<PAGE>
PIMCO Funds Prospectus
PIMCO
Variable
Insurance
Trust
April 1, 2000
Share Classes
[LOGO] Institutional
[LOGO] Administrative
- --------------------------------------------------------------------------------
SHORT DURATION BOND PORTFOLIOS
Money Market Portfolio
Short-Term Bond Portfolio
Low Duration Bond Portfolio
- --------------------------------------------------------------------------------
INTERMEDIATE DURATION BOND PORTFOLIOS
Real Return Bond Portfolio
Total Return Bond Portfolio
Total Return Bond Portfolio II
High Yield Bond Portfolio
- --------------------------------------------------------------------------------
LONG DURATION BOND PORTFOLIOS
Long-Term U.S. Government Bond Portfolio
- --------------------------------------------------------------------------------
INTERNATIONAL BOND PORTFOLIOS
Global Bond Portfolio
Foreign Bond Portfolio
Emerging Markets Bond Portfolio
- --------------------------------------------------------------------------------
STOCK AND BOND PORTFOLIOS
Strategic Balanced Portfolio
- --------------------------------------------------------------------------------
Stock Portfolios
StocksPLUS Growth and Income Portfolio
P I M C O
F U N D S
This cover is not part of the Prospectus
<PAGE>
Prospectus
PIMCO This Prospectus describes 13 separate investment portfolios (the
Variable "Portfolios"), offered by the PIMCO Variable Insurance Trust (the
Insurance "Trust"). The Portfolios provide access to the professional
Trust investment management services offered by Pacific Investment
Management Company ("PIMCO"). The investments made by the
April 1, Portfolios at any given time are not expected to be the same as
2000 those made by other mutual funds for which PIMCO acts as
investment adviser, including mutual funds with investment
Shares objectives and strategies similar to those of the Portfolios.
Classes Accordingly, the performance of the Portfolios can be expected to
Institu- vary from that of the other mutual funds.
tional and
Administra- This Prospectus explains what you should know about the Portfolios
tive before you invest. Please read it carefully.
Shares of the Portfolios currently are sold to segregated asset
accounts ("Separate Accounts") of insurance companies that 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 determined if this Prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
PIMCO Variable Insurance Trust
1
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Summary Information.............................................. 3
Portfolio Summaries.............................................. 5
Money Market Portfolio......................................... 5
Short-Term Bond Portfolio...................................... 7
Low Duration Bond Portfolio.................................... 9
Real Return Bond Portfolio..................................... 11
Total Return Bond Portfolio.................................... 13
Total Return Bond Portfolio II................................. 15
High Yield Bond Portfolio...................................... 17
Long-Term U.S. Government Bond Portfolio....................... 19
Global Bond Portfolio.......................................... 21
Foreign Bond Portfolio......................................... 23
Emerging Markets Bond Portfolio................................ 25
Strategic Balanced Portfolio................................... 27
StocksPLUS Growth and Income Portfolio......................... 29
Summary of Principal Risks....................................... 31
Management of the Portfolios..................................... 34
Investment Options............................................... 35
Purchases and Redemptions........................................ 36
How Portfolio Shares are Priced.................................. 37
Tax Consequences................................................. 38
Characteristics and Risks of Securities and Investment
Techniques...................................................... 39
Financial Highlights............................................. 49
Appendix A--Description of Securities Ratings.................... A-1
</TABLE>
Prospectus 2
<PAGE>
Summary Information
The table below compares certain investment characteristics of the Portfolios.
Other important characteristics are described in the individual Portfolio
Summaries beginning on page 5. Following the table are certain key concepts
which are used throughout the Prospectus.
<TABLE>
<CAPTION>
Non-U.S.
Dollar
Denominated
Main Investments Duration Credit Quality(1) Securities(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C> <C>
Short Money Market Money market (Less than or equal to) Min 95% Aaa or 0%
Duration instruments 90 days dollar-weighted Prime 1; (less than or =)
Bond average maturity 5% Aa or Prime 2
Portfolios
------------------------------------------------------------------------------------------------------------------
Short-Term Bond Money market 0-1 year B to Aaa; max 10% 0-5%(3)
instruments and below Baa
short maturity
fixed income
securities
-------------------------------------------------------------------------------------------------------------------
Low Duration Bond Short maturity 1-3 years B to Aaa; max 10% 0-20%(3)
fixed income below Baa
securities
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Real Return Bond Inflation- N/A B to Aaa; max 10% 0-20%(3)
Duration Bond indexed fixed below Baa
Portfolios income
securities
-------------------------------------------------------------------------------------------------------------------
Total Return Bond Intermediate 3-6 years B to Aaa; max 10% 0-20%(3)
maturity fixed below Baa
income
securities
-------------------------------------------------------------------------------------------------------------------
Total Return Bond II Intermediate 3-6 years Baa to Aaa 0%
maturity fixed
income
securities with
quality and non-
U.S. issuer
restrictions
-------------------------------------------------------------------------------------------------------------------
High Yield Bond Higher yielding 2-6 years B to Aaa; min 65% 0-15%(4)
fixed income below Baa
securities
- ----------------------------------------------------------------------------------------------------------------------------------
Long Duration Long-Term Long-term (Greater than A to Aaa 0%
Bond U.S. Government maturity fixed or equal to)
Portfolios income 8 years
securities
- ----------------------------------------------------------------------------------------------------------------------------------
International Global Bond U.S. and non- 3-7 years B to Aaa; max 25-75%(5)
Bond U.S. 10% below Baa
Portfolios intermediate
maturity fixed
income
securities
-------------------------------------------------------------------------------------------------------------------
Foreign Bond Intermediate 3-7 years B to Aaa; max (greater than
maturity hedged 10% below Baa or equal to)
non-U.S. fixed 85%(5)
income
securities
-------------------------------------------------------------------------------------------------------------------
Emerging Markets Bond Emerging market 0-8 years B to Aaa (greater than
fixed income or equal to)
securities 80%(5)
- ----------------------------------------------------------------------------------------------------------------------------------
Stock and Strategic Balanced Intermediate 0-6 years B to Aaa; max 0-20%(3)
Bond maturity fixed- 10% below Baa
Portfolios income
securities and
S&P 500 stock
index
derivatives
- ----------------------------------------------------------------------------------------------------------------------------------
Stock StocksPLUS Growth S&P 500 stock 0-1 year B to Aaa; max 0-20%(3)
Portfolios and Income index 10% below Baa
derivatives
backed by a
portfolio of
short-term
fixed-income
securities
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As rated by Moody's Investors Service, Inc., or equivalently rated by
Standard & Poor's Ratings Services, or if unrated, determined by PIMCO to
be of comparable quality.
