LOGO
PIMCO
Variable
Insurance
Trust
Intermediate-Term Bond Portfolio
High Yield Bond Portfolio
Stock Portfolio
StocksPLUS Growth and Income Portfolio
Prospectus
October 27, 1998
<PAGE>
PIMCO Variable Insurance Trust
Prospectus
October 27, 1998
The PIMCO High Yield Bond Portfolio and the PIMCO StocksPLUS Growth and Income
Portfolio, which are two series of PIMCO Variable Insurance Trust (the "Trust"),
are designed to provide access to the professional investment management
services offered by Pacific Investment Management Company ("PIMCO" or the
"Adviser"). Each Portfolio has its own investment objective and strategies and
its own risk/reward profile, which are described in this Prospectus. 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.
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"). Variable Contract Owners do not deal directly with
the Portfolios to purchase or redeem shares. 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.
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.
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TABLE OF CONTENTS
OVERVIEW ............................................................. 3
Portfolios at a Glance............................................ 3
Investment Strategies and Risk Factors............................ 3
Fixed Income Instruments.......................................... 3
Ratings of Debt Securities........................................ 4
DESCRIPTION OF PORTFOLIOS.............................................. 5
PIMCO High Yield Bond Portfolio................................... 5
PIMCO StocksPLUS Growth and Income Portfolio...................... 7
MANAGEMENT OF THE TRUST................................................ 9
Adviser and Administrator......................................... 9
Advisory and Administrative Fees.................................. 10
Portfolio Transactions............................................ 10
PURCHASE OF SHARES..................................................... 10
REDEMPTION OF SHARES................................................... 11
NET ASSET VALUE........................................................ 11
TAXES ................................................................. 12
RISK FACTORS AND SPECIAL CONSIDERATIONS................................ 12
FINANCIAL HIGHLIGHTS................................................... 17
OTHER INFORMATION...................................................... 18
Portfolio Names................................................... 18
Total Return and Real Return...................................... 18
Performance Information of Similar Funds.......................... 18
APPENDIX A............................................................. 20
APPENDIX B............................................................. 21
<PAGE>
OVERVIEW
Portfolios at a Glance
<TABLE>
<CAPTION>
Intermediate-Term Bond
Portfolio Primary Investments Duration Credit Quality(1) Foreign(2)
<S> <C> <C> <C> <C>
High Yield Bond Higher yielding fixed income 2-6 years B to Aaa; min 65% 0%
securities below Baa
Stock 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 below Baa
short-term fixed income securities
<FN>
(1) As rated by Moody's Investors Service, 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
description of Main Investment Strategies.
(2) Percentage limitations relate to foreign currency-denominated securities.
Each Portfolio may invest beyond these limits in U.S. dollar-denominated
securities of foreign issuers.
</FN>
</TABLE>
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 "Main
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.
Risk Factors. The major risks associated with investing in each Portfolio
are described under the heading "Risk Factors" in the Description of Portfolios.
Please be sure to read all risk disclosures carefully before investing. 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
"Fixed Income Instruments" as used in this Prospectus means:
o securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities ("U.S. Government securities");
o corporate debt securities, including convertible securities and
corporate commercial paper;
o mortgage-backed and other asset-backed securities;
o inflation-indexed bonds issued both by governments and corporations;
o structured notes, including hybrid or "indexed" securities,
catastrophe bonds and loan participations;
o delayed funding loans and revolving credit facilities;
o bank certificates of deposit, fixed time deposits and bankers'
acceptances;
o repurchase agreements and reverse repurchase agreements;
o obligations of foreign governments or their subdivisions, agencies and
instrumentalities; and
o 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. The High Yield Bond Portfolio may hold different
percentages of its assets in these various types of securities.
<PAGE>
OVERVIEW (continued)
Ratings of Debt Securities
In this Prospectus, references are made to the ratings of Fixed Income
Instruments. To aid in your understanding of the use of these terms, the
following is a brief description of the ratings categories applicable to such
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 Ratings Services ("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
to be predominately speculative with respect to the issuer's ability to pay
interest and repay principal. For more information on the risks of investing in
lower-rated securities, see "High Yield Securities ("Junk Bonds")" in "Risk
Factors and Special Considerations."
