FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Mark One:
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year ended December 31, 1996
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [No Fee Required]
For the Transition Period from to
Commission file No. 1-09772
PIMCO ADVISORS L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1349805
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
800 NEWPORT CENTER DRIVE, NEWPORT BEACH, CA 92660
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (Zip Code)
Registrant's telephone number, including area code: 714-717-7022
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS WHICH REGISTERED
CLASS A UNITS OF LIMITED PARTNER INTEREST NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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(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
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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. [_]
State the aggregate market value of the voting stock* held by non-
affiliates of the registrant. As of March 24, 1997, the value was
approximately $305,747,190.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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* The securities held by non-affiliates are not voting stock but are 13,588,764
publicly held Class A Units of limited partner interest.
PART I
ITEM 1. BUSINESS
OVERVIEW
PIMCO Advisors L.P.(the "Partnership" or "PIMCO Advisors") is one of the
nation's largest publicly traded investment management firms with approximately
$110 billion of assets under management at December 31, 1996. The Partnership
offers a broad range of investment management services and styles to
institutional and retail investors, combining the fixed income-oriented
institutional investment management operations of Pacific Investment Management
Company, the equity-oriented investment management operations of Columbus Circle
Investors and four smaller affiliated domestic and international equity
investment management firms and mutual fund operations. The Partnership provides
investment management services primarily to (i) large institutional clients
through separate accounts, (ii) smaller institutional clients and financial
intermediaries through the institutional share classes of the PIMCO Funds
(described below) and (iii) retail investors through the retail share classes of
the PIMCO Funds, which are sold principally through broker-dealers.
The Partnership's strategy is to pursue growth by marketing the investment
management expertise, performance record and reputation of its six institutional
investment management firms (the "Investment Management Firms"). The Investment
Management Firms are five Delaware partnerships: Pacific Investment Management
Company ("Pacific Investment Management"), Columbus Circle Investors ("CCI"),
Cadence Capital Management ("Cadence"), NFJ Investment Group ("NFJ") and
Parametric Portfolio Associates ("Parametric"); and one United Kingdom limited
partnership, Blairlogie Capital Management ("Blairlogie").
The six Investment Management Firms are structured as separate subsidiaries.
The Partnership believes this decentralized structure enables the Investment
Management Firms to implement their own distinct investment strategies and
philosophies, providing financial and other incentives for the managers of each
of the firms to render superior performance and client service. The Managing
Directors of the Investment Management Firms have a significant profits interest
in their respective Investment Management Firms, as well as substantial economic
interests in the Partnership. These economic interests relate significantly to
Class B Units of limited partner interest ("Class B LP Units"), distributions
on which until December 31, 1997 are subordinated to the annual $1.88 per
unit priority distribution on the Class A Units of limited partner
interest ("Class A LP Units") as described below.
PIMCO Advisors business results from the November 1994 consolidation (the
"Consolidation") of the investment advisory businesses of certain wholly-owned
subsidiaries of Pacific Financial Asset Management Corporation ("PFAMCo"), i.e.,
Pacific Investment Management, Cadence, Parametric, NFJ and Blairlogie, with the
investment advisory and mutual fund distribution businesses, including CCI,
which were formerly conducted under the name of Thomson Advisory Group L.P. and
its affiliate Thomson Investors Services Inc. (now named PIMCO Funds
Distribution Company). PFAMCo also contributed its own administrative and
distribution operations to Pacific Investment Management Company Advisors as
part of the Consolidation. As part of the Consolidation, PIMCO Partners, G.P.,
("PIMCO GP") replaced Thomson Advisory Group Inc. ("TAG Inc.") as the general
partner of the Partnership.
Under current law, the Partnership will cease being classified as a
partnership for federal income tax purposes and will be treated as a corporation
immediately after December 31, 1997 (or sooner if the Partnership adds a
substantial new line of business or otherwise fails to satisfy certain
requirements) unless the Partnership limited partner interests cease to be
publicly traded prior to such time. As a corporation, the Partnership would be
subject to tax on its income and its equityholders would be subject to tax on
distributions. In an effort to preserve partnership tax treatment after December
31, 1997 for the holders of PIMCO Advisors partner interests who are affiliates
of the Partnership (the "Nonpublic Unitholders"), the Partnership's Amended and
Restated Partnership Agreement (the "Partnership Agreement") confers on PIMCO
GP, the general partner of the Partnership, broad authority to effect one or
more restructurings (collectively, the "Restructuring") of the Partnership in
connection with, or in anticipation of, such a change in tax status.
It is currently anticipated that on or about November 30, 1997, but no later
than December 31, 1997, the Partnership, PIMCO GP and TAG Inc. will engage in
transactions resulting in the PIMCO Advisors unitholders and the stockholders of
TAG Inc. all indirectly owning equity interests in the Partnership through
the shares of a newly-formed corporate general partner of the Partnership, which
will directly or beneficially own the PIMCO Advisors units in which such persons
formerly
1
had an interest. Following the Restructuring, it is expected that the corporate
general partner will be the sole publicly traded entity through which equity
interests in the Partnership will be owned. See "Restructuring" in Item 13.
RECENT DEVELOPMENTS
On February 13, 1997, the Partnership and its affiliate TAG Inc. entered into
an Agreement and Plan of Merger with Oppenheimer Group, Inc. and its subsidiary
Oppenheimer Financial Corp., providing for the acquisition of a 32.5% managing
general partner interest in Oppenheimer Capital (a general partnership), the one
percent general partner interest in Oppenheimer Capital, L.P. and 100% of the
stock of Advantage Advisers, an affiliate of Oppenheimer Group, which manages
eight closed-end funds. The transaction covers only the private interests
Oppenheimer Group holds in Oppenheimer Capital and Oppenheimer Capital, L.P. and
does not include the publicly traded units of Oppenheimer Capital, L.P.
The agreement provides for the acquisition of these assets by TAG Inc. through
a merger with Oppenheimer Group, Inc. in exchange for total consideration of
approximately $233 million in convertible preferred stock to be issued by TAG
Inc. and the assumption of approximately $32 million of debt. At the closing,
TAG Inc. will contribute the one-third general partner interest in Oppenheimer
Capital to the Partnership in exchange for approximately 9.137 million Class A
LP Units ($233 million at the agreed value of $25.50 per unit). PIMCO Advisors
may be obligated in certain circumstances to purchase such convertible preferred
stock for its issue price. The Partnership will hold the interest in Oppenheimer
Capital through a newly-formed investment management subsidiary, and the
operating results of the Partnership will include its proportionate share of the
operating results of Oppenheimer Capital. The transaction is subject to certain
client, lender, Internal Revenue Service and other approvals, and is expected to
take up to six months to complete.
GENERAL
The table below sets forth the assets under management of the Partnership and
its six Investment Management Firms at the dates indicated:
ASSETS UNDER MANAGEMENT (in millions)
AT DECEMBER 31,
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1996 1995 1994 1993(2) 1992(2)
------- -------- -------- -------- --------
Pacific Investment Management $ 88,147 $ 76,371 $ 56,883 $ 53,001 $ 41,249
Columbus Circle Investors 14,159 12,670 10,304 9,848 8,070
Cadence Capital Management 3,229 2,393 1,762 1,647 940
Parametric Portfolio Associates 2,001 1,569 1,546 1,385 932
NFJ Investment Group 1,743 1,455 1,072 966 534
Blairlogie Capital Management 673 645 479 97 -
Other(1) 70 79 129 1,194 2,630
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Total $110,022 $ 95,182 $ 72,175 $ 68,138 $ 54,355
======== ======== ======== ======== ========
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(1) Includes assets under management not advised or subadvised by the Investment
Management Firms. For years ended December 31, 1992 and 1993, includes
assets invested in the Cash Accumulation Trust, a money market fund, which
is currently subadvised by Columbus Circle Investors.
(2) Proforma as if the consolidation of PIMCO Advisors had occurred on January
1, 1993. See Item 7 of this Form 10-K.
2
The table below sets forth the aggregate assets under management of PIMCO
Advisors and the six Investment Management Firms by investment type:
ASSETS UNDER MANAGEMENT (in millions)
AT DECEMBER 31,
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1996 1995 1994
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Institutional Separate Accounts
Fixed Income $ 57,295 $50,264 $38,778
Equity 18,075 16,248 12,461
Institutional Mutual Funds (1)
Fixed Income 19,592 16,732 11,830
Equity 5,077 3,768 2,515
Retail Mutual Funds
Fixed Income 2,541 2,043 1,744
Equity 6,728 5,486 4,055
Retail Money Market 714 641 792
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Total $110,022 $95,182 $72,175
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(1) Includes assets managed under pooling arrangements.
The Partnership markets its investment management services to institutional
and mutual fund clients through client service representatives at each of the
Investment Management Firms and through distributors including PIMCO Funds
Distribution Company ("PFD"),(formerly known as PIMCO Advisors Distribution
Company), a wholly-owned broker-dealer which distributes and markets shares of
the retail mutual funds of PIMCO Advisors.
The revenues of the Partnership and its six Investment Management Firms
consist principally of management fees based on the value of assets under
management and in some cases the performance of the advisor. The table below
sets forth management fees for the Partnership and its six Investment Management
Firms for the periods indicated:
MANAGEMENT FEES (in thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994(2) 1993(2) 1992(2)
-------- -------- -------- -------- --------
Pacific Investment Management $222,274 $180,937 $141,218 $144,487 $106,279
Columbus Circle Investors 63,698 53,078 44,363 39,460 32,151
Cadence Capital Management 17,873 14,555 12,120 9,504 6,103
Parametric Portfolio Associates 3,466 3,753 4,451 4,505 2,932
NFJ Investment Group 7,271 5,916 4,967 3,795 2,007
Blairlogie Capital Management 3,721 2,916 420 23 -
Other (1) 20,038 20,455 23,936 20,592 22,805
-------- -------- -------- -------- --------
Total $338,341 $281,610 $231,475 $222,366 $172,277
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(1) Includes revenues not directly allocable to the investment management
services of the Investment Management Firms, the management fees of the Cash
Accumulation Trust and intercompany eliminations.
(2) Proforma as if the consolidation of PIMCO Advisors had occurred on January
1, 1993. See Item 7 of this Form 10-K.
3
A principal component of the Partnership's marketing strategy is the
historical performance of the Investment Management Firms relative to selected
benchmarks over long periods of time. For example, Pacific Investment Management
stresses its record in equaling or exceeding client-selected performance
benchmarks over long periods through a measured risk taking approach that
emphasizes preservation of capital. Over the last 10 years, Pacific Investment
Management's Total Return composite, representing approximately 56% of Pacific
Investment Management's total assets under management at December 31, 1996,
outperformed the Lehman Brothers Aggregate Bond Index by approximately 108 basis
points (9.55% compared to 8.47%) annually on a compound basis after adjusting
for the advisory fees paid to Pacific Investment Management.
PRIMARY MARKETS AND STRATEGY FOR GROWTH
The two primary markets for the investment management services offered by the
Investment Management Firms are the institutional market and the mutual fund
market. Several of the Investment Management Firms also manage private accounts
for high net worth individuals.
INSTITUTIONS. The institutional market for investment management services
includes corporate, government and multi-employer pension plans, charitable
endowments and foundations, and corporations purchasing investment management
services for their own account. Each of the Investment Management Firms serves
the institutional market and conducts its own institutional marketing
activities. In general, the Investment Management Firms' marketing approach
targets Fortune 1,000 companies and other large institutional investors. The
Investment Management Firms seek to develop client relationships through
investment management performance and focused and responsive client service.
Their business strategies also involve increasing assets under management for
non-U.S. clients, expanding the array of fixed income and equity products
offered to clients, seeking to expand market share with medium and smaller
institutional investors by offering pooled investment vehicles such as the PIMCO
Funds (described below), and otherwise seeking to diversify and expand their
businesses by investment strategy, method of delivery and markets.
MUTUAL FUNDS. Like the institutional market for investment management
services, the mutual fund market has expanded rapidly in recent years.
The mutual fund industry is highly competitive and is characterized by a high
degree of fragmentation and a large and rapidly increasing number of product
offerings. Marketing strategies, product development, business development,
sales expertise and servicing are increasingly important. The traditional
channel for the distribution of mutual funds (other than money market funds) is
through brokerage firms that are not affiliated with the funds' sponsor
organization and that are compensated primarily through front-end sales loads
deducted from the purchaser's investment at the time of the sale. Increasingly
other distribution arrangements and channels have become important. These
include "no-load" or "low-load" funds, sold primarily through direct marketing
efforts or captive sales forces affiliated with the sponsor organization;
"private label" and "proprietary" funds managed by and offered primarily
through, or to customers of, a financial organization such as a brokerage firm,
insurance company or bank; and "back-end load" or "level load" funds offered
through brokerage and other third-party channels, but with compensation to the
selling brokers being funded through commission advances from the funds' sponsor
which are recovered through ongoing charges against fund assets assessed under
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), contingent deferred sales charges assessed against shareholders
at the time they redeem their investments, or a combination of such sources.
The Partnership's retail strategy is to build a "brand name" awareness of the
fund group both at the broker-dealer level and the retail investor level,
creating a valuable, long-term franchise. Leveraging off the depth and expertise
of the six Investment Management Firms, the Partnership has developed new funds
to fill gaps in its product line in terms of investment objectives and styles.
INVESTMENT MANAGEMENT FIRMS
PACIFIC INVESTMENT MANAGEMENT COMPANY (PACIFIC INVESTMENT MANAGEMENT)
General. Pacific Investment Management Company had aggregate assets under
management at December 31, 1996 and December 31, 1995 of $88.1 billion and $76.4
billion, respectively, of which 90% and 89.9%, respectively, consisted of fixed
income accounts and 10% and 10.1%, respectively, consisted of equity-related
accounts. Pacific Investment Management's clients principally include large and
medium-sized corporate pension and profit sharing plans, public pension plans,
multi-employer pension plans and foundations and endowment funds. Its client
list includes many of the nation's largest pension funds, foundations and
endowments and other institutional investors.
4
Investment Strategy. Pacific Investment Management believes that its strength
in the management of fixed income assets is derived from its investment
philosophy, which stresses a long-term or secular focus, active management, with
measured risk-taking, and the application of strong analytical capabilities
across all fixed income market sectors. Under Pacific Investment Management's
investment philosophy, longer term macro-economic trends are key inputs to
portfolio strategy, and moderate portfolio duration ranges are favored to reduce
volatility relative to client-specified benchmarks. Pacific Investment
Management's investment strategy process begins with a "top-down" approach
utilizing an intensive review of long-term and cyclical trends to anticipate
interest rates, volatility, yield curve shape and credit trends. These forecasts
become the basis for the major portfolio strategies. Pacific Investment
Management then uses a "bottom up" process to select specific portfolio
investments.
In managing fixed income investment advisory accounts, within client and
mutual fund guidelines, Pacific Investment Management uses a broad array of
fixed income investments, including investment grade and below investment grade
securities, as well as derivatives (which use dates back to 1980) in seeking to
manage portfolio risk and exploit market inefficiencies. Pacific Investment
Management's use of derivatives has generally been confined to futures, options
and mainstream mortgage derivatives (such as collateralized mortgage
obligations, or CMOs); however, Pacific Investment Management at times has also
held positions in client portfolios in interest-only and principal-only strips
(IOs and POs) and, occasionally, structured notes and swaps. Although certain of
these derivative securities can have higher degrees of interest rate risk,
illiquidity and counterparty credit risk, Pacific Investment Management
approaches derivatives much as it does other complex fixed income instruments--
as potential investments to be analyzed, monitored and used when appropriate to
enhance a portfolio's return or manage its risk. Pacific Investment
Management has developed and employs, in the case of derivatives as well as
other instruments, various risk controls at the portfolio and individual
instrument levels in an effort to evaluate and monitor interest rate, liquidity
and credit quality risk.
As part of its active management style, Pacific Investment Management uses
internally developed, proprietary computer software programs in managing its
clients' assets rather than using analytical models purchased from outside
sources. Pacific Investment Management believes that its proprietary computer
technology provides it with an important competitive advantage.
Pacific Investment Management has sought to expand its client base beyond the
traditional defined benefit pension market, and has increased its presence in
the defined contribution pension market. Pacific Investment Management's
strategy also involves focusing on financial service aggregators of retail
assets such as unaffiliated sponsors of mutual funds and other registered
investment advisors (including fee-based financial planners) who recommend the
use of "no-load" mutual funds such as the institutional and administrative
classes of PIMCO Funds PIMS Series (defined below under Partnership Mutual
Funds) to their clients, and consultant alliances. In addition, Pacific
Investment Management seeks to increase both institutional and retail assets
under management from non-U.S. investors.
INVESTMENT PRODUCTS. Pacific Investment Management offers a range of
investment services for both fixed income and equity assets:
FIXED INCOME PORTFOLIOS. Pacific Investment Management offers a
variety of strategies for clients with fixed income portfolios, designed to
reflect each particular client's investment objective:
Total Return Portfolios--Pacific Investment Management structures
total return portfolios with the objective of realizing maximum total return,
consistent with the preservation of capital and prudent investment management
across the spectrum of fixed income securities. This strategy generally results
in a portfolio duration of three to six years. The total return strategy is
Pacific Investment Management's flagship investment management service;
portfolios utilizing this strategy represented approximately $54 billion of
Pacific Investment Management's total assets under management at December 31,
1996.
Low Duration Portfolios--Pacific Investment Management has actively
managed low duration accounts since 1979 (overall portfolio duration 1-3
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 guaranteed
investment contract ("GIC") products which are designed to outperform GICs) and
sector emphases (e.g., international, high-yield, or mortgages).
5
EQUITY RELATED PORTFOLIOS. Pacific Investment Management also manages
an enhanced equity based strategy: StocksPLUS(R), which accounted for $8.8
billion of assets under management at December 31, 1996. 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 AND OTHER PORTFOLIOS. Pacific Investment Management, as
investment advisor to a series of offshore funds and individual clients,
provides fixed income investment advice to non-U.S. investors. Assets under
management for these offshore funds totaled $476 million and $130 million at
December 31, 1996 and December 31, 1995, respectively. Pacific Investment
Management also serves as subadvisor for a series of term trusts investing in
mortgage related securities that are marketed to Japanese investors. These
trusts had assets of $1.4 billion and $2.1 billion at December 31, 1996 and
December 31, 1995, respectively. 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, 1996 and December 31, 1995 were $3.5 billion and $3.1 billion,
respectively.
Set forth below is a table showing Pacific Investment Management's
assets under management and the number of portfolios at the dates indicated:
ASSETS UNDER MANAGEMENT ($ in millions)(1)
AT DECEMBER 31,
-----------------------------------------------
1996 1995 1994
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No. Amount No. Amount No. Amount
--- ------- --- ------- --- -------
Fixed Income Portfolios:
Total Return Portfolios 182 $51,078 162 $45,075 153 $34,681
Low Duration Portfolios 30 5,829 30 5,365 25 4,253
Other Duration Specific or
Sector Specific Portfolios:
Duration/Specific 17 9,514 10 7,719 11 3,506
GIC Alternatives 21 2,918 13 1,968 12 1,634
Mortgages 15 3,545 19 4,514 25 4,649
Global/Non-U.S. 17 3,096 9 1,670 8 1,680
Other 11 3,318 14 2,359 10 1,750
--- ------- --- ------- --- -------
Total 293 79,298 257 68,670 244 52,153
--- ------- --- ------- --- -------
Equity/Related Portfolios:
StocksPLUS 20 8,838 20 7,591 17 4,636
Other 1 11 4 110 4 94
--- ------- --- ------- --- -------
Total 21 8,849 24 7,701 21 4,730
--- ------- --- ------- --- -------
TOTAL ASSETS UNDER MANAGEMENT 314 $88,147 281 $76,371 265 $56,883
=== ======= === ======= === =======
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(1) Includes the managed assets of PIMCO Funds.
Performance-Based Fees. Pacific Investment Management's fee schedules are
typically computed as a percentage of assets under management. Pacific
Investment Management's StocksPLUS product, which accounted for $8.8 billion of
assets under management at December 31, 1996, generally is subject to a
performance-based fee schedule in which underperformance relative to the S&P 500
index over a particular time period results in no fees being paid by clients and
superior performance results in incentive fees that are not subject to a cap.
The StocksPLUS fee arrangement can materially affect Pacific Investment
Management's total revenues from period to period.
6
In addition to the StocksPLUS accounts, several large fixed income accounts
also have performance-based fee arrangements. For these accounts, Pacific
Investment Management must outperform a specified fixed income benchmark over a
particular time period in order to receive a performance-based fee, but
generally is entitled to a base fee determined with reference to the value of
assets under management. Such arrangements can make Pacific Investment
Management's revenues volatile, but also provide an opportunity to earn higher
fees than could be obtained under fee arrangements based solely on a percentage
of assets under management.
Employees. Pacific Investment Management's 13 Managing Directors have an
average of 18 years of industry experience. Of the 13 Managing Directors, three
(William H. Gross, William F. Podlich, III and James F. Muzzy) have been
associated with Pacific Investment Management since its founding and the other
ten have been with Pacific Investment Management for an average of 11 years. At
December 31, 1996, the firm-wide staff of 284 included 48 investment
professionals, of whom 17 are Chartered Financial Analysts. Pacific Investment
Management's portfolio managers, including the fixed income staff (18
professionals) and equity staff (3 professionals), are responsible for research
and trading. Account managers (29 professionals) are primarily responsible for
client relationship management and/or marketing.
