As filed with the Securities and Exchange Commission on December 19, 1997
File Nos. 333-37115
811-8399
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X/
Pre-Effective Amendment No. 1 / X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X/
Amendment No. 1 / X/
PIMCO VARIABLE INSURANCE TRUST
(Exact Name of Registrant as Specified in Charter)
840 Newport Center Drive
Newport Beach, California 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code:
(714) 760-4867
Robert W. Helm, Esq. R. Wesley Burns
Dechert Price & Rhoads Pacific Investment Management Company
1500 K Street, N.W. 840 Newport Center Drive
Washington, D.C. 20005 Newport Beach, California 92660
(Name and Address of Agent for Service)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C> <C> <C>
___________________________________________________________________________________________
Proposed Maximum
Title of Number Offering Proposed
Securities of Shares Price per Maximum Amount of
Being Being Share (within Offering Registration
Registered Registered 15 days of filing) Price Fee
___________________________________________________________________________________________
Shares of Indefinite N/A N/A Indefinite
Beneficial
Interest, Par
Value $.001
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Cross-Reference Sheet
Required By Rule 495
Under The Securities Act of 1933
PART A
Information Required in Prospectus
Item Number Heading
1 Cover Page
2 Overview; Fees and Expenses
3 Not Applicable
4 Overview; Investment Objective; Main
Investment Strategies; Risk Factors; Risk
Factors and Special Considerations
5 Management of the Trust
5A Not Applicable
6 Taxes
7 Purchase of Shares
8 Redemption of Shares
9 Not Applicable
<PAGE>
PART B
Information Required in Statement of Additional Information
Item Number Heading
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Objectives and Policies;
Investment Restrictions
14 Trustees and Officers
15 Voting Rights
16 Management of the Trust; Distribution of
Trust Shares; Custodian
17 Portfolio Transactions and Brokerage
18 Other Information
19 Distribution of Trust Shares; Net Asset
Value
20 Taxation
21 Distribution of Trust Shares
22 Performance Information
23 Financial Statements
<PAGE>
PIMCO Variable Insurance Trust
Prospectus
January 1, 1998
SHORT-TERM BOND PORTFOLIOS
Money Market Portfolio
Short-Term Bond Portfolio
Low Duration Bond Portfolio
INTERMEDIATE-TERM BOND PORTFOLIOS
Total Return Bond Portfolio
High Yield Bond Portfolio
INTERNATIONAL BOND PORTFOLIOS
Global Bond Portfolio
Foreign Bond Portfolio
Emerging Markets Bond Portfolio
EQUITY PORTFOLIO
StocksPLUS Growth and Income Portfolio
BALANCED PORTFOLIO
Strategic Balanced Portfolio
P I M C O
<PAGE>
SUBJECT TO COMPLETION: DATED DECEMBER 19, 1997
PIMCO Variable Insurance Trust
Prospectus
January 1, 1998
PIMCO Variable Insurance Trust (the "Trust") is an open-end management
investment company ("mutual fund") consisting of ten separate investment
portfolios (the "Portfolios"). The Trust is designed to provide access to the
professional investment management services offered by Pacific Investment
Management Company ("PIMCO"), which serves as investment adviser (the "Adviser")
to the Portfolios. Each Portfolio has its own investment objective and
strategies and its own risk/reward profile, which are described in this
Prospectus.
This Prospectus gives vital information you should know before investing in the
Portfolios. For your own benefit and protection, please read it before you
invest and keep it for future reference.
Shares of the Portfolios currently are sold to segregated asset accounts
("Separate Accounts") of insurance companies which fund variable annuity
contracts and variable life insurance policies ("Variable Contracts"). Assets in
the Separate Account are invested in shares of the Portfolios in accordance with
allocation instructions received from owners of the Variable Contracts
("Variable Contract Owners"). The allocation rights of Variable Contract Owners
are described in the accompanying Separate Account prospectus. Shares of the
Portfolios also may be sold to qualified pension and retirement plans outside of
the separate account context.
Shares of the Portfolios are:
. not insured or guaranteed by the FDIC or any other government agency; not
. deposits or other obligations of, or guaranteed by, any financial
. institution; and subject to investment risks, including possible loss of
the principal amount invested.
This Prospectus should be read in conjunction with the prospectus of the
Separate Account. Both prospectuses should be read carefully and retained for
future reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
TABLE OF CONTENTS
Page
OVERVIEW......................................................................3
DESCRIPTION OF PORTFOLIOS.....................................................7
PIMCO Money Market Portfolio...............................................7
PIMCO Short-Term Bond Portfolio............................................9
PIMCO Low Duration Bond Portfolio.........................................11
PIMCO Total Return Bond Portfolio.........................................13
PIMCO High Yield Bond Portfolio...........................................15
PIMCO Global Bond Portfolio...............................................17
PIMCO Foreign Bond Portfolio..............................................19
PIMCO Emerging Markets Bond Portfolio.....................................21
PIMCO StocksPLUS Growth and Income Portfolio..............................24
PIMCO Strategic Balanced Portfolio........................................27
MANAGEMENT OF THE TRUST......................................................29
Adviser and Administrator.................................................29
Advisory And Administrative Fees..........................................30
Portfolio Transactions....................................................31
PURCHASE OF SHARES...........................................................32
REDEMPTION OF SHARES.........................................................32
TAXES........................................................................33
RISK FACTORS AND SPECIAL CONSIDERATIONS......................................33
OTHER INFORMATION............................................................37
Portfolio Names...........................................................37
Total Return..............................................................38
Performance Information of Similar Funds..................................38
APPENDIX A..................................................................A-1
APPENDIX B..................................................................B-1
<PAGE>
OVERVIEW
The Trust
The PIMCO Variable Insurance Trust (the "Trust") is an open-end investment
company ("mutual fund") that was organized as a Delaware business trust on
October 3, 1997. The Trust consists of ten separate investment portfolios that
are designed to be used as investment vehicles by Separate Accounts of insurance
companies that fund variable annuity contracts and variable life insurance
policies and by qualified pension and retirement plans. Variable Contract Owners
do not deal directly with the Portfolios to purchase or redeem shares. Variable
Contract Owners should refer to the prospectus for the applicable Separate
Account for information on the allocation of premiums and on transfers of
accumulated value among sub-accounts of the Separate Accounts that invest in the
Portfolios.
Portfolios at a Glance
<TABLE>
<S> <C> <C> <C> <C>
Short-Term Bond
Portfolios Primary Investments Duration Credit Quality(1) Foreign(2)
Money Market Money market instruments < 90 days Min 95% Aaa or 0%
dollar-weighted Prime 1; < 5%Aa or
average maturity Prime 2
Short-Term Bond Money market instruments and short 0-1 year B to Aaa; max 10% 0-5%
maturity fixed income securities below Baa
Intermediate Term Bond
Portfolios
Low Duration Bond Short and intermediate maturity fixed 1-3 years B to Aaa; max 10% 0-20%
income securities below Baa
Total Return Bond Intermediate maturity fixed income 3-6 years B to Aaa; max 10% 0-20%
securities below Baa
High Yield Bond Higher yielding fixed income 2-6 years B to Aaa; min 65% 0%
securities below Baa
International Bond
Portfolios
Global Bond Intermediate maturity U.S. and 3-6 years B to Aaa; max 10% 25-75%
foreign fixed income securities below Baa
Foreign Bond Intermediate maturity hedged foreign 3-6 years B to Aaa; max 10% > 85%
fixed income securities below Baa
Emerging Markets Bond Emerging market fixed income 0-8 years B to Aaa > 80%
securities
Equity Portfolio
StocksPLUS Growth and S&P 500 stock index derivatives 0-1 year B to Aaa; max 10% 0-20%
Income backed by a portfolio of short-term below Baa
fixed-income securities
Balanced Portfolio
Strategic Balanced Same as Total Return and StocksPLUS 0-6 years B to Aaa; max 10% 0-20%
Growth and Income Portfolios below Baa
according to PIMCO's allocation
strategy
</TABLE>
1. As rated by Moody's Investors Services, Inc., or if unrated, determined to be
of comparable quality. For specific information concerning the credit quality of
the securities held by each Portfolio, see that Portfolio's Risk/Return
Description.
2. Percentage limitations relate to foreign currency-denominated securities for
all Portfolios except the PIMCO Global Bond, Foreign Bond and Emerging Markets
Bond Portfolios. Percentage limitations for these three Portfolios relate to
securities of foreign issuers, denominated in any currency. Each Portfolio may
invest beyond these limits in U.S. dollar-denominated securities of foreign
issuers.
<PAGE>
Investment Objectives of the Portfolios
The PIMCO Money Market and Short-Term Bond Portfolios 3 to obtain maximum
current income consistent with preservation of capital and daily liquidity. The
PIMCO StocksPLUS Growth and Income Portfolio seeks to achieve a total return
which exceeds the total return performance of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"). Each of the remaining Portfolios seeks
to realize maximum total return, consistent with preservation of capital and
prudent investment management. There can be no assurance that the investment
objective of any Portfolio will be achieved. A Portfolio's investment objective
may not be changed without shareholder approval.
Each Portfolio employs its own strategy and has its own risk/reward profile.
Please be sure to read all risk disclosures carefully before investing and be
aware that the investments made by the Portfolios at any given time are not
expected to be the same as those made by other mutual funds for which PIMCO acts
as investment adviser, including mutual funds with investment objectives and
strategies similar to those of the Portfolios.
The Investment Adviser
PIMCO, a subsidiary partnership of PIMCO Advisors L.P., is the investment
adviser to all of the Portfolios. PIMCO is one of the premier fixed income
investment management firms in the United States. As of September 30, 1997,
PIMCO had over $108.5 billion in assets under management. PIMCO invests in all
sectors of the fixed income market, using its total return philosophy -- seeking
capital appreciation as well as yield.
Investment Strategies and Risk Factors
Investment Strategies. Each Portfolio has specific strategies that it may use to
pursue its investment objective, and specific types of securities in which the
Portfolio may invest, which are described under the heading "Investment
Strategies" in the Description of Portfolios. Percentage limitations described
in this Prospectus apply at the time of investment, and may vary with
fluctuations in the value of a Portfolio's investment portfolio. Certain
securities in which the Portfolios may invest, and techniques which the
Portfolios may use, are described in more detail in "Risk Factors and Special
Considerations" in the Prospectus and in "Investment Objectives and Policies" in
the Statement of Additional Information.
Additional information about each Portfolio's investments will be available in
the Trust's annual and semi-annual reports to shareholders. In particular, the
Trust's annual report will discuss the relevant market conditions and investment
strategies used by the Portfolios' Adviser that materially affected the
Portfolio's performance during the prior fiscal year. You may obtain these
reports at no cost by calling (888) 746-2688.
Risk Factors. The value of all securities and other instruments held by the
Portfolios will vary from time to time in response to a wide variety of market
factors. Consequently, the net asset value per share of each Portfolio will
vary, except that the PIMCO Money Market Portfolio shall attempt to maintain a
net asset value of $1.00 per share, although there can be no assurance that the
Portfolio will be successful in doing so. The net asset value per share of any
Portfolio may be less at the time of redemption than it was at the time of
investment.
<PAGE>
The major risks associated with investing in each Portfolio are described under
the heading "Risk Factors" in the Description of Portfolios. In addition, the
risks of certain securities that the Portfolios can purchase and of certain
investment techniques that the Portfolios can use are described in the
Prospectus in "Risk Factors and Special Considerations" and in the Statement of
Additional Information in "Investment Objectives and Policies." This Prospectus
does not describe all of the risks of every security or technique that the
Portfolios may use. For such information, please refer to the Statement of
Additional Information.
Fixed Income Instruments
The "Fixed Income Portfolios" are the PIMCO Money Market, Short-Term Bond, Low
Duration Bond, Total Return Bond, High Yield Bond, Global Bond, Foreign Bond and
Emerging Markets Bond Portfolios. Each of the Fixed Income Portfolios differs
from the others primarily in the length of the Portfolio's duration or the
proportion of its investments in certain types of fixed income securities.
Each of the Fixed Income Portfolios will invest at least 65% of its assets in
"Fixed Income Instruments," as defined below, which, unless specifically
provided otherwise in the descriptions of the Portfolios in this Prospectus, may
be issued by domestic or foreign entities and denominated in U.S. dollars or
foreign currencies.
"Fixed Income Instruments" as used in this Prospectus means:
. securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities");
. corporate debt securities, including convertible securities and corporate
commercial paper;
. mortgage-backed and other asset-backed securities;
. inflation-indexed bonds issued both by governments and corporations;
. structured notes, including hybrid or "indexed" securities, and loan
participations;
. bank certificates of deposit, fixed time deposits and bankers' acceptances;
. repurchase agreements and reverse repurchase agreements;
. obligations of foreign governments or their subdivisions, agencies and
instrumentalities; and
. obligations of international agencies or supranational entities.
Fixed Income Instruments may have fixed, variable, or floating rates of
interest, including rates of interest that vary inversely at a multiple of a
designated or floating rate, or that vary according to changes in relative
values of currencies. Each of the Fixed Income Portfolios may hold different
percentages of its assets in these various types of securities, and each
Portfolio, except the PIMCO Money Market Portfolio, may invest all of its assets
in derivative instruments or in mortgage- or asset-backed securities. Each of
the Fixed Income Portfolios may purchase and sell options and futures subject to
the limits discussed below, engage in credit spread trades and enter into
forward foreign currency contracts. Each of the Fixed Income Portfolios, except
the PIMCO Money Market Portfolio, may adhere to its investment policy by
entering into a series of purchase and sale contracts or using other investment
techniques by which it may obtain market exposure to the securities in which it
primarily invests.
Fixed Income Investment Philosophy
In selecting fixed income securities for each of the Portfolios, PIMCO utilizes
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other securities selection
techniques. The proportion of each Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on PIMCO's outlook for the U.S. and foreign economies, the
financial markets, and other factors. The management of duration, a measure of a
fixed income security's expected life that incorporates its yield, coupon
interest payments, final maturity and call features into one measure, is one of
the fundamental tools used by PIMCO. For a discussion of the concept of
duration, see "Appendix A - Description of Duration."
<PAGE>
Ratings of Debt Securities
In this Prospectus, references are made to the ratings of various debt
securities. To aid in your understanding of the use of these terms, the
following is a brief description of the ratings categories applicable to debt
securities. For a further description of ratings, see "Appendix B - Description
of Securities Ratings."
High Quality Debt Securities are those receiving ratings from at least one
nationally recognized statistical rating organization ("NRSRO"), such as
Standard & Poor's Rating Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), in one of the two highest rating categories (the highest category
for commercial paper) or, if unrated by any NRSRO, deemed comparable by PIMCO.
Investment Grade Debt Securities are those receiving ratings from at least one
NRSRO in one of the four highest rating categories or, if unrated by any NRSRO,
deemed comparable by PIMCO.
Lower-Rated, High Yield Securities ("Junk Bonds") are those rated lower than Baa
by Moody's or BBB by S&P and comparable securities. They are considered below
investment grade and are deemed to be predominately speculative with respect to
the issuer's ability to repay principal in accordance with the terms of the
obligations. For more information on the risks of investing in lower-rated
securities, see "High Yield Securities ("Junk Bonds")" in "Risk Factors and
Special Considerations."
Fees and Expenses
The costs and expenses that you will pay as an investor in the Portfolio are
described under the heading "Fees and Expenses" in the Description of
Portfolios. The Portfolios feature fixed advisory and administrative fee rates.
The administrative fee is all-inclusive and covers the cost of portfolio
administrative expenses such as legal, audit, custody and printing. Certain
other miscellaneous expenses will be paid by the Portfolios.
<PAGE>
DESCRIPTION OF PORTFOLIOS
PIMCO MONEY MARKET PORTFOLIO
Investment Objective
The PIMCO Money Market Portfolio seeks to obtain maximum current income
consistent with preservation of capital and daily liquidity. The Portfolio also
attempts to maintain a stable net asset value of $1.00 per share, although there
is no assurance that it will be successful in doing so.
Main Investment Strategies
The PIMCO Money Market Portfolio invests at least 95% of its total assets
in a diversified portfolio of money market securities that are in the highest
rating category for short-term obligations. The Portfolio also may invest up to
5% of its total assets in money market securities that are in the second-highest
rating category for short-term obligations. The Portfolio's investments in
securities will be limited to U.S. dollar-denominated securities that mature in
397 days or less from the date of purchase. The dollar-weighted average
portfolio maturity of the Portfolio will not exceed 90 days.
The Portfolio may invest in the following: obligations of the U.S.
Government (including its agencies and instrumentalities); short-term corporate
debt securities of domestic and foreign corporations; obligations of domestic
and foreign commercial banks, savings banks, and savings and loan associations;
and commercial paper. The Portfolio may invest more than 25% of its total assets
in securities or obligations issued by U.S. banks. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
It is intended that the Portfolio's investments will comply with the
quality, maturity and diversification requirements of Rule 2a-7 under the
Investment Company Act of 1940, which regulates money market funds.
Risk Factors
An investment in the PIMCO Money Market Portfolio is not insured or
guaranteed by the FDIC or any other government agency. Although the Portfolio
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Portfolio.
The Portfolio is subject to interest rate risk. Generally, the value of
fixed income securities will change inversely with changes in interest rates. As
interest rates rise, market value tends to decrease. This risk will be greater
for long-term securities than for short-term securities. The Portfolio also is
subject to credit risk, which is the possibility that an issuer of a security,
or a counterparty to a derivative contract, will default or become unable to
meet a financial obligation. The Portfolio attempts to limit both types of risk
by investing in short-term, high quality securities. For a further explanation,
see "Risk Factors and Special Considerations," which you should read carefully
before investing.
The PIMCO Money Market Portfolio may be appropriate for investors who:
<PAGE>
. seek a mutual fund for the money market portion of an asset allocation
portfolio
. are uncomfortable with share-price fluctuations seek income
The PIMCO Money Market Portfolio may NOT be appropriate for investors
who:
. seek growth of their investment over time
. seek potentially higher levels of return that may be associated
with longer term bond funds or equity funds
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
you may pay in connection with an investment in the PIMCO Money Market
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee.................................................0.30%
Administrative Fee...........................................0.20%
Total Annual Portfolio Operating Expenses....................0.50%
Example
This Example is intended to help you compare the cost of investing in the
Portfolio to the cost of investing in other portfolios. The Example assumes that
you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$5 $16
<PAGE>
PIMCO SHORT-TERM BOND PORTFOLIO
Investment Objective
The PIMCO Short-Term Bond Portfolio seeks to obtain maximum current income
consistent with preservation of capital and daily liquidity.
Main Investment Strategies
The PIMCO Short-Term Bond Portfolio invests in a diversified portfolio of
fixed income securities of varying maturities. The average portfolio duration of
this Portfolio will normally not exceed one year. See "Appendix A - Description
of Duration."
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The securities may be issued by domestic or foreign entities. The
Portfolio may invest all of its assets in derivative instruments, such as
options, futures contracts and swap agreements. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
The Portfolio may invest up to 10% of its assets in junk bonds rated B or
higher by Moody's or S&P, or, if unrated, determined by the Adviser to be of
comparable quality. The Portfolio may invest up to 5% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers.
Risk Factors
The PIMCO Short-Term Bond Portfolio is subject to interest rate risk.
Generally, the value of fixed income securities will change inversely with
changes in interest rates. As interest rates rise, market value tends to
decrease. This risk will be greater for long-term securities than for short-term
securities. Derivative instruments may be particularly sensitive to changes in
prevailing interest rates. The Portfolio also is subject to credit risk, which
is the possibility that an issuer of a security, or a counterparty to a
derivative contract, will default or become unable to meet a financial
obligation. Junk bonds carry a high degree of credit risk. Securities of foreign
issuers may be subject to additional risk factors, including foreign currency
and political risks. For a further explanation, see "Risk Factors and Special
Considerations," which you should read carefully before investing.
The PIMCO Short-Term Bond Portfolio may be appropriate for investors who:
. seek a higher level of current income than the PIMCO Money Market
Portfolio
. want low to moderate share price fluctuations
The PIMCO Short-Term Bond Portfolio may NOT be appropriate for
investors who:
. seek potentially higher levels of return that may be associated with
longer term bond funds or equity funds
. require absolute stability of principal
<PAGE>
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
you may pay in connection with an investment in the PIMCO Short-Term Bond
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.35%
Administrative Fee............................................0.25%
Total Annual Portfolio Operating Expenses.....................0.60%
----
----
Example
This Example is intended to help you compare the cost of investing in the
Portfolio to the cost of investing in other portfolios. The Example assumes that
you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$6 $19
<PAGE>
PIMCO LOW DURATION BOND PORTFOLIO
Investment Objective
The PIMCO Low Duration Bond Portfolio seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
Main Investment Strategies
The PIMCO Low Duration Bond Portfolio invests in a diversified portfolio of
fixed income securities of varying maturities. The average portfolio duration of
this Portfolio will normally vary within a one- to three-year time frame based
on the Adviser's forecast for interest rates. See "Appendix A - Description of
Duration."
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The securities may be issued by domestic or foreign entities. The
Portfolio may invest all of its assets in derivative instruments, such as
options, futures contracts or swap agreements. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
The Portfolio may invest up to 10% of its assets in junk bonds rated B or
higher by Moody's or S&P, or, if unrated, determined by the Adviser to be of
comparable quality. The Portfolio may invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers. The total rate of
return for this Portfolio is expected to exhibit less volatility than that of
the PIMCO Total Return Bond Portfolio (discussed below) because its duration
will be shorter.
Risk Factors
The PIMCO Low Duration Bond Portfolio is subject to interest rate risk.
Generally, the value of fixed income securities will change inversely with
changes in interest rates. As interest rates rise, market value tends to
decrease. This risk will be greater for long-term securities than for short-term
securities. Derivative instruments may be particularly sensitive to changes in
prevailing interest rates. The Portfolio also is subject to credit risk, which
is the possibility that an issuer of a security, or a counterparty to a
derivative contract, will default or become unable to meet a financial
obligation. Junk bonds carry a high degree of credit risk. Securities of foreign
issuers may be subject to additional risk factors, including foreign currency
and political risks. For a further explanation, see "Risk Factors and Special
Considerations," which you should read carefully before investing.
The PIMCO Low Duration Bond Portfolio may be appropriate for investors who:
. are looking for a higher level of current income than is expected for
the PIMCO Short-Term Bond and Money Market Portfolios
. want low to moderate share price fluctuations
<PAGE>
The PIMCO Low Duration Bond Portfolio may NOT be appropriate for
investors who:
. seek potentially higher levels of return that may be associated with
longer term bond funds or equity funds
. require absolute stability of principal
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
you may pay in connection with an investment in the PIMCO Low Duration Bond
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.40%
Administrative Fee............................................0.25%
Total Annual Portfolio Operating Expenses.....................0.65%
----
----
Example
This Example is intended to help you compare the cost of investing in the
Portfolio to the cost of investing in other portfolios. The Example assumes that
you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$7 $21
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
Investment Objective
The PIMCO Total Return Bond Portfolio seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
Main Investment Strategies
The PIMCO Total Return Bond Portfolio invests under normal circumstances at
least 65% of its assets in a diversified portfolio of fixed income securities of
varying maturities. The average portfolio duration of this Portfolio will
normally vary within a three- to six-year time frame based on the Adviser's
forecast for interest rates. See "Appendix A - Description of Duration."
Portfolio holdings will be concentrated in areas of the bond market (based on
quality, sector, coupon or maturity) which the Adviser believes to be relatively
undervalued.
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The securities may be issued by domestic or foreign entities. The
Portfolio may invest all of its assets in derivative instruments, such as
options, futures contracts or swap agreements. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
The Portfolio may invest up to 10% of its assets in junk bonds rated B or
higher by Moody's or, if unrated, determined by the Adviser to be of comparable
quality. The Portfolio also may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) that the Adviser believes to be relatively undervalued.
Risk Factors
The PIMCO Total Return Bond Portfolio is subject to interest rate risk.
Generally, the value of fixed income securities will change inversely with
changes in interest rates. As interest rates rise, market value tends to
decrease. This risk will be greater for long-term securities than for short-term
securities. Derivative instruments may be particularly sensitive to changes in
prevailing interest rates. The Portfolio also is subject to credit risk, which
is the possibility that an issuer of a security, or a counterparty to a
derivative contract, will default or become unable to meet a financial
obligation. Junk bonds carry a high degree of credit risk. Securities of foreign
issuers may be subject to additional risk factors, including foreign currency
and political risks. For a further explanation, see "Risk Factors and Special
Considerations," which you should read carefully before investing.
The PIMCO Total Return Bond Portfolio may be appropriate for investors who:
. seek a high level of current income
. want low to moderate share price fluctuations
<PAGE>
The PIMCO Total Return Bond Portfolio may NOT be appropriate for investors
who:
. seek potentially higher levels of return that may be associated
with longer term bond funds or equity funds
. require absolute stability of principal
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
you may pay in connection with an investment in the PIMCO Total Return Bond
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.40%
Administrative Fee............................................0.25%
Total Annual Portfolio Operating Expenses.....................0.65%
Example
This Example is intended to help you compare the cost of investing in the
Portfolio to the cost of investing in other portfolios. The Example assumes that
you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$7 $21
<PAGE>
PIMCO HIGH YIELD BOND PORTFOLIO
Investment Objective
The PIMCO High Yield Bond Portfolio seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
Main Investment Strategies
The PIMCO High Yield Bond Portfolio invests under normal circumstances at
least 65% of its assets in a diversified portfolio of junk bonds rated at least
B by Moody's or S&P, or, if unrated, determined by the Adviser to be of
comparable quality. The remainder of the Portfolio's assets may be invested in
investment grade fixed income securities. The average portfolio duration of this
Portfolio will normally vary within a two- to six-year time frame depending on
the Adviser's view of the potential for total return offered by a particular
duration strategy. See "Appendix A - Description of Duration." The Portfolio may
invest in securities of foreign issuers only if the securities are U.S.
dollar-denominated. The Portfolio also may engage in hedging strategies
involving equity options.
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The Portfolio may invest all of its assets in derivative
instruments, such as options, futures contracts or swap agreements. The
Portfolio may lend its portfolio securities to brokers, dealers and other
financial institutions in order to earn income.
Risk Factors
The PIMCO High Yield Bond Portfolio is subject to credit risk. Investments
in high yield securities, while generally providing greater potential
opportunity for capital appreciation and higher yields than investments in
higher rated securities, also entail greater credit risk, including the
possibility of default or bankruptcy of the issuer of the securities. Risk of
default or bankruptcy may be greater in periods of economic uncertainty or
recession. The Adviser seeks to reduce credit risk through diversification,
credit analysis and attention to current developments and trends in both the
economy and financial markets. For a further discussion of the special risks of
investing in lower rated securities, see "Risk Factors and Special
Considerations--High Yield Securities ("Junk Bonds")" and "Appendix B -
Description of Securities Ratings."
The Portfolio also is subject to interest rate risk. Generally, the value
of fixed income securities will change inversely with changes in interest rates.
As interest rates rise, market value tends to decrease. This risk will be
greater for long-term securities than for short-term securities. Derivative
instruments may be particularly sensitive to changes in prevailing interest
rates. For a further explanation, see "Risk Factors and Special Considerations,"
which you should read carefully before investing.
The PIMCO High Yield Bond Portfolio may be appropriate for investors who:
. seek a high level of current income and maximum return
. can tolerate possibly high share price fluctuations
. are able to hold their investment over a long period of time
<PAGE>
The PIMCO High Yield Bond Portfolio may NOT be appropriate for investors
who:
. are uncomfortable with share price fluctuations
. require stability of principal
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
you may pay in connection with an investment in the PIMCO High Yield Bond
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.50%
Administrative Fee............................................0.25%
Total Annual Portfolio Operating Expenses.....................0.75%
Example
This Example is intended to help you compare the cost of investing in the
Portfolio to the cost of investing in other portfolios. The Example assumes that
you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$8 $24
<PAGE>
PIMCO GLOBAL BOND PORTFOLIO
Investment Objective
The PIMCO Global Bond Portfolio seeks to maximize total return, consistent
with preservation of capital and prudent investment management.
Main Investment Strategies
The PIMCO Global Bond Portfolio invests in a portfolio of fixed income
securities denominated in major foreign currencies, baskets of foreign
currencies (such as the European Currency Unit, or "ECU"), and the U.S. dollar.
Under normal circumstances, at least 65% of its assets will be invested in fixed
income securities of issuers located in at least three countries (one of which
may be the United States), which may be represented by futures contracts
(including related options) with respect to such securities, and options on such
securities, when the Adviser deems it appropriate to do so. The Adviser will
select the Portfolio's foreign country and currency compositions based on an
evaluation of relative interest rates, exchange rates, monetary and fiscal
policies, trade and current account balances, and any other specific factors the
Adviser believes to be relevant. Investments in the securities of issuers
located outside the United States will normally vary between 25% and 75% of the
Portfolio's assets. The average portfolio duration of this Portfolio will
normally vary within a three- to six-year time frame. See "Appendix A -
Description of Duration."
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The securities may be issued by domestic or foreign entities. The
Portfolio may invest all of its assets in derivative instruments, such as
options, futures contracts or swap agreements. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
The Portfolio may invest up to 10% of its assets in junk bonds rated B or
higher by Moody's or S&P, or, if unrated, determined by the Adviser to be of
comparable quality.
Risk Factors
The PIMCO Global Bond Portfolio is "non-diversified," meaning that it may
invest a greater percentage of its assets in the securities of one issuer than
many of the other Portfolios. The Portfolio is, however, subject to
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended, which means that as of the end of each calendar quarter it may have no
more than 25% of its assets invested in the securities of a single issuer, and
may, with respect to 50% of its assets, have no more than 5% of its assets
invested in the securities of a single issuer. Because it is "non-diversified,"
the Portfolio may be more susceptible to risks associated with a single
economic, political or regulatory occurrence than a diversified portfolio might
be.
The Portfolio is subject to interest rate risk. Generally, the value of
fixed income securities will change inversely with changes in interest rates. As
interest rates rise, market value tends to decrease. This risk will be greater
for long-term securities than for short-term securities. Derivative instruments
may be particularly sensitive to changes in prevailing interest rates. The
Portfolio also is subject to credit risk, which is the possibility that an
issuer of a security, or a counterparty to a derivative contract, will default
or become unable to meet a financial obligation. Junk bonds carry a high degree
of credit risk. Securities of foreign issuers may be subject to additional risk
factors, including foreign currency and political risks. For a further
explanation, see "Risk Factors and Special Considerations," which you should
read carefully before investing.
<PAGE>
The PIMCO Global Bond Portfolio may be appropriate for investors who:
. seek high current income
. seek international diversification
. are able to hold their investment over a long time period
. are able to tolerate fluctuations in the principal value of their
investment
The PIMCO Global Bond Portfolio may NOT be appropriate for investors who:
. are uncomfortable with share price fluctuations
. invest with a shorter time horizon in mind
Fees and Expenses
This table describes the fees and expenses (as a percentage of net
assets) you may pay in connection with an investment in the PIMCO Global Bond
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee.................................................0.60%
Administrative Fee...........................................0.30%
Total Annual Portfolio Operating Expenses....................0.90%
Example
This Example is intended to help you compare the cost of investing in
the Portfolio to the cost of investing in other portfolios. The Example assumes
that you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$9 $29
<PAGE>
PIMCO FOREIGN BOND PORTFOLIO
Investment Objective
The PIMCO Foreign Bond Portfolio seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
Main Investment Strategies
The PIMCO Foreign Bond Portfolio invests in a portfolio of fixed
income securities primarily denominated in major foreign currencies and baskets
of foreign currencies (such as the European Currency Unit, or "ECU"). The
Adviser will invest the assets of the Portfolio in a number of international
bond markets so that, under normal circumstances, the Portfolio will invest at
least 85% of its assets in securities of issuers located outside the United
States, representing at least three foreign countries, which may be represented
by futures contracts (including related options) with respect to such
securities, and options on such securities, when the Adviser deems it
appropriate to do so. The Adviser will select the Portfolio's foreign country
and currency compositions based on an evaluation of relative interest rates,
exchange rates, monetary and fiscal policies, trade and current account
balances, and any other specific factors the Adviser believes to be relevant.
The average portfolio duration of this Portfolio will normally vary within a
three- to six-year time frame. See "Appendix A Description of Duration."
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The securities may be issued by domestic or foreign entities. The
Portfolio may invest all of its assets in derivative instruments, such as
options, futures contracts or swap agreements. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
The Portfolio may invest up to 10% of its assets in junk bonds rated B
or higher by Moody's or S&P, or, if unrated, determined by the Adviser to be of
comparable quality.
The PIMCO Foreign Bond Portfolio differs from the PIMCO Global Bond
Portfolio primarily in the extent to which assets are invested in the securities
of issuers located outside the United States.
Risk Factors
The PIMCO Foreign Bond Portfolio is "non-diversified," meaning that it
may invest a greater percentage of its assets in the securities of one issuer
than many of the other Portfolios. The Portfolio is, however, subject to
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended, which means that as of the end of each calendar quarter it may have no
more than 25% of its assets invested in the securities of a single issuer, and
may, with respect to 50% of its assets, have no more than 5% of its assets
invested in the securities of a single issuer. Because it is "non-diversified,"
the Portfolio may be more susceptible to risks associated with a single
economic, political or regulatory occurrence than a diversified portfolio might
be.
The Portfolio is subject to interest rate risk. Generally, the value
of fixed income securities will change inversely with changes in interest rates.
As interest rates rise, market value tends to decrease. This risk will be
greater for long-term securities than for short-term securities. Derivative
instruments may be particularly sensitive to changes in prevailing interest
rates. Unexpected changes in interest rates may adversely affect the value of a
Portfolio's investments in particular derivative instruments. The Portfolio also
is subject to credit risk, which is the possibility that an issuer of a
security, or a counterparty to a derivative contract, will default or become
unable to meet a financial obligation. Junk bonds carry a high degree of credit
risk. Securities of foreign issuers may be subject to additional risk factors,
including foreign currency and political risks. For a further explanation, see
"Risk Factors and Special Considerations," which you should read carefully
before investing.
<PAGE>
The PIMCO Foreign Bond Portfolio may be appropriate for investors who:
. seek high current income
. seek international diversification
. are able to hold their investment over a long time period
. are able to tolerate fluctuations in the principal value of
their investment
The PIMCO Foreign Bond Portfolio may NOT be appropriate for investors
who:
. are uncomfortable with share price fluctuations
. invest with a shorter time horizon in mind
Fees and Expenses
This table describes the fees and expenses (as a percentage of net
assets) you may pay in connection with an investment in the PIMCO Foreign Bond
Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.60%
Administrative Fee............................................0.30%
Total Annual Portfolio Operating Expenses.....................0.90%
Example
This Example is intended to help you compare the cost of investing in
the Portfolio to the cost of investing in other portfolios. The Example assumes
that you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$9 $29
<PAGE>
PIMCO EMERGING MARKETS BOND PORTFOLIO
Investment Objective
The PIMCO Emerging Markets Bond Portfolio seeks to maximize total
return, consistent with preservation of capital and prudent investment
management.
Main Investment Strategies
The PIMCO Emerging Markets Bond Portfolio invests in a portfolio of
fixed income securities denominated in foreign currencies and the U.S. dollar.
Under normal market conditions, the Portfolio will invest at least 80% of its
assets in fixed income securities of issuers that economically are tied to
countries with emerging securities markets. The Portfolio may invest up to 20%
of its assets in other types of fixed income instruments, including securities
of issuers located in, or securities denominated in currencies of, countries
with developed foreign securities markets. The Portfolio also may invest up to
10% of its assets in shares of investment companies that invest primarily in
emerging market debt securities. The average portfolio duration of the Portfolio
will vary based on the Adviser's view of the potential for total return offered
by a particular duration strategy and, under normal market conditions, is not
expected to exceed eight years. See "Appendix A Description of Duration."
