; (ii) costs incurred by
-------
Landlord with respect to goods and services (including utilities sold and
supplied to tenants and occupants of the Building) to the extent that Landlord
is entitled to reimbursement for such costs other than through the operating
costs pass-through provisions of such tenant leases; (iii) costs incurred by
Landlord for repairs, replacements and/or restoration to or of the Building or
the common areas thereof to the extent that Landlord is reimbursed by insurance
or condemnation proceeds or by tenants, warrantors or other third persons (other
than through operating cost pass throughs); (iv) costs, including costs of
plans, construction, permit, license and inspection costs, incurred with respect
to the installation of tenant improvements made for other tenants in the
Building or incurred in renovating or otherwise improving, decorating, painting
or redecorating vacant space for tenants or other occupants of the Building; (v)
attorneys' fees and other costs and expenses incurred in connection with
negotiations or disputes with present or prospective tenants or other occupants
of the Building; (vi) except to the extent otherwise expressly set forth above
in this Section 4.2, costs of a capital nature, including, without limitation,
-----------
capital improvements, capital replacements, capital repairs, capital equipment
and capital tools, all as determined in accordance with generally accepted
accounting principles, consistently applied; provided, however, that the
following costs only (amortized over the useful life of the improvement together
with interest at the lower of Landlord's then current cost of unsecured
financing or the maximum rate allowed by law on the unamortized balance) of the
following capital improvements, repairs, replacements, equipment and tools shall
be included in the definition of operating costs: (a) capital improvements,
repairs, replacements, equipment and tools made to comply with any law or
10
<PAGE>
governmental regulation, where such governmental requirement did not apply prior
to April 1, 1998; (b) capital improvements, repairs, replacements, equipment and
tools which reduce operating costs, where the cost of such capital improvement,
repair, replacement, equipment or tools is less than the amount of operating
costs reasonably anticipated to be saved over the anticipated useful life of the
item; and (c) any other capital improvements, repairs, replacements, equipment
and tools not to exceed Ten Thousand Dollars ($10,000.00) in any calendar year;
(vii) brokerage commissions, tenant incentives, finders' fees, attorney's fees,
advertising expenses, entertainment and travel expenses and other costs incurred
by Landlord in leasing or attempting to lease space in the Building; (viii)
interest on debt or amortization on any mortgage or mortgages encumbering the
Building or the common areas thereof; (ix) Landlord's general corporate
overhead; (x) subject to the same three (3) exceptions set forth in clause
"(vi)" above, rental payments incurred in leasing air conditioning systems,
elevators or other equipment ordinarily considered to be of a capital nature,
except operating/maintenance equipment not affixed to the Building or common
areas which is used in providing janitorial or similar services; (xi) costs of
installing the initial landscaping and the initial sculpture, paintings and
objects of art for the Building and common areas thereof; (xii) advertising and
promotional expenditures; (xiii) costs incurred in connection with the operation
of the parking facilities (other than insurance and taxes); (xiv) taxes and
assessments attributable to the tenant improvements or property of other tenants
of the Building to the extent such improvements are assessed at or above a level
for which Tenant would be individually responsible under the Lease; (xv) costs
incurred to correct any defect in the original construction of the Building or
common areas thereof; (xvi) repairs, alterations, additions, improvements or
replacements made to rectify or correct any latent defect in the design,
materials or workmanship of the Building or common areas; (xvii) repairs or
replacements covered by warranties or guaranties to the extent of service or
payment thereunder; (xviii) repairs or replacements to the common areas for
which Tenant is obligated to pay directly under this Lease, or for which other
tenants are obligated to pay directly, to the extent of receipt of such
payments; (xix) damage and repairs of a capital nature to the common areas
attributable to condemnation, fire or other casualty, and damage and repairs of
a non-capital nature to the common areas attributable to condemnation, fire or
other casualty, in each case to the extent of awards or insurance proceeds
received by Landlord; (xx) damage and repairs necessitated by the gross
negligence or willful misconduct of Landlord, Landlord's employees, contractors
or agents and to the extent Landlord can identify such persons and collect the
costs of any such damages or repair therefrom (with Landlord using Landlord's
commercially reasonable efforts to do so), other tenants and their employees,
contractors or agents; (xxi) executive salaries or salaries of service personnel
(including the Building superintendent) to the extent that such service-
personnel perform services other than in connection with the management,
operation, repair or maintenance of the Building or common areas; (xxii)
accountants' fees and other expenses associated with the enforcement of any
leases or defense of Landlord's title to or interest in the Building or any part
thereof; (xxiii) costs incurred with respect to the repair and maintenance of
the Common Area due to (1) violation by Landlord of the terms and conditions of
any provision of the Lease or any other lease in the Building; (2) violation by
any other tenant in the Building of the terms and conditions of any lease of
space in the Building to the extent of recovery of such costs from such
violating parties or from third parties; or (3) violation by Landlord of any
governmental rule or authority; (xxiv) services, installations, or benefits
furnished to some tenants which are not furnished to Tenant or quantities of
such services furnished to some tenants which are also furnished to Tenant but
are furnished to other tenants in an amount materially in excess of that which
would represent a fair proportion of such services; (xxv) compensation and
related costs of Landlord's employees above the level of Project manager; (xxvi)
that portion of the costs of goods or services supplied to the Project by
Landlord or an affiliate of Landlord in excess of the cost of such goods or
services if supplied by other vendors in the Newport Center area of Newport
Beach, California; (xxvii) the cost of abating any Hazardous Materials at or on
the Project as of the Lease Commencement Date or thereafter on the Project
except to the extent Landlord is unable, after using Landlord's commercially
reasonable efforts to do so, to identify the person(s) or entity(ies)
responsible for any such Hazardous Materials being on the Project and to collect
the cost of removal therefrom; and (xxviii) any amount or fee allocated as a
management fee for the Project in excess of the actual management fee paid by
Landlord for the management of the
11
<PAGE>
Project. In no event shall any portion of any expense be included as an
Operating Expense if recovered from Tenant or any other tenant of the Project
under any provision of such tenant's lease other than that pertaining to
recovery of Operating Expenses. Landlord shall not collect in excess of one
hundred percent (100%) of all Operating Expenses from the tenants of the
Building. If Landlord does not carry earthquake or any other insurance during
the Base Year (calendar year 1998) but carries earthquake or such other
insurance during any subsequent calendar year, then for purposes of calculating
Operating Expenses payable by Tenant during such subsequent calendar year,
Operating Expenses for the Base Year shall be deemed to be increased by the
amount which Landlord would have incurred had Landlord carried such insurance
during such Base Year.
4.2.4 "Project Expenses" shall mean "Operating Expenses" and "Tax
Expenses."
4.2.5 "Tax Expenses" shall mean all federal, state, county, or local
governmental or municipal taxes, fees, charges or other impositions of every
kind and nature, whether general, special, ordinary or extraordinary
(including, without limitation, real estate taxes, general and special
assessments, transit taxes, leasehold taxes or taxes based upon the receipt of
rent, including gross receipts or sales taxes applicable to the receipt of rent,
unless required to be paid by Tenant, personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances,
furniture and other personal property used in connection with the Project),
which Landlord shall pay or incur during any Expense Year (without regard to any
different fiscal year used by such governmental or municipal authority) because
of or in connection with the ownership, leasing and operation of the Project.
For purposes of this Lease, Tax Expenses shall be calculated as if the tenant
improvements in the Project were fully constructed and the Project, and all
tenant improvements in the Project were fully assessed for real estate tax
purposes, and accordingly, during the portion of any Expense Year occurring
during the Base Year, Tax Expenses shall be deemed to be increased
appropriately. Tax Expenses which are levied on a fiscal year basis shall be
deemed to apply one-twelfth (1/12th) to each calendar month in such fiscal year.
4.2.5.1 Tax Expenses shall include, without limitation:
(i) Any assessment, tax, fee, levy or charge in
addition to, or in substitution, partially or totally, of any assessment, tax,
fee, levy or charge previously included within the definition of real property
tax, it being acknowledged by Tenant and Landlord that Proposition 13 was
adopted by the voters of the State of California in the June 1978 election
("Proposition 13") and that assessments, taxes, fees, levies and charges may be
imposed by governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, conservation, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants, and, in further recognition of the decrease in the level and quality
of governmental services and amenities as a result of Proposition 13, Taxes
shall also include any governmental or private assessments or the Project's
contribution towards a governmental or private cost-sharing agreement for the
purpose of augmenting or improving the quality of services and amenities
normally provided by governmental agencies. It is the intention of Tenant and
Landlord that all such new and increased assessments, taxes, fees, levies, and
charges and all similar assessments, taxes, fees, levies and charges be included
within the definition of Tax Expenses for purposes of this Lease;
(ii) Any assessment, tax, fee, levy, or charge
allocable to or measured by the area of the Premises or the Rent payable
hereunder, including, without limitation, any gross income tax with respect to
the receipt of such rent, or upon or with respect to the possession, leasing,
operating, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof;
12
<PAGE>
(iii) Any assessment, tax, fee, levy or charge, upon
this transaction or any document to which Tenant is a party, creating or
transferring an interest or an estate in the Premises; and
(iv) Any possessory taxes charged or levied in lieu
of real estate taxes.
4.2.5.2 Any reasonable expenses incurred by Landlord in
attempting to protest, reduce or minimize Tax Expenses shall be included in Tax
Expenses in the Expense Year such expenses are paid. Tax refunds shall be
deducted from Tax Expenses in the Expense Year they are received by Landlord.
The amount of Tax Expenses for the Base Year attributable to the valuation of
the Real Property, inclusive of tenant improvements, shall be known as "Base
Taxes." If, in any comparison year subsequent to the Base Year, the amount of
Base Taxes decreases, then for purposes of all subsequent comparison years,
including the comparison year in which such decrease in Tax Expenses occurred,
the Base Year shall be decreased by an amount equal to the decrease in Tax
Expenses.
4.2.5.3 Notwithstanding anything to the contrary contained in
this Section 4.2.5 (except as set forth in Section 4.2.5.1 and levied in whole
------------- ---------------
or part in lieu of Tax Expenses), there shall be excluded from Tax Expenses (i)
all excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's general or net income (as
opposed to rents, receipts or income attributable to operations at the Project),
(ii) any items included as Operating Expenses, and (iii) any items paid by
Tenant under Section 4.6 of this Lease.
-----------
4.2.6 "Tenant's Share" shall mean the percentage set forth in
Section 9.2 of the Summary. Tenant's Share was calculated by multiplying the
- -----------
number of rentable square feet of the Premises by 100 and dividing the product
by the total rentable square feet in the Project. In the event either the
Premises and/or the Project is expanded or reduced, Tenant's Share shall be
appropriately adjusted, and, as to the Expense Year in which such change occurs,
Tenant's Share for such year shall be determined on the basis of the number of
days during such Expense Year that each such Tenant's Share was in effect.
4.3 Allocation of Project Expenses to Tenants of the Project. Landlord
--------------------------------------------------------
shall have the right, from time to time, to equitably allocate some or all of
the Operating Costs and Taxes for the Project among different portions or
occupants of the Project (the "Cost Pools"), in Landlord's reasonable
discretion. Such Cost Pools may include, but shall not be limited to, the
office space tenants of a building of the Project or of the Project, and the
retail space tenants of a building of the Project or of the Project. The
Operating Costs and Taxes within each such Cost Pool shall be allocated and
charged to the tenants within such Cost Pool in the manner provided in Section
4.2.6.
4.4 Calculation and Payment of Additional Rent.
------------------------------------------
4.4.1 Calculation of Excess. Subject to the first sentence of
---------------------
Section 4.1, if for any Expense Year ending or commencing within the Lease Term,
Tenant's Share of Project Expenses for such Expense Year exceeds Tenant's Share
of the amount of Project Expenses applicable to the Base Year, then Tenant shall
pay to Landlord, in the manner set forth in Section 4.4.2, below, and as
-------------
Additional Rent, an amount equal to the excess (the "Excess"). Any Excess for a
partial Expense Year during the Lease Term shall be prorated at a per diem rate
based on the actual number of days of the Lease Term occurring within such
Expense Year.
4.4.2 Statement of Actual Project Expenses and Payment by Tenant.
----------------------------------------------------------
Landlord shall deliver to Tenant, on or before the first day of May following
the end of each Expense Year or as
13
<PAGE>
soon thereafter as reasonably practicable, a statement (the "Statement") which
shall state the Project Expenses incurred or accrued for such preceding Expense
Year and the amount thereof allocated to the tenants of the Building, and which
shall indicate the amount, if any, of any Excess. Upon receipt of the Statement
for each Expense Year ending during the Lease Term, if an Excess is present,
Tenant shall pay, with its next installment of Base Rent due, the full amount of
the Excess for such Expense Year, less the amounts, if any, paid during such
Expense Year as "Estimated Excess," as that term is defined in Section 4.4.4
-------------
below. The failure of Landlord to timely furnish the Statement for any Expense
Year shall not prejudice Landlord from enforcing its rights under this Article
4; provided however, that Tenant shall not be responsible for any Excess not
billed to Tenant within two (2) years after the end of the applicable Expense
Year. Even though the Lease Term has expired and Tenant has vacated the
Premises, when the final determination is made of Tenant's Share of the Project
Expenses allocated to the tenants of the Building for the Expense Year in which
this Lease terminates, if an Excess is present, Tenant shall immediately pay to
Landlord an amount as calculated pursuant to the provisions of Section 4.4.1 of
-------------
this Lease. The provisions of this Section 4.4.2 shall survive the
-------------
expiration or earlier termination of the Lease Term.
4.4.3 Statement of Estimated Project Expenses. In addition,
---------------------------------------
Landlord shall give Tenant a yearly expense estimate statement (the "Estimate
Statement") which shall set forth Landlord's reasonable estimate (the
"Estimate") of what the total amount of Project Expenses for the then-current
Expense Year shall be and the estimated Excess (the "Estimated Excess") as
calculated by comparing Tenant's share of Project Expenses allocated to the
tenants of the Building, which shall be based upon the Estimate, to Tenant's
share of Project Expenses applicable to the Base Year, which Estimate Statement
may be revised and reissued by Landlord not more frequently than once during any
Expense Year. The failure of Landlord to timely furnish the Estimate Statement
for any Expense Year shall not preclude Landlord from enforcing its rights to
collect any Estimated Excess under this Article 4. If pursuant to the Estimate
---------
Statement (or a revision thereof) an Estimated Excess is calculated for the
then-current Expense Year, Tenant shall pay, with its next installment of Base
Rent due, a fraction of the Estimated Excess (or the increase in the Estimated
Excess if pursuant to a revised Estimated Statement) for the then-current
Expense Year (reduced by any amounts paid pursuant to the last sentence of this
Section 4.4.3). Such fraction shall have as its numerator the number of months
- -------------
which have elapsed in such current Expense Year to the month of such payment,
both months inclusive, and shall have twelve (12) as its denominator. Until a
new Estimate Statement is furnished, Tenant shall pay monthly, with the monthly
Base Rent installments, an amount equal to one-twelfth (1/12) of the total
Estimated Excess set forth in the previous Estimate Statement delivered by
Landlord to Tenant.
4.5 Allocation of Project Expenses. Notwithstanding anything to the
------------------------------
contrary set forth in this Article 4, when calculating the Project Expenses for
---------
the Base Year, such Project Expenses shall not include any increase in Tax
Expenses attributable to special assessments, charges, costs, or fees, or due to
modifications or changes in governmental laws or regulations, including but not
limited to the institution of a split tax roll, and Operating Expenses shall
exclude market-wide labor-rate increases due to extraordinary circumstances,
including, but not limited to, boycotts and strikes, and utility rate increases
due to extraordinary circumstances including, but not limited to, conservation
surcharges, boycotts, embargoes or other shortages and amortized costs relating
to capital improvements.
4.6 Taxes and Other Charges for Which Tenant Is Directly Responsible.
----------------------------------------------------------------
Tenant shall reimburse Landlord, as Additional Rent, within thirty (30) days
after Tenant's receipt of Landlord's invoice therefor for any and all taxes
required to be paid by Landlord (except to the extent included in Tax Expenses
by Landlord), excluding state, local and federal personal or corporate income
taxes measured by the net income of Landlord from all sources and estate and
inheritance taxes, whether or not now customary or within the contemplation of
the parties hereto, when:
14
<PAGE>
4.6.1 Said taxes are measured by or reasonably attributable to the
cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises;
4.6.2 Said taxes are assessed upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises, any portion of the Project or the
parking facility used by Tenant in connection with this Lease; or
4.6.3 Said taxes are assessed upon this transaction or any document
to which Tenant is a party creating or transferring an interest or an estate in
the Premises.
4.7 Landlord's Books and Records. Within one hundred twenty (120) days
----------------------------
after receipt of a Statement by Tenant, if Tenant disputes the amount of
Additional Rent set forth in the Statement, Tenant shall have the right to have
an audit conducted of Landlord's books and records relating to Project Expenses
by an independent certified public accountant (which accountant is a member of
a nationally or regionally recognized accounting firm), or consultant with at
least five (5) years experience examining Project Expenses working on a non-
contingent fee basis, in each case mutually agreed upon by Landlord and Tenant;
provided however, Tenant shall pay any such disputed amount pending completion
of such audit. Notwithstanding anything to the contrary set forth herein, the
audit with respect to Project Expenses for the first three (3) Expense Years
during the Lease Term may be deferred until the date one hundred twenty (120)
days after Tenant receives the Statement for the third Expense Year occurring
during the Lease Term. The amounts payable under this Lease by Landlord to
Tenant or Tenant to Landlord, as the case may be, shall be appropriately
adjusted on the basis of such audit. If such audit discloses a liability for
further refund by Landlord to Tenant in excess of five percent (5%) of the
Operating Expenses previously made by Tenant for such calendar year, the cost of
such audit shall be borne by Landlord; otherwise the cost of such audit shall be
borne by Tenant. If Tenant shall not request an audit in accordance with the
provisions of this Section 4.7 within the time permitted herein, such Statement
-----------
shall be conclusively binding upon Landlord and Tenant.
4.8 Ownership of Building. Anything contained in the Lease to the
---------------------
contrary notwithstanding, Tenant acknowledges and agrees that for so long as the
Building is owned by the state or any local public entity or government,
including without limitation a state public retirement system, the Lease and
Tenant's interest hereunder may constitute a possessory interest subject to
property taxation and as a result Tenant may be subject to the payment of
property taxes levied on that interest. In addition, for so long as the
Building is owned by a state public retirement system, the full cash value, as
defined in Sections 110 and 110.1 of the California Revenue and Taxation Code,
of the possessory interest upon which property taxes will be based will equal
the greater of (A) the full cash value of the possessory interest, or (B) if
Tenant has leased less than all of the building, Tenant's Share of the full
cash value of the Building that would have been enrolled if the Building had
been subject to property tax upon acquisition by the state public retirement
system. Tenant's Share will be the number of rentable square feet of Tenant's
Premises divided by the total number of rentable square feet of the Building.
ARTICLE 5
---------
USE OF PREMISES
---------------
5.1 General Provisions. Tenant shall use the Premises solely for
------------------
investment counseling, investment supervision and any other general office
purposes, consistent with the character of the Project as a first-class office
building project, and Tenant shall not use or permit the Premises to be used for
any other purpose or purposes whatsoever without the prior written consent of
Landlord, which may be withheld in Landlord's reasonable discretion; provided,
however, that if the current fitness center in the
15
<PAGE>
Building becomes a part of the Premises, Tenant may continue to use such space
as a fitness center. Tenant further covenants and agrees that it shall not use,
or suffer or permit any person or persons to use, the Premises or any part
thereof for any use or purpose contrary to the Rules and Regulations, or in
violation of the laws of the United States of America, the State of California,
or the ordinances, regulations or requirements of the local municipal or county
governing body or other lawful authorities having jurisdiction over the Project.
Tenant shall faithfully observe and comply with the Rules and Regulations.
Landlord shall not be responsible to Tenant for the nonperformance of any of
such Rules and Regulations by or otherwise with respect to the acts or omissions
of any other tenants or occupants of the Project, but shall use reasonable
efforts to apply such Rules and Regulations in a non-discriminatory manner
against all Project tenants. Tenant shall comply with all recorded covenants,
conditions, and restrictions now or hereafter affecting the Project.
