-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WeuTwBHq2jrNwuHkCTYAmhqnpW7ASHy7ug36RmkOG8LZfQZN3zgR8IYF7lXrBCht K0o2kyoJZFoLdD93GqYsuw== 0000916641-94-000091.txt : 19940912 0000916641-94-000091.hdr.sgml : 19940912 ACCESSION NUMBER: 0000916641-94-000091 CONFORMED SUBMISSION TYPE: PRES14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940909 FILED AS OF DATE: 19940909 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBRIDGE SERIES TRUST CENTRAL INDEX KEY: 0000883428 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: PRES14A SEC ACT: 1934 Act SEC FILE NUMBER: 811-06550 FILM NUMBER: 94548578 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER STREET 2: C/O FEDERATED INVESTORS CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 8047823648 MAIL ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 PRES14A 1 PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12 Cambridge Series Trust (Name of Registrant as Specified in Its Charter) Cambridge Series Trust (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (Check the appropriate box): [X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2) [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:1 4) Proposed maximum aggregate value of transaction: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 1Set forth the amount on which the filing fee is calculated and state how it was determined. 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: CAMBRIDGE SERIES TRUST NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD OCTOBER 28, 1994 A Special Meeting of the shareholders of the Cambridge Government Income Portfolio of Cambridge Series Trust will be held at the Trust's principal offices at 901 East Byrd Street, Richmond, Virginia 23219, at 9:00 a.m., October 28, 1994, for the following purposes: (1) To approve a new sub-advisory contract among the Trust, Cambridge Investment Advisors, Inc. and Pacific Investment Management Company with regard to the Cambridge Government Income Portfolio; and (2) To transact such further business as may properly come before the meeting or any adjournment thereof. The Board of Trustees has fixed September 8, 1994, as the record date for determination of shareholders entitled to vote at the meeting. By Order of the Trustees Paul F. Costello Secretary September __, 1994 SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY TO AVOID ADDITIONAL EXPENSE CAMBRIDGE SERIES TRUST 901 East Byrd Street Richmond, Virginia 23219 PROXY STATEMENT The enclosed proxy is solicited on behalf of the Board of Trustees (the "Board") of Cambridge Series Trust (the "Trust"), with respect to the Cambridge Government Income Portfolio (the "Portfolio" or "Government Income"). The proxy is revocable at any time before it is voted by sending written notice of the revocation to the Trust, attention Secretary, or by appearing personally at the special meeting of shareholders ("Special Meeting"). The cost of preparing and mailing the notice of meeting, proxy card, this proxy statement and any additional proxy materials has been or is to be borne by Pacific Investment Management Company ("PIMCO" or the "Subadviser"). On September 8, 1994, Government Income had outstanding _____________ shares of beneficial interest, each share being entitled to one vote. The total outstanding shares of Government Income by class consisted of ______________ Class A shares and ___________ Class B shares. Only shareholders of record at the close of business on that date will be entitled to notice of and vote at the Special Meeting. A majority of the outstanding shares of Government Income, represented in person or by proxy, shall be required to constitute a quorum at the Special Meeting. The Trust's Annual Report, which includes audited financial statements for the period ended September 30, 1993, has been previously delivered to shareholders. The Trust's executive offices are located at 901 East Byrd Street, Richmond, Virginia 23219. The Board proposes to mail the enclosed notice of meeting, proxy card and this proxy statement on or about September __, 1994. NEW SUB-ADVISORY CONTRACT Background PIMCO currently serves as subadviser to the Portfolio pursuant to a Sub-Advisory Agreement with Cambridge Investment Advisors, Inc. (the "Adviser"), the Portfolio's Investment Adviser. PIMCO is presently a wholly owned subsidiary of Pacific Financial Asset Management Corporation ("PFAMCo"), which is, in turn, a wholly owned subsidiary of Pacific Mutual Life Insurance Company ("Pacific Mutual"). PFAMCo, PIMCO, the Managing Directors of PIMCO (the "PIMCO Managing Directors") and certain of their affiliates have entered into an Agreement and Plan of Consolidation with Thomson Advisory Group L.P. ("TAG") and certain of its control persons and affiliates (the "Consolidation Agreement") providing for the consolidation of the investment advisory and related businesses of PFAMCo and its affiliates (including PIMCO), and TAG (the "Consolidation"). As described in more detail below, the Consolidation would result in the transfer of the current investment advisory business of PIMCO to a new entity organized as a general partnership, Pacific Investment Management Company ("New PIMCO"). The Consolidation could be viewed as constituting a "change in control" of PIMCO for purposes of the 1940 Act, and cause the "assignment" and resulting termination of the current Sub-Advisory Agreement between PIMCO and the Adviser. The Sub-Advisory Agreement provides for its automatic termination in the event of its "assignment" as that term is defined in the 1940 Act. After considering various factors described below, the Trustees of Cambridge Series Trust (the "Trust"), including a majority of the Trustees who are not parties to the Sub- Advisory Agreement or interested persons (as defined in the 1940 Act) of any such party (the "Independent Trustees"), voting separately and as part of the full Board, unanimously approved, subject to the required shareholder approval described herein, a proposed new sub- advisory agreement (the "New Sub-Advisory Agreement"), between the Adviser and New PIMCO, and determined to recommend approval of the New Sub-Advisory Agreement to the shareholders of the Portfolio. The terms and conditions of the New Sub-Advisory Agreement are identical in all material respects to those of the present Sub-Advisory Agreement, with the exception of the identity of the service provider and its effective date and termination date. New PIMCO will retain the services of all of PIMCO's management personnel and employees, who currently provide investment management services to the Portfolio, and there will be no change in their current responsibilities with respect to the Portfolio. No change is anticipated in the investment philosophies and practices currently followed by the Portfolio. The Consolidation Transaction The Consolidation Agreement provides for the consolidation of certain of the investment advisory and other businesses of PFAMCo and its affiliates (including PIMCO), and TAG. The Consolidation contemplates the transfer of the investment advisory businesses of PIMCO and other PFAMCo affiliates to TAG in return for units of limited partner and general partner interest of TAG. TAG would be renamed PIMCO Advisors L.P. ("PIMCO Advisors"). The General Partner of PIMCO Advisors would become PIMCO Partners, G.P. ("PIMCO G.P."), a general partnership in which PFAMCo would indirectly hold an approximate 62.7% interest and the remainder would be held indirectly by a group comprised of the PIMCO Managing Directors. The investment advisory business of PIMCO would be transferred to New PIMCO, a subsidiary partnership of PIMCO Advisors. Pursuant to a separate transaction that may occur contemporaneously with the Consolidation, PIMCO G.P., certain other affiliates of PFAMCo, and certain stockholders of TAG Inc., the current general partner of TAG, may cause PIMCO Advisors to register for public offering a portion of the units of PIMCO Advisors issued in return for the PFAMCO advisory businesses in the Consolidation. If all such units were sold, it is presently contemplated that the joint interest of Pacific Mutual and its affiliates, including the PIMCO Managing Directors, in PIMCO Advisors would be approximately 70%, with the remaining units held by current executives and affiliates of TAG and the public. Certain units received by PFAMCo and the PIMCO Managing Directors will be effectively restricted as to sale or other disposition until January 1, 1998. See "Structural Aspects of the Consolidation." The Consolidation provides for the continuity of management and control of PIMCO through the creation of management boards on which the PIMCO Managing Directors and representatives of PFAMCo hold a majority of seats. The Consolidation further provides for the discretionary award of stock options to key management employees of PIMCO and its affiliates with respect to the purchase of