COLUMBUS CIRCLE INVESTORS (CCI)
General. Columbus Circle Investors, based in Stamford, Connecticut and
established in 1975, manages discretionary accounts for entities such as
corporate, government and union pension and profit sharing plans, foundations
and educational institutions, as well as accounts for "high net worth"
individuals. In addition, CCI has a private collective investment program for
accredited investors. As of December 31, 1996, assets under management by CCI,
exclusive of the approximately $5.2 billion of assets of the PIMCO MMS Funds
(defined below) and the Cash Accumulation Trust under CCI management, were
approximately $9.0 billion for 149 clients.
CCI's principal equity product consists of its "core" portfolios, which
accounted for approximately $8.0 billion (or 56%) of its assets under management
at December 31, 1996. CCI uses its "positive momentum & positive surprise" style
for these portfolios, which principally consist of "large cap" U.S. equity
securities. CCI also applies its "positive momentum & positive surprise" style
to manage "small cap" portfolios aggregating approximately $2.9 billion (or 20%)
of its assets under management at December 31, 1996; "mid cap" portfolios
aggregating approximately $1.6 billion (or 11%) of its assets under management
at December 31, 1996; and "equity income" portfolios aggregating approximately
$312 million (or 2%) of its assets under management at December 31, 1996. CCI
also manages several relatively small fixed income, balanced and specialized
equity portfolios.
Investment Strategy. CCI's investment strategy has remained essentially
unchanged since 1975. CCI's investment philosophy is based on the premise that
companies producing results which exceed the expectations of investors and Wall
Street equity research analysts will have rising stock prices, while companies
with disappointing results will experience stock price decline. CCI's investment
discipline focuses on the potential for "positive momentum & positive surprise."
CCI monitors numerous factors, including political and economic developments,
secular trends and industry and group dynamics, in addition to company-specific
events, to determine which companies are best-positioned to achieve revenue and
earnings acceleration. In addition to meeting the criteria for potential
"positive momentum & positive surprise," thorough fundamental analysis is
completed prior to making an investment decision. Depending upon market
conditions, CCI seeks to enhance investment performance by writing "covered"
call and stock index options on securities held in equity accounts.
Seven of the equity portfolios within the PIMCO Funds (plus the Tax Exempt
Fund) currently are managed by the same individuals who manage CCI's individual
and institutional private accounts. Accordingly, the CCI investment philosophy
and techniques described above are also applied to such equity and fixed income
funds. CCI's policy is to accept only new accounts of $10 million or more
(except in its accredited investors program). In 1995, CCI formed Columbus
Circle Trust Company, a limited purpose Connecticut trust company, which enables
CCI to provide trust and investment advisory services to smaller accounts.
Employees. Two of CCI's nine Managing Directors, Irwin F. Smith and Donald
A. Chiboucas, have been with CCI since its founding in 1975. Mr. Smith also
served as Chairman and Chief Executive Officer of the Partnership from March
1993 until the Consolidation. At December 31, 1996, CCI had 91 employees,
of whom 35 were investment professionals.
7
CADENCE CAPITAL MANAGEMENT (CADENCE)
General. Cadence Capital Management, based in Boston, Massachusetts and
established in 1988, specializes in disciplined, growth-oriented management of
equity securities. At December 31, 1996, Cadence had $3.2 billion of assets
under management, managed separate account portfolios for 61 clients and
subadvised six portfolios within the PIMCO Funds.
Investment Strategy. Cadence is a "growth at a reasonable price" equity
manager. Cadence's philosophy is to participate in the long-term growth of the
equity markets by constructing fully invested portfolios of stocks selling at
reasonable valuations in relation to the fundamental prospects of the underlying
companies. Cadence uses a disciplined, "bottom-up" investment process which
utilizes quantitative screening for favorable fundamental and valuation
attributes, followed by "hands-on" qualitative research to confirm the apparent
business trends. Cadence structures its portfolios to be broadly based,
typically including 80 to 100 issues.
Cadence's 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 (the top 1,000 market cap issues), mid cap (market cap of over $500 million
excluding the largest 250 issues), small cap ($50 million to $1 billion) and
micro cap (up to $100 million). Through this strategy, Cadence is able to
differentiate its investment products while remaining focused on a single
investment style.
Employees. Cadence's four Managing Directors include David B. Breed, a founder
of the firm; William Bannick, who joined Cadence in October 1992; Katherine A.
Burdon, who joined Cadence in December 1992 and was promoted to Managing
Director in May 1995; and Eric M. Wetlaufer, who joined Cadence in December 1991
and was also promoted to Managing Director in May 1995. Mr. Breed is the Chief
Executive Officer of Cadence and is responsible for the original development and
ongoing maintenance of the investment process. Mr. Bannick is responsible for
investment management and client service. Ms. Burdon is a portfolio
manager/analyst with client services responsibilities and research
responsibilities in healthcare, telecommunications, and broadcast media. Mr.
Wetlaufer is also a portfolio manager/analyst with client service
responsibilities and research responsibilities in basic materials and capital
goods. Cadence had a total of 26 employees at December 31, 1996, including seven
portfolio managers in addition to Mr. Breed.
OTHER INVESTMENT MANAGEMENT FIRMS
Parametric Portfolio Associates (Parametric). Parametric, based in Seattle,
Washington and established in 1987, specializes in the management of broadly
diversified domestic and international equity strategies for tax-exempt and
taxable clients. The firm offers active and indexed strategies which are
structured to meet client specific risk and return objectives. Active
portfolios seek superior returns relative to an assigned benchmark within a risk
controlled framework, while indexed portfolios are constructed to closely track
an appropriate index. In addition, Parametric manages tax efficient separate
account strategies for a growing clientele of taxable investors.
Parametric uses quantitative techniques in portfolio construction and
management. The active portfolios are designed to maintain economic sector
allocations similar to the benchmark. Security selection is based on a ranking
system which evaluates each stock's exposure to valuation, earnings and
momentum factors. Portfolios are optimized to achieve a diversified group of
securities which have exposure to factors associated with superior return and
risk characteristics.
Parametric manages a wide variety of index funds which extend to both large
and small capitalizations and across value and growth styles. The international
assignments include allocations to developed countries and emerging markets.
At December 31, 1996, Parametric had assets under management of $2 billion,
managed separate accounts for 20 clients, and served as subadvisor for one
portfolio within the PIMCO Funds and seven portfolios for several unaffiliated
families of funds.
NFJ Investment Group (NFJ). NFJ, based in Dallas, Texas and established in
1989, is a disciplined, value-oriented manager of equity securities.
NFJ's specialty is investing in a combination of low P/E stocks with high
dividends selected through a proprietary screening model. NFJ's business
strategy involves targeting the U.S. pension and mutual fund markets with
specific attention to the pension consultants which dominate the pension market.
NFJ believes that its value niche and conservative investment style is
attractive to prospective clients because it naturally complements the styles of
other growth or core equity managers. NFJ has developed a structured process
with a systematic buy/sell discipline based on fundamental research and computer
modeling. NFJ's investment philosophy is based on research showing that
portfolios with a
8
combination of low P/E stocks and high dividends consistently outperform market
indices. The low P/E bias is based on the belief that "out of favor" stocks are
not normally subjected to significant negative earnings surprises because their
low P/E ratios already incorporate the market's negative expectations. The high
dividend component offers an "income cushion" to protect returns when market
conditions are unfavorable. At December 31, 1996, NFJ had assets under
management of $1.7 billion, managed separate account portfolios for 25 clients
and also served as manager for four portfolios within the PIMCO Funds and four
unaffiliated families of funds.
Blairlogie Capital Management (Blairlogie). Blairlogie, based in Edinburgh,
Scotland and founded in late 1992, specializes in international equity
investments. Blairlogie provides an international investment product that
combines country selection strategies with the systematic application of an
investment process more typically used by U.S. investment firms. Blairlogie
focuses its marketing efforts in the U.S. and seeks to capitalize on increased
demand for international investment products by U.S. pension funds and retail-
oriented U.S. mutual funds. Blairlogie's investment strategy involves the
application of fundamental valuation criteria to country allocations and then to
stock selection in order to enhance client returns over time, while seeking a
relatively low level of overall portfolio risk. Blairlogie's future
business strategy may also include the development of investment management
relationships in the United Kingdom and other parts of Europe. At December 31,
1996, Blairlogie had assets under management of $673 million in the managed
separate account portfolios for three clients and served as manager for three
portfolios within PIMCO Funds and served as subadvisor to one affiliated and
two unaffiliated families of funds.
PARTNERSHIP MUTUAL FUNDS
PIMCO Advisors, together with the Investment Management Firms,
sponsors and manages mutual funds for both institutional and retail
investors.
PIMCO Funds. In January 1997, the Partnership restructured its proprietary
mutual funds into a single fund family called "PIMCO Funds" which is comprised
of two series: (i) PIMCO Funds: Pacific Investment Management Series ("PIMCO
Funds PIMS Series"), 20 funds advised by Pacific Investment Management, and (ii)
PIMCO Funds: Multi-Manager Series ("PIMCO Funds MMS Series"), 21 funds advised
by the Partnership and subadvised by the Investment Management Firms and one
independent subadvisor. The PIMCO Funds PIMS Series are primarily fixed income
funds and the PIMCO Funds MMS Series are primarily equity funds. All PIMCO Funds
are offered in up to five different share classes: institutional and
administrative share classes 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, the Partnership and Pacific
Investment Management (and not the PIMCO Funds) bear the risk of increases in
service costs (including of third-party service providers such as transfer
agents) and will directly benefit from decreases in those costs.
Marketing and Distribution. PFD, a wholly-owned subsidiary of the Partnership,
is the distributor for the PIMCO Funds. The Partnership 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. Since October 1990, PFD has entered into selling agreements with over
700 broker-dealers and banks. The sales and marketing personnel develop and
support sales and marketing strategies between the Partnership and the different
retail broker-dealers. Additionally, the relationships fostered by this group
allow PFD's wholesalers to have access to the branch offices and sales
representatives of the retail broker-dealers. At December 31, 1996, PIMCO Funds
had approximately $24.5 billion of assets under management of which
approximately $18.3 billion were in PIMCO Funds PIMS Series and approximately
$6.2 billion were in PIMCO Funds MMS Series.
REGULATION
Virtually all aspects of the investment management business of the Partnership
are subject to various federal and state laws and regulations. The Partnership
and its Investment Management Firms are registered with the Securities and
Exchange Commission (the "Commission") under the Investment Advisers Act of
1940, as amended (the "Advisers Act"), and are registered under numerous state
securities laws. The Advisers Act imposes numerous obligations on registered
investment advisors including fiduciary, recordkeeping, operational and
disclosure obligations. Blairlogie is also a member of the Investment Management
Regulatory Organization in the United Kingdom. Pacific Investment Management and
Parametric are registered with the Commodity Futures Trading Commission as
Commodity Trading Advisors and are members of the National Futures Association.
Pacific Investment Management and its subsidiary, StocksPLUS Management, Inc.,
are also registered as Commodity Pool Operators.
9
The Partnership and its Investment Management Firms are subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and to
regulations promulgated thereunder, insofar as they are "fiduciaries" under
ERISA with respect to many of their clients.
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict any
of the Investment Management Firms from conducting their business in the event
that they fail to comply with such laws and regulations. Possible sanctions that
may be imposed in the event of such noncompliance include the suspension of
individual employees, limitations on the Investment Management Firm's
business activities for specified periods of time, revocation of the Investment
Management Firm's registration as an investment advisor, and other censures
and fines. Changes in these laws or regulations could have a material adverse
impact on the profitability and mode of operations of the Partnership and its
Investment Management Firms.
The officers, directors and employees of the Partnership and its Investment
Management Firms may from time to time own securities which are also owned by
one or more of their clients. Each firm has internal policies with respect to
personal investment by employees. Each firm requires reports of securities
transactions and restricts certain transactions so as to minimize possible
conflicts of interest.
PFD is registered as a broker-dealer under the Securities Exchange Act of
1934, as amended, and is subject to regulation by the Commission, the National
Association of Securities Dealers, Inc. and other federal and state agencies. As
a registered broker-dealer, it is subject to the Commission's net capital rule
and certain state securities laws designed to enforce minimum standards
regarding the general financial condition and liquidity of a broker-dealer.
Under certain circumstances, these rules limit the ability of PFD's parent to
make withdrawals of capital and receive dividends. The securities industry is
one of the most highly regulated in the United States, and failure to comply
with related laws and regulations can result in the revocation of broker-dealer
licenses, the imposition of censures or fines and the suspension or expulsion
from the securities business of a firm, its officers or employees.
COMPETITION
The investment management business is highly competitive. The Partnership and
its Investment Management Firms compete with a large number of other domestic
and foreign investment management firms, commercial banks, insurance companies,
broker-dealers and other financial services providers. Some of the
financial services companies with which the firms compete have greater
resources, assets under management and administration than the Partnership and
the Investment Management Firms and offer a broader array of investment products
and services.
The Partnership 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. The Partnership's ability to increase and retain client assets could
be adversely affected if client accounts underperform the market or if key
investment managers leave the firms. The ability of the Partnership and the
Investment Management Firms to compete with other investment management firms is
also dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions. There are
relatively few barriers to entry by new investment management firms in the
institutional managed accounts business, which increases competitive pressure.
Selection of advisors by institutional investors often is subject to a
competitive review process relying heavily upon historical performance. As a
result, new firms such as Blairlogie typically require a three to five year
start-up period during which they experience losses and require subsidies.
A large number of mutual funds are sold to the public by investment management
firms, broker-dealers, insurance companies and banks in competition with mutual
funds sponsored by the Partnership. Many competitors apply substantial resources
to advertising and marketing their mutual funds which may adversely affect the
ability of Partnership-sponsored funds to attract new clients and to retain
assets under management. The ability to attract and retain mutual fund assets in
the load mutual funds which the Partnership offers is dependent to a significant
degree on the ability to attract, retain and motivate retail brokerage
salespersons.
10
POSSIBLE CONSTRAINTS ON GROWTH AND OPERATIONS
Cash that is used to pay distributions on the Partnership's Class A LP Units,
PIMCO Advisors units of general partner interest ("GP Units") and Class B LP
Units will not be available for other Partnership uses, including investments in
new business opportunities. Distributions on Class B LP Units are currently
subordinated to the first-priority distributions on Class A LP and GP Units. The
Partnership Agreement requires that for each quarter commencing with the quarter
ended December 31, 1994 and ending with the quarter ending December 31, 1997
(the "Interim Period"), distributions will be made first to holders of Class A
LP Units and GP Units until such holders have received $0.47 per unit per
calendar quarter (aggregating to $1.88 per unit per year) since the date of the
Consolidation, second to holders of Class B LP Units until such holders have
received $0.47 per unit per calendar quarter on a cumulative basis within a
calendar year but not carried over from year to year and third to all holders of
units pro rata. Distributions with respect to Class A LP and GP Units will be
made within 45 days of the end of each calendar quarter in the Interim Period
and thereafter within 60 days after the end of the calendar quarter, and with
respect to Class B LP Units will be made within 60 days of the end of the
calendar quarter, in all cases to holders of record on the 30th day after the
end of the quarter.
As a result of these priority distributions on Class A LP Units, and because
members of the Partnership's Operating and Equity Boards (which determine the
amounts to be distributed to Unitholders) have an economic interest in a
substantial number of Class B LP Units, there is a risk that the Partnership may
distribute cash that could otherwise be profitably reinvested in the
Partnership's business. Also, until December 31, 1997, there is a risk that the
Operating and Equity Boards could cause the Partnership in certain circumstances
to defer or forego the possibility of making an acquisition of a business
venture in the best interests of the Partnership through the issuance of
additional Class A LP Units because such an acquisition could result in a
diminution in distributions paid to the holders of the Class B LP Units.
DERIVATIVES
The use of derivatives by investors has received national attention in recent
years because of losses suffered on investments in derivatives. While other
Investment Management Firms have used derivatives, Pacific Investment
Management has used derivatives since 1980 in various ways, principally to
manage portfolio risk and exploit market inefficiencies. Its use of derivatives
has generally been confined to futures, options and mainstream mortgage
derivatives (such as collateralized mortgage obligations); however, Pacific
Investment Management has at times also held positions in client portfolios
in interest-only and principal-only strips (IOs and POs) and, occasionally,
structured notes and swaps.
RELIANCE ON KEY PERSONNEL AND PROFIT-SHARING PAYMENTS
The ability of the Partnership and the Investment Management Firms to attract
and retain clients is dependent to a large extent on their ability to attract
and retain key employees, including skilled portfolio managers. Certain of these
employees are responsible for significant client relationships. In particular,
the Partnership depends, to a significant extent, on the services of William H.
Gross of Pacific Investment Management, Irwin F. Smith and Donald A. Chiboucas
of CCI, and David B. Breed of Cadence. Mr. Gross is one of the best known fixed
income portfolio managers in the United States, and the loss of his services
could have a material adverse effect on the Partnership. In order to help retain
these and other key personnel, each of the six Investment Management Firms has a
policy of reserving a substantial percentage of its adjusted net book income for
profit-sharing payments (45% in the case of Pacific Investment Management and
CCI and in the case of the other Investment Management Firms, 15% of the first
$3 million of such income, 25% of the next $2 million of such income, 40% of the
next $5 million of such income and 45% of such income in excess of $10 million).
These profit-sharing payments significantly reduce the amount of the Investment
Management Firms' profits that is distributed to the Partnership and becomes
available for distribution to unitholders. There can be no assurance that key
personnel will be retained.
FACTORS AFFECTING FEE REVENUES
General Considerations. Investment management agreements between Investment
Management Firms and their clients typically provide for fees based on a
percentage of the assets under management, determined at least quarterly and
valued at current market levels. The percentage of the fee applicable to a
particular classification of assets under management is a function of several
factors. For example, investments or strategies which have a higher degree of
risk and uncertainty command a higher percentage fee. Therefore, significant
fluctuations in securities prices or in the investment patterns of clients that
result in shifts in assets under management can have a material effect on the
Partnership's consolidated revenues and profitability. Such fluctuations in
asset valuations and client investment patterns may be affected by overall
economic
11
conditions and other factors influencing the capital markets and the
net sales of mutual fund shares generally, including interest rate fluctuations.
Virtually all of the Partnership's 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 the Partnership's results of
operations.
The investment management business is highly competitive and fees vary among
investment managers. Some of the Investment Management Firms' fees are higher
than those of many investment managers relative to the average size of accounts
under management. Each Investment Management Firm's ability to maintain its fee
structure in the competitive environment is dependent to a large extent on the
ability of its investment managers to provide clients with service and
investment returns that will cause clients to be willing to pay those fees.
There can be no assurance that the Investment Management Firms will be able to
retain their clients or sustain their fee structures in the future.
Reliance on Performance-Based Fees. Approximately 7.0% and 5.9% of the
Partnership's revenues for the year ended December 31, 1996 and December 31,
1995, respectively, were derived from performance-based fees. Most of these
revenues are attributable to Pacific Investment Management's operations. To earn
a performance-based fee with respect to an account, the relevant Investment
Management Firm must generally outperform a specific benchmark over a particular
period. Performance-based fee arrangements make revenues more volatile, but also
provide an opportunity to earn higher fees than could be obtained under fee
arrangements based solely on a percentage of assets under management. Pacific
Investment Management's StocksPLUS product, which accounted for $8.8 billion of
assets under management at December 31, 1996, is subject to a performance-based
fee schedule in which under-performance relative to the S&P 500 over a
particular time period results in no fees being paid by clients, while superior
performance results in incentive fees that are not subject to a cap. In addition
to the StocksPLUS accounts, several large fixed income accounts aggregating
approximately $10.9 billion at December 31, 1996, 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 the Partnership,
from period to period. For example, Pacific Investment Management's failure to
exceed certain benchmarks during 1994 resulted in performance-based fees of $9.2
million, compared to $18.6 million for 1995.
ITEM 2. PROPERTIES
The Partnership's principal offices are currently located at 800 Newport
Center Drive, Newport Beach, California where it occupies approximately 10,460
square feet of space under a lease expiring in 2002 and at 2187 Atlantic Street,
Stamford, Connecticut where it and PFD occupy approximately 17,200 square feet
of space under a sub-lease expiring in 2002. Pacific Investment Management's
principal offices are currently located at 840 Newport Center Drive and 5 Civic
Plaza, Newport Beach, California where it occupies approximately 106,000 square
feet of space under leases expiring in 1998. CCI's principal office is currently
located at 1 Station Place, Stamford, Connecticut, where it occupies
approximately 31,000 square feet of space under a lease expiring in 1999. Each
location is a modern office building and the demised space is adequate for the
Partnership's current operations, but more space may be necessary should the
Partnership's business expand.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Partnership Agreement provides for the issuance of three types of units:
Class A LP Units, Class B LP Units, and GP Units. Class A LP Units have a
priority right to distributions over Class B LP Units, as described below.
Except for their subordinated right to distributions and their potential to be
further subordinated to other units issued by PIMCO Advisors, the Class B LP
Units are identical to the Class A LP Units, including with respect to voting
rights (although the Class B LP Units vote as a class with respect to proposed
amendments to Partnership Agreement that affect only Class B LP Units). GP Units
have distribution rights identical to the Class A LP Units, but are held by the
general partner who has unlimited liability for the obligations of the
Partnership and has the right to manage and control the Partnership. Holders of
the Class A LP Units and Class B LP Units do not have the right to vote with
respect to the management and control of the Partnership.
The Class A LP Units are listed on the New York Stock Exchange (the "NYSE")
under the symbol "PA." The GP Units and Class B LP Units are not publicly
traded. The following table sets forth, for the periods indicated, the high and
low trading prices for each Class A LP Unit as reported on the NYSE and the
total cash distributions paid per Class A LP Unit, GP Unit and Class B LP Unit.
