SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-09772
PIMCO ADVISORS L.P.
(Exact name of registrant as specified in its charter)
Delaware 06-1349805
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Newport Center Drive
Newport Beach, CA 92660
(Address of principal executive offices)
(Zip Code)
(714) 717-7022
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes No
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As of September 30, 1996, 13,588,764 publicly traded Class A units of
limited partner interest and 26,557,391 privately-held Class A units of limited
partner interest were issued and outstanding. There were 800,000 units of
general partner interest issued and outstanding at September 30, 1996. In
addition, there were 32,960,826 privately-held Class B units of limited partner
interest issued and outstanding at September 30, 1996.
PIMCO ADVISORS L.P.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the nine months
ended September 30, 1996 and September 30, 1995 4
Consolidated Statements of Operations for the three months
ended September 30, 1996 and September 30, 1995 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
PIMCO Advisors L.P. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
September 30,1996 December 31, 1995
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Assets
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Current Assets:
Cash and cash equivalents $ 54,254,138 $ 34,915,170
Fees receivable 62,974,387 57,351,994
Short term investments 11,230,382 11,531,226
Notes receivable 1,712,374 1,230,168
Other assets - current 2,188,430 2,620,639
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Total current assets 132,359,711 107,649,197
Investments in limited partnerships 4,248,838 3,384,237
Fixed assets, net of accumulated depreciation 10,201,058 10,743,184
Intangible assets, net of accumulated amortization 216,824,970 243,831,819
Other non current assets 9,910,901 3,983,358
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Total assets $373,545,478 $369,591,795
============ ============
Liabilities and Partners' Capital
- ---------------------------------
Current Liabilities:
Accounts payable, accrued expenses and
other current liabilities $ 29,532,567 $ 16,040,212
Accrued compensation 38,577,538 21,246,685
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Total current liabilities 68,110,105 37,286,897
Other non current liabilities 692,023 748,265
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Total liabilities 68,802,128 38,035,162
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Partners' Capital:
General Partner (800,000 units issued
and outstanding) 3,099,334 3,456,973
Class A Limited Partners (40,146,155 and
40,121,155 units issued and outstanding
at September 30, 1996 and
December 31, 1995, respectively) 211,058,679 228,465,440
Class B Limited Partners (32,960,826
units issued and outstanding) 102,436,542 114,806,204
Unamortized compensation (11,851,205) (15,171,984)
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Total Partners' Capital 304,743,350 331,556,633
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Total liabilities and partners'
capital $373,545,478 $369,591,795
============ ============
See accompanying notes.
3
PIMCO Advisors L.P. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the nine months ended
---------------------------------------
September 30, 1996 September 30, 1995
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Revenues:
Investment advisory fees:
Private accounts $156,571,557 $139,066,290
Proprietary Funds 94,575,782 61,083,542
Distribution and servicing fees 35,185,219 28,644,034
Other 828,408 992,336
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Total revenues 287,160,966 229,786,202
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Expenses:
Compensation and benefits 128,119,778 109,009,197
Amortization of intangibles, restricted units
and option plans 30,852,315 32,635,932
Commissions 27,480,251 20,736,108
General and administrative 13,019,473 6,790,103
Occupancy and equipment 6,932,010 6,466,117
Other 15,423,389 12,063,798
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Total expenses 221,827,216 187,701,255
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Operating income 65,333,750 42,084,947
Equity in income of limited partnership 173,556 155,002
Other income 2,227,716 2,655,277
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Income before taxes 67,735,022 44,895,226
Provision for taxes 833,554 505,378
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Net income $ 66,901,468 $ 44,389,848
============ ============
Net income allocated to:
General Partner $ 770,361 $ 645,529
Class A Limited Partner Units 38,651,130 32,334,287
Class B Limited Partner Units 27,479,977 11,410,032
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Total $ 66,901,468 $ 44,389,848
============ ============
Net income per unit:
General Partner and Class A Limited Partner unit $ 0.96 $ 0.81
============= ============
Class B Limited Partner unit $ 0.76 $ 0.31
============= ============
Cash distributions paid per unit:
General Partner and Class A Limited Partner unit $ 1.410 $ 1.179
============= ============
Class B Limited Partner unit $ 1.209 $ 0.414
============= ============
See accompanying notes
4
PIMCO Advisors L.P. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the three months ended
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September 30, 1996 September 30, 1995
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Revenues:
Investment advisory fees:
Private accounts $52,889,341 $47,932,243
Proprietary Funds 31,860,003 23,871,658
Distribution and servicing fees 12,121,557 11,088,648
Other 228,086 310,260
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Total revenues 97,098,987 83,202,809
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Expenses:
Compensation and benefits 43,176,174 38,764,094
Amortization of intangibles, restricted units
and option plans 10,319,085 11,366,016
Commissions 9,127,681 7,689,152
General and administrative 4,058,746 2,121,240
Occupancy and equipment 2,305,601 2,230,259
Other 5,164,611 4,618,929
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Total expenses 74,151,898 66,789,690
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Operating income 22,947,089 16,413,119
Equity in income of limited partnership 82,005 57,149
Other income 939,380 934,272
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Income before taxes 23,968,474 17,404,540
Provision for taxes 238,035 263,384
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Net income $23,730,439 $17,141,156
=========== ===========
Net income allocated to:
General Partner $ 262,036 $ 231,969
Class A Limited Partner Units 13,149,665 11,633,599
Class B Limited Partner Units 10,318,738 5,275,588
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Total $23,730,439 $17,141,156
=========== ===========
Net income per unit
General Partner and Class A Limited Partner unit $ 0.32 $ 0.29
=========== ===========
Class B Limited Partner unit $ 0.28 $ 0.14
=========== ===========
Cash distributions paid per unit:
General Partner and Class A Limited Partner unit $ 0.470 $ 0.470
=========== ===========
Class B Limited Partner unit $ 0.447 $ 0.199
=========== ===========
See accompanying notes.