additional units of PIMCO Advisors. PIMCO believes that the Consolidation, in light of all relevant circumstances, does not materially affect the current autonomy, management or control of PIMCO. A description of the post- Consolidation management boards of PIMCO Advisors appears in "Information about the Subadviser" below. PIMCO has elected to qualify for the "safe harbor" offered by Section 15(f) of the 1940 Act to an adviser that may have received "any amount or benefit" in connection with a sale of interests that constitutes a "change in control" of the adviser. Section 15(f) is available provided (1) for a three year period following the Consolidation, the Trust maintains a Board of Trustees at least 75% of whose members are not "interested persons" of the Subadviser (either before or after the change in control), and (2) no "unfair burden" is imposed on the Trust as a result of the Consolidation. Pacific Mutual and PIMCO have committed to the Trust's Board that there is no present intention to seek an increase in the Portfolio's advisory fee rates (not including the impact of any fee waivers or expense reimbursements) for a period of at least two years following the Consolidation. TAG and its affiliates provide investment advisory and related services to a wide range of institutional and individual clients. TAG is a Delaware limited partnership organized in 1987. As of June 30, 1994, TAG managed approximately $9.4 billion in assets, primarily through its Columbus Circle Investors division ("CCI"). Consummation of the Consolidation is subject to several conditions, including regulatory approvals and consents and approval by TAG's unitholders, as well as approval of new investment advisory agreements (or consent to continuation of current agreements) by clients and funds representing 90% of the aggregate investment advisory revenues of the parties to the transaction for the 12-month period ending March 31, 1994. For a more complete description of certain of the transactions contemplated by the Agreement, see "Structural Aspects of the Consolidation" below. The Present and New Sub-Advisory Agreement The terms and conditions of the New Sub-Advisory Agreement (attached as Exhibit 1) are identical in all material respects to those of the present Sub-Advisory Agreement , with the exception of the identity of the service provider and the effective date and termination date. The present Sub-Advisory Agreement was approved by the Trustees and shareholders on February 15, 1994 and April 26, 1994, respectively, and such Agreement took effect on April 26, 1994. If the New Sub-Advisory Agreement is approved by the Portfolio's shareholders, it will become effective upon consummation of the Consolidation, and will remain in effect, unless earlier terminated, for an initial two year term, subject to annual review and continuation thereafter. Although approval of new advisory agreements or consent to continuation of existing advisory agreements by a certain portion of the clients of PFAMCo, PIMCO and TAG is a condition to the consummation of the Consolidation, PFAMCo, PIMCO, and TAG may nevertheless proceed with the Consolidation, even if the New Sub-Advisory Agreement is not approved. In the event that the shareholders of the Portfolio do not approve the New Sub-Advisory Agreement and the Consolidation is consummated, subject to the approval of the Securities and Exchange Commission, the Board of Trustees would seek to obtain for the Portfolio interim advisory services either from New PIMCO or from another advisory organization. Thereafter, the Board of Trustees would either negotiate a new investment advisory agreement with an advisory organization selected by the Board or make other appropriate arrangements, in either event subject to approval by the shareholders of the Portfolio. In the event the Consolidation is not consummated, PIMCO would continue to serve as the Subadviser of the Portfolio pursuant to the terms of the present Sub-Advisory Agreement. The New Sub-Advisory Agreement provides that it will continue in effect from year to year after its initial two-year term, subject to annual approval by the Board of Trustees or by vote of the holders of a majority of the outstanding shares of the Portfolio (as defined in the 1940 Act) and also, in either event, approval by a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval. For this purpose, the vote of the holders of a majority of the outstanding shares of the Portfolio means the lesser of either (A) the vote of 67% or more of the shares of the Portfolio present at the meeting if the holders of more than 50% of the outstanding Portfolio shares are present or represented by proxy or (B) the vote of the holders of more than 50% of the outstanding shares of the Portfolio. The New Sub-Advisory Agreement will terminate automatically in the event of its assignment, and may be terminated with respect to the Portfolio at any time, without the payment of any penalty, by a vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Portfolio or by a vote of a majority of the Trust's entire board of Trustees on 60 days' written notice to New PIMCO or by New PIMCO on 60 days' written notice to the Trust. Advisory Fees The New Sub-Advisory Agreement provides that New PIMCO would receive a monthly fee from the Adviser at an annual rate based on average daily net assets of the Portfolio as follows: Cambridge Government Income Portfolio Fee Rate Annual rate of 0.30% of average daily net assets on first $150 million; 0.25% of average daily net assets on assets over $150 million paid monthly. This is the same fee as is currently received by PIMCO under the present Sub-Advisory Agreement. Information about the Subadviser PIMCO is an investment management firm founded in 1971 and currently has over $55 billion in assets under management. The address of PIMCO is 840 Newport Center Drive, Suite 360, Newport Beach, California, 92660. A balance sheet relating to PIMCO's last fiscal year is attached as Exhibit 2. PIMCO is currently a wholly owned subsidiary of PFAMCo, an indirect wholly owned subsidiary of Pacific Mutual. The address of Pacific Mutual and PFAMCo is 700 Newport Center Drive, Newport Beach, California 92660. PIMCO is registered as an investment adviser under the Investment Advisers Act of 1940 and is registered as a commodity trading advisor with the Commodity Futures Trading Commission. Its directors and principal executive officers and their principal occupations are shown below. The address of each director and officer is 840 Newport Center Drive, Suite 360, Newport Beach, California 92660. Name Position and Principal Occupation William D. Cvengros Chairman of the Board and Director, (1986 to present) PIMCO; Chairman, Chief Executive Officer and Director, PM Realty Advisors, Inc. ("PMRA"), NFJ Investment Group, Inc. and Pacific Financial Asset Management Corporation; Chairman and Director, Cadence Capital Management Corporation and Parametric Portfolio Associates, Inc.; Director, Vice Chairman and Chief Investment Officer, Pacific Mutual; Vice President and Trustee, Pacific Select Fund. David H. Edington Managing Director, PIMCO. (1994 to present) Walter B. Gerken (1983 to present) Director, PIMCO; Chairman of the Executive Committee, Pacific Mutual. William H. Gross Managing Director and Director, (1971 to present) PIMCO. John L. Hague Managing Director, PIMCO. (1993 to present) Brent R. Harris Managing Director, PIMCO. (1993 to present) James F. McIntosh Director, PIMCO; Executive Director, (1983 to present) Paul, Hastings, Janofsky & Walker. Dean S. Meiling Managing Director, PIMCO. (1987 to present) James F. Muzzy Managing Director and Director, (1971 to present) PIMCO. William F. Podlich III Managing Director and Director, (1971 to present) PIMCO. Henry H. Porter, Jr. Director, PIMCO; independent investor (1983 to present) and consultant. William C. Powers Managing Director, PIMCO. (1993 to present) Frank B. Rabinovitch Managing Director, PIMCO. (1993 to present) Ernest L. Schmider Chief Administrative and Legal (1994 to present) Officer, PIMCO. Eduardo S. Schwartz Director, PIMCO; Professor of (1992 to present) Finance, University of California at Los Angeles Graduate School of Management. Thomas C. Sutton Director, PIMCO; Chairman of the (1990 to present) Board, Director and Chief Executive Officer, Pacific Mutual; Director, Pacific Equities Network. Ott Thompson II Director, PIMCO; Consultant, Pacific (1972 to present) Mutual Realty Advisors, Inc. William S. Thompson, Jr. Chief Executive Officer, Managing (1993 to present) Director and Director, PIMCO. New PIMCO New PIMCO will be a general partnership whose partners will be PIMCO Management Inc., a newly formed Delaware corporation, and PIMCO Advisors. The address of PIMCO Advisors, PIMCO Management Inc. and New PIMCO will be 840 Newport Center Drive, Newport Beach, CA 92660. PIMCO Management Inc. will be wholly owned by