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DESCRIPTION OF PORTFOLIOS
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 Instruments. 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 may invest all of its assets in derivative instruments, such
as options, futures contracts or swap agreements, or in mortgage- or
asset-backed securities. The Portfolio may lend its portfolio securities to
brokers, dealers and other financial institutions to earn income. The Portfolio
may enter into a series of purchase and sale contracts or use other investment
techniques to obtain market exposure to the securities in which it primarily
invests.
Risk Factors
An investment in the PIMCO High Yield Bond Portfolio is subject to
investment risk, including possible loss of the principal amount invested. The
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.
An investment in the Portfolio is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
that 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 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 $10,000 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 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
$77 $ 240
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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. 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 Instruments. 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.
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 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.
Risk Factors
An investment in the PIMCO StocksPLUS Growth and Income Portfolio is
subject to investment risk, including possible loss of the principal amount
invested. The 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.
To the extent that the Fund invests in S&P 500 derivatives backed by a
portfolio of Fixed Income Instruments, under certain conditions, generally in a
market where the value of both S&P 500 derivatives and Fixed Income Instruments
are declining, the Fund may experience greater losses than would be the case if
it were to invest directly in a portfolio of S&P 500 stocks.
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. 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.
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.
An investment in the Portfolio is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Fees and Expenses
This table describes the fees and expenses (as a percentage of net assets)
that 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 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 $10,000 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 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
$66 $ 208
<PAGE>
MANAGEMENT OF THE TRUST
Adviser and Administrator
PIMCO serves as investment adviser to the portfolios. PIMCO manages the
investment of the assets of these Portfolios, and 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." PIMCO is one of
the premier fixed income investment management firms in the United States. PIMCO
was founded in 1971, and had over $142 billion in assets under management as of
August 31, 1998. PIMCO invests in all sectors of the fixed income market using
its total return philosophy -- seeking capital appreciation as well as yield.
PIMCO is a subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). The
general partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors
Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership between
PIMCO Holding LLC, a Delaware limited liability company and an indirect
wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners
LLC, a California limited liability company controlled by the Managing Directors
of PIMCO. PIMCO Partners, G.P. is the sole general partner of PAH. PIMCO's
address is 840 Newport Center Drive, Suite 300, 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 Commodities
Futures Trading Commission.
In selecting fixed income securities, PIMCO uses 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."
The table below provides information about the individual portfolio
managers responsible for management of the Portfolios since their inceptions,
including their occupations for the past five years.
Portfolio Portfolio Manager And Business Experience
(Past Five Years)
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.
StocksPLUS Growth and William H. Gross, Managing Director, PIMCO. A
Income Portfolio 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. Mr. Gross is the leader of a
team which has managed the PIMCO Short-Term,
Strategic Balanced and StocksPLUS Funds for the
PIMCO Funds: Pacific Investment Management
Series since January 6, 1998.
PIMCO also serves as administrator to the Portfolios. PIMCO provides
administrative services to the Portfolios which include clerical help,
accounting, bookkeeping, internal audit services, preparation of reports to the
Portfolios' shareholders or other appropriate parties, regulatory filings and
certain other services required by the Portfolios.
Advisory and Administrative Fees
The Portfolios feature fixed advisory and administrative fee rates. For
investment advisory and administrative services as described below, each
Portfolio pays monthly fees at an annual rate based on the average daily net
assets of the Portfolio as follows:
Advisory Fee
Portfolio Rate
High Yield Bond Portfolio ...............................0.50%
StocksPLUS Growth and Income Portfolio ................0.40%
Administrative
Portfolio Fee Rate
High Yield Bond Portfolio .............................. 0.25%
StocksPLUS Growth and Income Portfolio ................. 0.25%
The administrative fee covers 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. While it is
expected that these expenses generally will not have a material effect on the
Portfolio expense ratios, they may have a material effect in certain
circumstances, such as when the average net assets of a Portfolio are lower than
anticipated.
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 use of derivative instruments with relatively short
maturities may tend to exaggerate the portfolio turnover rate for 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.
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. Variable Contract
Owners do not deal directly with the Portfolios. The allocation rights of
Variable Contract Owners are described in the accompanying Separate Account
prospectus.