5.2 Other Terms.
-----------
5.2.1 Prohibition. Except for reasonable quantities of products
-----------
customarily used in an office environment in accordance with the manufacturer's
instructions and with reasonable care, Tenant shall not cause or permit any
"Hazardous Material" as that term is defined below, to be generated, produced,
brought upon, used, stored, treated, discharged, released, spilled or disposed
of on, in, under or about the Project by Tenant, its affiliates, agents,
employees, contractors, sublessees or assignees. Tenant shall indemnify,
defend, protect, and hold Landlord harmless from and against any and all actions
(including, without limitation, remedial or enforcement actions of any kind,
administrative or judicial proceedings, and orders or judgments arising out of
or resulting therefrom), costs, claims, damages (including, without limitation,
punitive damages), expenses (including, without limitation, reasonable
attorneys', consultants' and experts' fees, court costs and amounts paid in
settlement of any claims or actions), fines, forfeitures or other civil,
administrative or criminal penalties, injunctive or other relief (whether or not
based upon personal injury, property damage, or contamination of, or adverse
effects upon, the environment, water tables or natural resources), liabilities
or losses arising from a breach of the foregoing prohibition by Tenant, its
affiliates, agents, employees, contractors, sublessees or assignees. In the
event that Hazardous Materials are discovered upon, in, or under the Project,
and any governmental agency or entity having jurisdiction over the Project
requires the removal of such Hazardous Material, Tenant shall be responsible for
removing those Hazardous Materials arising out of or related to the use or
occupancy of the Project by Tenant or its affiliates, agents, employees,
contractors, sublessees or assignees. Landlord shall indemnify, defend,
protect, and hold Tenant harmless from and against any and all actions
(including, without limitation, remedial or enforcement actions of any kind,
administrative or judicial proceedings, and orders or judgments arising out of
or resulting therefrom), costs, claims, damages (including, without limitation,
punitive damages), expenses (including, without limitation, reasonable
attorneys', consultants' and experts' fees, court costs and amounts paid in
settlement of any claims or actions), fines, forfeitures or other civil,
administrative or criminal penalties, injunctive or other relief (whether or not
based upon personal injury, property damage, or contamination of, or adverse
effects upon, the environment, water tables or natural resources), liabilities
or losses arising from any Hazardous Materials being located on, in, under or
about the Project in excess of levels permitted by applicable law by Landlord or
Landlord's agents, employees or contractors and except as may be disclosed in
that certain Phase I Environmental Site Assessment prepared by Hillman
Environmental Company, dated October, 1991, with respect to the Project, a copy
of which has been delivered to and reviewed by Tenant. Landlord represents and
warrants to Tenant that to Landlord's knowledge the Premises, including the
Must-Take Space, does not contain any asbestos containing materials ("ACM's")
and any ACM's located on the Premises as of the Lease Commencement Date (or the
applicable Must-Take Space Commencement Date with respect to Must-Take Space)
shall be removed at Landlord's sole expense.
5.2.2 Notice Requirements. Notwithstanding the foregoing, Tenant
-------------------
shall not take any remedial action in or about the Premises, the Building or the
Project without first notifying Landlord
16
<PAGE>
of Tenant's intention to do so and affording Landlord the opportunity to protect
Landlord's interest with respect thereto. Tenant immediately shall notify
Landlord in writing of: (i) any spill, release, discharge or disposal of any
Hazardous Material in, on or under the Premises, the Building, the Project or
any portion thereof caused by or otherwise known to Tenant; (ii) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, contemplated, or threatened (if Tenant has notice thereof) pursuant
to any Hazardous Materials laws; (iii) any claim made or threatened by any
person against Tenant, the Premises, the Building or the Project relating to
damage, contribution, cost recovery, compensation, loss or injury resulting from
or claimed to result from any Hazardous Materials and known to Tenant; and (iv)
any reports made to any governmental agency or entity arising out of or in
connection with any Hazardous Materials in, or, under or about or removed from
the Premises, the Building or the Project, including any complaints, notices,
warnings, reports or asserted violations in connection therewith, which reports
are made by or known to Tenant. Tenant also shall supply to Landlord as promptly
as possible, and in any event within five (5) business days after Tenant first
receives or sends the same, copies of all claims, reports, complaints, notices,
warnings or asserted violations relating in any way to Hazardous Materials in or
about the Premises or Project. The respective rights and obligations of Tenant
and Landlord under this Article 5 shall survive the expiration or earlier
---------
termination of this Lease.
5.2.3 Definitions. As used in this Lease, the term "Hazardous
-----------
Material" means any flammable items, explosives, radioactive materials,
hazardous or toxic substances, material or waste or related materials, including
any substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "infectious wastes," "hazardous materials" or
"toxic substances" now or subsequently regulated under any federal, state or
local laws, regulations or ordinances and including any different products and
materials which are subsequently found to have adverse effects on the
environment or the health and safety of persons.
ARTICLE 6
---------
SERVICES AND UTILITIES
----------------------
6.1 Standard Tenant Services. Landlord shall provide the following
------------------------
services on all days during the Lease Term, unless otherwise stated below.
6.1.1 Subject to all governmental rules, regulations and guidelines
applicable thereto, Landlord shall provide heating and air conditioning in the
Premises, from Monday through Friday, during the period from 7:00 a.m. to 6:00
p.m. and Saturday from 8:00 a.m. to 1:00 p.m., except for the date of
observation of New Year's Day, Independence Day, Labor Day, Memorial Day,
Thanksgiving Day, Christmas Day and not more than two (2) other locally or
nationally recognized holidays as to which Tenant receives prior written notice
(collectively, the "Holidays") in accordance with the standards set forth on
Exhibit "H".
- -----------
6.1.2 Landlord shall provide heating, ventilating and air
conditioning ("HVAC") in accordance with the standards referenced in Section
-------
6.1.1, and electrical wiring, facilities and power for normal general office use
- -----
as determined by Landlord in substantially the same manner and capacities as
Landlord has heretofore provided such items to Tenant under the Original Lease.
Electrical service shall be available twenty-four (24) hours per day, every day
of the year, subject to the provisions of this Lease. Tenant shall bear the
cost of replacement of non-Building standard lamps, starters and ballasts for
lighting fixtures within the Premises. Landlord shall provide from Monday
through Friday, during the period from 7:00 a.m. to 6:00 p.m. and Saturday from
8:00 a.m. to 1:00 p.m., except on the Holidays, an average of six (6) watts of
electricity connected load per rentable square foot of the Building for HVAC,
lighting, and receptacle/convenience use, including without limitation: use for
all fluorescent,
17
<PAGE>
incandescent, task, task ambient and other lighting systems; office equipment
such as duplicating (reproduction) machines, computers, terminals, mini
computers, telecommunication/ audiovisual equipment; vending machines; and
kitchen equipment. Tenant, at Tenant's sole expense, shall be responsible for
all costs of adding additional Base Building electrical capacity (including
without limitation subpanels, risers and transformers), to service Tenant's
electrical requirements in excess of the foregoing six (6) watts per rentable
square foot standard.
6.1.3 Landlord shall at all times provide city water from the
regular Building outlets for drinking, lavatory and toilet purposes.
6.1.4 Landlord shall provide janitorial services in accordance with
the specifications set forth on Exhibit F attached hereto Monday through
---------
Thursday and Sunday, except the date of observation of the Holidays, in and
about the Premises.
6.1.5 Landlord shall provide nonexclusive automatic elevator service
at all times.
6.2 Overstandard Tenant Use. Tenant shall not, without Landlord's prior
-----------------------
written consent, generate heating loads, consume power or increase the water
normally furnished for the Premises by Landlord pursuant to the terms of Section
-------
6.1 of this Lease. If such consent is given or if TenantOs equipment requires
- ---
twenty-four (24) hour per day heating or air conditioning, Landlord shall have
the right to require Tenant to install supplementary air conditioning units or
other facilities in the Premises, including supplementary or additional metering
devices, and the actual cost thereof, without markup including the cost of
installation, operation and maintenance, increased wear and tear on existing
equipment and other similar charges, shall be paid by Tenant to Landlord upon
billing by Landlord. If Tenant uses water or electricity in excess of that
supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall pay to
-----------
Landlord, upon billing, the actual cost of such excess consumption, and the cost
of the installation, operation, and maintenance of equipment which is installed
in order to supply such excess consumption; and Landlord may install devices to
separately meter any increased use and in such event Tenant shall pay the actual
increased cost without markup directly to Landlord, on demand, including the
cost of such additional metering devices. If Tenant desires to use heat,
ventilation or air conditioning during hours other than those for which Landlord
is obligated to supply such utilities pursuant to the terms of Section 6.1 of
-----------
this Lease, Tenant shall give Landlord such prior notice, as Landlord shall from
time to time establish as appropriate, of Tenant's desired use and Landlord
shall supply such utilities to Tenant at such hourly cost to Tenant as Landlord
shall from time to time establish. As of the date hereof, the hourly cost for
excess HVAC usage is $38.00 per floor per hour, with a two hour minimum and such
excess HVAC service can be activated by Tenant without notice to Landlord by use
of Tenant's HVAC activation system. Amounts payable by Tenant to Landlord for
such use of additional utilities shall be deemed Additional Rent hereunder and
shall be billed on a monthly basis.
6.3 Interruption of Use. Tenant agrees that Landlord shall not be liable
-------------------
for damages, for failure to furnish or delay in furnishing any service
(including telephone and telecommunication services), or for any diminution in
the quality or quantity thereof, when such failure or delay or diminution is
occasioned, in whole or in part, by repairs, replacements, or improvements, by
any strike, lockout or other labor trouble, by inability to secure electricity,
gas, water, or other fuel at the Building or Project after reasonable effort to
do so, by any accident or casualty whatsoever, by act or default of Tenant or
other parties, or by any other cause beyond Landlord's reasonable control.
Notwithstanding the foregoing, Landlord agrees to use Landlord's commercially
reasonable efforts to minimize any such service disruption as soon as is
reasonably practicable except to the extent caused by Tenant or Tenant's agents,
employees, contractors or invitees. To the extent any such failure, delay or
diminution is caused by Landlord or Landlord's agents, employees or contractors
and such disruption continues in excess of one (1) business day, then there
shall thereafter be an equitable abatement of rent so long as such disruption
continues. Furthermore, Landlord shall not be liable under any circumstances
for a loss of, or
18
<PAGE>
injury to, property or for injury to, or interference with, Tenant's business,
including, without limitation, loss of profits, however occurring, through or in
connection with or incidental to a failure to furnish any of the services or
utilities as set forth in this Article 6. Landlord may comply with voluntary
---------
controls or guidelines promulgated by any governmental entity relating to the
use or conservation of energy, water, gas, light or electricity or the reduction
of automobile or other emissions without creating any liability of Landlord to
Tenant under this Lease, provided that the Premises are not thereby rendered
untenantable.
ARTICLE 7
---------
REPAIRS
-------
Tenant shall, at Tenant's own expense, pursuant to the terms of this Lease,
including without limitation Article 8 hereof, keep the Premises, including all
---------
improvements, fixtures and furnishings therein, in good order, repair and
condition at all times during the Lease Term. In addition, Tenant shall, at
Tenant's own expense but under the supervision and subject to the prior approval
of Landlord, and within any reasonable period of time specified by Landlord,
pursuant to the terms of this Lease, including without limitation Article 8
---------
hereof, promptly and adequately repair all damage to the Premises and replace or
repair all damaged or broken fixtures and appurtenances; provided however, if
Tenant fails to make such repairs within ten (10) days after Landlord's demand
therefor (or such lesser period of time as may be appropriate in the event of an
emergency), Landlord may, but need not, make such repairs and replacements, and
Tenant shall pay Landlord the cost thereof, including three percent (3%) of the
cost thereof to reimburse Landlord for overhead, general conditions, fees and
other costs or expenses arising from Landlord's involvement with such repairs
and replacements forthwith upon being billed for same. Landlord may, but shall
not be required to, enter the Premises at all reasonable times to make such
repairs, alterations, improvements and additions to the Premises or to the
Project or to any equipment located in the Project as Landlord shall desire or
deem necessary or as Landlord may be required to do by governmental or quasi-
governmental authority or court order or decree; provided however, Landlord
agrees to use Landlord's commercially reasonable efforts to do the foregoing in
a manner which minimizes interference with Tenant's business and with reasonable
prior notice to Tenant (which may be telephonic notice to Tenant's facilities
manager) and to schedule disruptive work after Tenant's business hours or at
other times scheduled in cooperation with Tenant. Landlord agrees to maintain
the base, shell and core of the Building in good condition and repair consistent
with a first class office building. If Landlord fails to do so, Tenant may
exercise Tenant's rights pursuant to Section 19.6 hereof. Except as expressly
------------
provided in this Lease, Tenant hereby waives and releases its right to make
repairs at Landlord's expense under Sections 1941 and 1942 of the California
Civil Code or under any similar law, statute, or ordinance now or hereafter in
effect.
ARTICLE 8
---------
ADDITIONS AND ALTERATIONS
-------------------------
8.1 Landlord's Consent to Alterations. Tenant may not make any
---------------------------------
improvements, alterations, additions or changes to the Premises (collectively,
the "Alterations") without first procuring the prior written consent of Landlord
to such Alterations, which consent shall be requested by Tenant not less than
thirty (30) days prior to the commencement thereof, and which consent shall not
be unreasonably withheld, delayed or conditioned by Landlord; provided that
Landlord shall not be required to consent to any Alterations which cause
Hazardous Material to be incorporated into or brought into the Project or
Premises. Landlord's consent shall not be required in connection with Tenant's
recarpeting or repainting the interior of the Premises or relocation of modular
furniture and modular offices; however, Tenant shall give Landlord at least ten
(10) days' prior written notice of any
19
<PAGE>
such repainting or recarpeting. The construction of the initial improvements to
the Premises shall be governed by the terms of the Tenant Work Letter, attached
hereto as Exhibit D, and not the terms of this Article 8.
--------- ---------
8.2 Manner of Construction. Landlord may impose, as a condition of its
----------------------
consent to all Alterations or repairs of the Premises or about the Premises
which require Landlord's approval, such reasonable requirements as Landlord in
its reasonable discretion may deem desirable, including, but not limited to, the
requirement that upon Landlord's request, Tenant shall, at Tenant's expense,
remove upon the expiration or any early termination of the Lease Term such
Alterations as are in Landlord's reasonable opinion not likely to be used by
subsequent tenants, such as, but not limited to, theatre space or exceptionally
large or unusually shaped seminar or conference rooms, and/or the requirement
that Tenant utilize for such purposes only contractors, materials, mechanics and
materialmen reasonably approved by Landlord. Upon request of Tenant made at the
time Tenant requests Landlord's approval of such Alterations, Landlord will
notify Tenant whether Landlord will require removal of such Alterations upon the
expiration or any early termination of the Lease Term. Tenant shall construct
such Alterations and perform such repairs in conformance with any and all
applicable rules and regulations of any federal, state, county or municipal code
or ordinance and pursuant to a valid building permit, issued by the City of
Newport Beach, in conformance with Landlord's reasonable construction rules and
regulations, a copy of which construction rules and regulations in effect as of
the date hereof have been delivered to Tenant. All work with respect to any
Alterations must be done in a good and workmanlike manner and diligently
prosecuted to completion to the end that the Premises shall at all times be a
complete unit except during the period of work. In performing the work of any
such Alterations, Tenant shall have the work performed in such manner as not to
obstruct access to the Project, Building or Common Areas or any portion thereof,
by any other tenant of the Project, and as not to obstruct the business of
Landlord, other tenants in the Project, or interfere with the labor force
working in the Project. Upon completion of any Alterations, Tenant agrees to
notify Landlord so Landlord can cause a timely Notice of Completion to be
recorded in the office of the Recorder of the County of Orange in accordance
with the terms of Section 3093 of the Civil Code of the State of California or
any successor statute, and Tenant shall deliver to the Building management
office a reproducible copy of the "as built" drawings of the Alterations, or if
Tenant has not obtained such "as built" drawings and subject to Landlord's right
to require "as built" drawings, a reproducible copy of the construction drawings
of the Alterations.
8.3 Payment for Improvements. Upon completion of such work, Tenant shall
------------------------
deliver to Landlord evidence of payment, contractors' affidavits and full and
final waivers of all liens for labor, services or materials. Tenant shall pay
to Landlord three percent (3%) of the cost of such work to compensate Landlord
for all overhead, general conditions, fees and other costs and expenses arising
from Landlord's involvement with such work.
8.4 Construction Insurance. In the event that Tenant makes any
----------------------
Alterations, Tenant agrees to carry "Builder's All Risk" insurance in an amount
equal to the cost of the Alterations covering the construction of such
Alterations, it being understood and agreed that all of such Alterations shall
be insured by Tenant pursuant to Article 10 of this Lease immediately upon
----------
completion thereof. In addition, Landlord may, in its discretion, require
Tenant to obtain a lien and completion bond or some alternate form of security
satisfactory to Landlord in an amount sufficient to ensure the lien-free
completion of such Alterations and naming Landlord as a co-obligee. Landlord
agrees not to require any such bond or security so long as the Tenant is the
original Tenant executing this Lease or an assignee permitted under Section 14.7
------------
hereof without Landlord's consent, and such Tenant occupies the portion of the
Premises subject to the Alterations.
8.5 Landlord's Property. All Alterations, improvements, fixtures and/or
-------------------
equipment which may be installed or placed in or about the Premises, and all
signs installed in, on or about the Premises, from time to time, shall be at the
sole cost of Tenant and shall be and become the property of Landlord at
20
<PAGE>
the end of the Lease Term, except that Tenant may remove any Alterations,
improvements, fixtures and/or equipment which Tenant can substantiate to
Landlord have not been paid for with any tenant improvement allowance funds
provided to Tenant by Landlord, provided Tenant repairs any damage to the
Premises and Building caused by such removal. Furthermore, if Landlord, as a
condition to Landlord's consent to any Alteration, requires pursuant to the
standard and in the manner provided in Section 8.2 that Tenant remove any
-----------
Alteration upon the expiration or early termination of the Lease Term, Landlord
may, by written notice to Tenant prior to the end of the Lease Term, or given
upon any earlier termination of this Lease, require Tenant at Tenant's expense
to remove such Alterations and to repair any damage to the Premises and Building
caused by such removal. If Tenant fails to complete such removal and/or to
repair any damage caused by the removal of any Alterations, Landlord may do so
and may charge the cost thereof to Tenant.
ARTICLE 9
---------
COVENANT AGAINST LIENS
----------------------
Tenant has no authority or power to cause or permit any lien or encumbrance
of any kind whatsoever, whether created by act of Tenant, operation of law or
otherwise, to attach to or be placed upon the Project, Building or Premises, and
any and all liens and encumbrances created by Tenant shall attach to Tenant's
interest only. Landlord shall have the right at all times to post and keep
posted on the Premises any notice which it deems necessary for protection from
such liens. Tenant covenants and agrees not to suffer or permit any lien of
mechanics or materialmen or others to be placed against the Project, the
Building or the Premises with respect to work or services claimed to have been
performed for or materials claimed to have been furnished to Tenant or the
Premises, and, in case of any such lien attaching or notice of any lien
resulting from work or materials ordered by Tenant, Tenant covenants and agrees
to cause it to be promptly released and removed of record by payment or by
posting a proper statutory lien release bond. Notwithstanding anything to the
contrary set forth in this Lease, in the event that such lien is not released
and removed on or before the date occurring thirty (30) days after notice of
such lien is delivered by Landlord to Tenant, Landlord, at its sole option, may
immediately take all action necessary to release and remove such lien, without
any duty to investigate the validity thereof, and all sums, costs and expenses,
including reasonable attorneys' fees and costs, incurred by Landlord in
connection with such lien shall be deemed Additional Rent under this Lease and
shall be due and payable by Tenant within thirty (30) days after Tenant's
receipt of Landlord's invoice therefor.