PIMCO Advisors, which will also hold 99.9% of the partnership interest in New PIMCO. Under the terms of the general partnership agreement establishing New PIMCO, the day-to-day management of New PIMCO is entrusted to its managing general partner, which has delegated authority over the business and operations of New PIMCO to New PIMCO's Managing Directors. The Managing Directors of New PIMCO will be the same individuals who currently serve as Managing Directors of PIMCO. The current Managing Directors of PIMCO who will become Managing Directors of New PIMCO are: David H. Edington, William H. Gross, John L. Hague, Brent R. Harris, Dean S. Meiling, James F. Muzzy, William F. Podlich III, William C. Powers, Frank B. Rabinovitch and William S. Thomson, Jr. PIMCO Advisors must give its prior approval to certain extraordinary business transactions, contractual arrangements, and other specified activities of New PIMCO. New PIMCO will establish a profit sharing plan in which the Managing Directors and certain designated employees may participate, with the amount allocated for distribution equal to 45% of the taxable income of New PIMCO. Each Managing Director of New PIMCO also will enter into an employment agreement with New PIMCO providing for a base salary, the right to participate in New PIMCO's profit sharing plan and other employee benefit plans, and non-solicitation and confidentiality provisions. PIMCO has informed the Trustees that the Consolidation will have no material adverse impact on the operations it expects to carry on through New PIMCO or on the ability of New PIMCO to provide services to the Portfolio. See "Structural Aspects of the Consolidation" and "Information About the Subadviser" for a more detailed discussion of the relationship between New PIMCO and PIMCO Advisors. PIMCO G.P. will delegate management and supervisory functions for PIMCO Advisors to a twelve-person Equity Board, a twelve-person Operating Board, and a three-person Operating Committee. The Operating Board will have twelve members until a restructuring, and consist of 6 representatives designated by New PIMCO; 3 representatives designated by the successor of Columbus Circle Investors ("New CCI"); one representative designated by the remaining PFAMCo advisory entities (Cadence Capital Management, NFJ Investment Group, Parametric Portfolio Associates, and Blairlogie Capital Management); and the Chief Executive Officer of PIMCO Advisors. Until any restructuring, the Equity Board will consist of three representatives of New PIMCO; three representatives of PFAMCo; two representatives of the preferred stockholders of TAG Inc.; three independent directors; and the Chief Executive Officer of PIMCO Advisors. Subject to delegation and review by the Equity Board, the Operating Board will exercise all of the powers of PIMCO G.P., the General Partner, and will delegate day-to-day operational issues to the Operating Committee. The Equity Board has reserved to itself the authority to approve certain transactions and other material matters involving PIMCO Advisors. The Operating Committee will initially be comprised of Messrs. Cvengros, W. Thompson, and a representative of New CCI. Messrs. Cvengros, W. Thompson, Gross, Gerken, Podlich and Sutton will initially serve on the Equity Board, and Messrs. Cvengros, W. Thompson, Harris, Powers, Gross, Podlich, Muzzy and Meiling will initially serve on the Operating Board of PIMCO Advisors. After any restructuring of PIMCO Advisors, the members of the Operating Board (other than the Chief Executive Officer of the partnership, who will serve ex officio) will be selected by the advisory subpartnerships based on the relative contributions to the net income of the partnership, and the members of the Equity Board (other than the Chairperson of the Operating Board and the Chief Executive Officer of the partnership) will be selected by the existing members of the Equity Board in a manner reasonably determined to most effectively represent the proportionate interests of all direct and indirect beneficial holders of units, including public unit holders, with at least three members of the Equity Board being independent directors. The Amended and Restated Partnership Agreement of PIMCO Advisors provides that PIMCO G.P. may choose the form and timing of any restructuring of PIMCO Advisors. A restructuring may occur on the date on which the partnership's exemption from corporate income tax expires, or on such earlier or later date as PIMCO G.P. may determine based on certain factors, including certain tax considerations relating to PFAMCo. A restructuring may involve the delisting of publicly traded units of PIMCO Advisors. Other Investment Company Clients PIMCO serves as investment adviser or sub-adviser to the following investment companies, at the fee rates set forth below, and which had the following net assets at June 30, 1994. With respect to the Frank Russell Investment Management Company, PIMCO serves as co-adviser and as such provides fewer ancillary administrative services than it provides to the other investment companies indicated. The PFAMCo Funds, which are sponsored by PFAMCo, pay to PFAMCo a management fee of 0.50% of net assets on an annual basis of the PFAMCo Funds' Balanced and Managed Bond & Income Portfolios, out of which (among other expenses) it pays the below stated fee to PIMCO to serve as sub-adviser to the Portfolios. Name of Fund Fee Rate Assets at June 30, 1994 Frank Russell Investment Management Company For all accounts 75,012,116 Fixed Income I Fund (including separate 72,725,918 Diversified Bond Fund accounts) combined, 0.25% 51,747,286 Fixed Income III Fund of first $1 billion of 45,774,637 Multistrategy Bond Fund average daily net assets, 0.20% of average daily net assets thereafter. Pacific Select Fund Managed Bond Series For each Series 50,928,673 Government Securities individually, 0.50% of 21,694,508 Series average daily net assets, 0.375% of next $25 million of average daily net assets, 0.25% of average daily net assets thereafter. PIMCO Funds Foreign Fund For each Fund 398,746,411 Global Fund individually: annual rate 57,026,993 High Yield Fund of 0.30% of average daily 276,696,377 International Fund net assets up to $150 184,435,763 Long-Term U.S. million, 0.25% of average Government Fund daily net assets over $150 25,671,409 Low Duration Fund million. 2,200,115,762 Low Duration Fund II 137,185,635 Short-Term Fund 158,892,200 Total Return Fund 5,511,451,411 Total Return Fund III 94,404,152 Growth Stock Fund 22,373,883 StocksPLUS Fund 18,045,179 0.45% of average daily net assets up to $150 million, 0.40% of average daily net assets thereafter. PFAMCo Funds Managed Bond and Income For each Portfolio 355,146,188 Portfolio individually, 0.25% of 52,547,345 Balanced Portfolio average daily net assets. Target Portfolio Trust Intermediate-Term Bond For each Portfolio 72,529,926 Portfolio individually, 0.25% of 32,100,424 Total Return Bond average daily net assets. Portfolio PIMCO Commercial Mortgage Annual rate of 0.725% of 141,191,849 Securities Trust, Inc. average weekly net assets paid quarterly. American Skandia Trust 0.30% of average daily net 24,229,918 assets up to $150,000,000, 0.25% of average daily net assets over $150,000,000. Pacific Corinthian Variable Fund Balanced Series Annual rate of 0.50% of 8,941,848 (Fixed-Income Segment) average daily net assets. The Harbor Fund Harbor Bond Fund 0.50% of average daily net 165,994,145 assets on first $25 million; 0.375% of average daily net assets on next $25 million; 0.35% of average daily net assets over $50 million. Fremont Mutual Funds, Inc. Fremont Bond Fund Annual rate of 0.25% of 33,514,015 average daily net assets paid quarterly. The Evaluation by the Board of Trustees The Board of Trustees has determined that, by approving the New Sub-Advisory Agreement on behalf of the Trust, the Trust can best assure itself that services currently provided to the Portfolio by PIMCO and its officers and employees will continue to be provided after the Consolidation without interruption. The Board believes that, like the present Sub-Advisory Agreement, the New Sub-Advisory Agreement will enable the Portfolio to obtain services of high quality at costs deemed appropriate, reasonable, and in the best interests of the Portfolio and its shareholders. In considering approval of the New Sub-Advisory Agreement, the Trustees, including the Independent Trustees, met on August 9, 1994. At their meeting the Trustees requested, and were provided, information they deemed necessary to enable them to consider whether the New Sub-Advisory Agreement was in the best interest of the Portfolio and its shareholders. The Trustees considered, among other factors, representations by PIMCO that the Consolidation would not materially affect the investment advisory operations of PIMCO or the level or quality of advisory services provided to the Portfolio; that the same