The Adviser has broad discretion to identify and invest in countries
that it considers to qualify as emerging securities markets. However, the
Adviser generally considers an emerging securities market to be one located in
any country that is defined as an emerging or developing economy by any of the
following: the International Bank for Reconstruction and Development (i.e., the
World Bank), including its various offshoots, such as the International Finance
Corporation, or the United Nations or its authorities. The Portfolio's
investments in emerging market fixed income securities may be represented by
securities on which the return is derived primarily from emerging securities
markets, when the Adviser deems it appropriate to do so.
The Portfolio emphasizes countries with relatively low gross national
product per capita and with the potential for rapid economic growth. The Adviser
will select the Portfolio's country and currency composition based on its
evaluation of relative interest rates, inflation rates, exchange rates, monetary
and fiscal policies, trade and current account balances, and any other specific
factors the Adviser believes to be relevant. The Portfolio likely will
concentrate its investments in Asia, Africa, the Middle East, Latin America and
the developing countries of Europe.
The Portfolio will invest at least 65% of its assets in Fixed Income
Instruments. The securities may be issued by domestic or foreign entities. The
Portfolio may invest all of its assets in derivative instruments, such as
options, futures contracts or swap agreements. The Portfolio may lend its
portfolio securities to brokers, dealers and other financial institutions in
order to earn income.
The Portfolio may invest substantially all of its assets in junk bonds
rated B or higher by Moody's or S&P, or, if unrated, determined by the Adviser
to be of comparable quality).
Risk Factors
The PIMCO Emerging Markets Bond Portfolio is "non-diversified,"
meaning that it may invest a greater percentage of its assets in the securities
of one issuer than many of the other Portfolios. The Portfolio is, however,
subject to diversification requirements imposed by the Internal Revenue Code of
1986, as amended, which means that as of the end of each calendar quarter, a
Portfolio may have no more than 25% of its assets invested in the securities of
a single issuer, and may, with respect to 50% of its assets, have no more than
5% of its assets invested in the securities of a single issuer. Because it is
"non-diversified," the Portfolio may be more susceptible to risks associated
with a single economic, political or regulatory occurrence than a diversified
portfolio might be.
<PAGE>
The Portfolio will be particularly susceptible to the effects of
political and economic developments in the regions in which it invests. This
effect may be increased by a relative scarcity of issuers in certain of these
markets, which may result in the Portfolio being highly concentrated in a small
number of issuers. For a further discussion of the special risks of investing in
foreign and emerging market countries, see "Risk Factors and Special
Considerations--Foreign Securities."
While lower rated securities generally provide greater potential
opportunity for capital appreciation and higher yields than investments in
higher rated securities, they also entail greater risk, including the
possibility of default or bankruptcy of the issuer of the securities. Risk of
default or bankruptcy may be greater in periods of economic uncertainty or
recession, as the issuers may be less able to withstand general economic
downturns affecting the regions in which the Portfolio invests. The Adviser
seeks to reduce risk through diversification, credit analysis and attention to
current developments and trends in emerging market economies and markets. For a
further discussion of the special risks of investing in lower rated securities,
see "Risk Factors and Special Considerations--High Yield Securities ("Junk
Bonds")."
The Portfolio is subject to interest rate risk. Generally, the value
of fixed income securities will change inversely with changes in interest rates.
As interest rates rise, market value tends to decrease. This risk will be
greater for long-term securities than for short-term securities. Derivative
instruments may be particularly sensitive to changes in prevailing interest
rates. For a further explanation, see "Risk Factors and Special Considerations,"
which you should read carefully before investing.
The PIMCO Emerging Markets Bond Portfolio may be appropriate for
investors who:
. seek high current income
. seek international diversification
. are able to hold their investment over a long time period
. are able to tolerate potentially significant fluctuations in the
principal value of their investment
The PIMCO Emerging Markets Bond Portfolio may NOT be appropriate
for investors who:
. are uncomfortable with share price fluctuations
. invest with a shorter time horizon in mind
Fees and Expenses
This table describes the fees and expenses (as a percentage of net
assets) you may pay in connection with an investment in the PIMCO Emerging
Markets Bond Portfolio.
<PAGE>
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.65%
Administrative Fee............................................0.35%
Total Annual Portfolio Operating Expenses.....................1.00%
Example
This Example is intended to help you compare the cost of investing in
the Portfolio to the cost of investing in other portfolios. The Example assumes
that you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$10 $32
<PAGE>
PIMCO StocksPLUS GROWTH AND INCOME PORTFOLIO
Investment Objective
The PIMCO StocksPLUS Growth and Income Portfolio seeks to achieve a
total return which exceeds the total return performance of the S&P 500.
Main Investment Strategies
The PIMCO StocksPLUS Growth and Income Portfolio invests in common
stocks, options, futures, options on futures and swaps consistent with its
portfolio management strategy as set forth below. StocksPLUS is the name of a
proprietary portfolio management strategy which uses S&P 500 derivatives in
addition to or in place of S&P 500 stocks to attempt to equal or exceed the
performance of the S&P 500. The Adviser expects that under normal market
conditions, the Portfolio will invest substantially all of its assets in S&P 500
derivatives, backed by a portfolio of fixed income securities. The Adviser will
actively manage the fixed income assets serving as cover for derivatives, as
well as any other fixed income assets held by the Portfolio, with a view to
enhancing the Portfolio's total return investment performance, subject to an
overall portfolio duration which is normally not expected to exceed one year.
See "Appendix A - Description of Duration."
The S&P 500 is composed of 500 selected common stocks, most of which
are listed on the New York Stock Exchange. S&P chooses the stocks to be included
in the S&P 500 solely on a statistical basis. Stocks represented currently in
the S&P 500 represent approximately two-thirds of the total market value of all
U.S. common stocks. The Portfolio is neither sponsored by nor affiliated with
S&P. The Portfolio will seek to remain invested in S&P 500 derivatives or S&P
500 stocks even when the S&P 500 is declining.
When S&P 500 derivatives appear to be overvalued relative to the S&P
500, the Portfolio may invest up to 100% of its assets in a "basket" of S&P 500
stocks. The composition of this basket will be determined by standard
statistical techniques that analyze the historical correlation between the
return of every stock currently in the S&P 500 and the return on the S&P 500
itself. The Adviser may employ fundamental stock analysis only to choose among
stocks that have already satisfied the statistical correlation tests. Stocks
chosen for the Portfolio are not limited to those with any particular weighting
in the S&P 500.
Positions in S&P 500 futures and options on futures will be entered
into only to the extent they constitute permissible positions for the Portfolio
according to applicable rules of the Commodity Futures Trading Commission
("CFTC"). From time to time, requirements of the Internal Revenue Code or an
unanticipated inability to close out positions when it would be most
advantageous to do so may limit the Adviser's ability to use S&P 500
derivatives.
Assets not invested in equity securities may be invested in securities
eligible for purchase by the Fixed Income Portfolios. The Portfolio may invest
up to 10% of its assets in junk bonds rated B or higher by Moody's or S&P, or,
if unrated, determined by the Adviser to be of comparable quality. In addition,
the Portfolio may lend its portfolio securities to brokers, dealers and other
financial institutions in order to earn income. The Portfolio may invest up to
20% of its assets in securities of foreign issuers, may purchase and sell
options and futures on foreign currencies, and may enter into forward currency
contracts. The Portfolio may invest all of its assets in derivative instruments,
such as options, futures contracts or swap agreements.
<PAGE>
Risk Factors
The PIMCO StocksPLUS Growth and Income Portfolio is subject to market
risk, which is the risk that the market value of securities may move up and
down, sometimes rapidly and unpredictably. The Portfolio also is subject to
interest rate risk. Generally, the value of fixed income securities will change
inversely with changes in interest rates. As interest rates rise, market value
tends to decrease. This risk will be greater for long-term securities than for
short-term securities. Derivative instruments may be particularly sensitive to
changes in prevailing interest rates. Unexpected changes in interest rates may
adversely affect the value of the Portfolio's investments in particular
derivative instruments.
A large number of investors use S&P 500 derivatives for both hedging
and speculative purposes, and although generally this helps guarantee a liquid
market in those instruments, at times liquidity may be limited. The Portfolio
also is subject to credit risk, which is the possibility that an issuer of a
security, or a counterparty to a derivative contract, will default or become
unable to meet a financial obligation. Junk bonds carry a high degree of credit
risk. Securities of foreign issuers may be subject to additional risk factors,
including foreign currency and political risks. For a further explanation, see
"Risk Factors and Special Considerations," which you should read carefully
before investing.
The PIMCO StocksPLUS Growth and Income Portfolio may be appropriate
for investors who:
. seek capital appreciation over the long term
. can accept short-term risk along with higher potential
long-term gains
. invest for goals that are many years in the future
. seek exposure to equity investments
The PIMCO StocksPLUS Growth and Income Portfolio may NOT be
appropriate for investors who:
. are uncomfortable with an investment that will fluctuate in value
. invest with a shorter time horizon in mind
Fees and Expenses
This table describes the fees and expenses (as a percentage of net
assets) you may pay in connection with an investment in the PIMCO StocksPLUS
Growth and Income Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee..................................................0.40%
Administrative Fee............................................0.25%
Total Annual Portfolio Operating Expenses.....................0.65%
----
----
<PAGE>
Example
This Example is intended to help you compare the cost of investing in
the Portfolio to the cost of investing in other portfolios. The Example assumes
that you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$7 $21
<PAGE>
PIMCO STRATEGIC BALANCED PORTFOLIO
Investment Objective
The PIMCO Strategic Balanced Portfolio has as its investment objective
the maximization of total return, consistent with preservation of capital and
prudent investment management.
Main Investment Strategies
The PIMCO Strategic Balanced Portfolio invests in the securities
eligible for purchase by the PIMCO StocksPLUS Growth and Income Portfolio and
the PIMCO Total Return Bond Portfolio. The percentage of the Portfolio's assets
allocated to equity or fixed income securities will vary according to an asset
allocation methodology developed by the Adviser. The methodology builds upon the
Adviser's long-standing process of economic forecasting of business cycle stages
by applying to this process a disciplined asset allocation model which employs
certain statistical variance techniques. Depending on the outcome of this asset
allocation methodology, the Portfolio's equity exposure will vary between 45%
and 75% of its total assets, and its fixed income exposure will vary between 25%
and 55% of its total assets. There is no assurance that the Adviser's asset
allocation methodology will be successful. The Portfolio may invest all of its
assets in derivative instruments, such as options, futures contracts or swap
agreements.
Risk Factors
The PIMCO Strategic Balanced Portfolio is subject to market risk,
which is the risk that the market value of securities may move up and down,
sometimes rapidly and unpredictably. The Portfolio also is subject to interest
rate risk. Generally, the value of fixed income securities will change inversely
with changes in interest rates. As interest rates rise, market value tends to
decrease. This risk will be greater for long-term securities than for short-term
securities. Derivative instruments may be particularly sensitive to changes in
prevailing interest rates. Unexpected changes in interest rates may adversely
affect the value of a Portfolio's investments in particular derivative
instruments.
A large number of investors use S&P 500 derivatives for both hedging
and speculative purposes, and although generally this helps guarantee a liquid
market in those instruments, at times liquidity may be limited. The Portfolio
also is subject to credit risk, which is the possibility that an issuer of a
security, or a counterparty to a derivative contract, will default or become
unable to meet a financial obligation. Junk bonds carry a high degree of credit
risk. Securities of foreign issuers may be subject to additional risk factors,
including foreign currency and political risks. For a further explanation, see
"Risk Factors and Special Considerations," which you should read carefully
before investing.
The PIMCO Strategic Balanced Portfolio may be appropriate for
investors who:
. seek income and capital appreciation
. want to reduce risk through diversification among these
securities and asset types
<PAGE>
The PIMCO Strategic Balanced Portfolio may NOT be appropriate for
investors who:
. are uncomfortable with an investment that will fluctuate in value
. invest with a shorter time horizon in mind
Fees and Expenses
This table describes the fees and expenses (as a percentage of net
assets) you may pay in connection with an investment in the PIMCO Strategic
Balanced Portfolio.
Annual Portfolio Operating Expenses (expenses deducted from Portfolio
assets)
Advisory Fee................................................0.50%
Administrative Fee..........................................0.25%
Total Annual Portfolio Operating Expenses...................0.75%
Example
This Example is intended to help you compare the cost of investing in
the Portfolio to the cost of investing in other portfolios. The Example assumes
that you invest $1,000 in the Portfolio for the time periods indicated and then
redeem all your shares at the end of those periods. The Example also assumes a
5% return on your investment each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 year 3 years
$8 $24
<PAGE>
MANAGEMENT OF THE TRUST
Each Portfolio is a series of shares of the Trust, which is an
open-end investment company. The business affairs of the Trust and each
Portfolio are managed by a Board of Trustees. The Board retains various
companies to carry out the Trust's and the Portfolios' operations. The Board has
the right to terminate these relationships and retain a different company if it
believes it is in the best interests of the shareholders.
Adviser and Administrator
PIMCO serves as Adviser to the Portfolios. The Adviser is an
investment counseling firm founded in 1971, and had approximately $108.5 billion
in assets under management as of September 30, 1997. PIMCO is a subsidiary
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Investment Management Company, a California corporation and indirect
wholly owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners,
LLC, a limited liability company controlled by the PIMCO Managing Directors.
PIMCO's address is 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is registered as an investment adviser with the
Securities and Exchange Commission ("SEC") and as a commodity trading advisor
with the CFTC.
The Adviser manages the investment of the assets of each Portfolio.
The Adviser places orders for the purchase and sale of each Portfolio's
investments directly with brokers or dealers selected by it in its discretion.
See "Portfolio Transactions." The table below provides information about the
individual portfolio managers responsible for management of the Trust's
Portfolios, including their occupations for the past five years.
<TABLE>
<S> <C>
Portfolio Manager And
Portfolio Business Experience (Past Five Years)
Money Market Portfolio Leslie Barbi, Senior Vice President,
PIMCO. A Fixed Income Portfolio Manager,
Ms. Barbi has managed the PIMCO Money
Market Fund for the PIMCO Funds: Pacific
Investment Management Series since
November 1, 1995. Prior to joining PIMCO
in 1993, Ms. Barbi was associated with
Salomon Brothers as a proprietary
Portfolio Manager.
Short-Term Bond Portfolio David H. Edington, Managing Director,
StocksPLUS Growth and Income PIMCO. A Fixed Income Portfolio Manager,
Portfolio Mr. Edington joined PIMCO in 1987 and
Strategic Balanced Portfolio has managed the PIMCO Short-Term,
StocksPLUS, Strategic Balanced and
Moderate Duration Funds for the PIMCO
Funds: Pacific Investment Management
Series since their inception, October 7,
1987, May 14, 1993, June 28, 1996 and
December 31, 1996, respectively.
Low Duration Bond Portfolio William H. Gross, Managing Director,
Total Return Bond Portfolio PIMCO. A Fixed Income Portfolio Manager,
Mr. Gross is one of the founders of
PIMCO and has managed the PIMCO Low
Duration, Low Duration II, Low Duration
III, Total Return, Total Return II and
Total Return III Funds for the PIMCO
Funds: Pacific Investment Management
Series since their inceptions on May 11,
1987, November 1, 1991, December 31,
1996, May 11, 1987, December 30, 1991
and May 1, 1991, respectively.
<PAGE>
High Yield Bond Portfolio Benjamin Trosky, Managing Director,
PIMCO. A Fixed Income Portfolio Manager,
Mr. Trosky joined PIMCO in 1990 and has
managed the PIMCO High Yield Fund for
the PIMCO Funds: Pacific Investment
Management Series since its inception on
December 16, 1992.
Emerging Markets Bond Portfolio Michael J. Rosborough, Senior Vice
President, PIMCO. A Fixed Income
Portfolio Manager, Mr. Rosborough was
associated with RBC Dominion in Tokyo as
a Vice President and Manager in foreign
fixed income prior to joining PIMCO in
1994. Mr. Rosborough has managed the
PIMCO Emerging Markets Bond Fund for the
PIMCO Funds: Pacific Investment
Management Series since its inception on
July 31, 1997.
Foreign Bond Portfolio Lee R. Thomas, III, Managing Director
Global Bond Portfolio and Senior International Portfolio
Manager, PIMCO. A Fixed Income Portfolio
Manager, Mr. Thomas has managed the
PIMCO Funds: Pacific Investment
Management Series' Foreign Bond, Global
Bond and International Bond Funds since
July 13, 1995, and the PIMCO Global Bond
Fund II since October 1, 1995. Prior to
joining PIMCO in 1995, Mr. Thomas was
associated with Investcorp as a member
of the management committee responsible
for global securities and foreign
exchange trading. Prior to Investcorp,
he was associated with Goldman Sachs as
an Executive Director in foreign fixed
income.
</TABLE>
PIMCO also serves as administrator to the Portfolios. PIMCO provides
administrative services to the Portfolios, which include clerical help and
accounting, bookkeeping, internal audit services, and certain other services
required by the Portfolios, preparation of reports to the Portfolios'
shareholders or other appropriate parties, and regulatory filings.
Advisory And Administrative Fees
The Portfolios feature fixed advisory and administrative fee rates. For
providing investment advisory and administrative services to the Portfolios as
described below, PIMCO receives monthly fees from each Portfolio at an annual
rate based on the average daily net assets of the Portfolio as follows:
<PAGE>
<TABLE>
<S> <C>
Advisory
Portfolio Fee Rate
Money Market Portfolio.......................................................0.30%
Short-Term Bond Portfolio....................................................0.35%
Low Duration Bond, Total Return Bond and
StocksPLUS Growth and Income Portfolios...................................0.40%
Strategic Balanced and High Yield Bond Portfolios............................0.50%
Global Bond and Foreign Bond Portfolios......................................0.60%
Emerging Markets Bond Portfolio..............................................0.65%
Administrative
Fee Rate
Portfolio
Money Market Portfolio........................................................0.20%
Short-Term Bond, Low Duration Bond, Total Return Bond,
StocksPLUS, Strategic Balanced and High Yield Bond Portfolios..............0.25%
Global Bond and Foreign Bond Portfolios.......................................0.30%
Emerging Markets Bond Portfolio...............................................0.35%
</TABLE>
PIMCO pays for most of the expenses of the Portfolios, including legal,
audit, custody, transfer agency and certain other services, and is responsible
for the costs of registration of the Trust's shares and the printing of
prospectuses and shareholder reports for current shareholders or other
appropriate parties.
The Portfolios are responsible for bearing certain expenses associated with
their operations that are not provided or procured by PIMCO. These expenses are
not expected to have a material effect on the Portfolio expense ratios.
Portfolio Transactions
The Adviser has discretion to select the brokers and dealers with which it
places orders for the purchase and sale of portfolio investments. In doing so,
the Adviser will seek the best price and execution of the Portfolios' orders. A
Portfolio may pay higher commission rates than the lowest available when the
Adviser believes it is reasonable in light of the value of the brokerage and
research services provided by the broker effecting the transaction.
The Adviser manages the Portfolios without regard generally to restrictions
on portfolio turnover. The Adviser's use of derivative instruments with
relatively short maturities may tend to exaggerate the portfolio turnover rate
for some of the Portfolios. Trading in fixed income securities does not
generally involve the payment of brokerage commissions, but does involve
indirect transaction costs. The use of futures contracts may involve the payment
of commissions to futures commission merchants. A Portfolio with a higher rate
of portfolio turnover will generally incur higher transaction costs.
Some securities considered for investment by the Portfolios also may be
appropriate for other clients served by the Adviser. If a purchase or sale of
securities consistent with the investment policies of a Portfolio and one or
more of these clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
clients in a manner deemed fair and reasonable by the Adviser. The Adviser may
aggregate orders for the Portfolios with simultaneous transactions entered into
on behalf of other clients of the Adviser.
<PAGE>
PURCHASE OF SHARES
As of the date of this Prospectus, shares of the Portfolios are offered for
purchase by Separate Accounts to serve as an investment medium for Variable
Contracts issued by life insurance companies, and to qualified pension and
retirement plans outside of the separate account context.
While the Portfolios currently do not foresee any disadvantages to Variable
Contract Owners if the Portfolios serve as an investment medium for both
variable annuity contracts and variable life insurance policies, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interest of owners of annuity contracts and insurance policies
for which the Portfolios served as an investment medium might at some time be in
conflict. However, the Trust's Board of Trustees and each insurance company with
a separate account allocating assets to the Portfolios are required to monitor
events to identify any material conflicts between variable annuity contract
owners and variable life insurance policy owners, and would have to determine
what action, if any, should be taken in the event of such a conflict. If such a
conflict occurred, an insurance company participating in the Portfolios might be
required to redeem the investment of one or more of its separate accounts from
the Portfolios, which might force the Portfolios to sell securities at
disadvantageous prices.
The Trust is "open for business" on each day the New York Stock Exchange
(the "Exchange") is open for trading, and the net asset value per share of each
Portfolio will be determined once on each day on which the Exchange is open as
of the close of regular trading on the Exchange (ordinarily 4:00 p.m. Eastern
Time). A purchase order, together with payment in proper form, received before
the Trust's close of business (ordinarily 4:00 p.m., Eastern time) on a day the
Trust is open for business will be effected at that day's net asset value. In
order to facilitate efficient operation of the PIMCO StocksPLUS and Strategic
Balanced Portfolios, the Trust requests that all purchase orders for these
Portfolios be received before 3:00 p.m., Eastern time. An order received after
the close of business generally will be effected at the net asset value
determined on the next business day.
The Trust and its distributor each reserves the right, in its sole
discretion, to suspend the offering of shares of the Portfolios or to reject any
purchase order, in whole or in part, or to redeem shares, in whole or in part,
when, in the judgment of management, such suspension or rejection is in the best
interests of the Trust. The sale of shares will be suspended during any period
in which the Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the SEC, when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Portfolios to dispose
of their securities or to determine fairly the value of their net assets, or
during any other period as permitted by the SEC for the protection of investors.
In the event that a Portfolio ceases offering its shares, any investments
allocated to the Portfolio will, subject to any necessary regulatory approvals,
be invested in another Portfolio.
REDEMPTION OF SHARES
Shares may be redeemed without charge on any day that the net asset value
is calculated. All redemption orders are effected at the net asset value per
share next determined after a redemption request is received. Payment for shares
redeemed normally will be made within seven days.
The Trust may suspend the right of redemption or postpone the payment date
at times when the Exchange is closed, or during certain other periods as
permitted under the federal securities laws. In consideration of the best
interests of the remaining shareholders, the Trust reserves the right to pay
redemption proceeds in whole or in part by a distribution in kind of securities
held by a Portfolio in lieu of cash. It is highly unlikely that shares would
ever be redeemed in kind. If shares are redeemed in kind, however, the redeeming
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the distribution.
<PAGE>
TAXES
Each Portfolio intends to qualify as a regulated investment company
annually and to elect to be treated as a regulated investment company for
federal income tax purposes. As such, a Portfolio generally will not pay federal
income tax on the income and gains it pays as dividends to its shareholders. In
order to avoid a 4% federal excise tax, each Portfolio intends to distribute
each year substantially all of its net income and gains.
The Portfolios also intend to comply with diversification requirements
imposed by regulations under Section 817(h) of the Internal Revenue Code, as
amended. Compliance with these diversification rules generally will limit the
ability of a Portfolio to invest greater than 55% of its total assets in direct
obligations of the U.S. Treasury (or any other issuer), or to invest primarily
in securities issued by a single agency or instrumentality of the U.S.
Government.
If a Portfolio fails to meet the diversification requirement under Section
817(h), income with respect to Variable Contracts invested in the Portfolio at
any time during the calendar quarter in which the failure occurred could become
currently taxable to the owners of the Variable Contracts and income for prior
periods with respect to such contracts also could be taxable, most likely in the
year of the failure to achieve the required diversification. Other adverse tax
consequences could also ensue.
Please refer to the prospectus for the Separate Account and Variable
Contract for information regarding the federal income tax treatment of
distributions to the Separate Account. See "Additional Information Additional
Tax Information" in the Portfolios' Statement of Additional Information for more
information on taxes.
RISK FACTORS AND SPECIAL CONSIDERATIONS
A Portfolio's risk profile is largely defined by the Portfolio's principal
securities and the investment practices that it uses. You can find a concise
description of each Portfolio's risk profile in the section captioned
"Description of Portfolios" in this Prospectus. As with any mutual fund, there
is no guarantee that a Portfolio will earn income or show a positive total
return over any period of time, and you could lose money by investing in the
Portfolio.
The Portfolios are permitted to use, within limits established by the
Trustees and imposed by applicable laws, a wide variety of securities and
investment practices, each of which has certain risks and opportunities
associated with it. To the extent that a Portfolio uses these securities or
practices, its overall performance may be affected, either positively or
negatively. The following pages describe certain of the securities in which the
Portfolios may invest and certain of investment practices in which the
Portfolios may engage, along with the risks associated with them. Additional
information about these and other investments and investment practices may be
found in the Statement of Additional Information, which you may obtain free of
charge by calling (888) 746-2688.
<PAGE>
U.S. Government Securities
U.S. Government securities are obligations of and, in certain cases,
guaranteed by, the U.S. Government, its agencies or instrumentalities. The U.S.
Government does not guarantee the net asset value of the Portfolios' shares.
U.S. Government securities may include zero coupon securities, which do not
distribute interest on a current basis and tend to be subject to greater market
risk than interest-paying securities of similar maturities.
Corporate Debt Securities
The rate of interest paid on a corporate debt security may be fixed,
floating or variable, and may vary inversely with respect to a reference rate.
See "Variable and Floating Rate Securities" below. The rate of return or return
of principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are rated below investment grade
are described below in "High Yield Securities ("Junk Bonds")." See also,
"Appendix B -- Description of Securities Ratings."
Convertible Securities and Equity Securities
Although most Portfolios intend to invest primarily in fixed income
securities, each may invest in convertible securities or equity securities.
While some countries or companies may be regarded as favorable investments, pure
fixed income opportunities may be unattractive or limited due to insufficient
supply, or legal or technical restrictions. In such cases, a Portfolio may
consider equity securities or convertible securities to gain exposure to such
investments.
A convertible security is a fixed income security that may be converted
into a prescribed amount of common stock at a specified formula. A Portfolio may
be required to permit the issuer of a convertible security to redeem the
security, convert it into the underlying common stock, or sell it to a third
party, which could have an adverse effect on a Portfolio's ability to achieve
its investment objective.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. Each of the Fixed Income Portfolios
may engage in credit spread trades and invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate, and
resets periodically. While variable and floating rate securities provide a
Portfolio with a certain degree of protection against rises in interest rates, a
Portfolio will participate in any declines in interest rates as well.
Inflation-Indexed Bonds
Inflation-indexed bonds are fixed income securities whose principal value
is periodically adjusted according to the rate of inflation. Such bonds
generally are issued at an interest rate lower than typical bonds, but are
expected to retain their principal value over time. The interest rate on these
bonds is fixed at issuance, but over the life of the bond this interest may be
paid on an increasing principal value, which has been adjusted for inflation. If
a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal. While these
securities are expected to be protected from long-term inflationary trends,
short-term increases in inflation may lead to a decline in value.
<PAGE>
Mortgage-Related and Other Asset-Backed Securities
Each of the Portfolios (except the PIMCO Money Market Portfolio) may invest
all of its assets in mortgage- or other asset-backed securities. The value of
some mortgage- or asset-backed securities in which the Portfolios invest may be
particularly sensitive to changes in prevailing interest rates, and, like other
fixed income investments, the ability of a Portfolio to successfully use these
instruments may depend in part upon the ability of the Adviser to forecast
interest rates and other economic factors correctly.
Mortgage Pass-Through Securities represent interests in "pools" of mortgage
loans secured by residential or commercial real property. Early repayment of
principal on some mortgage-related securities may expose a Portfolio to a lower
rate of return upon reinvestment of principal. Like other fixed income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed income securities. The rate of prepayments on underlying mortgages
will affect the price and volatility of a mortgage-related security, and may
have the effect of shortening or extending the effective maturity of the
security.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage-related or asset-backed securities.
Mortgage-Related Securities include securities other than those described
above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property.
Other Asset-Backed Securities. The Portfolios may invest in other
asset-backed securities that have been or may be offered to investors. For a
discussion of the characteristics of some of these instruments, see the
Statement of Additional Information.
Foreign Securities
Each of the Portfolios may invest directly in fixed income securities of
non-U.S. issuers. The PIMCO Money Market and High Yield Bond Portfolios may only
invest in U.S. dollar-denominated fixed income securities of non-U.S. issuers.
The PIMCO StocksPLUS Growth and Income Portfolio may invest directly in foreign
equity securities.
Investing in the securities of issuers in any foreign country involves
special risks and considerations not typically associated with investing in U.S.
companies. These risks include: differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer currency
from a country); and political instability which could affect U.S. investments
in foreign countries. Additionally, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Additional costs associated with an investment
in foreign securities may include higher custodial fees than apply to domestic
custodial arrangements and transaction costs of foreign currency conversions.
Changes in foreign exchange rates also will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar.
<PAGE>
Certain of the Portfolios, and particularly the PIMCO Emerging Markets Bond
Portfolio, may invest in the securities of issuers based in countries with
developing economies. Investing in developing (or "emerging market") countries
involves certain risks not typically associated with investing in U.S.
securities, and imposes risks greater than, or in addition to, risks of
investing in foreign, developed countries. These risks are detailed in the
Statement of Additional Information.
Foreign Currency Transactions
Foreign currency exchange rates may fluctuate significantly over short
periods of time. All Portfolios that may invest in securities denominated in
foreign currencies may buy and sell foreign currencies on a spot and forward
basis to reduce the risks of adverse changes in foreign exchange rates. A
forward foreign currency exchange contract reduces a Portfolio's exposure to
changes in the value of the currency it will deliver and increases its exposure
to changes in the value of the currency it will exchange into. Contracts to sell
foreign currency would limit any potential gain which might be realized by a
Portfolio if the value of the hedged currency increases. A Portfolio may enter
into these contracts for the purpose of hedging against foreign exchange risk
arising from the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. A Portfolio also may enter into these
contracts for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another.
All Portfolios that may invest in securities denominated in foreign
currencies may invest in options on foreign currencies and foreign currency
futures and options thereon. The Portfolios also may invest in foreign currency
exchange-related securities, such as foreign currency warrants and other
instruments whose return is linked to foreign currency exchange rates. Each
Portfolio that may invest in securities denominated in foreign currencies,
except the PIMCO Global Bond and Emerging Markets Bond Portfolios, will use
these techniques to hedge at least 75% of its exposure to foreign currency. For
a description of these instruments, see "Derivative Instruments" below and the
Statement of Additional Information.
High Yield Securities ("Junk Bonds")
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest payments. For
more information, see "Appendix B -- Decription of Securities Ratings." Analysis
of the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. If the issuer of high
yield securities defaults, a Portfolio may incur additional expenses to seek
recovery.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities, which may adversely affect
and cause large fluctuations in the daily net asset value of a Portfolio's
shares. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield
securities, especially in a thinly traded market.
<PAGE>
The Adviser seeks to minimize the risks of investing in high yield
securities through diversification, in-depth credit analysis and attention to
current developments in interest rates and market conditions.
Derivative Instruments
To the extent permitted by the investment objectives and policies of the
Portfolios, the Portfolios (except the PIMCO Money Market Portfolio) may
purchase and write call and put options on securities, securities indexes and
foreign currencies, and enter into futures contracts and use options on futures
contracts. The Portfolios also may enter into swap agreements with respect to
foreign currencies, interest rates, and securities indexes. The Portfolios may
use these techniques to hedge against changes in interest rates, foreign
currency exchange rates or securities prices or as part of their overall
investment strategies.
Each Portfolio (except the PIMCO Money Market Portfolio) may invest all of
its assets in derivative instruments, subject only to the Portfolio's investment
objective and policies and any restrictions imposed by applicable law. The use
of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments. While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in related investments or otherwise, due to the
possible inability of a Portfolio to purchase or sell a portfolio security at a
time that otherwise would be favorable, or the possible need to sell a portfolio
security at a disadvantageous time because the Portfolio is required to maintain
asset coverage or offsetting positions in connection with transactions in
derivative instruments, and the possible inability of a Portfolio to close out
or to liquidate its derivatives positions. The value of some derivative
instruments in which the Portfolios invest may be particularly sensitive to
changes in prevailing interest rates, and, like the other investments of the
Portfolios, the ability of a Portfolio to successfully use these instruments may
depend in part upon the ability of the Adviser to forecast interest rates and
other economic factors correctly. If the Adviser incorrectly forecasts such
factors and has taken positions in derivative instruments contrary to prevailing
market trends, the Portfolios could be exposed to the risk of loss.
Temporary Defensive Positions
For temporary, defensive or emergency purposes, a Portfolio may invest
without limit in U.S. debt securities, including short-term money market
securities, when in the opinion of the Advisor it is appropriate to do so. It is
impossible to predict for how long such alternative strategies will be utilized.
OTHER INFORMATION
Portfolio Names
Each of the Fixed Income Portfolios (other than the PIMCO Money Market
Portfolio) considers the various types of debt or fixed income securities in
which it invests, as specifically described in this Prospectus, to be "bonds" as
referenced in that Portfolio's name. The use of this name is not meant to
restrict a Portfolio's investment to the narrow category of debt securities that
are formally called "bonds."
<PAGE>
Total Return
The "total return" sought by certain of the Portfolios will consist of
interest and dividends from underlying securities, capital appreciation
reflected in unrealized increases in value of portfolio securities, or realized
from the purchase and sale of securities and use of futures and options, or
gains from favorable changes in foreign currency exchange rates. Generally, over
the long term, the total return obtained by a portfolio investing primarily in
fixed income securities is not expected to be as great as that obtained by a
portfolio that invests primarily in equity securities. At the same time, the
market risk and price volatility of a fixed income portfolio is expected to be
less than that of an equity portfolio, so that a fixed income portfolio is
generally considered to be a more conservative investment. The change in market
value of fixed income securities (and therefore their capital appreciation or
depreciation) is largely a function of changes in the current level of interest
rates. Generally, when interest rates are falling, a portfolio with a shorter
duration will not generate as high a level of total return as a portfolio with a
longer duration. See "Appendix A - Description of Duration." Conversely, when
interest rates are rising, a portfolio with a shorter duration will generally
outperform longer duration portfolios. When interest rates are flat, shorter
duration portfolios generally will not generate as high a level of total return
as longer duration portfolios (assuming that long-term interest rates are higher
than short-term rates, which is commonly the case). With respect to the
composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the anticipated potential for total return, with,
however, greater attendant market risk and price volatility than for a portfolio
with a shorter duration. The market value of fixed income securities denominated
in currencies other than the U.S. dollar also may be affected by movements in
foreign currency exchange rates.
The change in market value of equity securities (and therefore their
capital appreciation or depreciation) may depend upon a number of factors,
including: conditions in the securities markets, the business success of the
security's issuer, changing interest rates, real or perceived economic and
competitive industry conditions, and foreign currency exchange rates.
Historically, the total return performance of equity-oriented portfolios has
generally been greater over the long term than fixed income portfolios. However,
the market risk and price volatility of an equity portfolio is generally greater
than that of a fixed income portfolio, and is generally considered to be a more
aggressive investment.
Performance Information of Similar Funds
The following table provides information concerning the historical total
return performance of the Institutional Class shares of certain series of PIMCO
Funds: Pacific Investment Management Series ("PIMS"), another registered
investment company managed by PIMCO. Each PIMS series has investment objectives,
policies and risks substantially similar to those of its respective Portfolio
and is managed by the same portfolio manager. While the investment objectives
and policies of each PIMS series and its respective Portfolio are similar, they
are not identical and the performance of the PIMS series and the Portfolio will
vary. The data is provided to illustrate the past performance of each portfolio
manager in managing a substantially similar investment portfolio and does not
represent the past performance of any of the Portfolios or the future
performance of any Portfolio or its portfolio manager. Consequently, potential
investors should not consider this performance data as an indication of the
future performance of any Portfolio or of its portfolio manager.