(2) Each Portfolio (except the Total Return Bond II and Long-Term U.S.
Government Portfolios) may invest beyond this limit in U.S. dollar-
denominated securities.
(3) The percentage limitation relates to non-U.S. dollar-denominated
securities.
(4) The percentage limitation relates to euro-denominated securities.
(5) The percentage limitation relates to securities of foreign issuers,
denominated in any currency.
3 PIMCO Variable Insurance Trust
<PAGE>
Summary Information (continued)
Fixed The "Fixed Income Portfolios" are the Money Market, Short-Term
Income Bond, Low Duration Bond, Real Return Bond, Total Return Bond,
Instruments Total Return Bond II, High Yield Bond, Long-Term U.S. Government
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 Fixed Income Portfolio invests at least 65% of
its assets in "Fixed Income Instruments," which as used in this
Prospectus includes:
. securities issued or guaranteed by the U.S. Government, its
agencies or government-sponsored enterprises ("U.S. Government
Securities");
. corporate debt securities of U.S. and non-U.S. issuers,
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,
event-linked bonds and loan participations;
. delayed funding loans and revolving credit facilities;
. bank certificates of deposit, fixed time deposits and bankers'
acceptances;
. repurchase agreements and reverse repurchase agreements;
. debt securities issued by states or local governments and their
agencies, authorities and other instrumentalities;
. obligations of non-U.S. governments or their subdivisions,
agencies and instrumentalities; and
. obligations of international agencies or supranational entities.
Duration Duration is a measure of the expected life of a fixed income
security that is used to determine the sensitivity of a security's
price to changes in interest rates. The longer a security's
duration, the more sensitive it will be to changes in interest
rates. Similarly, a Portfolio with a longer average portfolio
duration will be more sensitive to changes in interest rates than
a Portfolio with a shorter average portfolio duration.
Credit In this Prospectus, references are made to credit ratings of debt
Ratings securities which measure an issuer's expected ability to pay
principal and interest on time. Credit ratings are determined by
rating organizations, such as Standard & Poor's Rating Service
("S&P") or Moody's Investors Service, Inc. ("Moody's"). The
following terms are generally used to describe the credit quality
of debt securities depending on the security's credit rating or,
if unrated, credit quality as determined by PIMCO:
. high quality
. investment grade
. below investment grade ("high yield securities" or "junk bonds")
For a further description of credit ratings, see "Appendix A--
Description of Securities Ratings."
Portfolio The Portfolios provide a broad range of investment choices. The
Descrip- following summaries identify each Portfolio's investment
tions, objective, principal investments and strategies, principal risks,
Performance performance information and fees and expenses. A more detailed
and Fees "Summary of Principal Risks" describing principal risks of
investing in the Portfolios begins after the Portfolio Summaries.
It is possible to lose money on investments in the Portfolios.
An investment in a Portfolio is not a deposit of a bank and is
not guaranteed or insured by the Federal Deposit Insurance
Corporation or any other government agency.
Prospectus
4
<PAGE>
PIMCO Money Market Portfolio
- --------------------------------------------------------------------------------
Principal Investment Objective Portfolio Focus Credit Quality
Investments Seeks maximum Money market Minimum 95% rated Aaa
and current income, instruments or Prime 1; (less
Strategies consistent with than or equal to) 5%
preservation of Average Portfolio Aa or Prime 2
capital and Maturity (less than
daily liquidity or equal to) 90 Dividend Frequency
days dollar- Declared daily and
weighted average distributed monthly
maturity
The Portfolio seeks to achieve its investment objective by
investing 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 may only invest in U.S. dollar-
denominated securities that mature in 397 days or fewer from the
date of purchase. The dollar-weighted average portfolio maturity
of the Portfolio may not exceed 90 days. The Portfolio 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.
The Portfolio may invest in the following: obligations of the
U.S. Government (including its agencies and government-sponsored
enterprises); 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.
The Portfolio's investments will comply with applicable rules
governing the quality, maturity and diversification of securities
held by money market funds.