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. A purchase order, together with payment in
proper form, received before the close of regular trading on the Exchange
(normally 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 Growth and Income Portfolio, the Trust
requests that all purchase orders for the Portfolio be received at least one
hour prior to the close of regular trading on the Exchange (normally 3:00 p.m.,
Eastern time). An order received after the close of regular trading on the
Exchange 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.
NET ASSET VALUE
The net asset value per share of each Portfolio will be determined once on
each day that the Exchange is open as of the close of regular trading on the
Exchange (normally 4:00 p.m. Eastern time). Net asset value will not be
determined on days on which the Exchange is closed for trading. 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.
Portfolio securities and other assets for which market quotations are
readily available are stated at market value. Fixed income securities are
normally valued on the basis of quotations obtained from brokers and dealers or
pricing services. 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.
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 investment practices. You can find a concise description of each
Portfolio's risk profile in the section captioned "Description of the
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.
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
A convertible security is a fixed income security that may be converted
into a prescribed amount of common stock at a specified formula. The price of
the convertible security will normally vary in some proportion to changes in the
price of the underlying common stock because of the conversion feature. 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.
Although the High Yield Bond Portfolio intends to invest primarily in fixed
income securities, it 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.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The High Yield Bond Portfolio may
invest in floating rate debt instruments ("floaters") and engage in credit
spread trades. 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,
the 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.
Mortgage-Related and Other Asset-Backed Securities
Each 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
The High Yield Bond Portfolio may only invest in U.S. dollar-denominated
fixed income securities of non-U.S. issuers, and 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.
The PIMCO StocksPLUS Growth and Income 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. The PIMCO StocksPLUS Growth and Income Portfolio 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 the 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 the Portfolio if the value
of the hedged currency increases. The 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. The 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.
The PIMCO StocksPLUS Growth and Income Portfolio may invest in options on
foreign currencies and foreign currency futures and options thereon. The
Portfolio 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. The Portfolio 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.
Significant uncertainty surrounds the proposed introduction of the euro (a
common currency for the European Union) in January 1999 and its effect on the
value of securities denominated in local European currencies. These and other
currencies in which the StocksPLUS Growth and Income Portfolio's assets are
denominated may be devalued against the U.S. dollar, resulting in a loss to the
Portfolio.
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--Description 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.
PIMCO 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 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.
The Portfolios may invest all of their 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.
Catastrophe Bonds
The Portfolios may invest in "catastrophe bonds." Catastrophe bonds are
fixed income securities, for which the return of principal and payment of
interest is contingent on the non-occurrence of a specific "trigger" event, such
as a hurricane or an earthquake. If a trigger event causes losses exceeding a
specific amount in the geographic region and time period specified in a bond, a
Portfolio investing in the bond may lose a portion or all of its principal
invested in the bond. If no trigger event occurs, the Portfolio will recover its
principal plus interest. Catastrophe bonds may also expose the Portfolio to
certain unanticipated risks including but not limited to issuer (credit)
default, adverse regulatory or jurisdictional interpretation, and adverse tax
consequences.
Temporary Defensive Positions
For temporary, defensive or emergency purposes, the Portfolios may invest
without limit in U.S. debt securities, including short-term money market
securities, when in the opinion of PIMCO it is appropriate to do so. It is
impossible to predict for how long such alternative strategies will be utilized.
Illiquid Securities
The Portfolios may invest up to 15% of their net assets in illiquid
securities. "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. The
Adviser or Portfolio Manager may be subject to significant delays in disposing
of illiquid securities and may not be able to dispose of these securities at the
desired time and price. Transactions in illiquid securities may entail
additional registration expenses and other transaction costs.
Service Systems--Year 2000 Problem
Many of the services provided to the Portfolios depend on the smooth
functioning of computer systems. Many systems in use today cannot distinguish
between the year 1900 and the year 2000. Should any of the service systems fail
to process information properly, that could have an adverse impact on the
Portfolios' operations and services provided to shareholders. PIMCO, the
Custodian, and certain other service providers to the Portfolios have reported
that each is working toward mitigating the risks associated with the so-called
"year 2000 problem." However, there can be no assurance that the problem will be
corrected in all respects and that the Portfolios' operations and services
provided to shareholders will not be adversely effected, nor can there be any
assurance that the year 2000 problem will not have an adverse effect on the
entities whose securities are held by the Portfolios or on domestic or global
markets or economies, generally.