The performance data shown below reflects the operating expenses of each
PIMS series, which for all series except the PIMCO StocksPLUS Fund are lower
than the expenses of the corresponding Portfolio. Performance would have been
lower for those series if the Portfolios' expenses were used. In addition, the
PIMS series, unlike the Portfolios, are not sold to Separate Accounts to fund
Variable Contracts. As a result, the performance results presented below do not
take into account charges or deductions against a Separate Account or Variable
Contract for cost of insurance charges, premium loads, administrative fees,
maintenance fees, premium taxes, mortality and expense risk charges, or other
charges that may be incurred under a Variable Contract for which the Portfolio
serves as an underlying investment vehicle. By contrast, Variable Contract
Owners with contract value allocated to the Portfolios will be subject to
charges and expenses relating to the Variable Contracts and Separate Accounts.
<PAGE>
Each PIMS series' performance data shown below is calculated in accordance
with standards prescribed by the SEC for the calculation of average annual total
return information. The investment results of the PIMS series presented below
are unaudited and are not intended to predict or suggest results that might be
experienced by the PIMS series or the Portfolios. Share prices and investment
returns will fluctuate reflecting market conditions, as well as changes in
company-specific fundamentals of portfolio securities. The performance data for
the benchmark indices identified below does not reflect the fees or expenses of
the PIMS series or the Portfolios.
Average Annual Total Return for Similar Series of PIMS and for Benchmark Indices
for Periods Ended June 30, 1997
<TABLE>
<S> <C> <C> <C> <C>
Since Inception
PIMS Series Fund / Benchmark 1 Year 5 Years Inception Date
---------------------------- ------ ------- ------------- ------------
PIMCO Money Market Fund 5.23% 4.43% 4.54% 3/1/91
Lipper Money Market1 4.69% 4.09%
PIMCO Short-Term Bond Fund 7.55% 5.69% 6.60% 10/7/87
Lipper Money Market1 4.69% 4.09%
PIMCO Low Duration Bond Fund 8.79% 6.85% 8.31% 5/11/87
Merrill Lynch 1-3 yr. Treasury2 6.57% 5.57%
PIMCO Total Return Bond Fund 9.93% 8.31% 9.73% 5/11/87
Lehman Aggregate Bond3 8.15% 7.12%
PIMCO High Yield Bond Fund 16.15% N/A 13.03% 12/16/92
Lehman BB Int. Corporate4 13.01% N/A
PIMCO Global Bond Fund 8.26% N/A 8.97% 11/23/93
J. P. Morgan Global (Unhedged) 5 4.48% N/A
PIMCO Foreign Bond Fund 17.16% N/A 11.54% 12/3/92
J. P. Morgan Non-U.S. (Hedged) 6 13.38% N/A
PIMCO StocksPLUS Fund 34.33% N/A 22.68% 5/14/93
S & P 5007 34.70% N/A
PIMCO Strategic Balanced Fund 25.51% N/A 25.51% 6/28/96
Lipper Balanced Index8 20.41% N/A
__________________
</TABLE>
<PAGE>
1 The Lipper Money Market Index consists of the performance returns of the 30
largest Money Market Funds equally weighted as compiled by Lipper Analytical
Services, Inc. The Index reflects performance which is net of fees charged by
each respective Fund in the index and assumes reinvestment of dividends and
capital gain distributions, if any.
2 The Merrill Lynch 1-3 Year Treasury Index consists of all public U.S.
Treasury obligations having maturities from one to 2.99 years. The Index
includes income and distributions but does not reflect fees, brokerage
commissions or other expenses of investing.
3 The Lehman Brothers Aggregate Bond Index consists of the Lehman Brothers
Government/Corporate Bond Index, the Lehman Brothers Mortgage-Backed Securities
Index, and the Lehman Brothers Asset-Backed Securities Index. The
Government/Corporate Bond Index consists of the Lehman Brothers Government Bond
Index and the Lehman Brothers Corporate Bond Index. The Government Bond Index
includes all public obligations of the U.S. Treasury (excluding flower bonds and
foreign-targeted issues), its agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. Government. The Corporate Bond Index
includes all publicly issued, fixed rate, non-convertible investment grade U.S.
dollar denominated corporate debt registered with the SEC; it also includes debt
issued or guaranteed by foreign sovereign governments, municipalities, and
governmental or international agencies. The Mortgage-Backed Securities Index
consists of 15- and 30-year fixed rate securities backed by mortgage pools of
the Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association (excluding buydowns,
manufactured homes and graduated equity mortgages). The Asset-Backed Securities
Index consists of credit card, auto and home equity loans (excluding
subordinated tranches) with an average life of one year. Each Index includes
income and distributions but does not reflect fees, brokerage commissions or
other expenses of investing.
4 The Lehman Brothers BB Intermediate Corporate Index is an unmanaged market
index comprised of various fixed income securities rated BB. The Index includes
income and distributions but does not reflect fees, brokerage commissions or
other expenses of investing.
5 The J.P. Morgan Global Index (Unhedged) is an unmanaged market index
representative of the total return performance in U.S. dollars on an unhedged
basis of major world bond markets. The Index includes income and distributions
but does not reflect fees, brokerage commissions or other expenses of investing.
6 The J.P. Morgan Non-U.S. Index (Hedged) is an unmanaged market index
representative of the total return performance in U.S. dollars of major non-U.S.
bond markets. The Index includes income and distributions but does not reflect
fees, brokerage commissions or other expenses of investing.
7 The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index
containing common stocks of 500 industrial, transportation, utility and
financial companies, regarded as generally representative of the U.S. stock
market. The Index reflects the reinvestment of income dividends and capital
gains distributions, if any, but does not reflect fees, brokerage commissions,
or other expenses of investing.
8 The Lipper Balanced Index consists of the performance returns of the 30
largest Balanced Funds equally weighted as compiled by Lipper Analytical
Services, Inc. The Index reflects performance which is net of fees charged by
each respective Fund in the index and assumes reinvestment of dividends and
capital gain distributions, if any.
<PAGE>
APPENDIX A
DESCRIPTION OF DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of "term to
maturity." Traditionally, a fixed income security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a fixed
income security provides its final payment, taking no account of the pattern of
the security's payments before maturity. In contrast, duration incorporates a
bond's yield, coupon interest payments, final maturity and call features into
one measure. Duration management is one of the fundamental tools used by the
Adviser.
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any fixed income security with interest payments occurring before the payment of
principal, duration is always less than maturity. In general, all other things
being equal, the lower the stated or coupon rate of interest of a fixed income
security, the longer the duration of the security; conversely, the higher the
stated or coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Portfolio's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. For inflation-indexed bonds, duration is calculated on the basis
of modified real duration, which measures price changes of inflation-indexed
bonds on the basis of changes in real, rather than nominal, interest rates.
Another example where the interest rate exposure is not properly captured by
duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure.
Finally, the duration of a fixed income security may vary over time in response
to changes in interest rates and other market factors. In these and other
similar situations, the Adviser will use more sophisticated analytical
techniques that incorporate the anticipated economic life of a security into the
determination of its interest rate exposure.
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
Certain of the Portfolios make use of average portfolio credit quality
standards to assist institutional investors whose own investment guidelines
limit their investments accordingly. In determining a Portfolio's overall
dollar-weighted average quality, unrated securities are treated as if rated,
based on the Adviser's view of their comparability to rated securities. A
Portfolio's use of average quality criteria is intended to be a guide for those
institutional investors whose investment guidelines require that assets be
invested according to comparable criteria. Reference to an overall average
quality rating for a Portfolio does not mean that all securities held by the
Portfolio will be rated in that category or higher. A Portfolio's investments
may range in quality from securities rated in the lowest category in which the
Portfolio is permitted to invest to securities rated in the highest category (as
rated by Moody's or S&P or, if unrated, determined by the Adviser to be of
comparable quality). The percentage of a Portfolio's assets invested in
securities in a particular rating category will vary. Following is a description
of Moody's and S&P's ratings applicable to fixed income securities.
Moody's Investors Service, Inc.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
<PAGE>
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
<PAGE>
Standard & Poor's Ratings Group
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
<PAGE>
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality after completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Commercial Paper Rating Definitions
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from A for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
<PAGE>
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
<PAGE>
[Back Cover]
PIMCO Variable Insurance Trust
Prospectus
January 1, 1998
For More Information
Two documents are made available that offer further information on the
Portfolios of PIMCO Variable Insurance Trust.
Annual or Semi-Annual Reports to Shareholders
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
Statement of Additional Information (SAI) dated January 1, 1998.
The SAI contains more detailed information on all aspects of the Portfolios.
A current SAI has been filed with the Securities and Exchange Commission. It is
incorporated into this Prospectus by reference.
To request a free copy of the current annual or semi-annual report or SAI, or to
make inquiries about the Portfolios, please write or call:
PIMCO Variable Insurance Trust
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
Telephone: (888) 746-2688
Information about the Trust (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. Information on the operation of the public reference room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information about
the Trust are available on the Commission's Internet site at http://www/sec.gov,
and copies of that information may be obtained, upon payment of a duplicating
fee, by writing the Public Reference Section of the Commission, Washington, D.C.
20549-6009.
<PAGE>
SUBJECT TO COMPLETION: DATED DECEMBER 19, 1997
PIMCO Variable Insurance Trust
Statement of Additional Information
PIMCO Variable Insurance Trust (the "Trust") is an open-end management
investment company ("mutual fund") currently consisting of ten separate
investment portfolios (the "Portfolios"): the PIMCO Money Market Portfolio; the
PIMCO Short-Term Bond Portfolio; the PIMCO Low Duration Bond Portfolio; the
PIMCO High Yield Bond Portfolio; the PIMCO Total Return Bond Portfolio; the
PIMCO Foreign Bond Portfolio; the PIMCO Global Bond Portfolio; the PIMCO
Emerging Markets Bond Portfolio (together, the "Fixed Income Portfolios"); the
PIMCO StocksPLUS Growth and Income Portfolio; and the PIMCO Strategic Balanced
Portfolio.
The Trust's investment adviser is Pacific Investment Management Company
("PIMCO" or the "Adviser"), 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is a subsidiary partnership of PIMCO Advisors L.P.
("PIMCO Advisors").
Shares of the Portfolios are currently sold to segregated asset accounts
("Separate Accounts") of insurance companies to serve as an investment medium
for variable annuity contracts and variable life insurance policies ("Variable
Contracts"). The Separate Accounts invest in shares of the Portfolios in
accordance with allocation instructions received from owners of the Variable
Contracts ("Variable Contract Owners"). Shares of the Portfolios also may be
sold to qualified pension and retirement plans outside the separate account
context.
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with a Prospectus for the Trust. The Portfolios' shares are
offered through a Prospectus dated January 1, 1998 (the "Prospectus"). A copy of
the Prospectus may be obtained free of charge at the address and telephone
number listed below.
PIMCO Variable Insurance Trust
840 Newport Center Drive
Suite 360
Newport Beach, California 92660
Telephone: (888) 746-2688
January 1, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES..........................................1
U.S. Government Securities.........................................1
Borrowing..........................................................1
Corporate Debt Securities..........................................2
Participation on Creditors Committees..............................3
Variable and Floating Rate Securities..............................3
Inflation-Indexed Bonds............................................4
Mortgage-Related and Other Asset-Backed Securities.................5
Foreign Securities.................................................9
Foreign Currency Transactions.....................................12
Foreign Currency Exchange-Related Securities......................13
Bank Obligations..................................................15
Loan Participations...............................................16
Short Sales.......................................................17
Repurchase Agreements.............................................18
Reverse Repurchase Agreements, Dollar Rolls and Sale-Buybacks.....18
Loans of Portfolio Securities.....................................19
When-Issued, Delayed Delivery,and Forward Commitment Transactions.19
Derivative Instruments............................................20
Warrants to Purchase Securities...................................27
Hybrid Instruments................................................28
Investment in Investment Companies................................28
Illiquid Securities...............................................28
INVESTMENT RESTRICTIONS....................................................29
Fundamental Investment Restrictions...............................29
Non-Fundamental Investment Restrictions...........................30
MANAGEMENT OF THE TRUST....................................................31
Trustees and Officers.............................................31
Compensation Table................................................33
Investment Adviser................................................33
Administrator.....................................................34
DISTRIBUTION OF TRUST SHARES...............................................35
Distributor.......................................................35
Purchases and Redemptions.........................................35
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................36
Investment Decisions..............................................36
Brokerage and Research Services...................................36
Portfolio Turnover................................................37
<PAGE>
NET ASSET VALUE............................................................37
TAXATION.................................................................. 39
Distributions.....................................................40
Sales of Shares...................................................40
Options, Futures and Forward Contracts, and Swap Agreements.......40
Passive Foreign Investment Companies..............................41
Foreign Currency Transactions.....................................42
Foreign Taxation..................................................42
Original Issue Discount...........................................43
Other Taxation....................................................44
OTHER INFORMATION..........................................................44
Capitalization....................................................44
Performance Information...........................................44
Voting Rights.....................................................51
Code of Ethics....................................................52
Custodian.........................................................52
Independent Accountants...........................................52
Counsel...........................................................52
Registration Statement............................................52
Financial Statements..............................................53
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Portfolio
are described in the Prospectus. Additional information concerning the
characteristics of certain of the Portfolios' investments is set forth below.
U.S. Government Securities
U.S. Government securities are obligations of and, in certain cases,
guaranteed by, the U.S. Government, its agencies or instrumentalities. The U.S.
Government does not guarantee the net asset value of the Portfolios' shares.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. Government securities may include zero
coupon securities, which do not distribute interest on a current basis and tend
to be subject to greater market risk than interest-paying securities of similar
maturities.
Borrowing
A Portfolio may borrow for temporary administrative purposes. This
borrowing may be unsecured. Provisions of the Investment Company Act of 1940
("1940 Act") require a Portfolio to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed, with an exception for borrowings not in excess of
5% of the Portfolio's total assets made for temporary administrative purposes.
Any borrowings for temporary administrative purposes in excess of 5% of the
Portfolio's total assets must maintain continuous asset coverage. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, a Portfolio may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time. Borrowing will tend to exaggerate the effect on net
asset value of any increase or decrease in the market value of a Portfolio's
portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. A Portfolio also may
be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
In addition to borrowing for temporary purposes, a Portfolio may enter into
reverse repurchase agreements, mortgage dollar rolls, sale-buybacks, and
economically similar transactions, that can be viewed as constituting a form of
borrowing or financing transaction by the Portfolio. For a more detailed
discussion of such transactions, see "Reverse Repurchase Agreements, Dollar
Rolls and Sale-Buybacks," below. To the extent a Portfolio covers its commitment
under a reverse repurchase agreement (or economically similar transaction) by
the maintenance of a segregated account consisting of assets determined in
accordance with procedures adopted by the Trustees, equal in value to the amount
of the Portfolio's commitment to repurchase, such an agreement will not be
considered a "senior security" by the Portfolio and therefore will not be
subject to the 300% asset coverage requirement otherwise applicable to
borrowings by the Portfolios. To the extent that positions in reverse repurchase
agreements, dollar rolls or similar transactions are not covered through the
maintenance of a segregated account consisting of liquid assets at least equal
to the amount of any forward purchase commitment, such transactions would be
subject to the Portfolios' limitations on borrowings, which would restrict the
aggregate of such transactions (plus any other borrowings) to 33 1/3% of a
Portfolio's total assets. Apart from such transactions, a Portfolio will not
borrow money, except for temporary administrative purposes.
<PAGE>
Corporate Debt Securities
A Portfolio's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Portfolio, or, if unrated, are in the
Adviser's opinion comparable in quality to corporate debt securities in which
the Portfolio may invest. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Debt securities may be
acquired with warrants attached. Corporate income-producing securities may also
include forms of preferred or preference stock.
Among the corporate debt securities in which the Portfolios may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. Convertible securities may
offer higher income than the common stocks into which they are convertible. A
convertible security generally entitles the holder to receive interest paid or
accrued until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to non-convertible debt securities. Convertible securities rank senior
to common stock in a corporation's capital structure and, therefore, generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Portfolio
is called for redemption, the Portfolio would be required to permit the issuer
to redeem the security and convert it to underlying common stock, or would sell
the convertible security to a third party. Thus, a Portfolio may not be able to
control whether the issuer of a convertible security chooses to convert that
security. A Portfolio generally would invest in convertible securities for their
favorable price characteristics and total return potential and would normally
not exercise an option to convert.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's Investor Service, Inc. ("Moody's")
describes securities rated Baa as "medium-grade" obligations; they are "neither
highly protected nor poorly secured . . . [i]nterest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." Standard & Poor's Rating Group ("S&P")
describes securities rated BBB as "regarded as having an adequate capacity to
pay interest and repay principal . . . [w]hereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal .
. . than in higher rated categories."
Investments in securities rated below investment grade that are eligible
for purchase by certain of the Portfolios (i.e., rated B or better by Moody's or
S&P), and in particular, by the PIMCO High Yield Bond Portfolio, are described
as "speculative" by both Moody's and S&P. Investment in lower rated corporate
debt securities ("high yield securities" or "junk bonds") generally provides
greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Analysis of the
creditworthiness of issuers of debt securities that are high yield may be more
complex than for issuers of higher quality debt securities.
<PAGE>
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities have been found to be less sensitive to
interest-rate changes than higher-rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If an issuer of high yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, the Portfolios investing in such securities may incur additional
expenses to seek recovery. In the case of high yield securities structured as
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the
Portfolios could sell a high yield security, and could adversely affect the
daily net asset value of the shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield securities, especially in a thinly-traded market. When
secondary markets for high yield securities are less liquid than the market for
higher grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable, objective
data available. The Adviser seeks to minimize the risks of investing in all
securities through diversification, in-depth credit analysis and attention to
current developments in interest rates and market conditions.
Participation on Creditors Committees
A Portfolio (in particular, the PIMCO High Yield Bond Portfolio) may from
time to time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject a Portfolio to expenses such as legal fees and
may make a Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict such Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by a Portfolio on such committees also may expose
the Portfolio to potential liabilities under the federal bankruptcy laws or
other laws governing the rights of creditors and debtors. A Portfolio will
participate on such committees only when the Adviser believes that such
participation is necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate. The PIMCO Money Market
Portfolio may invest in a variable rate security having a stated maturity in
excess of 397 calendar days if the interest rate will be adjusted and the
Portfolio may demand payment of principal from the issuer within that period.
Each of the Fixed Income Portfolios may engage in credit spread trades and
invest in floating rate debt instruments ("floaters"). A credit spread trade is
an investment position relating to a difference in the prices or interest rates
of two securities or currencies, where the value of the investment position is
determined by movements in the difference between the prices or interest rates,
as the case may be, of the respective securities or currencies. The interest
rate on a floater is a variable rate which is tied to another interest rate,
such as a money-market index or Treasury bill rate. The interest rate on a
floater resets periodically, typically every six months. While, because of the
interest rate reset feature, floaters provide a Portfolio with a certain degree
of protection against rises in interest rates, a Portfolio will participate in
any declines in interest rates as well.
<PAGE>
Each of the Fixed Income Portfolios may also invest in inverse floating
rate debt instruments ("inverse floaters"). The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floating rate security may
exhibit greater price volatility than a fixed rate obligation of similar credit
quality. The Portfolios have adopted a policy under which no Portfolio will
invest more than 5% of its net assets in any combination of inverse floater,
interest only ("IO"), or principal only ("PO") securities. See "Mortgage-Related
and Other Asset-Backed Securities" for a discussion of IOs and POs.
Inflation-Indexed Bonds
Inflation-indexed bonds are fixed income securities whose principal value
is periodically adjusted according to the rate of inflation. Such bonds
generally are issued at an interest rate lower than typical bonds, but are
expected to retain their principal value over time. The interest rate on these
bonds is fixed at issuance, but over the life of the bond this interest may be
paid on an increasing principal value, which has been adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Portfolio purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months
were 1%, the mid-year par value of the bond would be $1,010 and the first
semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year reached 3%, the end-of-year par value of the
bond would be $1,030 and the second semi- annual interest payment would be
$15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Portfolios
may also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Portfolio may be forced to liquidate positions
when it would not be advantageous to do so. There also can be no assurance that
the U.S. Treasury will issue any particular amount of inflation-indexed bonds.
Certain foreign governments, such as the United Kingdom, Canada and Australia,
have a longer history of issuing inflation-indexed bonds, and there may be a
more liquid market in certain of these countries for these securities.
<PAGE>
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Taxation" below for information about the
possible tax consequences of investing in inflation-indexed bonds.
Mortgage-Related and Other Asset-Backed Securities
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." The Portfolios may also invest in debt securities which are secured
with collateral consisting of mortgage-related securities (see "Collateralized
Mortgage Obligations"), and in other types of mortgage-related securities.
Mortgage Pass-Through Securities. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential or commercial mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by GNMA)
are described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
Payment of principal and interest on some mortgage pass-through securities
may be guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by GNMA); or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by FNMA or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage-related securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
<PAGE>
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs
(the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government. FHLMC was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. It is a government-sponsored corporation
formerly owned by the twelve Federal Home Loan Banks and now owned entirely by
private stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the United
States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Portfolios may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Adviser determines that the securities meet the Trust's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. No Portfolio will purchase mortgage-related securities or any other
assets which in the Adviser's opinion are illiquid if, as a result, more than
15% of the value of the Portfolio's net assets will be illiquid (10% in the case
of the PIMCO Money Market Portfolio.)
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolios' industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolios take the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by a portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the FHA or the VA. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
<PAGE>
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Interest and prepaid
principal on a CMO is paid, in most cases, monthly. CMOs may be collateralized
by whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their
income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government securities by
the Portfolios, while other CMOs, even if collateralized by U.S. government
securities, will have the same status as other privately issued securities for
purposes of applying a Portfolio's diversification tests.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semi-annually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
<PAGE>
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including mortgage dollar rolls, CMO residuals or stripped
mortgage-backed securities ("SMBS"). Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities--Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a Portfolio's limitations on investment in illiquid securities.
<PAGE>
Stripped Mortgage-Backed Securities. SMBS are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to recoup some or all of its initial investment
in these securities even if the security is in one of the highest rating
categories. The Portfolios have adopted a policy under which no Portfolio will
invest more than 5% of its net assets in any combination of IO, PO, or inverse
floater securities.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Adviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile ReceivablesSM
("CARSSM"). CARSSM represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with a Portfolio's investment objectives and policies, the
Adviser also may invest in other types of asset-backed securities (unrelated to
mortgage loans), such as rate reduction bonds, which are derived from
utility-generated revenue streams. Other asset-backed securities in which the
Portfolios may choose to invest may be based on revenue streams derived from,
but not limited to, student loans, credit card receivables, government
securities or corporate bonds.
Foreign Securities
All Portfolios may invest in corporate debt securities of foreign issuers
(including preferred or preference stock), certain foreign bank obligations (see
"Bank Obligations") and U.S. dollar- or foreign currency-denominated obligations
of foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The PIMCO Money Market and
High Yield Bond Portfolios may invest in securities of foreign issuers only if
they are U.S. dollar-denominated.
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Except for the PIMCO Emerging Markets Bond Portfolio, each of the
Portfolios will concentrate its foreign investments in securities of issuers
based in developed countries. However, the PIMCO Short-Term Bond and Low
Duration Bond Portfolios may each invest up to 5% of its assets in securities of
issuers based in the emerging market countries in which the PIMCO Emerging
Markets Bond Portfolio may invest, and each of the remaining Fixed Income
Portfolios that may invest in foreign securities may invest up to 10% of its
assets in such securities.
Securities traded in certain emerging market countries, including the
emerging market countries in Eastern Europe, may be subject to risks in addition
to risks typically posed by international investing due to the inexperience of
financial intermediaries, the lack of modern technology, and the lack of a
sufficient capital base to expand business operations. A number of emerging
market countries restrict, to varying degrees, foreign investment in securities.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some emerging
market countries. A number of the currencies of emerging market countries have
experienced significant declines against the U.S. dollar in recent years, and
devaluation may occur after investments in these currencies by a Portfolio.
Inflation and rapid fluctuations in inflation rates have had, and may continue
to have, negative effects on the economies and securities markets of certain
emerging market countries. Many of the emerging securities markets are
relatively small, have low trading volumes, suffer periods of relative
illiquidity, and are characterized by significant price volatility. There is a
risk in emerging market countries that a future economic or political crisis
could lead to price controls, forced mergers of companies, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.
Additional risks of investing in emerging market countries may include:
currency exchange rate fluctuations; greater social, economic and political
uncertainty and instability (including the risk of war); more substantial
governmental involvement in the economy; less governmental supervision and
regulation of the securities markets and participants in those markets;
unavailability of currency hedging techniques in certain emerging market
countries; the fact that companies in emerging market countries may be newly
organized and may be smaller and less seasoned companies; the difference in, or
lack of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and significantly smaller market capitalization of securities markets.
Emerging securities markets may have different clearance and settlement
procedures, which may be unable to keep pace with the volume of securities
transactions or otherwise make it difficult to engage in such transactions.
Settlement problems may cause a Portfolio to miss attractive investment
opportunities, hold a portion of its assets in cash pending investment, or delay
in disposing of a portfolio security. Such a delay could result in possible
liability to a purchaser of the security. Any change in the leadership or
policies of Eastern European countries, or the countries that exercise a
significant influence over those countries, may halt the expansion of or reverse
the liberalization of foreign investment policies now occurring and adversely
affect existing investment opportunities. Additionally, former Communist regimes
of a number of Eastern European countries previously expropriated a large amount
of property, the claims on which have not been entirely settled. There can be no
assurance that a Portfolio's investments in Eastern Europe will not also be
expropriated, nationalized or otherwise confiscated.
Each of the Fixed Income Portfolios may invest in Brady Bonds. Brady Bonds
are securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in a number of countries, including: Argentina, Bolivia,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil
has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan in the future.
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Brady Bonds do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter secondary
market. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Brady Bonds are not considered to be U.S. Government securities. In light
of the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities in
countries issuing Brady Bonds, investments in Brady Bonds may be viewed as
speculative. There can be no assurance that Brady Bonds in which the Portfolios
may invest will not be subject to restructuring arrangements or to requests for
new credit, which may cause the Portfolios to suffer a loss of interest or
principal on any of its holdings.
Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Portfolio, and
the political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Portfolios) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which governmental entities have defaulted may be collected in whole or in
part.
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The PIMCO Emerging Markets Bond Portfolio will consider an issuer to be
economically tied to a country with an emerging securities market if (1) the
issuer is organized under the laws of, or maintains its principal place of
business in, the country, (2) its securities are principally traded in the
country's securities markets, or (3) the issuer derived at least half of its
revenues or profits from goods produced or sold, investments made, or services
performed in the country, or has at least half of its assets in that country.
A Portfolio's investments in foreign currency denominated debt obligations
and hedging activities will likely produce a difference between its book income
and its taxable income. This difference may cause a portion of the Portfolio's
income distributions to constitute returns of capital for tax purposes or
require the Portfolio to make distributions exceeding book income to qualify as
a regulated investment company for federal tax purposes.
Foreign Currency Transactions
Foreign currency exchange rates may fluctuate significantly over short
periods of time. All Portfolios that may invest in foreign currency-denominated
securities also may purchase and sell foreign currency options and foreign
currency futures contracts and related options (see "Derivative Instruments"),
and may engage in foreign currency transactions either on a spot (cash) basis at
the rate prevailing in the currency exchange market at the time or through
forward currency contracts ("forwards") with terms generally of less than one
year. Portfolios may engage in these transactions in order to protect against
uncertainty in the level of future foreign exchange rates in the purchase and
sale of securities. The Portfolios may also use foreign currency options and
foreign currency forward contracts to increase exposure to a foreign currency or
to shift exposure to foreign currency fluctuations from one country to another.
The Portfolios also may invest in foreign currency exchange-related
securities, such as foreign currency warrants and other instruments whose return
is linked to foreign currency exchange rates. As a non-fundamental, operating
policy, the Adviser intends to use foreign currency-related derivative
instruments (currency futures and related options, currency options, forward
contracts and swap agreements) in an effort to hedge foreign currency risk with
respect to at least 75% of the assets of the Fixed Income Portfolios (other than
the PIMCO Global Bond and Emerging Markets Bond Portfolios) denominated in
currencies other than the U.S. dollar. There is no assurance that the Adviser
will be successful in doing so. The active use of currency derivatives involves
transaction costs which may adversely effect yield and return. For a description
of these instruments, see "Derivative Instruments" below.
A forward involves an obligation to purchase or sell a specific currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts may be bought or sold to protect a Portfolio against a possible
loss resulting from an adverse change in the relationship between foreign
currencies and the U.S. dollar or to increase exposure to a particular foreign
currency. A Portfolio may use one currency (or a basket of currencies) to hedge
against adverse changes in the value of another currency (or a basket of
currencies) when exchange rates between the two currencies are positively
correlated. By entering into a forward foreign currency exchange contract, the
Portfolio "locks in" the exchange rate between the currency it will deliver and
the currency it will receive for the duration of the contract. As a result, a
Portfolio reduces its exposure to changes in the value of the currency it will
deliver and increases its exposure to changes in the value of the currency it
will exchange into. Open positions in forwards used for non-hedging purposes
will be covered by the segregation with the Trust's custodian of assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, and are marked to market daily. Although forwards are
intended to minimize the risk of loss due to a decline in the value of the
hedged currencies, at the same time, they tend to limit any potential gain which
might result should the value of such currencies increase. Forwards will be used
primarily to adjust the foreign exchange exposure of each Portfolio with a view
to protecting the outlook, and the Portfolios might be expected to enter into
such contracts under the following circumstances:
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Lock In. When the Adviser desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
Cross Hedge. If a particular currency is expected to decrease against
another currency, a Portfolio may sell the currency expected to decrease and
purchase a currency which is expected to increase against the currency sold in
an amount approximately equal to some or all of the Portfolio's portfolio
holdings denominated in the currency sold.
Direct Hedge. If the Adviser wants to a eliminate substantially all of the
risk of owning a particular currency, and/or if the Adviser thinks that a
Portfolio can benefit from price appreciation in a given country's bonds but
does not want to hold the currency, it may employ a direct hedge back into the
U.S. dollar. In either case, a Portfolio would enter into a forward contract to
sell the currency in which a portfolio security is denominated and purchase U.S.
dollars at an exchange rate established at the time it initiated the contract.
The cost of the direct hedge transaction may offset most, if not all, of the
yield advantage offered by the foreign security, but a Portfolio would hope to
benefit from an increase (if any) in value of the bond.
Proxy Hedge. The Adviser might choose to use a proxy hedge, which may be
less costly than a direct hedge. In this case, a Portfolio, having purchased a
security, will sell a currency whose value is believed to be closely linked to
the currency in which the security is denominated. Interest rates prevailing in
the country whose currency was sold would be expected to be closer to those in
the U.S. and lower than those of securities denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge
because it is dependent on a stable relationship between the two currencies
paired as proxies and the relationships can be very unstable at times.
Costs of Hedging. When a Portfolio purchases a foreign bond with a higher
interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially reduced or lost if
the Portfolio were to enter into a direct hedge by selling the foreign currency
and purchasing the U.S. dollar. This is what is known as the "cost" of hedging.
Proxy hedging attempts to reduce this cost through an indirect hedge back to the
U.S. dollar.
It is important to note that hedging costs are treated as capital
transactions and are not, therefore, deducted from a Portfolio's dividend
distribution and are not reflected in its yield. Instead such costs will, over
time, be reflected in a Portfolio's net asset value per share.
Tax Consequences of Hedging. Under applicable tax law, the Portfolios may
be required to limit their gains from hedging in foreign currency forwards,
futures, and options. Although the Portfolios are expected to comply with such
limits, the extent to which these limits apply is subject to tax regulations as
yet unissued. Hedging may also result in the application of the marked-to-market
and straddle provisions of the Internal Revenue Code. Those provisions could
result in an increase (or decrease) in the amount of taxable dividends paid by
the Portfolios and could affect whether dividends paid by the Portfolios are
classified as capital gains or ordinary income.
Foreign Currency Exchange-Related Securities
Foreign currency warrants. Foreign currency warrants such as Currency
Exchange WarrantsSM ("CEWsSM") are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
<PAGE>
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal exchange rate linked securities. Principal exchange rate linked
securities ("PERLsSM") are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance indexed paper. Performance indexed paper ("PIPsSM") is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
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Bank Obligations
Bank obligations in which the Portfolios may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Portfolio will not
invest in fixed time deposits which (1) are not subject to prepayment or (2)
provide for withdrawal penalties upon prepayment (other than overnight deposits)
if, in the aggregate, more than 15% of its net assets (10% in the case of the
PIMCO Money Market Portfolio) would be invested in such deposits, repurchase
agreements maturing in more than seven days and other illiquid assets.
Each Portfolio limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A
Portfolio also may invest in certificates of deposit of savings and loan
associations (federally or state chartered and federally insured) having total
assets in excess of $1 billion.
Each Portfolio (except the PIMCO Money Market and High Yield Bond
Portfolios) limits its investments in foreign bank obligations to United States
dollar- or foreign currency-denominated obligations of foreign banks (including
United States branches of foreign banks) which at the time of investment (i)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (ii) in terms of assets are among the 75 largest foreign banks in the
world; (iii) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (iv) in the opinion of the
Adviser, are of an investment quality comparable to obligations of United States
banks in which the Portfolios may invest. The PIMCO Money Market and High Yield
Bond Portfolios may invest in the same types of bank obligations as the other
Portfolios, but they must be U.S. dollar-denominated. Subject to the Trust's
limitation on concentration of no more than 25% of its assets in the securities
of issuers in a particular industry, there is no limitation on the amount of a
Portfolio's assets which may be invested in obligations of foreign banks which
meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any U.S.
Government agency or instrumentality.
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Loan Participations
Each Portfolio may purchase participations in commercial loans. Such
indebtedness may be secured or unsecured. Loan participations typically
represent direct participation in a loan to a corporate borrower, and generally
are offered by banks or other financial institutions or lending syndicates. When
purchasing loan participations, a Portfolio assumes the credit risk associated
with the corporate borrower and may assume the credit risk associated with an
interposed bank or other financial intermediary. The participation interests in
which a Portfolio intends to invest may not be rated by any nationally
recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Portfolio has direct recourse against the corporate borrower,
the Portfolio may have to rely on the agent bank or other financial intermediary
to apply appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated in
the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of a Portfolio were determined to
be subject to the claims of the agent bank's general creditors, the Portfolio
might incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the corporate borrower for payment of principal and
interest. If a Portfolio does not receive scheduled interest or principal
payments on such indebtedness, the Portfolio's share price and yield could be
adversely affected. Loans that are fully secured offer a Portfolio more
protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.
The Portfolios may invest in loan participations with credit quality
comparable to that of issuers of its securities investments. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, a Portfolio bears
a substantial risk of losing the entire amount invested.
Each Portfolio limits the amount of its total assets that it will invest in
any one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, a Portfolio generally will treat
the corporate borrower as the "issuer" of indebtedness held by the Portfolio. In
the case of loan participations where a bank or other lending institution serves
as a financial intermediary between a Portfolio and the corporate borrower, if
the participation does not shift to the Portfolio the direct debtor-creditor
relationship with the corporate borrower, Securities and Exchange Commission
("SEC") interpretations require the Portfolio to treat both the lending bank or
other lending institution and the corporate borrower as "issuers" for the
purposes of determining whether the Portfolio has invested more than 5% of its
total assets in a single issuer. Treating a financial intermediary as an issuer
of indebtedness may restrict a Portfolios' ability to invest in indebtedness
related to a single financial intermediary, or a group of intermediaries engaged
in the same industry, even if the underlying borrowers represent many different
companies and industries.
<PAGE>
Loans and other types of direct indebtedness may not be readily marketable
and may be subject to restrictions on resale. In some cases, negotiations
involved in disposing of indebtedness may require weeks to complete.