- --------------------------------------------------------------------------------
Principal An investment in the Portfolio is not insured or guaranteed by the
Risks Federal Deposit Insurance Corporation 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. Among the principal risks of investing
in the Portfolio, which could adversely affect its net asset
value, yield and total return, are:
. Interest Rate . Market Risk
Risk . Issuer Risk
. Credit Risk
. Management Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
PIMCO Variable Insurance Trust
5
<PAGE>
PIMCO Money Market Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.15% None 0.21%(1) 0.36% (0.01%) 0.35%
----------------------------------------------------------------------------------------
Administrative 0.15% 0.15% 0.97%(2) 1.27% (0.77%) 0.50%
----------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.20%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.20% administrative fee and 0.77%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.35% and 0.50%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or
Administrative Class shares of the Portfolio with the costs of
investing in other mutual funds. The Examples assume that you
invest $10,000 in the noted class of shares for the time periods
indicated, and then redeem all your shares at the end of those
periods. The Examples also assume that your investment has a 5%
return each year, the reinvestment of all dividends and
distributions, and that the Portfolio's operating expenses remain
the same. Although your actual costs may be higher or lower, the
Examples show what your costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3
-----------------------------------------------------------------------------------------
<S> <C> <C>
Institutional $36 $115
-----------------------------------------------------------------------------------------
Administrative 51 327
-----------------------------------------------------------------------------------------
</TABLE>
Prospectus 6
<PAGE>
PIMCO Short-Term Portfolio
- --------------------------------------------------------------------------------
Principal Investment Portfolio Focus Credit Quality
Investments Objective Money market B to Aaa; maximum
and Seeks maximum instruments and 10% below Baa
Strategies current income, short maturity
consistent with fixed income Dividend Frequency
preservation of securities Declared daily and
capital and daily distributed monthly
liquidity Average Portfolio
Duration
0-1 year
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
a diversified portfolio of Fixed Income Instruments of varying
maturities. The average portfolio duration of this Portfolio will
vary based on PIMCO's forecast for interest rates and will
normally not exceed one year. For point of reference, the dollar-
weighted average portfolio maturity of this Portfolio is normally
not expected to exceed three years.
The Portfolio invests primarily in investment grade debt
securities, but may invest up to 10% of its assets in high yield
securities ("junk bonds") rated B or higher by Moody's or S&P, or,
if unrated, determined by PIMCO 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.
The Portfolio will normally hedge at least 75% of its exposure to
foreign currency to reduce the risk of loss due to fluctuations in
currency exchange rates.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls).
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Issuer Risk . Leveraging
Risk . Derivatives Risk
. Credit Risk Risk . Management
. Market Risk . Mortgage Risk Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
7 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Short-Term Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.21%(1) 0.46% (0.01%) 0.45%
----------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 1.02%(2) 1.42% (0.82%) 0.60%
----------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.20%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.20% administrative fee and 0.82%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.45% and 0.60%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3
--------------------------------------------------------------------
<S> <C> <C>
Institutional $46 $147
--------------------------------------------------------------------
Administrative 61 369
--------------------------------------------------------------------
</TABLE>
Prospectus 8
<PAGE>
PIMCO Low Duration Portfolio
- --------------------------------------------------------------------------------
Principal Investment Objective Portfolio Focus Credit Quality
Investments Seeks maximum total Short maturity fixed B to Aaa; maximum
and return, consistent income securities 10% below Baa
Strategies with preservation of
capital and prudent Average Portfolio Dividend Frequency
investment management Duration Declared daily and
1-3 years distributed monthly
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
a diversified portfolio of Fixed Income Instruments of varying
maturities. The average portfolio duration of this Portfolio
normally varies within a one- to three-year time frame based on
PIMCO's forecast for interest rates.
The Portfolio invests primarily in investment grade debt
securities, but may invest up to 10% of its assets in high yield
securities ("junk bonds") rated B or higher by Moody's or S&P, or,
if unrated, determined by PIMCO 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 Portfolio will normally hedge at least 75% of its exposure to
foreign currency to reduce the risk of loss due to fluctuations in
currency exchange rates.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls). The "total return" sought by the Portfolio
consists of income earned on the Portfolio's investments, plus
capital appreciation, if any, which generally arises from
decreases in interest rates or improving credit fundamentals for a
particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate Risk . Derivatives Risk . Currency Risk
. Credit Risk . Liquidity Risk . Leveraging Risk
. Market Risk . Mortgage Risk . Management Risk
. Issuer Risk . Foreign Investment Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
9 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Low Duration Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.26%(1) 0.51% (0.01%) 0.50%
----------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.38%(2) 0.78% (0.13%) 0.65%
----------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.25%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.25% administrative fee and 0.13%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.50% and 0.65%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3
--------------------------------------------------------------------
<S> <C> <C>
Institutional $51 $163
--------------------------------------------------------------------
Administrative 66 236
--------------------------------------------------------------------
</TABLE>
Prospectus 10
<PAGE>
PIMCO Real Return Bond Portfolio
- --------------------------------------------------------------------------------
Principal Investment Portfolio Focus Credit Quality
Investments Objective Inflation indexed B to Aaa; maximum
and Seeks maximum fixed income 10% below Baa
Strategies real return, securities
consistent with Dividend
preservation of Average Portfolio Frequency
real capital and Duration Declared daily and
prudent See description distributed monthly
investment below
management
The Portfolio seeks its investment objective by investing under
normal circumstances at least 65% of its assets in inflation-
indexed bonds of varying maturities issued by the U.S. and non-
U.S. governments, their agencies or government-sponsored
enterprises and corporations. Inflation-indexed bonds are fixed
income securities that are structured to provide protection
against inflation. The value of the bond's principal or the
interest income paid on the bond is adjusted to track changes in
an official inflation measure. The U.S. Treasury uses the Consumer
Price Index for Urban Consumers as the inflation measure.
Inflation-indexed bonds issued by a foreign government are
generally adjusted to reflect a comparable inflation index,
calculated by that government. "Real return" equals total return
less the estimated cost of inflation, which is typically measured
by the change in an official inflation measure.
Because of the unique features of inflation-indexed bonds, PIMCO
uses a modified form of duration for the Portfolio ("real
duration") which measures price changes as a result of changes in
"real" interest rates. A "real" interest rate is the market
interest rate minus expected inflation. There is no limit on the
real duration of the Portfolio, but it is expected that the
average real duration of this Portfolio will normally vary
approximately within the range of the average real duration of all
inflation-indexed bonds issued by the U.S. Treasury in the
aggregate, which as of March 7, 2000 was 9.0 years. For point of
reference, it is expected that the average portfolio duration (as
opposed to real duration) of the Portfolio will generally vary
within a one- to five-year time frame, although this range is
subject to change.