personnel at PIMCO who currently provide services to the Portfolio would continue to do so after the Consolidation; and that the Portfolio would be unaffected in any other way by the Consolidation, including that the Portfolio would not be subjected to any unfair burden as a result of the transaction. Based upon its review, the Board of Trustees concluded that the New Sub-Advisory Agreement is reasonable, fair and in the best interests of the Portfolio and its shareholders, and that the fees provided in the New Sub-Advisory Agreement are fair and reasonable. In the Board's view, retaining New PIMCO to serve as investment adviser of the Portfolio, under the terms of the New Sub-Advisory Agreement, after the Consolidation is desirable and in the best interests of the Portfolio and its shareholders. Accordingly, after consideration of the above factors, and such other factors and information as it deemed relevant, the Board of Trustees, including all of the Independent Trustees, unanimously approved the New Sub-Advisory Agreement and voted to recommend its approval by the Portfolio's shareholders. Structural Aspects of the Consolidation The Consolidation Agreement provides that the PFAMCo investment advisory businesses, including that of PIMCO, will be transferred to TAG in return for 24,575,000 newly issued units of partner interest, of which 400,000 will be units of general partner interest ("GP units") and 24,175,000 will be units of limited partner interest, divided into two classes, Class A and Class B. Of this total, all of the general partner units, 10,537,500 Class A units and 10,937,500 Class B units will represent the contribution of the business of PIMCO to PIMCO Advisors. In connection with its assuming the role of general partner of PIMCO Advisors, PIMCO G.P. also will acquire common stock of TAG Inc., the current general partner of TAG, for approximately $130 million. The current common stockholders of TAG Inc. will retain economic interests in TAG Inc. through preferred stock representing approximately 34% of the Class A and Class B partnership units owned by TAG Inc. Class A units will have the same rights as the currently outstanding public units of TAG; Class B units will be subordinated to Class A units with respect to certain distribution rights. In connection with the Consolidation and recapitalization of TAG Inc., the Board of Directors of TAG Inc. has approved a conversion ratio of 1 limited partner unit and/or GP unit held by TAG Inc. for 1.4 Class B units. Effective January 1, 1998, or earlier in the event of a restructuring of PIMCO Advisors undertaken by PIMCO G.P. in connection with changes in the tax status of PIMCO Advisors, it is anticipated that Class B units will convert to Class A units. The average of the high and low prices for TAG Class A units quoted on the New York Stock Exchange on August 10, 1994 was $39.375. Giving effect to the Consolidation, but prior to any secondary offering, PIMCO G.P. will own 400,000 GP units, 10,537,000 Class A units and 10,937,500 Class B units (approximately 60.5% of all outstanding units) of PIMCO Advisors. PFAMCo and its other affiliates will separately own 1,350,000 Class A units and 1,350,000 Class B units (approximately 7.4% of all outstanding units). TAG Inc. will own 2,950,295 Class A units and 4,130,413 Class B units (approximately 19.6% of all outstanding units), and the public will own 4,339,410 Class A units (approximately 12.2% of all outstanding units). In connection with the Consolidation, PIMCO Advisors will adopt a stock option plan to provide incentives and rewards to key employees of PIMCO Advisors and its subpartnerships, which may include the officers and directors of New PIMCO. The aggregate number of Class B units with respect to which options may be granted under the plan is 2,800,000, and the terms of the Consolidation Agreement provide for the grant of options with respect to up to 2,675,000 units at the closing of the Consolidation. PIMCO Partners, L.P., a California limited partnership ("PIMCO Partners"), will be the managing general partner of PIMCO G.P. Each PIMCO Managing Director will have an interest in PIMCO Partners equal to his approximate indirect ownership interest in PIMCO G.P. and PIMCO Advisors. PIMCO Partners will have a profits interest of approximately 37.3% in PIMCO G.P. It is anticipated that each PIMCO Managing Director will agree to maintain ownership of at least 50% of his aggregate economic interest in PIMCO Advisors through December 31, 1998. As of the Consolidation, but prior to any secondary offering of units that may be made at or about that time, William H. Gross, a Managing Director of PIMCO, will hold approximately 41.9% of the ownership interests in PIMCO Partners (representing an indirect economic interest in approximately 15.6% of the units owned by PIMCO G.P., or approximately 12.5% of the outstanding units of PIMCO Advisors after the Consolidation). Under the terms of the Amended and Restated Agreement of Limited Partnership of PIMCO Advisors, PIMCO Partners has the right to appoint two members to the Equity Board of PIMCO Advisors, which is the ultimate management control board of the partnership. See "Information About the Subadviser." Pursuant to a registration rights agreement among TAG Inc., certain current stockholders of TAG Inc., certain individuals affiliated with TAG and PFAMCo, PIMCO G.P., and PFAMCo and its advisory affiliates, holders of rights may cause PIMCO Advisors to register Class A units held by such individuals and entities for public sale under the Securities Act of 1933. It is presently contemplated that approximately 4,000,000 Class A units may be registered and sold in this manner contemporaneously with the closing of the Consolidation. If all such units were sold, it is presently contemplated that the direct or indirect holdings of PIMCO G.P. in PIMCO Advisors would represent approximately 70% of the total outstanding units of PIMCO Advisors, and the indirect interest of the PIMCO Managing Directors in PIMCO G.P. would represent approximately 28%, with the interest of PFAMCo increased to approximately 72% in that entity. The terms of any secondary offering of units are subject to negotiation among the parties and whether such offering will occur will depend on many factors, including prevailing market conditions. It is not possible to predict whether such an offering will occur. A secondary offering also may have the effect of changing the relative percentage interests in PIMCO Partners of the individual PIMCO Managing Directors. The Amended and Restated Partnership Agreement of PIMCO Advisors will provide that a person or group that owns more than 20% of the combined voting power of the outstanding units of the partnership shall have the right to vote not more than 20% of the outstanding units entitled to vote, and the remaining units owned by such person or group shall have no voting rights and shall not be counted for quorum or unitholder approval purposes. These provisions do not apply to entities controlled by Pacific Mutual, PFAMCo or the PIMCO Managing Directors, to certain savings, profit-sharing, unit or stock bonus and employee incentive or stock ownership plans established by PIMCO Advisors or certain of its subsidiaries, or to other persons or groups approved by PIMCO G.P. The intention of this provision is to reduce the possibility that a future sale of units by a significant holder of units would cause a "change in control" of PIMCO Advisors for purposes of the 1940 Act or Investment Advisers Act of 1940. THE BOARD OF TRUSTEES RECOMMENDS APPROVAL OF A NEW SUB-ADVISORY CONTRACT AMONG CAMBRIDGE SERIES TRUST, CAMBRIDGE INVESTMENT ADVISORS, INC. AND PACIFIC INVESTMENT MANAGEMENT COMPANY WITH REGARD TO THE CAMBRIDGE GOVERNMENT INCOME PORTFOLIO __________ BROKERAGE PIMCO agrees that it will place orders pursuant to its investment determinations for Government Income either directly with the issuer or with brokers or dealers selected by PIMCO in accordance with the standards specified below. Until notified to the contrary by the Adviser, PIMCO may place orders for Government Income with affiliates of the Adviser in accordance with Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, Section 17(e) of the Investment Company Act of 1940 and Rule 17e-1 thereunder and other applicable laws and regulations. PIMCO will identify to the Adviser in writing any brokers or dealers which are affiliates of PIMCO. The Adviser will identify to PIMCO in writing any brokers or dealers which are affiliates of the Adviser and will forward to PIMCO information provided by the other sub-advisers with respect to affiliated broker-dealers of such sub-advisers. When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, PIMCO will look for prompt execution of the order at the best overall terms available. In working with dealers, PIMCO will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. In