Consequently, some indebtedness may be difficult or impossible to dispose of
readily at what the Adviser believes to be a fair price. In addition, valuation
of illiquid indebtedness involves a greater degree of judgment in determining a
Portfolio's net asset value than if that value were based on available market
quotations, and could result in significant variations in the Portfolio's daily
share price. At the same time, some loan interests are traded among certain
financial institutions and accordingly may be deemed liquid. As the market for
different types of indebtedness develops, the liquidity of these instruments is
expected to improve. In addition, the Portfolios currently intend to treat
indebtedness for which there is no readily available market as illiquid for
purposes of the Portfolios' limitation on illiquid investments.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Portfolios. For example, if a loan is foreclosed, a Portfolio could become
part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, a Portfolio
could be held liable as co-lender. It is unclear whether loans and other forms
of direct indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, the
Portfolios rely on the Adviser's research in an attempt to avoid situations
where fraud or misrepresentation could adversely affect the Portfolios.
Short Sales
Each of the Portfolios except for the PIMCO High Yield Bond Portfolio may
make short sales of securities as part of their overall portfolio management
strategies involving the use of derivative instruments and to offset potential
declines in long positions in similar securities. A short sale (other than a
short sale "against the box") is a transaction in which a Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline.
When a Portfolio makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Portfolio may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of the
short sale and the time and the Portfolio replaces the borrowed security, the
Portfolio will incur a loss; conversely, if the price declines, the Portfolio
will realize a capital gain. Any gain will be decreased, and any loss increased,
by the transaction costs described above. The successful use of short selling
may be adversely affected by imperfect correlation between movements in the
price of the security sold short and the securities being hedged.
To the extent that a Portfolio engages in short sales, it will provide
collateral to the broker-dealer and (except in the case of short sales "against
the box") will maintain additional asset coverage in the form of assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in a segregated account. Each Portfolio does not
intend to enter into short sales (other than those "against the box") if
immediately after such sale the aggregate of the value of all collateral plus
the amount in such segregated account exceeds one-third of the value of the
Portfolio's net assets. This percentage may be varied by action of the Trustees.
A short sale is "against the box" to the extent that the Portfolio
contemporaneously owns, or has the right to obtain at no added cost, securities
identical to those sold short. The Portfolios will engage in short selling to
the extent permitted by the 1940 Act and rules and interpretations thereunder.
<PAGE>
Repurchase Agreements
For the purpose of achieving income, each of the Portfolios may enter into
repurchase agreements, which entail the purchase of a portfolio-eligible
security from a bank or broker-dealer that agrees to repurchase the security at
the Portfolio's cost plus interest within a specified time (normally one day).
If the party agreeing to repurchase should default, as a result of bankruptcy or
otherwise, the Portfolio will seek to sell the securities which it holds, which
action could involve procedural costs or delays in addition to a loss on the
securities if their value should fall below their repurchase price. No Portfolio
will invest more than 15% of its net assets (10% in the case of the PIMCO Money
Market Portfolio) (taken at current market value) in repurchase agreements
maturing in more than seven days.
Reverse Repurchase Agreements, Dollar Rolls and Sale-Buybacks
A reverse repurchase agreement involves the sale of a security by a
Portfolio and its agreement to repurchase the instrument at a specified time and
price. Under a reverse repurchase agreement, the Portfolio continues to receive
any principal and interest payments on the underlying security during the term
of the agreement. The Portfolio generally will maintain a segregated account
consisting of assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, equal (on a daily
mark-to-market basis) to its obligations under reverse repurchase agreements, to
cover its obligations under reverse repurchase agreements and, to this extent, a
reverse repurchase agreement (or economically similar transaction) will not be
considered a "senior security" subject to the 300% asset coverage requirements
otherwise applicable to borrowings by a Portfolio. However, reverse repurchase
agreements involve the risk that the market value of securities retained by the
Portfolio may decline below the repurchase price of the securities sold by the
Portfolio which it is obligated to repurchase.
A Portfolio may enter into dollar rolls, in which the Portfolio sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date. In a "mortgage dollar roll" transaction a Portfolio sells
a mortgage-related security, such as a security issued by the Government
National Mortgage Association ("GNMA"), to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the future at a
pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase
agreement, as a collateralized borrowing in which a Portfolio pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which a Portfolio enters into a
dollar roll transaction is not obligated to return the same securities as those
originally sold by the Portfolio, but only securities which are "substantially
identical." To be considered "substantially identical," the securities returned
to a Portfolio generally must: (1) be collateralized by the same types of
underlying mortgages; (2) be issued by the same agency and be part of the same
program; (3) have a similar original stated maturity; (4) have identical net
coupon rates; (5) have similar market yields (and therefore price); and (6)
satisfy "good delivery" requirements, meaning that the aggregate principal
amounts of the securities delivered and received back must be within 2.5% of the
initial amount delivered.
A Portfolio's obligations under a dollar roll agreement must be covered by
liquid assets equal in value to the securities subject to repurchase by the
Portfolio, maintained in a segregated account. As with reverse repurchase
agreements, to the extent that positions in dollar roll agreements are not
covered through the maintenance of a segregated account consisting of liquid
assets at least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Portfolios' limitations on borrowings.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to a Portfolio's overall limitations on investments in illiquid
securities. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
<PAGE>
A Portfolio also may effect simultaneous purchase and sale transactions
that are known as "sale-buybacks". A sale-buyback is similar to a reverse
repurchase agreement, except that in a sale-buyback, the counterparty who
purchases the security is entitled to receive any principal or interest payments
make on the underlying security pending settlement of the Portfolio's repurchase
of the underlying security. A Portfolio's obligations under a sale-buyback
typically would be offset by liquid assets equal in value to the amount of the
Portfolio's forward commitment to repurchase the subject security.
To the extent that positions in reverse repurchase agreements, dollar
rolls, sale-buybacks or similar transactions are not covered through the
maintenance of a segregated account consisting of liquid assets at least equal
to the amount of any forward purchase commitment, such transactions would be
subject to the Portfolios' limitations on borrowings, which would restrict the
aggregate of such transactions (plus any other borrowings) to 33 1/3% of a
Portfolio's total assets.
Loans of Portfolio Securities
For the purpose of achieving income, the Portfolios may lend their
portfolio securities to brokers, dealers, and other financial institutions,
provided: (i) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash or cash equivalents maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned; (ii) the Portfolio may at any time call the loan and
obtain the return of the securities loaned; (iii) the Portfolio will receive any
interest or dividends paid on the loaned securities; and (iv) the aggregate
market value of securities loaned will not at any time exceed 33 1/3% of the
total assets of the Portfolio. Each Portfolio's performance will continue to
reflect changes in the value of the securities loaned and will also reflect the
receipt of either interest through investment of cash collateral by the
Portfolio in permissible investments, or a fee, if the collateral is U.S.
Government securities. Securities lending involves the risk of loss of rights in
the collateral or delay in recovery of the collateral should the borrower fail
to return the securities loaned or become insolvent. The Portfolios may pay
lending fees to the party arranging the loan.
When-Issued, Delayed Delivery, and Forward Commitment Transactions
Each of the Portfolios may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis. These transactions involve a
commitment by the Portfolio to purchase or sell securities for a predetermined
price or yield, with payment and delivery taking place more than seven days in
the future, or after a period longer than the customary settlement period for
that type of security. When such purchases are outstanding, the Portfolio will
set aside and maintain until the settlement date in a segregated account assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in an amount sufficient to meet the purchase price.
Typically, no income accrues on securities a Portfolio has committed to purchase
prior to the time delivery of the securities is made, although a Portfolio may
earn income on securities it has deposited in a segregated account. When
purchasing a security on a when-issued, delayed delivery, or forward commitment
basis, the Portfolio assumes the rights and risks of ownership of the security,
including the risk of price and yield fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the Portfolio is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Portfolio's other investments. If the
Portfolio remains substantially fully invested at a time when when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage. When the Portfolio has sold a security on a
when-issued, delayed delivery, or forward commitment basis, the Portfolio does
not participate in future gains or losses with respect to the security. If the
other party to a transaction fails to deliver or pay for the securities, the
Portfolio could miss a favorable price or yield opportunity or could suffer a
loss. A Portfolio may dispose of or renegotiate a transaction after it is
entered into, and may sell when-issued or forward commitment securities before
they are delivered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Portfolios may purchase or sell
securities on a when-issued, delayed delivery, or forward commitment basis.
<PAGE>
Derivative Instruments
The Portfolios consider derivative instruments to consist of securities or
other instruments whose value is derived from or related to the value of some
other instrument or asset, and not to include those securities whose payment of
principal and/or interest depends upon cash flows from underlying assets, such
as mortgage-related or asset-backed securities. In pursuing their individual
objectives the Portfolios (except the PIMCO Money Market Portfolio) may, to the
extent permitted by their investment objectives and policies, purchase and sell
(write) both put options and call options on securities, securities indexes, and
foreign currencies, and enter into interest rate, foreign currency and index
futures contracts and purchase and sell options on such futures contracts
("futures options") for hedging purposes, except that those Portfolios that may
not invest in foreign currency-denominated securities may not enter into
transactions involving currency futures or options. The Portfolios also may
purchase and sell foreign currency options for purposes of increasing exposure
to a foreign currency or to shift exposure to foreign currency fluctuations from
one country to another. The Portfolios also may enter into swap agreements with
respect to foreign currencies, interest rates and indexes of securities. The
Portfolios may invest in structured notes. If other types of financial
instruments, including other types of options, futures contracts, or futures
options are traded in the future, a Portfolio may also use those instruments,
provided that the Trustees determine that their use is consistent with the
Portfolio's investment objective. The Portfolios might not employ any of the
strategies described below, and no assurance can be given that any strategy used
will succeed. If the Adviser incorrectly forecasts interest rates, market values
or other economic factors in utilizing a derivatives strategy for a Portfolio,
the Portfolio might have been in a better position if it had not entered into
the transaction at all. Each Portfolio will maintain a segregated account
consisting of assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its obligations
under options, futures, and swaps to limit leveraging of the Portfolio.
The use of these strategies involves certain special risks, including a
possible imperfect correlation, or even no correlation, between price movements
of derivative instruments and price movements of related investments. While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in related investments or otherwise due to the
possible inability of a Portfolio to purchase or sell a portfolio security at a
time that otherwise would be favorable, or the possible need to sell a portfolio
security at a disadvantageous time because the Portfolio is required to maintain
asset coverage or offsetting positions in connection with transactions in
derivative instruments, and the possible inability of a Portfolio to close out
or to liquidate its derivatives positions.
Options on Securities and Indexes. A Portfolio may purchase and sell both
put and call options on fixed income or other securities or indexes in
standardized contracts traded on foreign or domestic securities exchanges,
boards of trade, or similar entities, or quoted on NASDAQ or on a regulated
foreign over-the-counter market, and agreements, sometimes called cash puts,
which may accompany the purchase of a new issue of bonds from a dealer. One
purpose of purchasing put options is to protect holdings in an underlying or
related security against a substantial decline in market value, while a purpose
of purchasing call options is to protect against substantial increases in prices
of securities the Portfolio intends to purchase pending its ability to invest in
such securities in an orderly manner. A Portfolio may sell put or call options
it has previously purchased, which could result in a net gain or loss depending
on whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the put or call option which is sold.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
<PAGE>
A Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or other assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in such amount are placed in a segregated account by
its custodian) upon conversion or exchange of other securities held by the
Portfolio. For a call option on an index, the option is covered if the Portfolio
maintains with its custodian assets determined to be liquid by the Adviser in
accordance with procedures established by the Board of Trustees, in an amount
equal to the contract value of the index. A call option is also covered if the
Portfolio holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the Portfolio in assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in a segregated account with its custodian. A put
option on a security or an index is "covered" if the Portfolio maintains assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, equal to the exercise price in a segregated account
with its custodian. A put option is also covered if the Portfolio holds a put on
the same security or index as the put written where the exercise price of the
put held is (i) equal to or greater than the exercise price of the put written,
or (ii) less than the exercise price of the put written, provided the difference
is maintained by the Portfolio in assets determined to be liquid by the Adviser
in accordance with procedures established by the Board of Trustees, in a
segregated account with its custodian.
If an option written by a Portfolio expires unexercised, the Portfolio
realizes a capital gain equal to the premium received at the time the option was
written. If an option purchased by a Portfolio expires unexercised, the
Portfolio realizes a capital loss equal to the premium paid. Prior to the
earlier of exercise or expiration, an exchange traded option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Portfolio will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Portfolio will realize a capital gain or, if it is
less, the Portfolio will realize a capital loss. The principal factors affecting
the market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
The Portfolios may write covered straddles consisting of a combination of a
call and a put written on the same underlying security. A straddle will be
covered when sufficient assets are deposited to meet the Portfolios' immediate
obligations. The Portfolios may use the same liquid assets to cover both the
call and put options where the exercise price of the call and put are the same,
or the exercise price of the call is higher than that of the put. In such cases,
the Portfolios will also segregate liquid assets equivalent to the amount, if
any, by which the put is "in the money."
Risks Associated with Options on Securities and Indexes. There are
several risks associated with transactions in options on securities and on
indexes. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
<PAGE>
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless. If a
Portfolio were unable to close out a covered call option that it had written on
a security, it would not be able to sell the underlying security unless the
option expired without exercise. As the writer of a covered call option, a
Portfolio forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above the
sum of the premium and the exercise price of the call, but, as long as its
obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline. If a put or call option purchased by the
Portfolio is not sold when it has remaining value, and if the market price of
the underlying security remains equal to or greater than the exercise price (in
the case of a put), or remains less than or equal to the exercise price (in the
case of a call), the Portfolio will lose its entire investment in the option.
Also, where a put or call option on a particular security is purchased to hedge
against price movements in a related security, the price of the put or call
option may move more or less than the price of the related security.
If trading were suspended in an option purchased by a Portfolio, the
Portfolio would not be able to close out the option. If restrictions on exercise
were imposed, the Portfolio might be unable to exercise an option it has
purchased. Except to the extent that a call option on an index written by the
Portfolio is covered by an option on the same index purchased by the Portfolio,
movements in the index may result in a loss to the Portfolio; however, such
losses may be mitigated by changes in the value of the Portfolio's securities
during the period the option was outstanding.
Foreign Currency Options. A Portfolio that invests in foreign currency
denominated securities may buy or sell put and call options on foreign
currencies either on exchanges or in the over-the-counter market for purposes of
increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. A put option on a foreign
currency gives the purchaser of the option the right to sell a foreign currency
at the exercise price until the option expires. A call option on a foreign
currency gives the purchaser of the option the right to purchase the currency at
the exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Portfolio to reduce foreign currency risk using such options. Over-the-counter
options in which certain Portfolios invest differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller, and generally do not have as much market liquidity as
exchange-traded options. The Portfolios may be required to treat as illiquid
over-the-counter options purchased and securities being used to cover certain
written over-the-counter options.
Futures Contracts and Options on Futures Contracts. Each of the Fixed
Income Portfolios (except the PIMCO Money Market Portfolio) may invest in
interest rate futures contracts and options thereon ("futures options"), and to
the extent it may invest in foreign currency-denominated securities, may also
invest in foreign currency futures contracts and options thereon. The PIMCO
StocksPLUS Growth and Income Portfolio and the PIMCO Strategic Balanced
Portfolio may invest in interest rate, stock index and foreign currency futures
contracts and options thereon.
<PAGE>
An interest rate, foreign currency or index futures contract provides for
the future sale by one party and purchase by another party of a specified
quantity of a financial instrument, foreign currency or the cash value of an
index at a specified price and time. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including: the S&P 500; the S&P Midcap 400; the Nikkei 300; the Nikkei 225; the
Hang Send Index; the TSE 300 Composite Index; the TSE 100 Index; the Financial
Times-Stock Exchange 100 Index; The Financial Times Mid-250 Index; the CAC 40
Index; the IBEX-35 Stock Index; the DAX Stock Index; the MIB Index; the NYSE
composite; U.S. Treasury bonds; German Government Bond; Italian Government Bond;
3-month Sterling Interest Rate; 3-month Eurodollar Interest Rate; 3-month
Euro-Deutsche Mark Interest Rate; 3-month Euro-Swiss Franc Interest Rate;
3-month Euro-Lira Interest Rate; Treasury notes; GNMA Certificates; three-month
U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit;
Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar;
the British pound; the German mark; the Japanese yen; the French franc; the
Swiss franc; the Mexican peso; and certain multinational currencies, such as the
European Currency Unit ("ECU"). It is expected that other futures contracts will
be developed and traded in the future.
A Portfolio may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission
("CFTC") under which the Trust and the Portfolios avoid being deemed a
"commodity pool" or a "commodity pool operator," each Portfolio intends
generally to limit its use of futures contracts and futures options to "bona
fide hedging" transactions, as such term is defined in applicable regulations,
interpretations and practice. For example, a Portfolio might use futures
contracts to hedge against anticipated changes in interest rates that might
adversely affect either the value of the Portfolio's securities or the price of
the securities which the Portfolio intends to purchase. A Portfolio's hedging
activities may include sales of futures contracts as an offset against the
effect of expected increases in interest rates, and purchases of futures
contracts as an offset against the effect of expected declines in interest
rates. Although other techniques could be used to reduce that Portfolio's
exposure to interest rate fluctuations, the Portfolio may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures contracts
and futures options.
A Portfolio will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of assets determined to be liquid by the Adviser
in accordance with procedures established by the Board of Trustees ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. Margin requirements on foreign exchanges may be different than U.S.
exchanges. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by a Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Portfolio
pays or receives cash, called "variation margin," equal to the daily change in
value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by a Portfolio but is
instead a settlement between the Portfolio and the broker of the amount one
would owe the other if the futures contract expired. In computing daily net
asset value, each Portfolio will mark to market its open futures positions.
<PAGE>
A Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
The Portfolios may write covered straddles consisting of a call and a put
written on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Portfolios' immediate obligations. A
Portfolio may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, the Portfolios will
also segregate liquid assets equivalent to the amount, if any, by which the put
is "in the money."
Limitations on Use of Futures and Futures Options. In general, the
Portfolios intend to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
a Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's net assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, a Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, that, when added to the amounts deposited with a futures commission
merchant as margin, are equal to the market value of the futures contract.
Alternatively, the Portfolio may "cover" its position by purchasing a put option
on the same futures contract with a strike price as high or higher than the
price of the contract held by the Portfolio.
When selling a futures contract, a Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, that are equal to the market value of the instruments underlying the
contract. Alternatively, the Portfolio may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to that of the
index on which the futures contract is based), or by holding a call option
permitting the Portfolio to purchase the same futures contract at a price no
higher than the price of the contract written by the Portfolio (or at a higher
price if the difference is maintained in liquid assets with the Trust's
custodian).
When selling a call option on a futures contract, a Portfolio will maintain
with its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that, when added to the amounts deposited with a futures commission
merchant as margin, equal the total market value of the futures contract
underlying the call option. Alternatively, the Portfolio may cover its position
by entering into a long position in the same futures contract at a price no
higher than the strike price of the call option, by owning the instruments
underlying the futures contract, or by holding a separate call option permitting
the Portfolio to purchase the same futures contract at a price not higher than
the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, a Portfolio will maintain
with its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the Portfolio may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Portfolio.
<PAGE>
To the extent that securities with maturities greater than one year are
used to establish and maintain segregated accounts to cover a Portfolio's
obligations under futures contracts and related options, such use will not
eliminate the risk of a form of leverage, which may tend to exaggerate the
effect on net asset value of any increase or decrease in the market value of a
Portfolio's portfolio, and may require liquidation of portfolio positions when
it is not advantageous to do so. However, any potential risk of leverage
resulting from the use of securities with maturities greater than one year may
be mitigated by the overall duration limit on a Portfolio's portfolio
securities. Thus, the use of a longer-term security may require a Portfolio to
hold offsetting short-term securities to balance the Portfolio's portfolio such
that the Portfolio's duration does not exceed the maximum permitted for the
Portfolio in the Prospectus.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Portfolio may enter into futures, futures
options or forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Portfolio securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. An incorrect correlation could result in a loss on
both the hedged securities in a Portfolio and the hedging vehicle so that the
portfolio return might have been greater had hedging not been attempted. A
decision as to whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
<PAGE>
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Lack of a liquid market for any reason may prevent a Portfolio from liquidating
an unfavorable position.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts, and Forward Currency Exchange Contracts and Options Thereon.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Trust's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
Swap Agreements. The Portfolios may enter into interest rate, index and
currency exchange rate swap agreements. These transactions are entered into in a
attempt to obtain a particular return when it is considered desirable to do so,
possibly at a lower cost to the Portfolio than if the Portfolio had invested
directly in an instrument that yielded that desired return. Swap agreements are
two party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments, which may be adjusted for an interest factor. The gross returns to
be exchanged or "swapped" between the parties are generally calculated with
respect to a "notional amount," i.e., the return on or increase in value of a
particular dollar amount invested at a particular interest rate, in a particular
foreign currency, or in a "basket" of securities representing a particular
index. Forms of swap agreements include interest rate caps, under which, in
return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap"; interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified rate, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Portfolios would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Portfolio's current obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Portfolio's current obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, to avoid any potential leveraging of the Portfolio's
portfolio. Obligations under swap agreements so covered will not be construed to
be "senior securities" for purposes of the Portfolio's investment restriction
concerning senior securities. A Portfolio will not enter into a swap agreement
with any single party if the net amount owed or to be received under existing
contracts with that party would exceed 5% of the Portfolio's assets.
<PAGE>
Whether a Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the Adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Portfolio bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. The
Portfolios will enter into swap agreements only with counterparties that meet
certain standards of creditworthiness (generally, such counterparties would have
to be eligible counterparties under the terms of the Portfolios' repurchase
agreement guidelines). Certain restrictions imposed on the Portfolios by the
Internal Revenue Code may limit the Portfolios' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Portfolio's ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which includes the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Portfolio invests in these
securities, however, the Adviser analyzes these securities in its overall
assessment of the effective duration of the Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Warrants to Purchase Securities
The Portfolios may invest in or acquire warrants to purchase equity or
fixed income securities. Bonds with warrants attached to purchase equity
securities have many characteristics of convertible bonds and their prices may,
to some degree, reflect the performance of the underlying stock. Bonds also may
be issued with warrants attached to purchase additional fixed income securities
at the same coupon rate. A decline in interest rates would permit a Portfolio to
buy additional bonds at the favorable rate or to sell the warrants at a profit.
If interest rates rise, the warrants would generally expire with no value.
<PAGE>
Hybrid Instruments
A hybrid instrument can combine the characteristics of securities, futures,
and options. For example, the principal amount or interest rate of a hybrid
could be tied (positively or negatively) to the price of some commodity,
currency or securities index or another interest rate (each a "benchmark"). The
interest rate or (unlike most fixed income securities) the principal amount
payable at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and increased
total return. Hybrids may not bear interest or pay dividends. The value of a
hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the
benchmark. These benchmarks may be sensitive to economic and political events,
such as commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the redemption
value of a hybrid could be zero. Thus, an investment in a hybrid may entail
significant market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal amount and
pays a fixed rate or floating rate of interest. The purchase of hybrids also
exposes a Portfolio to the credit risk of the issuer of the hybrids. These risks
may cause significant fluctuations in the net asset value of the Portfolio.
Accordingly, no Portfolio will invest more than 5% of its assets in hybrid
instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Portfolios' investments in these products will be subject to limits applicable
to investments in investment companies and may be subject to restrictions
contained in the 1940 Act.
Investment in Investment Companies
Each of the Portfolios may invest in securities of other investment
companies, such as closed-end management investment companies, or in pooled
accounts or other investment vehicles. As a shareholder of an investment
company, a Portfolio may indirectly bear service and other fees which are in
addition to the fees the Portfolio pays its service providers.
Illiquid Securities
The Portfolios may invest up to 15% of their net assets in illiquid
securities (10% in the case of the PIMCO Money Market Portfolio). The term
"illiquid securities" for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which a Portfolio has valued the securities. Illiquid securities are
considered to include, among other things, written over-the-counter options,
securities or other liquid assets being used as cover for such options,
repurchase agreements with maturities in excess of seven days, certain loan
participation interests, fixed time deposits which are not subject to prepayment
or provide for withdrawal penalties upon prepayment (other than overnight
deposits), and other securities which legally or in the Adviser's opinion may be
deemed illiquid (not including securities issued pursuant to Rule 144A under the
1933 Act and certain commercial paper that the Adviser has determined to be
liquid under procedures approved by the Board of Trustees).
Illiquid securities may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities laws.
Although certain of these securities may be readily sold, for example, under
Rule 144A, others may be illiquid, and their sale may involve substantial delays
and additional costs.
<PAGE>
Certain illiquid securities may require pricing at fair value as determined
in good faith under the supervision of the Board of Trustees. The Adviser may be
subject to significant delays in disposing of illiquid securities, and
transactions in illiquid securities may entail registration expenses and other
transaction costs that are higher than those for transactions in liquid
securities.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Each Portfolio's investment objective as set forth in the Prospectus under
the heading "Description of Portfolios" for each such Portfolio, together with
the investment restrictions set forth below, are fundamental policies of the
Portfolio and may not be changed with respect to a Portfolio without shareholder
approval by vote of a majority of the outstanding shares of that Portfolio.
Under these restrictions a Portfolio may not:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply (a) to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase agreements
with respect thereto) and (b) with respect to the Money Market Portfolio, to
securities or obligations issued by U.S. banks;
(2) with respect to 75% of its assets, invest in a security if, as a result
of such investment, more than 5% of its total assets (taken at market value at
the time of such investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (This
investment restriction is not applicable to the Foreign Bond Portfolio, the
Global Bond Portfolio, or the Emerging Markets Bond Portfolio.);
(3) with respect to 75% of its assets, invest in a security if, as a result
of such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer (This
restriction is not applicable to the Foreign Bond Portfolio, the Global Bond
Portfolio or the Emerging Markets Bond Portfolio.);
(4) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein;
(5) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit a Portfolio, subject to
restrictions described in the Prospectus and elsewhere in this Statement of
Additional Information, from purchasing, selling or entering into futures
contracts, options on futures contracts, foreign currency forward contracts,
foreign currency options, or any interest rate, securities-related or foreign
currency-related hedging instrument, including swap agreements and other
derivative instruments, subject to compliance with any applicable provisions of
the federal securities or commodities laws;
(6) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that a Portfolio may (i) borrow from banks or
enter into reverse repurchase agreements, or employ similar investment
techniques, but only if immediately after each borrowing there is asset coverage
of 300% and (ii) enter into transactions in options, futures, options on
futures, and other derivative instruments as described in the Prospectus and in
this Statement of Additional Information (the deposit of assets in escrow in
connection with the writing of covered put and call options and the purchase of
securities on a when-issued or delayed delivery basis, collateral arrangements
with respect to initial or variation margin deposits for futures contracts and
commitments entered into under swap agreements or other derivative instruments,
will not be deemed to be pledges of a Portfolio's assets);
<PAGE>
(7) lend any funds or other assets, except that a Portfolio may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans, (b) enter into repurchase agreements, and (c) lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets, provided such loans are made in accordance with applicable
guidelines established by the Securities and Exchange Commission and the
Trustees of the Trust;
(8) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
Non-Fundamental Investment Restrictions
Each Portfolio is also subject to the following non-fundamental
restrictions and policies (which may be changed without shareholder approval)
relating to the investment of its assets and activities. Unless otherwise
indicated, a Portfolio may not:
(A) invest more than 15% of the net assets of the Portfolio (10% in the
case of the PIMCO Money Market Portfolio) (taken at market value at the time of
the investment) in "illiquid securities," which include securities subject to
legal or contractual restrictions on resale (which may include private
placements), repurchase agreements maturing in more than seven days, certain
loan participation interests, fixed time deposits which are not subject to
prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), certain options traded over the counter that a Portfolio
has purchased, securities or other liquid assets being used to cover such
options a Portfolio has written, securities for which market quotations are not
readily available, or other securities which legally or in the Adviser's opinion
may be deemed illiquid (other than securities issued pursuant to Rule 144A under
the Securities Act of 1933 and certain commercial paper that PIMCO has
determined to be liquid under procedures approved by the Board of Trustees);
(B) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with covered transactions in options,
futures, options on futures and short positions;
In addition, the Trust has adopted a non-fundamental policy pursuant to
which each Portfolio that may invest in securities denominated in foreign
currencies, except the PIMCO Global Bond and PIMCO Emerging Markets Bond
Portfolios, will hedge at least 75% of its exposure to foreign currency using
the techniques described in the Prospectus and the Statement of Additional
Information. There can be no assurance that currency hedging techniques will be
successful.
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed. Notwithstanding
the provisions of fundamental investment restriction (6) above, a Portfolio may
borrow money for temporary administrative purposes. To the extent that
borrowings for temporary administrative purposes exceed 5% of the total assets
of a Portfolio, such excess shall be subject to the 300% asset coverage
requirement of that restriction.
To the extent a Portfolio covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the maintenance of a
segregated account consisting of assets determined to be liquid in accordance
with procedures adopted by the Trustees, equal in value to the amount of the
Portfolio's commitment to repurchase, such an agreement will not be considered a
"senior security" by the Portfolio and therefore will not be subject to the 300%
asset coverage requirement otherwise applicable to borrowings by the Portfolio.
<PAGE>
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated above and elsewhere in this Statement of Additional
Information) apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a security (or,
if unrated, deemed to be of comparable quality), or change in the percentage of
Portfolio assets invested in certain securities or other instruments, or change
in the average duration of a Portfolio's investment portfolio, resulting from
market fluctuations or other changes in a Portfolio's total assets will not
require a Portfolio to dispose of an investment until the Adviser determines
that it is practicable to sell or close out the investment without undue market
or tax consequences to the Portfolio. In the event that ratings services assign
different ratings to the same security, the Adviser will determine which rating
it believes best reflects the security's quality and risk at that time, which
may be the higher of the several assigned ratings.
MANAGEMENT OF THE TRUST
Trustees and Officers
The Trustees and Executive Officers of the Trust, their business address
and principal occupations during the past five years are as follows (unless
otherwise indicated, the address of all persons below is 840 Newport Center
Drive, Suite 360, Newport Beach, California 92660):
<TABLE>
<S> <C> <C>
Position Principal Occupation(s)
Name, Address and Age with the Trust During the Past Five Years
Brent R. Harris* Chairman of the Board Managing Director, PIMCO; Director, Harris
Age 38 and Trustee Holdings, Harris Oil Company; Chairman and
Trustee, PIMCO Funds: Pacific Investment
Management Series; Chairman and Director, PIMCO
Commercial Mortgage Securities Trust, Inc.
R. Wesley Burns* President and Trustee Executive Vice President, PIMCO; Trustee and
Age 38 President, PIMCO Funds: Pacific Investment
Management Series; Director and President, PIMCO
Commercial Mortgage Securities Trust, Inc.
Formerly Vice President, PIMCO.
Guilford C. Babcock Trustee Associate Professor of Finance, University of
1575 Circle Drive Southern California; Trustee, PIMCO Funds:
San Marino, California Pacific Investment Management Series; Director,
91108 PIMCO Commercial Mortgage Securities Trust,
Age 66 Inc.; Director, AMCAP Fund and Fundamental
Investors Fund of the Capital Group; Director,
Good Hope Medical Foundation.
Vern O. Curtis Trustee Private Investor; Director of 16 Real Estate
14158 N.W. Bronson Creek Drive Investment Trusts affiliated with Public
Portland, Oregon Storage, Inc.; Trustee, PIMCO Funds: Pacific
97229 Investment Management Series; Director, PIMCO
Age 63 Commercial Mortgage Securities Trust, Inc.
Formerly Charitable Work, The Church of Jesus
Christ of Latter Day Saints.
Thomas P. Kemp Trustee Co-Chairman, U.S. Committee to Assist Russian
1141 Marine Drive Reform; Director, Union Financial Corp.;
Laguna Beach, California Trustee, PIMCO Funds: Pacific Investment
92651 Management Series; Director, PIMCO Commercial
Age 67 Mortgage Securities Trust, Inc. Formerly Senior
Consultant, World Cup 1994 Organizing Committee;
Chairman and CEO of Coca Cola Bottling Company
of L.A.
<PAGE>
William J. Popejoy Trustee Director, California State Lottery; Chairman,
600 North 10th Street Western Vinyl Manufacturing; Partner, Butler
Sacramento, California Popejoy Group; Trustee, PIMCO Funds: Pacific
95814 Investment Management Series; Director, PIMCO
Age 59 Commercial Mortgage Securities Trust, Inc.
Formerly Chief Executive Officer, Orange County,
California; Principal, Castine Partners.
William H. Gross Senior Vice President Managing Director, PIMCO.
Age 53
Jeffrey M. Sargent Vice President Vice President and Manager of Pooled Funds
Age 34 Shareholder Servicing, PIMCO.
William S. Thompson, Jr. Vice President Chief Executive Officer and Managing Director,
Age 52 PIMCO. Formerly Managing Director, Salomon
Brothers, Inc.
John P. Hardaway Treasurer Vice President and Manager of Pooled Funds
Age 40 Operations, PIMCO.
Garlin G. Flynn Secretary Senior Portfolio Administrator, PIMCO. Formerly
Age 51 Senior Mutual Portfolio Analyst, PIMCO Advisors
Institutional Services; Senior Mutual Portfolio
Analyst, Pacific Financial Asset Management
Corporation.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Fund Taxation,
Age 33 PIMCO. Formerly Director of Financial
Reporting, Carl I. Brown & Co.; Tax Manager,
Price Waterhouse LLP.
Michael J. Willemsen Assistant Secretary Manager, PIMCO. Formerly Project Lead, PIMCO.
Age 37
- -------------------
*Mr. Harris and Mr. Burns are "interested persons" of the Trust (as that term is defined in the 1940
Act) because of their affiliations with PIMCO.
</TABLE>
<PAGE>
Compensation Table
For the fiscal year ending December 31, 1997, the Trust anticipates paying
the following compensation to the Trustees of the Trust:
<TABLE>
<S> <C> <C>
Aggregate Total Compensation from
Compensation Trust and Fund Complex
Name and Position from Trust1 Paid to Trustees2
Guilford C. Babcock $0 $60,250
Trustee
Vern O. Curtis $0 $61,750
Trustee
Thomas P. Kemp $0 $60,250
Trustee
William J. Popejoy $0 $60,250
Trustee
- --------------------
</TABLE>
1Each Trustee, other than those affiliated with the Adviser or its
affiliates will receive an annual retainer of $4,000 plus $1,500 for each Board
of Trustees meeting attended in person and $250 for each meeting attended
telephonically, plus reimbursement of related expenses. In addition, a Trustee
serving as a Committee Chair, other than those affiliated with the Adviser or
its affiliates, will receive an additional annual retainer of $500.
2Each Trustee also serves as a Director of PIMCO Commercial Mortgage
Securities Trust, Inc., a registered closed-end management investment company,
and as a Trustee of PIMCO Funds, a registered open-end management investment
company. For their services to PIMCO Commercial Mortgage Securities Trust, Inc.,
each Director who is unaffiliated with the Adviser or its affiliates receives an
annual retainer of $6,000 plus $1,000 for each Board of Directors meeting
attended and $500 for each Board of Directors meeting attended telephonically.
Each Trustee serving as a Committee Chair, other than those affiliated with the
Adviser or its affiliates, receives an annual retainer of $500. For their
services to PIMCO Funds, each Trustee, other than those affiliated with the
Adviser or its affiliates, receives an annual retainer of $45,000 plus $3,000
for each Board of Trustees meeting attended in person and $500 for each meeting
attended telephonically, plus reimbursement of related expenses. In addition, a
Trustee serving as a Committee Chair, other than those affiliated with the
Adviser or its affiliates, receives an additional annual retainer of $1,500.
Investment Adviser
PIMCO serves as investment adviser to the Portfolios pursuant to an
investment advisory contract ("Advisory Contract") between PIMCO and the Trust.
PIMCO is a subsidiary partnership of PIMCO Advisors. A majority interest of
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Investment Management Company, a California corporation and indirect
wholly owned subsidiary of Pacific Life Insurance Company ("Pacific Life"), and
PIMCO Partners, LLC ("PIMCO Partners"), a limited liability company controlled
by the PIMCO Managing Directors.