<PAGE>
FINANCIAL HIGHLIGHTS
This financial highlight table is intended to help you understand the
Portfolios' financial performance for the period of their operations. Certain
information reflects financial results for a single portfolio share. The total
returns in the table represent the rate that an investor would have earned or
lost on an investment in the Portfolio (assuming reinvestment of all dividends
and distributions). This information, which is unaudited, is included in the
Trust's Semi-Annual Report, which is available upon request.
<TABLE>
<CAPTION>
High Yield StocksPLUS Growth
Bond and Income
Selected Per Share Data for the Period Ended: June 30, 1998 (unaudited) Portfolio (a)(b) Portfolio (a)(c)
<S> <C> <C>
Net asset value, beginning of period............................... $ 10.00 $ 10.00
Income from Investment Operations
Net investment income.............................................. 0.12 0.15
Net gains or losses on securities (both realized and unrealized)... (0.02) 1.55
Total from investment operations................................... 0.10 1.70
Less Distributions
Dividends (from net investment income)............................. (0.12) (0.10)
Distributions (from capital gains)................................. 0.00 0.00
Total distributions................................................ (0.12) (0.10)
Net asset value, end of period..................................... 9.98 11.60
Total return (%)................................................... 1.01 17.01
Ratios/Supplemental Data
Net assets, end of period (000's).................................. 5,980.00 8,070.00
Ratio of expenses to average net assets (%)........................ 1.08* 0.66*
Ratio of net investment income to average net assets (%)........... 7.13* 5.09*
<FN>
*Annualized
(a) Per share information is for a capital share outstanding for the period
from December 31, 1997 (initial public offering) through June 30, 1998.
(b) Commenced operations on April 30, 1998.
(c) Commenced operations on December 31, 1997.
</FN>
</TABLE>
<PAGE>
OTHER INFORMATION
Portfolio Names
The High Yield Bond 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 the Portfolio's investment to the narrow
category of debt securities that are formally called "bonds."
Total Return and Real Return
The "total return" sought by 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 currently 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
PIMCO 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 the PIMCO High Yield Bond Fund are lower than the
expenses of the corresponding Portfolio. Performance would have been lower for
that series if the PIMCO High Yield Bond Portfolio's 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.
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 August 31, 1998
<TABLE>
<CAPTION>
1 3 5 Since Inception
PIMS Series Fund / Benchmark Year Years Years Inception Date
<S> <C> <C> <C> <C> <C>
PIMCO High Yield Bond Fund................................... 5.50 10.77 10.71 11.76 12/16/92
Lehman BB Int. Corporate1................................. 5.43 9.08 8.95
PIMCO StocksPLUS Fund........................................ 6.01 21.29 18.78 19.10 5/14/93
S & P 5002................................................ 8.09 21.76 18.25
<FN>
1 The Lehman Brothers BB Intermediate Corporate Index is an unmanaged market
index comprising various fixed income securities rated BB. The Index includes
income and distributions but does not reflect fees, brokerage commissions or
other expenses of investing.
2 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 income and distributions, if any, but does not
reflect fees, brokerage commissions, or other expenses of investing.
</FN>
</TABLE>
<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.
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.
Standard & Poor's Ratings Services
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. 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.
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
An S&P 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.
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
S&P 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>
LOGO
PIMCO
Variable
Insurance
Trust
For More Information
Two documents are or will be made available that offer further information on
the Portfolios:
Annual/Semi-Annual Reports to Shareholders. The Trust's annual reports will
include a discussion of the market conditions and investment strategies that
significantly affected the Portfolios' performance during the last fiscal year.
The Trust has not yet issued an annual report.
Statement of Additional Information (SAI). The SAI contains additional
information about the Portfolios. A current SAI has been filed with the
Securities and Exchange Commission, and is incorporated into this Prospectus by
reference.
To request a free copy of these documents or to make inquiries about the
Portfolios, please write or call:
PIMCO Variable Insurance Trust
840 Newport Center Drive, Suite 300
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 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.
SEC File No. 811-8399
Prospectus
October 27, 1998