selecting among firms believed to meet these criteria, PIMCO may give consideration to those firms which have sole or are willing to sell shares of the Portfolio. PIMCO will make decisions on portfolio transactions and select brokers and dealers subject to review by the Board. Subject to the requirements descried above, in selecting brokers or dealers to execute a particular transaction and in evaluating the best overall terms available, the Adviser shall have the right to suggest in writing to PIMCO that transactions giving rise to brokerage commissions shall be executed by brokers and dealers that provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Trust or will be of value to the Trust in the management of its assets or the Adviser's performance of its management services provided to the Trust. These services may be furnished directly to the Portfolio or to PIMCO and may include: (bullet) advice as to the advisability of investing in securities; (bullet) security analysis and reports; (bullet) economic studies; (bullet) receipt of quotations for portfolio evaluations; and (bullet) similar services. PIMCO will exercise reasonable judgment in selecting brokers who offer brokerage and research services to execute securities transactions. It will determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. Research services provided by brokers may be used by PIMCO in advising the Portfolio and other accounts. To the extent that receipt of these services may supplant services for which PIMCO might otherwise have been paid, it would tend to reduce its expenses, but it is not expected that such reduction will be material. In addition, subject to the requirements set forth above and the applicable Rules of Fair Practice of the National Association of Securities Dealers, Inc., the Trust shall have the right to suggest that such transactions be executed by brokers and dealers by or through whom sales of shares of the Trust are made. During its last fiscal year, Government Income paid no brokerage commissions. For Government Income's fiscal year ended September 30, 1993, the portfolio turnover rate was 102%. PIMCO anticipates an increase in this rate for fiscal 1994 due to changes in portfolio investments by PIMCO, but it is not anticipated that such turnover rates will exceed 175%. Increased turnover may cause increased investment costs. The underwriter for Government Income is Cambridge Distributors Inc. Cambridge Distributors Inc. is a wholly-owned subsidiary of Investment Management Group, Inc., which in turn is a wholly-owned subsidiary of WFS Financial Corporation. A substantial portion (20%-50%) of WFS Financial Corporation is owned by WFS ESOP. No person other than WFS ESOP owns more than 5% of WFS Financial Corporation. No person owns more than 5% of WFS ESOP. The address of Cambridge Distributors Inc., Investment Management Group, Inc., WFS Financial Corporation and WFS Financial ESOP is 901 E. Byrd Street, Richmond, Virginia 23219. OTHER MATTERS AND DISCRETION OF ATTORNEYS NAMED IN THE PROXY While the Special Meeting is called to act upon any other business that may properly come before it, at the date of this proxy statement the only business which the Board intends to present or knows that others will present is the business mentioned in the notice of meeting. If any other matters lawfully come before the Special Meeting, and as to all procedural matters at the meeting, it is the intention that the enclosed proxy shall be voted in accordance with the best judgment of the attorneys named therein, or their substitutes, present and acting at the Special Meeting. In the event that at the time any session of the Special Meeting is called to order, a quorum is not present in person or by proxy, the persons named as proxies may vote those proxies which have been received to adjourn the Special Meeting to a later date. In the event that a quorum is present, but sufficient votes in favor of the proposal have not been received, the persons named as proxies may propose one or more adjournments of the Special Meeting to permit further solicitation of proxies with respect to the proposal. All such adjournments will require the affirmative vote of a majority of the Shares present in person or by proxy at the session of the Special Meeting to be adjourned. The persons named as proxies will vote those proxies which they are entitled to vote in favor of the proposal, in favor of such an adjournment, and will vote those proxies required to be voted against the proposal, against any such adjournment. To the best knowledge of the Trust, there were no beneficial owners of more than 5% of the outstanding Shares of the Trust as of September __, 1994. If you do not expect to attend the Special Meeting, please sign your proxy and return it in the enclosed envelope to avoid unnecessary expense and delay. No postage is necessary. By Order of the Trustees Paul F. Costello Secretary September __, 1994 EXHIBIT 1 CAMBRIDGE SERIES TRUST INVESTMENT ADVISORY AGREEMENT Pacific Investment Management Company 840 Newport Center Drive Suite 360 Newport Beach, CA 92660 Dear Sirs: Under an agreement (the Management Agreement) between Cambridge Series Trust, a Massachusetts business trust (the Trust ), and Cambridge Investment Advisors, Inc., a Virginia corporation, (the Adviser ), the Adviser serves as the Trust's investment adviser and has the responsibility of evaluating, recommending, supervising and compensating investment advisors to each series of the Trust. The Adviser hereby confirms its agreement with Pacific Investment Management Company (the Sub-Adviser ) and the Trust with respect to the Sub-Adviser's serving as the sub-adviser of Cambridge Government Income Portfolio (the Portfolio ), a series of the Trust, on an interim basis as contemplated by Rule 15a-4 under the Investment Company Act of 1940, as amended (the Act), as follows: Section 1. Investment Description; Appointment (a) The Trust desires to employ the Portfolio's capital by investing and reinvesting in investments of the kind and in accordance with the investment objectives, policies and limitations specified in the prospectus (the Prospectus ) and in the statement of additional information (the Statement of Additional Information ) filed with the Securities and Exchange Commission (the SEC ) as part of the Trust's Registration Statement on Form N-1A, as amended from time to time (the Registration Statement ). The Adviser has herewith furnished the Sub-Adviser copies of the Trust's Prospectus, Statement of Additional Information, Declaration of Trust and By-Laws as currently in effect and agrees during the continuance of the Agreement to furnish the Sub-Adviser copies of any amendments or supplements thereto before or at the time the amendments or supplements become effective. The Sub-Adviser will be entitled to rely on all such documents furnished to it by the Adviser or the Trust. (b) The Adviser, with the approval of the Trust, hereby appoints the Sub-Adviser to act as investment adviser to the Portfolio for the periods and on the terms set forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. Section 2. Portfolio Management Duties (a) Subject to the supervision of the Adviser and the Trust's Board of Trustees, the Sub-Adviser will (i) manage the Portfolio's assets in accordance with the Portfolio's investment objectives, policies and limitations as stated in the Trust's Prospectus and Statement of Additional Information; (ii) make investment decisions for the Portfolio; and (iii) place orders to purchase and sell securities (and options thereon) (and where appropriate) commodity futures contracts (and options thereon) for the Portfolio. (b) The Sub-Adviser will keep the Trust and the Adviser informed of developments materially affecting the Portfolio and shall, on the Sub-Adviser's own initiative and as reasonably requested by the Adviser or the Trust, furnish to the Trust and the Adviser from time to time whatever information the Adviser reasonably believes appropriate for this purpose. (c) The Sub-Adviser agrees that, in the performance of the duties required of it by this Agreement, it will comply with the Act, and all rules and regulations thereunder, all applicable federal and state laws and regulations and with any applicable procedures adopted by the Trust's Board of Trustees and identified in writing to the Sub-Adviser. The Adviser will provide to the Sub-Adviser any specific procedures that must be followed in the performance of Sub-Adviser's duties hereunder by reason of the affiliation of other sub-advisers or service providers with the Trust. Section 3. Brokerage (a) The Sub-Adviser agrees that it will place orders pursuant to its investment determinations for the Portfolio either directly with the issuer or with brokers or dealers selected by the Sub-Adviser in accordance with the standards specified in paragraphs (b) and (c) of this