5
PIMCO Advisors L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended
---------------------------------------
September 30, 1996 September 30, 1995
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Cash flows from operating activities:
Net income $ 66,901,468 $ 44,389,848
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization, restricted unit
and option plans 33,398,649 34,730,364
Equity in income of limited partnership (173,556) (155,002)
Unrealized loss (gain) on investments 150,348 (95,647)
Change in operating assets and liabilities:
Fees receivable (5,622,393) (23,130,978)
Other assets (5,495,334) (1,849,819)
Accounts payable, accrued expenses
and other current liabilities 13,492,355 (2,812,318)
Accrued compensation 17,330,853 19,566,507
Other liabilities (56,243) (747,410)
Other (43,687) 12,593
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Net cash provided by operating activities 119,882,460 69,908,138
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Cash flows from investing activities:
Purchases of fixed assets (2,394,268) (4,702,671)
Proceeds from sale of fixed assets 621,387 269,275
Notes receivable advances (676,737) (265,709)
Sale of securities 266,343 (10,067,765)
Investments in limited partnerships (800,000) (897,728)
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Net cash used in investing activities (2,983,275) (15,664,598)
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Cash flows from financing activities:
Cash distributions paid (97,560,217) (61,843,002)
Proceeds from options exercised - 374,921
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Net cash used in financing activities (97,560,217) (61,468,081)
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Net increase in cash and cash equivalents 19,338,968 (7,224,541)
Cash and cash equivalents, beginning of period 34,915,170 55,003,751
------------ ------------
Cash and cash equivalents, end of period $ 54,254,138 $ 47,779,210
============ ============
Supplemental disclosures:
Taxes paid $ 356,232 $ 383,310
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See accompanying notes.
6
PIMCO ADVISORS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) The condensed consolidated financial statements included herein have been
prepared without audit in accordance with the instructions to Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
PIMCO Partners, G.P., the General Partner, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of (a) the
financial condition at September 30, 1996 and December 31, 1995, (b) the results
of operations for the nine- and three-month periods ended September 30, 1996 and
1995, and (c) the cash flows for the nine-month periods ended September 30, 1996
and 1995, for PIMCO Advisors L.P. ("PA") have been made. It is suggested that
these unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes included in
PA's Annual Report on Form 10-K for the year ended December 31, 1995. Certain
reclassifications have been made to conform the prior period presentation to the
current period presentation. These interim results may not be indicative of the
results which may occur in the future. (See Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations).
2) Earnings per unit are computed under the two-class method and are based on
the weighted average number of units outstanding, assuming the exercise of
dilutive unit options. See Exhibit 11 for the computation of the weighted
average number of units outstanding during the periods.
Distributions on the units outstanding are paid quarterly in arrears to
unitholders of record as of the thirtieth day of the first month following each
quarter-end.
3) In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) N0. 123, "Accounting for Stock-Based
Compensation", which will be effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. PA will continue to apply APB Opinion No. 25 to its unit
based compensation awards to employees and will disclose the required pro forma
effect on net income and earnings per unit in the annual financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PIMCO Advisors L.P. and subsidiaries ("PA") are primarily involved in
investment advisory services. The investment advisor subsidiaries are as
follows:
Pacific Investment Management Company ("Pacific Investment
Management") and its wholly owned subsidiary, StocksPLUS
Management, Inc. ("StocksPLUS"), manages primarily fixed income
investments, with approximately $83.2 billion in assets under
management;
Columbus Circle Investors ("CCI") and its wholly owned subsidiary,
Columbus Circle Trust Company ("CCTC"), manages primarily equity
and equity related investments, with approximately $14.1 billion
in assets under management;
Cadence Capital Management ("Cadence") manages equity and equity
related investments, with approximately $3.0 billion in assets
under management;
Parametric Portfolio Associates ("Parametric"), manages equity and
equity related investments, with approximately $1.8 billion in
assets under management;
NFJ Investment Group ("NFJ"), manages equity and equity related
investments, with approximately $1.7 billion in assets under
management; and
Blairlogie Capital Management ("Blairlogie"), manages equity and
equity related investments, with approximately $673 million in
assets under management.