ARTICLE 10
----------
INSURANCE
---------
10.1 Indemnification and Waiver. To the extent not prohibited by law,
--------------------------
Landlord, its partners, trustees, ancillary trustees and their respective
officers, directors, shareholders, beneficiaries, agents, servants, employees,
and independent contractors (collectively, the "Landlord Parties") shall not be
liable for any damage either to person or property or resulting from the loss of
use thereof, which damage is sustained by Tenant or by other persons claiming
through Tenant and which is not the result of the negligence or intentional act
of Landlord, its agents, employees and contractors. Tenant shall indemnify,
defend, protect, and hold harmless Landlord Parties from any and all loss, cost,
damage, expense and liability (including without limitation court costs and
reasonable attorneys' fees) incurred in connection with or arising from any
cause in, on or about the Premises, either prior to, during, or after the
expiration of the Lease Term, provided that the terms of the foregoing indemnity
shall not apply to the negligence or willful misconduct of Landlord or
Landlord's agents, employees or contractors. Landlord shall indemnify, defend,
protect, and hold harmless Tenant and Tenant's partners and their respective
21
<PAGE>
officers, directors, shareholders, beneficiaries, agents, servants, employees,
and independent contractors (collectively, the "Tenant Parties") from any and
all loss, cost, damage, expense and liability (including without limitation
court costs and reasonable attorneys' fees) incurred in connection with or
arising from any cause in, on or about the Project other than the Premises,
either prior to, during, or after the expiration of the Lease Term, to the
extent caused by Landlord or Landlord Parties, provided that the terms of the
foregoing indemnity shall not apply to the gross negligence or willful
misconduct of Tenant or Tenant Parties. The provisions of this Section 10.1
------------
shall survive the expiration or sooner termination of this Lease with respect to
any claims or liability occurring prior to such expiration or termination.
10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance.
---------------------------------------------------------------
Tenant shall, at Tenant's expense, comply with all reasonable insurance company
requirements pertaining to the use of the Premises. If Tenant's conduct or use
of the Premises causes any increase in the premium for any insurance policies
carried by Landlord, then Tenant shall reimburse Landlord for any such increase.
To Landlord's knowledge, as of the date hereof Tenant's conduct or use of the
Premises does not cause any increase in such premiums. Tenant, at Tenant's
expense, shall comply with all rules, orders, regulations or requirements of the
American Insurance Association (formerly the National Board of Fire
Underwriters) and with any similar body.
10.3 Tenant's Insurance. Tenant shall maintain the following coverages in
------------------
the following amounts.
10.3.1 Commercial General Liability Insurance covering the insured
against claims of bodily injury, personal injury and property damage arising out
of Tenant's operations, assumed liabilities or use of the Premises, including a
Commercial General Liability endorsement covering the insuring provisions of
this Lease and the performance by Tenant of the indemnity agreements set forth
in Section 10.1 of this Lease, for limits of liability not less than: (i)
------------
Bodily Injury and Property Damage Liability - $2,000,000 each occurrence and
$2,000,000 annual aggregate, and (ii) Personal Injury Liability - $2,000,000
each occurrence and $2,000,000 annual aggregate.
10.3.2 Physical Damage Insurance covering (i) all office furniture,
trade fixtures, office equipment, merchandise and all other items of Tenant's
property on the Premises installed by, for, or at the expense of Tenant, (ii)
the "Tenant Improvements," as that term is defined in the Tenant Work Letter,
and (iii) all other improvements, alterations and additions to the Premises
effected by Tenant. Such insurance shall be written on an "all risks" of
physical loss or damage basis, for the full replacement cost value new without
deduction for depreciation of the covered items and in amounts that meet any co-
insurance clauses of the policies of insurance and shall include a vandalism and
malicious mischief endorsement, sprinkler leakage coverage and earthquake
sprinkler leakage coverage.
10.3.3 Extra-expense insurance in such amounts as will reimburse
Tenant for direct or indirect loss of earnings attributable to all perils
commonly insured against by prudent tenants or attributable to prevention of
access to the Premises, to the Building or to the Project as a result of such
perils.
10.3.4 Form of Policies. The minimum limits of policies of insurance
----------------
required of Tenant under this Lease shall in no event limit the liability of
Tenant under this Lease. Such insurance shall (i) name Landlord, and any other
party it so specifies which has an insurable interest in the Project, as an
additional insured; (ii) specifically cover the liability assumed by Tenant
under this Lease, including, but not limited to, Tenant's obligations under
Section 10.1 of this Lease; (iii) be issued by an insurance company having a
- ------------
rating of not less than A-iX in Best's Insurance Guide or which is otherwise
acceptable to Landlord and licensed to do business in the State of California;
(iv) be primary insurance as to all claims thereunder and provide that any
insurance carried by Landlord is excess and is non-contributing with any
insurance requirement of Tenant; provided however, such insurance may be
22
<PAGE>
effected by a blanket policy or policies of insurance provided that the total
amount of insurance available with respect to the Premises and/or Tenant's
liability hereunder shall be at least the equivalent of separate policies in the
amounts required herein and that in other respects any such blanket policy or
policies shall comply with the requirements of this Section 10.3.4; (v) provide
--------------
that said insurance shall not be canceled or coverage reduced unless thirty (30)
days' prior written notice shall have been given to Landlord and any mortgagee
of Landlord; and (vi) contain a cross-liability endorsement or severability of
interest clause acceptable to Landlord. Tenant shall deliver certificates of
such insurance to Landlord on or before the Lease Commencement Date and at least
thirty (30) days before the expiration dates thereof.
10.4 Subrogation. Landlord and Tenant agree to have their respective
-----------
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the case
may be. As long as such waivers of subrogation are contained in their
respective insurance policies, Landlord and Tenant hereby waive any right that
either may have against the other on account of any loss or damage to their
respective property to the extent such loss or damage is insurable under
policies of insurance for fire and all risk coverage, theft, or other similar
insurance, whether or not the coverages required hereunder are in fact
maintained.
10.5 Additional Insurance Obligations. Tenant shall carry and maintain
--------------------------------
during the entire Lease Term, at Tenant's sole cost and expense, increased
amounts of the insurance required to be carried by Tenant pursuant to this
Article 10, as may be reasonably based on the amounts of insurance required by
- ----------
prudent owners of comparable buildings in the Newport Beach, California area.
10.6 Landlord's Insurance. Landlord shall during the Lease Term keep in
--------------------
full force and effect: (a) commercial general liability insurance for bodily
injury, personal injury and damage to property with such minimum limits as
prudent owners of comparable property in Newport Beach, California from time to
time carry, (b) a policy of "all-risk" property insurance for the full
replacement value of the Project, with such commercially reasonable deductibles
as Landlord may determine to be appropriate, and (c) such other insurance as
Landlord deems reasonably necessary based on coverage maintained by owners of
comparable properties in the Newport Center area of Newport Beach, California,
including without limitation rental loss insurance. All insurance premiums
shall be included in Operating Expenses, as described in Article 4 hereof. Such
---------
insurance shall meet at least the minimum limits and requirements set forth in
Section 10.3.1 of this Lease and shall comply with the requirements of Section
10.3.4 of this Lease.
ARTICLE 11
----------
DAMAGE AND DESTRUCTION
----------------------
11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly
----------------------------------------
notify Landlord of any damage to the Premises resulting from fire or any other
casualty. If the Premises, any Common Areas serving or providing access to the
Premises or any other portion of the Project shall be damaged by fire or other
casualty, Landlord shall promptly and diligently, subject to reasonable delays
for insurance adjustment or other matters beyond Landlord's reasonable control,
and subject to all other terms of this Article 11, restore the damaged areas.
----------
Landlord shall use commercially reasonable efforts to conduct such restoration
in a manner to minimize disruption of Tenant's business at the Premises and such
restoration shall be to substantially the same condition existing prior to the
casualty, except for modifications required by zoning and building codes and
other laws or any other modifications to the Common Areas deemed desirable by
Landlord, all of which modifications shall be Landlord's responsibility,
provided access to the Premises and any common restrooms serving the Premises
shall not be materially impaired. Notwithstanding any other provision of this
Lease, upon the occurrence of any damage to the Premises, Tenant shall assign to
Landlord (or to any party designated by Landlord) all
23
<PAGE>
insurance proceeds payable to Tenant under Tenant's insurance required under
Section 10.3 of this Lease with respect to the Tenant Improvements only, and
- ------------
Landlord shall repair any injury or damage to the Tenant Improvements installed
in the Premises and shall return such Tenant Improvements to their original
condition; provided that if the cost of such repair by Landlord exceeds the
amount of insurance proceeds received by Landlord from Tenant's insurance
carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant
to Landlord prior to Landlord's repair of the damage. In connection with such
repairs and replacements, Tenant shall, prior to the commencement of
construction, submit to Landlord, for Landlord's review and approval, all plans,
specifications and working drawings relating thereto, and Landlord shall select
the contractors to perform such improvement work. Such submittal of plans and
construction of improvements shall be performed in substantial compliance with
the terms of the Tenant Work Letter as though such construction of improvements
were the initial construction of the Tenant Improvements. Landlord shall not be
liable for any inconvenience or annoyance to Tenant or its visitors, or injury
to Tenant's business resulting in any way from such damage or the repair
thereof; provided however, that if such fire or other casualty shall have
damaged the Premises or Common Areas necessary to Tenant's occupancy, Landlord
shall allow Tenant a proportionate abatement of Rent to the extent Landlord is
reimbursed from the proceeds of rental interruption insurance purchased by
Landlord as part of Operating Expenses, during the time and to the extent the
Premises are unfit for occupancy for the purposes permitted under this Lease,
and not occupied by Tenant as a result thereof.
11.2 Landlord's Option to Repair. Notwithstanding the terms of Section
--------------------------- -------
11.1 of this Lease, Landlord may elect not to rebuild and/or restore the
- ----
Premises, Building and/or Project and instead terminate this Lease by notifying
Tenant in writing of such termination within sixty (60) days after the date of
damage, such notice to include a termination date giving Tenant ninety (90) days
to vacate the Premises, but Landlord may so elect only if the Building or
Project shall be damaged by fire or other casualty or cause, whether or not the
Premises are affected, and one or more of the following conditions is present:
(i) repairs cannot reasonably be completed within one hundred eighty (180) days
of the date of damage (when such repairs are made without the payment of
overtime or other premiums); (ii) the holder of any mortgage on the Building or
Project or ground lessor with respect to the Building or Project shall require
that the insurance proceeds be used to retire the mortgage debt, or shall
terminate the ground lease, as the case may be; or (iii) the damage is not fully
covered, except for deductible amounts not to exceed Two Hundred Fifty Thousand
Dollars ($250,000), by Landlord's insurance policies.
11.3 Waiver of Statutory Provisions. The provisions of this Lease,
------------------------------
including this Article 11, constitute an express agreement between Landlord and
----------
Tenant with respect to any and all damage to, or destruction of, all or any part
of the Premises, the Building or any other portion of the Project, and any
statute or regulation of the State of California, including, without limitation,
Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any
rights or obligations concerning damage or destruction in the absence of an
express agreement between the parties, and any other statute or regulation, now
or hereafter in effect, shall have no application to this Lease or any damage or
destruction to all or any part of the Premises, the Building or any other
portion of the Project.
11.4 Damage Near End of Term; Tenant's Right to Terminate. In the event
----------------------------------------------------
that (i) the Premises, the Building or the Project is destroyed or damaged to
any substantial extent (i.e., $250,000 or more to repair or replace) during the
last eighteen (18) months of the Lease Term, unless Tenant has exercised an
option to extend the Lease Term pursuant to Section 2.2 hereof (and for such
-----------
purpose Tenant shall be entitled to an early exercise of any such option during
the period ending with thirty (30) days after the date of the damage), in which
event Landlord shall not be entitled to terminate the Lease pursuant to this
clause (i) of this Section 11.4, or (ii) in the event the repairs cannot
------------
reasonably be completed within one hundred eighty (180) days after the date of
damage, then notwithstanding anything contained in this Article 11, either party
----------
shall have the option to terminate this Lease by giving written notice to the
other of the exercise of such option within thirty (30) days after such damage
or destruction, in which event this Lease shall cease and terminate as of the
date of such notice, Tenant shall pay the Base
24
<PAGE>
Rent and Additional Rent, properly apportioned up to such date of damage, and
both parties hereto shall thereafter be freed and discharged of all further
obligations hereunder, except as provided for in provisions of this Lease which
by their terms survive the expiration or earlier termination of the Lease Term.
ARTICLE 12
----------
NONWAIVER
---------
No waiver of any provision of this Lease by either party shall be implied
by any failure of such party to enforce any remedy on account of the violation
of such provision, even if such violation shall continue or be repeated
subsequently, any waiver by either party of any provision of this Lease may only
be in writing, and no express waiver shall affect any provision other than the
one specified in such waiver and that one only for the time and in the manner
specifically stated. No receipt of monies by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Lease Term or
of Tenant's right of possession hereunder or after the giving of any notice
shall reinstate, continue or extend the Lease Term or affect any notice given
Tenant prior to the receipt of such monies, it being agreed that after the
service of notice or the commencement of a suit or after final judgment for
possession of the Premises, Landlord may receive and collect any Rent due, and
the payment of said Rent shall not waive or affect said notice, suit or
judgment. No payment by Tenant or receipt or acceptance by Landlord of a lesser
amount than the correct Rent due shall be deemed to be other than a payment on
account, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment be deemed an accord and satisfaction, and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance, treat such partial payment as a default or pursue any
other remedy provided in this Lease or at law.
ARTICLE 13
----------
CONDEMNATION
------------
If twenty-five percent (25%) or more of the Premises, the Building or the
Project shall be taken by power of eminent domain or condemned by any competent
authority for any public or quasi-public use or purpose, or if access to the
Premises is substantially impaired, or if Landlord shall grant a deed or other
instrument in lieu of such taking by eminent domain or condemnation, either
party shall have the option to terminate this Lease upon sixty (60) days'
notice, provided such notice is given no later than ninety (90) days after the
date of such taking, condemnation, reconfiguration, vacation, deed or other
instrument. Landlord shall be entitled to receive the entire award or payment
in connection therewith, except that Tenant shall have the right to file any
separate claim available to Tenant for any taking of Tenant's personal property
and fixtures belonging to Tenant and removable by Tenant upon expiration of the
Lease Term pursuant to the terms of this Lease, alterations and improvements
paid for by Tenant from sources other than the Tenant Improvement Allowance and
Tenant is not otherwise reimbursed by Landlord therefor and for moving expenses.
All Rent shall be apportioned as of the date of such termination, or the date of
such taking (i.e., the date the condemning authority requires possession),
whichever shall first occur. If any part of the Premises shall be taken, and
this Lease shall not be so terminated, the Rent shall be proportionately
abated. Tenant hereby waives any and all rights it might otherwise have
pursuant to Section 1265.130 of the California Code of Civil Procedure.
25
<PAGE>
ARTICLE 14
----------
ASSIGNMENT AND SUBLETTING
-------------------------
14.1 Transfers. Except as specifically permitted by Section 14.7 hereof,
--------- ------------
Tenant shall not, without the prior written consent of Landlord, assign,
mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or
otherwise transfer, this Lease or any interest hereunder, permit any assignment
or other such foregoing transfer of this Lease or any interest hereunder by
operation of law, sublet the Premises or any part thereof, or permit the use of
the Premises by any persons other than Tenant and its employees (all of the
foregoing are hereinafter sometimes referred to collectively as "Transfers" and
any person to whom any Transfer is made or sought to be made is hereinafter
sometimes referred to as a "Transferee"). If Tenant shall desire Landlord's
consent to any Transfer, Tenant shall notify Landlord in writing, which notice
(the "Transfer Notice") shall include (i) the proposed effective date of the
Transfer, which shall not be less than thirty (30) days nor more than one
hundred eighty (180) days after the date of delivery of the Transfer Notice,
(ii) a description of the portion of the Premises to be transferred (the
"Subject Space"), (iii) all of the terms of the proposed Transfer and the
consideration therefor, including a calculation of the "Transfer Premium," as
that term is defined in Section 14.3, below, in connection with such Transfer,
------------
the name and address of the proposed Transferee, and a copy of all existing
and/or proposed documentation pertaining to the proposed Transfer, including all
existing operative documents to be executed to evidence such Transfer, (iv)
current financial statements of the proposed Transferee certified by an officer,
partner or owner thereof, and any other information reasonably required by
Landlord, which will enable Landlord to determine the financial responsibility,
character, and reputation of the proposed Transferee, nature of such
Transferee's business and proposed use of the Subject Space, and (v) an executed
estoppel certificate from Tenant in the form attached hereto as Exhibit E. Any
---------
Transfer made without Landlord's prior written consent shall, at Landlord's
option, be null, void and of no effect, and shall, at Landlord's option,
constitute a default by Tenant under Section 19.1.7 of this Lease. Whether or
--------------
not Landlord shall grant consent, Tenant shall pay Landlord's review and
processing fees, as well as any reasonable legal fees incurred by Landlord,
within thirty (30) days after written request by Landlord, all in an aggregate
amount not more than $2,500 per Transfer.
14.2 Landlord's Consent. Landlord shall not unreasonably withhold its
------------------
consent to any proposed Transfer of the Subject Space to the Transferee on the
terms specified in the Transfer Notice. The parties hereby agree that it shall
be deemed to be reasonable under this Lease and under any applicable law for
Landlord to withhold consent to any proposed Transfer where one or more of the
following apply, without limitation as to other reasonable grounds for
withholding consent:
14.2.1 The Transferee is of a character or reputation or engaged in a
business which is not consistent with the quality of the Building or the
Project;
14.2.2 [Intentionally omitted.]
14.2.3 The Transferee's intended use of the Premises is inconsistent
with the permitted use specified in Article 5 above;
---------
14.2.4 The Transferee is not a party of reasonable financial worth
and/or financial stability in light of the responsibilities involved under the
Lease on the date consent is requested;
14.2.5 The proposed Transfer would cause Landlord to be in violation
of another lease or agreement to which Landlord is a party, or would give an
occupant of the Project a right to cancel its lease;
26
<PAGE>
14.2.6 Except for a Transfer permitted without Landlord's consent
pursuant to Section 14.7 hereof, the terms of the proposed Transfer will allow
-----------
the Transferee to exercise a right of renewal, right of expansion, right of
first offer, or other similar right held by Tenant (or will allow the Transferee
to occupy space leased by Tenant pursuant to any such right);
14.2.7 [Intentionally omitted.]
14.2.8 The Transferee does not intend to occupy the entire Premises
and conduct its business therefrom for a substantial portion of the term of the
Transfer; or
14.2.9 The rent charged by Tenant to such Transferee during the term
of such Transfer (the "Transferee's Rent"), calculated using a present value
analysis, is less than eighty percent (80%) of the rent being obtained by
Landlord at the time of such Transfer, based on Landlord's most recent
transactions for comparable space in the Project for a comparable term (the
"Quoted Rent"), calculated using a present value analysis.
If Landlord consents to any Transfer pursuant to the terms of this
Section 14.2 (and does not exercise any recapture rights Landlord may have under
- ------------
Section 14.4 of this Lease), Tenant may within six (6) months after Landlord's
- ------------
consent, but not later than the expiration of said six-month period, enter into
such Transfer of the Premises or portion thereof, upon substantially the same
terms and conditions as are set forth in the Transfer Notice furnished by Tenant
to Landlord pursuant to Section 14.1 of this Lease, provided that if there are
------------
any changes in the terms and conditions from those specified in the Transfer
Notice (i) such that Landlord would initially have been entitled to refuse its
consent to such Transfer under this Section 14.2, or (ii) which would cause the
------------
proposed Transfer to be more favorable to the Transferee than the terms set
forth in Tenant's original Transfer Notice, Tenant shall again submit the
Transfer to Landlord for its approval and other action under this Article 14
----------
(including Landlord's right of recapture, if any, under Section 14.4 of this
------------
Lease).