Class A LP
Trading Prices and GP Units Class B Units
Class A Units -------------- -------------
----------------- Total Cash Total Cash
High Low Distributions Distributions
---- --- ------------- -------------
1995
First Quarter $18-1/4 $16-7/8 $0.239 $0.077
Second Quarter 20-5/8 17-3/8 0.470 0.138
Third Quarter 21-1/4 19 0.470 0.199
Fourth Quarter 21-1/4 19-5/8 0.470 0.259
------------- -------------
Total $1.649 $0.673
============= =============
1996
First Quarter $23-5/8 $20-1/2 $0.470 $0.444
Second Quarter 22-1/4 20-1/8 0.470 0.318
Third Quarter 22-7/8 20 0.470 0.447
Fourth Quarter 23-7/8 21-3/4 0.470 0.449
------------- -------------
Total $1.880 $1.658
============= =============
On March 24, 1997, the closing price of the Partnership's Class A LP Units as
reported on the NYSE was $22.50 per unit. On March 24, 1997, there were
approximately 660 holders of record of the Partnership's Class A LP Units and
approximately 22 holders of record of the Partnership's Class B LP Units.
The Partnership Agreement provides that the general partner shall cause the
Partnership to distribute to unitholders on a quarterly basis cash in an amount
equal to Operating Profit Available for Distribution less any amount the general
partner deems may be required for capital expenditures, reserves or otherwise in
the business of the Partnership. The Partnership Agreement defines Operating
Profit Available for Distribution as the sum of (i) the net income of the
Partnership for such quarter determined in accordance with generally accepted
accounting principles; (ii) certain non-cash charges resulting from the
amortization of goodwill and certain other intangible assets and non-cash
compensation expenses related to options and restricted units and (iii)
losses of any subsidiary which is not a flow-through entity for tax purposes.
Since the Consolidation, the amounts withheld for capital expenditures, reserves
or otherwise have not been significant and the Partnership has distributed cash
to unitholders in an amount which represented substantially all of the
Partnership's Operating Profit Available for Distribution.
13
After December 31, 1997, or earlier upon the occurrence of an Adverse Tax
Event, as defined in the Partnership Agreement, the priority distributions will
cease, distributions thereafter will be made on a pro rata basis among all units
then outstanding and any remaining cumulative shortfalls in the quarterly
priority amounts will not be carried over. If, immediately prior to that time,
the Class B LP Unit distribution were less than the Class A LP Unit
distribution, upon termination of the subordination feature of the Class B LP
Units, distributions to holders of Class A LP Units would decrease. Although not
currently anticipated, a change in current law or the addition of a substantial
new line of business may result in the occurrence of an Adverse Tax Event. If a
Restructuring occurs prior to December 31, 1997, the general partner will make
(i) a final quarterly distribution for the quarter preceding the Restructuring
in the priorities stated above and (ii) a cash distribution in an amount which
the general partner, in its good faith discretion, determines will not be
required for expenses, for capital expenditures, as reserves or otherwise in the
business of the ongoing restructured entity in the priorities stated above. If
an Adverse Tax Event has not occurred prior to the Restructuring, the first-
priority distributions to the holders of Class A LP Units and GP Units will
continue until the earlier of December 31, 1997 or the occurrence of an Adverse
Tax Event.
No assurances can be given as to the Partnership's future earnings levels.
Distributions made by the Partnership will depend on the Partnership's
profitability and the profitability of the Investment Management Firms, which in
turn, will be affected in part by overall economic conditions and other factors
affecting capital markets generally, which are beyond the Partnership's control.
In addition, the general partner may, in determining the amount of
distributions, deduct from Operating Profit Available for Distribution any
amount the general partner deems may be required for capital expenditures,
reserves or otherwise in the business of the Partnership. To the extent the
Partnership retains profits in any year, unitholders may have taxable income
from the Partnership that exceeds their cash distributions.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA OF PIMCO ADVISORS
The following table sets forth summary financial data of PIMCO Advisors for each
of the five years ended December 31, 1996. PIMCO Advisors and subsidiaries was
formed on November 15, 1994, when PFAMCo merged certain of its investment
management businesses and substantially all of its assets (the "PFAMCo Group")
into Thomson Advisory Group L.P. ("TAG") (the "Consolidation"). Under generally
accepted accounting principles, the Consolidation is accounted for as an
acquisition of TAG by PFAMCo Group, even though the legal form was the reverse.
Therefore, the historical financial statements include the operations of PFAMCo
Group, in its corporate form, prior to the Consolidation and the combined
results of PIMCO Advisors, in its partnership form, for the period since the
Consolidation. This information should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Annual Report on Form 10-K and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of PIMCO Advisors."
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
STATEMENTS OF OPERATIONS DATA: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------
(Amounts in thousands, except per unit amounts)
Total revenues $392,024 $323,014 $180,263 $165,856 $120,155
Operating expenses 261,978 215,271 145,220 131,447 93,011
Amortization of intangibles,
options and restricted units 41,171 42,723 6,202 - -
- ---------------------------------------------------------------------------------
Operating income 88,875 65,020 28,841 34,409 27,144
Other income, net 3,454 3,964 1,083 864 1,115
- ---------------------------------------------------------------------------------
Income before income tax expense 92,329 68,984 29,924 35,273 28,259
Income tax expense 1,201 517 10,669 15,556 11,405
- ---------------------------------------------------------------------------------
Net income $ 91,128 $ 68,467 $ 19,255 $ 19,717 $ 16,854
=================================================================================
Net income allocated to:
General Partner and Class A
Limited Partner units $ 52,916 $ 46,655 $ 4,976
Class B Limited
Partner units 38,212 21,812 1,128
Pre-Consolidation - - 13,151
- ---------------------------------------------------------------------------------
Total $ 91,128 $ 68,467 $ 19,255
=================================================================================
NET INCOME PER UNIT (1):
- ---------------------------------------------------------------------------------
General Partner and Class A
Limited Partner units $ 1.29 $ 1.16 $ 0.12
Class B Limited
Partner units $ 1.05 $ 0.59 $ 0.03
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING (POST-CONSOLIDATION):
- ---------------------------------------------------------------------------------
Units outstanding:
General Partner 800 800 800
Class A Limited
Partner 40,135 40,108 40,018
Class B Limited
Partner 32,961 32,961 32,961
- ---------------------------------------------------------------------------------
Total 73,896 73,869 73,779
Weighted average effect of
unit options 3,119 1,684 984
- ---------------------------------------------------------------------------------
Total 77,015 75,553 74,763
=================================================================================
DIVIDENDS/DISTRIBUTIONS $131,604 $ 89,613 $ 24,384 $22,158 $ 12,950
=================================================================================
15
SELECTED FINANCIAL DATA
(Continued)
FOR THE YEARS ENDED DECEMBER 31,
FINANCIAL CONDITION AT END OF PERIOD: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------
(Amounts in thousands)
Total assets (2) $358,500 $369,592 $379,708 $ 70,388 $ 43,189
Total liabilities 62,257 38,035 34,179 44,567 17,686
Total Stockholder's Equity -- -- -- 25,821 25,503
Total Partners' Capital 296,243 331,557 345,529 -- --
OTHER STATISTICS:
- ---------------------------------------------------------------------------------------
Assets under management (in millions) $110,022 $ 95,182 $ 72,175 $ 57,182 $ 43,737
Operating Profit Available
for Distribution (1) 132,314 111,205 12,306 -- --
Cash flows provided by
operating activities 140,446 86,921 25,852 23,620 9,309
Cash flows provided by
(used in) investing activities (2,446) (17,771) 22,401 (436) (1,149)
Cash flows used in
financing activities (131,604) (89,238) (2,549) (14,900) (15,800)
(1) Computed on earnings following the Consolidation. Operating Profit
Available for Distribution is defined by the Partnership Agreement as the
sum of net income plus non-cash charges from the amortization of intangible
assets, non-cash compensation expenses arising from option and restricted
unit plans, and losses of any subsidiary which is not a flow-through entity
for tax purposes.
(2) Upon completion of the Consolidation, approximately $284.9 million of
intangible assets were created. See Note 3 in the Notes to the Consolidated
Financial Statements.
Note: The information above should be read in connection with Management's
Discussion and Analysis of Financial Condition and Results of Operations
and the Consolidated Financial Statements and related notes appearing
elsewhere in this document.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PIMCO ADVISORS
GENERAL
PIMCO Advisors L.P. ("PIMCO Advisors") and subsidiaries was formed on
November 15, 1994 when Pacific Financial Asset Management Corporation ("PFAMCo")
merged (the "Consolidation") PFAMCo Group into Thomson Advisory Group L.P.
("TAG"). PFAMCo Group comprised the operations of PFAMCo, an indirect wholly-
owned subsidiary of Pacific Mutual Life Insurance Company ("Pacific Mutual"),
and certain of its wholly-owned investment management subsidiaries. The
businesses of PFAMCo Group contributed to PIMCO Advisors were then contributed
to newly-formed subsidiaries of PIMCO Advisors. These businesses, as well as
TAG's former division of Columbus Circle Investors ("CCI"), are as follows:
PACIFIC INVESTMENT MANAGEMENT COMPANY ("Pacific Investment Management"),
and its wholly-owned subsidiary, StocksPLUS Management, Inc.
("StocksPLUS"), managing primarily fixed income, with approximately $88.1
billion in assets under management;
CCI and its wholly-owned subsidiary, Columbus Circle Trust Company
("CCTC"), managing primarily equities, with approximately $14.2 billion in
assets under management;
CADENCE CAPITAL MANAGEMENT ("Cadence"), managing equities, with
approximately $3.2 billion in assets under management;
PARAMETRIC PORTFOLIO ASSOCIATES ("Parametric"), managing equities, with
approximately $2.0 billion in assets under management;
NFJ INVESTMENT GROUP ("NFJ"), managing equities, with approximately $1.7
billion in assets under management; and,
BLAIRLOGIE CAPITAL MANAGEMENT ("Blairlogie), managing equities, with
approximately $675 million in assets under management.
Each subsidiary is a registered investment advisor and collectively they
provide a broad array of investment management and advisory services for clients
using distinctive investment styles.
In addition to the investment management subsidiaries, PIMCO Advisors
operates a wholly-owned distributor, PIMCO Funds Distribution Company ("PFD")
and sponsors the PIMCO Funds Mutual Fund complex which resulted from a January
1997 combination of 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).
Under generally accepted accounting principles, the Consolidation has been
accounted for as an acquisition of TAG by PFAMCo Group, even though the legal
form was the reverse. Therefore, the historical financial statements include the
operations of PFAMCo Group, in its corporate form, prior to the Consolidation
and the combined results of PIMCO Advisors, in its partnership form, for the
period since the Consolidation.
Due to the different bases of presentation and resulting difficulties in
analyzing comparative historical financial information as a result of the
required accounting presentation, management has included below certain pro
forma financial information as if the Consolidation occurred at the beginning of
1993. Pro forma results eliminate the significant comparative differences in the
historical results of operations arising primarily from different taxation of
corporations and partnerships, from the inclusion of TAG's results of operations
in the pro forma results from the beginning of 1993 (rather than only from the
date of Consolidation reflected in the historical financial statements), and
from certain transactions and restructuring effected by the Consolidation,
principally related to the creation and amortization of intangibles and revised
profit sharing arrangements.
17
PRO FORMA FINANCIAL INFORMATION
The following table summarizes the unaudited condensed pro forma results of
operations of PIMCO Advisors as if the Consolidation discussed above had
occurred on January 1, 1993. The pro forma operating results give effect to:
(i) the Consolidation of PFAMCo Group and TAG;
(ii) the amendment of existing options under TAG's 1993 Unit Option
Plan;
(iii) the adoption of the Class B Limited Partnership Unit Option Plan;
(iv) the contribution of PFD to PIMCO Advisors in exchange for
Class A Limited Partner Units; and
(v) certain transactions effected by PFAMCo Group and TAG in connection
with the Consolidation, primarily related to intangible amortization
and profit sharing.
Year Ended December 31,
1996 1995 1994
---- ---- ----
(Actual) (Actual) (Pro Forma)
---------------------------------------------
(Amounts in millions, except per unit amounts)
REVENUES
Investment Advisory $338.3 $281.6 $231.5
PFD 53.7 41.4 37.6
------ ------ ------
392.0 323.0 269.1
------ ------ ------
EXPENSES
Compensation and Benefits 173.5 149.1 119.7
Commissions 37.7 28.7 23.1
Marketing and Promotional 11.0 9.1 11.4
Occupancy and Equipment 9.2 8.7 6.7
General and Administrative 17.6 11.4 7.4
Insurance 2.6 2.8 1.8
Professional Fees 5.5 3.2 3.4
Amortization of intangibles,
options and restricted units 41.2 42.7 40.7
Other (income) expense (net) 2.6 (1.2) 0.2
------ ------ ------
300.9 254.5 214.4
------ ------ ------
NET INCOME $ 91.1 $ 68.5 $ 54.7
====== ====== ======
Net Income per General Partner ("GP")
and Class A Limited Partner unit $ 1.29 $ 1.16 $ 1.08
====== ====== ======
Net Income per Class B Limited Partner unit $ 1.05 $ 0.59 $ 0.28
====== ====== ======
Revenues by operating entity were as follows:
Pacific Investment Management $222.3 $180.9 $142.9
CCI 63.7 53.0 45.1
Cadence 17.9 14.6 12.1
Parametric 3.5 3.8 4.5
NFJ 7.3 5.9 5.0
PFD 53.7 41.4 37.6
Other (1) 23.6 23.4 21.9
------ ------ ------
Consolidated PIMCO Advisors $392.0 $323.0 $269.1
====== ====== ======
(1) Includes PIMCO Advisors Institutional Services (formerly PFAMCo) and
Mutual Funds divisions and Blairlogie.
The pro forma information for 1994, given above, is not intended to reflect the
results that actually would have been obtained if the operations were
consolidated during the period presented.
18
RESULTS OF OPERATIONS - GENERAL COMMENTARY
PIMCO Advisors derives substantially all its revenues and net income from
advisory fees for investment management services provided through its investment
management subsidiaries to its institutional and individual clients, and
advisory, distribution and servicing fees for services provided to the PIMCO
Funds.
Generally, such fees are determined based upon a percentage of client
assets under management and are billed quarterly to institutional clients,
either in advance or arrears, depending on the agreement with the client, and
monthly in arrears to the PIMCO Funds. Revenues are determined in large part
based upon the level of assets under management, which itself is dependent upon
factors including market conditions, client decisions to add or withdraw assets
from PIMCO Advisors management, and PIMCO Advisors ability to attract new
clients. In addition, PIMCO Advisors has certain accounts which are subject to
performance based fee schedules wherein performance relative to the S&P 500
Index or other benchmarks over a particular time period can result in additional
fees. These fees accrue on a quarterly or annual basis, depending upon the
specific investment advisory contract. Quarterly fees generally are calculated
based upon a rolling twelve-month performance result. Annual fees are
predominantly weighted towards second and fourth quarter billings. As a result,
there is a seasonality to the recognition of such fees. Such performance based
fees can have a significant effect on revenues, but also provide an opportunity
to earn higher fees (as well as lower fees) than could be obtained under fee
arrangements based solely on a percentage of assets under management.
Intangible assets of approximately $284.9 million created by the
Consolidation represent the excess of the purchase price over the fair value of
net tangible assets of TAG deemed acquired by PFAMCo Group. Approximately $80.7
million of the intangible assets represents the value assigned to PIMCO Advisors
master limited partnership ("MLP") structure. Under current tax law, an MLP is
exempt from federal and most state and local income taxes through December 31,
1997. The value attributed to the MLP structure is being amortized through the
period ended December 31, 1997. The remainder is being amortized over its
estimated life of 20 years.
Net income per unit is computed under the two-class method which allocates
net income to 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 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. Class A Limited Partner and GP units are
entitled to a priority distribution of $1.88 per unit per year until December
31, 1997. Because of this, the amount of Operating Profit Available for
Distribution allocated to such units 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 GP Units is currently greater than the
net income allocated per Class B Limited Partner Units. 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.
Actual unit distributions in 1996 were $1.88 for the GP and Class A Limited
Partner Units and $1.658 for the Class B Limited Partner Units. These amounts
reflect Operating Profit Available for Distribution for the fourth quarter of
1995 and the first three quarters of 1996, as such distributions are made in
arrears. Actual unit distributions in 1995 were $1.649 for the GP and Class A
Limited Partner Units and were $0.673 for the Class B Limited Partner Units.
These amounts reflect Operating Profit Available for Distribution for the 46 day
period from the date of Consolidation through December 31, 1994, and Operating
Profit Available for Distribution for the first three quarters of 1995.
RESULTS OF OPERATIONS - PRO FORMA AND ACTUAL FINANCIAL INFORMATION
Year Ended December 31, 1996 Actual Compared to Year Ended December 31, 1995
Actual
PIMCO Advisors consolidated actual 1996 revenues, including those of its
wholly-owned distributor, PFD, were $392.0 million, compared to revenues of
$323.0 million in 1995. Advisory revenues in this comparison increased $56.7
million to $338.3 million in 1996. PFD's revenues increased $12.3 million to
$53.7 million in 1996. Revenue increases resulted from the commitment of new
assets primarily by institutional clients and increases in the market value of
existing assets under management. These increases were further enhanced by an
increase in performance based fees, which amounted to $22.5 million in 1996 as
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.
19
Compensation and benefit expenses in 1996 of $173.5 million were $24.4
million higher than 1995, reflecting additional staffing at virtually all
subsidiaries, and increased profit sharing at the investment management firms
due to improved profitability. The total number of employees increased 5.0%
from 521 as of December 31, 1995 to 547 as of December 31, 1996.
Commission expenses increased by $9.0 million or 31.3% in 1996 as compared
with 1995. Commission expenses are incurred by PFD and are paid
primarily to broker-dealers and their sales people for the sale of PIMCO
Advisors retail-oriented mutual funds. These include "up-front" commissions paid
at the time of sale of the mutual funds, "trail" commissions for the maintenance
of assets in the mutual funds and service fee commissions paid for services
provided to mutual fund shareholders. The level of commission expense will vary
according to the level of assets in the mutual funds (on which trail and service
fee commissions are determined) and on the level of sales of mutual funds (on
which up-front commissions are determined). Trail and service fee commissions
are generally paid quarterly beginning one year after sale of the mutual funds.
Therefore, at any given time, trail and service fee commissions will be paid on
only the mutual fund assets that qualify for such payments. In 1996, trail and
service fee commissions increased to $30.3 million, an increase of $6.1 million
or 25.2%, compared to 1995. This increase is related to an increase in the
underlying qualifying assets. Up-front commissions increased from $4.5 million
in 1995 to $7.4 million in 1996, an increase of $2.9 million or 64.4%. This is a
result of increases in total sales volume and the mix of share classes sold.
Marketing and promotional costs increased $1.9 million or 20.9% in 1996
compared to 1995. This increase occurred at most entities, but primarily at PFD
and Pacific Investment Management. At PFD, increased mutual fund share sales
correlate to the increase. At Pacific Investment Management, increased travel
costs comprise the majority of the increase.
Occupancy and equipment costs increased $.5 million or 5.7% in 1996
compared to 1995. The increase relates to increased depreciation of equipment
and inflationary facilities cost increases at all entities.
General and administrative costs increased $6.2 million or 54.4% in 1996
compared to 1995. Pacific Investment Management converted its institutional fund
family to a fixed administrative fee basis in October 1995 resulting in
increases to this cost category for expenses previously borne directly by the
funds. There is a corresponding increase in revenues related to this
conversion. These incremental costs account for approximately $6.0 million of
the increase.
Insurance costs decreased $.2 million or 7.1% in 1996 compared to 1995.
This decrease relates principally to PIMCO Advisors decreased cost of coverage
for general partner liability insurance coverage. Offsetting this decline,
partially, were slight increases due to increased assets under management, and
related activities at the Investment Management Firms.
Professional fees increased $2.3 million or 71.9% in 1996 compared to 1995.
This increase resulted primarily from the costs associated with the
restructuring of the three mutual fund "families" in December of 1996.
Other (income) expense, net, includes such items as consulting costs,
reimbursement agreements and income taxes, offset by other income, and reflects
a net increase of $3.8 million in 1996 compared to 1995. This increase is
comprised principally of decreased investment income and lower levels of
reimbursement under agreements with Pacific Mutual that became effective in
November 1994.
Amortization of intangibles, options and restricted units decreased $1.5
million principally due to the accelerated vesting in 1995 of outstanding
options and restricted units for certain employees terminating during 1995.
Year Ended December 31, 1995 Actual Compared to Year Ended December 31, 1994 Pro
Forma
PIMCO Advisors consolidated actual 1995 revenues, including those of its
wholly-owned distributor, PFD, were $323.0 million, compared to pro forma
revenues of $269.1 million in 1994. Advisory revenues in this comparison
increased $50.1 million to $281.6 million in 1995. PFD's revenues increased $3.8
million to $41.4 million in 1995. Revenue increases resulted from the commitment
of new assets by institutional clients and increases in the market value of
existing assets under management. These increases were further enhanced by an
increase in performance based fees, which amounted to $19.1 million in 1995 as
compared to $9.2 million in 1994. The increase in performance based fees
occurred principally in a product line that seeks to outperform the S&P 500
Index.
20
Compensation and benefit expenses in 1995 of $149.1 million were $29.4
million higher than 1994, reflecting additional staffing at virtually all
subsidiaries, and increased profit sharing at the investment management firms
due to improved profitability. The total number of employees increased 12.5%
from 463 as of December 31, 1994 to 521 as of December 31, 1995.