<PAGE>
PIMCO is responsible for making investment decisions and placing orders for
the purchase and sale of the Trust's investments directly with the issuers or
with brokers or dealers selected by it in its discretion. See "Portfolio
Transactions and Brokerage" below. PIMCO also furnishes to the Board of
Trustees, which has overall responsibility for the business and affairs of the
Trust, periodic reports on the investment performance of each Portfolio.
Under the terms of the Advisory Contract, PIMCO is obligated to manage the
Portfolios in accordance with applicable laws and regulations. The investment
advisory services of PIMCO to the Trust are not exclusive under the terms of the
Advisory Contract. PIMCO is free to, and does, render investment advisory
services to others. The Advisory Contract was approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Advisory
Contract or interested persons of such parties ("Independent Trustees"), at a
meeting held on August 26, 1997 and was approved by the shareholders of all
then-operational Portfolios on December 31, 1997.
Following the expiration of the two year period commencing with the
effectiveness of the Advisory Contract, it will continue in effect on a yearly
basis provided such continuance is approved annually (i) by the holders of a
majority of the outstanding voting securities of the Trust or by the Board of
Trustees and (ii) by a majority of the Independent Trustees. The Advisory
Contract may be terminated without penalty by vote of the Trustees or the
shareholders of the Trust, or by the Adviser, on 60 days' written notice by
either party to the contract and will terminate automatically if assigned.
The Adviser currently receives a monthly investment advisory fee from each
Portfolio at an annual rate based on average daily net assets of the Portfolios
as follows:
<TABLE>
<S> <C>
Advisory
Fee Rate
Portfolio
Money Market Portfolio............................................................0.30%
Short-Term Bond Portfolio.........................................................0.35
Low Duration Bond, Total Return Bond and StocksPLUS Growth and Income Portfolios..0.40
Strategic Balanced and High Yield Bond Portfolios.................................0.50
Global Bond and Foreign Bond Portfolios...........................................0.60
Emerging Markets Bond Portfolio...................................................0.65
</TABLE>
Administrator
PIMCO also serves as Administrator to the Portfolios pursuant to an
administration agreement dated December 31, 1997 (the "Administration
Agreement") which was approved by the Board of Trustees, including all of the
Independent Trustees, at a meeting held on August 26, 1997. PIMCO provides the
Portfolios with certain administrative and shareholder services necessary for
Portfolio operations and is responsible for the supervision of other Portfolio
service providers. PIMCO may in turn use the facilities or assistance of its
affiliates to provide certain services under the Administration Agreement, on
terms agreed between PIMCO and such affiliates. The administrative services
provided by PIMCO include but are not limited to: (1) shareholder servicing
functions, including preparation of reports and communications to shareholders
and other appropriate parties, (2) regulatory compliance, such as reports and
filings with the SEC and state securities commissions, and (3) general
supervision of the operations of the Portfolios, including coordination of the
services performed by the Portfolios' transfer agent, custodian, legal counsel,
independent accountants, and others. PIMCO (or an affiliate of PIMCO) also
furnishes the Portfolios with office space facilities required for conducting
the business of the Portfolios, and pays the compensation of those officers,
employees and Trustees of the Trust affiliated with PIMCO. In addition, PIMCO,
at its own expense, arranges for the provision of legal, audit, custody,
transfer agency and other services for the Portfolios, and is responsible for
the costs of registration of the Trust's shares and the printing of prospectuses
and reports for current shareholders and other appropriate parties. PIMCO has
contractually agreed to provide these services, and to bear these expenses, at
the following rates for each Portfolio (each expressed as a percentage of the
Portfolio's average daily net assets attributable to its classes of shares on an
annual basis):
<PAGE>
<TABLE>
<S> <C>
Administrative
Portfolio Fee Rate
Money Market Portfolio.................................................................0.20%
Short-Term Bond, Low Duration Bond, Total Return Bond,
StocksPLUS Growth and Income, Strategic Balanced and High Yield Bond Portfolios.....0.25
Global Bond and Foreign Bond Portfolios................................................0.30
Emerging Markets Bond Portfolio........................................................0.35
</TABLE>
Except for the expenses paid by PIMCO, the Trust bears all costs of its
operations. The Portfolios are responsible for: (i) salaries and other
compensation of any of the Trust's executive officers and employees who are not
officers, directors, stockholders, or employees of PIMCO or its subsidiaries or
affiliates; (ii) taxes and governmental fees; (iii) brokerage fees and
commissions and other portfolio transaction expenses; (iv) costs of borrowing
money, including interest expenses; (v) fees and expenses of the Trustees who
are not "interested persons" of PIMCO or the Trust, and any counsel retained
exclusively for their benefit; (vi) extraordinary expenses, including costs of
litigation and indemnification expenses; and (vii) expenses, such as
organizational expenses, which are capitalized in accordance with generally
accepted accounting principles.
The Administration Agreement may be terminated by the Trustees, or by a
vote of the outstanding voting securities of the Trust or Portfolio, as
applicable, at any time on 60 days' written notice. Following the expiration of
the two year period commencing with the effectiveness of the Agreement, the
Agreement may be terminated by PIMCO on 60 days' written notice. Following its
initial two-year term, the agreement will continue from year to year if approved
by the Trustees, including a majority of the Trust's Independent Trustees (as
that term is defined in the 1940 Act).
DISTRIBUTION OF TRUST SHARES
Distributor
PIMCO Funds Distribution Company (the "Distributor") serves as the
distributor of the Trust's shares pursuant to a distribution contract
("Distribution Contract") with the Trust which is subject to annual approval by
the Board. The Distributor is a wholly owned subsidiary of PIMCO Advisors. The
Distribution Contract is terminable with respect to a Portfolio or class without
penalty, at any time, by the Portfolio or class by not more than 60 days' nor
less than 30 days' written notice to the Distributor, or by the Distributor upon
not more than 60 days' nor less than 30 days' written notice to the Trust. The
Distributor is not obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect with respect to each
Portfolio for successive one-year periods, provided that each such continuance
is specifically approved (i) by the vote of a majority of the Trustees who are
not interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Distribution Contract; and (ii) by
the vote of a majority of the entire Board of Trustees cast in person at a
meeting called for that purpose. If the Distribution Contract is terminated (or
not renewed) with respect to one or more Portfolios, it may continue in effect
with respect to any Portfolio as to which it has not been terminated (or has
been renewed).
Purchases and Redemptions
Variable Contract Owners do not deal directly with the Portfolios to
purchase, redeem, or exchange shares, and Variable Contract Owners should refer
to the prospectus for the applicable Separate Account for information on the
allocation of premiums and on transfers of accumulated value among sub-accounts
of the Separate Accounts that invest in the Portfolios.
<PAGE>
Shares of a Portfolio may not be offered or sold in any state unless
qualified in that jurisdiction, unless an exemption from qualification is
available.
A shareholder may exchange shares of any Portfolio for shares of any other
Portfolio of the Trust on the basis of their respective net asset values. Orders
for exchanges accepted prior to the close of regular trading on the New York
Stock Exchange (the "Exchange") on any day the Trust is open for business will
be executed at the respective net asset values determined as of the close of
business that day.
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the Exchange is restricted, as determined by the
SEC, or that Exchange is closed for other than customary weekend and holiday
closings; (b) the SEC has by order permitted such suspension; or (c) an
emergency, as determined by the SEC, exists, making disposal of portfolio
securities or valuation of net assets of the Portfolio not reasonably
practicable.
Although the Trust will normally redeem all shares for cash, it may, in
unusual circumstances, redeem by payment in kind of securities held in the
Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved (including the
Trust). Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that two
or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in the
Adviser's opinion is equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
Brokerage and Research Services
There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions in
foreign securities generally involve the payment of fixed brokerage commissions,
which are generally higher than those in the United States.
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the relevant Portfolio and buys
and sells such securities, options and futures for the Trust through a
substantial number of brokers and dealers. In so doing, the Adviser uses its
best efforts to obtain for the Trust the most favorable price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions as described below. In seeking the most favorable price and
execution, the Adviser, having in mind the Trust's best interests, considers all
factors it deems relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions.
<PAGE>
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser receives research services from many broker-dealers with which the
Adviser places the Trust's portfolio transactions. These services, which in some
cases may also be purchased for cash, include such matters as general economic
and security market reviews, industry and company reviews, evaluations of
securities and recommendations as to the purchase and sale of securities. Some
of these services are of value to the Adviser in advising various of its clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fee paid by the Trust is not
reduced because the Adviser and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser may cause the Trust to pay a broker-dealer which provides "brokerage and
research services" (as defined in the Act) to the Adviser an amount of disclosed
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Portfolio Turnover
The Adviser manages the Portfolios without regard generally to restrictions
on portfolio turnover. See "Taxation" below. The use of certain derivative
instruments with relatively short maturities may tend to exaggerate the
portfolio turnover rate for some of the Portfolios. Trading in fixed income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. A Portfolio
with a higher rate of portfolio turnover will generally incur higher transaction
costs. The portfolio turnover rate for each of the following Portfolios
generally is not expected to exceed the indicated rate: PIMCO Short-Term Bond
Portfolio - 100%; PIMCO Low Duration Bond Portfolio - 250%; PIMCO High Yield
Bond Portfolio - 75%; PIMCO Total Return Bond Portfolio - 175%; PIMCO Foreign
Bond Portfolio - 1000%; PIMCO Global Bond Portfolio - 1000%; PIMCO Emerging
Markets Bond Portfolio - 1000%; PIMCO StocksPLUS Growth and Income Portfolio -
100%; and PIMCO Strategic Balanced Portfolio - 100%.
The portfolio turnover rate of a Portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by (b) the monthly average of the value of the portfolio securities
owned by the Portfolio during the particular fiscal year. In calculating the
rate of portfolio turnover, there is excluded from both (a) and (b) all
securities, including options, whose maturities or expiration dates at the time
of acquisition were one year or less. Proceeds from short sales and assets used
to cover short positions undertaken are included in the amounts of securities
sold and purchased, respectively, during the year.
NET ASSET VALUE
The net asset value per share of each Portfolio will be determined once on
each day that the New York Stock Exchange (the "Exchange") is open as of the
close of regular trading on the Exchange (ordinarily at 4:00 p.m. Eastern time.)
Net asset value will not be determined on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Portfolios
that invest in securities traded in foreign securities markets may trade such
securities on days when the Exchange is not open, and the net asset value per
share of these Portfolios may be affected significantly on days when investors
do not have access to the Portfolios.
<PAGE>
The net asset value per share of each Portfolio is determined by dividing
the total market value of a Portfolio's portfolio investments and other assets
attributable to that class, less any liabilities, by the number of total
outstanding shares of that class. Net asset value will not be determined on days
on which the Exchange is closed.
For all Portfolios other than the PIMCO Money Market Portfolio, portfolio
securities and other assets for which market quotations are readily available
are stated at market value. Market value is determined on the basis of last
reported sales prices, or if no sales are reported, as is the case for most
securities traded over-the- counter, at the mean between representative bid and
asked quotations obtained from a quotation reporting system or from established
market makers. Fixed income securities, including those to be purchased under
firm commitment agreements (other than obligations having a maturity of 60 days
or less), are normally valued on the basis of quotations obtained from brokers
and dealers or pricing services, which take into account appropriate factors
such as institutional-sized trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using foreign exchange quotations received from independent
dealers. Short-term investments having a maturity of 60 days or less are valued
at amortized cost, when the Board of Trustees determines that amortized cost is
their fair value. Certain fixed income securities for which daily market
quotations are not readily available may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to fixed income securities
whose prices are more readily obtainable and whose durations are comparable to
the securities being valued. Subject to the foregoing, other securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
The PIMCO Money Market Portfolio's securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During such periods the yield
to investors in the Portfolio may differ somewhat from that obtained in a
similar investment company which uses available market quotations to value all
of its portfolio securities.
The SEC's regulations require the PIMCO Money Market Portfolio to adhere to
certain conditions. The Trustees, as part of their responsibility within the
overall duty of care owed to the shareholders, are required to establish
procedures reasonably designed, taking into account current market conditions
and the Portfolio's investment objective, to stabilize the net asset value per
share as computed for the purpose of distribution and redemption at $1.00 per
share. The Trustees' procedures include a requirement to periodically monitor,
as appropriate and at such intervals as are reasonable in light of current
market conditions, the relationship between the amortized cost value per share
and the net asset value per share based upon available indications of market
value. The Trustees will consider what steps should be taken, if any, in the
event of a difference of more than 1/2 of 1% between the two. The Trustees will
take such steps as they consider appropriate, (e.g., selling securities to
shorten the average portfolio maturity) to minimize any material dilution or
other unfair results which might arise from differences between the two. The
Portfolio also is required to maintain a dollar-weighted average portfolio
maturity of 90 days or less, to limit its investments to instruments having
remaining maturities of 397 days or less (except securities held subject to
repurchase agreements having 397 days or less maturity) and to invest only in
securities determined by the Adviser under procedures established by the Board
of Trustees to be of high quality with minimal credit risks.
<PAGE>
TAXATION
The following discussion is general in nature and should not be regarded as
an exhaustive presentation of all possible tax ramifications. All shareholders
should consult a qualified tax adviser regarding their investment in a
Portfolio.
Each Portfolio intends to qualify annually and elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, each Portfolio
generally must, among other things, (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or currencies ("Qualifying
Income Test"); (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Portfolio's assets
is represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Portfolio's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes dividends, interest and net short-term capital gains in
excess of any net long-term capital losses) each taxable year. The Treasury
Department is authorized to promulgate regulations under which gains from
foreign currencies (and options, futures, and forward contracts on foreign
currency) would constitute qualifying income for purposes of the Qualifying
Income Test only if such gains are directly relating to investing in securities.
To date, such regulations have not been issued.
As a regulated investment company, a Portfolio generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years)
designated by the Portfolio as capital gain dividends, if any, that it
distributes to shareholders on a timely basis. Each Portfolio intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and any net capital gains. In addition,
amounts not distributed by a Portfolio on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To avoid the tax, a Portfolio must distribute during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses (and adjusted for
certain ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by a Portfolio in
October, November, or December of that year to shareholders of record on a date
in such a month and paid by the Portfolio during January of the following year.
Such distributions will be taxable to shareholders (other than those not subject
to federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid application of the excise tax, each Portfolio intends to make its
distributions in accordance with the calendar year distribution requirement.
To comply with regulations under section 817(h) of the Code, each Portfolio
is required to diversify its investments. Generally, a Portfolio will be
required to diversify its investments so that on the last day of each quarter of
a calendar year no more than 55% of the value of its total assets is represented
by any one investment, no more than 70% is represented by any two investments,
no more than 80% is represented by any three investments, and no more than 90%
is represented by any four investments. For this purpose, securities of a given
issuer generally are treated as one investment, but each U.S. Government agency
and instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S. or
an agency or instrumentality of the U.S. is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
<PAGE>
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no
assurance that the Portfolios will be able to operate as currently described, or
that the Trust will not have to change one or more Portfolio's investment
objective or investment policies. While each Portfolio's investment objective is
fundamental and may be changed only by a vote of a majority of its outstanding
shares, the investment policies of a Portfolio may be modified as necessary to
prevent any such prospective rules and regulations from causing Variable
Contract Owners to be considered the owners of the shares of a Portfolio
underlying the Separate Accounts.
Distributions
Dividends paid out of a Portfolio's investment company taxable income will
be treated as ordinary income for tax purposes in the hands of a U.S.
shareholder (such as a Separate Account). Distributions received by tax-exempt
shareholders will not be subject to federal income tax to the extent permitted
under applicable tax law.
A portion of the dividends paid by the PIMCO StocksPLUS Growth and Income
Portfolio may qualify for the deduction for dividends received by corporations.
Dividends paid by the other Portfolios generally are not expected to qualify for
the deduction for dividends received by corporations, although certain
distributions from the PIMCO High Yield Bond Portfolio may qualify.
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains, regardless of how long the
shareholder has held a Portfolio's shares and are not eligible for the dividends
received deduction. Any distributions that are not from a Portfolio's investment
company taxable income or net realized capital gains may be characterized as a
return of capital to shareholders or, in some cases, as capital gain.
Sales of Shares
Upon the disposition of shares of a Portfolio (whether by redemption, sale
or exchange), a shareholder (such as a Separate Account) will realize a gain or
loss. Such gain or loss will be capital gain or loss if the shares are capital
assets in the shareholder's hands, and will be long-term or short-term generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a disposition will be disallowed to the extent the shares disposed
of are replaced within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of shares held by the shareholder for
six months or less will be treated as a long-term capital loss to the extent of
any distributions of capital gain dividends received by the shareholder with
respect to such shares.
Options, Futures and Forward Contracts, and Swap Agreements
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Portfolios may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by a Portfolio at the end of each taxable year
(and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as ordinary or 60/40 gain or loss.
<PAGE>
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Portfolio, may result in
"straddles" for U.S. federal income tax purposes. In some cases, the straddle
rules also could apply in connection with swap agreements. The straddle rules
may affect the character of gains (or losses) realized by a Portfolio. In
addition, losses realized by a Portfolio on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing the straddle
rules have been promulgated, the tax consequences of transactions in options,
futures, forward contracts, and swap agreements to a Portfolio are not entirely
clear. The transactions may increase the amount of short-term capital gain
realized by a Portfolio which is taxed as ordinary income when distributed to
shareholders.
A Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If a Portfolio makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a portfolio that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Portfolios intend to account for such transactions in a manner they deem to be
appropriate, the Internal Revenue Service might not accept such treatment. If it
did not, the status of a Portfolio as a regulated investment company might be
affected. The Trust intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for a Portfolio to qualify
as a regulated investment company may limit the extent to which a Portfolio will
be able to engage in swap agreements.
Short Sales
Certain Portfolios may make short sales of securities. Short sales may
increase the amount of short-term capital gain realized by a Portfolio, which is
taxed as ordinary income when distributed to shareholders.
Passive Foreign Investment Companies
Certain Portfolios may invest in the stock of foreign corporations which
may be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC for a
taxable year if at least one-half of its assets constitute investment-type
assets or 75% or more of its gross income is investment-type income. If a
Portfolio receives a so-called "excess distribution" with respect to PFIC stock,
the Portfolio itself may be subject to tax on a portion of the excess
distribution, whether or not the corresponding income is distributed by the
Portfolio to stockholders. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Portfolio held the PFIC stock. A Portfolio itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Certain distributions from a
PFIC as well as gain from the sale of PFIC stock are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
<PAGE>
A Portfolio may be eligible to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently is available in some
circumstances, a Portfolio generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market a Portfolio's PFIC shares at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized.
If this election were made, tax at the Portfolio level under the PFIC rules
would generally be eliminated, but the Portfolio could, in limited
circumstances, incur nondeductible interest charges. A Portfolio's intention to
qualify annually as a regulated investment company may limit its elections with
respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains and the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, and may subject a Portfolio
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders and will be taxed to shareholders as ordinary income
or long-term capital gain may be increased or decreased substantially as
compared to a portfolio that did not invest in PFIC shares.
Foreign Currency Transactions
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain other instruments, gains or losses attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
Foreign Taxation
Income received by the Portfolios from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser intends to manage the Portfolios with the
intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of the PIMCO Foreign Bond, Global Bond or
Emerging Markets Bond Portfolios' total assets at the close of their taxable
year consists of securities of foreign corporations, such Portfolio will be
eligible to elect to "pass-through" to the Portfolio's shareholders the amount
of foreign income and similar taxes paid by the Portfolio. If this election is
made, a shareholder generally subject to tax will be required to include in
gross income (in addition to taxable dividends actually received) his pro rata
share of the foreign taxes paid by the Portfolio, and may be entitled either to
deduct (as an itemized deduction) his or her pro rata share of foreign taxes in
computing his taxable income or to use it (subject to limitations) as a foreign
tax credit against his or her U.S. federal income tax liability. No deduction
for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the close of
the Portfolio's taxable year whether the foreign taxes paid by the Portfolio
will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election is
made, the source of the PIMCO Foreign Bond, Global Bond or Emerging Markets Bond
Portfolios' income will flow through to shareholders of the Trust. With respect
to such Portfolios, gains from the sale of securities will be treated as derived
from U.S. sources and certain currency fluctuation gains, including fluctuation
gains from foreign currency-denominated debt securities, receivables and
payables will be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income, and to certain other types of income. Shareholders may be unable
to claim a credit for the full amount of their proportionate share of the
foreign taxes paid by the Portfolio. The foreign tax credit can be used to
offset only 90% of the revised alternative minimum tax imposed on corporations
and individuals and foreign taxes generally are not deductible in computing
alternative minimum taxable income.
<PAGE>
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Portfolio may be
treated as debt securities that are issued originally at a discount. Generally,
the amount of the original issue discount ("OID") is treated as interest income
and is included in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. A portion of the OID includable in income with respect to
certain high-yield corporate debt securities may be treated as a dividend for
Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Portfolio in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. A Portfolio may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing of recognition of income
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Portfolio may be treated as
having acquisition discount, or OID in the case of certain types of debt
securities. Generally, the Portfolio will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. The Portfolio may make one or more of the elections applicable
to debt securities having acquisition discount, or OID, which could affect the
character and timing of recognition of income.
A Portfolio generally will be required to distribute dividends to
shareholders representing discount on debt securities that is currently
includable in income, even though cash representing such income may not have
been received by the Portfolio. Cash to pay such dividends may be obtained from
sales proceeds of securities held by the Portfolio.
Inflation-Indexed Bonds
Coupon payments received by a Portfolio from inflation-indexed bonds will
be includable in the Portfolio's gross income in the period in which they
accrue. Periodic adjustments for inflation in the principal value of these
securities also may give rise to original issue discount, which, likewise, will
be includable in the Portfolio's gross income on a current basis, regardless of
whether the Portfolio receives any cash payments. Amounts includable in a
Portfolio's gross income become subject to tax-related distribution
requirements. Accordingly, a Portfolio may be required to make annual
distributions to shareholders in excess of the cash received in a given period
from these investments. As a result, the Portfolio may be required to liquidate
certain investments at a time when it is not advantageous to do so. If the
principal value of an inflation-indexed bond is adjusted downward in any period
as a result of deflation, the reduction may be treated as a loss to the extent
the reduction exceeds coupon payments received in that period; in that case, the
amount distributable by the Portfolio may be reduced and amounts distributed
previously in the taxable year may be characterized in some circumstances as a
return of capital.
<PAGE>
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations"). However,
some states may exempt all or a portion of such distributions from income tax to
the extent the shareholder is able to establish that the distribution is derived
from qualifying federal obligations. Moreover, for state income tax purposes,
interest on some federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on FNMA Certificates
and GNMA Certificates). Each Portfolio will provide information annually to
shareholders indicating the amount and percentage of a Portfolio's dividend
distribution which is attributable to interest on federal obligations, and will
indicate to the extent possible from what types of federal obligations such
dividends are derived.
OTHER INFORMATION
Capitalization
The Trust is a Delaware business trust established under a Trust Instrument
dated October 3, 1997. The capitalization of the Trust consists solely of an
unlimited number of shares of beneficial interest with a par value of $0.001
each. The Board of Trustees may establish additional series (with different
investment objectives and fundamental policies) at any time in the future.
Establishment and offering of additional series will not alter the rights of the
Trust's shareholders. When issued, shares are fully paid, non-assessable,
redeemable and freely transferable. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio, each shareholder is entitled
to receive his pro rata share of the net assets of that Portfolio.
Expenses incurred by the Trust in connection with its organization and the
public offering of its shares will be deferred and amortized on a straight line
basis over a period not less than five years. Expenses incurred in the
organization of subsequently offered Portfolios will be charged to those
Portfolios and will be amortized on a straight line basis over a period not less
than five years.
Under Delaware law, shareholders are not personally liable for the
obligations of the Trust. In addition, the Trust Instrument disclaims liability
of the shareholders, Trustees or officers of the Trust for acts or obligations
of the Trust, which are binding only on the assets and property of the Trust,
and requires that notice of the disclaimer be given in each contract or
obligation entered into or executed by the Trust or the Trustees. The Trust
Instrument also provides for indemnification out of Trust property for all loss
and expense of any shareholder held personally liable for the obligations of the
Trust. However, there is no certainty that the limited liability of shareholders
of a Delaware business trust will be recognized in every state. Even in such a
circumstance, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which the contractual
disclaimer against shareholder liability is inoperative or the Trust itself is
unable to meet its obligations, and thus should be considered remote.
Performance Information
Each Portfolio may, from time to time, include information regarding its
performance in advertisements or reports to shareholders or prospective
investors. Performance information for the Portfolios will not be advertised or
included in sales literature unless accompanied by comparable performance
information for a separate account to which the Portfolios offer their shares.
<PAGE>
The Trust may, from time to time, include the yield and effective yield of
the PIMCO Money Market Portfolio, and the yield and total return for all of the
Portfolios, computed in accordance with SEC-prescribed formulas, in
advertisements or reports to shareholders, prospective investors or other
appropriate parties. Current yield for the PIMCO Money Market Portfolio will be
based on the change in the value of hypothetical investment (exclusive of
capital changes) over a particular 7-day period less a pro-rata share of
Portfolio expenses accrued over that period (the "base period"), and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the PIMCO Money Market Portfolio assumes that all
dividends received during an annual period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [(Base Period Return +1)365/7] - 1
Quotations of yield for the remaining Portfolios will be based on all
investment income per share (as defined by the SEC) during a particular 30-day
(or one month) period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[( a-b + 1)6-1]
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of
the period.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over periods of one, five and ten years (up to the
life of the Portfolio), calculated pursuant to the following formula: P (1 + T)n
= ERV (where P = a hypothetical initial payment of $1,000, T = the average
annual total return, n = the number of years, and ERV = the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the period).
Except as noted below, all total return figures reflect, to the extent
applicable, the deduction of a proportional share of Portfolio expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid. The Portfolios also may, with respect to certain periods of less than
one year, provide total return information for that period that is unannualized.
Quotations of total return may also be shown for other periods. Any such
information would be accompanied by standardized total return information. Total
return is measured by comparing the value of an investment in the Portfolio at
the beginning of the relevant period to the redemption value of the investment
in the Portfolio at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions at net asset value). The Portfolios
may advertise total return using alternative methods that reflect all elements
of return, but that may be adjusted to reflect the cumulative impact of
alternative fee and expense structures, such as the currently effective advisory
and administrative fees for the Portfolios.
<PAGE>
Current distribution information for a Portfolio will be based on
distributions for a specified period (i.e., total dividends from net investment
income), divided by Portfolio net asset value per share on the last day of the
period and annualized according to the following formula:
DIVIDEND YIELD = (((a/b)*365)/c)
where a = actual dividends distributed for the calendar month in question,
b = number of days of dividend declaration in the month in question,
and
c = net asset value (NAV) calculated on the last business day
of the month in question.
The rate of current distributions does not reflect deductions for
unrealized losses from transactions in derivative instruments such as options
and futures, which may reduce total return. Current distribution rates differ
from standardized yield rates in that they represent what a Portfolio has
declared and paid to shareholders as of the end of a specified period rather
than the Portfolio's actual net investment income for that same period.
Distribution rates will exclude net realized short-term capital gains. The rate
of current distributions for a Portfolio should be evaluated in light of these
differences and in light of the Portfolio's total return figures, which will
always accompany any calculation of the rate of current distributions.
Performance information for a Portfolio may also be compared to various
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Lehman Brothers Aggregate Bond
Index, the Lehman Brothers Mortgage-Backed Securities Index, the Merrill Lynch 1
to 3 Year Treasury Index, the Lehman Intermediate and 20+ Year Treasury Bond
Index, the Lehman BB Intermediate Corporate Index, indexes prepared by Lipper
Analytical Services, the J.P. Morgan Global Index, the J.P. Morgan Emerging
Markets Bond Index Plus, the Salomon Brothers World Government Bond Index-10 Non
U.S.-Dollar Hedged and the J.P. Morgan Government Bond Index Non U.S.-Dollar
Hedged. Unmanaged indexes (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses. PIMCO may
report to shareholders or to the public in advertisements concerning the
performance of PIMCO as adviser to clients other than the Trust, or on the
comparative performance or standing of PIMCO in relation to other money
managers. PIMCO also may provide current or prospective private account clients,
in connection with standardized performance information for the Portfolios,
performance information for the Portfolios gross of fees and expenses for the
purpose of assisting such clients in evaluating similar performance information
provided by other investment managers or institutions. Comparative information
may be compiled or provided by independent ratings services or by news
organizations. Any performance information, whether related to the Portfolios or
to the Adviser, should be considered in light of the Portfolios' investment
objectives and policies, characteristics and quality of the Portfolios, and the
market conditions during the time period indicated, and should not be considered
to be representative of what may be achieved in the future.
Performance information for a Portfolio will not take into account charges
or deductions against a Separate Account or Variable Contract specific
deductions for cost of insurance charges, premium loads, administrative fees,
maintenance fees, premium taxes, mortality and expense risk charges, or other
charges that may be incurred under a Variable Contract for which the Portfolio
serves as an underlying investment vehicle. A Portfolio's performance should not
be compared with the performance of mutual funds that sell their shares directly
to the public since the figures provided do not reflect charges against a
Separate Account or the Variable Contracts.
The Trust may also include in its advertisements or in reports to
shareholder, prospective investors or other appropriate parties performance
information regarding certain series (the "Funds") of PIMCO Funds: Pacific
Investment Management Series (the "PIMCO Funds") which have investment
objectives, policies and strategies substantially the same as a corresponding
Portfolio of the Trust. In addition, the current Portfolio Manager for each Fund
is the same as the Portfolio Manager for the corresponding Portfolio of the
Trust. The methods discussed above with regard to calculating the yield, total
return and distribution rates for the Portfolios will also be used to calculate
the same information for the Funds, although performance information for the
Funds will reflect the deduction of sales loads and other charges to which the
Funds are subject. The following table shows which Fund of the PIMCO Funds
corresponds to each Portfolio of the Trust:
<PAGE>
Portfolio Fund
- --------- ----
Money Market Portfolio Money Market Fund
Short-Term Bond Portfolio Short-Term Fund
Low Duration Bond Portfolio Low Duration Fund
High Yield Bond Portfolio High Yield Fund
Total Return Bond Portfolio Total Return Fund
Foreign Bond Portfolio Foreign Bond Fund
Global Bond Portfolio Global Bond Fund
Emerging Markets Bond Portfolio Emerging Markets Bond Fund
StocksPLUS Growth and Income Portfolio StocksPLUS Fund
Strategic Balanced Portfolio Strategic Balanced Fund
In accordance with methods approved by the SEC in various pronouncements,
total return presentations for periods prior to the inception date of a
particular class of a Fund are based on the historical performance of an older
class of the Fund (specified below) restated to reflect the current sales
charges (if any) of the newer class, but not reflecting any higher operating
expenses such as 12b-1 distribution and servicing fees and administration fees
associated with the newer class. All other things being equal, such higher
expenses would have adversely affected (i.e., reduced) total return for the
newer classes by the amount of such higher expenses compounded over the relevant
periods.
The yield of the PIMCO Money Market Fund for the seven day period ended
June 30, 1997 was as follows: Institutional Class - 5.27%, Administrative Class
- - 5.02%, Class A - 5.00%, Class B - 4.17% and Class C - 5.03%. The effective
yield of the PIMCO Money Market Fund for the seven day period ended June 30,
1997 was as follows: Institutional Class - 5.41%, Administrative Class - 5.15%,
Class A - 5.13%, Class B - 4.26% and Class C - 5.16%.
For the one month period ended June 30, 1997, the yield of the Funds
was as follows (all numbers are annualized):
Yield for Period
Ended June 30, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Institutional Administrative
Fund Class Class A B C
Money Market Fund 5.29% 5.04% 4.98% 4.15% 5.03%
Short-Term Fund 5.98% 5.63% 5.56% 4.81% 5.23%
Low Duration Fund 5.99% 5.73% 5.34% 4.76% 5.01%
High Yield Fund 8.04% 7.78% 7.62% 6.86% 6.87%
Total Return Fund 6.22% 5.97% 5.74% 4.99% 5.00%1
Foreign Bond Fund 5.96% 5.69% 5.49% 4.72% 4.71%
Global Bond Fund 6.07% 5.81% N/A N/A N/A
StocksPLUS Fund 5.51% 5.27% 5.04% 4.50% 4.68%
Strategic Balanced Fund 5.92% N/A N/A N/A N/A
</TABLE>
The table below sets forth the average annual total return of each class of
shares of the following Funds for the periods ended June 30, 1997. As noted
below, total return presentations for periods prior to the inception date of a
particular class are based on the historical performance of Institutional Class
shares restated to reflect the current sales charges (if any) of the newer
class, but not reflecting any higher operating expenses such as 12b-1
distribution and servicing fees, which are paid by all classes except the
Institutional Class (at a maximum rate of 1.00% per annum), and the higher
administration fee charges associated with Class A, Class B, and Class C shares.
All other things being equal, such higher expenses would have adversely affected
(i.e., reduced) total return for the newer classes by the amount of the higher
expenses, compounded over the relevant period.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Return for Periods Ended June 30, 1997
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Since Inception
of Portfolio Inception Inception
(Annualized) Date of Date of
Fund Class 1 Year 5 Years Portfolio Class
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Money Market Institutional 5.23% 4.43% 4.54% 03/01/91 03/01/91
Administrative 4.97% 4.32% 4.45% 01/25/95
Class A 5.08% 4.41% 4.53% 01/20/97
Class B (0.32%) 3.99% 4.46% 01/20/97
Class C 4.11% 4.41% 4.53% 01/20/97
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Short-Term Institutional 7.55% 5.69% 6.60% 10/07/87 10/07/87
Administrative 7.28% 5.60% 6.55% 02/01/96
Class A 5.21% 5.23% 6.37% 01/20/97
Class B 2.18% 5.30% 6.57% 01/20/97
Class C 6.22% 5.63% 6.58% 01/20/97
=================== ------------------ ------------ ----------- ---------------- ------------- ==============
Low Duration Institutional 8.79% 6.85% 8.31% 05/11/87 05/11/87
Administrative 8.52% 6.72% 8.24% 01/03/95
Class A 5.31% 6.16% 7.97% 01/13/97
Class B 3.19% 6.42% 8.26% 01/13/97
Class C 7.33% 6.76% 8.27% 01/13/97
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
High Yield Institutional 16.15% N/A 13.03% 12/16/92 12/16/92
Administrative 15.86% 12.91% 01/16/95
Class A 10.74% 11.86% 01/13/97
Class B 10.51% 12.61% 01/13/97
Class C 14.54% 12.91% 01/13/97
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Total Return Institutional 9.93% 8.31% 9.73% 05/11/87 05/11/87
Administrative 9.66% 8.19% 9.67% 09/08/94
Class A 4.75% 7.28% 9.22% 01/13/97
Class B 4.34% 7.91% 9.68% 01/13/97
Class C 8.34% 8.20% 9.68% 01/13/97
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Foreign Bond Institutional 17.16% N/A 11.54% 12/03/92 12/03/92
Administrative 17.01% 11.51% 01/28/97
Class A 11.64% 10.38% 01/20/97
Class B 11.52% 11.11% 01/20/97
Class C 15.55% 11.42% 01/20/97
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Global Bond Institutional 8.26% N/A 8.97% 11/23/93 11/23/93
Administrative 8.07% 8.92% 07/31/96
------------------- ------------------ ------------ ----------- ---------------- -------------
StocksPLUS Institutional 34.33% N/A 22.68% 05/14/93 05/14/93
Administrative 34.21% 22.65% 01/07/97
Class A 30.12% 21.76% 01/20/97
Class B 28.74% 22.31% 01/20/97
Class C 32.81% 22.58% 01/20/97
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
Strategic Balanced Institutional 25.51% N/A 25.51% 06/28/96 06/28/96
------------------- ------------------ ------------ ----------- ---------------- ------------- ==============
</TABLE>
For the month ended June 30, 1997, the current distribution rates
(annualized) for the Funds were as follows:
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Distribution Rate
Institutional Administrative
Fund Class Class A B C
Money Market Fund 5.28% 5.03% 4.93% 4.15% 5.04%
Short-Term Fund 6.03% 5.74% 5.77% 4.89% 5.30%
Low Duration Fund 6.18% 5.93% 5.71% 4.96% 5.21%
High Yield Fund 8.58% 8.34% 8.18% 7.43% 7.44%
Total Return Fund 6.31% 6.06% 5.83% 5.09% 5.09%
Foreign Bond Fund 3.68% 3.31% 3.22% 2.46% 2.45%
Global Bond Fund 4.27% 4.02% N/A N/A N/A
StocksPLUS Fund N/A N/A N/A N/A N/A
Strategic Balanced Fund N/A N/A N/A N/A N/A
</TABLE>
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the 25 years from 1972 to 1996 was:
*Stocks: 12.5%
Bonds: 9.2%
T-Bills: 7.0%
Inflation: 5.6%
*Returns of unmanaged indexes do not reflect past or future performance of
any of the Portfolios of PIMCO Variable Insurance Trust. Stocks are represented
by Ibbotson's Common Stock Total Return Index. Bonds are represented by
Ibbotson's Long-term Corporate Bond Index. T-bills are represented by Ibbotson's
Treasury Bill Index and Inflation is represented by the Cost of Living Index.