14.3 Transfer Premium. Subject to the provisions of Section 14.7, if
---------------- ------------
Landlord consents to a Transfer, as a condition thereto which the parties hereby
agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any
"Transfer Premium," as that term is defined in this Section 14.3, received by
------------
Tenant from such Transferee. "Transfer Premium" shall mean all rent, additional
rent or other consideration payable by such Transferee in excess of (x) the Rent
and Additional Rent payable by Tenant under this Lease, plus (y) the broker's
commission which Tenant actually in good faith pays to obtain the Transferee;
any Economic Concessions (defined below) granted by Tenant to the Transferee;
reasonable attorneys' fees incurred by Tenant in preparing the assignment or
sublease, as the case may be, and in obtaining Landlord's consent thereto
(excluding fees incurred in litigating or arbitrating rent or profit issues);
and the unamortized cost of the tenant improvements constructed for the
Transferee to the extent paid by Tenant, prorated to the amount of space subject
to a sublease, but without proration in the case of an assignment. For purposes
of this Section 14.3, "Economic Concessions" shall include, without limitation,
------------
annual rental rates and escalations, rent abatement concessions, tenant
improvements or allowances, payment of broker's fees and commissions (if any),
moving allowances, buy-outs of prior leases, payment or reimbursement of
termination fees for prior leases, the value of extraordinary services, free or
reduced rate parking privileges, reduced rent or free rent, options to extend at
fixed or below market rates, and all other concessions having economic value.
In calculating the profits under this Section 14.3, Tenant shall deliver to
------------
Landlord a detailed description of the profit calculation, with the division of
profit being on a monthly basis, and with an annual reconciliation and a right
of Landlord to audit, in the same manner and within the same time as Tenant's
right to audit set forth in Section 4.7 hereof with respect to Operating
-----------
Expenses. The Transfer Premium shall be determined, on a per rentable square
foot basis if less than all of the Premises is transferred. "Transfer Premium"
shall also include, but not be limited to, key money and bonus money paid by
Transferee to Tenant in connection with such Transfer, and any payment in excess
of fair market value for services rendered by Tenant to Transferee or
27
<PAGE>
for assets, fixtures, inventory, equipment, or furniture transferred by Tenant
to Transferee in connection with such Transfer. In the calculations of the Rent
(as it relates to the Transfer Premium calculated under this Section 14.3), and
------------
the Transferee's Rent and Quoted Rent under Section 14.2.9 of this Lease, the
--------------
Rent paid during each annual period for the Subject Space by Tenant, and the
Transferee's Rent and the Quoted Rent, shall be computed after adjusting such
rent to the actual effective rent to be paid, taking into consideration any and
all leasehold concessions granted in connection therewith, including, but not
limited to, any rent credit and tenant improvement allowance. For purposes of
calculating any such effective rent, all such concessions shall be amortized on
a straight-line basis over the relevant term.
14.4 Landlord's Option as to Subject Space. Notwithstanding anything to
-------------------------------------
the contrary contained in this Article 14, Landlord shall have the option, by
----------
giving written notice to Tenant within thirty (30) days after receipt of any
Transfer Notice, to (i) recapture the Subject Space, or (ii) take an assignment
or sublease of the Subject Space from Tenant; provided however, Tenant shall
have the right to rescind Tenant's Transfer Notice by written notice to Landlord
given within fifteen (15) days after Landlord notifies Tenant of Landlord's
exercise of Landlord's rights under this sentence, and in such event Tenant's
Transfer Notice shall be void ab initio and of no further force or effect
-- ------
whatsoever. If Tenant rescinds any such Transfer Notice, Landlord shall not
have the rights set forth in the first sentence of this Section 14.4. Such
------------
recapture, or sublease or assignment notice shall cancel and terminate this
Lease, or create a sublease or assignment, as the case may be, with respect to
the Subject Space as of the date stated in the Transfer Notice as the effective
date of the proposed Transfer until the last day of the term of the Transfer as
set forth in the Transfer Notice. In the event of a recapture by Landlord, if
this Lease shall be canceled with respect to less than the entire Premises, the
Rent reserved herein shall be prorated on the basis of the number of rentable
square feet retained by Tenant in proportion to the number of rentable square
feet contained in the Premises, and this Lease as so amended shall continue
thereafter in full force and effect, and upon request of either party, the
parties shall execute written confirmation of the same. If Landlord declines,
or fails to elect in a timely manner to recapture, sublease or take an
assignment of the Subject Space under this Section 14.4, then, provided Landlord
------------
has consented to the proposed Transfer or not responded within five (5) days
after the date a second notice given to Landlord by Tenant at any time after
thirty (30) days after receipt of the information required pursuant to Section
-------
14.1 (which second notice must state in prominent bold type that unless Landlord
- ----
responds, Tenant shall be entitled to proceed as set forth in this sentence),
then Tenant shall be entitled to proceed to transfer the Subject Space to the
proposed Transferee, subject to the provisions of the last paragraph of Section
-------
14.2 of this Lease. Notwithstanding anything to the contrary set forth herein
- ----
(and except for any assignment or subletting with an effective date occurring
during the last twenty-four (24) months of the Lease Term, including any
extended Term if Tenant has exercised Tenant's option to extend the Term of this
Lease pursuant to Section 2.2 hereof), Landlord shall not have the right to
-----------
recapture, or take an assignment or sublease, of the Subject Space pursuant to
clauses (i) or (ii), above, of this Section 14.4 if Landlord does not agree, in
------------
Landlord's reasonable discretion, to allow Tenant to expand the size of the
Premises beyond the size permitted by Section 1.1.6.4 of this Lease.
---------------
14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the terms
------------------
and conditions of this Lease shall in no way be deemed to have been waived or
modified, (ii) such consent shall not be deemed consent to any further Transfer
by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord,
promptly after execution, an original executed copy of all documentation
pertaining to the Transfer in form reasonably acceptable to Landlord, (iv)
Tenant shall furnish upon Landlord's request a complete statement, certified by
an independent certified public accountant, or Tenant's chief financial officer,
setting forth in detail the computation of any Transfer Premium Tenant has
derived and shall derive from such Transfer, and (v) no Transfer relating to
this Lease or agreement entered into with respect thereto, whether with or
without Landlord's consent, shall relieve Tenant or any guarantor of the Lease
from liability under this Lease. Landlord or its authorized representatives
shall have the right at all reasonable times to audit the books, records and
papers of Tenant relating to any Transfer, and shall have the right to make
copies thereof. If the Transfer Premium respecting any Transfer shall be found
28
<PAGE>
understated, Tenant shall, within thirty (30) days after demand, pay the
deficiency and Landlord's costs of such audit, if understated by more than ten
percent (10%). Any such audit must be within the time period specified in
Section 4.7.
- -----------
14.6 Additional Transfers. For purposes of this Lease, the term "Transfer"
--------------------
shall also include (i) if Tenant is a partnership, the withdrawal or change,
voluntary, involuntary or by operation of law, of PIMCO Advisors, L.P. as a
constituent partner or if other than the original Tenant executing this Lease,
twenty-five percent (25%) or more of the partners, or transfer of twenty-five
percent or more of partnership interests, within a twelve (12)-month period, or
the dissolution of the partnership without immediate reconstitution thereof, and
(ii) if Tenant is a closely held corporation (i.e., whose stock is not publicly
held and not traded through an exchange or over the counter), (A) the
dissolution, merger, consolidation or other reorganization of Tenant, the sale
or other transfer of more than an aggregate of fifty percent (50%) of the voting
shares of Tenant (other than to immediate family members by reason of gift or
death), within a twelve (12)-month period, or (C) the sale, mortgage,
hypothecation or pledge of more than an aggregate of fifty percent (50%) of the
value of the unencumbered assets of Tenant within a twelve (12) month period.
14.7 Non-Transfers. Notwithstanding anything to the contrary contained in
-------------
this Lease, neither (i) an assignment to a transferee of all or substantially
all of the assets of Tenant, (ii) an assignment of the Premises to a transferee
which is the resulting entity of a merger or consolidation of Tenant with
another entity, nor (iii) an assignment or subletting of all or a portion of the
Premises to an "Affiliated" of Tenant (an entity which is controlled by,
controls, or is under common control with, Tenant), shall be deemed a Transfer
under Article 14 of this Lease (and no Transfer Premium shall be payable to
----------
Landlord in connection therewith), provided that Tenant notifies Landlord of any
such assignment or sublease within twenty (20) days after such assignment or
subletting and promptly supplies Landlord with any documents or information
reasonably requested by Landlord regarding such transfer or transferee as set
forth in items (i) through (iii) above, that such assignment or sublease is not
a subterfuge by Tenant to avoid its obligations under this Lease, that if an
assignment, the transferee assumes in full, in writing, the obligations of
Tenant under this Lease accruing after the date of the Transfer (or if a
sublease, the sublessee of a portion of the Premises or Term assumes, in full
the obligations of Tenant with respect to such portion), in writing, and in each
case a copy of such assumption is delivered to Landlord prior to the date of the
assignment or subletting, and except for an assignment permitted under this
Section 14.7 without Landlord's consent, that such transferee or affiliate shall
- -----------
have a net worth (not including goodwill as an asset) computed in accordance
with generally accepted accounting principles (the "Net Worth") in an amount
which reasonably reflects financial stability in light of the responsibilities
under the Lease and the transferee's or affiliate's other liabilities and
financial obligations. "Control," as used in this Section 14.7, shall mean the
------------
ownership, directly or indirectly, of at least fifty-one percent (51%) of the
voting securities of, or possession of the right to vote, in the ordinary
direction of its affairs, of at least fifty-one percent (51%) of the voting
interest in, any person or entity.
ARTICLE 15
----------
SURRENDER OF PREMISES; REMOVAL OF TRADE FIXTURES
------------------------------------------------
15.1 Surrender of Premises. No act or thing done by Landlord or any agent
---------------------
or employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in a writing signed by Landlord. The delivery of keys
to the Premises to Landlord or any agent or employee of Landlord shall not
constitute a surrender of the Premises or effect a termination of this Lease,
whether or not the keys are thereafter retained by Landlord, and notwithstanding
such delivery Tenant shall be entitled to the return of such keys at any
reasonable time upon request until this Lease shall have been terminated. The
voluntary or
29
<PAGE>
other surrender of this Lease by Tenant, whether accepted by Landlord or not, or
a mutual termination hereof, shall not work a merger, and at the option of
Landlord shall operate as an assignment to Landlord of all subleases or
subtenancies affecting the Premises.
15.2 Removal of Tenant Property by Tenant. Upon the expiration of the
------------------------------------
Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this Article 15, quit and surrender possession of the
----------
Premises to Landlord in as good order and condition as when Tenant took
possession and as thereafter improved by Landlord and/or Tenant, reasonable wear
and tear and repairs which are specifically made the responsibility of Landlord
hereunder excepted. Upon such expiration or termination, Tenant shall, without
expense to Landlord, remove or cause to be removed from the Premises all debris
and rubbish, and such items of furniture, equipment, free-standing cabinet work,
and other articles of personal property owned by Tenant or installed or placed
by Tenant at its expense in the Premises, and such similar articles of any other
persons claiming under Tenant, as Tenant elects to remove or Landlord may, in
its sole discretion, require to be removed, and Tenant shall repair at its own
expense all damage to the Premises and Building resulting from such removal.
Notwithstanding anything herein to the contrary, Tenant shall have the right to
remove all items which bear any name, logo or other material proprietary to
Tenant.
ARTICLE 16
----------
HOLDING OVER
------------
If Tenant holds over after the expiration of the Lease Term hereof, with or
without the express or implied consent of Landlord, such tenancy shall be from
month-to-month only, and shall not constitute a renewal hereof or an extension
for any further term, and in such case Rent shall be payable at a monthly rate
equal to one hundred fifty percent (150%) the Rent applicable during the last
rental period of the Lease Term under this Lease. Such month-to-month tenancy
shall be subject to every other term, covenant and agreement contained herein.
Nothing contained in this Article 16 shall be construed as consent by Landlord
----------
to any holding over by Tenant, and Landlord expressly reserves the right to
require Tenant to surrender possession of the Premises to Landlord as provided
in this Lease upon the expiration or other termination of this Lease. The
provisions of this Article 16 shall not be deemed to limit or constitute a
----------
waiver of any other rights or remedies of Landlord provided herein or at law.
If Tenant fails to surrender the Premises upon the termination or expiration of
this Lease, in addition to any other liabilities to Landlord accruing therefrom,
Tenant shall protect, defend, indemnify and hold Landlord harmless from all
loss, costs (including reasonable attorneys' fees) and liability resulting from
such failure, including, without limiting the generality of the foregoing, any
claims made by any succeeding tenant founded upon such failure to surrender, and
any lost profits to Landlord resulting from such failure to surrender, provided
that Landlord notifies Tenant in writing of the general nature of such liability
within ten (10) days after Tenant requests that Landlord do so.
ARTICLE 17
----------
ESTOPPEL CERTIFICATES
---------------------
Within fifteen (15) days following a request in writing by Landlord, Tenant
shall execute and deliver to Landlord an estoppel certificate, which, as
submitted by Landlord, shall be substantially in the form of Exhibit E, attached
---------
hereto, (or such other form as may be required by any prospective mortgagee or
purchaser of the Building or the Project, or any portion thereof), indicating
therein any exceptions thereto that may exist at that time, and shall also
contain any other information concerning this Lease, Tenant or the Premises
reasonably requested by Landlord or Landlord's mortgagee or prospective
30
<PAGE>
mortgagee or purchasers. Tenant shall execute and deliver whatever other
instruments may be reasonably required for such purposes. In connection
therewith, Landlord may require Tenant to provide Landlord with a current
financial statement and financial statements of the two (2) years prior to the
current financial statement year, which statements may be the publicly
disseminated statements of PIMCO Advisors, L.P. so long as such entity is a
constituent general partner of Tenant and the Tenant is the original Tenant
executing this Lease. Such statements shall be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice of
Tenant or PIMCO Advisors, L.P., shall be audited by an independent certified
public accountant.
ARTICLE 18
----------
SUBORDINATION
-------------
This Lease is subject and subordinate to all present and future ground or
underlying leases of the Building or Project and to the lien of any mortgages or
trust deeds, now or hereafter in force against the Building or Project, if any,
and to all renewals, extensions, modifications, consolidations and replacements
thereof, and to all advances made or hereafter to be made upon the security of
such mortgages or trust deeds, unless the holders of such mortgages or trust
deeds, or the lessors under such ground lease or underlying leases, require in
writing that this Lease be superior thereto. Tenant covenants and agrees in the
event any proceedings are brought for the foreclosure of any such mortgage, to
attorn, without any deductions or set-offs other than as specifically provided
in this Lease, to the purchaser upon any such foreclosure sale if so requested
to do so by such purchaser, and to recognize such purchaser as the lessor under
this Lease. Tenant shall, within thirty (30) days of request by Landlord,
execute such further instruments or assurances as Landlord may reasonably deem
necessary to evidence or confirm the subordination or superiority of this Lease
to any such mortgages, trust deeds, ground leases or underlying leases; provided
however, Landlord agrees to provide Tenant with commercially reasonable
subordination, non-disturbance and attornment agreement(s) in favor of Tenant
from any ground lessors, mortgagees or lien holders of Landlord with respect to
the Building as a condition precedent to Tenant's agreement to be bound by the
future subordination of this Lease. Tenant waives the provisions of any current
or future statute, rule or law which may give or purport to give Tenant any
right or election to terminate or otherwise adversely affect this Lease and the
obligations of the Tenant hereunder in the event of any foreclosure proceeding
or sale. Landlord represents and warrants that the Building is not currently
encumbered by any mortgage or deed of trust.
ARTICLE 19
----------
DEFAULTS; REMEDIES
------------------
19.1 Defaults. The occurrence of any of the following shall constitute a
--------
default of this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease, or any part thereof, within five (5)
business days after receipt of written notice thereof from Landlord to Tenant;
19.1.2 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed by
Tenant where such failure continues for fifteen (15) days after written notice
thereof from Landlord to Tenant; provided however, that any such notice shall be
in lieu of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161 or any similar or successor law; provided that if
such cure reasonably requires more than
31
<PAGE>
fifteen (15) days to effect, Tenant shall not be in default so long as Tenant
commences the cure within such fifteen (15) day period and diligently pursues
the cure to completion; or
19.1.3 [Intentionally Omitted.]
19.1.4 To the extent permitted by law, a general assignment by Tenant
or any guarantor of the Lease for the benefit of creditors, or the filing by or
against Tenant or any guarantor of any proceeding under an insolvency or
bankruptcy law, unless in the case of a proceeding filed against Tenant or any
guarantor the same is dismissed within sixty (60) days, or the appointment of a
trustee or receiver to take possession of all or substantially all of the assets
of Tenant or any guarantor, unless possession is restored to Tenant or such
guarantor within sixty (60) days, or any execution or other judicially
authorized seizure of all or substantially all of Tenant's assets located upon
the Premises or of Tenant's interest in this Lease, unless such seizure is
discharged within sixty (60) days; or
19.1.5 The committing of waste on the Premises;
19.1.6 The hypothecation or assignment of this Lease or subletting of
the Premises, or attempts at such actions, in violation of Article 14 hereof; or
----------
19.1.7 [Intentionally Omitted.]
19.2 Remedies Upon Default. Upon the occurrence of a default by Tenant,
---------------------
Landlord shall have, in addition to any other remedies available to Landlord at
law or in equity, the option to pursue any one or more of the following
remedies, each and all of which shall be cumulative and nonexclusive, without
any notice or demand whatsoever.
19.2.1 Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, without being liable for prosecution or any claim or damages therefor;
and Landlord may recover from Tenant the following:
(i) The worth at the time of award of any unpaid rent
which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iii) The worth at the time of award of the amount by
which the unpaid rent for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, specifically including but not limited to, brokerage
commissions and advertising expenses incurred, expenses of remodeling the
Premises or any portion thereof for a new tenant, whether for the same or a
different use, and any special concessions made to obtain a new tenant; and
32
<PAGE>
(v) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable law.
The term "rent" as used in this Section 19.2 shall be deemed to be and
------------
to mean all sums of every nature required to be paid by Tenant pursuant to the
terms of this Lease, whether to Landlord or to others. As used in Paragraphs
19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by
allowing interest at the rate set forth in Article 25 of this Lease, but in no
----------
case greater than the maximum amount of such interest permitted by law. As used
in Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California Civil
Code Section 1951.4 (lessor may continue lease in effect after lessee's breach
and abandonment and recover Rent as it becomes due, if lessee has the right to
sublet or assign, subject only to reasonable limitations). Accordingly, if
Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
19.3 Subleases of Tenant. Whether or not Landlord elects to terminate this
-------------------
Lease on account of any default by Tenant, as set forth in this Article 19,
----------
Landlord shall have the right to terminate any and all subleases, licenses,
concessions or other consensual arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed
to Tenant's interest in such subleases, licenses, concessions or arrangements.
In the event of Landlord's election to succeed to Tenant's interest in any such
subleases, licenses, concessions or arrangements, Tenant shall, as of the date
of notice by Landlord of such election, have no further right to or interest in
the rent or other consideration receivable thereunder.
19.4 Form of Payment After Default. Following the occurrence of a default
-----------------------------
by Tenant, and until the cure of such defaults, Landlord shall have the right to
require that any or all subsequent amounts paid by Tenant to Landlord hereunder,
whether in the cure of the default in question or otherwise, be paid in the form
of cash, money order, cashier's or certified check drawn on an institution
acceptable to Landlord, or by other means approved by Landlord, notwithstanding
any prior practice of accepting payments in any different form.
19.5 Efforts to Relet. For the purposes of this Article 19, Tenant's right
---------------- ----------
to possession shall not be deemed to have been terminated by efforts of Landlord
to relet the Premises, by its acts of maintenance or preservation with respect
to the Premises, or by appointment of a receiver to protect Landlord's interests
hereunder. The foregoing enumeration is not exhaustive, but merely illustrative
of acts which may be performed by Landlord without terminating Tenant's right to
possession.