The subsidiaries are each a registered investment advisor and collectively they
provide a broad array of investment management and advisory services for
clients, using separate and distinct investment management styles.
In addition to the investment management subsidiaries, PA operates a wholly-
owned distributor, PIMCO Advisors Distribution Company ("PADCo") and sponsors
two mutual fund families: PIMCO Funds (funds for institutional and
401(k)/defined contribution investors) and PIMCO Advisors Funds (retail funds
and the Cash Accumulation Trust).
The Trustees of the the above mutual fund trusts have approved a plan to combine
the fund groups into a single mutual fund complex, the PIMCO Funds. The
restructuring is subject to shareholder approvals and other conditions. It is
expected to be effective in January 1997. The combination is not expected to
have a material impact on PA's results of operations.
RESULTS OF OPERATIONS FOR 1996 COMPARED TO 1995
PA derives substantially all its revenues and net income from advisory fees for
investment management services provided to its institutional and individual
clients and advisory, distribution and servicing fees for services provided to
its two proprietary families of mutual funds ("Proprietary 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 Proprietary 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
PA's management and from PA's ability to attract new clients. In addition, PA
has certain accounts which are subject to performance based fee schedules
wherein performance relative to the S&P 500 Index or other benchmarks over a
particular time period can result in additional fees. Such performance based
fees can have a significant effect on revenues, and provide an opportunity to
earn higher fees (as well as lower) than could be obtained under fee
arrangements based solely on a percentage of assets under management.
PA's consolidated 1996 third quarter revenues, including those of its wholly-
owned distributor, PADCo, were $97.1 million compared to $83.2 million in the
third quarter of 1995, up $13.9 million. Advisory revenues were $84.7 million in
the third quarter of 1996 compared to $71.8 million for the same period in 1995,
up $12.9 million. For the nine months ended September 30, 1996 PA's consolidated
revenues were $287.2 million compared to $229.8 milllion in 1995. Revenues at
the distributor increased to $39.7 million in 1996 from $29.6 million in 1995.
Advisory revenue increases resulted from both the commitment
8
of new assets by institutional clients and from market appreciation. These
revenues included performance based fees, which amounted to $4.9 million during
the third quarter of 1996 as compared to $4.9 million during the same period in
1995. For the nine months ended September 30, 1996 performance fees increased to
$16.3 million, from $10.3 million in the comparable period of 1995. The increase
in performance based fees occurred both in a product line that seeks to
outperform the S&P 500 Index, and selected fixed income accounts. Increases at
the distributor relate to higher levels of sales and qualifying assets.
Revenues by operating entity were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------- --------------------
(In millions) (In millions)
Pacific Investment Management $54.9 $45.6 $162.1 $126.1
CCI 15.5 13.9 47.2 38.7
Cadence 4.5 4.0 13.0 10.5
Parametric 0.9 1.0 2.6 2.9
NFJ 1.8 1.5 5.4 4.4
PADCo 13.3 11.4 39.7 29.6
Other (1) 6.2 5.8 17.2 17.6
----- ----- ------ ------
$97.1 $83.2 $287.2 $229.8
===== ===== ====== ======
(1) Includes PA's Institutional Services (formerly PFAMCo) and Mutual Funds
divisions and Blairlogie.
Compensation and benefits in the third quarter of 1996 of $43.2 million were
$4.4 million higher than the same period in 1995. For the nine-month period,
this cost category increased from $109.0 million in 1995 to $128.1 million in
1996. These increases reflect additional staffing at both Pacific Investment
Management and CCI, as well as higher profit sharing expenses (which are based
on profits of each of the investment advisor subsidiaries).
Commission expenses, incurred by PADCo related to sales and servicing of retail
mutual funds, increased $1.4 million to $9.1 million in the third quarter of
1996 compared to the same period a year ago, and increased $6.8 million to $27.5
million for the first nine months of 1996 compared to the same period in 1995,
reflecting higher trail commissions due to an increased level of qualifying
assets, as well as increased "up front" commissions due to higher current sales
levels.