These are all unmanaged indices, which can not be invested in directly. While
Treasury bills are insured and offer a fixed rate of return, both the principal
and yield of investment securities will fluctuate with changes in market
conditions. Source: Ibbotson, Roger G., and Rex A. Sinquefiled, Stocks, Bonds,
Bill and Inflation (SBBI), 1989, updated in Stocks, Bonds, Bills and Inflation
1997 Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1972-1996, the average annual return of stocks comprising the Ibbotson's
Common Stock Total Return Index ranged from -26.5% to 37.4% while the annual
return of a hypothetical portfolio comprised 40% of such common stocks, 40% of
bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1972
through 1996 is set forth in the following table.
<TABLE>
<S> <C> <C> <C> <C> <C>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------- ----- ------- ---------- ---------
1972 18.98% 7.26% 3.84% 3.41% 11.26%
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% .387% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
</TABLE>
<PAGE>
*Returns of unmanaged indexes do not reflect past or future performance of any
of the Portfolios of PIMCO Variable Insurance Trust. Stocks are represented by
Ibbotson's Common Stock Total Return Index. Bonds are represented by Ibbotson's
Long-term Corporate Bond Index. T'bills are represented by Ibbotson's Treasury
Bill Index and Inflation is represented by the Cost of Living Index. These are
all unmanaged indices, which can not be invested in directly. While Treasury
bills are insured and offer a fixed rate of return, both the principal and yield
of investment securities will fluctuate with changes in market conditions.
Source: Ibbotson, Roger G., and Rex A. Sinquefiled, Stocks, Bonds, Bill and
Inflation (SBBI), 1989, updated in Stocks, Bonds, Bills and Inflation 1997
Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may use in its advertisement and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
30 Years $1,979 $59,370 $200,000
25 Years $2,955 $73,875 $200,000
20 Years $4,559 $91,180 $200,000
15 Years $7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
This hypothetical example assumes a fixed 7% return compounded annually and a
guaranteed return of principal. The example is intended to show the benefits of
a long-term, regular investment program, and is in no way representative of any
past or future performance of a Portfolio. There can be no guarantee that you
will be able to find an investment that would provide such a return at the times
you invest and an investor in any of the Portfolios should be aware that certain
of the Portfolios have experienced periods of negative growth in the past and
may again in the future.
<PAGE>
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1990:
% of Income for Individuals
Aged 65 Years and Older in 1990*
Social Security
Year and Pension Plans Other
1990 38% 62%
* For individuals with an annual income of at least $51,000. Other includes
personal savings, earnings and other undisclosed sources of income. Source:
Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Portfolios may appear in various
national publications and services including, but not limited to: The Wall
Street Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual
Portfolio Magazine, The New York Times, Kiplinger's Personal Finance, Fortune,
Money Magazine, Morningstar's Mutual Portfolio Values, CDA Investment
Technologies and The Donoghue Organization. Some or all of these publications or
reports may publish their own rankings or performance reviews of mutual funds,
including the Portfolios, and may provide information relating to the Adviser,
including descriptions of assets under management and client base, and opinions
of the author(s) regarding the skills of personnel and employees of the Adviser
who have portfolio management responsibility. From time to time, the Trust may
include references to or reprints of such publications or reports in its
advertisements and other information relating to the Portfolios.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Portfolios over a specified period of time and may use charts
and graphs to display that growth.
Investment results of the Portfolios or the Funds will fluctuate over time,
and any presentation of the Portfolios' or the Funds' total return or yield for
any prior period should not be considered as a representation of what an
investor's total return or yield may be in any future period. The Trust's Annual
Report contains additional performance information for the Portfolios and is
available upon request, without charge, by calling (888) 746-2688.
Voting Rights
Under the Trust Instrument, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Trust Instrument. In this regard, the Trust will be required to
hold a meeting to elect Trustees to fill any existing vacancies on the Board if,
at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. In addition, the Trust Instrument provides that the
holders of not less than two-thirds of the outstanding shares of the Trust may
remove a person serving as Trustee at any shareholder meeting. The Trustees are
required to call a meeting of shareholders if requested in writing to do so by
the holders of not less than ten percent of the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that a holder of
more than 50% of the outstanding shares may elect the entire Board of Trustees,
in which case the holders of the remaining shares would not be able to elect any
Trustees.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As used in the Prospectus or this Statement of
Additional Information, the phrase "vote of a majority of the outstanding
shares" of a Portfolio (or the Trust) means the vote of the lesser of: (1) 67%
of the shares of the Portfolio (or the Trust) present at a meeting, if the
holders of more than 50% of the outstanding shares are present in person or by
proxy; or (2) more than 50% of the outstanding shares of the Portfolio (or the
Trust).
<PAGE>
In accordance with current laws, it is anticipated that an insurance
company issuing a variable contract that participates in the Portfolios will
request voting instructions from variable contract owners and will vote shares
or other voting interests in the separate account in proportion to the votes
received.
Code of Ethics
The Trust and PIMCO have each adopted a Code of Ethics governing personal
trading activities of all Trustees and officers of the Trust, and Directors,
officers and employees of PIMCO who, in connection with their regular functions,
play a role in the recommendation of any purchase or sale of a security by the
Trust or obtain information pertaining to such purchase or sale or who have the
power to influence the management or policies of the Trust or PIMCO. Such
persons are prohibited from effecting certain transactions, allowed to effect
certain exempt transactions, required to preclear certain security transactions
with PIMCO's Compliance Officer or her designee and to report certain
transactions on a regular basis. PIMCO has developed procedures for
administration of the Codes.
Custodian
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas
City, Missouri 64105 serves as custodian for assets of all Portfolios. Pursuant
to rules adopted under the 1940 Act, the Trust may maintain foreign securities
and cash in the custody of certain eligible foreign banks and securities
depositories. Pursuant to a sub-custody agreement between IFTC and State Street
Bank and Trust Company ("State Street"), State Street serves as subcustodian of
the Trust for the custody of the foreign securities acquired by those Portfolios
that invest in foreign securities. No assurance can be given that expropriation,
nationalization, freezes, or confiscation of assets that would impact assets of
the Portfolios will not occur, and shareholders bear the risk of losses arising
from these or other events.
Independent Accountants
Price Waterhouse LLP, 1055 Broadway, Kansas City, MO 64105, serves as
independent public accountants for all Portfolios. Price Waterhouse LLP provides
audit services, tax return preparation and assistance and consultation in
connection with review of SEC filings.
Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all of the information included in the Trust's registration statement filed with
the SEC under the 1933 Act with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
Financial Statements
Financial statements for the Trust as of ___________, 1997, including notes
thereto, and the report of Price Waterhouse thereon dated _________, 1997, are
included herein.
[To be provided]
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Included in Part A:
Included in Part B:
(b) Exhibits
(1) (i) Trust Instrument dated October 3, 1997(1)
(ii) Certificate of Trust dated October 3, 1997(1)
(2) By-Laws(1)
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Advisory Contract
(6) Form of Distribution Contract
(7) Not Applicable
(8) Form of Custodian Agreement*
(9) (i) Form of Administration Agreement
(ii) Form of Participation Agreement
(iii) Form of Services Agreement
(10) (i) Opinion of Counsel*
(ii) Consent of Counsel*
(11) Consent of Independent Auditors*
<PAGE>
(12) Not Applicable
(13) Form of Subscription Agreement
(14) Not Applicable
(15) Not Applicable
(16) Calculation of Performance*
(17) Financial Data Schedule*
(18) Not Applicable
(19) Powers of Attorney and Secretary's Certificate(1)
- ----------
1 Incorporated by reference from the initial Registration Statement filed
on October 3, 1997.
* To be filed by amendment.
Item 25. Persons Controlled by or Under Common Control with Registrant
No person is controlled by or under common control with the Registrant.
Item 26. Number of Holders of Securities
There is no shareholder of record as of the date of this filing.
Item 27. Indemnification
Reference is made to Article X of the Registrant's Trust Instrument
(Exhibit 1) which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant by the Registrant pursuant to the
Registrant's Trust Instrument, its By-Laws or otherwise, the Registrant
is aware that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act
and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such trustees,
officers or controlling persons in connection with shares being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issues.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
PIMCO, the investment adviser to the Trust, is a subsidiary partnership
of PIMCO Advisors L.P. ("PIMCO Advisors"). The general partner of PIMCO
Advisors is PIMCO Partners, G.P., a general partnership between Pacific
Investment Management Company, an indirect wholly-owned subsidiary of
Pacific Life Insurance Company ("Pacific Life"), and PIMCO Partners
LLC, a limited liability company controlled by the PIMCO Managing
Directors.
The directors and officers of PIMCO and their business and other
connections are as follow:
Name Business and Other Connections
Allan, George C. Vice President, PIMCO and PIMCO Management,
Inc.
Arnold, Tamara J. Vice President, PIMCO and PIMCO Management,
Inc.
Barbi, Leslie A. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Benz, William R. II Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Member of PIMCO Partners LLC.
Bishop, Gregory A. Vice President, PIMCO
Brynjolfsson, John B. Vice President, PIMCO and PIMCO Management,
Inc.
Burns, R. Wesley Executive Vice President, PIMCO and PIMCO
Management, Inc.; Trustee and President of
the Trust and PIMCO Funds, President of PIMCO
Commercial Mortgage Securities Trust, Inc.;
Executive Vice President, PIMCO Funds:
Multi-Manager Series.
Cupps, Wendy W. Vice President, PIMCO and PIMCO Management,
Inc.
Daniels, Charles M. III Executive Vice President, PIMCO and PIMCO
Management, Inc.
Dow, Michael Vice President, PIMCO, PIMCO Management, Inc.
and PIMCO Funds
Dunn, Anita Vice President, PIMCO and PIMCO Management,
Inc.
Edington, David H. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Director: Stocks Plus Management, Inc.;
Member of PIMCO Partners LLC.
<PAGE>
Ehlert, A. Benjamin Executive Vice President, PIMCO and PIMCO
Management, Inc.
Ettl, Robert A. Vice President, PIMCO and PIMCO Management,
Inc.
Faillace, Anthony L. Vice President, PIMCO and PIMCO Management,
Inc.
Fitzgerald, Robert M. Chief Financial Officer and Treasurer, PIMCO,
PIMCO Management, Inc., Cadence Capital
Management, Inc., NFJ Investment Group, NFJ
Management, Inc., Parametric Portfolio
Associates, Parametric Management Inc., and
StocksPLUS Management Inc., PIMCO Funds
Distribution Company; Chief Financial Officer
and Assistant Treasurer, Cadence Capital
Management; Chief Financial Officer and
Treasurer, Columbus Circle Investors and
Columbus Circle Investors Management Inc.;
Chief Financial Officer and Senior Vice
President, PIMCO Advisors; Chief Financial
Officer, Senior Vice President and
Controller, Thomson Advisory Group, Inc.;
Chief Financial Officer, Columbus Circle
Trust Co.
Frisch, Ursula T. Vice President, PIMCO, PIMCO Management and
PIMCO Funds
Gross, William H. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Director and Vice President, StocksPLUS
Management, Inc.; Senior Vice President of
the Trust and PIMCO Funds; Member of Equity
and Operating Boards, PIMCO Advisors; Member
of PIMCO Partners LLC.
Hague, John L. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Member of Operating Board, PIMCO Advisors;
Member of PIMCO Partners LLC.
Hally, Gordon C. Executive Vice President, PIMCO and PIMCO
Management, Inc.
Hamalainen, Pasi M. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Hardaway, John P. Vice President, PIMCO and PIMCO Management,
Inc.; Treasurer of the Trust, PIMCO Funds,
PIMCO Funds: Multi-Manager Series and PIMCO
Commercial Mortgage Securities Trust, Inc.
Harris, Brent R. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Director and Vice President, StocksPLUS
Management, Inc.; Trustee and Chairman of the
Trust, PIMCO Funds and PIMCO Commercial
Mortgage Securities Trust, Inc.; Member of
Operating Board, PIMCO Advisors; Member of
PIMCO Partners LLC.
<PAGE>
Hattesohl, Joseph D. Vice President, PIMCO and PIMCO Management,
Inc.; Assistant Treasurer, the Trust, PIMCO
Funds, PIMCO Funds: Multi-Manager Series and
PIMCO Commercial Mortgage Securities Trust,
Inc.
Hayes, Raymond C. Vice President, PIMCO Funds, PIMCO and PIMCO
Management, Inc.
Hinman, David C. Vice President, PIMCO and PIMCO Management,
Inc.
Hocson, Liza Vice President, PIMCO and PIMCO Management,
Inc.
Hodge, Douglas M. Executive Vice President, PIMCO and PIMCO
Management, Inc.
Holden, Brent L. Executive Vice President, PIMCO and PIMCO
Management, Inc.
Holloway, Dwight F., Jr. Vice President, PIMCO and PIMCO Management,
Inc.
Howe, Jane T. Vice President, PIMCO and PIMCO Management,
Inc.
Hudoff, Mark Vice President, PIMCO and PIMCO Management,
Inc.
Isberg, Margaret E. Executive Vice President, PIMCO and PIMCO
Management, Inc.; Senior Vice President,
PIMCO Funds.
Keller, James M. Vice President, PIMCO and PIMCO Management,
Inc.
Kennedy, Raymond G. Vice President, PIMCO and PIMCO Management,
Inc.
Kociuba, James Vice President, PIMCO and PIMCO Management,
Inc.
Loftus, John S. Executive Vice President, PIMCO and PIMCO
Management, Inc.; Vice President and
Assistant Secretary, StocksPLUS Management,
Inc.
Lown, David Vice President, PIMCO and PIMCO Management,
Inc.
Meiling, Dean S. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Vice
President, PIMCO Funds and PIMCO Commercial
Mortgage Securities Trust, Inc.; Member of
PIMCO Partners, LLC.
Muzzy, James F. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Director and Vice President, StocksPLUS
Management, Inc.; Senior Vice President of
the Trust; Vice President, PIMCO Funds;
Member of Operating Board, PIMCO Advisors;
Member of PIMCO Partners LLC.
<PAGE>
Nguyen, Vinh T. Vice President, Controller, Columbus Circle
Investors, Columbus Circle Investors
Management, Inc., Cadence Capital Management,
Inc., NFJ Management, Inc., Parametric
Management, Inc, StocksPLUS Management, Inc.,
PIMCO Advisors; ; Controller, PIMCO, PIMCO
Management, Inc.
Ongaro, Douglas J. Vice President, PIMCO Funds, PIMCO and PIMCO
Management, Inc.
Otterbein, Thomas J. Vice President, PIMCO and PIMCO Management,
Inc.
Pittman, David J. Vice President, PIMCO Management, Inc.
Podlich, William F. III Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Vice President, PIMCO Commercial Mortgage
Securities Trust, Inc., Member of Equity and
Operating Boards, PIMCO Advisors; Member of
PIMCO Partners LLC.
Powers, William C. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Senior Vice President, PIMCO Commercial
Mortgage Securities Trust, Inc., Member of
PIMCO Partners LLC.
Rabinovitch, Frank B. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Member of PIMCO Partners LLC.
Rennie, Edward P. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Roney, Scott L. Vice President, PIMCO and PIMCO Management,
Inc.
Rosborough, Michael J. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Sargent, Jeffrey M. Vice President, PIMCO, PIMCO Management,
Inc., the Trust, PIMCO Funds, PIMCO
Commercial Mortgage Securities Trust, Inc.
and PIMCO Funds: Multi-Manager Series.
Schmider, Ernest L. Executive Vice President, Secretary, Chief
Administrative and Legal Officer, PIMCO and
PIMCO Management, Inc.; Secretary, PIMCO
Partners LLC, Director and Assistant
Secretary, Assistant Treasurer, StocksPLUS
Management, Inc.
Scholey, Leland T. Senior Vice President, PIMCO Funds, PIMCO and
PIMCO Management, Inc.
<PAGE>
Selby, Richard W. Senior Vice President, Chief Technology
Officer, PIMCO
Seliga, Denise C. Vice President, PIMCO and PIMCO Management,
Inc.
Seymour, Rita J. Vice President, PIMCO and PIMCO Management,
Inc.
Thomas, Lee R. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Member, PIMCO Partners LLC.
Thompson, William S. Jr. Chief Executive Officer and Managing
Director, PIMCO; Director, Managing Director
and Chief Executive Officer, PIMCO
Management, Inc.; Director and President,
StocksPLUS Management, Inc.; Director,
Thomson Advisory Group; Senior Vice President
of the Trust; Vice President, PIMCO Funds and
PIMCO Commercial Mortgage Securities Trust,
Inc.; Member of Equity Board and Operating
Board, PIMCO Advisors; Member, President and
Chief Executive Officer of PIMCO Partners
LLC.
Trosky, Benjamin L. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Senior Vice President, PIMCO Commercial
Mortgage Securities Trust, Inc.; Member of
Operating Board, PIMCO Advisors; Member of
PIMCO Partners LLC.
Weil, Richard M. Assistant Secretary, PIMCO, Columbus Circle
Investors, Columbus Circle Investors
Management, Inc., Cadence Capital Management
and PIMCO Funds Distribution Company; Senior
Vice President and Assistant Secretary, PIMCO
Management, Inc.; Senior Vice President Legal
and Secretary, PIMCO Advisors; Senior Vice
President and Secretary, Thomson Advisory
Group; Secretary, Cadence Capital Management,
Inc., NFJ Management, Inc., Parametric
Management, Inc., NFJ Investment Group,
Parametric Portfolio Associates, and
StocksPLUS Management, Inc.; Vice President,
PIMCO Funds: Multi-Manager Series.
Wegener, Marilyn Vice President, PIMCO and PIMCO Management,
Inc.
Willner, Ram Vice President, PIMCO and PIMCO Management,
Inc.
Wilsey, Kristen M. Vice President, PIMCO Funds, PIMCO and PIMCO
Management, Inc.
Wood, George H. Senior Vice President, PIMCO and PIMCO
Management, Inc.
<PAGE>
Yetter, Michael A. Vice President, PIMCO and PIMCO Management,
Inc.
Young, David Vice President, PIMCO
The address of PIMCO is 840 Newport Center Drive, Newport Beach, CA 92260.
The address of PIMCO Advisors, L.P. is 800 Newport Center Drive, Newport Beach,
CA 92660.
The address of PIMCO Funds Distribution Company is 2187 Atlantic Street,
Stamford, CT 06902.
Item 29. Principal Underwriter
(a) PIMCO Funds Distribution Company (the "Distributor")
serves as Distributor of Shares of the Trust. The
Distributor also acts as the principal underwriter
for PIMCO Funds: Pacific Investment Management Series
and PIMCO Funds: Multi-Manager Series. The
Distributor is a wholly-owned subsidiary of PIMCO
Advisors.
(b)
<TABLE>
<S> <C> <C>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
---------------- ---------------- ---------------
Booth, Jeffrey L. Vice President None
Bosch, James D. Regional Vice President None
Brennan, Deborah P. Vice President None
Clark, Timothy R. Senior Vice President None
Cvengros, William D. Director None
Fessel, Jonathan P. Vice President None
Fitzgerald, Robert M. Chief Financial Officer and Treasurer None
Gallagher, Michael J. Vice President None
Goldsmith, David S. Vice President None
Gray, Ronald H. Vice President None
<PAGE>
Hussey, John B. Vice President None
Janeczek, Edward W. Senior Vice President None
Jobe, Stephen R. Vice President None
Jones, Jonathan C. Vice President None
Lynch, William E. Senior Vice President None
McCarthy, Jacqueline A. Vice President None
Meyers, Andrew J. Executive Vice President None
Moyer, Fiora N. Regional Vice President None
Neugebauer, Phil J. Vice President None
Nguyen, Vinh T. Vice President, Controller None
Pearlman, Joffrey H. Regional Vice President None
Pisapia, Glynne P. Regional Vice President None
Russell, Matthew M. Vice President None
Schott, Newton B., Jr. Director, Executive Vice None
President/Secretary, Chief
Administrative/Legal Officer and
Secretary
Smith, Robert M. Vice President None
Spear, Ellen Z. Vice President None
Stone, David P. Regional Vice President None
Sullivan, Daniel W. Vice President None
Thomas, William H., Jr. Regional Vice President None
Treadway, Stephen J. Director, Chairman, President and None
Chief Executive Officer
Troyer, Paul H. Senior Vice President None
<PAGE>
Trumbore, Brian F. Executive Vice President None
Weil, Richard M. Assistant Secretary None
Zimmerman, Glen A. Vice President None
</TABLE>
* The business address of all directors and officers of the Distributor is
either 2187 Atlantic Street, Stamford, CT 06902 or 800 Newport Center Drive,
Newport Beach, CA 92660.
(c) Not Applicable
Item 30. Location of Accounts and Records
The account books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder will
be maintained at the offices of Pacific Investment Management
Company, 840 Newport Center Drive, Newport Beach, California
92660, and Investors Fiduciary Trust Company, 127 West 10th
Street, Kansas City, Missouri 64105.
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Not Applicable
(b) Registrant undertakes to file a post-effective
amendment, using financial statements which need not
be certified, within four to six months from the
latter of the effective date of Registrant's
Registration Statement under the Securities Act of
1933 or the date of which shares of the Funds are
first offered (other than shares sold for seed
money).
(c) Registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders
upon request and without charge.
(d) Registrant undertakes to call a meeting of
shareholders for the purpose of voting upon the
question of removal of a person serving as Trustee if
requested in writing to do so by the holders of not
less than 10% of the outstanding shares of
Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Washington in the District of Columbia on the 18th
day of December, 1997.
PIMCO VARIABLE INSURANCE TRUST
By:____________________________
R. Wesley Burns*
President
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
Signatures Title Date
___________________ Trustee December 18, 1997
Guilford C. Babcock*
___________________ Trustee December 18, 1997
Thomas P. Kemp*
___________________ Trustee and December 18, 1997
Brent R. Harris* Chairman
____________________ Trustee December 18, 1997
William J. Popejoy*
____________________ Trustee December 18, 1997
Vern O. Curtis*
____________________ Trustee and December 18, 1997
R. Wesley Burns* President
<PAGE>
____________________ Treasurer (Principal December 18, 1997
John P. Hardaway* Financial and
Accounting Officer)
</TABLE>
* By: /s/ Robert W. Helm
------------------
Robert W. Helm,
as attorney-in-fact
* Pursuant to powers of attorney filed as Exhibit 19 to the initial Registration
Statement on October 3, 1997.
<PAGE>
PIMCO Variable Insurance Trust
Index to Exhibits
Exhibit 5 Form of Investment Advisory Contract
Exhibit 6 Form of Distribution Contract
Exhibit 8 Form of Custodian Agreement
Exhibit 9(i) Form of Administration Agreement
Exhibit 9(ii) Form of Participation Agreement
Exhibit 9(iii) Form of Services Agreement
Exhibit 13 Form of Subscription Agreement
INVESTMENT ADVISORY CONTRACT
PIMCO Variable Insurance Trust
840 Newport Center Drive
Newport Beach, California 92260
____________________, 1997
Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, California 92260
Dear Sirs:
This will confirm the agreement between the undersigned (the "Trust") and
Pacific Investment Management Company (the "Adviser") as follows:
1. The Trust is an open-end investment company which currently has ten
separate investment portfolios, all of which are subject to this agreement: the
Money Market Portfolio; the Short-Term Bond Portfolio; the Low Duration Bond
Portfolio; the High Yield Bond Portfolio; the Total Return Bond Portfolio; the
Global Bond Portfolio; the Foreign Bond Portfolio; the Emerging Markets Bond
Portfolio; the StocksPLUS Growth and Income Portfolio; and the Strategic
Balanced Portfolio (the "Portfolios"). Additional investment portfolios may be
established in the future. This Contract shall pertain to the Portfolios and to
such additional investment portfolios as shall be designated in Supplements to
this Contract, as further agreed between the Trust and the Adviser. The Trust
engages in the business of investing and reinvesting the assets of each
Portfolio in the manner and in accordance with the investment objective and
restrictions applicable to that Portfolio as specified in the currently
effective Prospectus (the "Prospectus") for the Trust included in the
registration statement, as amended from time to time (the "Registration
Statement"), filed by the Trust under the Investment Company Act of 1940 (the
"1940 Act") and the Securities Act of 1933 ("1933 Act"). Copies of the documents
referred to in the preceding sentence have been furnished to the Adviser. Any
amendments to those documents shall be furnished to the Adviser promptly.
Pursuant to a Distribution Contract, as amended (the "Distribution Contract"),
between the Trust and PIMCO Funds Distribution Company (the "Distributor"), the
Trust has employed the Distributor to serve as principal underwriter for the
shares of beneficial interest of the Trust. Pursuant to an Administration
Agreement ("Administration Agreement") between the Trust and the Adviser, the
Trust has also retained the Adviser to provide the Trust with administrative and
other services.
2. The Trust hereby appoints the Adviser to provide the investment advisory
services specified in this Contract and the Adviser hereby accepts such
appointment.
<PAGE>
3. (a) The Adviser shall, at its expense, (i) employ or associate with
itself such persons as it believes appropriate to assist it in performing its
obligations under this contract and (ii) provide all services, equipment and
facilities necessary to perform its obligations under this Contract.
(b) The Trust shall be responsible for all of its expenses and
liabilities, including compensation of its Trustees who are not affiliated with
the Adviser, the Distributor or any of their affiliates; taxes and governmental
fees; interest charges; fees and expenses of the Trust's independent accountants
and legal counsel; trade association membership dues; fees and expenses of any
custodian (including maintenance of books and accounts and calculation of the
net asset value of shares of the Trust), transfer agent, registrar and dividend
disbursing agent of the Trust; expenses of issuing, selling, redeeming,
registering and qualifying for sale shares of beneficial interest in the Trust;
expenses of preparing and printing share certificates, prospectuses and reports
to shareholders or other appropriate recipients, notices, proxy statements and
reports to regulatory agencies; the cost of office supplies, including
stationery; travel expenses of all officers, Trustees and employees; insurance
premiums; brokerage and other expenses of executing portfolio transactions;
expenses of shareholders' or variable insurance contract holders' meetings;
organizational expenses; and extraordinary expenses. Notwithstanding the
foregoing, the Trust may enter into a separate agreement, which shall be
controlling over this contract, as amended, pursuant to which some or all of the
foregoing expenses of this Section 3(b) shall be the responsibility of the other
party or parties to that agreement.
4. (a) The Adviser shall provide to the Trust investment guidance and
policy direction in connection with the management of the Portfolios, including
oral and written research, analysis, advice, and statistical and economic data
and information.
Consistent with the investment objectives, policies and restrictions
applicable to the Trust and the Portfolios, the Adviser will determine the
securities and other assets to be purchased or sold by each Portfolio and will
determine what portion of each Portfolio shall be invested in securities or
other assets, and what portion, if any, should be held uninvested.
The Trust will have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to investment
advisory clients of the Adviser. It is understood that the Adviser will not use
any inside information pertinent to investment decisions undertaken in
connection with this Contract that may be in its possession or in the possession
of any of its affiliates, nor will the Adviser seek to obtain any such
information.
(b) The Adviser also shall provide to the officers of the Trust
administrative assistance in connection with the operation of the Trust and the
Portfolios, which shall include (i) compliance with all reasonable requests of
the Trust for information, including information required in connection with the
Trust's filings with the Securities and Exchange Commission and state securities
commissions, and (ii) such other services as the Adviser shall from time to time
determine to be necessary or useful to the administration of the Trust and the
Portfolios.
<PAGE>
(c) As manager of the assets of the Portfolios, the Adviser shall
make investments for the account of the Portfolios in accordance with the
Adviser's best judgment and within the investment objectives, policies, and
restrictions set forth in the Prospectus, the 1940 Act and the provisions of the
Internal Revenue Code relating to regulated investment companies that serve as
underlying investment media of variable insurance contracts, subject to policy
decisions adopted by the Trust's Board of Trustees.
(d) The Adviser shall furnish to the Trust's Board of Trustees
periodic reports on the investment performance of the Trust and the Portfolios
and on the performance of its obligations under this Contract and shall supply
such additional reports and information as the Trust's officers or Board of
Trustees shall reasonably request.
(e) On occasions when the Adviser deems the purchase or sale of a
security to be in the best interest of a Portfolio as well as other of its
clients, the Adviser, to the extent permitted by applicable law, may aggregate
the securities to be so sold or purchased in order to obtain the best execution
of the order or lower brokerage commissions, if any. The Adviser may also on
occasion purchase or sell a particular security for one or more clients in
different amounts. On either occasion, and to the extent permitted by applicable
law and regulations, allocation of the securities so purchased or sold, as well
as the expenses incurred in the transaction, will be made by the Adviser in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Trust and to such other customers.
(f) The Adviser may cause a Portfolio to pay a broker which provides
brokerage and research services to the Adviser a commission for effecting a
securities transaction in excess of the amount another broker might have
charged. Such higher commissions may not be paid unless the Adviser determines
in good faith that the amount paid is reasonable in relation to the services
received in terms of the particular transaction or the Adviser's overall
responsibilities to the Trust and any other of the Adviser's clients.
5. (a) The Adviser shall immediately notify the Trust in the event (1)
that the Securities and Exchange Commission has censured the Adviser; placed
limitations upon its activities, functions or operations; suspended or revoked
its registration as an investment adviser; or has commenced proceedings or an
investigation that may result in any of these actions, (2) upon having a
reasonable basis for believing that any Portfolio has ceased to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code, or
(3) upon having a reasonable basis for believing that any Portfolio has ceased
to comply with the diversification provisions of Section 817(h) of the Internal
Revenue Code or the Regulations thereunder. The Adviser further agrees to notify
the Trust immediately of any material fact known to the Adviser respecting or
relating to the Adviser that is not contained in the Registration Statement or
Prospectus for the Trust, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue.
(b) The Adviser shall be responsible for making inquiries and for
reasonably ensuring that any employee of the Adviser, any person or firm that
the Adviser has employed or with which it has associated, or any employee has
not, to the best of the Adviser's knowledge, in any material connection with the
handling of Trust assets: (i) been convicted, in the last ten (10) years, of any
felony or misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving violations
of Sections 1341, 1342, or 1343 of Title 18, United States Code; or (ii) been
found by any state regulatory authority, within the last ten (10) years, to have
violated or to have acknowledged violation of any provision of any state
insurance law involving fraud, deceit or knowing misrepresentation; or (iii)
been found by any federal or state regulatory authorities, within the last ten
(10) years, to have violated or to have acknowledged violation of any provisions
of federal or state securities laws involving fraud, deceit or knowing
misrepresentation.
<PAGE>
6. The Adviser shall give the Trust the benefit of the Adviser's best
judgment and efforts in rendering services under this Contract. As an inducement
to the Adviser's undertaking to render these services, the Trust agrees that the
Adviser shall not be liable under this Contract for any mistake in judgment or
in any other event whatsoever, provided that nothing in this Contract shall be
deemed to protect or purport to protect the Adviser against any liability to the
Trust or its shareholders to which the Adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of the Adviser's duties under this Contract or by reason of the Adviser's
reckless disregard of its obligations and duties hereunder.
7. In consideration of the services to be rendered by the Adviser
under this Contract, each Portfolio shall pay the Adviser a monthly fee on the
first business day of each month, based upon the average daily value (as
determined on each business day at the time set forth in the Prospectus for
determining net asset value per share) of the net assets of the Portfolio during
the preceding month, at the following annual rates: Money Market Portfolio:
0.30%; Short-Term Bond Portfolio: 0.35%; Low Duration Bond Portfolio, Total
Return Bond Portfolio and StocksPLUS Growth and Income Portfolio: 0.40%;
Strategic Balanced Portfolio and High Yield Bond Portfolio: 0.50%; Global Bond
Portfolio and Foreign Bond Portfolio: 0.60%; and Emerging Markets Bond
Portfolio: 0.65%.
If the fees payable to the Adviser pursuant to this paragraph 6
begin to accrue before the end of any month or if this Contract terminates
before the end of any month, the fees for the period from that date to the end
of that month or from the beginning of that month to the date of termination, as
the case may be, shall be prorated according to the proportion which the period
bears to the full month in which the effectiveness or termination occurs. For
purposes of calculating the monthly fees, the value of the net assets of each
Portfolio shall be computed in the manner specified in the Prospectus for the
computation of net asset value. For purposes of this Contract, a "business day"
is any day the New York Stock Exchange is open for trading or as otherwise
provided in the Trust's prospectus.
<PAGE>
8. If the aggregate expenses of every character incurred by, or
allocated to, the Trust in any fiscal year, other than interest, taxes,
brokerage commissions and other portfolio transaction expenses, other
expenditures which are capitalized in accordance with generally accepted
accounting principles and any extraordinary expense (including, without
limitation, litigation and indemnification expense), but including the fees
payable under this Contract ("includable expenses"), shall exceed any expense
limitations applicable to the Trust, the Adviser shall pay the Trust an amount
equal to that excess. With respect to portions of a fiscal year in which this
Contract shall be in effect, the foregoing limitations shall be prorated
according to the proportion which that portion of the fiscal year bears to the
full fiscal year. At the end of each month of the Trust's fiscal year, the
Adviser will review the includable expenses accrued during that fiscal year to
the end of the period and shall estimate the contemplated includable expenses
for the balance of that fiscal year. If, as a result of that review and
estimation, it appears likely that the includable expenses will exceed the
limitations referred to in this paragraph 7 for a fiscal year with respect to
the Trust, the monthly fees relating to the Trust payable to the Adviser under
this Contract and under the Administration Agreement for such month shall be
reduced, subject to a later reimbursement to reflect actual expenses, by an
amount equal to a pro rata portion (prorated on the basis of the remaining
months of the fiscal year, including the month just ended) of the amount by
which the includable expenses for the fiscal year (less an amount equal to the
aggregate of actual reductions made pursuant to this provision with respect to
prior months of the fiscal year) are expected to exceed the limitations provided
in this paragraph 7. For purposes of the foregoing, the value of the net assets
of each Portfolio of the Trust shall be computed in the manner specified in
paragraph 6, and any payments required to be made by the Adviser shall be made
once a year promptly after the end of the Trust's fiscal year.
9. The Trust and the Adviser acknowledge that the Trust will offer its
shares so that it may serve as an investment vehicle for variable annuity
contracts and variable life insurance policies issued by insurance companies, as
well as to qualified pension and retirement plans and other appropriate
investors. Shares of the Portfolios may be offered only to separate accounts and
general accounts of insurance companies that are approved in writing by the
Adviser. The Adviser shall be under no obligation to investigate insurance
companies to which the Trust offers or proposes to offer its shares.
10. (a) This Contract shall become effective with respect to the
Portfolios on _________________, 1997 (and, with respect to any amendment, or
with respect to any additional portfolio, the date of the amendment or
Supplement hereto) and shall continue in effect with respect to a Portfolio for
a period of more than two years from that date (or, with respect to any
additional portfolio, the date of the Supplement) only so long as the
continuance is specifically approved at least annually (i) by the vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio or by the Trust's Board of Trustees and (ii) by the vote, cast in
person at a meeting called for the purpose, of a majority of the Trust's
trustees who are not parties to this Contract or "interested persons" (as
defined in the 1940 Act) of any such party.