Commission expenses increased by $5.6 million or 24.3% in 1995 as compared
with 1994 pro forma. In 1995, trail and service fee commissions increased to
$24.2 million, an increase of $7.9 million or 48.5%, compared to 1994. This
increase is related to an increase in the underlying qualifying assets. Up-
front commissions decreased from $6.8 million in 1994 to $4.5 million in 1995, a
decrease of $2.3 million or 33.8%. This is a result of decreases in total sales
volume and the mix of share classes sold.
Marketing and promotional costs declined $2.3 million or 20.6% in 1995
compared to 1994. This decrease occurred at most entities, but primarily at PFD
and Pacific Investment Management. At PFD, reduced mutual fund share sales
correlate to the reduction. At Pacific Investment Management, reduced
promotional costs comprise the majority of the reduction.
Occupancy and equipment costs increased $2.0 million or 29.8% in 1995
compared to 1994. The increase correlates strongly to new equipment and
facilities for increased staff, primarily at Pacific Investment Management.
General and administrative costs increased $4.0 million or 55.1% in 1995
compared to 1994. Pacific Investment Management converted its institutional fund
family to a fixed administrative fee basis in October 1995 resulting in
increases to this cost category for expenses previously borne directly by the
funds. There is a corresponding increase in revenues related to this
conversion. These incremental costs account for approximately $2.6 million of
the increase. The remaining increase was incurred at all entities and relates
to higher levels of staffing and activity.
Insurance costs increased $1.0 million or 55.0% in 1995 compared to 1994.
This increase relates principally to PIMCO Advisors increased cost of coverage
for general partner liability. Increases due to increased assets under
management, and related activities also occurred at the Investment Management
Firms.
Professional fees declined $0.2 million or 5.7% in 1995 compared to 1994.
This decline resulted primarily from increased reliance on internal staffing.
Other (income) expense, net, includes such items as consulting costs,
reimbursement agreements and income taxes, offset by other income, and reflects
a net decrease of $1.4 million in 1995 compared to 1994. This decrease is
comprised principally of increased investment income and higher levels of
reimbursement under an agreement with Pacific Mutual that became effective in
November 1994.
Amortization of intangibles, options and restricted units increased $2.0
million principally due to the accelerated vesting of outstanding options and
restricted units for certain employees terminating during 1995.
RESULTS OF OPERATIONS - HISTORICAL FINANCIAL INFORMATION ONLY
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The historical financial statements reflect the results of PFAMCo Group, in
its corporate form for the period January 1, 1994 to November 15, 1994 and PIMCO
Advisors post-Consolidation combined results in its partnership form from
November 16, 1994 to December 31, 1994, and for 1995. This accounting treatment,
known as "reverse acquisition" accounting, is required under generally accepted
accounting principles.
Therefore, many of the comparative differences in the results of operations
between 1995 and 1994 are due to the reorganization of PFAMCo Group into
partnership form, the inclusion of TAG's operations in PFAMCo Group's
operations from November 16, 1994, to December 31, 1994, and in 1995, and from
transactions and restructuring that occurred in the Consolidation. The 1994 and
1995 results also include certain non-cash expenses related to the amortization
of intangible assets created by the Consolidation and from expenses related to
option and restricted unit plans.
21
PIMCO Advisors 1995 revenues, including PFD, were $323.0 million,
compared to $180.3 million in 1994, up $142.7 million. The increase in revenue
results primarily from the inclusion of TAG in the results of PIMCO Advisors
operations since the Consolidation, and to a lesser extent, from increased
assets under management at the investment management firms.
Compensation and benefits, which includes salaries, employee benefits and
incentive compensation, is the largest expense category. The increase in 1995
of $31.9 million, to $149.1 million, reflects increased staff levels, higher
profit sharing and the inclusion of TAG in the full year of 1995, compared with
only 46 days in 1994.
In addition to the effect of including TAG's operations for a full year
in 1995, as compared to only 46 days in 1994, other expense categories reflect
the following fluctuations:
(i) Restricted units and option plans, which came into existence at the
Consolidation, include approximately $2.0 million of amortization
related to the accelerated vesting of outstanding options; and
(ii) Trail and service fee commissions increased approximately $7.0 million
as a result of an increase in the underlying qualifying assets.
CAPITAL RESOURCES AND LIQUIDITY
PIMCO Advisors and the combined businesses of its predecessor entities have
not historically been capital intensive. Prior to the Consolidation, working
capital requirements have been satisfied out of operating cash flow or short-
term borrowings. PIMCO Advisors makes quarterly profit-sharing payments to key
employees and distributions to its unitholders, and may finance profit sharing
payments using short-term borrowings.
PIMCO Advisors had approximately $52.8 million of cash and cash equivalents
and short term investments at December 31, 1996 compared to approximately $46.5
million at December 31, 1995. The increase was due to the timing of payment of
certain current liabilities offset by the funding of "B" Share commissions to
brokers. "B" Shares involve the payment of commissions to the selling broker by
the distributor at the time of sale of mutual fund shares. Through deferred
sales charges to the investor, or 12-b1 plans with the mutual fund, these
"front-end" commissions are recouped by the distributor over a period of years.
PIMCO Advisors excess liquidity, after distributions to its unitholders, is used
for general corporate purposes including profit-sharing payments and brokers'
commissions on sales of mutual fund shares distributed without a front-end sales
load. To the extent that the level of such commissions increases due to the
introduction of new products and mutual fund pricing structures, an alternate
financing source may be needed. However, PIMCO Advisors has made no decision as
to the source or necessity of such financing.
PIMCO Advisors 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. The facility was not utilized during 1996.
It is currently anticipated that the provisions in the tax code permitting
PIMCO Advisors to be a Publicly Traded Partnership ("PTP") will expire on
December 31, 1997. In the event that no extension of PTP status is enacted
during 1997, it is the intention of the partnership to take appropriate steps
("the Restructuring") prior to December 31, 1997 that would enable it to
continue to be taxed as a partnership, while allowing continued public ownership
through the publicly traded shares of a newly incorporated general partner of
PIMCO Advisors taxed as a corporation. Those steps would include, but not be
limited to:
(i) Declaring a special distribution during the fourth quarter of 1997 to
holders of PIMCO Advisors units consisting of Operating Profit
Available for Distribution through the date of the Restructuring, not
previously distributed;
(ii) Establishing a new corporation and admitting such corporation as a
general partner of PIMCO Advisors; and
(iii) Issuing shares of common stock of such corporate general partner
("PIMCO Advisors, Inc.") to public and certain private unitholders of
PIMCO Advisors in exchange for and upon contribution of their Class A
and Class B Limited Partner Units.
22
Subsequent to the Restructuring, it is expected that the only source of
public ownership of PIMCO Advisors will be through PIMCO Advisors, Inc.
It is not yet clear what impact, if any, the Restructuring will have on the
ability of PIMCO Advisors to raise capital in the future, however, management
believes that this corporate structure for indirect public ownership in PIMCO
Advisors will enable ownership by institutional investors who would otherwise
avoid investing in partnerships directly.
ECONOMIC AND OTHER FACTORS
The general economy including interest rates, inflation and client
responses to economic factors will affect the results of operations of PIMCO
Advisors. A significant portion of assets under management are fixed income
investments, and are sensitive to fluctuations in interest rates. Significant
interest rate shifts could have a material impact on the operations of PIMCO
Advisors. PIMCO Advisors advisory business is generally not capital intensive
and therefore any effect of inflation, other than on interest rates, is not
expected to have a significant impact on its operations or financial condition.
Client responses to the economy, including decisions as to the amount of assets
invested, may also impact the operations of PIMCO Advisors. These fluctuations
may or may not be recoverable in the pricing of services offered by PIMCO
Advisors.
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 for PIMCO Advisors, as a whole, were significant ($6.7 billion in
1996 and $6.6 billion in 1995), CCI experienced substantial net cash outflows in
both years attributable in large part to underperformance measured against
relevant benchmarks. This trend has continued in 1997.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements:
Page(s)
---------
PIMCO Advisors L.P.
Report of Independent Accountants 25
Independent Auditors' Report 26
Consolidated Statements of Financial 27
Condition - as of December 31, 1996
and 1995
Consolidated Statements of Operations - 29
for each of the years in the three
years ended December 31, 1996
Consolidated Statements of Changes in 30
Owners' Equity - for each of the years
in the three years ended December 31, 1996
Consolidated Statements of Cash Flows - 32
for each of the years in the three
years ended December 31, 1996
Notes to Consolidated Financial 34
Statements
24
Report of Independent Accountants
---------------------------------
To the Equity Board and Partners
of PIMCO Advisors L.P.
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of operations, of changes in owners'
equity and of cash flows present fairly, in all material respects, the financial
position of PIMCO Advisors L.P. and subsidiaries (the "Partnership") at December
31, 1996, and the results of their operations and their cash flows for the year
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Los Angeles, California
February 14, 1997
25
INDEPENDENT AUDITORS' REPORT
PIMCO Advisors L.P. and subsidiaries:
We have audited the accompanying consolidated statement of financial condition
of PIMCO Advisors L.P. and subsidiaries (the "Partnership") as of December 31,
1995, and the related consolidated statements of operations, cash flows, and
changes in owners' equity for each of the two years ended December 31, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Partnership as of December 31,
1995, and the results of their operations and their cash flows for each of the
two years ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 2, 1996
26
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
1996 1995
- ----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 41,311,545 $ 34,915,170
Investment advisory fees receivable:
Private accounts 52,261,212 45,344,158
Proprietary Funds 9,629,075 8,413,302
Distribution and servicing fees receivable 4,382,154 3,594,534
Notes receivable 1,569,950 1,230,168
Receivable from PIMCO Advisors Funds 462,616 337,744
Short term investments 11,520,726 11,531,226
Other current assets 3,924,592 2,282,895
------------ ------------
Total current assets 125,061,870 107,649,197
Investment in StocksPLUS, L.P. 2,629,864 3,384,237
Fixed assets - Net of accumulated depreciation and amortization
of $6,979,756 and $4,415,199 10,561,346 10,743,184
Intangible assets - Net of accumulated amortization
of $76,519,260 and $40,510,128 207,822,687 243,831,819
Other non current assets 12,424,534 3,983,358
------------ ------------
TOTAL ASSETS $358,500,301 $369,591,795
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
27
PIMCO ADVISORS L. P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Continued)
December 31,
1996 1995
- ------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 13,841,641 $ 8,132,005
Commissions payable 8,435,048 6,450,407
Payable to affiliates - -
Accrued compensation 26,027,732 21,246,685
Other current liabilities 11,537,236 1,457,800
------------- -------------
Total current liabilities 59,841,657 37,286,897
Other non current liabilitites 2,415,883 748,265
------------- -------------
Total liabilities 62,257,540 38,035,162
------------- -------------
PARTNERS' CAPITAL
General Partner (800,000 units issued and
outstanding) 2,986,983 3,456,973
Class A Limited Partners (40,146,155 and
40,121,155 units issued and outstanding) 205,420,612 228,465,440
Class B Limited Partners (32,960,826 units
issued and outstanding) 98,369,570 114,806,204
Unamortized compensation (10,534,404) (15,171,984)
------------- -------------
Total Partners' Capital 296,242,761 331,556,633
------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 358,500,301 $ 369,591,795
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
28
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
REVENUES
Investment advisory fees:
Private accounts $213,852,081 $192,702,939 $126,913,420
Proprietary Funds 128,855,694 90,772,988 48,822,835
Distribution and servicing fees 48,182,499 38,240,015 4,288,702
Other 1,134,108 1,297,933 238,208
------------ ------------ ------------
Total revenues 392,024,382 323,013,875 180,263,165
------------ ------------ ------------
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Compensation and benefits 173,526,137 149,163,906 117,197,986
Commissions 37,738,954 28,743,396 2,877,497
Restricted Unit and Option Plans 5,162,268 6,713,664 1,162,143
Marketing and promotional 10,981,804 9,066,414 6,594,546
Occupancy and equipment 9,195,606 8,662,499 4,342,777
General and administrative 17,629,876 11,433,726 5,842,962
Insurance 2,621,086 2,799,795 1,118,651
Professional fees 5,472,729 3,164,410 3,899,758
Amortization of intangible assets 36,009,132 36,009,132 5,039,680
Other 4,812,078 2,236,996 3,345,535
------------ ------------ ------------
Total expenses 303,149,670 257,993,938 151,421,535
------------ ------------ ------------
OPERATING INCOME 88,874,712 65,019,937 28,841,630
Equity in income of StocksPLUS, L.P. 271,187 225,670 10,722
Other income, net 3,183,699 3,738,980 1,072,221
------------ ------------ ------------
Income before income tax expense 92,329,598 68,984,587 29,924,573
Income tax expense 1,201,417 517,133 10,669,295
------------ ------------ ------------
NET INCOME $ 91,128,181 $ 68,467,454 $ 19,255,278
============ ============ ============
- --------------------------------------------------------------------------------------------------------------------
NET INCOME ALLOCATED TO:
General Partner $ 1,034,010 $ 912,890 $ 97,522
Class A Limited Partner units 51,881,756 45,742,775 4,878,336
Class B Limited Partner units 38,212,415 21,811,789 1,128,234
Pre-Consolidation 13,151,186
------------ ------------ ------------
Total $ 91,128,181 $ 68,467,454 $ 19,255,278
============ ============ ============
NET INCOME PER UNIT (POST-CONSOLIDATION):
Net income per General Partner and
Class A Limited Partner units $ 1.29 $ 1.16 $ 0.12
============ ============ ============
Net income per Class B Limited Partner unit $ 1.05 $ 0.59 $ 0.03
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
29
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY
FOREIGN
COMMON STOCK PAID-IN RETAINED CURRENCY GENERAL PARTNER
SHARES AMOUNT CAPITAL EARNINGS TRANSLATION UNITS AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1994 1,000 $ 1,000 $ 10,843,146 $ 14,978,001 $ (812) - -
Net income 13,151,186 $ 97,522
PFAMCo Group
capital contributions 7,775,000
Dividends (9,200,000)
Translation adjustment (50,427)
Deemed dividend, net (6,559,420) (8,625,011)
Conversion to partnership (1,000) (1,000) (12,058,726) (10,304,176) 51,239 800,000 318,182
TAG contributed capital
Goodwill from acquisition 3,447,579
Proceeds from Primary Offering
Amended Option Plan
grants (total award)
Restricted Unit Plan
grants (total award)
Vesting of options
and restricted units
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1994 - - - - - 800,000 3,863,283
Net income 912,890
Distributions (1,319,200)
Exercise of unit options
Balance of proceeds-Primary offering
Vesting of options
and restricted units
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 - - - - - 800,000 3,456,973
Net income 1,034,010
Distributions (1,504,000)
Restricted Unit Plan grants
Vesting of options
and restricted units
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 - $ - $ - $ - $ - 800,000 $ 2,986,983
======= ======== ============ =========== ======== ======= ============
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
30
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY,
(Continued)
CLASS A LIMITED PARTNERS CLASS B LIMITED PARTNERS UNAMORTIZED TOTAL
UNITS AMOUNT UNITS AMOUNT COMPENSATION OWNER'S EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1994 -- -- -- -- -- $ 25,821,335
Net income $ 4,878,336 $ 1,128,234 19,255,278
PFAMCo Group
capital contributions 7,775,000
Dividends (9,200,000)
Translation adjustment (50,427)
Deemed dividend, net (15,184,431)
Conversion to partnership 23,775,000 13,088,231 24,575,000 8,906,250 --
TAG contributed capital 14,918,155 9,644,238 8,260,826 1,990,739 11,634,977
Goodwill from acquisition 167,285,821 101,459,864 272,193,264
Proceeds from Primary Offering 1,200,000 19,972,951 19,972,951
Amended Option Plan --
grants (total award) 31,135,761 ($18,987,077) 12,148,684
Restricted Unit Plan
grants (total award) 125,000 2,368,750 125,000 1,691,964 (4,060,714) --
Vesting of options
and restricted units 1,162,143 1,162,143
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1994 40,018,155 248,374,088 32,960,826 115,177,051 (21,885,648) 345,528,774
Net income 45,742,775 21,811,789 68,467,454
Distributions (66,110,962) (22,182,636) (89,612,798)
Exercise of unit options 103,000 374,920 374,920
Balance of proceeds-Primary offering 84,619 84,619
Vesting of options
and restricted units 6,713,664 6,713,664
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 40,121,155 228,465,440 32,960,826 114,806,204 (15,171,984) 331,556,633
Net income 51,881,756 38,212,415 91,128,181
Distributions (75,451,272) (54,649,049) (131,604,321)
Restricted Unit Plan grants 25,000 524,688 (524,688) --
Vesting of options
and restricted units 5,162,268 5,162,268
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 40,146,155 $205,420,612 32,960,826 $ 98,369,570 ($10,534,404) $ 296,242,761
========== ============ ========== ============ ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
31
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 91,128,181 $ 68,467,454 $ 19,255,278
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 40,916,431 38,972,101 6,339,107
Deferred income taxes 734,836 270,000 804,116
Amortization of compensation plan - - 663,697
Restricted Unit and Option Plans 5,162,268 6,713,664 1,162,143
Unrealized loss (gain) on
investments 53,879 (198,396) (135,376)
Equity in income of StocksPLUS,
L.P. (271,187) (225,670) (10,722)
Change in operating assets and
liabilities:
Change in fees receivable (8,920,447) (28,217,386) 7,919,554
Change in receivable from
PIMCO Advisors Funds (124,872) 865,614 (618,123)
Change in other assets (11,676,643) (3,398,979) (10,838,869)
Change in accounts payable
and accrued expenses 5,709,636 941,302 (660,816)
Change in commissions payable 1,984,641 1,714,200 2,413,750
Change in accrued compensation 4,781,047 7,859,345 8,423,141
Change in other liabilities 11,012,219 (1,003,184) (649,686)
Change in payable to affiliates - (5,841,256) (6,877,311)
Other (43,686) 1,811 (1,337,755)
------------ ----------- -----------
Net cash provided by operating
activities 140,446,303 86,920,620 25,852,128
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments $ (694,498) $ (11,334,021) $ (52,601,192)
Proceeds from sales of investments 783,570 -- 62,247,248
Return of investment in StocksPLUS, L.P. 1,600,000 -- --
Investment in StocksPLUS, L.P. (700,000) (400,000) --
Cash of acquired entities -- -- 14,698,855
Proceeds from sale of fixed assets 644,978 309,575 --
Purchase of fixed assets (3,446,152) (5,982,054) (1,826,800)
Notes receivable advances (633,505) (364,823) (117,232)
------------ ----------- -----------
Net cash (used in) provided by
investing activities (2,445,607) (17,771,323) 22,400,879
------------ ----------- -----------
32
PIMCO ADVISORS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from primary offering $ -- $ -- $ 19,972,951
Cash distributions (131,604,321) (89,612,798) --
Unit options exercised -- 374,920 --
Dividends -- -- (22,521,573)
------------- ------------- -------------
Net cash used in financing activities (131,604,321) (89,237,878) (2,548,622)
------------- ------------- -------------
Net increase (decrease)
in cash and cash equivalents 6,396,375 (20,088,581) 45,704,385
Cash and cash equivalents, beginning of year 34,915,170 55,003,751 9,299,366
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 41,311,545 $ 34,915,170 $ 55,003,751
============= ============= =============
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING ACTIVITIES
Reduction of payable to affiliates
by capital contribution $ - $ - $ 7,775,000
============= ============= =============
Deemed dividend $ - $ - $ 1,862,858
============= ============= =============
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 447,724 $ 405,542 $ 15,004,148
============= ============= =============
Interest paid $ - $ 18,750 $ 209,171
============= ============= =============
Fair value of non-cash
assets acquired $ - $ - $ 27,995,376
============= ============= =============
Liabilities assumed $ - $ - $ 24,642,727
============= ============= =============
Non-cash assets excluded
from the Consolidation $ - $ - $ 46,431,262
============= ============= =============
Liabilities transferred excluded
from the Consolidation $ - $ - $ 31,748,537
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
33
PIMCO ADVISORS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
PIMCO Advisors L.P. ("PIMCO Advisors") is a registered investment advisor that
provides a broad array of investment management and advisory services to
institutional and retail mutual funds and to separate accounts of institutional
clients. PIMCO Advisors operates in one industry segment, that of investment
management services.
PIMCO Advisors was formed on November 15, 1994, when Pacific Financial Asset
Management Group ("PFAMCo Group") merged (the "Consolidation") certain of its
investment management businesses and substantially all of its assets into
Thomson Advisory Group L.P. ("TAG"). The PFAMCo Group comprised Pacific
Financial Asset Management Corporation ("PFAMCo""), a wholly-owned subsidiary of
Pacific Mutual Life Insurance Company ("Pacific Mutual"), and certain of its
wholly-owned investment management subsidiaries. The businesses of PFAMCo Group
contributed to PIMCO Advisors were then contributed to newly formed subsidiaries
of PIMCO Advisors.
For the period after the Consolidation, the accompanying consolidated
financial statements include the accounts of PIMCO Advisors and its
subsidiaries. The investment advisor subsidiaries included in these consolidated
financial statements are as follows:
. PACIFIC INVESTMENT MANAGEMENT COMPANY ("Pacific Investment Management")
manages a variety of predominantly fixed income portfolios primarily for
institutions and mutual funds;
. COLUMBUS CIRCLE INVESTORS ("CCI") manages primarily equity securities using a
Positive Momentum/Positive Surprise approach, principally for institutions and
mutual funds;
. CADENCE CAPITAL MANAGEMENT ("Cadence") specializes in disciplined, growth-
oriented management of equity securities primarily for institutions and mutual
funds;
. PARAMETRIC PORTFOLIO ASSOCIATES ("Parametric") specializes in highly
quantitative management of domestic and international equity portfolios
primarily for institutions and mutual funds;
. NFJ INVESTMENT GROUP ("NFJ") is a value-oriented manager of equity securities
primarily for institutions and mutual funds; and
. BLAIRLOGIE CAPITAL MANAGEMENT ("Blairlogie") specializes in international
equity securities from its office in Edinburgh, Scotland, primarily for
institutions and mutual funds.