The Portfolio invests primarily in investment grade securities,
but may invest up to 10% of its assets in high yield securities
("junk bonds") rated B or higher by Moody's or S&P, or, if
unrated, determined by PIMCO 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.
The Portfolio will normally hedge at least 75% of its exposure to
foreign currency to reduce the risk of loss due to fluctuations in
currency exchange rates. The Portfolio is non-diversified, which
means that it may concentrate its assets in a smaller number of
issuers than a diversified Portfolio.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls).
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate Risk . Derivatives Risk . Currency Risk
. Credit Risk . Liquidity Risk . Leveraging Risk
. Market Risk . Issuer Non-Diversification . Management Risk
. Issuer Risk Risk
. Foreign Investment Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
11 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Real Return Bond Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual
Portfolio Net Portfolio
Advisory Service Other Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.26%(1) 0.51% (0.01%) 0.50%
---------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.52%(2) 0.92% (0.27%) 0.65%
---------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.25%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.25% administrative fee and 0.27%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.50% and 0.65%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3
--------------------------------------------------------------------
<S> <C> <C>
Institutional $51 $163
--------------------------------------------------------------------
Administrative 66 266
--------------------------------------------------------------------
</TABLE>
Prospectus 12
<PAGE>
PIMCO Total Return Portfolio
- --------------------------------------------------------------------------------
Principal Investment Portfolio Focus Credit Quality
Investments Objective Intermediate B to Aaa; maximum
and Seeks maximum maturity fixed 10% below Baa
Strategies total return, income
consistent with securities Dividend Frequency
preservation of Declared daily and
capital and Average Portfolio distributed monthly
prudent Duration
investment 3-6 years
management
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
a diversified portfolio of Fixed Income Instruments of varying
maturities. The average portfolio duration of this Portfolio
normally varies within a three- to six-year time frame based on
PIMCO's forecast for interest rates.
The Portfolio invests primarily in investment grade debt
securities, but may invest up to 10% of its assets in high yield
securities ("junk bonds") rated B or higher by Moody's or S&P or,
if unrated, determined by PIMCO 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 Portfolio will normally hedge at least 75% of its exposure to
foreign currency to reduce the risk of loss due to fluctuations in
currency exchange rates.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls). The "total return" sought by the Portfolio
consists of income earned on the Portfolio's investments, plus
capital appreciation, if any, which generally arises from
decreases in interest rates or improving credit fundamentals for a
particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Derivatives . Currency Risk
Risk Risk . Leveraging
. Credit Risk . Liquidity Risk Risk
. Market Risk . Mortgage Risk . Management
. Issuer Risk . Foreign Risk
Investment
Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance The top of the next page shows summary performance information for
Information the Portfolio in a bar chart and an Average Annual Total Returns
table. The information provides some indication of the risks of
investing in the Portfolio by showing changes in its performance
from year to year and by showing how the Portfolio's average
annual returns compare with the returns of a broad-based
securities market index. The bar chart and the information to its
right show performance of the Portfolio's Administrative Class
Shares. The bar chart and table do not reflect Variable Contract
fees and expenses. If they did, performance would have been lower.
No performance information has been provided for Institutional
Class shares because they were not offered prior to the date of
this Prospectus. For the same periods, Institutional Class shares
would have had higher annual returns than Administrative Class
shares, even though they are invested in the same portfolio of
securities, because Institutional Class shares pay lower total
annual operating expenses. Past performance is no guarantee of
future results.
13 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Total Return Portfolio (continued)
- --------------------------------------------------------------------------------
Calendar Year Total Returns -- Administrative Class
[BAR CHART OF TOTAL RETURN
PORTFOLIO APPEARS HERE]
Highest and Lowest Quarter Returns
Annual Return (for periods shown in the bar chart)
------------------------------------
'98 '99 Highest (3rd Qtr. '98) 5.43%
------ ------ ------------------------------------
8.61% -0.58% Lowest (2nd Qtr. '99) (0.94%)
Calendar Year End (through 12/31)
Average Annual Total Returns (for periods ended 12/31/99)
<TABLE>
<CAPTION>
Portfolio
Inception
1 Year (12/31/97)
--------------------------------------------------------------------
<S> <C> <C>
Administrative Class (0.58%) 3.91%
--------------------------------------------------------------------
Lehman Aggregate Bond Index(1) (0.82%) 3.82%
--------------------------------------------------------------------
</TABLE>
(1) The Lehman Brothers Aggregate Bond Index is an unmanaged index
of investment grade, U.S. dollar-denominated fixed income
securities of domestic issuers having a maturity greater than
one year. It is not possible to invest directly in the index.
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual
Portfolio Net Portfolio
Advisory Service Other Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.26%(1) 0.51% (0.01%) 0.50%
---------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.29%(2) 0.69% (0.04%) 0.65%
---------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.25%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.25% administrative fee and 0.04%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.50% and 0.65%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional $51 $163 $284 $640
--------------------------------------------------------------------
Administrative 66 217 380 855
--------------------------------------------------------------------
</TABLE>
Prospectus 14
<PAGE>
PIMCO Total Return Portfolio II
- --------------------------------------------------------------------------------
Principal Investment Objective Portfolio Focus Credit Quality
Investments Seeks maximum Intermediate Baa to Aaa
and total return, maturity fixed
Strategies consistent with income Dividend Frequency
preservation of securities Declared daily and
capital and distributed monthly
prudent Average Portfolio
investment Duration
management 3-6 years
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
a diversified portfolio of Fixed Income Instruments of varying
maturities. The average portfolio duration of this Portfolio
normally varies within a three- to six-year time frame based on
PIMCO's forecast for interest rates. The Portfolio may invest only
in investment grade U.S. dollar denominated securities of U.S.