19.6 Landlord's Default. Landlord shall not be in default in the
------------------
performance of any obligation required to be performed by Landlord under this
Lease, and Tenant shall have no right to any remedy for such failed obligation
available under this Lease, at law or otherwise, unless Landlord has failed to
perform such obligation within a commercially reasonable time period (which
shall not exceed fifteen (15) days unless the time to cure such failure requires
more than fifteen (15) days in which event Landlord must commence to cure within
such fifteen (15) day period and thereafter diligently pursue the same to
completion) after the receipt of written notice from Tenant specifying in detail
Landlord's failure to perform; provided, however, if, during such commercially
reasonable time period, Landlord neither cures the failed obligation nor
commences performance and thereafter diligently and continuously proceeds to
cure such failed obligation, then Landlord shall be in default in the
performance of such obligation required to be performed under this Lease, and
Tenant may cure Landlord's default for the account and at the expense of
Landlord and render a bill to Landlord for such expense. If Landlord fails
33
<PAGE>
to pay such bill within thirty (30) days after it is rendered, Tenant may bring
suitable legal action to require Landlord to pay such bill. If the final
judgment of such action determines that Landlord was in default, and that Tenant
in curing the default reasonably incurred an expense, or if Landlord agrees in
writing that Tenant may do so with respect to the amount of the deduction,
Tenant, in addition to its normal remedies, but subject to the provisions of
Section 29.10 of this Lease (which Section 29.10 shall prevail in the event of a
- ------------- -------------
conflict with this Section 19.6), may deduct the amount of the final judgment,
------------
together with interest as set forth in the following sentence, or the amount so
approved by Landlord, as the case may be, from the Base Rent and any other
amounts payable by Tenant hereunder to Landlord until Tenant has recovered all
of such amount. The amount to be paid by Landlord shall include interest on the
judgment at the reference rate of interest of Bank of America, N.T.&S.A., not to
exceed the highest rate permitted by applicable law, from the date Tenant paid
the expense to the date of payment by Landlord to Tenant. In addition, but
subject to the provisions of Section 29.10 hereof, Tenant may exercise such
-------------
rights or remedies that shall be provided or permitted by law to recover any
damages proximately caused by such default, and, at Tenant's election, and after
five (5) business days' written notice to Landlord of such election, Tenant may
offset all or any portion of such award against any obligation due and owing by
Tenant to Landlord under this Lease.
ARTICLE 20
----------
ATTORNEYS' FEES
---------------
If either party commences litigation against the other for the specific
performance of this Lease, for damages for the breach hereof or otherwise for
enforcement of any remedy hereunder, the parties hereto agree to and hereby do
waive any right to a trial by jury and, in the event of any such commencement of
litigation, the prevailing party shall be entitled to recover from the other
party such costs and reasonable attorneys' fees as may have been incurred.
ARTICLE 21
----------
SECURITY DEPOSIT
----------------
No later than September 1, 2004, Tenant shall deposit with Landlord a
security deposit (the "Security Deposit") in the amount set forth in Section 10
----------
of the Summary. Subject to Landlord's prior approval as to the form of the
letter of credit, the Security Deposit may be in the form of an unconditional,
irrevocable standby letter of credit issued by a nationally recognized financial
institution having at least One Hundred Million Dollars ($100,000,000.00) in
capital, which provides that Landlord can draw on the letter of credit subject
only to Landlord's delivery of a certification that Landlord is entitled to do
so pursuant to this Article 21. Landlord shall have the right to approve the
----------
financial institution issuing the letter of credit, which approval shall not be
unreasonably withheld. The Security Deposit shall be held by Landlord as
security for the faithful performance by Tenant of all the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the Lease
Term. If Tenant defaults with respect to any provisions of this Lease,
including, but not limited to, the provisions relating to the payment of Rent,
Landlord may, but shall not be required to, use, apply or retain all or any part
of the Security Deposit for the payment of any Rent or any other sum in default,
or for the payment of any amount that Landlord may spend or become obligated to
spend by reason of Tenant's default, or to compensate Landlord for any other
loss or damage that Landlord may suffer by reason of Tenant's default. If any
portion of the Security Deposit is so used or applied, Tenant shall, within ten
(10) days after written demand therefor, provide a replacement letter of credit
in the required amount, and Tenant's failure to do so shall be a default under
this Lease. If Tenant shall fully and faithfully perform every provision of
this Lease to be performed by it, the Security Deposit, or any balance thereof,
shall be returned to Tenant, or, at
34
<PAGE>
Landlord's option, to the last assignee of Tenant's interest hereunder, within
thirty (30) days following the expiration of the Lease Term. Tenant shall not be
entitled to any interest on the Security Deposit. Tenant hereby waives the
provisions of Section 1950.7 of the California Civil Code, and all other
provisions of law, now or hereafter in force, which provide that Landlord may
claim from a security deposit only those sums reasonably necessary to remedy
defaults in the payment of rent, to repair damage caused by Tenant or to clean
the Premises, it being agreed that Landlord may, in addition, claim those sums
reasonably necessary to compensate Landlord for any other loss or damage,
foreseeable or unforeseeable, caused by the act or omission of Tenant or any
officer, employee, agent or invitee of Tenant.
ARTICLE 22
----------
ROOFTOP USE/SATELLITES; ACCESS
------------------------------
22.1 Rooftop Use/Satellites. Subject to Tenant paying to Landlord the
----------------------
prevailing rate charged by Landlord therefor, except as otherwise specifically
set forth herein, Tenant shall have the non-exclusive right to install, operate
and maintain up to an aggregate of four (4) telecommunication antennae,
satellite dishes or microwave dishes, whether receiving and/or transmitting
signals, and related telecommunications equipment (collectively, the "Antenna")
at locations on the roof of the Building within the area described on Exhibit A
---------
attached hereto and incorporated herein by this reference and of a design which
shall be subject to the prior approval of Landlord, which approval shall not be
unreasonably withheld or delayed. Landlord hereby approves the location of the
three (3) Antennae installed on the roof of the Building as of the date hereof.
Landlord agrees that Tenant shall not be required to pay any rental on any
satellite dishes included within the Antenna provided the diameter or width of
the satellite dish does not exceed twenty-four (24) inches. The initial monthly
rental rate for each Antenna in excess of (i) twenty-four (24) up to and
----
including sixty (60) inches in diameter shall be Two Hundred Dollars ($200) per
month, and (ii) sixty (60) inches in diameter shall be Three Hundred Dollars
($300) per month, which rental rates shall increase on the first day of the
fourth Lease Year and on the first day of every third (3rd) anniversary
thereafter by twenty percent (20%) over the monthly rental in effect prior to
the date of such increase. Tenant's installation and operation of the Antenna
shall be conditioned upon Tenant fulfilling, at Tenant's sole cost and expense,
the following obligations:
(a) Tenant's right to install, operate and maintain the Antenna shall
be subject to all governmental laws, rules and regulations (including without
limitation, applicable building codes and any regulations promulgated by all
applicable governmental authorities). Landlord agrees, at no cost or liability
to Landlord, to cooperate with Tenant in Tenant obtaining all required
governmental permits and licenses for the Antenna.
(b) All costs of installation, operation, insuring and maintenance of
the Antenna and any connecting cable (including, without limitation, costs of
obtaining any necessary permits and any and all costs of electricity
attributable to the Antenna) shall be borne by Tenant directly. Tenant and
Tenant's agents, employees and contractors shall have the right of access to the
roof of the Building upon reasonable prior notice to Landlord (including oral
notice to Landlord or the security office of the Building), at any time to
inspect, maintain, repair and replace the Antennae; provided however, any such
activity which disrupts or would disrupt tenants of the Building shall be
conducted after business hours.
(c) It is expressly understood that Landlord retains the right to use
by Landlord or others the roof of the Building for any purpose whatsoever
provided that Landlord shall not unreasonably interfere with the use or
operation of the Antenna.
35
<PAGE>
(d) Tenant shall use the Antenna so as not to cause any unreasonable
interference to other tenants in the Building or with any other
telecommunication equipment and not to damage or interfere with the normal
operation of the Building.
(e) Landlord shall not have any obligation with respect to the
maintenance or repair of the Antenna nor shall Landlord be responsible for any
damage that may be caused to Tenant or the Antenna whether caused by any other
tenant in or occupant of the Building or otherwise, except to the extent caused
by the negligence or willful action of Landlord or Landlord's agents, employees
or contractors. Landlord makes no representation that the Antenna will be able
to receive or transmit communication signals without interference or disturbance
and Tenant agrees that Landlord shall not be liable to Tenant therefor.
(f) Tenant shall (i) be solely responsible for any damage related to
the Antenna, including damage to the Building, (ii) promptly pay any tax,
license or permit fees charged pursuant to any laws or regulations in connection
with the installation, maintenance or use of the Antenna and comply with all
precautions and safeguards recommended by all governmental authorities, and
(iii) pay for all necessary repairs, replacements or maintenance of the Antenna.
(g) Tenant shall remove the Antenna and connecting cable at Tenant's
sole cost upon the expiration or earlier termination of this Lease or upon the
imposition of any governmental law or regulation which may require removal, and
shall repair the roof of the Building upon such removal to the extent required
by such work of removal.
(h) In no event shall any Antenna, or any part thereof, extend above
the parapet wall surrounding the rooftop of the Building, and the Antenna shall
consist of equipment, machinery and appurtenances generally comparable to that
installed atop the Building.
22.2 Access. Tenant and Tenant's architects, engineers, consultants and
------
contractors shall have access to the Building and the Premises for the purpose
of planning Tenant's work in the Premises and installing Tenant's fixtures and
equipment in the Premises subject to Landlord's reasonable rules and regulations
governing such access. Any inspection or work to be performed by Tenant or
Tenant's architects, engineers, consultants or contractors within the Premises
shall be done so as not to interfere with any work being performed by Landlord
or Landlord's contractors at the Premises and shall be subject to Landlord's
construction rules and regulations in effect from time to time, a copy of which
currently effective construction rules and regulations have been delivered to
Tenant. Landlord, at no cost to Tenant, shall provide use of Landlord's freight
elevators, parking facilities, loading docks, electricity, water and related
facilities at the Building as may reasonably be necessary to enable Tenant and
Tenant's architects, engineers, consultants and contractors to perform such
inspection and work; provided however, that Tenant shall be responsible and
liable to Landlord and Landlord's contractor for any damage done to such
facilities by Tenant or Tenant's architects, engineers, consultants or
contractors in using same. Such access shall be in the nature of a license and
shall be automatically revoked upon any termination or cancellation of this
Lease. Such access to the Building shall be had only during the normal hours of
construction on the Premises. In consideration of such license, Tenant shall
carry liability insurance as provided in Section 10.3 hereof. Tenant agrees to
------------
indemnify Landlord against and hold Landlord free and harmless from any and all
loss, cost, damage, claim or liability which may arise from any act or omission
of Tenant or Tenant's architects, engineers, consultants or contractors related
to such access to the Building. Any access to the Building by Tenant or Tenant's
architects, engineers, consultants or contractors shall be upon reasonable
advance telephonic notice to Landlord (not to exceed twenty-four (24) hours
advance notice). Subject to Landlord's prior written consent, which consent
shall not be unreasonably withheld or delayed, Tenant shall be entitled to use
the Building's existing shafts, risers and conduits (including unused portions
of the existing four (4) inch underground Telco conduit) between the Premises
and other portions of the Building (including the roof) for the purposes of
installation and
36
<PAGE>
maintenance of conduits, cables, ducts, flues, pipes and similar devices for the
Antennae and other communications or data processing equipment, supplementary
heating, ventilating and air conditioning systems and similar uses consistent
with the Building being a first class office building and not interfering with
the use or occupancy of the Building by other tenants. Subject to the provisions
of Article 8 hereof (including without limitation Landlord's approval thereof),
---------
Tenant, at Tenant's expense, shall have the right to install a two (2) inch
underground conduit between the 800 Building and the 840 Building for use with
Tenant's fibre optics facilities.
22.3 Back-up Generator. Tenant shall have the right to install, operate
-----------------
and maintain a back-up electricity generator and related equipment for support
of Tenant's telecommunications and computer systems, subject to Tenant complying
with all applicable governmental laws, rules and regulations (collectively, the
"Back-up Equipment"). The Back-up Equipment and an enclosure therefor (which
enclosure is to match the existing enclosure) shall be located as depicted on
Exhibit A attached hereto. Landlord agrees, at no cost or liability to
- ---------
Landlord, to cooperate with Tenant in Tenant obtaining all governmental permits
and licenses required for the installation and operation of the Back-up
Equipment and enclosure at such location. All costs of installation, operation,
insuring and maintenance of the Back-up Equipment and any connecting cables and
conduits (including, without limitation, the cost of obtaining any necessary
permits or license and any all costs of electricity attributable to the Back-up
Equipment) shall be borne by Tenant. Landlord shall not have any obligation
with respect to the maintenance or repair of the Back-up Equipment nor shall
Landlord be responsible for any damage that may be caused to Tenant or the Back-
up Equipment, other than that caused by the negligence or intentional action of
Landlord, its agents, employees or contractors. Tenant, at Tenant's sole cost,
shall remove the Back-up Equipment and connecting cables and conduits (i.e.,
generator, enclosure and conduits to the Building electrical room) upon the
expiration or earlier termination of this Lease or upon the imposition of any
governmental law or regulation which may require such removal, and shall repair
the Building upon such removal to the extent required by such work of removal.
ARTICLE 23
----------
SIGNS
-----
23.1 Full Floor Tenants. Subject to Landlord's prior written approval, in
------------------
its reasonable discretion, and provided all signs are in keeping with the
quality, design and style of the Building and Project, Tenant, if the Premises
comprise an entire floor of the Building, at its sole cost and expense, may
install identification signage anywhere in the Premises including in the
elevator lobby of the Premises, provided that such signs must not be visible
from the exterior of the Building.
23.2 Multi-Tenant Floor Tenants. If other tenants occupy space on the
--------------------------
floor on which the Premises is located, Tenant's identifying signage shall be
provided by Landlord, at Tenant's cost, and such signage shall be comparable to
that used by Landlord for other similar floors in the Building and shall comply
with Landlord's Building standard signage program.
23.3 Prohibited Signage and Other Items. Any signs, notices, logos,
----------------------------------
pictures, names or advertisements which are installed and that have not been
individually approved by Landlord may be removed without notice by Landlord at
the sole expense of Tenant. Tenant may not install any signs on the exterior or
roof of the Building or Project or the Common Areas. Any signs, window
coverings, or blinds (even if the same are located behind the Landlord approved
window coverings for the Building), or other items visible from the exterior of
the Premises or Building, as well as the Monument Sign (as defined below), are
subject to the prior written approval of Landlord, in Landlord's sole
discretion. Tenant shall be entitled to one (1) line of signage on the lobby
directory of each Building for each nine
37
<PAGE>
hundred (900) rentable square feet of space leased by Tenant in that Building.
Tenant shall be responsible for the cost of such lobby directory signage.
23.4 Monument Signage. So long as Tenant is leasing and occupying at least
----------------
forty-five thousand (45,000) rentable square feet within the Building under this
Lease (the "Required Occupancy Level") and subject to satisfaction and
fulfillment of all "Sign Requirements" (as defined below), Tenant shall have the
non-exclusive right, at Tenant's sole expense, to install and maintain one panel
sign on the monument sign located on the Newport Center Drive side of the
Building (the "Monument Sign"). Tenant may transfer the right to the Monument
Sign to any "Affiliate" of Tenant (defined in Section 14.7) or permitted
------------
assignee or sublessee under Section 14.7 of this Lease which leases or subleases
------------
(together with all Affiliates of Tenant) in excess of the Required Occupancy
Level so long as such transferee is of comparable reputation, standing and image
in the business community as the original Tenant executing this Lease, and is
not engaged in a business and does not hold a political orientation which, in
Landlord's reasonable good faith judgment, is disreputable or is inconsistent
with the quality of the Project. Subject to Landlord's prior written approval
of the permitted transferee's changes to and replacements of the Monument Sign,
Landlord agrees that Landlord shall not withhold Landlord's approval to a sign
of comparable size to Tenant's original sign which uses Tenant's transferee's
name provided that the proposed sign is consistent with generally accepted
standards for signage in similar first class office projects in the Fashion
Island area of Newport Beach, California. Tenant shall promptly remove Tenant's
panel on the Monument Sign and repair the monument as necessary due to such
removal, all at Tenant's sole cost and expense, immediately upon the termination
of this Lease or, upon written request of Landlord, upon Tenant's failure to
meet such Required Occupancy Level. The size, style, graphics and type of the
Monument Sign shall match the existing signs on the Monument Sign and shall be
subject to any and all approvals and requirements and all applicable laws,
regulations and ordinances of the City of Newport Beach. The cost of obtaining
any and all approvals of the City of Newport Beach and the cost of all
fabrication, installation, maintenance, insurance, removal and utilities, if
any, for Tenant's Monument Sign shall be paid by Tenant. Landlord shall
cooperate in Tenant's efforts to comply with the Sign Requirements in order to
allow Tenant's Monument Sign to be installed. Landlord does not warrant or
represent that Tenant's Monument Sign, or the plans and specifications therefor,
shall meet any and all approvals and requirements or any and all applicable
laws, regulations and ordinances of the City of Newport Beach. The Sign
Requirements include all documents of record affecting the Building. The only
third party approval of Tenant's panel sign on the Monument Sign, other than the
City of Newport Beach, is the approval of The Irvine Company.
ARTICLE 24
----------
COMPLIANCE WITH LAW
-------------------
Tenant shall not do anything or suffer anything to be done in or about the
Premises which will in any way conflict with any law, statute, ordinance or
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated, including without limitation the ADA. At
its sole cost and expense, Tenant shall promptly comply with all such
governmental measures, including without limitation all ADA requirements
affecting the Premises, including corridors and restrooms, other than the making
of structural changes or changes to the Building's life safety system on all
floors on which Tenant leases the entire leasable area; provided however,
Landlord shall be responsible for compliance with all ADA requirements in effect
and applicable as of the Lease Commencement Date with respect to the restrooms
located on the fifth and sixth floors of the 800 Building. Should any standard
or regulation now or hereafter be imposed on Landlord or Tenant by a state,
federal or local governmental body charged with the establishment, regulation
and enforcement of occupational, health or safety standards for employers,
employees, landlords or tenants, then Tenant agrees, at its sole cost and
expense, to comply promptly with such standards or regulations. The
38
<PAGE>
judgment of any court of competent jurisdiction or the admission of Tenant in
any judicial action, regardless of whether Landlord is a party thereto, that
Tenant has violated any of said governmental measures, shall be conclusive of
that fact as between Landlord and Tenant.
ARTICLE 25
----------
LATE CHARGES
------------
If any installment of Rent or any other sum due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) days after said
amount is due, then Tenant shall pay to Landlord a late charge equal to four
percent (4%) of the overdue amount, plus any attorneys' fees incurred by
Landlord by reason of Tenant's failure to pay Rent and/or other charges when due
hereunder; provided however, there shall be no late charge as to the first late
payment in each calendar year which is paid within five (5) days after receipt
of written notice from Landlord. The late charge shall be deemed Additional
Rent and the right to require it shall be in addition to all of Landlord's other
rights and remedies hereunder or at law and shall not be construed as liquidated
damages or as limiting Landlord's remedies in any manner. In addition to the
late charge described above, any Rent or other amounts owing hereunder which are
not paid on or before the date they are due shall thereafter bear interest until
paid at a rate per annum equal to twelve percent (12%) per annum, provided that
in no case shall such rate be higher than the highest rate permitted by
applicable law.
ARTICLE 26
----------
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
----------------------------------------------------
26.1 Landlord's Cure. Except as otherwise specifically set forth in this
---------------
Lease, all covenants and agreements to be kept or performed by Tenant under this
Lease shall be performed by Tenant at Tenant's sole cost and expense and without
any reduction of Rent. If Tenant shall fail to perform any of its obligations
under this Lease, within a reasonable time after such performance is required
by the terms of this Lease, Landlord may, but shall not be obligated to, after
reasonable prior notice to Tenant, make any such payment or perform any such act
on Tenant's part without waiving its right based upon any default of Tenant and
without releasing Tenant from any obligations hereunder.
26.2 Tenant's Reimbursement. Except as may be specifically provided to the
----------------------
contrary in this Lease, Tenant shall pay to Landlord, within thirty (30) days
after delivery by Landlord to Tenant of statements therefor: (i) sums equal to
expenditures reasonably made and obligations incurred by Landlord in connection
with the remedying by Landlord of Tenant's defaults pursuant to the provisions
of Section 26.1; (ii) sums equal to all losses, costs, liabilities, damages and
------------
expenses referred to in Article 10 of this Lease; and (iii) if Landlord is
----------
determined to be the prevailing party, sums equal to all expenditures made and
obligations incurred by Landlord in collecting or attempting to collect the Rent
or in enforcing or attempting to enforce any rights of Landlord under this Lease
or pursuant to law, including, without limitation, all legal fees and other
amounts so expended. Tenant's obligations under this Section 26.2 shall survive
------------
the expiration or sooner termination of the Lease Term. Except to the extent
otherwise specifically set forth herein, all non-periodic monetary payments
payable by Tenant to Landlord shall be due and payable to Landlord upon Tenant's
receipt of Landlord's invoice therefor and shall be delinquent thirty (30) days
thereafter.