The investment advisor subsidiaries are supported by additional incorporated
subsidiaries:
. PIMCO FUNDS DISTRIBUTION COMPANY (formerly PIMCO Advisors Distribution
Company) ("PFD") serves as the distributor of institutional and retail mutual
funds (the "Proprietary Funds") for which PIMCO Advisors and the investment
advisor subsidiaries provide investment management and administrative
services;
. STOCKSPLUS MANAGEMENT, INC. ("StocksPLUS"), a wholly-owned subsidiary of
Pacific Investment Management, owns approximately 0.125 percent interest in,
and is the general partner of StocksPLUS, L.P. (Note 12); and
. COLUMBUS CIRCLE TRUST COMPANY ("CCTC"), a non bank trust company and wholly-
owned subsidiary of CCI, established in November 1995, which commenced
business in January 1996.
Pacific Investment Management, CCI, Cadence, Parametric, NFJ and Blairlogie
are registered investment advisors. PFD is a registered broker/dealer with the
Securities and Exchange Commission and a member of the National Association of
Securities Dealers, Inc.
Prior to January 17, 1997, institutional mutual funds managed consisted of two
open-end investment management companies. One series included 18 predominantly
fixed income funds. The other series included 12 predominantly equity funds. The
retail mutual funds managed consisted of 17 funds included within two open-end
investment management companies, the PIMCO Advisors Funds ("PAF"), formerly the
Thomson Funds, and the Cash Accumulation Trust ("CAT"). With Trustee and
shareholder
34
approval, the fund groups were combined into a single mutual fund complex, the
PIMCO Funds, in January 1997, consisting of 41 funds offering retail and
institutional share classes.
The accompanying consolidated financial statements for the period prior to the
Consolidation include the accounts of PFAMCo and its wholly-owned subsidiaries,
reflected on a combined basis.
2. SIGNIFICANT ACCOUNTING POLICIES
a. CASH AND CASH EQUIVALENTS - PIMCO Advisors invests certain cash balances
in money market funds. At December 31, 1996, this investment is
approximately $25,429,000, of which approximately $814,000 is invested in
the National Money Market Fund of CAT, approximately $595,000 is invested
in the PIMCO Advisors Money Market Fund and approximately $24,020,000 is
invested in non affiliate money market funds. At December 31, 1995, this
investment was approximately $20,844,000, of which approximately
$5,738,000 was invested in the National Money Market Fund of CAT,
approximately $4,284,000 was invested in the PIMCO Advisors Money Market
Fund and approximately $10,822,000 was invested in non affiliate money
market funds. Management considers investments in money market funds to
be cash equivalents for purposes of the Consolidated Statements of Cash
Flows. These investments are carried at cost, which approximates market.
b. INVESTMENT ADVISORY FEES - PIMCO Advisors records investment advisory
fees on an accrual basis. Investment advisory fees receivable for private
and separate accounts consist primarily of accounts billed on a quarterly
basis. Private accounts may also generate a fee based on investment
performance, which is recorded as income when earned and not subject to
forfeiture. Investment advisory fees for the Proprietary Funds are
received monthly.
c. SHORT TERM INVESTMENTS - The short term investments, as of December 31,
1996 and 1995, are primarily invested in the PIMCO Funds with a short-
term duration objective. The investments are carried at market value.
Cost approximated market value as of December 31, 1996 and 1995.
d. DEPRECIATION AND AMORTIZATION - Office equipment, furniture and fixtures
are depreciated on a straight line basis over their estimated useful
lives, generally five years. Automobiles are depreciated on a straight-
line basis over their estimated lives, generally three years. Leasehold
improvements are amortized on a straight-line basis over the remaining
terms of the related leases or the useful lives of such improvements,
whichever is shorter.
e. OTHER ASSETS - Effective May 29, 1995, PFD commenced sale of a "B"
class of mutual fund shares. Under this share structure PFD advances
commissions to independent brokers and is entitled to recoup its
marketing costs through an ongoing fee stream from the respective funds
or contingent deferred sales charges collected from the share purchaser.
Such fees are capitalized as deferred sales charges and amortized on a
straight line basis as commission expense over a period of 60 months.
Deferred unamortized marketing costs of approximately $11,100,000 and
$3,600,000 are included in other assets at December 31, 1996 and 1995,
respectively.
f. INCOME TAXES - Subsequent to the Consolidation, PIMCO Advisors and its
subsidiaries are predominantly partnerships and, as a result, are
generally not subject to Federal or state income taxes. PIMCO Advisors is
subject to an unincorporated business tax in a certain jurisdiction in
which it operates. All partners of PIMCO Advisors are responsible for
taxes, if any, on their proportionate share of Pimco Advisors' taxable
income. Certain corporate subsidiaries are subject to Federal and state
income taxes and file separate tax returns and account for income taxes
under Statement of Financial Accounting Standards No. 109 ("FASB 109").
The provision for income taxes is determined using the liability method
which gives recognition to deferred tax assets and liabilities based on
the expected future tax consequences of events that have been recognized
in the financial statements or tax returns. In estimating future tax
consequences, FASB 109 generally requires the consideration of all
expected future events other than enactments of changes in the tax law or
rates.
g. FOREIGN CURRENCY TRANSLATION - The assets and liabilities of Blairlogie,
PFAMCo UK Limited and Blairlogie's predecessor company have been
translated into U.S. dollars at the current rate of exchange existing at
year-end. Revenues and expenses were translated at the average of the
monthly exchange rates then in effect.
35
h. NET INCOME ALLOCATION - Net income is allocated in accordance with the
Amended and Restated Agreement of Limited Partnership of PIMCO Advisors.
Net income is allocated among unit holders in the same proportions as
cash distributions. PIMCO Advisors cash distribution policy provides for
a first priority distribution to General Partner and Class A Limited
Partner Units ($1.88 per year through December 31, 1997) followed by a
second priority distribution to Class B Limited Partner Units. During the
years ended December 31, 1996 and 1995, the second priority distribution
was less than the first priority distribution.
i. EARNINGS PER UNIT - Earnings per unit are computed based on the weighted
average number of units outstanding, assuming the exercise of dilutive
unit options. Proceeds from the exercise of such unit options are assumed
to be used to repurchase outstanding Limited Partner units under the
treasury stock method. The weighted average number of units used to
compute earnings per unit was as follows:
1996 1995 1994
---------- ---------- ----------
General Partner and Class A Limited
Partner units 42,501,469 42,127,833 41,802,420
Class B Limited Partner units 34,513,573 33,425,537 32,960,826
j. OTHER - Certain items have been reclassified to conform with the current
year presentation. All significant intercompany items have been
eliminated in the accompanying consolidated financial statements.
k. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
financial statements have been prepared in accordance with generally
accepted accounting principles which require management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
3. INTANGIBLE ASSETS
For accounting purposes, the Consolidation between PFAMCo Group and TAG is
treated as a purchase and recapitalization of TAG by PFAMCo Group, or a "reverse
acquisition." Intangible assets of approximately $284.9 million represented the
excess of the purchase price over the fair value of the net tangible assets of
TAG deemed acquired in the Consolidation. A portion of the intangible assets
represents the value assigned to PIMCO Advisor's Master Limited Partnership
("MLP") structure. Under current Internal Revenue code guidelines, an MLP is
exempt from Federal and most state and local income taxes through December 31,
1997. The value attributed to the MLP structure will be amortized over the
period ending December 31, 1997. The remainder will be amortized on a straight-
line basis over its estimated life of twenty years. During the years ended
December 31, 1996, 1995 and 1994, approximately $36,000,000, $36,000,000 and
$5,000,000 of amortization have been charged to expense, respectively.
4. SUPPLEMENTARY FINANCIAL DATA
The following supplementary financial data presents the actual results of
operations for 1996 and 1995 and the unaudited pro forma results of operations
for 1994 as if the Consolidation discussed in Note 1 had occurred on January 1,
1993, except for the period from November 15, 1994 through December 31, 1994
which reflects actual results. The 1994 pro forma operating results give effect
to:
(a) The Consolidation of PFAMCo Group and TAG;
(b) The amendment of existing options under TAG's 1993 Unit Option Plan;
(c) The adoption of the Class B Limited Partnership Unit Option Plan;
(d) The contribution of PFD to PIMCO Advisors in exchange for
Class A Limited Partner Units; and
(e) Certain transactions effected by PFAMCo Group and TAG in connection with
the Consolidation, primarily related to intangible amortization and
profit sharing.
36
YEAR ENDED DECEMBER 31,
1996 1995 1994
(ACTUAL) (ACTUAL) (PRO FORMA)
(Amounts in thousands, except per unit amounts)
- --------------------------------------------------------------------------------
REVENUES
Investment advisory $ 338,341 $ 281,610 $ 231,475
PFD 53,683 41,404 37,629
--------- --------- ---------
392,024 323,014 269,104
========= ========= =========
- --------------------------------------------------------------------------------
EXPENSES
Investment advisory 207,203 171,272 137,246
PFD 52,522 40,552 36,435
Amortization of intangibles,
options and restricted units 41,171 42,723 40,713
--------- --------- ---------
300,896 254,547 214,394
--------- --------- ---------
Net income $ 91,128 $ 68,467 $ 54,710
========= ========= =========
Net income per General Partner
and Class A Limited Partner unit $ 1.29 $ 1.16 $ 1.08
========= ========= =========
The pro forma information above is not intended to reflect the results that
actually would have been obtained if the operations were consolidated during the
periods presented.
5. NOTES RECEIVABLE
Pacific Investment Management and PIMCO Advisors have granted loans to
certain employees as part of programs designed to ensure the long-term retention
of those employees. These loans are primarily non-interest bearing and are
generally due within one year of issuance.
6. FIXED ASSETS
The major classifications of fixed assets are as follows:
AS OF DECEMBER 31,
1996 1995
- -------------------------------------------------------------------------------
Office equipment, furniture and
fixtures $ 12,827,368 $ 9,548,212
Automobiles 9,069 836,152
Leasehold improvements 4,704,665 4,774,019
------------ ------------
Total fixed assets 17,541,102 15,158,383
Less accumulated depreciation and
amortization 6,979,756 4,415,199
------------ ------------
Fixed assets, net $ 10,561,346 $ 10,743,184
============ ============
Fixed assets of certain of the subsidiaries were revalued at their estimated
fair market value in connection with the Consolidation.
7. INCOME TAXES
Subsequent to the Consolidation, only certain subsidiaries are subject to
income taxes directly. The total income tax provision for the affected
subsidiaries is as follows:
37
YEAR ENDED DECEMBER 31,
1996 1995
- --------------------------------------------------------------------------------
Current expense:
State $ 163,669 $ 105,724
Federal 295,215 159,440
Deferred expense:
State 197,970 68,378
Federal 544,563 183,591
----------- ----------
$ 1,201,417 $ 517,133
=========== ==========
Prior to the Consolidation, PFAMCo's operations and those of its domestic
subsidiaries were included in the combined domestic Federal income tax returns
of Pacific Mutual. PFAMCo's operations and its domestic subsidiaries were
included in the combined California franchise tax return of Pacific Financial
Holding Company ("PFHC"), the parent of PFAMCo. Certain subsidiaries filed
separate state income or franchise tax returns. PFAMCo and its domestic
subsidiaries were allocated an expense or a benefit based principally on the
effect of including their operations in the combined provision as if the
companies filed a separate return in accordance with a tax sharing agreement
between PFAMCo and PFHC.
The provision for taxes prior to the Consolidation was as follows:
PERIOD ENDED
NOVEMBER 15,
1994
- ---------------------------------------------------------------
Current expense:
State $ 2,140,509
Federal 7,705,429
Deferred expense:
State 156,960
Federal 647,147
------------
$ 10,650,045
============
After the Consolidation, PIMCO Advisors incurred a tax liability of $19,250
in 1994 principally related to the activities of a corporate subsidiary.
Reconciliations of the statutory Federal income tax rates to the effective
income tax rates prior to the Consolidation are as follows:
PERIOD ENDED
NOVEMBER 15,
1994
- ----------------------------------------------------------------
Statutory Federal income tax rate
applied to income before Federal
income taxes 35.0%
State taxes, net of Federal benefit 6.1
Foreign operations 3.1
Other 0.5
------------
Effective income tax rate 44.7%
============
38
8. RELATED-PARTY TRANSACTIONS
Pacific Mutual provided certain support services to PFAMCo Group prior to the
Consolidation. Services for certain of PFAMCo Group's employees include
participation in a pension plan maintained by Pacific Mutual (Note 9g). Charges
for support services, including pension plan participation, amounted to
approximately $2,335,000 for the period ended November 15, 1994.
9. BENEFIT PLANS
a. PROFIT SHARING AND INCENTIVE PROGRAMS - PIMCO Advisors and its
subsidiaries have several profit sharing and incentive programs that
compensate participants on the basis of profitability and discretionary
bonuses. Compensation under these programs was approximately $114,139,000
and $94,487,000 for the years ended December 31, 1996 and 1995,
respectively, and was approximately $10,091,000 for the period from the
Consolidation through December 31, 1994. PFAMCo Group had nonqualified
profit sharing plans (the "Profit Sharing Plans") covering certain key
employees and other employees. The Profit Sharing Plans provided for
awards based on the profitability of the respective subsidiary. Such
profitability was primarily based on income before income taxes and
before profit sharing. The awards ranged from 40% to 80% of such amounts
depending on the level of profitability. Profit sharing awards were fully
vested at the date of the Consolidation. Profit sharing expense relating
to the Profit Sharing Plans of approximately $68,387,000 is included in
compensation and benefits in the accompanying Consolidated Statements of
Operations for the period ended November 15, 1994.
b. LONG TERM COMPENSATION - Long term compensation includes amounts payable
to certain officers of a subsidiary in connection with the discretionary
bonuses discussed above. The amounts payable will be paid on specified
dates and are subject to cancellation upon the occurrence of certain
events. In addition, certain key employees of the PFAMCo subsidiaries
participated in Long-Term Incentive Plans that provided compensation
under the Profit Sharing Plans for a specified period of time subsequent
to their termination of employment. These plans were terminated as of the
Consolidation.
c. EXECUTIVE DEFERRED COMPENSATION PLAN - PIMCO Advisors and its
subsidiaries have a nonqualified deferred compensation plan pursuant to
which a portion of the compensation otherwise payable to certain eligible
employees will be mandatorily deferred, and pursuant to which such
eligible employees may elect to defer additional amounts of compensation.
The plan is unfunded and is maintained primarily for the purpose of
providing deferred compensation for a select group of management or
highly compensated employees, within the meaning of Sections 201(2),
301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of
1974, as amended. Amounts deferred under the plan are held in a trust and
invested by the trustee in Class A Limited Partner Units. PIMCO Advisors
will contribute additional funds or Class A Limited Partner Units to the
trust such that the average purchase price of all units acquired at that
date is not greater than 85% of the then current market price for such
units. No expense was incurred in 1996 related to this plan.
d. SAVINGS AND INVESTMENT PLANS - PIMCO Advisors and its subsidiaries have
several defined contribution employee benefit plans covering
substantially all employees. PIMCO Advisors and Pacific Investment
Management are the sponsors of certain defined contribution employee
savings and investment plans. The plans qualify under Section 401(k) of
the Internal Revenue Code and allow eligible employees of PIMCO Advisors
and certain of its subsidiaries, to contribute up to ten percent of their
annual compensation as defined, and subject to a maximum dollar amount
determined from time to time by the Internal Revenue Service. Employees
are generally eligible following the later of attainment of age 21 or the
completion of one year of credited service ("IRS"). For 1996 and 1995,
PIMCO Advisors and certain of its subsidiaries, matched and contributed
an amount equal to the first five or six percent of annual compensation,
subject to IRS Internal Revenue Service limits, contributed by the
employees. In addition, PIMCO Advisors and certain of its subsidiaries,
may elect to make a discretionary contribution to all participants. The
amount expensed by PIMCO Advisors and its subsidiaries related to this
plan during the year ended December 31, 1996, 1995 and 1994 was
approximately $2,017,000, $1,851,000 and $50,000, respectively.
For 1994, PIMCO Advisors and certain of its subsidiaries, matched and
contributed an amount equal to one half of the first six percent of
annual compensation, subject to IRS limits, contributed by the employees.
In addition, PIMCO Advisors and certain of its subsidiaries, elected to
make a discretionary contribution to all participants. Contributions
fully vest to employees after five years of credited service.
Pacific Investment Management has several defined contribution employee
benefit plans covering substantially all of its employees and made
contributions to the plans ranging form five percent to eleven percent of
covered individuals' base compensation. The aggregate expense recorded is
approximately $989,000, $950,000 and none in 1996, 1995 and 1994,
respectively.
39
e. RESTRICTED UNIT PLAN - PIMCO Advisors adopted a restricted unit plan for
the benefit of certain key employees. A total of 150,000 Class A Limited
Partner Units and 125,000 Class B Limited Partner Units have been awarded
under the plan. The units generally vest over a five-year period;
however, accelerated vesting occurred in 1995 upon the departure of a key
employee. There are no additional units available for grants under the
plan. The expense under this plan was approximately $755,000, $2,010,000
and $101,000 during 1996, 1995 and 1994, respectively.
f. UNIT OPTION PLANS - PIMCO Advisors has two unit-option plans, which are
described below. No compensation cost has been recognized for these fixed
unit option plans because the option price approximated the market price
on the date of grant. Had compensation cost for PIMCO Advisors two unit
option plans been determined based on the fair value rather than market
value at the grant dates, PIMCO Advisors net income and earnings per unit
would have been reported as the pro forma amounts indicated below:
1996 1995
----------- -----------
NET INCOME
As reported $91,128,181 $68,467,454
Pro forma $90,839,243 $68,368,057
NET INCOME PER UNIT
Net income per General Partner and
Class A Limited Partner unit
As reported $1.29 $1.16
Pro forma $1.29 $1.16
Net income per Class B Limited Partner
unit
As reported $1.05 $0.59
Pro forma $1.05 $0.59
For the above disclosure purposes, the fair value of each option
granted is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995, respectively: dividend yield of 7.7% and 3.5%;
expected volatility of 14% and 10%; risk-free interest of 6.30% and 6.80%;
and expected lives of 6 and 7 years.
The unit option plans are administered by the Unit Incentive Committee of
the Equity Board of PIMCO Advisors, which determines the key employees and
the terms of the options to be granted. Under the 1993 Unit Option Plan (as
amended), PIMCO Advisors may grant options to its employees up to 3,090,000
Class A Limited Partner Units. Under the 1994 Unit Option Plan, PIMCO
Advisors may grant options to its employees up to 5,600,000 Class B Limited
Partner Units. There are 270,400 Class B Limited Partner Units options
available for future grants at December 31, 1996. The expense under the
option plans was approximately $4,408,000, $4,704,000 and $1,061,000 during
1996, 1995 and 1994, respectively.
Under both plans, the exercise price for each option reported herein has
been not less than the average trading price of PIMCO Advisor's units for
the 20 trading day period prior to the grant date and each option's maximum
term is 10 years. There was no material difference between the option price
and the market price on the grant date. The outstanding options vest over a
period of not more than five years and vested options are generally
exercisable after January 1, 1998. Following is a summary of the status of
both unit option plans:
40
OPTION PRICE
UNITS RANGE PER UNIT
- ------------------------------------------------------------------------------
Outstanding, January 1, 1994 - -
Class A Limited Partner units
Granted 2,442,130 $2.425 - $ 4.85
Class B Limited Partner units
Granted 5,297,000 $13.53
---------
Outstanding, December 31, 1994 7,739,130 $2.425 - $13.53
Class A Limited Partner units
Exercised (103,000) $2.425 - $ 4.85
Class B Limited Partner units
Granted 109,000 $12.70 - $14.68
Canceled (174,200) $13.53
---------
Outstanding, December 31, 1995 7,570,930 $2.425 - $14.68
Class B Limited Partner units
Granted 227,000 $17.72 - $18.81
Canceled (29,200) $12.78 - $13.53
---------
Outstanding, December 31, 1996 7,768,730 $2.425 - $18.81
=========
Exercisable:
Class A Limited Partner units 801,110 $2.425
Class B Limited Partner units 200,000 $13.53
---------
Exercisable, December 31, 1996 1,001,110
=========
G. OTHER BENEFIT PLANS - Certain of PFAMCo Group's eligible employees were
included in a Pacific Mutual sponsored defined benefit pension plan, and
health care and life insurance plans that provide post-retirement
benefits. PFAMCo Group was charged an immaterial amount by Pacific Mutual
for these plans prior to the Consolidation. Subsequent to the
Consolidation, PIMCO Advisors has no expense associated with these plans.
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:
YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 $3,560,785
1998 2,523,057
1999 1,705,000
2000 821,122
2001 759,837
Thereafter 375,054
-----------
Total $9,744,855
-----------
Rent expense in connection with these agreements was approximately
$3,772,000, $3,641,000 and $2,379,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
B. LETTER OF CREDIT - PIMCO Advisors is contingently liable for a letter of
credit in the amount of $738,548 related to PIMCO Advisors membership in
a captive insurance program.