issuers that are rated at least Baa by Moody's or BBB by S&P, or,
if unrated, determined by PIMCO to be of comparable quality.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls). The "total return" sought by the Portfolio
consists of income earned on the Portfolio's investments, plus
capital appreciation, if any, which generally arises from
decreases in interest rates or improving credit fundamentals for a
particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate Risk . Issuer Risk . Leveraging Risk
. Credit Risk . Derivatives Risk . Liquidity Risk
. Market Risk . Mortgage Risk . Management Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
15 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Total Return Portfolio II (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.26%(1) 0.51% (0.01%) 0.50%
-------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.38%(2) 0.78% (0.13%) 0.65%
-------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.25%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.25% administrative fee and 0.13%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.50% and 0.65%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3
--------------------------------------------------------------------------------------
<S> <C> <C>
Institutional $51 $163
--------------------------------------------------------------------------------------
Administrative 66 236
--------------------------------------------------------------------------------------
</TABLE>
Prospectus
16
<PAGE>
PIMCO High Yield Portfolio
- --------------------------------------------------------------------------------
Principal Investment Portfolio Focus Credit Quality
Investments Objective Higher yielding B to Aaa; minimum
and Seeks maximum fixed income 65% below Baa
Strategies total return, securities
consistent with Dividend Frequency
preservation of Average Portfolio Declared daily and
capital and Duration distributed monthly
prudent 2-6 years
investment
management
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
a diversified portfolio of high yield securities ("junk bonds")
rated below investment grade but rated at least B by Moody's or
S&P, or, if unrated, determined by PIMCO 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 normally varies within a two-
to six-year time frame based on PIMCO's forecast for interest
rates. The Portfolio may invest without limit in U.S. dollar-
denominated securities of foreign issuers. The Portfolio may
invest up to 15% of its assets in euro-denominated securities. The
Portfolio normally will hedge at least 75% of its exposure to the
euro to reduce the risk of loss due to fluctuations in currency
exchange rates.
The Portfolio may invest up to 15% of its assets in derivative
instruments, such as options, futures contracts or swap
agreements. The Portfolio may invest all of its assets 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 seek to obtain
market exposure to the securities in which it primarily invests by
entering into a series of purchase and sale contracts or by using
other investment techniques (such as buy backs or dollar rolls).
The "total return" sought by the Portfolio consists of income
earned on the Portfolio's investments, plus capital appreciation,
if any, which generally arises from decreases in interest rates or
improving credit fundamentals for a particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Issuer Risk . Foreign
Risk . Liquidity Risk Investment Risk
. Credit Risk . Derivatives Risk . Currency Risk
. High Yield Risk . Mortgage Risk . Leveraging Risk
. Market Risk . Management Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance The top of the next page shows summary performance information for
Information the Portfolio in a bar chart and an Average Annual Total Returns
table. The information provides some indication of the risks of
investing in the Portfolio by showing changes in its performance
from year to year and by showing how the Portfolio's average
annual returns compare with the returns of a broad-based
securities market index. The bar chart and the information to its
right show performance of the Portfolio's Administrative Class
Shares. The bar chart and table do not reflect Variable Contract
fees and expenses. If they did, performance would have been lower.
No performance information has been provided for Institutional
Class shares because they were not offered prior to the date of
this Prospectus. For the same periods, Institutional Class shares
would have had higher annual returns than Administrative Class
shares, even though they are invested in the same portfolio of
securities, because Institutional Class shares pay lower total
annual operating expenses. Past performance is no guarantee of
future results.
17
PIMCO Variable Insurance Trust
<PAGE>
PIMCO High Yield Portfolio (continued)
Calendar Year Total Returns -- Administrative Class
[BAR CHART OF HIGH YIELD PORTFOLIO APPEARS HERE] Highest and Lowest
Annual Return Quarter Returns
(for periods shown
99 in the bar chart)
----- -----------------------------
3.01% Highest (1st Qtr.'99) 2.00%
-----------------------------
Lowest (2nd Qtr.'99) (0.51%)
Calendar Year End (through 12/31)
Average Annual Total Returns (for periods ended 12/31/99)
<TABLE>
<CAPTION>
Portfolio
Inception
1 Year (04/30/98)
-----------------------------------------------
<S> <C> <C>
Administrative Class 3.01% 2.88%
-----------------------------------------------
Lehman Brothers BB Intermediate
Corporate Index(1) 2.20% 3.02%
-----------------------------------------------
</TABLE>
(1) The Lehman Brothers BB Intermediate Corporate Index is an
unmanaged index comprised of various fixed income securities
rated BB with an average duration of 4.40 years as of
12/31/99. It is not possible to invest directly in the index.
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.36%(1) 0.61% (0.01%) 0.60%
-------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.35%(2) 0.75% 0.00% 0.75%
-------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.35%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflects a 0.35% administrative fee.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.60% and 0.75%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional $61 $194 $339 $761
-----------------------------------------------------------------------------------
Administrative 77 240 417 930
-----------------------------------------------------------------------------------
</TABLE>
Prospectus 18
<PAGE>
PIMCO Long-Term U.S. Government Portfolio
- --------------------------------------------------------------------------------
Principal Investment Portfolio Focus Credit Quality
Investments Objective Long-term A to Aaa
and Seeks maximum maturity
Strategies total return, fixed income Dividend Frequency
consistent with securities Declared daily and
preservation of distributed monthly
capital and Average Portfolio
prudent Duration
investment (greater than or
management =) 8 years
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
a diversified portfolio of fixed income securities that are issued
or guaranteed by the U.S. Government, its agencies or government-
sponsored enterprises ("U.S. Government Securities"). Assets not
invested in U.S. Government Securities may be invested in other
types of Fixed Income Instruments. The Portfolio also may obtain
exposure to U.S. Government Securities through the use of futures
contracts (including related options) with respect to such
securities, and options on such securities, when PIMCO deems it
appropriate to do so. While PIMCO may invest in derivatives at any
time it deems appropriate, it will generally do so when it
believes that U.S. Government Securities are overvalued relative
to derivative instruments. This Portfolio will normally have a
minimum average portfolio duration of eight years. For point of
reference, the dollar-weighted average portfolio maturity of the
Portfolio is normally expected to be more than ten years.