Section 3. Until notified to the contrary by the Adviser, the Sub-Adviser may place orders for the Portfolio with affiliates of the Adviser in accordance with Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, Section 17(e) of the Act and Rule 17e-1 thereunder and other applicable laws and regulations. The Sub-Adviser will identify to the Adviser in writing any brokers or dealers which are affiliates of the Sub-Adviser. The Adviser will identify to the Sub-Adviser in writing any brokers and dealers which are affiliates of the Adviser and will forward to each Sub-Adviser information provided by the other Sub-Advisers with respect to affiliated broker-dealers of such Sub-Advisers. (b) In placing orders with brokers and dealers, the Sub-Adviser will seek the best overall terms available. In assessing the best overall terms available for any portfolio transaction, the Sub-Adviser will consider all factors it deems relevant including, but not limited to, the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer and the reasonableness of any commission for the specific transaction and on a continuing basis. (c) Subject to the requirements of subsections (a) and (b) above, in selecting brokers or dealers to execute a particular transaction and in evaluating the best overall terms available, the Adviser shall have the right to request in writing that transactions giving rise to brokerage commissions shall be executed by brokers and dealers that provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Trust or will be of value to the Trust in the management of its assets or the Adviser's performance of its management services provided to the Trust. In addition, subject to the requirements of subsections (a) and (b) above and the applicable Rules of Fair Practice of the National Association of Securities Dealers, Inc., the Trust shall have the right to request that such transactions be executed by brokers and dealers by or through whom sales of shares of the Trust are made. Section 4. Information Provided to the Adviser and the Trust (a) The Sub-Adviser agrees that it will make available to the Adviser and the Trust promptly upon their request copies of all of its investment records and ledgers with respect to the Portfolio to assist the Adviser and the Trust in monitoring compliance with the Act and the Investment Advisers Act of 1940, as amended (the Advisers Act ), as well as other applicable laws. The Sub-Adviser will furnish the Trust's Board of Trustees with respect to the Portfolio such periodic and special reports as the Adviser and the Board of Trustees may reasonably request. (b) The Sub-Adviser agrees that it will immediately notify the Adviser and the Trust, and the Adviser agrees that it will immediately notify the Sub-Adviser, in the event that the Sub-Adviser or Adviser, respectively, or any of its respective affiliates: (i) becomes subject to a statutory disqualification that prevents the Sub-Adviser from serving as investment advisor pursuant to this Agreement; or (ii) is or expects to become the subject of an administrative proceeding or enforcement action by the SEC or other regulatory authority. The Sub-Adviser has provided the information about itself set forth in the Registration Statement and acknowledges that, as of the date hereof, it is true and correct and contains no material misstatement or omission, and the Sub-Adviser further agrees to notify the Adviser immediately of, (i) any material fact known to the Sub-Adviser respecting or relating to the Sub-Adviser that is not contained in the Prospectus or Statement of Additional Information of the Trust, or any amendment or supplement thereto, if the omission of such would make such document misleading, or (ii) any statement contained therein that becomes untrue in any material respect. (c) The Sub-Adviser represents that it is an investment adviser registered under the Advisers Act and other applicable laws and that the statements contained in the Sub-Adviser's registration under the Advisers Act on Form ADV, as of the date hereof, are true and correct and do not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The Sub-Adviser agrees to maintain the completeness and accuracy of its registration on Form ADV in accordance with all legal requirements relating to that Form. The Sub-Adviser acknowledges that it is an investment advisor to the Portfolio within the meaning of the Act and the Advisers Act. (d) The Adviser and the Trust agree not to publish or use any document naming or describing the Sub-Adviser in any way without (i) the prior consent of the Sub-Adviser and (ii) with respect to sales, marketing or advertising materials, appropriate regulatory filings and approvals. The Adviser and the Trust agree to provide the Sub-Adviser with copies of all materials using its name. Section 5. Books and Records In compliance with the requirements of Rule 31a-3 under the Act, the Sub-Adviser hereby agrees that all records that it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust copies of any such records upon the Trust's request. The Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the Act the records with respect to the Sub-Adviser's duties hereunder required to be maintained by Rule 31a-1 under the Act and to preserve the records required by Rule 204-2 under the Advisers Act for the period specified in that Rule. Section 6. Compensation (a) In consideration of services rendered pursuant to this Agreement, the Adviser will pay the Sub-Adviser a fee that is computed daily and paid monthly at the annual rate of .30% for Portfolio assets up to and including $150 million and .25% for Portfolio assets in excess of $150 million (the Portfolio Advisory Fee ). From time to time the Sub-Adviser may agree to reimburse the Trust additional expenses or waive a portion or all of its fee, in the sole discretion of the Sub-Adviser. (b) The Portfolio Advisory Fee for the period from the date that the Portfolio commences investment operations to the end of the month during which the Portfolio commences investment operations shall be prorated according to the proportion that such period bears to the full monthly period. Upon any termination of this Agreement before the end of a month, the fee for such part of that month shall be prorated according to the proportion that such period bears to the full monthly period and shall be payable upon the date of termination of this Agreement. (c) For the purposes of determining fees payable to the Sub-Adviser, the value of the Trust's net assets shall be computed at the times and in the manner specified in the Trust's Prospectus and/or the Statement of Additional Information. Section 7. Costs and Expenses During the term of this Agreement, the Sub-Adviser will pay all expenses incurred by it and its staff in connection with the performance of its services under this Agreement, including the payment of salaries of all officers and employees who are employed by it, but not including expenses to be paid by the Trust or the Adviser such as brokerage fees and commissions and custodian charges. The Trust shall assume and pay any expenses for services rendered by a custodian for the safekeeping of the Trust's securities or other property, for keeping its books of account, for any other charges of the custodian, and for calculating the net asset value of the Trust as provided in the prospectus of the Trust. The Sub-Adviser shall not be required to pay and the Trust (or the Adviser) shall assume and pay the charges and expenses of the Trust's operations, including compensation of the trustees, charges and expenses of independent auditors, of legal counsel, of any transfer or dividend disbursing agent, and of any registrar of the Trust, costs of acquiring and disposing of portfolio securities, commodity futures transaction costs, interest, if any, on obligations incurred by the Trust, costs of share certificates and of reports, membership dues in the Investment Company Institute or any similar organization, costs of reports and notices to shareholders, other like miscellaneous expenses and all taxes and fees payable to federal, state or other governmental agencies on account of the registration of securities issued by the Trust, filing of trust documents or otherwise. Section 8. Standard of Care The Sub-Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Adviser or the Trust in connection with the matters to which this Agreement relates, provided that nothing in this Agreement shall be deemed to protect or purport to protect the Sub-Adviser against any liability to the Adviser or the Trust to which the Sub-Adviser would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or by reason of the Sub-Adviser's reckless disregard of its obligations and duties under this Agreement. Section 9. Services to Other Companies or Accounts (a) Except as otherwise agreed between the Adviser and the Sub-Adviser, it is understood that the