C. REVOLVING LINE OF CREDIT - PIMCO Advisors has a $25 million, 4 year
revolving credit facility, originated in April of 1996. The facility
permits short term borrowings at a floating rate of interest. The terms
of the agreement include an interest
41
coverage ratio, a fixed charge coverage ratio and a minimum operating
cash flow ratio. The partnership did not utilize this facility in 1996,
but was in compliance with the required ratios.
11. NET CAPITAL
PFD is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities and Exchange Act of 1934, which requires the maintenance of minimum
net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. At December 31, 1996, PFD
had net capital of $3,058,237, which was $2,238,261 in excess of its required
net capital of $819,976. PFD's net capital ratio was 3.73 to 1. At December 31,
1995, PFD had net capital of $1,049,818, which was $515,116 in excess of its
required net capital of $534,702. PFD's net capital ratio was 7.64 to 1. At
December 31, 1994, PFD had $1,156,876 in excess of its required net capital of
$579,935. PFD's net capital ratio was 5.01 to 1 at that time.
12. INVESTMENT IN STOCKSPLUS, L.P.
StocksPLUS accounts for its investment in StocksPLUS, L.P. under the equity
method because StocksPLUS is the general partner in, and exercises significant
influence over the operating and financial policies of StocksPLUS, L.P. (Note
1). The underlying investments of StocksPLUS, L.P. are carried at fair value.
The effect of such accounting does not have a material effect on PIMCO Advisors
consolidated financial statements. StocksPLUS, L.P. has made its investments
with the intent to have its performance exceed that of the S & P 500 Index.
StocksPLUS has mitigated the effects of its pro rata investment in
StocksPLUS, L.P.'s investments through the use of short futures positions. Gains
and losses related to these positions are settled daily. Included in "Short term
investments" in the accompanying Consolidated Statements of Financial Condition
are securities which are used as necessary for deposits made in connection with
the futures positions and are recorded at fair value. The notional amounts of
the contracts do not necessarily represent future cash requirements, as the
contracts are intended to be closed prior to their expiration. As of December
31, 1996 and 1995, the notional amounts of futures contracts approximated
$2,932,000 and $3,401,000, respectively.
42
Condensed financial information for StocksPLUS, L.P. is as follows:
AS OF DECEMBER 31,
SUMMARY OF FINANCIAL CONDITION 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments - at fair value $2,306,673,000 $1,893,770,000
Other assets 26,481,000 18,685,000
-------------- --------------
Total assets 2,333,154,000 1,912,455,000
============== ==============
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities $ 136,880,000 $ 219,072,000
StocksPLUS' Partner Capital 2,629,000 3,384,000
Limited Partners' Capital 2,193,645,000 $1,689,999,000
-------------- --------------
Total liabilities and partners' capital $2,333,154,000 $1,912,455,000
============== ==============
FOR THE YEARS ENDED DECEMBER 31,
SUMMARY OF OPERATIONS 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net trading gains (losses) on futures $292,185,000 $ 326,096,000 $ (30,291,000)
Net gain (loss) in fair value of securities 12,040,000 31,266,000 (21,278,000)
Interest income 126,535,000 92,260,000 58,383,000
Fees and commissions (4,631,000) (3,822,000) (878,000)
------------ -------------- --------------
Net income $426,129,000 $ 445,800,000 $ 5,936,000
============ ============== ==============
13. SUBSEQUENT EVENT
On February 13, 1997, PIMCO Advisors and its affiliate, Thomson Advisory
Group Inc. ("TAG Inc."), and Oppenheimer Group, Inc. and its subsidiary,
Oppenheimer Financial Corp. signed a definitive agreement for TAG Inc. to
acquire a one-third, managing general partner interest in Oppenheimer Capital (a
general partnership), the 1 percent general partner interest in Oppenheimer
Capital, L.P. and 100% of the stock of Advantage Advisers, an affiliate of
Oppenheimer Group, which manages eight closed-end funds. The transaction covers
only the private interests Oppenheimer Group holds in Oppenheimer Capital and
Oppenheimer Capital, L.P. and does not include the publicly traded units of
Oppenheimer Capital, L.P. The acquisition is subject to certain client, lender,
IRS and other approvals, and is expected to take up to six months to complete.
The agreement provides for the acquisition by TAG Inc. of the above listed
assets through a merger with Oppenheimer Group, Inc. in exchange for total
consideration of approximately $233 million in convertible preferred stock to be
issued by TAG Inc. and the assumption of approximately $32 million of debt.
Subsequently, TAG Inc. will contribute the general partner interest in
Oppenheimer Capital to PIMCO Advisors, in exchange for approximately $233
million of newly issued Class A Limited Partner Units, at $25.50 per unit. PIMCO
Advisors may be obligated in certain circumstances to purchase such convertible
preferred stock for its issue price. PIMCO Advisors will account for this
transaction using the purchase method. After the closing, operating results for
PIMCO Advisors will include its proportionate share of the operating results of
Oppenheimer Capital.
43
14. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results for the periods indicated were as follows:
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------
Revenues $91,220,000 $98,842,000 $97,099,000 $104,863,000
Expenses 71,468,000 74,827,000 73,131,000 80,269,000
----------- ----------- ----------- ------------
Income before taxes 19,752,000 24,015,000 23,968,000 24,594,000
Income tax expense 389,000 207,000 238,000 367,000
----------- ----------- ----------- ------------
Net income $19,363,000 $23,808,000 $23,730,000 $ 24,227,000
=========== =========== =========== ============
Net income per General
Partner and Class A Limited
Partner unit $ 0.31 $ 0.33 $ 0.32 $ 0.33
=========== =========== =========== ============
Net income per Class B
Limited Partner unit $ 0.19 $ 0.29 $ 0.28 $ 0.29
=========== =========== =========== ============
Market price per Class A
Limited Partner unit
Low $ 20 5/8 $ 20 1/4 $ 20 1/4 $ 19 5/8
High $ 23 1/8 $ 22 $ 22 3/4 $ 23 5/8
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
- ------------------------------------------------------------------------------------------------------------------
Revenues $71,118,000 $75,465,000 $83,203,000 $93,228,000
Expenses 57,934,000 61,158,000 65,799,000 69,139,000
----------- ----------- ----------- ------------
Income before taxes 13,184,000 14,307,000 17,404,000 24,089,000
Income tax expense 44,000 198,000 263,000 12,000
----------- ----------- ----------- ------------
Net income $13,140,000 $14,109,000 $17,141,000 $24,077,000
=========== =========== =========== ============
Net income per General
Partner and Class A Limited
Partner unit $ 0.26 $ 0.26 $ 0.29 $ 0.35
=========== =========== =========== ===========
Net income per Class B
Limited Partner unit $ 0.07 $ 0.10 $ 0.14 $ 0.28
=========== =========== =========== ===========
Market price per Class A
Limited Partner unit
Low $ 16 7/8 $ 17 3/8 $ 19 $ 19 5/8
High $ 18 1/4 $ 20 5/8 $ 21 1/4 $ 21 1/4
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The Partnership carries on its combined businesses (i) directly through the
Partnership with respect to the Partnership's administrative, accounting and
legal functions and its mutual fund business and (ii) through six Investment
Management Firms which carry on the respective businesses of Pacific Investment
Management, CCI, Cadence, Parametric, NFJ and Blairlogie.
PARTNERSHIP
The Partnership is managed by its general partner, PIMCO GP. The general
partner has delegated the management and control of the Partnership to two
management boards, the Operating Board and the Equity Board. Under the terms of
the delegation, governance matters for most day-to-day decisions are allocated
to the Operating Board, which has, in turn, delegated the authority to manage
day-to-day operations and policies of the Partnership to an Operating Committee.
Accordingly, the members of the Operating Committee, together with certain other
officers of the Partnership, fulfill the functions of executive officers of the
Partnership.
The members of the Operating Board are as set forth below:
Name Age Positions
---- --- ---------
David B. Breed 49 Chief Executive Officer and Managing
Director of Cadence
Donald A. Chiboucas 52 President and Managing Director of CCI
William D. Cvengros (1) 48 Chief Executive Officer and President of
the Partnership
William H. Gross 52 Managing Director of Pacific Investment
Management
John L. Hague 39 Managing Director of Pacific Investment
Management
Brent R. Harris 37 Managing Director of Pacific Investment
Management
James F. Muzzy 57 Managing Director of Pacific Investment
Management
Daniel S. Pickett 33 Managing Director of CCI
William F. Podlich, III 52 Managing Director of Pacific Investment
Management
Irwin F. Smith(1) 57 Chief Executive Officer and Managing
Director of CCI
William S. Thompson, Jr. 51 Chief Executive Officer and Managing
(Chair)(1) Director of Pacific Investment
Management
Benjamin L. Trosky 37 Managing Director of Pacific Investment
Management
- ------------
(1) Member of Operating Committee
Until the earlier of December 31, 1997 or the Restructuring, the Operating
Board will be composed of the Chief Executive Officer of Pacific Investment
Management, six other persons designated by the Managing Directors of Pacific
Investment Management, three persons designated by the Managing Directors of
CCI, one person selected by the vote of the Managing Directors of Cadence, NFJ,
Parametric and Blairlogie weighted by the contribution of Cadence, NFJ,
Parametric and Blairlogie to the income of the Partnership, and the Chief
Executive Officer of the Partnership, who serves ex officio. Thereafter, the
Operating Board will consist of at least 11 members designated by the Investment
Management Firms in accordance with their relative contributions to the income
of the Partnership and may include additional members.
The Operating Committee, which is appointed by the Operating Board, is
required to be composed of no fewer than three members, including the Chief
Executive Officer of the Partnership and one member who is a Managing Director
of an Investment Management Firm other than Pacific Investment Management. The
management board of an Investment Management Firm may appeal any decision made
by the Operating Committee which may have a material adverse effect on such
Investment Management Firm to the full Operating Board which, after any such
appeal, will have the sole power and authority (subject to the referral to the
Equity Board in certain circumstances) with respect to the resolution of such
matter.
The authority of the Operating Board and the Operating Committee to take
certain specified actions is subject to the approval of the Equity Board. The
Equity Board has jurisdiction over any decision of the Operating Board with
which three members of the
46
Operating Board disagree and which is expected to have a material adverse effect
on an Investment Management Firm. In addition, the Equity Board's approval is
required for certain material transactions, including amendment of the
Partnership Agreement or the partnership agreement of an Investment Management
Firm, incurring large amounts of debt or making significant investments, making
certain material changes in the business of the Partnership or of an Investment
Management Firm or material acquisitions or dispositions by the Partnership or
an Investment Management Firm, the authorization of additional units, the
selection of the Chief Executive Officer of the Partnership, the removal of any
Managing Director of an Investment Management Firm (to the extent such approval
is required by the partnership agreement of the Investment Management Firm),
declaring distributions on units, material transactions with affiliates, any
increase in the compensation of a Managing Director of an Investment Management
Firm in excess of consumer price index adjustments, and the adoption of any
policy or any action by one Investment Management Firm that materially burdens
another.
The members of the Equity Board are as set forth below:
Name Age Positions
---- --- ---------
Walter E. Auch, Sr. 75 Management Consultant
William D. Cvengros 48 Chief Executive Officer and President of
the Partnership
Walter B. Gerken (Chair) 74 Former Chairman and Former Director of
Pacific Mutual
William H. Gross 52 Managing Director of Pacific Investment
Management
Donald R. Kurtz 66 Former Managing Director of General Motors
Investment Management Corp.
James F. McIntosh 56 Executive Director of Allen, Matkins,
Leck, Gamble & Mallory LLP.
Donald K. Miller 65 Chairman of Greylock Financial Inc.
William F. Podlich, III 52 Managing Director of Pacific Investment
Management
Glenn S. Schafer 47 President and Director of Pacific Mutual
Irwin F. Smith 57 Chief Executive Officer and Managing
Director of CCI
Thomas C. Sutton 54 Chairman and Chief Executive Officer of
Pacific Mutual
William S. Thompson, Jr. 51 Chief Executive Officer and Managing
Director of Pacific Investment
Management
Until the earlier of December 31, 1997 or the Restructuring, the members of
the Equity Board will be composed of eight members who are not employed by PIMCO
Advisors (including five members designated by certain unitholders), the Chief
Executive Officer of PIMCO Advisors, the Chairperson of the Operating Board and
two representatives of Pacific Investment Management. Thereafter, the then
serving Equity Board will appoint an Equity Board consisting of 13 members who
shall consist of the Chairperson of the Operating Board, the Chief Executive
Officer of the Partnership and 11 other members, including at least three
independent directors, allocated in a manner reasonably determined by the Equity
Board to represent most effectively the interests of the direct or indirect
beneficial owners of units, including the public unitholders.
Other individuals who serve as executive officers of the Partnership include
Stephen J. Treadway, Executive Vice President; Kenneth M. Poovey, General
Counsel; Robert M. Fitzgerald, Chief Financial Officer, Senior Vice President
and Principal Accounting Officer; Richard M. Weil, Senior Vice President-Legal;
James G. Ward, Senior Vice President & Director of Human Resources; Vinh T.
Nguyen, Vice President, Controller; Mark J. Porterfield, Vice President,
Compliance Officer; and Robert S. Venable, Vice President, Asset Allocation.
In addition, the Partnership has an Audit Committee, a Compensation
Committee, a Constructive Termination Committee and a Unit Incentive Committee
of the Equity Board, each comprised of the three independent members of the
Equity Board.
Set forth below is certain background information with respect to the
persons who are the members of the Operating and Equity Boards or certain
executive officers of the Partnership:
Walter E. Auch, Sr. Mr. Auch has served on the Equity Board as an
independent member and as a member of the Audit Committee, Compensation
Committee, Unit Incentive Committee and the Constructive Termination
Committee since the Consolidation in November 1994. He currently is a
management consultant. Mr. Auch was a Director of TAG Inc. 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.
47
David B. Breed. Mr. Breed has served as Chief Executive Officer and a
Managing Director of Cadence since the Consolidation in November 1994. From
February 1988 to July 1993, he was a Managing Director and Director of
Cadence Capital Management Corporation and he was Chief Executive Officer
and Chief Investment Officer thereof until November 1994.
Donald A. Chiboucas. Mr. Chiboucas has served as a member of the Operating
Board of the Partnership and the President and a Managing Director of CCI
since the Consolidation in November 1994. Mr. Chiboucas was Senior
Executive Vice President of TAG Inc. and the Partnership, a member of the
Partnership's Executive Operating Committee and President of the CCI
division from October 1990 until November 1994.
William D. Cvengros. Mr. Cvengros has served as Chief Executive Officer and
President of the Partnership, a member of its Equity and Operating Boards
and Chairman of its Operating Committee since the Consolidation in November
1994. In February 1986, Mr. Cvengros became both Chairman of the Board and
Director of Pacific Investment Management Company (the predecessor to
Pacific Investment Management). He was associated with Pacific Mutual from
July 1972 when he joined Pacific Mutual as an investment analyst until
November 1994. He was promoted to Executive Vice President, Investment
Operations of Pacific Mutual in April 1986, and became a director in
January 1988. Mr. Cvengros became Vice Chairman and Chief Investment
Officer of Pacific Mutual in January 1990. Mr. Cvengros also served as a
director of Pacific Mutual Distributors, Inc., Mutual Service Corporation,
PFAMCo, PFAMCo UK Limited, Blairlogie, Parametric, NFJ, Cadence and
PMRealty Advisors, Inc. He is currently a director of Furon Corporation and
a director of RemedyTemp, Inc.
Robert M. Fitzgerald. Mr. Fitzgerald, 45, is Senior Vice President,
Chief Financial Officer, and Principal Accounting Officer of the
Partnership. He joined the Partnership in February 1995. From April 1994
through January 1995, he served as a consultant to various companies,
including Pacific Investment Management. From October 1991 until April
1994, he served in various senior executive positions, including President,
at Mechanics National Bank. Prior to October 1991, he was a partner with
Price Waterhouse LLP. He is a Certified Public Accountant.
Walter B. Gerken. Mr. Gerken has served as the Chairman of the Equity Board
since the Consolidation in November 1994. Mr. Gerken was formerly on the
Board of Pacific Investment Management Company. Mr. Gerken is the former
Chairman of the Board and CEO of Pacific Mutual, of which he served as
Chairman of the Executive Committee from 1987 until 1995.
William H. Gross. Mr. Gross is a Managing Director of Pacific Investment
Management and a member of the Equity and Operating Boards. Mr. Gross
joined Pacific Investment Management Company (the predecessor to Pacific
Investment Management) in June 1971 and became a Managing Director in
February 1982. He serves as a Director and Vice President of StocksPLUS and
as a Senior Vice President of PIMCO Funds.
John L. Hague. Mr. Hague is a Managing Director of Pacific Investment
Management and a member of the Operating Board. Mr. Hague was a Managing
Director of Pacific Investment Management Company (the predecessor to
Pacific Investment Management) from April 1993 through November 1994. Mr.
Hague joined Pacific Investment Management Company as a Portfolio Manager
in September 1987, and became a Vice President in March 1988, a Principal
in April 1991 and a Managing Director in April 1993.
Brent R. Harris. Mr. Harris is a Managing Director of Pacific Investment
Management and has served on the Operating Board since the Consolidation in
November 1994. Mr. Harris was a Managing Director of Pacific Investment
Management Company (the predecessor to Pacific Investment Management) until
November 1994. He joined Pacific Investment Management Company as an
Account Manager in June 1985, and became a Vice President in February 1987,
a Senior Vice President in February 1990, a Principal in April 1991 and a
Managing Director in April 1993. Mr. Harris serves on the boards of PIMCO
Commercial Mortgage Securities Trust, Inc. and StocksPLUS. He also
serves as a Trustee and Chairman of the PIMCO Funds and the PIMCO
Commercial Mortgage Securities Trust, Inc.
Donald R. Kurtz. Mr. Kurtz has served on the Equity Board as an independent
member and as a member of the Audit Committee, Compensation Committee, Unit
Incentive Committee and the Constructive Termination Committee of the
Partnership since the Consolidation in November 1994. Mr. Kurtz was a
Director of TAG 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 and at General Motors
Corp. from February 1987 until December 1989.
48
James F. McIntosh. Mr. McIntosh has served on the Equity Board as an
independent member and as a member of the Audit Committee, Compensation
Committee, Unit Incentive Committee and Constructive Termination Committee
of the Partnership since the Consolidation in November 1994. Prior to that
time, he served as a Director of PIMCO Inc. (the predecessor to Pacific
Investment Management), a position he held since June 1983. He is currently
the Executive Director of Allen, Matkins, Leck, Gamble & Mallory LLP, a law
firm, which position he has held from October 1994. From January 1981 to
October 1994, he was Executive Director of Paul, Hastings, Janofsky &
Walker, LLP, a law firm.
Donald K. Miller. Mr. Miller has served as a member of the Equity Board
since the Consolidation in November 1994. Prior thereto, Mr. Miller was
Vice Chairman of the Partnership, Vice Chairman and a Director of TAG Inc.
and a member of the Partnership's Executive Operating Committee. From
October 1990 until March 1993, he was Chairman, Chief Executive Officer and
a Director of TAG Inc. and the Chairman and Chief Executive Officer of the
Partnership and Chairman of its Executive Operating Committee. He was a
Director of PFD from May 1992 until November 1994. Mr. Miller is the
Chairman of Greylock Financial Inc. and currently serves as a Director of
Layne Christensen Company, Huffy Corporation, Fibreboard Corporation and
RPM, Inc. He was a trustee of the PIMCO Advisors Funds and Cash
Accumulation Trust from October 1990 until November 1994.
James F. Muzzy. Mr. Muzzy is a Managing Director of Pacific Investment
Management and has served as a member of the Operating Board since the
Consolidation in November 1994. Mr. Muzzy was a Managing Director of
Pacific Investment Management Company (the predecessor to Pacific
Investment Management) until November 1994. Mr. Muzzy joined Pacific
Investment Management Company in September 1971 and became a Director in
February 1978 and a Managing Director in February 1982. Mr. Muzzy serves as
a director of StocksPLUS.
Daniel S. Pickett. Mr. Pickett is a Managing Director of CCI and a member
of the Operating Board. Mr. Pickett was a Managing Director of CCI since
the Consolidation in November 1994. From June 1988 through November 1994,
he served in various positions with the Columbus Circle Investors division
of the Partnership (the predecessor to CCI) including Senior Vice President
and Director of Research. He served on the Operating Board from November
1994 through February 1996.
William F. Podlich, III. Mr. Podlich is a Managing Director of Pacific
Investment Management and has served as a member of the Equity and
Operating Boards since the Consolidation in November 1994. Mr. Podlich
joined Pacific Investment Management Company (the predecessor to Pacific
Investment Management) as a Director in August 1969 and became a Managing
Director in February 1982. Mr. Podlich serves as a director of
StocksPLUS and of Maxager Technology, Inc.
Kenneth M. Poovey. Mr. Poovey, 65, is General Counsel of the Partnership,
which position he has held since November 1994. He is currently a partner
with the law firm of Latham & Watkins with which he has been affiliated
since 1980.
Glenn S. Schafer. Mr. Schafer has served as a member of the Equity Board
since the Consolidation in November 1994. He currently serves as a
Director and the President of Pacific Mutual. Mr. Schafer was the Executive
Vice President and Chief Financial Officer of Pacific Mutual from April
1991 until January 1995. He also serves as an officer and Director for
numerous subsidiaries of Pacific Mutual.