The Portfolio's investments in Fixed Income Instruments are
limited to those of investment grade U.S. dollar-denominated
securities of U.S. issuers that are rated at least A by Moody's or
S&P, or, if unrated, determined by PIMCO to be of comparable
quality. In addition, the Portfolio may only invest up to 10% of
its assets in securities rated A by Moody's or S&P, and may only
invest up to 25% of its assets in securities rated Aa by Moody's
or AA by S&P.
The Portfolio may invest all of its assets in derivative
instruments, such as options, futures contracts or swap
agreements, or in mortgage-backed securities. The Portfolio may
lend its portfolio securities to brokers, dealers and other
financial institutions to earn income. The Portfolio may seek to
obtain market exposure to the securities in which it primarily
invests by entering into a series of purchase and sale contracts
or by using other investment techniques (such as buy backs or
dollar rolls). The "total return" sought by the Portfolio consists
of income earned on the Portfolio's investments, plus capital
appreciation, if any, which generally arises from decreases in
interest rates or improving credit fundamentals for a particular
sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Issuer Risk . Leveraging Risk
Risk . Derivatives Risk . Management Risk
. Credit Risk . Mortgage Risk
. Market Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
19 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Long-Term U.S. Government Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.25% None 0.26%(1) 0.51% (0.01%) 0.50%
-------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.31%(2) 0.71% (0.06%) 0.65%
-------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for
the initial fiscal year of the class, reflect a 0.25%
administrative fee and 0.01% representing the class'
estimated pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.25% administrative fee and 0.06%
representing the Portfolio's organizational expenses as
attributed to the class and pro rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.50% and 0.65%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3
--------------------------------------------------------------------------------------
<S> <C> <C>
Institutional $51 $163
--------------------------------------------------------------------------------------
Administrative 66 221
--------------------------------------------------------------------------------------
</TABLE>
Prospectus 20
<PAGE>
PIMCO Global Bond Portfolio
- --------------------------------------------------------------------------------
Principal Investment Objective Portfolio Focus Credit Quality
Investments Seeks maximum U.S. and non-U.S. B to Aaa; maximum
and total return, intermediate 10% below Baa
Strategies consistent with maturity
preservation of fixed income Dividend Frequency
capital and securities Declared daily and
prudent distributed monthly
investment Average Portfolio
management Duration
3-7 years
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its assets in
Fixed Income Instruments 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. The
Portfolio invests primarily in securities of issuers located in
economically developed countries. Securities may be denominated in
major foreign currencies, baskets of foreign currencies (such as
the euro), or the U.S. dollar.
PIMCO selects the Portfolio's foreign country and currency
compositions based on an evaluation of various factors, including,
but not limited to, relative interest rates, exchange rates,
monetary and fiscal policies, trade and current account balances.
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 normally varies within a three- to seven-year time
frame. The Portfolio invests primarily in investment grade debt
securities, but may invest up to 10% of its assets in high yield
securities ("junk bonds") rated B or higher by Moody's or S&P, or,
if unrated, determined by PIMCO to be of comparable quality. The
Portfolio is non-diversified, which means that it may concentrate
its assets in a smaller number of issuers than a diversified
Portfolio.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls). The "total return" sought by the Portfolio
consists of income earned on the Portfolio's investments, plus
capital appreciation, if any, which generally arises from
decreases in interest rates or improving credit fundamentals for a
particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Foreign . Mortgage Risk
Risk Investment Risk . Derivatives Risk
. Credit Risk . Currency Risk . Leveraging Risk
. Market Risk . Issuer Non- . Management Risk
. Issuer Risk Diversification
Risk
. Liquidity Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this portfolio is not provided because
Information this Portfolio has not commenced operations as of the date if this
Prospectus.
21 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Global Bond Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses(1) Expenses Reduction(2) Expenses
------------------------------------------------------------------------------------------
Institutional 0.25% None 0.78% 1.03% (0.28%) 0.75%
------------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.78% 1.18% (0.28%) 0.90%
------------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the Portfolio, reflect a 0.50%
administrative fee and 0.28% representing the Portfolio's
estimated organizational expenses and pro rata Trustees' fees.
(2) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.75% and 0.90%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<S> <C> <C>
Share Class Year 1 Year 3
-----------------------------------------------------------------------------------------
Institutional $77 $300
-----------------------------------------------------------------------------------------
Administrative 92 347
-----------------------------------------------------------------------------------------
</TABLE>
Prospectus 22
<PAGE>
PIMCO Foreign Bond Portfolio
- --------------------------------------------------------------------------------
Investment Objective Portfolio Focus Credit Quality
Principal Seeks maximum Intermediate B to Aaa; maximum
Investments total return, maturity hedged 10% below Baa
and consistent with non-U.S. fixed
Strategies preservation of income securities Dividend Frequency
capital and Declared daily and
prudent Average Portfolio distributed monthly
investment Duration
management 3-7 years
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 85% of its assets in
Fixed Income Instruments 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.
Such securities normally are denominated in major foreign
currencies or baskets of foreign currencies (such as the euro).
The Portfolio will normally hedge at least 75% of its exposure to
foreign currency to reduce the risk of loss due to fluctuations in
currency exchange rates.
PIMCO selects the Portfolio's foreign country and currency
compositions based on an evaluation of various factors, including,
but not limited to, relative interest rates, exchange rates,
monetary and fiscal policies, trade and current account balances.