General and administrative expenses amounted to $4.1 million during the third
quarter 1996, an increase of $2.0 million over the same period a year ago. This
cost category increased by $6.2 million to $13.0 million for the first nine
months of 1996 compared to the same period in 1995. These increases can be
primarily attributed to the conversion of Pacific Investment Management's
institutional fund family to a fixed administrative fee basis resulting in
increases to this cost category for expenses previously borne directly by the
funds. This change was effective October 1, 1995. There is a corresponding
increase in revenues related to this conversion. These incremental costs account
for substantially all of this increase.
Other expenses in the third quarter of 1996 increased by $0.6 million to $5.2
million from the same period in 1995. Such costs for the first nine months of
1996 increased $3.3 million to $15.4 million compared to the same period in
1995. The rise in both periods is principally due to increases in marketing and
promotional costs and professional fees, as well as reductions in reimbursement
agreements with Pacific Mutual Life Insurance Company resulting from certain
subsidiaries having approached or reached profitability.
Net income per unit is computed under the two-class method which allocates net
income to Class A and Class B Limited Partner units in proportion to the
Operating Profit Available for Distribution for each class. Operating Profit
Available for Distribution is defined by PA's 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. Class A Limited Partner and General Partner units are
entitled to a priority distribution of $1.88 per unit per year until December
31, 1997. Because of this, the amount of Operating Profit Available for
9
Distribution allocated to such units is currently greater than the amount
allocated to Class B Limited Partner units. As a result, the net income
allocated per Class A Limited Partner and General Partner units is currently
greater than the net income allocated per Class B Limited Partner unit. Due to
the priority distribution, any dilution to net income per unit from the assumed
exercise of unit options is currently applied entirely to Class B Limited
Partner units.
CAPITAL RESOURCES AND LIQUIDITY
PA's business has not historically been capital intensive. In general, working
capital requirements had been satisfied out of operating cash flow or short-term
borrowings. PA will make quarterly profit-sharing payments and distributions to
its unitholders. PA may need to finance profit-sharing payments using short-term
borrowings.
PA had approximately $65.5 million of cash and cash equivalents and short-term
investments at September 30, 1996 compared to approximately $46.5 million at
December 31, 1995. PA's liquidity not otherwise used for quarterly distributions
will be used for general purposes including profit-sharing payments and for
brokers' commissions on sales of mutual fund shares distributed without a front-
end sales load. PA believes that the level of such commissions may increase in
the future due to the introduction of new products and mutual fund pricing
structures which may require use of an alternate financing source other than the
operating cash flow.
The Partnership distributes substantially all of its "Operating Profit Available
for Distribution", after appropriate reserves, to its partners. Distributions
are paid quarterly, in arrears, on the units outstanding to unitholders of
record on the thirtieth day of the first month following each quarter-end.
During the first nine months of 1996, the Partnership distributed $1.41 per
Class A Limited Partner and General Partner unit and $1.209 per Class B Limited
Partner unit. These distributions related to the fourth quarter of 1995 and
first two quarters of 1996's earnings. The Partnership declared a third quarter
distribution of $0.47 per Class A Limited Partner and General Partner unit
payable to holders of record on October 30, 1996. The payment date for this
distribution is November 14, 1996. The Partnership also declared a third quarter
distribution of $0.449 per Class B Limited Partner unit payable to holders of
record on October 30, 1996. The payment date for this distribution is November
29, 1996.
PA currently has no long-term debt. In April 1996, the Partnership obtained a
$25 million, four year revolving line of credit for working capital purposes.
This facility was not utilized during the period.
ECONOMIC FACTORS
The general economy including interest rates, inflation and client responses to
economic factors will affect, to some degree, the operations of PA. As a
significant portion of assets under management are fixed income assets,
fluctuations in interest rates could have a material impact on the operations of
PA. PA's 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 PA. Any resulting revenue fluctuations may or may not
be recoverable in the pricing of services offered by PA.
10
PART II: OTHER INFORMATION
Item 5. Other Information
The Equity Board has approved a Deferred Compensation Plan to be
implemented in December 1996 or January 1997 and a Unit Incentive Plan,
to be implemented upon ratification by the unitholders. The Deferred
Compensation Plan will allow eligible employees to acquire Partnership
units through a trust at a discount from the current market price
utilizing deferred compensation. The Unit Incentive Plan will expand
the number of units available for grant as options and/or restricted
units by 4.4 million, to a total of 10 million units.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computations of Net Income Per Unit.
27 Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 31, 1996 disclosing a
change in the registrant's certifying accountant.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIMCO Advisors L.P.
By /s/ William D. Cvengros
-----------------------
William D. Cvengros
Chief Executive Officer
By /s/ Robert M. Fitzgerald
------------------------
Robert M. Fitzgerald
Principal Accounting Officer
November 13, 1996
12