Irwin F. Smith. Mr. Smith has served as a member of the Operating and
Equity Boards and the Operating Committee of the Partnership and the
Chairman, Chief Executive Officer and Chief Investment Officer of CCI since
the Consolidation in November 1994. Prior thereto, Mr. Smith was Chairman
and Chief Executive Officer of the Partnership, Chairman of its Executive
Operating Committee, Chairman, Chief Executive Officer and Chief Investment
Officer of the CCI division, and Chairman, Chief Executive Officer and a
Director of TAG Inc. From October 1990 until March 1993, he was Vice
Chairman and a Director of TAG Inc. and Vice Chairman of the Partnership
and a member of its Executive Operating Committee.
49
Thomas C. Sutton. Mr. Sutton has served as a member of the Equity Board
since the Consolidation in November 1994. Mr. Sutton has been the Chairman
and Chief Executive Officer of Pacific Mutual since January 1990 and a
Director of Pacific Mutual since 1987. He has been associated with Pacific
Mutual since June 1965 and became its President in September 1987. He is an
officer and Director for numerous subsidiaries of Pacific Mutual. Mr.
Sutton is also a Director of Edison International, Newhall Land and
Farming Company and the Irvine Company and is currently the Chairman of
the American Council of Life Insurance.
William S. Thompson, Jr. Mr. Thompson is a Managing Director and the Chief
Executive Officer of Pacific Investment Management and has served as
Chairman of the Operating Board and as a member of the Equity Board and the
Operating Committee since the Consolidation in November 1994. Prior
thereto, Mr.Thompson was a Managing Director and the Chief Executive
Officer of Pacific Investment Management Company (the predecessor to
Pacific Investment Management). Mr. Thompson joined Pacific Investment
Management Company in April 1993. From February 1975 until April 1993, he
was with Salomon Brothers Inc., an investment banking firm, serving as a
Managing Director starting in 1981 and he is currently a director of
Spieker Properties, a public company.
Stephen J. Treadway. Mr. Treadway, 49, is an Executive Vice President of
the Partnership and Director, Chairman and President of PFD. He joined the
Partnership in May 1996. Prior thereto, he was associated with Smith
Barney, Inc. for eighteen years and served in various senior positions,
including Executive Vice President.
Benjamin L. Trosky. Mr. Trosky is a Managing Director of Pacific Investment
Management, and a member of the Operating Board. Mr. Trosky joined Pacific
Investment Management Company (the predecessor to Pacific Investment
Management) in October 1990, became a Vice President in April 1991, and was
an Executive Vice President from February 1994 through November 1994. He
served as Executive Vice President of Pacific Investment Management after
the Consolidation, and became a Managing Director in February 1996. Mr.
Trosky currently serves as a Senior Vice President of PIMCO Commercial
Mortgage Securities Trust, Inc.
James G. Ward. Mr. Ward, 42, is Senior Vice President and Director of Human
Resources of the Partnership. Mr. Ward served as Vice President and
Director of Human Resources of the Partnership from April 1995 through
December 1996. Prior to that time, he served as Vice President and Director
of Human Resources for Pacific Investment Management, a position he held
beginning October 1994. From November 1987 through October 1994, he served
as Vice President and Area Manager, Human Resources for Salomon Brothers
Inc.
Richard M. Weil. Mr. Weil, 33, is Senior Vice President-Legal, which
position he assumed in March 1996. Mr. Weil was a Vice President in the
Global Asset Management Group of Bankers Trust Company from December 1994
through February 1996 and was with the law firm of Simpson, Thatcher &
Bartlett from September 1989 through November 1994.
To the Partnership's knowledge, based solely on a review of the copies of
reports furnished to the Partnership and written representations that no other
reports were required, during the two fiscal years ended December 31, 1996 and
1995, there has been compliance with all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934, as amended, applicable to its officers,
directors and greater than ten percent beneficial owners, except that the Form 3
for each of Messrs. Treadway and Weil regarding the grant of options to acquire
Class B LP Units of the Partnership in connection with their election as
officers of the Partnership was not timely filed and the Form 3 for Mr. Trosky
regarding his ownership interests in the Partnership in connection with his
election as Managing Director of Pacific Investment Management was not timely
filed.
50
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or allocated with
respect to the three years ended December 31, 1996 for services rendered to the
Partnership (and its affiliates) in all capacities to the Chief Executive
Officer and each of the Partnership's four most highly compensated executive
officers or members of the Operating Committee (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-term compensation awards
------------------- ---------------------------------
Securities All
Salary Other Annual Restricted Underlying Other
Name and Principal Year (2) Bonus Compensation Unit Awards Options/SARs Compensation
Underlying Position (1) ($) ($) ($) ($) ($) (#) ($)
- ----------------------------- ---- -------- ---------- ------------- ------------ ------------- ----------------
William D. Cvengros 1996 $500,000 $ 950,000 $ 9,500(3) - - $ 3,444(4)
Chief Executive Officer 1995 500,000 800,000 4,620 - - -
and President 1994 63,847 62,500 - $3,248,571 400,000 1,915
William S. Thompson, Jr. 1996 $225,000 $5,601,616 - - - $ 23,758(5)
Member of Operating Committee 1995 191,304 4,752,463 $28,696 - - 27,620
1994 24,853 387,349 3,512 - 230,000 390
Irwin F. Smith 1996 $359,100 $5,174,796 - - - $ 20,973(6)
Member of Operating Committee 1995 350,000 4,424,609 - - - 19,399
1994 350,000 3,815,922 - - - 19,393
Stephen J. Treadway 1996 $196,730 $ 250,000 - $ 562,500(7) 100,000 $303,444(8)
Executive Vice President 1995 - - - - - -
1994 - - - - - -
John O. Leasure 1996 $275,000 $ 425,000 - - - $ 12,444(10)
Former Senior 1995 275,000 425,000 - - - 37,107
Vice President (9) 1994 275,000 525,000 - - 80,000 17,082
_______________
(1) Amounts shown for Messrs. Treadway and Leasure includes amounts paid by
PFD. Amounts shown for Messrs. Thompson and Smith include amounts paid by
Pacific Investment Management and CCI, respectively.
(2) The salary and bonus amounts for Messrs. Cvengros, Smith and Leasure
include amounts deferred in the Partnership's 401(k) Savings and Investment
Plan of $9,500 for 1996. For Mr. Thompson, salary and bonus include amounts
deferred in the PIMCO 401(k) Employee Savings and Investment Plan of
$9,500 for 1996. Mr. Treadway joined the Partnership in May 1996, and his
salary reflects a partial year of service.
(3) Represents a bonus paid in lieu of the employer contribution to the
Partnership's 401(k) Savings and Investment Plan.
(4) Represents the premiums on term life insurance and long-term disability.
(5) The amount includes a $7,500 matching contribution to the Pacific
Investment Management Employee Savings Plan and a $12,814 employer
contribution by Pacific Investment Management to its Employee Retirement
Plan and the premiums on term life insurance.
(6) Represents the premiums on term life insurance and long-term disability.
Also includes a $9,000 matching contribution to the Partnership's 401(k)
Savings and Investment Plan.
(7) Mr. Treadway was awarded 25,000 Class A LP Units. The Units vest over a
five year period, pay distributions quarterly and had an aggregate value of
$562,500 at December 31, 1996.
(8) Represents amounts deferred under Executive Deferred Compensation Plan (the
"Plan"). An additional amount, which cannot currently be determined, may be
contributed by the Partnership at such time as the amounts deferred are
invested by the trustee of the plan in Class A LP Units to cause the
effective purchase price not to exceed 85% of the current market price for
Class A LP Units on the investment date. The amount also includes the
premiums on term life insurance and long-term disability.
(9) From and after January 1, 1997, Mr. Leasure is acting in a consulting
capacity with the Partnership.
(10) Represents the premiums on term life insurance and long-term disability.
Compensation to key employees who are not executive officers may exceed the
compensation paid to executive officers in any given year.
51
The following table provides information on option exercises in 1996 by the
Named Executive Officers, and the value of unexercised options held by each
Named Executive Officer at December 31, 1996:
AGGREGATED OPTION/SAR EXERCISE IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities In-The-Money Options/
Underlying Unexercised SARs at FY-End ($)
Shares Acquired Value Realized Options/SARs at FY-End (#) Exercisable (E)/Unexercisable
Name on Exercise (#) ($) Exercisable (E)/Unexercisable (U) (U)
- ---- --------------- -------------- --------------------------------- -----------------------------
William D. Cvengros - - 400,000 (U) $ 2,754,021
William S. Thompson, Jr. - - 230,000 (U) $ 1,583,562
Irwin F. Smith - - 801,110 (E) $16,082,283
228,890 (U) 4,594,967
Stephen J. Treadway - - 100,000 (U) $ 244,505
John O. Leasure - - 185,400 (U) $ 3,496,645
80,000 (U) 550,804
COMPENSATION OF DIRECTORS
The Partnership pays members of the Equity Board who are not employees of the
Partnership, an Investment Management Firm or Pacific Mutual a $20,000 annual
retainer plus $750 per in-person meeting ($250 per conference call meeting) of
the Equity Board attended and for each meeting of a committee of the Equity
Board. Members who are employees of the Partnership or any Investment Management
Firm or Pacific Mutual are not entitled to any additional compensation from the
Partnership for their services as Board members. Pursuant to the terms of the
Partnership's 1996 Unit Incentive Plan, the non-employee members of the Equity
Board may elect to receive restricted Class B LP Units in lieu of
such retainer, with such restricted units valued at 91% of fair market value on
the date of issuance. In addition, the non-employee members of the Equity Board
received a one-time grant of 1,311 restricted Class B LP Units in December 1996,
issued in January 1997.
COMPENSATION OF GENERAL PARTNER
PIMCO GP does not receive any compensation from the Partnership for services
rendered to the Partnership as General Partner. Rather, PIMCO GP's interest in
profits and losses of the Partnership is based on the number of units it holds.
Upon liquidation, the liquidating distributions to the general partner will be
based on the number of units it holds. The Partnership pays for substantially
all expenses incurred by the PIMCO GP in performing its activities as general
partner, including the cost of directors' and officers' liability insurance.
COMPENSATION PURSUANT TO CONTRACT
William D. Cvengros, Chief Executive Officer and President of the Partnership
and a member of the Operating and Equity Board, is party to an employment
agreement with the Partnership, the term of which was extended through December
31, 1998 by the Operating and Equity Board 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 at the recommendation of the Operating Board and
upon the approval of the Equity Board). The Partnership granted Mr. Cvengros
options to purchase up to 400,000 Class B LP Units under the 1994 Unit Option
Plan. In 1994, Mr. Cvengros was also granted 100,000 restricted Class A LP Units
and 100,000 restricted Class B LP Units which are forfeitable to PIMCO GP upon
certain events of termination. If his contract is terminated without cause prior
to December 31, 1998, he is entitled to accrued and unpaid salary and bonus
payments, severance payments totalling
52
$500,000 and immediate vesting of all of his options and restricted units.
William S. Thompson, Jr., the Chairperson of the Operating Board and a member
of the Operating Committee, and Equity Board, as well as a Managing Director and
the Chief Executive Officer of Pacific Investment Management, is a party to an
employment agreement with Pacific Investment Management under which he receives
an annual base salary of $225,000, subject to yearly increases based on
inflation. In addition, Mr. Thompson is eligible to participate in the profit
sharing plan adopted by Pacific Investment Management. The Partnership also
granted Mr. Thompson options to purchase up to 230,000 Class B LP Units under
the 1994 Unit Option Plan.
Irwin F. Smith, a member of the Operating Board, Operating Committee and
Equity Board, as well as Chief Executive Officer of CCI, is party to an
employment agreement with CCI through December 31, 1998, under which he receives
an annual base salary of $350,000, which will increase to $400,000 on January 1,
1997. Mr. Smith is also eligible to participate in the profit sharing plan
adopted by CCI. During the term of his employment agreement, Mr. Smith will be
prohibited from diverting or taking away funds with respect to which CCI is
performing investment management services or from competing with the investment
management services offered by the Partnership or any of the Investment
Management Firms. Upon a voluntary termination or a termination for cause, until
January 1, 1999, Mr. Smith will not engage in certain prohibited competition
activities and until December 31, 2000, Mr. Smith will also be prohibited from
soliciting clients or soliciting or working with professional employees of CCI.
Mr. Smith's existing option agreement was amended in certain respects in
connection with the Consolidation.
Kenneth M. Poovey, General Counsel of the Partnership, acts in such capacity
in return for a monthly payment of $40,000 (plus travel and other expenses) to
his law firm, Latham & Watkins. This arrangement will be reviewed quarterly and
adjusted if appropriate. In addition, his firm will also bill the Partnership
for the fees and expenses of other professionals employed by such firm who
render services to the Partnership at the firm's usual rates.
NEW EMPLOYEE PLANS
- ------------------
1996 Unit Incentive Plan
- ------------------------
In December 1996, the Partnership adopted The 1996 Unit Incentive Plan, which
amends and restates the 1994 Class B LP Unit Option Plan. The Plan provides for
the award of options, restricted units, deferred units, unit payments and unit
appreciation rights with respect to up to 10,000,000 Class B LP Units (including
those previously awarded under the 1994 Class B LP Unit Option Plan). The
effectiveness of awards granted under the plan is subject to unitholder
approval, expected to be solicited in 1997.
Executive Deferred Compensation Plan
- ------------------------------------
In December 1996, the Partnership adopted the PIMCO Advisors L.P. Executive
Deferred Compensation Plan. The plan is an unfunded nonqualified deferred
compensation plan pursuant to which a portion of compensation otherwise payable
to certain eligible employees of the Partnership and participating Investment
Management Firms will be subject to mandatory deferral, and pursuant to
which eligible employees may irrevocably elect to defer additional amounts of
compensation. Amounts deferred under the plan are held in trust and invested by
the trustee of the trust in Class A LP Units of the Partnership purchased from
existing holders of Class A LP Units in a "dutch auction" or in open market
purchases. The Partnership will contribute additional funds or Class A LP Units
to the trust such that the average purchase price of Class A LP Units purchased
by the trust is not greater than 85% of the current market price for Class A LP
Units on the investment date. Compensation deferred under the plan must be
deferred for a period no less than five years, and can be forfeited under
certain circumstances. The Executive Deferred Compensation Plan will be
submitted to the Partnership's unitholders for approval in 1997.
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
the Partnership's GP Units, Class A LP Units and Class B LP Units as of December
31, 1996 by each person who, to the Partnership's knowledge, is the beneficial
owner of more than 5% of a class of units and of all units as a single class,
each person who may be deemed to be a director of the Partnership, the Chief
Executive Officer of the Partnership and the Partnership's four most highly
compensated executive officers and all officers and persons who may be deemed to
be directors of the Partnership as a group. Except as indicated, the address of
each person or entity listed below is 800 Newport Center Drive, Newport Beach,
California 92660.
GP UNITS CLASS A LP UNITS CLASS B LP UNITS
(1) (1) (1)
- -------------------------------------------------------------------------------------------
FIVE PERCENT HOLDERS (OTHER THAN THOSE
LISTED UNDER OPERATING AND EQUITY BOARD
MEMBERS BELOW)
- -------------------------------------------------------------------------------------------
PIMCO Partners, G.P. ("PIMCO GP")(2) 800,000/ 23,654,713/ 30,135,826/
100% 57.8% 91.4%
- -------------------------------------------------------------------------------------------
Pacific Mutual Life Insurance Company 800,000 27,089,911/ 32,835,826/
("Pacific Mutual")(3) 100% 66.2% 99.6%
- -------------------------------------------------------------------------------------------
Pacific Financial Asset Management 800,000 27,089,911/ 32,835,826/
Corporation ("PFAMCo")(3) 100% 66.2% 99.6%
- ------------------------------------------------------------------------------------------
Pacific Investment Management Company 800,000 24,019,747/ 30,335,826/
("PIMCO Inc.")(3) 100% 58.7% 92.0%
- -------------------------------------------------------------------------------------------
PIMCO Partners, LLC ("PIMCO LLC")(4) 800,000 23,797,193/ 30,135,826
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Thomson Advisory Group Inc. ("TAG Inc.") 0 6,119,391/ 8,260,826/
14.9% 25.1%
- -------------------------------------------------------------------------------------------
David H. Edington(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- ------------------------------------------------------------------------------------------
Dean S. Meiling(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
William C. Powers(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Frank B. Rabinovitch(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
OPERATING AND EQUITY BOARD MEMBERS
- -------------------------------------------------------------------------------------------
Walter E. Auch, Sr. 0 0 0
- -------------------------------------------------------------------------------------------
David B. Breed 0 265,000 285,000
* *
- -------------------------------------------------------------------------------------------
Donald A. Chiboucas(5) 0 366,475/ 826,082/
* 2.5%
- -------------------------------------------------------------------------------------------
William D. Cvengros 0 100,000/ 100,000/
* *
- -------------------------------------------------------------------------------------------
Walter B. Gerken 0 0 0
- -------------------------------------------------------------------------------------------
William H. Gross(6)(7) 800,000 23,899,193/ 30,135,826/
100% 58.4% 91.4%
- -------------------------------------------------------------------------------------------
John L. Hague(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Brent R. Harris(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Donald R. Kurtz 0 4,000/ 0
*
- -------------------------------------------------------------------------------------------
James F. McIntosh 0 1,000/ 0
*
- -------------------------------------------------------------------------------------------
Donald K. Miller(5) 0 32,287/ 82,608/
* *
-------------------------------------------------------------------------------------------
James F. Muzzy(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Daniel S. Pickett 0 0 0
- -------------------------------------------------------------------------------------------
William F. Podlich, III(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Glenn S. Schafer 0 0 0
54
- -------------------------------------------------------------------------------------------
Irwin F. Smith(5)(8) 0 1,147,037/ 826,082/
2.5% 2.5%
- -------------------------------------------------------------------------------------------
Thomas C. Sutton 0 0 0
- -------------------------------------------------------------------------------------------
William S. Thompson, Jr.(7)(9) 800,000 23,802,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
Benjamin L. Trosky(7) 800,000 23,797,193/ 30,135,826/
100% 58.1% 91.4%
- -------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS NOT INCLUDED ABOVE
- -------------------------------------------------------------------------------------------
Stephen J. Treadway 0 25,000 0
- -------------------------------------------------------------------------------------------
John O. Leasure 0 0 0
- -------------------------------------------------------------------------------------------
All directors and executive 800,000/ 25,044,827/ 32,255,598/
officers as a group (26 persons) 100% 61.2% 97.9%
- ----------------------------------------------------------------------------------------------
- -----------------
* Less than 1%
(1) Each of the persons and entities listed disclaims beneficial ownership of
any units except to the extent that it has a pecuniary interest in such
items.
(2) Includes (i) 16,735,322 Class A LP Units and 21,875,000 Class B LP Units
held of record by PIMCO GP; (II) 800,000 CLASS A LP Units which may be
acquired by PIMCO GP pursuant to the Partnership Agreement upon conversion
of the 800,000 GP Units of the Partnership held by PIMCO GP should PIMCO GP
cease to be the general partner of the Partnership; and (iii) 6,119,391
Class A LP Units and 8,260,826 Class B LP Units held of record by TAG Inc.,
all of the common stock (which is non voting) is owned by PIMCO GP.
(3) Includes (i) the 800,000 GP Units, 24,019,747 Class A LP Units and
30,135,826 Class B LP Units which may be deemed to be beneficially owned by
PIMCO GP, which may be deemed to be beneficially owned by Pacific Mutual,
PFAMCo and PIMCO Inc., because PIMCO Inc. is a general partner of PIMCO GP
and is a wholly-owned subsidiary of PFAMCo, which is a wholly-owned
subsidiary of Pacific Mutual; (ii) 728,475 Class A LP Units held of record
by PFAMCo, over which PFAMCo holds sole voting and disposition power; and
(iii) an aggregate of 2,341,689 Class A LP Units issued as follows: Cadence
Capital Management Corp. ("Cadence Inc.") (32,652 Class A LP Units), Cadence
Partners, L.P. ("Cadence LP") (1,275,000 Class A LP Units), NFJ Investment
Group, Inc. ("NFJ Inc.") (18,404 Class A LP Units), NFJ Partners L.P. ("NFJ
LP") (506,211 Class A LP Units), Parametric Portfolio Associates, Inc.
("Parametric Inc.") (18,562 Class A LP Units), and Parametric Partners L.P.
("Parametric LP") (490,860 Class A LP Units) which may be deemed
beneficially owned by PFAMCo because Cadence Inc., NFJ Inc., and Parametric
Inc., are wholly owned subsidiaries of PFAMCo and Cadence Inc., NFJ Inc.,
Parametric Inc., in turn are the general partners of Cadence LP, NFJ LP, and
Parametric LP, respectively. Also includes 2,700,000 Class B LP Units owned
by the foregoing. As general partners, Cadence Inc., NFJ Inc., and
Parametric Inc., have shared investment and disposition powers with respect
to Units held by Cadence LP, NFJ LP, and Parametric LP, respectively.
Address: 700 Newport Center Drive, Newport Beach, California 92660.
(4) Includes (i) 142,480 Class A LP Units held of record by PIMCO LLC; and (ii)
800,000 GP Units, 23,654,713 Class A LP Units and 30,135,826 Class B LP
Units which may be considered to be beneficially owned by PIMCO GP, and
which may be deemed to be beneficially owned by PIMCO LLC, which is a
general partner of PIMCO GP.
(5) Includes Class A LP Units which may be acquired upon exchange of Series A
Preferred Stock of TAG Inc. based on a variable conversion rate (initially,
0.93 Class A LP Units per share of Series A Preferred Stock during 1994).
Includes Class B LP Units that may be acquired in limited circumstances upon
exchange of Series B Preferred Stock of TAG Inc. on a one-for-one basis. The
individual disclaims beneficial ownership of any Class B LP Units.