39
<PAGE>
ARTICLE 27
----------
ENTRY BY LANDLORD
-----------------
Landlord reserves the right at all reasonable times and upon reasonable
notice to the Tenant to enter the Premises to (i) inspect them; (ii) show the
Premises to prospective purchasers, mortgagees or, during the last twelve (12)
months of the Lease Term, tenants, or to the ground or underlying lessors; (iii)
post notices of nonresponsibility; or (iv) alter, improve or repair the Premises
or the Building if necessary to comply with current building codes or other
applicable laws, or for structural alterations, repairs or improvements to the
Building. Landlord shall use commercially reasonable care to minimize the
disruption of Tenant's business in connection with any such entry.
Notwithstanding anything to the contrary contained in this Article 27, Landlord
----------
may enter the Premises at any time to (A) perform services required of Landlord;
(B) take possession due to any breach of this Lease in the manner provided
herein; and (C) perform any covenants of Tenant which Tenant fails to perform.
Landlord may make any such entries without the abatement of Rent unless Tenant
is thereby prevented from operating in the Premises for more than one (1)
business day, in which event there shall be an equitable abatement of Rent for
the duration of the interference. Landlord may take such steps as required to
accomplish the stated purposes. Except to the extent caused by the negligence or
willful misconduct of Landlord or Landlord's agents, contractors or employees,
Tenant hereby waives any claims for damages or for any injuries or inconvenience
to or interference with Tenant's business, lost profits, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby. For
each of the above purposes, Landlord shall at all times have a key with which to
unlock all the doors in the Premises, excluding Tenant's vaults, safes and
special security areas designated in advance by Tenant. In an emergency,
Landlord shall have the right to use any means that Landlord may deem proper to
open the doors in and to the Premises. Any entry into the Premises by Landlord
in the manner hereinbefore described shall not be deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an actual or
constructive eviction of Tenant from any portion of the Premises.
ARTICLE 28
----------
TENANT PARKING
--------------
Tenant shall rent from Landlord parking passes on a monthly basis
throughout the Lease Term in numbers up to those determined pursuant to Section
-------
11 of the Summary for parking spaces located on the site of the Project. Except
- --
as otherwise provided in Section 11 of the Summary, Tenant shall pay to Landlord
for automobile parking passes on a monthly basis the prevailing rate charged for
parking passes at the location of such passes. In addition, Tenant shall be
responsible for any taxes imposed by any governmental authority in connection
with the renting of such parking passes by Tenant or the use of the parking
facility by Tenant. Tenant's continued right to use the parking passes is
conditioned upon Tenant abiding by all reasonable rules and regulations which
are prescribed from time to time for the orderly operation and use of the
parking facility where the passes are located and upon Tenant's cooperation in
seeing that Tenant's employees and visitors also comply with such rules and
regulations. Landlord specifically reserves the right to change the location,
size, configuration, design, layout and all other aspects of the parking
facility in question at any time and Tenant acknowledges and agrees that
Landlord may, without incurring any liability to Tenant and without any
abatement of Rent under this Lease, from time to time, close-off or restrict
access to the parking facility in question for purposes of permitting or
facilitating any such construction, alteration or improvements. Landlord agrees
to use Landlord's commercially reasonable efforts to minimize interference with
Tenant's access to the Premises and use of the parking facility in connection
with the foregoing activities. Landlord may totally or partially delegate its
responsibilities hereunder to a parking operator in which case such parking
operator shall have all the rights of control delegated by Landlord. The parking
passes rented by Tenant pursuant to this Article 28
----------
40
<PAGE>
are provided to Tenant solely for use by Tenant's own personnel (not including
Tenant's invitees and guests) and such passes may not be transferred, assigned,
subleased or otherwise alienated by Tenant without Landlord's prior approval.
ARTICLE 29
----------
MISCELLANEOUS PROVISIONS
------------------------
29.1 Binding Effect. Each of the provisions of this Lease shall extend to
--------------
and shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of their respective successors or assigns,
provided this clause shall not permit any assignment by Tenant contrary to the
provisions of Article 14 of this Lease.
----------
29.2 No Air Rights. No rights to any view or to light or air over any
-------------
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease. If at any time any windows of the Premises are temporarily
darkened or the light or view therefrom is obstructed by reason of any repairs,
improvements, maintenance or cleaning in or about the Project, the same shall be
without liability to Landlord and without any reduction or diminution of
Tenant's obligations under this Lease.
29.3 Modification of Lease. Should any current or prospective mortgagee or
---------------------
ground lessor for the Building or Project require a modification or
modifications of this Lease, which modification or modifications will not cause
an increased cost or expense to Tenant or in any other way adversely change the
rights and obligations of Tenant hereunder, then and in such event, Tenant
agrees that this Lease may be so modified and agrees to execute whatever
documents are required therefor and deliver the same to Landlord within twenty
(20) days following the request therefor. Should Landlord or any such
prospective mortgagee or ground lessor require execution of a short form of
Lease for recording, containing, among other customary provisions, the names of
the parties, a description of the Premises and the Lease Term, Tenant agrees to
execute such short form of Lease and to deliver the same to Landlord within
twenty (20) days following the request therefor. All documents pursuant to this
Section shall be prepared by Landlord at Landlord's cost.
29.4 Transfer of Landlord's Interest. Tenant acknowledges that Landlord
-------------------------------
has the right to transfer all or any portion of its interest in the Project or
Building and in this Lease, and Tenant agrees that in the event of any such
transfer and a transfer of the Security Deposit, Landlord shall automatically be
released from all liability under this Lease accruing after the effective date
of the transfer and Tenant agrees to look solely to such transferee for the
performance of Landlord's obligations hereunder after the date of transfer.
Landlord shall cause the transferee to assume such obligations in writing.
Tenant further acknowledges that Landlord may assign its interest in this Lease
to a mortgage lender as additional security and agrees that such an assignment
shall not release Landlord from its obligations hereunder and that Tenant shall
continue to look to Landlord for the performance of its obligations hereunder.
29.5 Prohibition Against Recording. Except as provided in Section 29.3 of
----------------------------- ------------
this Lease, neither this Lease, nor any memorandum, affidavit or other writing
with respect thereto, shall be recorded by Tenant or by anyone acting through,
under or on behalf of Tenant.
29.6 Captions. The captions of Articles and Sections are for convenience
--------
only and shall not be deemed to limit, construe, affect or alter the meaning of
such Articles and Sections.
29.7 Relationship of Parties. Nothing contained in this Lease shall be
-----------------------
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership,
41
<PAGE>
joint venturer or any association between Landlord and Tenant, it being
expressly understood and agreed that neither the method of computation of Rent
nor any act of the parties hereto shall be deemed to create any relationship
between Landlord and Tenant other than the relationship of landlord and tenant.
29.8 Time of Essence. Time is of the essence of this Lease and each of
---------------
its provisions.
29.9 Partial Invalidity. If any term, provision or condition contained
------------------
in this Lease shall, to any extent, be invalid or unenforceable, the remainder
of this Lease, or the application of such term, provision or condition to
persons or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
29.10 Landlord Exculpation. It is expressly understood and agreed that
--------------------
notwithstanding anything in this Lease to the contrary, and notwithstanding any
applicable law to the contrary, the liability of Landlord Parties hereunder
(including any successor landlord) and any recourse by Tenant against Landlord
shall be limited solely and exclusively to the lesser of (a) the interest of
Landlord in the Project and the Building or (b) the equity interest Landlord
would have in and to the Project and Building if the Project and the Building
were encumbered by debt in an amount equal to eighty percent (80%) of the value
of the Project and the Building, and neither Landlord, nor any of its
constituent partners, shall have any personal liability therefor, and Tenant
hereby expressly waives and releases such personal liability on behalf of itself
and all persons claiming by, through or under Tenant.
29.11 Entire Agreement. It is understood and acknowledged that there are
----------------
no oral agreements between the parties hereto affecting this Lease and this
Lease supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties hereto or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease. This Lease and
any side letter or separate agreement executed by Landlord and Tenant in
connection with this Lease and dated of even date herewith, the exhibits hereto
and the Storage Space Agreements contain all of the terms, covenants,
conditions, warranties and agreements of the parties relating in any manner to
the rental, use and occupancy of the Premises, shall be considered to be the
only agreement between the parties hereto and their representatives and agents,
and none of the terms, covenants, conditions or provisions of this Lease can be
modified, deleted or added to except in writing signed by the parties hereto.
29.12 Right to Lease. Landlord reserves the absolute right to effect such
--------------
other tenancies in the Project as Landlord in the exercise of its sole business
judgment shall determine to best promote the interests of the Project. Tenant
does not rely on the fact, nor does Landlord represent, that any specific tenant
or type or number of tenants shall, during the Lease Term, occupy any space in
the Project.
29.13 Force Majeure. Any prevention, delay or stoppage due to strikes,
-------------
lockouts, labor disputes, acts of God, inability to obtain services, labor, or
materials or reasonable substitutes therefor, governmental actions, civil
commotions, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform (collectively, the "Force Majeure"),
except with respect to the obligations imposed with regard to Rent and other
charges to be paid by Tenant pursuant to this Lease, shall excuse the
performance of such party for a period equal to any such prevention, delay or
stoppage and, therefore, if this Lease specifies a time period for performance
of an obligation of either party, that time period shall be extended by the
period of any delay in such party's performance caused by a Force Majeure.
29.14 Notices. All notices, demands, statements, approvals or
-------
communications (collectively, "Notices") given or required to be given by either
party to the other hereunder shall be in writing, shall be sent by United States
certified or registered mail, postage prepaid, return receipt requested, or
delivered
42
<PAGE>
personally (i) to Tenant at the appropriate address set forth in Section 5 of
---------
the Summary, or to such other place as Tenant may from time to time designate in
a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section
-------
3 of the Summary, or to such other firm or to such other place as Landlord may
- -
from time to time designate in a Notice to Tenant. Any Notice will be deemed
given on the date of receipt or refusal on the return receipt if mailed as
provided in this Section 29.14 or upon the date personal delivery is made or
-------------
attempted to be made. If Tenant is notified of the identity and address of
Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such
mortgagee or ground or underlying lessor written notice of any default by
Landlord under the terms of this Lease by registered or certified mail, and such
mortgagee or ground or underlying lessor shall be given the same opportunity to
cure such default as is afforded to Landlord prior to Tenant's exercising any
remedy available to Tenant.
29.15 Joint and Several. If there is more than one Tenant, the
-----------------
obligations imposed upon Tenant under this Lease shall be joint and several.
29.16 Authority. Each individual executing this Lease on behalf of Tenant
---------
or Landlord hereby represents and warrants that such entity is a duly formed and
existing entity qualified to do business in California and that such entity has
full right and authority to execute and deliver this Lease and that each person
signing on behalf of such entity is authorized to do so.
29.17 Governing Law. This Lease shall be construed and enforced in
-------------
accordance with the laws of the State of California.
29.18 Submission of Lease. Submission of this instrument for examination
-------------------
or signature by Tenant does not constitute a reservation of or an option for
lease, and it is not effective as a lease or otherwise until execution and
delivery by both Landlord and Tenant.
29.19 Brokers. Landlord and Tenant hereby warrant to each other that they
-------
have had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease, excepting only the real estate brokers or agents
specified in Section 12 of the Summary (the "Brokers") whose commission shall be
----------
paid by Landlord pursuant to Landlord's separate written agreement with
Landlord's broker, and that they know of no other real estate broker or agent
who is entitled to a commission in connection with this Lease. Each party
agrees to indemnify and defend the other party against and hold the other party
harmless from any and all claims, demands, losses, liabilities, lawsuits,
judgments, and costs and expenses (including without limitation reasonable
attorneys' fees) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of the indemnifying party's dealings
with any real estate broker or agent other than the Brokers. The terms of this
Section 29.19 shall survive the expiration or earlier termination of the Lease
- -------------
Term.
29.20 Independent Covenants. This Lease shall be construed as though the
---------------------
covenants herein between Landlord and Tenant are independent and not dependent
and Tenant hereby expressly waives the benefit of any statute to the contrary
and agrees that if Landlord fails to perform its obligations set forth herein,
Tenant shall not be entitled to make any repairs or perform any acts hereunder
at Landlord's expense or to any setoff of the Rent or other amounts owing
hereunder against Landlord except as specifically provided herein; provided,
however, that the foregoing shall in no way impair the right of Tenant to
commence a separate action against Landlord for any violation by Landlord of the
provisions hereof so long as notice is first given to Landlord and any holder of
a mortgage or deed of trust covering the Building, Project or any portion
thereof, of whose address Tenant has theretofore been notified, and an
opportunity is granted to Landlord and such holder to correct such violations as
provided above pursuant to Section 19.6.
------------
29.21 Project or Building Name and Signage. Landlord shall have the right
------------------------------------
at any time to change the name of the Project or Building and to install, affix
and maintain any and all signs on the
43
<PAGE>
exterior and on the interior of the Project or Building as Landlord may, in
Landlord's sole discretion, desire. Tenant shall not use the name of the Project
or Building other than as the address for the Premises or use pictures or
illustrations of the Project or Building in advertising or other publicity,
without the prior written consent of Landlord.
29.22 Transportation Management. Tenant shall fully comply with all
-------------------------
present or future governmentally mandated programs intended to manage parking,
transportation or traffic in and around the Project or Building, and in
connection therewith, Tenant shall take responsible action for the
transportation planning and management of all employees located at the Premises
by working directly with Landlord, any governmental transportation management
organization or any other transportation-related committees or entities. Such
programs may include, without limitation: (i) restrictions on the number of
peak-hour vehicle trips generated by Tenant; (ii) increased vehicle occupancy;
(iii) implementation of an in-house ridesharing program and an employee
transportation coordinator; (iv) working with employees and any Project,
Building or area-wide ridesharing program manager; (v) instituting employer-
sponsored incentives (financial or in-kind) to encourage employees to rideshare;
and (vi) utilizing flexible work shifts for employees.
29.23 [Intentionally Omitted.]
29.24 Landlord Renovations. It is specifically understood and agreed that
--------------------
Landlord has no obligation and has made no promises to alter, remodel, improve,
renovate, repair or decorate the Premises, Building, Project or any part thereof
and that no representations respecting the condition of the Premises, the
Building or the Project have been made by Landlord to Tenant except as
specifically set forth herein or in the Tenant Work Letter. However, Tenant
acknowledges that Landlord may during the Lease Term renovate, improve, alter,
or modify (collectively, the "Renovations") the Building, Premises, and/or
Project, including without limitation the parking structure, Common Areas,
systems and equipment, roof, and structural portions of the same. Landlord
agrees to use Landlord's commercially reasonable efforts to minimize disruption
of Tenant's access to and use of the Premises and the parking facilities in
connection with any such Renovations. If Tenant is prevented from operating in
the Premises for more than one (1) business day because of any such Renovation,
there shall be an equitable abatement of Rent for the duration of the
interference. Landlord agrees to give Tenant prior written notice of any
Renovation which will materially interfere with Tenant's use of the Premises or
the parking facilities. Landlord shall have no responsibility or for any reason
be liable to Tenant for any direct or indirect injury to or interference with
Tenant's business arising from the Renovations, nor shall Tenant be entitled to
any compensation or damages from Landlord for loss of the use of the whole or
any part of the Premises or of Tenant's personal property or improvements
resulting from the Renovations or Landlord's actions in connection with such
Renovations, or for any inconvenience or annoyance occasioned by such
Renovations or Landlord's actions in connection with such Renovations.
29.25 Airport Disclosure Statement Required by City of Newport Beach. The
--------------------------------------------------------------
following disclosure statement of the City of Newport Beach's policy regarding
John Wayne (Orange County) Airport is required to be included in all leases and
sub-leases for space in the Project. Accordingly, Tenant agrees to include such
disclosure statement in any sublease of the Premises or any portion thereof, and
Tenant, as well as Tenant's heirs, successors and assigns, acknowledges that:
(i) John Wayne Airport may not be able to provide adequate air
service for business establishments which rely on such service;
(ii) When an alternate air facility is available, a complete phase
out of jet service may occur at John Wayne Airport; and
44
<PAGE>
(iii) The City of Newport Beach may continue to oppose additional
commercial air service expansions at John Wayne Airport.
29.26 Private Road. Landlord possesses a non-exclusive right to use Santa
------------
Maria Drive (i.e., the private road running along the easterly line of the
Project and presently connecting San Clemente Drive with Newport Center Drive)
for the purpose of ingress to and egress from the Project and said private road
serves both the Project and owner ("Owner") of the private road (i.e., the
Owner's building and the surrounding landscaped area and parking area). The
Owner possesses the right to dedicate all or any portion of said road to the
City of Newport Beach at any time. Additionally, the Owner possesses the right
to transfer and assign (to any buyer or ground lessee of its property) its non-
exclusive right to use said private road, or to enter into cross-easements with
any such buyer or ground lessee in connection with Landlord's non-exclusive
right to use said private road. No exercise by Owner of any of its rights under
this Article shall have any effect upon this Lease, nor shall same subject
Landlord to any liability, as long as Tenant (along with its agents, employees
and invitees) continues to have the non-exclusive right to use said private road
with no material adverse effect thereon. Santa Maria Drive (i.e., the private
road running along the easterly line of the Project) is not part of the Common
Areas, but Tenant (along with its agents, employees and invitees) shall have the
non-exclusive right to use said private road, as more specifically provided in
this Section 29.26. Accordingly, all costs of repair and maintenance in
-------------
connection with the entire private road (i.e., from Newport Center Drive to San
Clemente Street) shall be allocated proportionately as follows: 56% to the
Owner's facility (and thus not included as operating costs of the Project) and
44% to the Project (and thus included as Project Expenses of the Project.
45
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized
representatives to execute this Lease as of the day and date first above
written.
"Landlord":
CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM, a
retirement system created under the laws of the
State of California
By: ERE Yarmouth Inc., Its investment advisor
By: /s/WILLIAM VINCENT
------------------
Its: Senior Vice President
---------------------
"Tenant"
PACIFIC INVESTMENT MANAGEMENT COMPANY,
a Delaware general partnership
By: PIMCO Management, Inc., a Delaware
corporation, Managing General Partner
By: /s/ ERNEST L. SCHMIDER
----------------------
Its: Executive Vice President
------------------------
By: /s/ WILLIAM S. THOMPSON
-----------------------
Its: Chief Executive Officer
-----------------------
Exhibit A: Outline of Premises
Exhibit B: Rules and Regulations
Exhibit C: Form of Notice of Lease Term Dates
Exhibit D: Tenant Work Letter
Exhibit E: Estoppel Certificate
Exhibit F: Janitorial Specifications
Exhibit G: Building Standard Component Specifications
Exhibit H: HVAC Standards
46
<PAGE>
EXHIBIT A
---------
OUTLINE OF PREMISES
-------------------
1. Designate Termination Portion ((S) 1.1.4).
2. Designate Must Take Space ((S) 1.1.5).
3. Rooftop/Satellite Area ((S) 22).
4. Generator Area ((S) 22).
5. 14 VIP Reserved Parking Space [Space Nos. 3, 5, 6, and 145-155]
A-1
<PAGE>
EXHIBIT B
---------
RULES AND REGULATIONS
---------------------
Tenant shall faithfully observe and comply with the following Rules and
Regulations. Landlord shall not be responsible to Tenant for the nonperformance
of any of said Rules and Regulations by or otherwise with respect to the acts or
omissions of any other tenants or occupants of the Project. Landlord shall,
however, use reasonable efforts to apply such Rules and Regulations in a non-
discriminatory manner against Tenant and the other tenants of the Project.
1. Tenant shall not alter any lock or install any new or additional locks or
bolts on any external doors of the Building or windows of the Premises without
obtaining Landlord's prior written consent and the locks to such exterior doors
shall be keyed to the Building's master key(s). Tenant shall bear the cost of
any lock changes or repairs required by Tenant. Two keys will be furnished by
Landlord for the Premises, and any additional keys required by Tenant must be
obtained from Landlord at a reasonable cost to be established by Landlord.