services of the Sub-Adviser are not exclusive, and nothing in this Agreement shall prevent the Sub-Adviser from providing similar services to other investment companies (whether or not their investment objectives and policies are similar to those of the Trust) or from engaging in other activities. (b) When the Sub-Adviser recommends the purchase or sale of a security for other investment companies and other clients, and at the same time the Sub-Adviser recommends the purchase or sale of the same security for the Trust, it is understood that in light of its fiduciary duty to the Trust, such transactions will be executed on a basis that it is fair and equitable to the Trust. (c) The Trust and the Adviser understand and acknowledge that the persons employed by the Sub-Adviser to assist in the performance of its duties under this Agreement will not devote their full time to that service; nothing contained in this Agreement will be deemed to limit or restrict the right of the Sub-Adviser or any affiliate of the Sub-Adviser to engage in and devote time and attention to other businesses or to render services of whatever kind or nature, except as otherwise agreed between the Adviser and the Sub-Adviser. Section 10. Duration and Termination (a) The Trust represents that this Agreement has been approved by the Trust's Board of Trustees and shareholders pursuant to Section 15 of the Act. This Agreement shall become effective on the date hereof and shall continue for two years from that date, such continuance, to the extent required by the Act, being subject to approval of this Agreement by the Trust's shareholders at the first meeting of such shareholders following such date, and thereafter shall continue automatically for successive annual periods, provided such continuance is specifically approved at least annually by (i) the Trust's Board of Trustees or (ii) a vote of a majority of the Portfolio's outstanding voting securities (as defined in the Act), provided that the continuance is also approved by a majority of the Trustees who are not interested persons (as defined in the Act) of the Trust, by vote cast in person at a meeting called for the purpose of voting on such approval. (b) Notwithstanding the foregoing, this Agreement may be terminated (i) by the Adviser at any time without penalty, upon 60 days' written notice to the Sub-Adviser and the Trust, (ii) at any time without penalty by the Trust, upon the vote of a majority of the Trust's Trustees or by vote of the majority of the Trust's outstanding voting securities, upon 60 days' written notice to the Sub-Adviser and the Adviser, or (iii) by the Sub-Adviser at any time without penalty, upon 60 days' written notice to the Adviser and the Trust. (c) This Agreement will terminate automatically in the event of its assignment (as defined in the Act and in rules adopted under the Act). Section 11. Amendments No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought, and no amendment of this Agreement shall be effective until approved in accordance with applicable law. Section 12. Limitations of Liability of Trustees, Officers, Employees, Agents and shareholders of the Trust The Sub-Adviser is expressly put on notice of the limitation of liability as set forth in the Declaration of Trust and agrees that the obligations assumed by the Trust pursuant to this Agreement shall be limited in any case to the Trust and its assets and that the Sub-Adviser shall not seek satisfaction of any such obligations from the shareholders of the Trust, the Trustees, officers, employees or agents of the Trust, or any of them. Section 13. Miscellaneous (a) This Agreement shall be governed by the laws of the Commonwealth of Virginia, provided that nothing herein shall be construed in a manner inconsistent with the Act, the Advisers Act, or rules or orders of the SEC thereunder. (b) The captions of this Agreement are included for convenience only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. (c) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (d) Nothing herein shall be construed as constituting the Sub-Adviser as an agent of the Trust or the Adviser. (e) For purposes of any notices to be provided pursuant to this Agreement, the following are the addresses to be used unless or until the parties notify each other of any changes thereto in writing: If to Pacific Investment Management Company: P.O. Box 9000 840 Newport Center Drive Newport Beach, CA 92658-9030 Attention: William R. Benz If to Cambridge Investment Advisors, Inc.: Riverfront Plaza, West Tower 901 East Byrd Street Richmond, VA 23219 Attention: Peter J. Quinn, Jr. If to Cambridge Series Trust: Riverfront Plaza, West Tower 901 East Byrd Street Richmond, VA 23219 Attention: Peter J. Quinn, Jr. If the terms and conditions described above are in accordance with your understanding, kindly indicate your acceptance of this Agreement by signing and returning to us the enclosed copy of this Agreement. CAMBRIDGE INVESTMENT ADVISORS, INC. By: Name: Title: CAMBRIDGE SERIES TRUST By: Name: Title: Accepted: PACIFIC INVESTMENT MANAGEMENT COMPANY By: Name: Title: PACIFIC INVESTMENT MANAGEMENT COMPANY Balance Sheet EXHIBIT 2 INDEPENDENT AUDITORS' REPORT Pacific Investment Management Company and Subsidiaries: We have audited the accompanying consolidated statement of financial position of Pacific Investment Management Company and its subsidiaries as of December 31, 1993. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of financial position is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of financial position. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement of financial position presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated statement of financial position presents fairly, in all material respects, the financial position of Pacific Investment Management Company and its subsidiaries as of December 31, 1993 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE February 25, 1994, except for Note 11, as to which the date is July 11, 1994 Costa Mesa, California PACIFIC INVESTMENT MANAGEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1993
ASSETS Current Assets: Cash........................................................................ $ 3,443,875 Accounts receivable......................................................... 29,354,628 Notes receivable............................................................ 859,900 Tax receivable from affiliate............................................... 2,961,544 Investment in mutual funds.................................................. 8,459,350 Prepaid expenses............................................................ 201,347 Total Current Assets..................................................... 45,280,644 Investment in limited partnership............................................. 2,083,306 Investments in securities..................................................... 652,587 Property, net................................................................. 3,655,808 TOTAL ASSETS.................................................................. $ 51,672,345 LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accrued liabilities......................................................... $ 14,611,994 Payable to affiliates, net.................................................. 16,210,498 Total Current Liabilities................................................ 30,822,492 Other liabilities............................................................. 5,444,869 Total Liabilities........................................................ 36,267,361 Stockholder's Equity: Common stock -- $1 par value; 25,000 shares authorized; 1,000 shares issued and outstanding.......................... 1,000 Paid-in capital............................................................. 397,869 Retained earnings........................................................... 15,006,115 Total Stockholder's Equity............................................... 15,404,984 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................... $ 51,672,345