(6) Includes 83,500 Class A LP Units held in trusts of which the individual is
trustee and as to which he has sole voting and disposition power, 18,000
Class A LP Units held by him and his spouse, of which he has shared voting
and investment power and 500 Class A LP Units held by his spouse of which he
has no voting or investment power.
(7) Includes the following which may be deemed to be beneficially owned by the
individual as a member of PIMCO LLC. (i) 142,480 Class A LP Units held of
record by PIMCO LLC; and (ii) 800,000 GP Units, 23,654,713 Class A LP Units
and 30,135,826 Class B LP Units which may be considered to be beneficially
owned by PIMCO GP, and which may be deemed to be beneficially owned by PIMCO
LLC as a general partner of PIMCO GP.
(8) Includes 801,110 Class A LP Units which may be acquired upon exercise of
options within 60 days.
(9) Includes 5,000 shares held in trusts of which the individual is trustee and
as to which he has sole voting and disposition power.
55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ANTICIPATED FUTURE RESTRUCTURING OF THE PARTNERSHIP
General. Under current law, the Partnership will cease being classified as
a partnership for federal income tax purposes, and will be treated as a
corporation, immediately after December 31, 1997 (or sooner if the Partnership
adds a substantial new line of business or otherwise fails to satisfy certain
requirements) unless the Partnership's limited partner interests cease to be
publicly traded prior to such time. As a corporation, the Partnership would be
subject to tax on its income and its shareholders would be subject to tax on
distributions. In an effort to preserve partnership tax treatment after December
31, 1997 for the holders of PIMCO Advisors partnership interests who are
affiliates of the Partnership ("Nonpublic Unitholders"), the Partnership
Agreement confers on the general partner, PIMCO GP, broad authority to effect
one or more Restructurings of the Partnership in connection with, or in
anticipation of, such a change in tax status.
While the precise form of a Restructuring will depend on the facts and
circumstances at the time a Restructuring is implemented, it is currently
anticipated that on or about November 30, 1997, but no later than December 31,
1997, the Partnership will cause all PIMCO Advisors limited partner interests
held by unitholders who are not affiliates of the Partnership (the "Public
Unitholders"), as well as certain other PIMCO Advisors units held by affiliates
of the Partnership, to be contributed to a newly-formed corporation (the
"Restructuring Corporation") in exchange for a number of shares of the
Restructuring Corporation common stock proportionate to the number of units
contributed. These shares are expected to be listed for trading on a national
securities exchange. In addition, it is expected that TAG Inc. will be merged
with the Restructuring Corporation or a subsidiary of the Restructuring
Corporation, with the stockholders of TAG Inc. (including PIMCO GP) receiving
shares of capital stock of the Restructuring Corporation proportionate to the
number of PIMCO Advisors units held by TAG Inc. In the Restructuring, the
Restructuring Corporation will become a General Partner of the Partnership.
Thereafter, it is anticipated that the Restructuring Corporation will be the
sole publicly traded entity through which equity interests in PIMCO Advisors
will be owned.
If a Restructuring occurs prior to December 31, 1997, the general partner will
make (i) a final quarterly distribution for the quarter preceding the
Restructuring according to the respective priorities in distribution of the
Class A LP Units, GP Units and Class B LP Units and (ii) a distribution in an
amount which the general partner, in its good faith discretion, determines will
not be required for expenses, for capital expenditures, as reserves or otherwise
in the business of the ongoing restructured entity, also according to the
respective priorities in distribution of the Class A LP Units, GP Units and
Class B LP Units. If an Adverse Tax Event (as defined in the Partnership
Agreement) has not occurred prior to the Restructuring, the first-priority
distributions to the holders of Class A LP Units and GP Units will continue
until the earlier of December 31, 1997 or the occurrence of an Adverse Tax
Event.
The Partnership does not expect to change its distribution policy following
the Restructuring, and it is anticipated, at least initially, that the
Restructuring Corporation generally will distribute all cash received by it from
the Partnership other than cash needed for payment of taxes and operational
expenses. Because of federal, state, and other taxes on the Restructuring
Corporation's income, cash available for dividends to the holders of the
Restructuring Corporation's publicly traded securities will be substantially
less than the cash distributed to the Restructuring Corporation by the
Partnership. Assuming that the Restructuring is carried out in the manner
anticipated, under current law the amount of such taxes imposed on the
Restructuring Corporation will be reduced by the Restructuring Corporation's
carrying over the balance of the amortizable Section 197 Intangibles associated
with the publicly traded Class A LP Units immediately prior to the Restructuring
and claiming amortization deductions with respect to such amount.
Restructuring Authority. Because of possible changes in applicable laws or
regulations and other factors, it cannot now be established with certainty what
actions PIMCO GP will take in connection with the Restructuring, if any. Section
XVIII of the Partnership Agreement confers on PIMCO GP broad power and authority
to take all such actions it may deem necessary or appropriate in connection
with, in anticipation of or to effect a Restructuring, without consent of or
other action on the part of any other unitholder and whether or not such actions
or omissions may treat Public Unitholders differently than Nonpublic Unitholders
and result in different and more favorable treatment of the Nonpublic
Unitholders. The Partnership Agreement imposes no obligations on PIMCO GP to
effect any Restructuring and gives PIMCO GP authority to choose the timing
(subject to certain limitations) of a Restructuring.
Limited Duty to Unitholders Related to Restructuring. In order to assure that
it is clear that PIMCO GP may effect the anticipated Restructuring in a form
which will preserve partnership taxation for the Nonpublic Unitholders even
though the Public Unitholders will be subject to corporate level tax, the
Partnership Agreement releases the general partner and its partners, directors,
officers, employees and affiliates from any liability based upon actions taken
or omitted to be taken by the general partner with
56
respect to any Restructuring, to the extent that such actions or omissions may
treat Public Unitholders differently and less favorably than Nonpublic
Unitholders.
LOSS REIMBURSEMENT AGREEMENTS
As part of the Consolidation, PFAMCo transferred to the Partnership certain
assets and liabilities of PFAMCo (excluding the businesses of the Investment
Management Firms) (the "PFAMCo Operation"). Until December 31, 1996, PFAMCo has
agreed to reimburse the Partnership for losses up to an aggregate of $2 million
incurred by the PFAMCo Operation. Through December 31, 1996, PFAMCo had paid the
Partnership $1,611,120 pursuant to this arrangement.
In addition, from the date of the Consolidation until the end of 1996, if the
Subpartnership conducting the business of Blairlogie (the "Blairlogie
Subpartnership") incurs net losses as a result of ordinary business operations,
PFAMCo has agreed to pay the amount of such net losses to the Partnership. If
the Blairlogie Subpartnership subsequently earns net profits as a result of
ordinary business operations, 50% of these profits will be paid to PFAMCo until
the amount of any loss reimbursement, plus accrued interest, has been repaid.
The Partnership has retained the right to dispose of or liquidate the Blairlogie
Subpartnership without recourse for such advances by PFAMCo after December 31,
1996. As of December 31, 1996 the Partnership is contingently liable to PFAMCO
for approximately $230,000 under this agreement, representing losses incurred
through December 31, 1995 of approximately $380,000, reduced by a reimbursement
to PFAMCo of approximately $150,000 in 1996.
INDEBTEDNESS OF MANAGEMENT
In March, 1996, Pacific Investment Management advanced $505,891 to Benjamin
L. Trosky, one of its managing directors. This advance bears interest at an
annual rate of 5.41% and is due in March, 1997. At December 31, 1996, $252,995
remained outstanding under this advance. In July 1996, the partnership made a
$250,000 relocation loan to Robert M. Fitzgerald, Senior Vice President and
Chief Financial Officer. The loan bears interest at 8%, and $200,000 of the
principal and interest thereon will be forgiven over three years pending
continued employment. At December 31, 1996, the loan had an outstanding
principal balance of $250,000. In January 1995, the partnership made a $100,000
relocation loan to James G. Ward, Senior Vice President, Director Human
Resources. The loan bears interest at 8%, and the principal and interest thereon
will be forgiven over three years pending continued employment. At December 31,
1996, the loan had an outstanding principal balance of $33,000.
OTHER CONFLICTS
Withdrawal and Removal of a General Partner. The general partner has agreed
that it may withdraw as general partner of the Partnership only if such
withdrawal is approved by holders of a majority of the units of limited partner
interest (other than those held by the general partner and its affiliates) and
if counsel renders an opinion that the limited partners do not lose their
limited liability pursuant to Delaware law or the Partnership Agreement (a
"Limited Liability Determination"), and provides certain other opinions relating
to the status of the Partnership as a partnership for federal income tax
purposes (a "Tax Determination") and the continuation of the Partnership's
advisory agreements (an "Assignment Determination"). The general partner may be
removed by a vote of unitholders holding 80% or more of all outstanding units if
a successor general partner is appointed, counsel makes a Limited Liability
Determination, a Tax Determination and an Assignment Determination and such
removal is approved by the successor general partner. However, by virtue of
PIMCO GP's ownership of units, PIMCO GP can veto any such removal. Also,
interests in the general partner may be sold or transferred without any prior
approval or consent of the holders of Class A LP Units.
In the event of withdrawal or removal of a general partner, such general
partner will have the option to require a successor general partner (if any) to
acquire all of the general partner's GP units for a cash payment equal to their
fair value as of the effective date of the general partner's departure. Such
value will be determined by agreement between the general partner and the
successor general partner or, if no agreement is reached, by an independent
investment banking firm or other independent expert selected by the general
partner and the successor general partner (or if no expert can be agreed upon,
by the expert chosen by agreement of each of the experts selected by each such
general partner). If the option is not exercised by the general partner, the GP
Units of the general partner will be converted into an equal number of Class A
LP Units.
57
TAG Inc., certain affiliates of PIMCO GP and Pacific Mutual and certain
individuals have registration rights as to units that they own or have the
right to acquire.
Indemnification. The Partnership Agreement provides that the Partnership
will indemnify the general partner or any general partner which has withdrawn or
been removed (a "Departing Partner"), any Person (as defined) who is or was an
affiliate of the general partner or any Departing Partner, each shareholder of
the general partner or of the parent company of the general partner, each
shareholder of the Departing Partner or of the parent company of the Departing
Partner, and any member of the Equity Board, Operating Board or Operating
Committee, any officer of the Partnership or any of its Investment Management
Firms or divisions. The Partnership may also enter into indemnification
agreements with certain other Persons.
The Partnership Agreement also provides that neither a general partner nor any
indemnitee will be liable to the Partnership 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 the Partnership or was
undertaken with reckless disregard for the best interests of the Partnership.
58
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 24 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:
--------
2.1 Amended and Restated Agreement and Plan of Consolidation of PIMCO
Advisors L.P. dated effective as of July 11, 1994.1/
-
2.2 Agreement and Plan of Merger by and among PIMCO Advisors L.P.,
Oppenheimer Group, Inc. and Oppenheimer Financial Corp., dated
February 13, 1997. 13/
--
3.1 Amended and Restated Certificate of Limited Partnership of
Registrant.2/
-
3.2 Amended and Restated Agreement of General Partnership of PIMCO
Partners, G.P. ("PIMCO GP").1/
-
4.1 Amended and Restated Agreement of Limited Partnership of
Registrant dated October 31, 1994.1/
-
4.1(a) First Amendment to Amended and Restated Agreement of Limited
Partnership of Registrant.3/
-
4.2 Specimen Class A LP Unit Certificate.4/
-
4.3 Specimen Class B LP Unit Certificate.4/
-
4.4 9.01% Secured Nonrecourse Note Agreement, dated as of November 14,
1994, by and between PIMCO GP and Thomson Advisory Group Inc.
("TAG Inc.").1/
-
4.5 PIMCO Pledge and Security Agreement, dated as of November 14,
1994, by and between PIMCO GP and Citibank, N.A.1/
-
4.6 TAG Pledge and Security Agreement, dated as of November 14, 1994,
by and among TAG Inc., PIMCO GP and Citibank, N.A.1/
-
4.7 Collateral Agency Agreement, dated as of November 14, 1994, by and
among Purchasers identified therein, PIMCO GP and Citibank, N.A.1/
-
4.8 Registration Rights Agreement, dated as of November 15, 1994, by
and among the Funds, PFAMCo Parties and Individuals, as such terms
are defined therein.1/
-
4.9 Exchange Agreement, dated November 14, 1994, by and among PIMCO
GP, TAG Inc. and the Registrant.1/
-
4.10 Custodial Account Agreement, dated as of November 15, 1994, by and
among PIMCO GP and Citibank, N.A.1/
-
4.11 Form of 9.01% Secured Nonrecourse Note due December 15, 2001.1/
-
4.12 Form of Intercompany Note Secured Nonrecourse Demand Note.1/
-
4.13 PFAMCo Stock Exchange Agreement dated November 15, 1994.1/
-
4.14 Amended and Restated Certificate of Incorporation of TAG Inc.1/
-
10.1 Cvengros Employment Agreement.4/
-
10.2 Smith Employment Agreement.4/
-
10.3 Chiboucas Employment Agreement.4/
-
10.4 Form of Manager Employer Agreement.4/
-
10.5 Profit Sharing Plan for Pacific Investment Management Company.2/
-
10.6 Profit Sharing Plan for Columbus Circle Investors.4/
-
10.7 Form of Profit Sharing Plan for Investment Management Firms.4/
-
10.8 PFAMCo Loss Reimbursement Agreement.4/
-
10.9 Blairlogie Loss Reimbursement and Recapture Agreement.4/
-
10.10(a) Thomson Advisory Group L.P. 1993 Unit Option Plan (as amended
through April 20, 1993).5/
-
59
10.10(b) Amendment to the Thomson Advisory Group L.P. 1993 Unit Option
Plan.14/
-
10.11 Award of Options dated March 10, 1993 to Irwin F. Smith.6/
-
10.12 Smith Option Amendment Agreement.4/
-
10.13 Form of Class I Option Amendment Agreement.4/
-
10.14 Form of Class II Option Amendment Agreement.4/
-
10.15 Form of PIMCO Advisors L.P. 1994 Class B LP Unit Option Plan.7/
-
10.16 Form of Option Agreement for Item 10.15.7/
-
10.17 PIMCO Advisors L.P. Restricted Unit Plan.4/
-
10.18 (a) Thomson Advisory Group 401(k) Savings and Investment Plan.8/
-
(b) First Amendment to the Thomson Advisory Group 401(k) Savings
and Investment Plan.9/
-
(c) Thomson Advisory Group 401(k) Savings and Investment Plan
Volume Submitter Amendment.9/
-
(d) Consolidation Transaction Amendment.2/
-
(e) Third Amendment to the Thomson Advisory Group 401(k) Savings
and Investment Plan.2/
-
(f) Fourth Amendment to the PIMCO Advisors 401(k) Savings and
Investment Plan.2/
-
10.19 Form of Indemnification Agreement executed by certain officers of
the Registrant and certain directors of Thomson McKinnon Asset
Management Inc. 10/
--
10.20 Form of Indemnification Agreement executed by certain directors
and/or officers of TAG Inc.11/
--
10.21 Form of Amendment No. 1 to Indemnification Agreement.12/
--
10.22 The 1996 Unit Incentive Plan of PIMCO Advisors L.P.
10.23 Credit Agreement dated as of April 12, 1996 between PIMCO Advisors
L.P. as borrower and Citicorp USA, Inc. as initial lender and agent.
15/
--
10.24 PIMCO Advisors L.P. Executive Deferred Compensation Plan
10.25 Employment Agreement: David B. Breed
10.26 Employment Agreement: William H. Gross
10.27 Employment Agreement: John L. Hague
10.28 Employment Agreement: Brent R. Harris
10.29 Employment Agreement: James F. Muzzy
10.30 Employment Agreement: Daniel S. Pickett
10.31 Employment Agreement: William F. Podlich, III
10.32 Employment Agreement: William S. Thompson, Jr.
10.33 Employment Agreement: Benjamin L. Trosky
21 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99.1 Agreement to Provide Exhibits and Schedules. 13/
--
__________
1/ Filed as an Exhibit to Schedule 13D of PIMCO Partners, G.P. filed November
- - 25, 1994 and incorporated herein by reference.
60
2/ Filed as an Exhibit to Registrant's Report on Form 10-K for the year
- -
ended December 31, 1994 and incorporated herein by reference.
3/ Filed as an Exhibit to Registrant's Report on Form 10-Q for the quarter
- -
ended March 31, 1995 and incorporated herein by reference.
4/ Filed as an Exhibit to the Registrant's Report on Form 8-K dated July 11,
- -
1994 and incorporated herein by reference.
5/ Filed as an Exhibit to Registrant's Report on Form 10-Q for the quarter
- -
ended March 31, 1993 and incorporated herein by reference.
6/ Filed as an Exhibit to Registrant's Report on Form 10-K for the year
- -
ended December 31, 1992 and incorporated herein by reference.
7/ Filed as an Exhibit to Registrant's Registration Statement on Form S-4
- -
(File No. 33-84914) and incorporated herein by reference.
8/ Filed as an Exhibit to Registrant's Report on Form 10-K for the year
- -
ended December 31, 1991 and incorporated herein by reference.
9/ Filed as an Exhibit to Registrant's Report on Form 10-K for the year
- -
ended December 31, 1993 and incorporated herein by reference.
10/ Filed as an Exhibit to Registrant's Report on Form 10-Q for the quarter
- --
ended June 30, 1990 and incorporated herein by reference.
11/ Filed as an Exhibit to Registrant's Report on Form 10-Q for the quarter
- --
ended September 30, 1990 and incorporated herein by reference.
12/ Filed as an Exhibit to Registrant's Report on Form 10-Q for the quarter
- --
ended March 31, 1991 and incorporated herein by reference.
13/ Filed as an Exhibit to Registrant's Report on Form 8-K filed February
- --
18, 1997.
14/ Filed as an Exhibit to Registrant's Report on Form 10-K for the
- --
year ended December 31, 1995 and incorporated herein by reference.
15/ Filed as an Exhibit to Registrant's Report on Form 10-Q for the
- --
quarter ended March 31, 1996 and incorporated herein by reference.
(b) Reports on Form 8-K. The Registrant filed the following reports on Form
--------------------
8-K during the fourth quarter of 1996.
None.
61
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 L.P.
By: /s/ WILLIAM D. CVENGROS
-------------------------------------
William D. Cvengros,
Chief Executive Officer and President
Date: March 28, 1997
62
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William D. Cvengros Chief Executive Officer and March 28, 1997
- ----------------------------- President of Registrant
William D. Cvengros Member of Equity Board and
Operating Board
/s/ Irwin F. Smith Member of Equity Board and March 28, 1997
- ----------------------------- Operating Board
Irwin F. Smith
/s/ William S. Thompson, Jr. Member of Equity Board and March 28, 1997
- ----------------------------- Operating Board
William S. Thompson, Jr.
/s/ Walter E. Auch, Sr. Member of Equity Board March 28, 1997
- -----------------------------
Walter E. Auch, Sr.
/s/ David B. Breed Member of Operating Board March 28, 1997
- -----------------------------
David B. Breed
/s/ Donald A. Chiboucas Member of Operating Board March 28, 1997
- -----------------------------
Donald A. Chiboucas
/s/ Walter B. Gerken Member of Equity Board March 28, 1997
- -----------------------------
Walter B. Gerken
/s/ William H. Gross Member of Equity Board and March 28, 1997
- ----------------------------- Operating Board
William H. Gross
/s/ John L. Hague Member of Operating Board March 28, 1997
- -----------------------------
John L. Hague
/s/ Brent R. Harris Member of Operating Board March 28, 1997
- -----------------------------
Brent R. Harris
/s/ Donald R. Kurtz Member of Equity Board March 28, 1997
- -----------------------------
Donald R. Kurtz
/s/ James F. McIntosh Member of Equity Board March 28, 1997
- -----------------------------
James F. McIntosh
/s/ Donald K. Miller Member of Equity Board March 28, 1997
- -----------------------------
Donald K. Miller
/s/ James F. Muzzy Member of Operating Board March 28, 1997
- -----------------------------
James F. Muzzy
/s/ Daniel S. Pickett Member of Operating Board March 28, 1997
- -----------------------------
Daniel S. Pickett
/s/ William F. Podlich, III Member of Equity Board and March 28, 1997
- ----------------------------- Operating Board
William F. Podlich, III
/s/ Glenn S. Schafer Member of Equity Board March 28, 1997
- -----------------------------
Glenn S. Schafer
/s/ Thomas C. Sutton Member of Equity Board March 28, 1997
- -----------------------------
Thomas C. Sutton
/s/ Benjamin L. Trosky Member of Operating Board March 28, 1997
- -----------------------------
Benjamin L. Trosky
/s/ Robert M. Fitzgerald Senior Vice President-Finance, March 28, 1997
- ----------------------------- Chief Financial Officer
Robert M. Fitzgerald and Principal Accounting
Officer
63
PIMCO ADVISORS L.P.
FORM 10-K
EXHIBIT INDEX
1996
NUMBER EXHIBIT PAGE
- ------ ------- ----
10.22 The 1996 Unit Incentive Plan of PIMCO Advisors L.P.
10.24 PIMCO Advisors L.P. Executive Deferred Compensation Plan
10.25 Employment Agreement: David B. Breed
10.26 Employment Agreement: William H. Gross
10.27 Employment Agreement: John L. Hague
10.28 Employment Agreement: Brent R. Harris
10.29 Employment Agreement: James F. Muzzy
10.30 Employment Agreement: Daniel S. Pickett
10.31 Employment Agreement: William F. Podlich, III
10.32 Employment Agreement: William S. Thompson, Jr.
10.33 Employment Agreement: Benjamin L. Trosky
22 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
64