2. All doors opening to public corridors shall be kept closed at all times
except for normal ingress and egress to the Premises.
3. Landlord reserves the right to close and keep locked all entrance and exit
doors of the Building during such hours as are customary for comparable
buildings in the greater Newport Beach area. Tenant, its employees and agents
must be sure that the doors to the Building are securely closed and locked when
leaving the Premises if it is after the normal hours of business for the
Building. Any tenant, its employees, agents or any other persons entering or
leaving the Building at any time when it is so locked, or any time when it is
considered to be after normal business hours for the Building, may be required
to sign the Building register. Access to the Building may be refused unless the
person seeking access has proper identification or has a previously arranged
pass for access to the Building. Landlord shall reasonably cooperate in issuing
passes as reasonably requested by Tenant. Landlord and his agents shall in no
case be liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. In case of invasion, mob, riot,
public excitement, or other commotion, Landlord reserves the right to prevent
access to the Building or the Project during the continuance thereof by any
means it deems appropriate for the safety and protection of life and property.
4. All significant moving activity into or out of the Building (that is, any
moving activity requiring more than two trips in the freight elevator) shall be
scheduled with Landlord and done only at such time and in such manner as
Landlord designates. No service deliveries (other than messenger services) will
be allowed between hours of 8:00 a.m. to 6:00 p.m., Monday through Friday other
than service deliveries using the freight elevators for periods not to exceed
thirty (30) minutes per instance. Landlord shall have the right to prescribe
the weight, size and position of all safes and other heavy property brought into
the Building and also the times and manner of moving the same in and out of the
Building. Safes and other heavy objects shall, if considered necessary by
Landlord, stand on supports of such thickness as is necessary to properly
distribute the weight. Landlord will not be responsible for loss of or damage
to any such safe or property in any case. Any damage to any part of the
Building, its contents, occupants or visitors by moving or maintaining any such
safe or other property shall be the sole responsibility and expense of Tenant.
5. No furniture or equipment will be received in the Building or carried up
or down in the elevators, except between such hours and only in the freight
elevator as shall be designated by Landlord. Messenger services may use the
Building's passenger elevators at any time so long as the messenger is not using
dollies or other equipment.
B-1
<PAGE>
6. The requirements of Tenant will be attended to only upon application at
the management office for the Project or at such office location
designated by Landlord. Employees of Landlord shall not perform any work
or do anything outside their regular duties unless under special
instructions from Landlord.
7. Tenant shall not disturb, solicit, or canvass any occupant of the Project
and shall cooperate with Landlord and its agents of Landlord to prevent
the same.
8. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed, and
no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting from the violation
of this rule shall be borne by the tenant who, or whose employees or
agents, shall have caused it.
9. Tenant shall not overload the floor of the Premises, nor deface the
Premises or any part thereof without Landlord's prior written consent.
10. Except for vending machines intended for the sole use of Tenant's
employees and invitees, no vending machine or machines other than
fractional horsepower office machines, photocopy machines, computers and
computer terminals and standard kitchen equipment shall be installed,
maintained or operated upon the Premises without the written consent of
Landlord.
11. Tenant shall not use or keep in or on the Premises, the Building, or the
Project any kerosene, gasoline or other inflammable or combustible fluid
or material other than normal office supplies and cleaning materials.
Landlord acknowledges and approves Tenant keeping fuel in the self-
contained fuel tank in Tenant's Back-up Equipment.
12. Tenant shall not without the prior written consent of Landlord use any
method of heating or air conditioning other than that supplied or
reasonably approved by Landlord.
13. Tenant shall not use, keep or permit to be used or kept, any foul or
noxious gas or substance in or on the Premises, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Project by reason of noise, odors, or
vibrations, or interfere in any way with other tenants or those having
business therein.
14. Tenant shall not bring into or keep within the Project, the Building or
the Premises any animals, birds or vehicles except for vehicles using the
parking facilities in the Project. Bicycles may be parked only in the
bicycle racks provided in the Project's parking facilities.
15. No cooking shall be done or permitted on the Premises, nor shall the
Premises be used for the storage of merchandise, for lodging or for any
improper, objectionable or immoral purposes. Notwithstanding the
foregoing, Underwriters' laboratory-approved equipment and microwave
ovens may be used in the Premises for heating food and brewing coffee,
tea, hot chocolate and similar beverages for employees and visitors,
provided that such use is in accordance with all applicable federal,
state and city laws, codes, ordinances, rules and regulations.
16. Landlord will approve where and how telephone and telegraph wires are to
be introduced to the Premises. No boring or cutting for wires shall be
allowed without the consent of Landlord. The location of telephone, call
boxes and other office equipment affixed to the Premises shall be subject
to the reasonable approval of Landlord; provided that Tenant may utilize
all existing conduits in connection with Tenant's replacement of existing
equipment.
B-2
<PAGE>
17. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
these Rules and Regulations.
18. Tenant, its employees and agents shall not loiter in or on the entrances,
corridors, sidewalks, lobbies, halls, stairways, elevators, or any Common Areas
for the purpose of smoking tobacco products or for any other purpose, nor in any
way obstruct such areas, and shall use them only as a means of ingress and
egress for the Premises.
19. Tenant shall not waste electricity, water or air conditioning and agrees
to cooperate fully with Landlord to ensure the most effective operation of the
Building's heating and air conditioning system, and shall refrain from
attempting to adjust any controls.
20. Tenant shall store all its trash and garbage within the interior of the
Premises. No material shall be placed in the trash boxes or receptacles if such
material is of such nature that it may not be disposed of in the ordinary and
customary manner of removing and disposing of trash in the vicinity of the
Building without violation of any law or ordinance governing such disposal. All
trash, garbage and refuse disposal shall be made only through entry-ways and
elevators provided for such purposes at such times as Landlord shall designate.
21. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
22. Tenant shall assume any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed.
23. No awnings or other projection shall be attached to the outside walls of
the Building without the prior written consent of Landlord. No curtains,
blinds, shades or screens shall be attached to or hung in, or used in connection
with, any window or door of the Premises without the prior written consent of
Landlord. All electrical ceiling fixtures hung in offices or spaces along the
perimeter of the Building must be fluorescent and/or of a quality, type, design
and bulb color approved by Landlord. Tenant shall abide by Landlord's
regulations concerning the opening and closing of window coverings which are
attached to the windows in the Premises, if any, which have a view of any
interior portion of the Building or Building Common Areas.
24. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels or other articles be placed on the windowsills.
25. Tenant must comply with requests by Landlord concerning the informing of
their employees of items of importance to Landlord with respect to the Project.
This obligation may be satisfied by distribution to Tenant's employees of
memoranda or e-mails.
26. Without the written consent of Landlord, Tenant shall not use the name of
the Building in connection with or in promoting or advertising the business of
Tenant except as Tenant's address.
27. No smoking shall be permitted in the Building.
Landlord reserves the right at any time to change or rescind any one or more
of these Rules and Regulations, or to make such other and further reasonable
Rules and Regulations as in Landlord's judgment may from time to time be
necessary for the management, safety, care and cleanliness of the
B-3
<PAGE>
Premises, Building, Project, and the Common Areas, and for the preservation of
good order therein, as well as for the convenience of other occupants and
tenants therein. Landlord may waive any one or more of these Rules and
Regulations for the benefit of any particular tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
of any other tenant, nor prevent Landlord from thereafter enforcing any such
Rules or Regulations against any or all tenants of the Project. Tenant shall be
deemed to have read these Rules and Regulations and to have agreed to abide by
them as a condition of its occupancy of the Premises. Any amendments,
modifications or additions to these Rules and Regulations shall be effective ten
(10) days after receipt thereof by Tenant. In the event of any conflict between
the Lease and any present or future Rules and Regulations, the Lease shall
control.
B-4
<PAGE>
EXHIBIT C
---------
FORM OF NOTICE OF LEASE TERM DATES
----------------------------------
To: __________________________
__________________________
__________________________
__________________________
Re: Office Lease dated ___________, 199__ between CALIFORNIA STATE TEACHERS
RETIREMENT SYSTEM, a retirement system created under the laws of the State of
California ("Landlord"), and PACIFIC INVESTMENT MANAGEMENT COMPANY, a Delaware
general partnership ("Tenant") concerning Suite _________________ on floor(s)
_______________________ of the office building located at _____________________
____________________________________________________, Newport Beach, California.
Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you
and/or confirm as follows:
1. The Premises are Ready For Occupancy, and the Lease Term shall commence on
or has commenced on __________________________ for a term of __________________
ending on _________________.
2. Rent commenced to accrue on __________________, in the amount of ________.
3. If the Lease Commencement Date is other than the first day of the month,
the first billing will contain a pro rata adjustment. Each billing thereafter,
with the exception of the final billing, shall be for the full amount of the
monthly installment as provided for in the Lease.
4. Your rent checks should be made payable to ________________________________
at ___________________________________________________________________________.
5. The exact number of rentable square feet within the Premises is ___________
square feet.
6. Tenant's Share as adjusted based upon the exact number of rentable square
feet within the Premises is ____________________%.
"Landlord":
CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM, a
retirement system created under the laws of the
State of California
By: Equitable Real Estate Investment Management
Inc., Its investment advisor
By: ______________________________________
Its:______________________________________
C-1
<PAGE>
Agreed to and Accepted as
of _________, 19____.
"Tenant"
PACIFIC INVESTMENT MANAGEMENT
COMPANY, a Delaware general partnership
By: PIMCO Management, Inc., a Delaware
corporation, Managing General Partner
By: _________________________________
Its:_________________________________
By: _________________________________
Its:_________________________________
C-2
<PAGE>
EXHIBIT D
---------
PACIFIC FINANCIAL PLAZA
-----------------------
TENANT WORK LETTER
------------------
This Tenant Work Letter sets forth the terms and conditions relating
to the construction of the tenant improvements in the Premises. Landlord and
Tenant acknowledge that tenant improvements have already been constructed for
Tenant in that portion of the Premises heretofore leased by Tenant or Tenant's
Affiliate under the Original Lease and the Advisors Lease and, accordingly, the
construction work contemplated hereunder shall generally consist of
refurbishment of such existing tenant improvements and construction of new
tenant improvements in the Must-Take Space not heretofore leased by Tenant or an
Affiliate of Tenant. This Tenant Work Letter is essentially organized
chronologically and addresses the issues of the construction of the Premises, in
sequence, as such issues will arise during the actual construction of the
Premises. All references in this Tenant Work Letter to Articles or Sections of
"this Lease" shall mean the relevant portion of Articles 1 through 29 of the
---------------------
Standard Form Office Lease to which this Tenant Work Letter is attached as
Exhibit D and of which this Tenant Work Letter forms a part, and all references
- ---------
in this Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean
the relevant portion of Sections 1 through 6 of this Tenant Work Letter.
--------------------
SECTION 1
---------
LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES
-----------------------------------------------
1.1 Base, Shell and Core of the Premises as Constructed by Landlord.
---------------------------------------------------------------
Landlord has constructed, at its sole cost and expense, the base, shell, and
core of the floors of the Building on which the Premises are located
(collectively, the "Base, Shell, and Core"). Landlord represents and warrants
that the Base, Shell and Core shall be in good condition and repair as of the
Lease Commencement Date.
SECTION 2
---------
TENANT'S IMPROVEMENTS
---------------------
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-
----------------------------
time tenant improvement allowance (the "Tenant Improvement Allowance") in the
amount of One Million Eighty-Seven Thousand Three Hundred Eighty Dollars
($1,087,380.00), which is equal to Five Dollars ($5.00) per usable square foot
of the Premises other than the Must-Take Space but including Suite 100 of Must-
Take Space II (or $293,460 based on an aggregate of 58,692 usable square feet),
plus Thirty Dollars ($30.00) per usable square foot of the Must-Take Space
(other than Suite 100 of Must-Take Space II) ($793,920 based on 26,464 usable
square feet), for the costs relating to the design and construction of Tenant's
improvements which are permanently affixed to the Premises, including the Must-
Take Space (the "Tenant Improvements"). Notwithstanding anything to the contrary
set forth herein, Landlord shall not be obligated to disburse any portion of the
Tenant Improvement Allowance allocable to Suites 100 or 150 of Must-Take Space
II until the Must-Take Space Commencement Date applicable to such space, which
allocable amounts are Twenty-Five Thousand Eight Hundred Eighty Dollars
($25,880) with respect to such Suite 100 and Eighty-Three Thousand Three Hundred
Ten Dollars ($83,310) with respect to such Suite 150. The Tenant Improvement
Allowance exclusive of the amounts allocable to Suites 100 and 150 of Must-Take
--
Space II is the aggregate amount of Nine Hundred Seventy-Eight Thousand One
Hundred Ninety Dollars ($978,190). In no event shall Landlord be obligated to
make disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance. Further, in no event shall
EXHIBIT D - Page 1
<PAGE>
Landlord be obligated to make disbursements pursuant to this Work Letter for any
unused portion of the Tenant Improvement Allowance. Tenant shall be entitled to
apply the Tenant Improvement Allowance to costs incurred for any portion of the
Premises, including the Must-Take Space, notwithstanding the method of
calculating the amount of the Tenant Improvement Allowance. Except with respect
to the portion of the Tenant Improvement Allowance allocable to Must-Take Space
II, any portion of the Tenant Improvement Allowance which is not utilized by
Tenant by December 31, 1998 (or the date twelve (12) months after the applicable
Must-Take Space Rent Commencement Date with respect to Suites 100 and 150 of
Must-Take Space II), shall revert to Landlord and Tenant shall receive no credit
for any unused portion of the Tenant Improvement Allowance. All Tenant
Improvements for which the Tenant Improvement Allowance has been made available
shall be deemed Landlord's property under the terms of Section 8.5 of the Lease.
-----------
2.2 Disbursement of the Tenant Improvement Allowance. Subject to
------------------------------------------------
Tenant's right to receive disbursements of the Tenant Improvement Allowance as
set forth herein, Tenant shall pay all costs related to the construction of the
Tenant Improvements. The Tenant Improvement Allowance shall be disbursed by
Landlord (each of which disbursements shall be made pursuant to Landlord's
disbursement process to Tenant or directly to Tenant's Contractor, as requested)
for costs related to the construction of the Tenant Improvements and for the
following items and costs (collectively, the "Tenant Improvement Allowance
Items"): (i) payment of the fees of the "Architect" and the "Engineers," as
those terms are defined in Section 3.1 of this Tenant Work Letter, and payment
-----------
of the fees incurred by, and the cost of documents and materials supplied by,
Landlord and Landlord's consultants in connection with the preparation and
review of the "Construction Drawings," as that term is defined in Section 3.1 of
-----------
this Tenant Work Letter; (ii) the cost of any changes in the Base, Shell and
Core when such changes are required by the Construction Drawings; (iii) the cost
of any changes to the Construction Drawings or Tenant Improvements required by
Code; (iv) the "Landlord Administration Fee", as that term is defined in Section
-------
4.3.2 of this Tenant Work Letter; (v) the cost of any demolition of existing
- -----
improvements in the Premises; and (vi) permits. Notwithstanding the foregoing,
(a) up to Twelve Thousand Seven Hundred Seventy-Three Dollars Forty Cents
($12,773.40) calculated at the rate of $.15 per usable square foot of the
Premises, including the Must-Take Space of the Tenant Improvement Allowance may
be used for preliminary space planning services by Tenant's Architect; and (b)
up to One Hundred Seventy Thousand Three Hundred Twelve Dollars ($170,312.00)
calculated at the rate of $2.00 per usable square foot of the Premises,
including the Must-Take Space may be used for Tenant's relocation/expansion
costs such as data and communication cabling, furniture disassembly and
reassembly and related expenses. The aggregate amount payable to Landlord (but
exclusive of any amounts payable to third parties under clause (i)) pursuant to
clauses (i) and (iv) shall not exceed two percent (2%) of the Tenant Improvement
Allowance. As a condition to Landlord's disbursement to Tenant of the Tenant
Improvement Allowance for construction of Tenant Improvements, Tenant shall
deliver to Landlord: (i) original lien waivers (unconditional for the final
draw of the Tenant Improvement Allowance) from all contractors, subcontractors,
materialmen, suppliers and all other persons performing work or supplying
materials on or about the Premises in connection with the Tenant Improvements;
and (ii) copies of appropriate invoices and other evidence showing actual costs
incurred by Tenant in constructing the Tenant Improvements and, in addition with
respect to the final disbursement: (a) a certificate of occupancy (if available
for the construction being completed) for the Premises indicating that the
Tenant Improvements and the Premises are acceptable for occupancy; (b) a copy of
all building permits with all sign-offs executed; (c) Tenant's Architect's
certification that the Tenant Improvements have been constructed in accordance
with the Final Working Drawings and are one hundred percent (100%) complete; and
(d) an affidavit from Tenant's Contractor stating that all contractors,
subcontractors, materialmen, suppliers and, to the extent such persons have
provided "20-day" preliminary notices as required by law, all other persons
performing work or supplying materials and/or services on or about the Premises
in connection with the Tenant Improvements, have been paid in full and have
waived all liens and claims arising as a result of the Tenant Improvements.
EXHIBIT D - Page 2
<PAGE>
2.3 Standard Tenant Improvement Package. Landlord has established
-----------------------------------
specifications (the "Specifications") for the Building standard components to be
used in the construction of the Tenant Improvements in the Premises, a copy of
which Specifications are attached as Exhibit "G" to the Lease. The quality of
-----------
Tenant Improvements shall be equal to or of greater quality than the quality of
the Specifications, provided that Landlord may, at Landlord's option, require
the Tenant Improvements to comply with certain Specifications.
SECTION 3
---------
CONSTRUCTION DRAWINGS
---------------------
3.1 Selection of Architect/Construction Drawings. Tenant shall
--------------------------------------------
retain an architect/space planner selected by Tenant and reasonably approved by
Landlord (the "Architect") to prepare all preliminary, design development and
engineered/construction documents, including the "Construction Drawings," as
that term as defined in this Section 3.1. Landlord hereby approves Gensler
-----------
Associates as the Architect. Landlord shall have the right to reasonably
approve the engineering consultants and contractors (the "Engineers") retained
by Tenant or Tenant's contractor to prepare all plans and engineering working
drawings relating to, as well as to perform any construction work relating to,
the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and
sprinkler work of the Tenant Improvements. The plans and drawings to be
prepared by the Architect and the Engineers hereunder shall be known
collectively as the "Construction Drawings." All Construction Drawings shall be
in a drawing format and specifications reasonably acceptable to Landlord, and
shall be subject to Landlord's approval, which approval shall not be
unreasonably withheld, conditioned or delayed. Tenant and Architect shall
verify, in the field, the dimensions and conditions as shown on the relevant
portions of the Base Building Plans, and Tenant and Architect shall be solely
responsible for the same, and Landlord shall have no responsibility in
connection therewith. Landlord's review of the Construction Drawings as set
forth in this Section 3, shall be for Landlord's sole purpose and shall not
---------
imply Landlord's review of the same, or obligate Landlord to review the same,
for quality, design, Code compliance or other like matters. Accordingly,
notwithstanding that any Construction Drawings are reviewed by Landlord or
Landlord's space planner, architect, engineers and consultants, and
notwithstanding any advice or assistance which may be rendered to Tenant by
Landlord or Landlord's space planner, architect, engineers, and consultants,
Landlord shall have no liability whatsoever in connection therewith and shall
not be responsible for any omissions or errors contained in the Construction
Drawings, and Tenant's waiver and indemnity set forth in Section 10.1 of this
------------
Lease shall specifically apply to the Construction Drawings. Except as may
otherwise specifically be set forth herein, Landlord shall approve or disapprove
any matters or items submitted to Landlord pursuant to this Work Letter by
written notice to Tenant given within ten (10) business days after submittal to
Landlord, and if such matters or items are not approved or disapproved within
such period, then the matter or item shall be deemed approved. Any disapproval
shall be accompanied by the reasons therefor, which shall be limited to "design
problems" that would cause an adverse effect upon the Building base, shell or
core or any structural, mechanical or other major component of the Project or
the exterior appearance of the Project or any other matter to which Landlord
reasonably objects or which conflicts with applicable laws or regulations.