The average portfolio duration of this Portfolio normally varies
within a three- to seven-year time frame. The Portfolio invests
primarily in investment grade debt securities, but may invest up
to 10% of its assets in high yield securities ("junk bonds") rated
B or higher by Moody's or S&P, or, if unrated, determined by PIMCO
to be of comparable quality. The Portfolio is non-diversified,
which means that it may concentrate its assets in a smaller number
of issuers than a diversified Portfolio.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls). The "total return" sought by the Portfolio
consists of income earned on the Portfolio's investments, plus
capital appreciation, if any, which generally arises from
decreases in interest rates or improving credit fundamentals for a
particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Foreign . Mortgage Risk
Risk Investment Risk . Derivatives Risk
. Credit Risk . Currency Risk . Leveraging Risk
. Market Risk . Issuer Non- . Management Risk
. Issuer Risk Diversification
Risk
. Liquidity Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information it has not been in operation for a full calendar year.
23 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Foreign Bond Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
----------------------------------------------------------------------------------------
Institutional 0.25% None 0.51%(1) 0.76% (0.01%) 0.75%
----------------------------------------------------------------------------------------
Administrative 0.25% 0.15% 0.85%(2) 1.25% (0.15%) 1.10%(4)
----------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses" which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.50%
administrative fee and 0.01% representing the class' estimated
pro rata Trustees' fees.
(2) "Other Expenses" reflect a 0.50% administrative fee, 0.20%
interest expense, and 0.15% representing the Portfolio's
organizational expenses as attributed to the class and pro
rata Trustees' fees.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.75% and 0.90%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
(4) Ratio of net expenses to average net assets excluding interest
expense is 0.90% for the Administrative Class.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<S> <C> <C>
Share Class Year 1 Year 3
-----------------------------------------------------------------------------------------
Institutional $ 77 $242
-----------------------------------------------------------------------------------------
Administrative 112 382
-----------------------------------------------------------------------------------------
</TABLE>
Prospectus 24
<PAGE>
PIMCO Emerging Markets Bond Portfolio
- --------------------------------------------------------------------------------
Principal Investment Objective Portfolio Focus Credit Quality
Investments Seeks maximum Emerging market B to Aaa
and total return, fixed income
Strategies consistent with securities Dividend
preservation of Frequency
capital and Average Portfolio Declared daily and
prudent Duration distributed monthly
investment 0-8 years
management
The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 80% of its assets in
Fixed Income Instruments of issuers that economically are tied to
countries with emerging securities markets. Such securities may be
denominated in non-U.S. currencies and the U.S. dollar. A security
is economically tied to an emerging market country if it is
principally traded on the country's securities markets, or the
issuer is organized or principally operates in the country,
derives a majority of its income from its operations within the
country or has a majority of its assets in the country. The
average portfolio duration of this Portfolio varies based on
PIMCO's forecast for interest rates and, under normal market
conditions, is not expected to exceed eight years.
PIMCO has broad discretion to identify and invest in countries
that it considers to qualify as emerging securities markets.
However, PIMCO generally considers an emerging securities market
to be one located in any country that is defined as an emerging or
developing economy by the World Bank or its related organizations,
or the United Nations or its authorities. The Portfolio emphasizes
countries with relatively low gross national product per capita
and with the potential for rapid economic growth. PIMCO 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 PIMCO 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 may invest in securities whose
return is based on the return of an emerging securities market,
such as a derivative instrument, rather than investing directly in
securities of issuers from emerging markets.
The Portfolio may invest substantially all of its assets in high
yield securities ("junk bonds") rated B or higher by Moody's or
S&P, or, if unrated, determined by PIMCO to be of comparable
quality. The Portfolio is non-diversified, which means that it may
concentrate its assets in a smaller number of issuers than a
diversified Portfolio.
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
seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale
contracts or by using other investment techniques (such as buy
backs or dollar rolls). The "total return" sought by the Portfolio
consists of income earned on the Portfolio's investments, plus
capital appreciation, if any, which generally arises from
decreases in interest rates or improving credit fundamentals for a
particular sector or security.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Interest Rate . Emerging . Liquidity Risk
Risk Markets Risk . Derivatives
. Credit Risk . Foreign Risk
. High Yield Risk Investment Risk . Leveraging Risk
. Market Risk . Currency Risk . Management Risk
. Issuer Risk . Issuer
Non-Diversification
Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information this Portfolio has not commenced operations as of the date of this
Prospectus.
25 PIMCO Variable Insurance Trust
<PAGE>
PIMCO Emerging Markets Bond Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses(1) Expenses Reduction(2) Expenses
----------------------------------------------------------------------------------------
Institutional 0.45% None 0.68% 1.13% (0.28%) 0.85%
----------------------------------------------------------------------------------------
Administrative 0.45% 0.15% 0.68% 1.28% (0.28%) 1.00%
----------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the Portfolio, reflect a 0.40%
administrative fee and 0.28% representing the Portfolio's
estimated organizational expenses and pro rata Trustees' fees.
(2) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.85% and 1.00%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<S> <C> <C>
Share Class Year 1 Year 3
--------------------------------------------------------------------------------------
Institutional $ 87 $331
--------------------------------------------------------------------------------------
Administrative 102 378
--------------------------------------------------------------------------------------
</TABLE>
Prospectus
26
<PAGE>
PIMCO Strategic Balanced Portfolio
- --------------------------------------------------------------------------------
Principal Investment Objective Portfolio Focus Credit Quality
Investments Seeks maximum Intermediate B to Aaa; maximum
and total return, maturity fixed 10% below Baa
Strategies consistent with income securities
preservation of and S&P 500 stock Dividend
capital and index derivatives Frequency
prudent Declared and
investment Average Portfolio distributed
management Duration quarterly
0-6 years
The Portfolio seeks to achieve its investment objective by
normally investing in a combination of fixed income securities and
equity securities or derivatives on equity securities. The
percentage of the Portfolio's assets invested in equities and
equity derivatives or in fixed income securities will be
determined based on methodology, developed by PIMCO, that
forecasts stages in the business cycle and considers the risk and
reward potential of equity and fixed income securities within
specific phases of the business cycle. The Portfolio's equity
exposure will vary between 45% and 75% of assets, and its fixed
income exposure will range from a minimum of 25% to a maximum of
55%.