(b) This Contract may be terminated with respect to a Portfolio (or
any additional 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 the Adviser or by the Adviser on 60 days'
written notice to the Trust. This Contract (or any Supplement hereto) shall
terminate automatically in the event of its assignment (as defined in the 1940
Act).
<PAGE>
11. Except to the extent necessary to perform the Adviser's
obligations under this Contract, nothing herein shall be deemed to limit or
restrict the right of the Adviser, or any affiliate of the Adviser, or any
employee of the Adviser, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
12. The investment management services of the Adviser to the Trust
under this contract are not to be deemed exclusive as to the Adviser and the
Adviser will be free to render similar services to others.
13. This Contract shall be construed in accordance with the laws of
the State of California, provided that nothing herein shall be construed in a
manner inconsistent with the 1940 Act.
14. The Declaration of Trust establishing the Trust, dated
____________, 1997 provides that the name "PIMCO Variable Insurance Trust"
refers to the trustees under the Declaration collectively as trustees and not as
individuals or personally, and that no shareholder, trustee, officer, employee
or agent of the Trust shall be subject to claims against or obligations of the
Trust to any extent whatsoever, but that the Trust estate only shall be liable.
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
PIMCO VARIABLE INSURANCE TRUST
By:__________________________
Title:
ACCEPTED:
PACIFIC INVESTMENT MANAGEMENT COMPANY
By:_________________________
Title:
DISTRIBUTION CONTRACT
PIMCO Variable Insurance Trust
840 Newport Center Drive
Newport Beach, California 92660
__________, 1997
PIMCO Funds Distribution Company
2187 Atlantic Avenue
Stanford, Connecticut 06902
Dear Sirs:
This will confirm the agreement between the undersigned (the "Trust")
and you (the "Distributor") as follows:
1. Description of Trust and Classes of Shares. The Trust is an open-end
investment company which presently has the following ten investment portfolios:
Money Market Portfolio; Short-Term Bond Portfolio; Total Return Bond Portfolio;
Low Duration Bond Portfolio; StocksPLUS Growth and Income Portfolio; Global Bond
Portfolio; High Yield Bond Portfolio; Strategic Balanced Portfolio; Foreign Bond
Portfolio; and Emerging Markets Bond Portfolio (each a "Portfolio," and
collectively, the "Portfolios"). Additional investment portfolios may be
established in the future. This Contract shall pertain to the Portfolios and to
such additional investment portfolios as shall be designated in Supplements to
this Contract, as further agreed between the Trust and the Distributor. A
separate series of shares of beneficial interest in the Trust is offered to
investors with respect to each Portfolio. The Trust engages in the business of
investing and reinvesting the assets of the Portfolios in the manner and in
accordance with the investment objectives and restrictions specified in the
Trust's currently effective Prospectus or Prospectuses and Statement of
Additional Information (together, the "Prospectus") relating to the Portfolios
included in the Trust's Registration Statement, as amended from time to time
(the "Registration Statement"), as filed by the Trust under the Investment
Company Act of 1940, as amended (together with the rules and regulations
thereunder, the "1940 Act") and the Securities Act of 1933, as amended (together
with the rules and regulations thereunder, the "1933 Act"). Copies of the
documents referred to in the preceding sentence have been furnished to the
Distributor. Any amendments to those documents shall be furnished to the
Distributor promptly.
2. Appointment and Acceptance. The Trust hereby appoints the
Distributor as a distributor of shares of beneficial interest in the Trust (the
"shares") which may from time to time be registered under the 1933 Act and as
servicing agent of shareholders and shareholder accounts of the Trust, and the
Distributor hereby accepts such appointment in accordance with the terms and
conditions set forth herein. As the Trust's agent, the Distributor shall, except
to the extent provided in Section 4 hereof, be the exclusive distributor for the
unsold portion of the shares.
<PAGE>
3. Sale of Shares to Distributor and Sales by Distributor. The
Distributor will have the right, as principal, to sell shares of each Portfolio
against orders therefor at the applicable public offering price. For such
purposes, the Distributor will have the right to purchase shares at net asset
value. The Distributor will also have the right, as agent, to sell shares of a
Portfolio indirectly through broker dealers who are members of the National
Association of Securities Dealers, Inc. and who are acting as introducing
brokers pursuant to clearing agreements with the Distributor ("introducing
brokers"), to broker dealers which are members of the National Association of
Securities Dealers, Inc. and who have entered into selling agreements with the
Distributor ("participating brokers") or through other financial intermediaries,
in each case against orders therefor. The price for introducing brokers,
participating brokers and other financial intermediaries shall be net asset
value.
The Trust shall sell through the Distributor, as the Trust's agent,
shares to eligible investors as described in the Prospectus. All orders through
the Distributor shall be subject to acceptance and confirmation by the Trust.
The Trust shall have the right, at its election, to deliver either shares issued
upon original issue or treasury shares.
Prior to the time of transfer of any shares by the Trust to, or on the
order of, the distributor or any introducing broker, participating broker or
other financial intermediary, the Distributor shall pay or cause to be paid to
the Trust or to its order an amount in New York clearing house funds equal to
the applicable net asset value of the shares. Upon receipt of registration
instructions in proper form, the distributor will transmit or cause to be
transmitted such instructions to the Trust or its agent for registration of the
shares purchased.
The public offering price of the shares shall be the net asset value of
such shares, plus any applicable sales charge as set forth in the Prospectus. In
no event will any applicable sales charge or underwriting discount exceed the
limitations on permissible sales loads imposed by Section 22(b) of the 1940 Act
and Rule 2830(d)(1) of the Conduct Rules of the National Association of
Securities Dealers, Inc., as either or both may be amended from time to time.
On every sale, the Trust shall receive the net asset value of the
shares. The net asset value of shares shall be determined in the manner provided
in the Trust Instrument and By-laws of the Trust as then amended. The
Distributor may retain so much of any sales charge or underwriting discount as
is not allowed by the Distributor as a concession to dealers and such sales
charge or underwriting discount shall be in addition to any fee paid to the
Distributor.
4. Sales of Shares by the Trust. In addition to sales by the
Distributor, the Trust reserves the right to issue shares at any time directly
to its shareholders as a stock dividend or stock split or to sell shares to its
shareholders or other persons at not less than net asset value to the extent
that the Trust, its officers, or other persons associated with the Trust
participate in the sale, or to the extent that the Trust or any transfer agent
for its shares receive purchase requests for shares.
<PAGE>
5. Reservation of Right Not to Sell. The Trust reserves the right to
refuse at any time or times to sell any of its shares for any reason deemed
adequate by it.
6. Use of Sub-Agents; Non-exclusivity. The Distributor may employ such
sub-agents, including one or more participating brokers or introducing brokers,
for the purposes of selling shares of the Trust as the Distributor, in its sole
discretion, shall deem advisable or desirable. The Distributor may enter into
similar arrangements with other issuers and, except to the extent necessary to
perform its obligations hereunder, nothing herein shall be deemed to limit or
restrict the right of the Distributor, or any affiliate of the Distributor, or
any employee of the Distributor, to engage in any other business or to devote
time and attention to the management or other aspects of any other business,
whether of a similar or dissimilar nature, or to render services of any kind to
any other corporation, firm, individual or association.
7. Repurchase of Shares. The Distributor will act as agent for the
Trust in connection with the repurchase and redemption of shares by the Trust
upon the terms and conditions set forth in the Prospectus or as the Trust acting
through its Trustees may otherwise direct. The Distributor may employ such
sub-agents, including one or more participating brokers or introducing brokers,
for such purposes as the Distributor, in its sole discretion, shall deem to be
advisable or desirable. Any contingent deferred sales charge imposed on
repurchases and redemptions of shares upon the terms and conditions set forth in
the Prospectus shall be paid to the Distributor. The Trust will take such steps
as are commercially reasonable to track on a share-by-share basis the aging of
its shares for purposes of calculating any contingent deferred sales charges
and/or distribution fees.
8. Basis of Purchases and Sales of Shares. The Distributor's obligation
to sell shares hereunder shall be on a best efforts basis only and the
Distributor shall not be obligated to sell any specific number of shares. Shares
will be sold by the Distributor only against orders therefor. The Distributor
will not purchase shares from anyone other than the Trust except in accordance
with Section 7 hereof, and will not take "long" or "short" positions in shares
contrary to any applicable provisions of the Trust Instrument of the Trust, as
amended.
9. Rules of Securities Associations, etc. As the Trust's agent, the
Distributor may sell and distribute shares in such manner not inconsistent with
the provisions hereof and the Trust's Prospectus as the Distributor may
determine from time to time. In this connection, the Distributor shall comply
with all laws, rules and regulations applicable to it, including, without
limiting the generality of the foregoing, all applicable rules or regulations
under the 1940 Act and of any securities association registered under the
Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "1934 Act"). The Distributor will conform to the
Conduct Rules of the National Association of Securities Dealers, Inc. and the
securities laws of any jurisdiction in which it sells, directly or indirectly,
any shares. The Distributor also agrees to furnish to the Trust sufficient
copies of any agreement or plans it intends to use in connection with any sales
of shares in adequate time for the Trust to file and clear them with the proper
authorities before they are put in use, and not to use them until so filed and
cleared.
<PAGE>
10. Independent Contractor. The Distributor shall be an independent
contractor and neither the Distributor nor any of its officers or employees as
such, is or shall be an employee of the Trust. The Distributor is responsible
for its own conduct and the employment, control and conduct of its agents and
employees and for injury to such agents or employees or to others through its
agents or employees. The Distributor assumes full responsibility for its agents
and employees under applicable statutes and agrees to pay all employer taxes
thereunder.
11. Registration and Qualification of Shares. The Trust agrees to
execute such papers and to do such acts and things as shall from time to time be
reasonably requested by the Distributor for the purpose of qualifying and
maintaining qualification of the shares for sale under the so-called Blue Sky
Laws or insurance laws of any state or for maintaining the registration of each
Portfolio of the Trust and the Trust under the 1933 Act and the 1940 Act, to the
end that there will be available for sale from time to time such number of
shares as the Distributor may reasonably be expected to sell. The Trust shall
advise the Distributor promptly of (a) any action of the Securities and Exchange
Commission or any authorities of any state or territory, of which it may be
advised, affecting registration or qualification of the Trust, a Portfolio or
the shares thereof, or rights to offer such shares for sale and (b) the
happening of any event which makes untrue any statement or which requires the
making of any change in the registration statement or Prospectus in order to
make the statements therein not misleading.
12. Securities Transactions. The Trust agrees that the Distributor may
effect a transaction on any national securities exchange of which it is a member
for the account of the Trust and any Portfolio of the Trust which is permitted
by Section 11(a) of the 1934 Act.
13. Expenses.
(a) The Distributor shall from time to time employ or
associate with it such persons as it believes necessary to assist it in carrying
out its obligations under this Contract. The compensation of such persons shall
be paid by the Distributor.
(b) The Distributor shall pay all expenses incurred in
connection with its qualification as a dealer or broker under Federal or state
law.
(c) The Distributor will pay all expenses of preparing,
printing and distributing advertising and sales literature as such expenses
relate to the shares (apart from expenses of registering shares under the 1933
Act and the 1940 Act and the preparation and printing of prospectuses and
reports for shareholders or others as required by said acts and the direct
expenses of the issue of shares, except that the Distributor will pay the cost
of the preparation and printing of prospectuses and shareholders' reports used
by it in the sale of Trust shares).
<PAGE>
(d) The Trust shall pay or cause to be paid all expenses
incurred in connection with (i) the preparation, printing and distribution to
shareholders or others of the Prospectus and reports and other communications to
existing shareholders or other appropriate recipients, (ii) future registrations
of shares under the 1933 Act and the 1940 Act, (iii) amendments of the
Registration Statement subsequent to the initial public offering of shares, (iv)
qualification of shares for sale in jurisdictions designated by the Distributor,
including under the securities, insurance or so-called "blue sky" law of any
State, (v) qualification of the Trust as a dealer or broker under the laws of
jurisdictions designated by the Distributor, (vi) qualification of the Trust as
a foreign corporation authorized to do business in any jurisdiction if the
Distributor determines that such qualification is necessary or desirable for the
purpose of facilitating sales of shares, (vii) maintaining facilities for the
issue and transfer of shares, (viii) supplying information, prices and other
data to be furnished by the Trust under this Contract, (ix) any expenses assumed
by the Trust with regard to shares of each Portfolio pursuant to any
distribution and/or servicing plan (a "Plan").
(e) The Trust shall pay any original issue taxes or transfer
taxes applicable to the sale or delivery of shares or certificates therefor.
14. Indemnification of Distributor. The Trust shall prepare and furnish
to the Distributor from time to time such number of copies of the most recent
form of the Prospectus filed with the Securities and Exchange Commission as the
Distributor may reasonably request. The Trust authorizes the Distributor to use
the Prospectus, in the form furnished to the Distributor from time to time, in
connection with the sale of shares. The Trust shall indemnify, defend and hold
harmless the Distributor, its officers and trustees and any person who controls
the Distributor within the meaning of the 1933 Act, from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which the Distributor, its officers and trustees or any
such controlling person may incur under the 1933 Act, the 1940 Act, the common
law or otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus or
arising out of or based upon any alleged omission to state a material fact
required to be stated in either or necessary to make the statements in either
not misleading. This Contract shall not be construed to protect the Distributor
against any liability to the Trust or its shareholders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Contract. This indemnity
agreement is expressly conditioned upon the Trust being notified of any action
brought against the Distributor, its officers or directors or any such
controlling person, which notification shall be given by letter or by telegram
addressed to the Trust at its principal office in Newport Beach, California, and
sent to the Trust by the person against whom such action is brought within 10
days after the summons or other first legal process shall have been served. The
failure to notify the Trust of any such action shall not relieve the Trust from
any liability which it may have to the person against whom such action is
brought by reason of any such alleged untrue statement or omission otherwise
than on account of the indemnity agreement contained in this Section 14. The
Trust shall be entitled to assume the defense of any suit brought to enforce any
such claim, demand or liability, but, in such case, the defense shall be
conducted by counsel chosen by the Trust and approved by the Distributor. If the
Trust elects to assume the defense of any such suit and retain counsel approved
by the Distributor, the defendant or defendants in such suit shall bear the fees
and expenses of any additional counsel retained by any of them, but in case the
Trust does not elect to assume the defense of any such suit, or in the case the
Distributor reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse the Distributor, its officers and directors or the
controlling person or persons named as defendant or defendants in such suit, for
the reasonable fees and expenses of any counsel retained by the Distributor or
them. In addition, the Distributor shall have the right to employ counsel to
represent it, its officers and directors and any such controlling person who may
be subject to liability arising out of any claim in respect of which indemnity
may be sought by the Distributor against the Trust hereunder if in the
reasonable judgment of the Distributor it is advisable for the Distributor, its
officers and directors or such controlling person to be represented by separate
counsel, in which event the fees and expense of such separate counsel shall be
borne by the Trust. This indemnity agreement and the Trust's representations and
warranties in this contract shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Distributor, its
officers and directors or any such controlling person. This indemnity agreement
shall inure exclusively to the benefit of the Distributor and its successors,
the Distributor's officers and directors and their respective estates and any
such controlling persons and their successors and estates. The Trust shall
promptly notify the Distributor of the commencement of any litigation or
proceedings against it in connection with the issue and sale of any shares.
<PAGE>
15. Indemnification of Trust. The Distributor agrees to indemnify,
defend and hold harmless the Trust, its officers and Trustees and any person who
controls the Trust within the meaning of the 1933 Act, from and against any and
all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or Trustees
or any such controlling person, may incur under the 1933 Act, the 1940 Act, the
common law or otherwise, but only to the extent that such liability or expense
incurred by the Trust, its officers or Trustees or such controlling person
resulting from such claims or demands shall arise out of or be based upon (a)
any alleged untrue statement of a material fact contained in information
furnished by the Distributor to the Trust for use in the Registration Statement
or the Prospectus or shall arise out of or be based upon any alleged omission to
state a material fact in connection with such information required to be stated
in the Registration Statement or the Prospectus or necessary to make such
information not misleading, (b) any alleged act or omission on the Distributor's
part as the Trust's agent that has not been expressly authorized by the Trust in
writing, and (c) any claim, action, suit or proceeding which arises out of or is
alleged to arise out of the Distributor's failure to exercise reasonable care
and diligence with respect to its services rendered in connection with
investment, reinvestment, employee benefit and other plans for shares. The
foregoing rights of indemnification shall be in addition to any other rights to
which the Trust or a Trustee may be entitled as a matter of law. This indemnity
agreement is expressly conditioned upon the Distributor being notified of an
action brought against the Trust, its officers or Trustees or any such
controlling person, which notification shall be given by letter or telegram
addressed to the Distributor at its principal office in Stamford, Connecticut,
and sent to the Distributor by the person against whom such action is brought,
within 10 days after the summons or other first legal process shall have been
served. The failure to notify the Distributor of any such action shall not
relieve the Distributor from any liability which it may have to the Trust, its
officers or Trustees or such controlling person by reason of any alleged
misstatement, omission, act or failure on the Distributor's part otherwise than
on account of the indemnity agreement contained in this Section 15. The
Distributor shall have a right to control the defense of such action with
counsel of its own choosing and approved by the Trust if such action is based
solely upon such alleged misstatement, omission, act or failure on the
Distributor's part, and in any other event the Trust, its officers and Trustees
or such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action at their own expense.
If the Distributor elects to assume the defense of any such suit and retain
counsel approved by the Trust, the defendant or defendants in such suit shall
bear the fees and expenses of any additional counsel retained by any of them,
but in case the Distributor does not elect to assume the defense of any such
suit, or in the case the Trust does not approve of counsel chosen by the
Distributor, the Distributor will reimburse the Trust, its officers and Trustees
or the controlling person or persons named as defendant or defendants in such
suit, for the fees and expenses of any counsel retained by the Trust or them. In
addition, the Trust shall have the right to employ counsel to represent it, its
officers and Trustees and any such controlling person who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the Trust against the Distributor hereunder if in the reasonable judgment of
the Trust it is advisable for the Trust, its officers and Trustees or such
controlling person to be represented by separate counsel, in which event the
fees and expense of such separate counsel shall be borne by the Distributor.
This indemnity agreement and the Distributor's representations and warranties in
this Contract shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of the Trust, its officers and Trustees
or any such controlling person. This indemnity agreement shall inure exclusively
to the benefit of the Trust and its successors, the Trust's officers and
Trustees and their respective estates and any such controlling persons and their
successors and estates. The Distributor shall promptly notify the Trust of the
commencement of any litigation and proceedings against it in connection with the
issue and sale of any shares
<PAGE>
16. Assignment Terminates this Contract; Amendments of this Contract.
This Contract shall automatically terminate, without the payment of any penalty,
in the event of its assignment. This Contract may be amended only if such
amendment be approved either by action of the Trustees of the Trust or at a
meeting of the shareholders of the Trust by the affirmative vote of a majority
of the outstanding shares of the Trust, and by a majority of the Trustees of the
Trust who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of any Plan or this Contract by
vote cast in person at a meeting called for the purpose of voting on such
approval.
17. Effective Period and Termination of this Contract. This Contract
shall take effect upon the date first above written and shall remain in force
and effect continuously as to a Portfolio (unless terminated automatically as
set forth in Section 16 hereof) until terminated.
(a) Either by such Portfolio or the Distributor by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the other
party; or
(b) Automatically as to any Portfolio or class thereof at the
close of business two years from the date hereof, or upon the
expiration of one year from the effective date of the last continuance
of this Contract, whichever is later, if the continuance of this
Contract is not specifically approved at least annually by the Trustees
of the Trust or the shareholders of such Portfolio or such class by the
affirmative vote of a majority of the outstanding shares of such
Portfolio or such class, and by a majority of the Trustees of the Trust
who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of any Plan or this
Contract by voting cast in person at a meeting called for the purpose
of voting on such approval.
Action by a Portfolio under (a) above may be taken either (i) by vote
of the Trustees of the Trust, or (ii) by the affirmative vote of a majority of
the outstanding shares of such Portfolio. The requirement under (b) above that
the continuance of this Contract be "specifically approved at least annually"
shall be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder.
Termination of this Contract pursuant to this Section 17 shall be
without the payment of any penalty.
If this Contract is terminated or not renewed with respect to one or
more Portfolios, it may continue in effect with respect to any Portfolio or any
class thereof as to which it has not been terminated (or has been renewed).
18. Limited Recourse. The Distributor hereby acknowledges that the
Trust's obligations hereunder with respect to any distribution fee or servicing
fee or contingent deferred sales charges payable with respect to the shares of
any Portfolio of the Trust are binding only on the assets and property belonging
to such Portfolio.
19. Certain Definitions. For the purposes of this Contract, the
"affirmative vote of a majority of the outstanding shares" means the affirmative
vote, at a duly called and held meeting of shareholders, (a) of the holders of
67% or more of the shares of the Trust, or Portfolio, as the case may be,
present (in person or by proxy) and entitled to vote at such meeting, if the
holders of more than 50% of the outstanding shares of the Trust, or Portfolio,
as the case may be, entitled to vote at such meeting are present in person or by
proxy, or (b) of the holders of more than 50% of the outstanding shares of the
Trust, or Portfolio, as the case may be, entitled to vote at such meeting,
whichever is less.
<PAGE>
For the purposes of this Contract, the terms "interested persons" and
"assignment" shall have the meanings defined in the 1940 Act, subject, however,
to such exemptions as may be granted by the Securities and Exchange Commission
under said Act. Certain other items used herein that are not otherwise defined
have the meaning given in the Trust's Prospectus or constituent agreements or
documents of the Trust.
The Trust Instrument establishing the Trust, dated _________, 1997
provides that the name "PIMCO Variable Insurance Trust" refers to the Trustees
under the Trust Instrument collectively as Trustees and not as individuals or
personally, and that no shareholder, Trustee, officers, employee or agent of the
Trust shall be subject to claims against or obligations of the Trust (or a
particular Portfolio) to any extent whatsoever, but that the Trust (or a
particular Portfolio) shall only be liable.
If the foregoing correctly sets forth the agreement between the Trust
and the Distributor, please so indicate by signing and returning to the Trust
the enclosed copy hereof.
Very truly yours,
PIMCO VARIABLE INSURANCE TRUST
By: _______________________________
Title:
ACCEPTED:
PIMCO FUNDS DISTRIBUTION COMPANY
By: _______________________________
Title:
ADMINISTRATION AGREEMENT
ADMINISTRATION AGREEMENT, made this ____ day of _____________, 1997 between
PIMCO Variable Insurance Trust (the "Trust"), a Delaware business trust, and
Pacific Investment Management Company (the "Administrator" or "PIMCO"), a
general partnership organized under the laws of California.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
("Shares") in separate series with each such series representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Trust has established ten series, which are designated as the
Money Market Portfolio; the Short-Term Bond Portfolio; the Low Duration Bond
Portfolio; the High Yield Bond Portfolio the Total Return Bond Portfolio; the
Global Bond Portfolio; the Emerging Markets Bond Portfolio; the Foreign Bond
Portfolio; the StocksPLUS Growth and Income Portfolio; and the Strategic
Balanced Portfolio; such series, together with any other series subsequently
established by the Trust, with respect to which the Trust desires to retain the
Administrator to render administrative services hereunder, and with respect to
which the Administrator is willing to do so, being herein collectively referred
to also as the "Portfolios"; and
WHEREAS, pursuant to an Investment Advisory Contract dated ___________,
1997, between the Trust and PIMCO ("Investment Advisory Contract"), the Trust
has retained PIMCO to provide investment advisory services with respect to the
Portfolios in the manner and on the terms set forth therein; and
WHEREAS, the Trust wishes to retain PIMCO to provide administrative and
other services to the Trust with respect to the Portfolios in the manner and on
the terms hereinafter set forth; and
WHEREAS, PIMCO is willing to furnish such services in the manner and on the
terms hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. The Trust hereby appoints PIMCO as its
Administrator, to provide the administrative and other services with respect to
the Portfolios for the period and on the terms set forth in this Agreement. The
Administrator accepts such appointment and agrees during such period to render
the services herein set forth for the compensation herein provided.
<PAGE>
In the event the Trust establishes and designates additional series with
respect to which it desires to retain the Administrator to render administrative
and other services hereunder, it shall notify the Administrator in writing. If
the Administrator is willing to render such services it shall notify the Trust
in writing, whereupon such additional series shall become a Portfolio hereunder.
2. Duties. Subject to the general supervision of the Board of
Trustees, the Administrator shall provide all administrative and other services
reasonably necessary for the operation of the Portfolios other than the
investment advisory services provided pursuant to the Investment Advisory
Contract.
(a) Administrative Services. These services shall
include the following: (i) coordinating matters relating to
the operation of the Portfolios including any necessary
coordination among the adviser or advisers to the Portfolios,
the custodian, transfer agent (if any), dividend disbursing
agent, and recordkeeping agent (including pricing and
valuation of the Portfolios), insurance companies,
accountants, attorneys, and other parties performing services
or operational functions for the Portfolios; (ii) providing
the Portfolios, at the Administrator's expense, with the
services of a sufficient number of persons competent to
perform such administrative and clerical functions as are
necessary to ensure compliance with federal securities laws
and state insurance laws as well as other applicable laws, and
to provide effective administration of the Portfolios; (iii)
maintaining or supervising the maintenance by third parties of
such books and records of the Trust and the Portfolios as may
be required by applicable federal or state law other than the
records and ledgers maintained under the Investment Advisory
Contract; (iv) preparing or supervising the preparation by
third parties of all federal, state, and local tax returns and
reports of the Portfolios required by applicable law; (v)
preparing, filing, and arranging for the distribution of proxy
materials and periodic reports to shareholders of the
Portfolios or other appropriate parties as required by
applicable law; (vi) preparing and arranging for the filing of
such registration statements and other documents with the SEC
and other federal and state regulatory authorities as may be
required to register the shares of the Trust and qualify the
Trust to do business or as otherwise required by applicable
law; (vii) taking such other action with respect to the
Portfolios, as may be required by applicable law, including
without limitation the rules and regulations of the SEC and of
state securities and insurance commissions and other
regulatory agencies; and (viii) providing the Portfolios, at
the Administrator's expense, with adequate personnel, office
space, communications facilities, and other facilities
necessary for the Portfolios' operations as contemplated in
this Agreement.
(b) Other Services. The Administrator shall also
procure on behalf of the Trust and the Portfolios, and at the
expense of the Administrator, the following persons to provide
services to the Portfolios, to the extent necessary: (i) a
custodian or custodians for the Portfolios to provide for the
safekeeping of the Portfolios' assets; (ii) a recordkeeping
agent to maintain the portfolio accounting records for the
Portfolios; (iii) a transfer agent for the Portfolios; and
(iv) a dividend disbursing agent for the Portfolios. The Trust
may be a party to any agreement with any of the persons
referred to in this Section 3(b).
<PAGE>
(c) The Administrator shall also make its officers
and employees available to the Board of Trustees and officers
of the Trust for consultation and discussions regarding the
administration of the Portfolios and services provided to the
Portfolios under this Agreement.
(d) In performing these services, the Administrator:
(i) Shall conform with the 1940 Act and all rules
and regulations thereunder, all other applicable
federal and state laws and regulations, with any
applicable procedures adopted by the Trust's Board of
Trustees, and with the provisions of the Trust's
Registration Statement filed an Form N-1A as
supplemented or amended from time to time.
(ii) Will make available to the Trust, promptly
upon request, any of the Portfolios' books and
records as are maintained under this Agreement, and,
upon request by the Trust, will furnish to regulatory
authorities having the requisite authority any such
books and records and any information or reports in
connection with the Administrator's services under
this Agreement that may be requested in order to
ascertain whether the operations of the Trust are
being conducted in a manner consistent with
applicable laws and regulations.
(iii) Will regularly report to the Trust's Board
of Trustees on the services provided under this
Agreement and will furnish the Trust's Board of
Trustees with respect to the Portfolios such periodic
and special reports as the Trustees may reasonably
request.
3. Documentation. The Trust has delivered copies of each of
the following documents to the Administrator and will deliver to it all future
amendments and supplements thereto, if any:
(a) the Trust's Registration Statement as filed with
the SEC and any amendments thereto; and
(b) exhibits, powers of attorneys, certificates and any
and all other documents relating to or filed in connection with the
Registration Statement described above.
4. Independent Contractor. The Administrator shall for all
purposes herein be deemed to be an independent contractor and shall, unless
otherwise expressly provided herein or authorized by the Board of Trustees of
the Trust from time to time, have no authority to act for or represent the Trust
in any way or otherwise be deemed its agent.
<PAGE>
5. Compensation. As compensation for the services rendered
under this Agreement, the Trust shall pay to the Administrator a monthly fee,
calculated as a percentage (on an annual basis) of the average daily value of
the net assets of each of the Portfolios during the preceding month. The fee
rates applicable to each Portfolio shall be set forth in a schedule to this
Agreement. The fees payable to the Administrator for all of the Portfolios shall
be computed and accrued daily and paid monthly. If the Administrator shall serve
for less than any whole month, the foregoing compensation shall be prorated.
6. Non-Exclusivity. It is understood that the services of
the Administrator hereunder are not exclusive, and the Administrator shall be
free to render similar services to other investment companies and other clients.
7. Expenses. During the term of this Agreement, the
Administrator will pay all expenses incurred by it in connection with its
obligations under this Agreement, except such expenses as are assumed by the
Portfolios under this Agreement, and any expenses that are paid under the terms
of the Investment Advisory Contract. The Administrator assumes and shall pay for
maintaining its staff and personnel and shall, at its own expense provide the
equipment, office space, office supplies (including stationery), and facilities
necessary to perform its obligations under this Agreement. In addition, the
Administrator shall bear the following expenses under this Agreement:
(a) Expenses of all audits by Trust's independent
public accountants;
(b) Expenses of the Trust's transfer agent, registrar,
dividend disbursing agent, and shareholder recordkeeping
services;
(c) Expenses of the Trust's custodial services
including any recordkeeping services provided by the
custodian;
(d) Expenses of obtaining quotations for calculating
the value of each Portfolio's net assets;
(e) Expenses of obtaining Portfolio Activity Reports
for each Portfolio;
(f) Expenses of maintaining the Trust's tax records;
(g) Costs and/or fees, including legal fees, incident
to meetings of the Trust's shareholders or of any contract
owners with contract value allocated to the Trust, the
preparation, printing and mailings of prospectuses, notices
and proxy statements and reports of the Trust to its
shareholders or other appropriate recipients, the filing of
reports with regulatory bodies, the maintenance of the
Trust's existence and qualification to do business, and the
expense of issuing, redeeming, registering and qualifying
for sale, shares with federal and state securities and/or
insurance authorities;
<PAGE>
(h) The Trust's ordinary legal fees, including the
legal fees that arise in the ordinary course of business for
a Delaware business trust registered as an open-end
management investment company;
(i) Costs of printing certificates representing shares
of the Trust;
(j) The Trust's pro rata portion of the fidelity bond
required by Section 17(g) of the 1940 Act, or other
insurance premiums; and
(k) Association membership dues.
The Trust shall bear the following expenses:
(a) Salaries and other compensation or expenses,
including travel expenses, of any of the Trust's executive
officers and employees, if any, who are not officers,
directors, stockholders, partners or employees of the
Administrator or its subsidiaries or affiliates;
(b) Taxes and governmental fees, if any, levied against
the Trust or any of its Portfolios;
(c) Brokerage fees and commissions, and other portfolio
transaction expenses incurred for any of the Portfolios;
(d) Costs, including the interest expenses, of
borrowing money;
(e) Fees and expenses, including travel expenses, and
fees and expenses of legal counsel retained for their
benefit, of trustees who are not officers, employees,
partners or shareholders of PIMCO or its subsidiaries or
affiliates;
(f) Extraordinary expenses, including extraordinary
legal expenses, as may arise, including expenses incurred in
connection with litigation, proceedings, other claims and
the legal obligations of the Trust to indemnify its
trustees, officers, employees, shareholders, distributors,
and agents with respect thereto;
(g) Organizational and offering expenses of the Trust
and the Portfolios, and any other expenses which are
capitalized in accordance with generally accepted accounting
principles; and
(h) Any expenses allocated or allocable to a specific
class of shares.
<PAGE>
8. Liability. The Administrator shall give the Trust the
benefit of the Administrator's best efforts in rendering services under this
Agreement. The Administrator may rely on information reasonably believed by it
to be accurate and reliable. As an inducement for the Administrator's
undertaking to render services under this Agreement, the Trust agrees that
neither the Administrator nor its stockholders, officers, directors, or
employees shall be subject to any liability for, or any damages, expenses or
losses incurred in connection with, any act or omission or mistake in judgment
connected with or arising out of any services rendered under this Agreement,
except by reason of willful misfeasance, bad faith, or gross negligence in
performance of the Administrator's duties, or by reason of reckless disregard of
the Administrator's obligations and duties under this Agreement. This provision
shall govern only the liability to the Trust of the Administrator and that of
its stockholders, officers, directors, and employees, and shall in no way govern
the liability to the Trust or the Administrator or provide a defense for any
other person including persons that provide services for the Portfolios as
described in Section 2(b) of this Agreement.
9. Term and Continuation. This Agreement shall take effect as
of the date indicated above, and shall remain in effect, unless sooner
terminated as provided herein, for two years from such date, and shall continue
thereafter on an annual basis with respect to each Portfolio provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Board of Trustees of the Trust, or (b) by vote of a majority of
the outstanding voting shares of the Portfolios, and provided continuance is
also approved by the vote of a majority of the Board of Trustees of the Trust
who are not parties to this Agreement or "interested persons" (as defined in the
1940 Act) of the Trust, or PIMCO, cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated:
(a) by the Trust at any time with respect to the
services provided by the Administrator, by vote of a majority
of the entire Board of Trustees of the Trust or by a vote of a
majority of the outstanding voting shares of the Trust or,
with respect to a particular Portfolio, by vote of a majority
of the outstanding voting shares of such Portfolio, on 60
days' written notice to the Administrator;
(b) at or after the expiration of the two-year period
commencing the date of its effectiveness, by the Administrator
at any time, without the payment of any penalty, upon 60 days'
written notice to the Trust.
10. Use of Name. It is understood that the name "Pacific
Investment Management Company" or "PIMCO" or any derivative thereof or logo
associated with those names are the valuable property of PIMCO and its
affiliates, and that the right of the Trust and/or the Portfolios to use such
names (or derivatives or logos) shall be governed by the Investment Advisory
Contract.
11. Notices. Notices of any kind to be given to the
Administrator by the Trust shall be in writing and shall be duly given if mailed
or delivered to the Administrator at 840 Newport Center Drive, Newport Beach,
California 92660, or to such other address or to such individual as shall be
specified by the Administrator. Notices of any kind to be given to the Trust by
the Administrator shall be in writing and shall be duly given if mailed or
delivered to 840 Newport Center Drive, Newport Beach, California 92660, or to
such other address or to such individual as shall be specified by the Trust.
<PAGE>
12. Trust Obligation. Notice is hereby given that the
Agreement has been executed on behalf of the Trust by a trustee of the Trust in
his or her capacity as trustee and not individually. The obligations of this
Agreement shall only be binding upon the assets and property of the Trust and
shall not be binding upon any trustee, officer, or shareholder of the Trust
individually.
13. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original.
14. Miscellaneous. (a) This Agreement shall be governed by the
laws of California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any rule
or order of the SEC thereunder.
(b) 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. To the extent that
any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise with regard to
any party, hereunder, such provisions with respect to other
parties hereto shall not be affected thereby.
(c) the captions in this Agreement are included for
convenience only and in no way define any of the provisions
hereof or otherwise affect their construction or effect.