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-1 PACIFIC INVESTMENT MANAGEMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL POSITION 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Pacific Investment Management Company (PIMCO) is a wholly-owned, third-tier subsidiary of Pacific Mutual Life Insurance Company (PM). The intermediate companies are Pacific Financial Holding Company (PFHC) and Pacific Financial Asset Management Corporation. The accompanying consolidated statement includes the accounts of PIMCO and its wholly-owned subsidiaries, StocksPLUS Management, Inc. (StocksPLUS) and Pacific Investment Administrative Services Company (Services Co.). PIMCO provides investment management services to its clients using various analytical techniques. All significant intercompany items have been eliminated. StocksPLUS owns approximately a 0.2 percent interest in, and is the general partner of, StocksPLUS, L.P., a Delaware limited partnership which provides investment and administrative management services on behalf of its clients (Note 10). INVESTMENTS Investments in mutual funds and securities are carried at the lower of cost or market value, with cost approximating market value at December 31, 1993. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). SFAS No. 115 is effective for years beginning after December 15, 1993 and addresses accounting and reporting for investments in certain equity securities and for all investments in debt securities. PIMCO will adopt SFAS No. 115 on January 1, 1994. SFAS No. 115 requires investments which are within the scope of this pronouncement to be classified into specific categories. PIMCO's investments in mutual funds will be categorized as trading with market fluctuations recorded in operations. PIMCO does not expect SFAS No. 115 to have a significant effect on its consolidated statement of financial position. 2. NOTES RECEIVABLE PIMCO has granted loans to certain employees as part of programs designed to ensure the long-term retention of key executives. These loans are primarily noninterest bearing and are generally due within one year of issuance. 3. PROPERTY Property is recorded at cost and is depreciated or amortized using the straight-line method over the estimated useful lives of the individual assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease terms or the useful lives of the improvements. F-2 PACIFIC INVESTMENT MANAGEMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL POSITION 3. PROPERTY -- Continued The components of property as of December 31, 1993 are as follows: Furniture and equipment........................................................................ $ 2,294,956 Computer equipment............................................................................. 2,428,838 Leasehold improvements......................................................................... 989,509 Computer software costs........................................................................ 371,074 Total property................................................................................. 6,084,377 Less accumulated depreciation and amortization................................................. (2,428,569) Property, net.................................................................................. $ 3,655,808
4. PAYABLE TO AFFILIATES, NET PIMCO has a credit agreement with PFHC which provides for borrowings up to $20,000,000. The balance outstanding as of December 31, 1993 totaled $18,000,000 and bears a rate of interest as defined in the agreement. At December 31, 1993 the applicable interest rate was 3.43%. The agreement expires December, 1994 and automatically renews for successive one-year terms unless either party terminates the agreement, as defined. Also included in payable to affiliates, net, on the accompanying consolidated statement of financial position are net intercompany receivables of $1,789,502. 5. PROFIT-SHARING PLAN AND LONG-TERM INCENTIVE PLAN PIMCO has a nonqualified profit-sharing plan (the Profit-Sharing Plan) covering certain key employees (Key Employees) and other employees. The Profit-Sharing Plan provides for awards based upon the profitability of PIMCO, as defined in the employment agreements. Profit-sharing awards fully vest as of the end of each year, and are payable by March 15 of the following year, unless subject to deferral whereby awards are paid upon vesting. In addition, Key Employees participate in a Long-Term Incentive Plan that provides compensation under the Profit-Sharing Plan for a specified period of time subsequent to their termination of employment. Compensation under this plan is determined based upon the profitability of PIMCO in future years and will be expensed as incurred. The plan requires, among other things, that Key Employees comply with a covenant not-to-compete with PIMCO. Other liabilities on the accompanying consolidated statement of financial position include notes payable to certain officers issued in connection with the deferred compensation plan discussed above. As defined in the agreements, the notes payable will be paid on specified dates and are subject to cancellation upon the occurrence of certain events. 6. OTHER EMPLOYEE BENEFIT PLANS PIMCO has defined contribution employee benefit plans covering substantially all employees. PIMCO's contribution ranges from 5% to 11% of an individual's base compensation. F-3 PACIFIC INVESTMENT MANAGEMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL POSITION 7. LEASES PIMCO leases office space and certain office equipment under operating lease agreements expiring at various dates through 1998. Future aggregate minimum rent payments on noncancelable leases are as follows:
YEAR ENDED DECEMBER 31: 1994.......................................................................... $ 796,068 1995.......................................................................... 796,068 1996.......................................................................... 768,588 1997.......................................................................... 754,848 1998.......................................................................... 188,712 $3,304,284
8. INCOME TAXES PIMCO's operations and those of its subsidiaries are included in the consolidated Federal income tax return of PM and the combined California franchise tax return of PFHC. PIMCO and its subsidiaries are allocated an expense based principally on the effect of including their operations in the consolidated tax provision. Such expense consists primarily of current taxes. Tax receivable from affiliate on the accompanying consolidated statement of financial position includes $141,085 of current taxes as of December 31, 1993. Also included in tax receivable from affiliate are deferred tax assets resulting primarily from differences between book and tax accounting for certain profit-sharing plans. 9. RELATED PARTY TRANSACTIONS PIMCO and Services Co. provide investment advisory and administrative management services to PIMCO Funds, an open-end investment company, and affiliates. PM provides certain support services to PIMCO and its subsidiaries included in payable to affiliates, net, on the accompanying consolidated statement of financial position. 10. INVESTMENT IN LIMITED PARTNERSHIP Because StocksPLUS is the general partner in, and exercises significant influence over the operating and financial policies of StocksPLUS, L.P. (Note 1), it accounts for its investment in the partnership under the equity method. The underlying investments of StocksPLUS, L.P. are carried at market value. StocksPLUS, L.P. has made its investments with the intent to have its performance equivalent to the S&P 500 index. F-4 PACIFIC INVESTMENT MANAGEMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL POSITION 10. INVESTMENT IN LIMITED PARTNERSHIP -- Continued StocksPLUS has hedged its pro rata investment in StocksPLUS, L.P.'s investments through short futures positions. Gains and losses related to these positions are settled daily. Securities shown on the accompanying consolidated statement of financial position are used as necessary for deposits made in connection with the positions. Approximate condensed financial information for StocksPLUS, L.P. as of December 31, 1993 is as follows: SUMMARY OF FINANCIAL POSITION Assets: Investments -- at market value............................................................... $931,764,000 Other assets................................................................................. 16,362,000 Total Assets................................................................................. $948,126,000 Liabilities and Equities: Liabilities.................................................................................. $ 50,463,000 StocksPLUS's equity.......................................................................... 2,083,000 Limited partners' equity..................................................................... 895,580,000 Total Liabilities and Equities............................................................... $948,126,000
F-5 11. SUSEQUENT EVENT On July 11, 1994, PFAMCo and Thompson Advisory Group L.P., a Delaware limited partnership with units traded on the New York Stock Exchange, entered into a definitive agreement and plan of consolidation to merge the two entities into a newly capitalized partnership named PIMCO Advisors L.P. PFAMCo and certain subsidiaries, including PIMCO, will contribute substantially all of their operations into PIMCO Advisors L.P. in exchange for the issuance of newly issued partnership units. The transaction is subject to approval by a majority of the publicly traded limited partnership units, as well as certain regulatory and other approvals. -----END PRIVACY-ENHANCED MESSAGE-----