3.2 Final Space Plan. On or before the date set forth in Schedule 1,
---------------- ----------
attached hereto, Tenant and the Architect shall prepare the final space plan for
Tenant Improvements in the Premises (collectively, the "Final Space Plan"),
which Final Space Plan shall include a layout and designation of all offices,
rooms and other partitioning, their intended use, and equipment to be contained
therein, and shall deliver the Final Space Plan to Landlord for Landlord's
approval, which approval shall not be unreasonably withheld, conditioned or
delayed.
3.3 Final Working Drawings. On or before the date set forth in
----------------------
Section 1, Tenant, the Architect and the Engineers shall complete the
- ---------
architectural and engineering drawings for the Premises,
EXHIBIT D - Page 3
<PAGE>
and the final architectural working drawings in a form which is complete to
allow subcontractors to bid on the work and to obtain all applicable permits
(collectively, the "Final Working Drawings") and shall submit the same to
Landlord for Landlord's approval, which approval shall not be unreasonably
withheld, conditioned or delayed.
3.4 Permits. The Final Working Drawings shall be approved by
-------
Landlord (the "Approved Working Drawings") prior to the commencement of the
construction of the Tenant Improvements. Thereafter, Tenant shall promptly
submit the Approved Working Drawings to the appropriate municipal authorities
for all applicable building permits necessary to allow "Contractor," as that
term is defined in Section 4.1, below, to commence and fully complete the
------------
construction of the Tenant Improvements (the "Permits"), and, in connection
therewith, Tenant and Tenant's Contractor shall be responsible for all phases of
the permitting process and obtaining any building permit or certificate of
occupancy for the Premises; provided however that Landlord shall, in any event,
cooperate with Tenant in executing permit applications and performing other
ministerial acts reasonably necessary to enable Tenant or Tenant's Contractor to
obtain any such permit or certificate of occupancy. Except for de minimis
changes, no changes, modifications or alterations in the Approved Working
Drawings may be made without the prior written consent of Landlord, provided
that Landlord will not withhold its consent to any reasonable changes in the
Approved Working Drawings so long as such changes are consistent with the
specifications Landlord has established for the Building.
3.5 Time Deadlines. Tenant shall use its best, good faith, efforts
--------------
and all due diligence to cooperate with the Architect, the Engineers, and
Landlord to complete all phases of the Construction Drawings and the permitting
process, to receive the permits, and to complete the construction of the Tenant
Improvements as soon as possible after the execution of the Lease, and, in that
regard, shall meet with Landlord on a scheduled basis, to discuss Tenant's
progress in connection with the same. The applicable dates for approval of
items, plans and drawings as described in this Section 3, Section 4, below, and
--------- ---------
in this Tenant Work Letter are set forth and further elaborated upon in Schedule
--------
1 (the "Time Deadlines"), attached hereto. Each party agrees to comply with the
- -
Time Deadlines.
3.6 ADA Certifications. Prior to Tenant's submittal of working
------------------
drawings for a building permit for the Tenant Improvements, Landlord shall
obtain from Landlord's Architect and deliver to Tenant's architect such
Architect's certification that as of such date the Building, including the
Common Areas of the Project and including all restrooms located on the fifth and
sixth floors of the 800 Building but excluding the restrooms located on the
--
first, second and third floors of the 800 Building, and excluding the Premises,
the Must-Take Space and other leasable areas, comply with the requirements of
the ADA (as defined in Section 4.2.3 of the Lease) that are "readily
-------------
achievable." On the date that a building permit is issued for the Tenant
Improvements contemplated by this Work Letter, Tenant shall obtain from Tenant's
Architect a certificate that, to such Architect's knowledge and subject to
completion of the Tenant Improvements substantially in accordance with the
Construction Drawings, the Premises will comply with the requirements of the ADA
in effect as of the date of issuance of the building permit. If Landlord's
Architect has exceptions to its ADA certification, Landlord, at Landlord's cost,
shall complete such work as may be necessary in order that Landlord's Architect
can certify as required above and any such work shall be scheduled so as to
minimize disruption of construction of the Tenant Improvements and Tenant's use
and occupancy of the Premises.
SECTION 4
---------
CONSTRUCTION OF THE TENANT IMPROVEMENTS
---------------------------------------
4.1 Contractor. Howard Construction or another general contractor
----------
designated by Tenant and subject to the approval of Landlord, which approval
shall not be unreasonably withheld, conditioned
EXHIBIT D - Page 4
<PAGE>
or delayed ("Contractor"), shall construct the Tenant Improvements. The
Contractor shall comply with Landlord's construction rules and guidelines.
4.2 [Intentionally omitted.]
4.3 Construction of Tenant Improvements by Contractor Under the
-----------------------------------------------------------
Supervision of Landlord.
-----------------------
4.3.1 [Intentionally Omitted.]
4.3.2 Retention of Contractor. Tenant shall independently retain
-----------------------
Contractor, to construct the Tenant Improvements in accordance
with the Approved Working Drawings and Landlord and Landlord's
Architect shall oversee the construction by Contractor and
preparation of the Construction Drawings, Final Space Plan, Final
Working Drawings and the Approved Working Drawings. In order to
reimburse Landlord for such services, Tenant shall pay a
construction administration and management fee (the "Landlord
Administration Fee") to Landlord in an amount equal to the
product of two percent (2%) of the Tenant Improvement Allowance.
Landlord shall be entitled to deduct such fee from the Tenant
Improvement Allowance. Notwithstanding the foregoing, Tenant,
Tenant's Architect and the Contractor shall be responsible for
the construction of the Tenant Improvements in compliance with
all applicable federal, state and local codes, rules and
regulations.
4.3.3 Contractor's Warranties and Guaranties. Landlord hereby
--------------------------------------
assigns to Tenant all warranties and guaranties by Contractor
relating to the Tenant Improvements, and Tenant hereby waives all
claims against Landlord relating to, or arising out of the
construction of, the Tenant Improvements.
4.3.4 Tenant's Covenants. Tenant hereby indemnifies Landlord
------------------
for any loss, claims, damages or delays arising from the actions
of Architect or Contractor on the Premises or in the Building.
Within ten (10) days after completion of construction of the
Tenant Improvements, Tenant shall notify Landlord to cause a
Notice of Completion to be recorded in the office of the Recorder
of the County of Orange in accordance with Section 3093 of the
Civil Code of the State of California or any successor statute
and furnish a copy thereof to Landlord upon recordation, failing
which, Landlord may itself execute and file the same on behalf of
Tenant as Tenant's agent for such purpose. In addition, promptly
following Substantial Completion of the Tenant Improvements,
Tenant shall have prepared and delivered to Landlord a copy of
the "as built" plans and specifications (including all working
drawings) for the Tenant Improvements.
SECTION 5
---------
COMPLETION OF THE TENANT IMPROVEMENTS
-------------------------------------
5.1 Ready for Occupancy. The Premises shall be deemed "Ready for
-------------------
Occupancy" upon the Substantial Completion of the Premises. For purposes of
this Lease, "Substantial Completion" of the Premises shall occur upon: (i) the
completion of construction of the Tenant Improvements in the Premises pursuant
to the Approved Working Drawings, with the exception of any minor "punch-list"
items and any Tenant fixtures, work-stations, built-in furniture, or equipment
to be installed by Tenant or under the supervision of Contractor; (ii) a
temporary certificate of occupancy is issued for the Premises; (iii) Tenant is
able to occupy the Premises in accordance with all applicable governmental
permits, regulations and requirements; and (iv) utilities are available at the
Premises.
5.2 Delay of the Substantial Completion of the Premises. The Lease
---------------------------------------------------
Commencement Date with respect to the Premises, exclusive of the Must-Take
Space, is set forth in Section 7.2 of the Summary of Basic Lease Information of
-----------
the Lease. Except as provided in this Section 5.2, the Must-Take Space Rent
-----------
Commencement Date for the applicable Must-Take Space shall occur as set forth in
Section 1.1.5.1 of the
- ---------------
EXHIBIT D - Page 5
<PAGE>
Lease and Section 5.1, above. If there shall be a delay or there are delays in
-----------
the Substantial Completion of the Premises or in the occurrence of any of the
other conditions precedent to the Must-Take Space Rent Commencement Date for the
applicable Must-Take Space, as set forth in Section 1.1.5.1 of the Lease, as a
---------------
direct, indirect, partial, or total result of:
5.2.1 Landlord's failure to comply with the Time Deadlines;
5.2.2 Landlord's failure to timely approve any matter
requiring Landlord's approval;
5.2.3 A breach by Landlord of the terms of this Tenant Work
Letter or the Lease;
5.2.4 Landlord's request for changes in the Approved Working
Drawings;
5.2.5 Any other acts or omissions of Landlord, or Landlord's
agents, or employees; or
5.2.6 Failure of Landlord's Architect to deliver the
certification required pursuant to Section 3.6 of this Work Letter;
then, notwithstanding anything to the contrary set forth in the Lease or this
Tenant Work Letter and regardless of the actual date of the Substantial
Completion of the Premises, the Must-Take Space Rent Commencement Date with
respect to the applicable portion of the Must-Take Space shall be that date
determined by increasing the time period set forth in Section 1.1.5.1 of the
Lease by the aggregate period of all such delays. Landlord shall not be
responsible for any other delays in the construction of the Tenant Improvements
and Tenant's remedies, if any, for any such delay shall be against the
Contractor.
SECTION 6
---------
MISCELLANEOUS
-------------
6.1 Tenant's Entry Into the Premises Prior to Substantial Completion.
----------------------------------------------------------------
Landlord shall allow Tenant access to the Building and the portion of the
Premises not heretofore leased by Tenant or an Affiliate of Tenant (unless such
portion is subject to a lease with another tenant), as well as certain other
facilities of the Building in accordance with (and subject to the conditions set
forth in) Section 22.2 of the Lease for the purpose of Tenant installing
------------
overstandard equipment or fixtures (including Tenant's data and telephone
equipment) in the Premises.
6.2 Tenant's Representative. Tenant has designated Anita Dunn as
-----------------------
Tenant's sole representative with respect to the matters set forth in this
Tenant Work Letter, who, until further notice to Landlord, shall have full
authority and responsibility to act on behalf of the Tenant as required in this
Tenant Work Letter.
6.3 Landlord's Representative. Landlord has designated Alan Arch as
-------------------------
Landlord's sole representative with respect to the matters set forth in this
Tenant Work Letter, who, until further notice to Tenant, shall have full
authority and responsibility to act on behalf of the Landlord as required in
this Tenant Work Letter.
6.4 Time of the Essence in This Tenant Work Letter. Unless otherwise
----------------------------------------------
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. In all instances where either party is required to approve or
deliver an item, if no written notice of approval is given or the item is not
delivered within the stated time period, at the end of such period the item
shall automatically be deemed approved or delivered and the next succeeding time
period shall commence.
EXHIBIT D - Page 6
<PAGE>
6.5 Tenant's Lease Default. Notwithstanding any provision to the
----------------------
contrary contained in this Lease, if an event of default as described in Section
-------
19.1 of the Lease, or a default by Tenant under this Tenant Work Letter, has
- ----
occurred at any time on or before the Substantial Completion of the Premises,
then (i) in addition to all other rights and remedies granted to Landlord
pursuant to the Lease, Landlord shall have the right to withhold payment of all
or any portion of the Tenant Improvement Allowance and/or Landlord may cause
contractor to cease the construction of the Premises, and (ii) all other
obligations of Landlord under the terms of this Tenant Work Letter shall be
postponed until such time as such default is cured pursuant to the terms of the
Lease.
EXHIBIT D - Page 7
<PAGE>
SCHEDULE 1
----------
TIME DEADLINES
--------------
Dates Actions to be Performed
- ----- -----------------------
A. March 15, 1998 Final Space Plan to be completed by Tenant and
delivered to Landlord.
B. April 15, 1998 Tenant to deliver Final Working Drawings to Landlord.
C. May 15, 1998 Tenant to deliver Permits to Contractor.
SCHEDULE 1 TO EXHIBIT D - Page 1
<PAGE>
EXHIBIT E
---------
ESTOPPEL CERTIFICATE
--------------------
TO:_______________________
_______________________
_______________________
_______________________
Attn:__________________
__________________________________ ("Tenant") hereby certifies as follows:
1. The undersigned is the Tenant under that certain Office Lease dated _____
_____, 19____ (the "Lease"), executed by ______________________________________
("Landlord") as Landlord and the undersigned as Tenant, covering a portion of
the property located at ______________________________________ (the "Property").
2. Pursuant to the Lease, Tenant has leased approximately _______ square
feet of space (the "Premises") at the Property and has paid to Landlord a
security deposit of $________________. The term of the Lease commenced on
______________________, 19____ and the expiration date of the Lease is ________.
Tenant has paid rent through ___________________, 19____. The next rental
payment in the amount of $____________ is due on _____________________, 19_____.
Tenant is required to pay ________________ percent (____%) of all annual
operating expenses for the Property in excess of _____________________________.
3. Tenant is entitled to _________________ parking spaces. ______________ of
such spaces are at a charge rate of $__________, __________________ of such
spaces are at a charge rate of $________________ and the balance of such
spaces are at a charge rate of $_________________, all on a per space per month
basis.
4. The Lease provides for an option to extend the term of the Lease for
________________ years. The rental rate for such extension term is as follows:
_______________________________________________________________________________
______________________________________. Except as expressly provided in the
Lease, and other documents attached hereto, Tenant does not have any right or
option to renew or extend the term of the Lease, to lease other space at the
Property, nor any preferential right to purchase all or any part of the Premises
or the Property.
5. True, correct and complete copies of the Lease and all amendments,
modifications and supplements thereto are attached hereto and the Lease, as so
amended, modified and supplemented, is in full force and effect, and represents
the entire agreement between Tenant and Landlord with respect to the Premises
and the Property. There are no amendments, modifications or supplements to the
Lease, whether oral or written, except as follows (include the date of such
amendment, modification or supplement):_________________________________________
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________________.
6. All space and improvements leased by Tenant have been completed and
furnished in accordance with the provisions of the Lease, and Tenant has
accepted and taken possession of the Premises.
E-1
<PAGE>
7. Landlord is not in any respect in default in the performance of the terms
and provisions of the Lease. Tenant is not in any respect in default under the
Lease and has not assigned, transferred or hypothecated the Lease or any
interest therein or subleased all or any portion of the Premises.
8. There are no offsets or credits against rentals payable under the Lease
and no free periods or rental concessions have been granted to Tenant, except as
follows: _______________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________________.
9. Tenant has no actual or constructive knowledge of any processing, use,
storage, disposal, release or treatment of any hazardous or toxic materials or
substances on the Premises or the Property except as follows (if none, state
"none"): _______________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________________.
This Certificate is given to ________________________________________________
with the understanding that __________________ will rely hereon in connection
with the conveyance of the Property of which the Premises constitute a part to
_________________________. Following any such conveyance, Tenant agrees that
the Lease shall remain in full force and effect and shall bind and inure to the
benefit of the _________ and its successor in interest as if no purchase had
occurred.
DATED: ______________, 19___
"Tenant"
________________________________,
a _______________________________
By: _____________________________
Its: ____________________________
By: _____________________________
Its: ____________________________
E-2
<PAGE>
EXHIBIT "H"
HVAC STANDARDS
Landlord shall provide and operate a heating, ventilating and air conditioning
("HVAC") system with service available on a year round basis in all occupied
areas of the Building in accordance with the following standards:
Base Building HVAC system to furnish conditioned clean supply air through the
high and/or medium pressure base building air ducts, in sufficient capacities
and quantities and at temperatures and pressures as required to maintain
conditions as noted below:
1. Available Supply Air (55 degrees F cold plenum @ cooling):
(i) Plaza level - 1.3 cfm/rsf
(ii) Typical Floor (2-6) - .9 cfm/rsf
(iii) 7th floor - .95 cfm/rsf
2. Supply air delivered to the space shall use minimum 55% efficient filters.
3. Outside air requirements consistent with ASHRAE Standard 62-1989
4. Maximum sound levels within the space shall not exceed NC 35-40 without
vibration.
E-3
<PAGE>
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
PIMCO Advisors L.P., a Delaware limited partnership
Columbus Circle Investors, a Delaware general partnership
Columbus Circle Investors Management Inc., a Delaware corporation
Columbus Circle Trust Company, a Connecticut corporation
Cadence Capital Management, a Delaware general partnership
Cadence Capital Management Inc., a Delaware corporation
NFJ Investment Group, a Delaware general partnership
NFJ Management Inc., a Delaware corporation
Parametric Portfolio Associates, a Delaware general partnership
Parametric Management Inc., a Delaware corporation
Pacific Investment Management Company, a Delaware general partnership
PIMCO Management Inc., a Delaware corporation
StocksPLUS, L.P., a Delaware limited partnership
StocksPLUS Management Inc., a Delaware corporation
Blairlogie Capital Management, a United Kingdom limited partnership
Blairlogie Holding Limited, United Kingdom Liability Company
PIMCO Funds Distributors LLC, a Delaware limited liability company
PIMCO Funds Advertising Agency Co., a Delaware corporation
PIMCO Advisors (Ireland) Ltd., an Irish Company
PIMCO Global Advisors (Japan) Limited, a British Virgin Islands Company
Oppenheimer Group Inc., a Delaware corporation
Oppenheimer Capital, a Delaware general partnership
Oppenheimer Capital Trust Company, a New York Trust Company
PIMCO Global Advisors (Europe) Limited, a British company
Opcap Advisors, a Delaware general partnership
OCC Distributors, a Delaware general partnership
225 Liberty Street Advisers, L.P., a Delaware limited partnership
Value Advisors LLC, a Delaware limited liability company
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-47417) of
our reports dated January 30, 1998, relating to the financial statements of
PIMCO Advisors Holdings L.P., formerly Oppenheimer Capital, L.P., and to the
consolidated financial statements of PIMCO Advisors L.P., respectively, as
identified on the index to financial statements included as item 8 of PIMCO
Advisors Holdings L.P.'s 1997 Annual Report on Form 10-K (Form 10-K) which
appear in such Form 10-K.
We also consent to the incorporation by reference to those reports in the
Registration Statement on Form S-8 (No. 333-43201).
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Los Angeles, California
March 26, 1998
<PAGE>
Exhibit 23.2
------------
CONSENT OF PRICE WATERHOUSE LLP
-------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-47417) of
our report dated January 30, 1998, relating to the consolidated financial
statements of Oppenheimer Capital, and its subsidiaries as identified on the
index to financial statements included as item 8 of PIMCO Advisors Holdings
L.P.'s 1997 Annual Report on Form 10-K for the transition period from May 1 to
December 31, 1997.
We also consent to the incorporation by reference to those reports in the
Registration Statement on Form S-8 (No. 333-43201).
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
March 26, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
47417 on Form S-3 and in Registration Statement No. 333-43201 on Form S-8 of
PIMCO Advisors Holdings L.P. of the report of Deloitte & Touche LLP dated
February 2, 1996, relating to the consolidated financial statements of PIMCO
Advisors L.P. and subsidiaries for the year ended December 31, 1995 appearing in
the Annual Report on Form 10-K of PIMCO Advisors Holdings, L.P.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 8-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> MAY-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<CASH> 15,522
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,709
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 438,964
<CURRENT-LIABILITIES> 30,627
<BONDS> 0
0
0
<COMMON> 408,337<F2>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 438,964
<SALES> 0<F3>
<TOTAL-REVENUES> 45,737<F4>
<CGS> 0<F3>
<TOTAL-COSTS> 1,605<F5>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 44,132
<INCOME-TAX> 0
<INCOME-CONTINUING> 44,132
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,132
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.68
<FN>
<F1>PIMCO Advisors Holdings L.P. changed its fiscal year end from April 30 to
December 31.
<F2>Entity is a partnership. Amount shown represents Partners' Capital.
<F3>The partnership is in the service business and has no sales or cost of goods
sold of tangible products.
<F4>Amount shown includes a $2,809 gain resulting from the Quest sale -- see the
footnotes to the financial statements for further details.
<F5>Amount shown includes amortization of intangibles of $1,517.
</FN>
</TABLE>