(d) This Agreement may not be assigned by the Trust
or the Administrator without the consent of the other party.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
PIMCO VARIABLE INSURANCE TRUST
_____________________ By:_________________________
Attest Title:
Title:
PACIFIC INVESTMENT MANAGEMENT COMPANY
By:_________________________
Title:
______________________
Attest
Title:
<PAGE>
Schedule to
Administration Agreement
Fee Rate
Money Market Portfolio 0.20%
Short-Term Bond Portfolio 0.25
Low Duration Bond Portfolio 0.25
High Yield Bond Portfolio 0.25
Total Return Bond Portfolio 0.25
Global Bond Portfolio 0.30
Foreign Bond Portfolio 0.30
Emerging Markets Bond Portfolio 0.35
StocksPLUS Growth and Income Portfolio 0.25
Strategic Balanced Portfolio 0.25
PARTICIPATION AGREEMENT
Among
[INSURANCE COMPANY],
PIMCO VARIABLE INSURANCE TRUST,
and
PIMCO FUNDS DISTRIBUTION COMPANY
THIS AGREEMENT, dated as of the ___ day of , 199__ by and among
__________________, (the "Company"), an [insert state] life insurance company,
on its own behalf and on behalf of each segregated asset account of the Company
set forth on Schedule A hereto as may be amended from time to time (each account
hereinafter referred to as the "Account"), PIMCO Variable Insurance Trust (the
"Fund"), a Delaware business trust, and PIMCO Funds Distribution Company (the
"Underwriter"), a corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter ("Participating Insurance Companies");
WHEREAS, the shares of common stock of the Fund are divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets;
WHEREAS, the Fund will, to the extent necessary, obtain an order from the
Securities and Exchange Commission (the "SEC") granting Participating Insurance
Companies and variable annuity and variable life insurance separate accounts
exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the
Investment Company Act of 1940, as amended, (the "1940 Act") and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, if and to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies (the "Mixed and Shared Funding Exemptive Order");
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, Pacific Investment Management Company (the "Adviser"), which
serves as investment adviser to the Fund, is duly registered as an investment
adviser under the federal Investment Advisers Act of 1940, as amended;
WHEREAS, the Company has issued or will issue certain variable life
insurance and/or variable annuity contracts supported wholly or partially by the
Account (the "Contracts"), and said Contracts are listed in Schedule A hereto,
as it may be amended from time to time by mutual written agreement;
<PAGE>
WHEREAS, the Account is duly established and maintained as a segregated
asset account, duly established by the Company, on the date shown for such
Account on Schedule A hereto, to set aside and invest assets attributable to the
aforesaid Contracts;
WHEREAS, the Underwriter, which serves as distributor to the Fund, is
registered as a broker dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Fund has granted to the Underwriter exclusive authority
to distribute the Fund's shares, and has agreed to instruct, and has so
instructed, the Underwriter to make available to the Company for purchase on
behalf of the Account Fund shares of those Designated Portfolios selected by the
Underwriter. Pursuant to such authority and instructions, and subject to Article
X hereof, the Underwriter agrees to make available to the Company for purchase
on behalf of the Account, shares of those Designated Portfolios listed on
Schedule A to this Agreement, such purchases to be effected at net asset value
in accordance with Section 1.3 of this Agreement. Notwithstanding the foregoing,
(i) Fund series (other than those listed on Schedule A) in existence now or that
may be established in the future will be made available to the Company only as
the Underwriter may so provide, and (ii) the Board of Trustees of the Fund (the
"Board") may suspend or terminate the offering of Fund shares of any Designated
Portfolio or class thereof, if such action is required by law or by regulatory
authorities having jurisdiction or if, in the sole discretion of the Board
acting in good faith and in light of its fiduciary duties under federal and any
applicable state laws, suspension or termination is necessary in the best
interests of the shareholders of such Designated Portfolio.
1.2. The Fund shall redeem, at the Company's request, any full or
fractional Designated Portfolio shares held by the Company on behalf of the
Account, such redemptions to be effected at net asset value in accordance with
Section 1.3 of this Agreement. Notwithstanding the foregoing, (i) the Company
shall not redeem Fund shares attributable to Contract owners except in the
circumstances permitted in Section 10.3 of this Agreement, and (ii) the Fund may
delay redemption of Fund shares of any Designated Portfolio to the extent
permitted by the 1940 Act, and any rules, regulations or orders thereunder.
1.3. Purchase and Redemption Procedures
(a) The Fund hereby appoints the Company as an agent of the
Fund for the limited purpose of receiving purchase and redemption requests on
behalf of the Account (but not with respect to any Fund shares that may be held
in the general account of the Company) for shares of those Designated Portfolios
made available hereunder, based on allocations of amounts to the Account or
subaccounts thereof under the Contracts and other transactions relating to the
Contracts or the Account. Receipt of any such request (or relevant transactional
information therefor) on any day the New York Stock Exchange is open for trading
and on which the Fund calculates it net asset value pursuant to the rules of the
SEC (a "Business Day") by the Company as such limited agent of the Fund prior to
the time that the Fund calculates its net asset value as described from time to
time in the Fund Prospectus (which as of the date of execution of this Agreement
is 4:00 p.m. Eastern Time) shall constitute receipt by the Fund on that same
Business Day, provided that the Fund receives notice of such request by 9:30
a.m. Eastern Time on the next following Business Day.
<PAGE>
(b) The Company shall pay for shares of each Designated
Portfolio on the same day that it notifies the Fund of a purchase request for
such shares. Payment for Designated Portfolio shares shall be made in federal
funds transmitted to the Fund by wire to be received by the Fund by 4:00 p.m.
Eastern Time on the day the Fund is notified of the purchase request for
Designated Portfolio shares (unless the Fund determines and so advises the
Company that sufficient proceeds are available from redemption of shares of
other Designated Portfolios effected pursuant to redemption requests tendered by
the Company on behalf of the Account). If federal funds are not received on
time, such funds will be invested, and Designated Portfolio shares purchased
thereby will be issued, as soon as practicable and the Company shall promptly,
upon the Fund's request, reimburse the Fund for any charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any advances
to, or borrowing or overdrafts by, the Fund, or any similar expenses incurred by
the Fund, as a result of portfolio transactions effected by the Fund based upon
such purchase request. Upon receipt of federal funds so wired, such funds shall
cease to be the responsibility of the Company and shall become the
responsibility of the Fund.
(c) Payment for Designated Portfolio shares redeemed by the
Account or the Company shall be made in federal funds transmitted by wire to the
Company or any other designated person on the next Business Day after the Fund
is properly notified of the redemption order of such shares (unless redemption
proceeds are to be applied to the purchase of shares of other Designated
Portfolio in accordance with Section 1.3(b) of this Agreement), except that the
Fund reserves the right to redeem Designated Portfolio shares in assets other
than cash and to delay payment of redemption proceeds to the extent permitted
under Section 22(e) of the 1940 Act and any Rules thereunder, and in accordance
with the procedures and policies of the Fund as described in the then current
prospectus. The Fund shall not bear any responsibility whatsoever for the proper
disbursement or crediting of redemption proceeds by the Company, the Company
alone shall be responsible for such action.
(d) Any purchase or redemption request for Designated
Portfolio shares held or to be held in the Company's general account shall be
effected at the net asset value per share next determined after the Fund's
receipt of such request, provided that, in the case of a purchase request,
payment for Fund shares so requested is received by the Fund in federal funds
prior to close of business for determination of such value, as defined from time
to time in the Fund Prospectus.
1.4. The Fund shall use its best efforts to make the net asset
value per share for each Designated Portfolio available to the Company by 6:30
p.m. Eastern Time each Business Day, and in any event, as soon as reasonably
practicable after the net asset value per share for such Designated Portfolio is
calculated, and shall calculate such net asset value in accordance with the
Fund's Prospectus. Neither the Fund, any Designated Portfolio, the Underwriter,
nor any of their affiliates shall be liable for any information provided to the
Company pursuant to this Agreement which information is based on incorrect
information supplied by the Company or any other Participating Insurance Company
to the Fund or the Underwriter.
<PAGE>
1.5. The Fund shall furnish notice (by wire or telephone followed
by written confirmation) to the Company as soon as reasonably practicable of any
income dividends or capital gain distributions payable on any Designated
Portfolio shares. The Company, on its behalf and on behalf of the Account,
hereby elects to receive all such dividends and distributions as are payable on
any Designated Portfolio shares in the form of additional shares of that
Designated Portfolio. The Company reserves the right, on its behalf and on
behalf of the Account, to revoke this election and to receive all such dividends
and capital gain distributions in cash. The Fund shall notify the Company
promptly of the number of Designated Portfolio shares so issued as payment of
such dividends and distributions.
1.6. Issuance and transfer of Fund shares shall be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Purchase and redemption orders for Fund shares shall be recorded in an
appropriate ledger for the Account or the appropriate subaccount of the Account.
1.7. (a) The parties hereto acknowledge that the arrangement
contemplated by this Agreement is not exclusive; the Fund's shares may be sold
to other insurance companies (subject to Section 1.8 hereof) and the cash value
of the Contracts may be invested in other investment companies, provided,
however, that until this Agreement is terminated pursuant to Article X, the
Company shall promote the Designated Portfolios on the same basis as other
funding vehicles available under the Contracts. Funding vehicles other than
those listed on Schedule A to this Agreement may be available for the investment
of the cash value of the Contracts, provided, however, (i) any such vehicle or
series thereof, has investment objectives or policies that are substantially
different from the investment objectives and policies of the Designated
Portfolios available hereunder; (ii) the Company gives the Fund and the
Underwriter 45 days written notice of its intention to make such other
investment vehicle available as a funding vehicle for the Contracts; and (iii)
unless such other investment company was available as a Funding vehicle for the
Contracts prior to the date of this Agreement and the Company has so informed
the Fund and the Underwriter prior to their signing this Agreement, the Fund or
Underwriter consents in writing to the use of such other vehicle, such consent
not to be unreasonably withheld.
(b) The Company shall not, without prior notice to the
Underwriter (unless otherwise required by applicable law), take any action to
operate the Account as a management investment company under the 1940 Act.
(c) The Company shall not, without prior notice to the
Underwriter (unless otherwise required by applicable law), induce Contract
owners to change or modify the Fund or change the Fund's distributor or
investment adviser.
(d) The Company shall not, without prior notice to the Fund,
induce Contract owners to vote on any matter submitted for consideration by the
shareholders of the Fund in a manner other than as recommended by the Board of
Trustees of the Fund.
<PAGE>
1.8. The Underwriter and the Fund shall sell Fund shares only to
Participating Insurance Companies and their separate accounts and to persons or
plans ("Qualified Persons") that communicate to the Underwriter and the Fund
that they qualify to purchase shares of the Fund under Section 817(h) of the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
thereunder without impairing the ability of the Account to consider the
portfolio investments of the Fund as constituting investments of the Account for
the purpose of satisfying the diversification requirements of Section 817(h).
The Underwriter and the Fund shall not sell Fund shares to any insurance company
or separate account unless an agreement complying with Article VI of this
Agreement is in effect to govern such sales, to the extent required. The Company
hereby represents and warrants that it and the Account are Qualified Persons.
The Fund reserves the right to cease offering shares of any Designated Portfolio
in the discretion of the Fund.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts (a)
are, or prior to issuance will be, registered under the 1933 Act, or (b) are not
registered because they are properly exempt from registration under the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under the 1933 Act. The Company further represents and warrants
that the Contracts will be issued and sold in compliance in all material
respects with all applicable federal securities and state securities and
insurance laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law, that it has legally and validly established
the Account prior to any issuance or sale thereof as a segregated asset account
under [insert state] insurance laws, and that it (a) has registered or, prior to
any issuance or sale of the Contracts, will register the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, or alternatively (b) has not
registered the Account in proper reliance upon an exclusion from registration
under the 1940 Act. The Company shall register and qualify the Contracts or
interests therein as securities in accordance with the laws of the various
states only if and to the extent deemed advisable by the Company.
2.2. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with applicable state and federal
securities laws and that the Fund is and shall remain registered under the 1940
Act. The Fund shall amend the registration statement for its shares under the
1933 Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund or the Underwriter.
2.3. The Fund may make payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act. Prior to financing distribution
expenses pursuant to Rule 12b-1, the Fund will have the Board, a majority of
whom are not interested persons of the Fund, formulate and approve a plan
pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses.
2.4. The Fund makes no representations as to whether any aspect
of its operations, including, but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states.
<PAGE>
2.5. The Fund represents that it is lawfully organized and
validly existing under the laws of the State of Delaware and that it does and
will comply in all material respects with the 1940 Act.
2.6. The Underwriter represents and warrants that it is a member
in good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with any applicable state and federal securities laws.
2.7. The Fund and the Underwriter represent and warrant that all
of their trustees/directors, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimum coverage as required currently by Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.8. The Company represents and warrants that all of its
directors, officers, employees, and other individuals/entities employed or
controlled by the Company dealing with the money and/or securities of the
Account are covered by a blanket fidelity bond or similar coverage for the
benefit of the Account, in an amount not less than $5 million. The aforesaid
bond includes coverage for larceny and embezzlement and is issued by a reputable
bonding company. The Company agrees to hold for the benefit of the Fund and to
pay to the Fund any amounts lost from larceny, embezzlement or other events
covered by the aforesaid bond to the extent such amounts properly belong to the
Fund pursuant to the terms of this Agreement. The Company agrees to make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many
copies of the Fund's current prospectus (describing only the Designated
Portfolios listed on Schedule A) or, to the extent permitted, the Fund's
profiles as the Company may reasonably request. The Company shall bear the
expense of printing copies of the current prospectus and profiles for the
Contracts that will be distributed to existing Contract owners, and the Company
shall bear the expense of printing copies of the Fund's prospectus and profiles
that are used in connection with offering the Contracts issued by the Company.
If requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the new prospectus on diskette at the
Fund's expense) and other assistance as is reasonably necessary in order for the
Company once each year (or more frequently if the prospectus for the Fund is
amended) to have the prospectus for the Contracts and the Fund's prospectus or
profile printed together in one document (such printing to be at the Company's
expense).
3.2. The Fund's prospectus shall state that the current Statement
of Additional Information ("SAI") for the Fund is available, and the Underwriter
(or the Fund), at its expense, shall provide a reasonable number of copies of
such SAI free of charge to the Company for itself and for any owner of a
Contract who requests such SAI.
3.3. The Fund shall provide the Company with information
regarding the Fund's expenses, which information may include a table of fees and
related narrative disclosure. for use in any prospectus or other descriptive
document relating to a Contract. The Company agrees that it will use such
information in the form provided. The Company shall provide prior written notice
of any proposed modification of such information, which notice will describe in
detail the manner in which the Company proposes to modify the information, and
agrees that it may not modify such information in any way without the prior
consent of the Fund.
<PAGE>
3.4. The Fund, at its expense, shall provide the Company with
copies of its proxy material, reports to shareholders, and other communications
to shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.5. The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners or to the
extent otherwise required by law. The Company will vote Fund shares held in any
segregated asset account in the same proportion as Fund shares of such portfolio
for which voting instructions have been received from Contract owners, to the
extent permitted by law.
3.6. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in a Designated
Portfolio calculates voting privileges as required by the Shared Funding
Exemptive Order and consistent with any reasonable standards that the Fund may
adopt and provide in writing.
ARTICLE IV. Sales Material and Information This text is hidden, do not remove.
4.1. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, each piece of sales literature or other promotional
material that the Company develops and in which the Fund (or a Designated
Portfolio thereof) or the Adviser or the Underwriter is named. No such material
shall be used until approved by the Fund or its designee, and the Fund will use
its best efforts for it or its designee to review such sales literature or
promotional material within ten Business Days after receipt of such material.
The Fund or its designee reserves the right to reasonably object to the
continued use of any such sales literature or other promotional material in
which the Fund (or a Designated Portfolio thereof) or the Adviser or the
Underwriter is named, and no such material shall be used if the Fund or its
designee so object.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
the Adviser or the Underwriter in connection with the sale of the Contracts
other than the information or representations contained in the registration
statement or prospectus or SAI for the Fund shares, as such registration
statement and prospectus or SAI may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in sales literature or
other promotional material approved by the Fund or its designee or by the
Underwriter, except with the permission of the Fund or the Underwriter or the
designee of either.
<PAGE>
4.3. The Fund and the Underwriter, or their designee, shall
furnish, or cause to be furnished, to the Company, each piece of sales
literature or other promotional material that it develops and in which the
Company, and/or its Account, is named. No such material shall be used until
approved by the Company, and the Company will use its best efforts to review
such sales literature or promotional material within ten Business Days after
receipt of such material. The Company reserves the right to reasonably object to
the continued use of any such sales literature or other promotional material in
which the Company and/or its Account is named, and no such material shall be
used if the Company so objects.
4.4. The Fund and the Underwriter shall not give any information
or make any representations on behalf of the Company or concerning the Company,
the Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus (which shall include an
offering memorandum, if any, if the Contracts issued by the Company or interests
therein are not registered under the 1933 Act), or SAI for the Contracts, as
such registration statement, prospectus, or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, SAIs, reports, proxy
statements, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Fund or its shares, promptly after the filing of such
document(s) with the SEC or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses (which shall include an
offering memorandum, if any, if the Contracts issued by the Company or interests
therein are not registered under the 1933 Act), SAIs, reports, solicitations for
voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Account, promptly after
the filing of such document(s) with the SEC or other regulatory authorities. The
Company shall provide to the Fund and the Underwriter any complaints received
from the Contract owners pertaining to the Fund or the Designated Portfolio.
4.7. The Fund will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Designated Portfolio,
and of any material change in the Fund's registration statement, particularly
any change resulting in a change to the registration statement or prospectus for
any Account. The Fund will work with the Company so as to enable the Company to
solicit proxies from Contract owners, or to make changes to its prospectus or
registration statement, in an orderly manner. The Fund will make reasonable
efforts to attempt to have changes affecting Contract prospectuses become
effective simultaneously with the annual updates for such prospectuses.
4.8. For purposes of this Article IV, the phrase "sales
literature and other promotional materials" includes, but is not limited to, any
of the following that refer to the Fund or any affiliate of the Fund:
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public media),
sales literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, and registration statements, prospectuses,
SAIs, shareholder reports, proxy materials, and any other communications
distributed or made generally available with regard to the Fund.
<PAGE>
ARTICLE V. Fees and Expenses
5.1. The Fund and the Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Fund or any
Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Fund or Underwriter may make payments to the
Company or to the underwriter for the Contracts if and in amounts agreed to by
the Underwriter in writing, and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or other
resources available to the Underwriter. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. Diversification and Qualification
6.1. The Fund will invest its assets in such a manner as to
ensure that the Contracts will be treated as annuity or life insurance
contracts, whichever is appropriate, under the Code and the regulations issued
thereunder (or any successor provisions). Without limiting the scope of the
foregoing, each Designated Portfolio has complied and will continue to comply
with Section 817(h) of the Code and Treasury Regulation ss.1.817-5, and any
Treasury interpretations thereof, relating to the diversification requirements
for variable annuity, endowment, or life insurance contracts, and any amendments
or other modifications or successor provisions to such Section or Regulations.
In the event of a breach of this Article VI by the Fund, it will take all
reasonable steps (a) to notify the Company of such breach and (b) to adequately
diversify the Fund so as to achieve compliance within the grace period afforded
by Regulation 1.817-5.
6.2. The Fund represents that it is or will be qualified as a
Regulated Investment Company under Subchapter M of the Code, and that it will
make every effort to maintain such qualification (under Subchapter M or any
successor or similar provisions) and that it will notify the Company immediately
upon having a reasonable basis for believing that it has ceased to so qualify or
that it might not so qualify in the future.
6.3. The Company represents that the Contracts are currently, and
at the time of issuance shall be, treated as life insurance or annuity insurance
contracts, under applicable provisions of the Code, and that it will make every
effort to maintain such treatment, and that it will notify the Fund and the
Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees that any prospectus offering a contract that is a
"modified endowment contract" as that term is defined in Section 7702A of the
Code (or any successor or similar provision), shall identify such contract as a
modified endowment contract.
<PAGE>
ARTICLE VII. Potential Conflicts
The following provisions shall apply only upon issuance of the Mixed and Shared
Funding Order and the sale of shares of the Fund to variable life insurance
separate accounts and the extent required under the 1940 Act.
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the Contract owners of
all separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts
of which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Mixed and Shared Funding Exemptive Order, by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited to, an obligation
by the Company to inform the Board whenever Contract owner voting instructions
are disregarded.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested members, that a material irreconcilable conflict
exists, the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority of
the disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the Account's
investment in the Fund and terminate this Agreement with respect to each
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund.
<PAGE>
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Section 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contract if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent the Mixed and Shared Funding Exemption
Order or any amendment thereto contains terms and conditions different from
Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement, then the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with the Mixed and Shared Funding
Exemptive Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in the Mixed and Shared
Funding Exemptive Order or any amendment thereto. If and to the extent that Rule
6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive
relief from any provision of the 1940 Act or the rules promulgated thereunder
with respect to mixed or shared funding (as defined in the Mixed and Shared
Funding Exemptive Order) on terms and conditions materially different from those
contained in the Mixed and Shared Funding Exemptive Order, then (a) the Fund
and/or the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1., 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in
effect only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
<PAGE>
ARTICLE VIII. Indemnification
8.1. Indemnification By the Company
8.1(a). The Company agrees to indemnify and hold harmless
the Fund and the Underwriter and each of its trustees/directors and officers,
and each person, if any, who controls the Fund or Underwriter within the meaning
of Section 15 of the 1933 Act or who is under common control with the
Underwriter (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements:
(i) arise out of or are based upon any untrue statement or
alleged untrue statements of any material fact contained in
the registration statement, prospectus (which staff include
a written description of a Contract that is not registered
under the 1933 Act), or SAI for the Contracts or contained
in the Contracts or sales literature for the Contracts (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund for use
in the registration statement, prospectus or SAI for the
Contracts or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI, or
sales literature of the Fund not supplied by the Company or
persons under its control) or wrongful conduct of the
Company or its agents or persons under the Company's
authorization or control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, SAI, or sales literature of the Fund
or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to
the Fund by or on behalf of the Company; or
(iv) arise as a result of any material failure by the
Company to provide the services and furnish the materials
under the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise, to
comply with the qualification requirements specified in
Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, as limited by and
in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of its obligations or
duties under this Agreement.
<PAGE>
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Company in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Contracts or the
operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold
harmless the Company and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement or prospectus or SAI or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Underwriter or
Fund by or on behalf of the Company for use in the
registration statement, prospectus or SAI for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI or
sales literature for the Contracts not supplied by the
Underwriter or persons under its control) or wrongful
conduct of the Fund or Underwriter or persons under their
control, with respect to the sale or distribution of the
Contracts or Fund shares; or
<PAGE>
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, SAI or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund or the Underwriter; or
(iv) arise as a result of any failure by the Fund or the
Underwriter to provide the services and furnish the
materials under the terms of this Agreement (including a
failure of the Fund, whether unintentional or in good faith
or otherwise, to comply with the diversification and other
qualification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Underwriter will be entitled to participate,
at its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Underwriter to such party of the
Underwriter's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Underwriter will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
<PAGE>
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless
the Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or litigation
(including legal and other expenses) to which the Indemnified Parties may be
required to pay or may become subject under any statute or regulation, at common
law or otherwise, insofar as such losses, claims, expenses, damages, liabilities
or expenses (or actions in respect thereof) or settlements, are related to the
operations of the Fund and:
(i) arise as a result of any failure by the Fund to
provide the services and furnish the materials under
the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise, to
comply with the diversification and other qualification
requirements specified in Article VI of this
Agreement); or
(ii) arise out of or result from any material breach of
any representation and/or warranty made by the Fund in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company, the Fund, the Underwriter or the
Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly
to notify the Fund of the commencement of any litigation or proceeding against
it or any of its respective officers or directors in connection with the
Agreement, the issuance or sale of the Contracts, the operation of the Account,
or the sale or acquisition of shares of the Fund.
<PAGE>
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of California.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, any Mixed and Shared Funding Exemptive
Order) and the terms hereof shall be interpreted and construed in accordance
therewith. If, in the future, the Mixed and Shared Funding Exemptive Order
should no longer be necessary under applicable law, then Article VII shall no
longer apply.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party, for any reason with respect to
some or all Designated Portfolios, by three (3) months
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Underwriter based upon the Company's determination that
shares of the Fund are not reasonably available to meet the
requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and
the Underwriter in the event any of the Designated
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by
the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the
Company by the NASD, the SEC, the Insurance Commissioner or
like official of any state or any other regulatory body
regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any
Account, or the purchase of the Fund's shares; provided,
however, that the Fund or Underwriter determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its
obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund
or Underwriter by the NASD, the SEC, or any state securities
or insurance department or any other regulatory body;
provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio in
the event that such Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M or fails to
comply with the Section 817(h) diversification requirements
specified in Article VI hereof, or if the Company reasonably
believes that such Portfolio may fail to so qualify or
comply; or
<PAGE>
(g) termination by the Fund or Underwriter by written notice to
the Company in the event that the Contracts fail to meet the
qualifications specified in Article VI hereof; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or
the Underwriter respectively, shall determine, in their sole
judgment exercised in good faith, that the Company has
suffered a material adverse change in its business,
operations, financial condition, or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice to the Fund and
the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that the Fund, Adviser, or
the Underwriter has suffered a material adverse change in
its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of
material adverse publicity; or
(j) termination by the Fund or the Underwriter by written notice
to the Company, if the Company gives the Fund and the
Underwriter the written notice specified in Section
1.7(a)(ii) hereof and at the time such notice was given
there was no notice of termination outstanding under any
other provision of this Agreement; provided, however, any
termination under this Section 10.1(j) shall be effective
forty-five days after the notice specified in Section
1.7(a)(ii) was given; or
(k) termination by the Company upon any substitution of the
shares of another investment company or series thereof for
shares of a Designated Portfolio of the Fund in accordance
with the terms of the Contracts, provided that the Company
has given at least 45 days prior written notice to the Fund
and Underwriter of the date of substitution; or
(l) termination by any party in the event that the Fund's Board
of Trustees determines that a material irreconcilable
conflict exists as provided in Article VII.
10.2. Notwithstanding any termination of this Agreement, the Fund
and the Underwriter shall, at the option of the Company, continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Contracts"), unless the
Underwriter requests that the Company seek an order pursuant to Section 26(b) of
the 1940 Act to permit the substitution of other securities for the shares of
the Designated Portfolios. The Underwriter agrees to split the cost of seeking
such an order, and the Company agrees that it shall reasonably cooperate with
the Underwriter and seek such an order upon request. Specifically, the owners of
the Existing Contracts may be permitted to reallocate investments in the Fund,
redeem investments in the Fund and/or invest in the Fund upon the making of
additional purchase payments under the Existing Contracts (subject to any such
election by the Underwriter). The parties agree that this Section 10.2 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement. The parties
further agree that this Section 10.2 shall not apply to any terminations under
Section 10.1(g) of this Agreement.
<PAGE>
10.3. The Company shall not redeem Fund shares attributable to
the Contracts (as opposed to Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract owner
initiated or approved transactions, (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), (iii) upon 45 days
prior written notice to the Fund and Underwriter, as permitted by an order of
the SEC pursuant to Section 26(b) of the 1940 Act, but only if a substitution of
other securities for the shares of the Designated Portfolios is consistent with
the terms of the Contracts, or (iv) as permitted under the terms of the
Contract. Upon request, the Company will promptly furnish to the Fund and the
Underwriter reasonable assurance that any redemption pursuant to clause (ii)
above is a Legally Required Redemption. Furthermore, except in cases where
permitted under the terms of the Contacts, the Company shall not prevent
Contract owners from allocating payments to a Portfolio that was otherwise
available under the Contracts without first giving the Fund or the Underwriter
45 days notice of its intention to do so.
10.4. Notwithstanding any termination of this Agreement, each
party's obligation under Article VIII to indemnify the other parties shall
survive.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund: PIMCO Variable Insurance Trust
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
If to the Company:
If to Underwriter: PIMCO Funds Distribution Company
2187 Atlantic Street
Stamford, CT 06902
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to
the property of the Fund, and in the case of a series company, the respective
Designated Portfolios listed on Schedule A hereto as though each such Designated
Portfolio had separately contracted with the Company and the Underwriter for the
enforcement of any claims against the Fund. The parties agree that neither the
Board, officers, agents or shareholders of the Fund assume any personal
liability or responsibility for obligations entered into by or on behalf of the
Fund.
<PAGE>
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential the names
and addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information without the express
written consent of the affected party until such time as such information has
come into the public domain.
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two
or more counterparts, each of which taken together shall constitute one and the
same instrument.
12.5. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
the Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other
party and all appropriate governmental authorities (including without limitation
the SEC, the NASD, and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Notwithstanding the generality of the foregoing, each party
hereto further agrees to furnish the [insert state] Insurance Commissioner with
any information or reports in connection with services provided under this
Agreement which such Commissioner may request in order to ascertain whether the
variable annuity operations of the Company are being conducted in a manner
consistent with the [insert state] variable annuity laws and regulations and any
other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies,
and obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereto.
12.9. The Company shall furnish, or shall cause to be
furnished, to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report
(prepared under generally accepted accounting
principles) filed with any state or federal regulatory
body or otherwise made available to the public, as soon
as practicable and in any event within 90 days after
the end of each fiscal year; and
(b) any registration statement (without exhibits) and
financial reports of the Company filed with the
Securities and Exchange Commission or any state
insurance regulatory, as soon as practicable after the
filing thereof.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
COMPANY:
By its authorized officer
By:_____________________________
Title:__________________________
Date:___________________________
PIMCO VARIABLE INSURANCE TRUST
By its authorized officer
By:_____________________________
Title:__________________________
Date:___________________________
PIMCO FUNDS DISTRIBUTION COMPANY
By its authorized officer
By:_____________________________
Title:__________________________
Date:___________________________
SERVICES AGREEMENT
The terms and conditions of this Services Agreement between
___________________ ("Adviser") [could also be "Distributor"] and Insurance
Company (the "Company") are effective as of _____________, 199_.
WHEREAS, the Company, ____________________________(the "Trust"), and
____________________, the Trust's Distributor have entered into a Fund
Participation Agreement dated , 199_, as may be amended from time to time (the
"Participation Agreement"), pursuant to which the Company, on behalf of certain
of its separate accounts (the "Separate Accounts"), purchases shares ("Shares")
of certain Portfolios of the Trust ("Portfolios") to serve as an investment
vehicle under certain variable annuity and/or variable life insurance contracts
("Variable Contracts") offered by the Company, which Portfolios may be one of
several investment options available under the Variable Contracts; and
WHEREAS, Adviser recognizes that it will derive substantial savings in
administrative expenses by virtue of having a sole shareholder rather than
multiple shareholders in connection with each Separate Account's investments in
the Portfolios, and that in the course of servicing owners of such Variable
Contracts, the Company will provide information about the Trust and its
Portfolios from time to time, answer questions concerning the Trust and its
Portfolios, including questions respecting Variable Contract owners' interests
in one or more Portfolios, and provide services respecting investments in the
Portfolios; and
WHEREAS, Adviser wishes to compensate the Company for the efforts of
the Company in providing written and oral information and services regarding the
Trust to Variable Contract owners; and
WHEREAS, the following represents the collective intention and
understanding of the service fee agreement between Adviser and the Company.
NOW, THEREFORE, in consideration of their mutual promises, the Company
and Adviser agree as follows:
1. Services. The Company and/or its affiliates agree to provide
services ("Services") to owners of Variable Contracts including, but not limited
to: teleservicing support in connection with the Portfolios; delivery of current
Trust prospectuses, reports, notices, proxies and proxy statements and other
informational materials; facilitation of the tabulation of Variable Contract
owners' votes in the event of a Trust shareholder vote; maintenance of Variable
Contract records reflecting Shares purchased and redeemed and Share balances,
and the conveyance of that information to the Trust or Adviser as may be
reasonably requested; provision of support services, including providing
information about the Trust and its Portfolios and answering questions
concerning the Trust and its Portfolios, including questions respecting Variable
Contract owners' interests in one or more Portfolios; provision and
administration of Variable Contract features for the benefit of Variable
Contract owners in connection with the Portfolios, which may include fund
transfers, dollar cost averaging, asset allocation, portfolio rebalancing,
earnings sweep, and pre-authorized deposits and withdrawals; and provision of
other services as may be agreed upon from time to time.
<PAGE>
2. Compensation. In consideration of the Services, Adviser agrees to
pay to the Company a service fee at an annual rate equal to ________ (__) basis
points (___%) of the average daily value of the Shares held in the Separate
Accounts. Such payments will be made monthly in arrears[, provided however, that
such payments shall only be payable for each calendar month during which time
the total dollar value of Shares held by the Separate Accounts purchased
pursuant to the Participation Agreement exceeds $ million]. For purposes of
computing the payment to the Company under this paragraph 2, the average daily
value of Shares held in the Separate Accounts over a monthly period shall be
computed by totaling such Separate Accounts' aggregate investment (Share net
asset value multiplied by total number of Shares held by such Separate Accounts)
on each business day during the calendar month, and dividing by the total number
of business days during such month. The payment to the Company under this
paragraph 2 shall be calculated by Adviser at the end of each calendar month and
will be paid to the Company within 30 days thereafter. Payment will be
accompanied by a statement showing the calculation of the monthly amounts
payable by Adviser.
3. Term. This Services Agreement shall remain in full force and effect
for an initial term of one year, and shall automatically renew for successive
one year periods. This Services Agreement may be terminated by either party
hereto upon 30 days written notice to the other. This Services Agreement shall
terminate automatically upon the redemption of all Shares held in the Separate
Accounts, upon termination of the Participation Agreement, upon a material,
unremedied breach of the Participation Agreement, as to a Portfolio upon
termination of the investment advisory agreement between the Trust, on behalf of
such Portfolio, and Adviser, or upon assignment of the Participation Agreement
by either the Company or Adviser. Notwithstanding the termination of this
Services Agreement, Adviser will continue to pay the service fees in accordance
with paragraph 2 so long as net assets [equal to or exceeding the total dollar
value set forth in Section 2] of the Separate Accounts remain in a Portfolio,
provided such continued payment is permitted in accordance with applicable law
and regulation.
4. Amendment. This Services Agreement may be amended only upon mutual
agreement of the parties hereto in writing.
5. Effect on Other Terms, Obligations and Covenants. Nothing herein
shall amend, modify or supersede any contractual terms, obligations or covenants
among or between any of the Company, Adviser or the Trust previously or
currently in effect, including those contractual terms, obligations or covenants
contained in the Participation Agreement.
In witness whereof, the parties have caused their duly authorized
officers to execute this Services Agreement.
[ADVISER]
By:
Title:
Date:
[INSURANCE COMPANY]
By:
Title:
Date:
SUBSCRIPTION
___________, 1997
TO: PIMCO Variable Insurance Trust
The undersigned hereby subscribes to ______ shares, par value $.001, of
beneficial interest of each of the Money Market Portfolio; Short-Term Bond
Portfolio, Low Duration Bond Portfolio, Total Return Bond Portfolio, High Yield
Bond Portfolio, Global Bond Portfolio, Foreign Bond Portfolio; Emerging Markets
Bond Portfolio, StocksPLUS Growth and Income Portfolio, and Strategic Balanced
Portfolio of PIMCO Variable Insurance Trust (the "Trust") at a price of $10.00
per share and agrees to pay therefor upon demand in cash the amount of $10.00
per share, for a total of 10,000 shares at a purchase price of $100,000.
In the event that any of the shares purchased hereunder are redeemed by
any holder thereof during the period that the costs incurred by the Trust in
connection with the registration and initial public offering are amortized by
the Trust, the Trust is authorized to reduce the redemption proceeds to cover
any unamortized expenses in the same proportion as the number of shares being
redeemed bears to the number of shares purchased hereunder that are outstanding
at the time of redemption. If, for any reason, said reduction of redemption
proceeds is not in fact made by the Trust in the event of such a redemption, the
undersigned agrees to reimburse the Trust immediately for any unamortized
expenses in the proportion stated above.
Very truly yours,
NAME
By: _____________________________
Name
Title