The Portfolio's equity exposure normally consists of S&P 500
derivatives, backed by a portfolio of short-term Fixed Income
Instruments. PIMCO 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 value of S&P 500 derivatives
closely track changes in the value of the index. However, S&P 500
derivatives may be purchased with a fraction of the assets that
would be needed to purchase the equity securities directly, so
that the remainder of the assets may be invested in Fixed Income
Instruments. PIMCO 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 toward enhancing
the Portfolio's total return investment performance. Though the
Portfolio does not normally invest directly in S&P 500 securities,
when S&P 500 derivatives appear to be overvalued relative to the
S&P 500, the Portfolio may invest the equity portion of its assets
in a "basket" of S&P 500 stocks.
The Portfolio's fixed income exposure will normally consist of a
diversified portfolio of Fixed Income Instruments of varying
maturities. The average portfolio duration of the fixed income
portion of this Portfolio's assets will normally vary within a
three- to six-year time frame. The Fixed Income Instruments in
which the Portfolio invests are primarily investment grade, but
the Portfolio may invest up to 10% of its assets in high yield
securities ("junk bonds") rated B or higher by Moody's or S&P, or,
if unrated, determined by PIMCO 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 Portfolio will normally hedge at least 75% of its exposure to
foreign currency to reduce the risk of loss due to fluctuations in
currency exchange rates.
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 to earn income.
The Portfolio may seek to obtain market exposure to the securities
in which it primarily invests by entering into a series of
purchase and sale contracts or by using other investment
techniques (such as buy backs or dollar rolls). The "total return"
sought by the Portfolio consists of net income earned on the
Portfolio's investments, plus capital appreciation arising from
increases in the market value of the Portfolio's holdings.
- --------------------------------------------------------------------------------
Principal Among the principal risks of investing in the Portfolio, which
Risks could adversely affect its net asset value, yield and total
return, are:
. Market Risk . Derivatives Risk . Mortgage Risk
. Issuer Risk . Liquidity Risk . Leveraging Risk
. Interest Rate Risk . Foreign Investment . Management Risk
. Credit Risk Risk
. Currency Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance Performance information for this Portfolio is not provided because
Information this Portfolio has not commenced operations as of the date of this
Prospectus.
PIMCO Variable Insurance Trust
27
<PAGE>
PIMCO Strategic Balanced Portfolio (continued)
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses(1) Expenses Reduction(2) Expenses
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional 0.40% None 0.48% 0.88% (0.28%) 0.60%
------------------------------------------------------------------------------------------
Administrative 0.40% 0.15% 0.48% 1.03% (0.28%) 0.75%
------------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses", which are based on estimated amounts for the
initial fiscal year of the Portfolio, reflect a 0.20%
administrative fee and 0.28% representing the Portfolio's
estimated organizational expenses and pro rata Trustees' fees.
(2) PIMCO has contractually agreed to reduce total annual
portfolio operating expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.60% and 0.75%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<S> <C> <C>
Share Class Year 1 Year 3
-----------------------------------------------------------------------------------------
Institutional $61 $253
-----------------------------------------------------------------------------------------
Administrative 77 300
-----------------------------------------------------------------------------------------
</TABLE>
Prospectus 28
<PAGE>
PIMCO StocksPLUS Growth and Income Portfolio
- --------------------------------------------------------------------------------
Principal Investment Portfolio Focus Credit Quality
Investments Objective S&P 500 stock B to Aaa; maximum
and Seeks total index derivatives 10% below Baa
Strategies return which backed by a
exceeds that of portfolio of Dividend
the S&P 500 short-term fixed Frequency
income securities Declared and
distributed
Average Portfolio quarterly
Duration
0-1 year
The Portfolio seeks to exceed the total return of the S&P 500 by
investing under normal circumstances substantially all of its
assets in S&P 500 derivatives, backed by a portfolio of Fixed
Income Instruments. The Portfolio may invest in common stocks,
options, futures, options on futures and swaps. The Portfolio 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
value of S&P 500 derivatives closely track changes in the value of
the index. However, S&P 500 derivatives may be purchased with a
fraction of the assets that would be needed to purchase the equity
securities directly, so that the remainder of the assets may be
invested in Fixed Income Instruments. PIMCO actively manages the
fixed income assets held by the Portfolio with a view toward
enhancing the Portfolio's total return, subject to an overall
portfolio duration which is normally not expected to exceed one
year.
The S&P 500 is composed of 500 selected common stocks that
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 seeks to remain invested in S&P
500 derivatives or S&P 500 stocks even when the S&P 500 is
declining.
Though the Portfolio does not normally invest directly in S&P 500
securities, when S&P 500 derivatives appear to be overvalued
relative to the S&P 500, the Portfolio may invest all of its
assets in a "basket" of S&P 500 stocks. Individual stocks are
selected based on an analysis of the historical correlation
between the return of every S&P 500 stock and the return on the
S&P 500 itself. PIMCO may employ fundamental analysis of factors
such as earnings and earnings growth, price to earnings ratio,
dividend growth, and cash flows to choose among stocks that
satisfy the correlation tests. Stocks chosen for the Portfolio are
not limited to those with any particular weighting in the S&P 500.
The Portfolio may also invest in exchange traded funds based on
the S&P 500, such as Standard & Poor's Depositary Receipt.
Assets not invested in equity securities or derivatives may be
invested in Fixed Income Instruments. The Portfolio may invest up
to 10% of its assets in high yield securities ("junk bonds") rated
B or higher by Moody's or S&P, or, if unrated, determined by PIMCO
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 Portfolio will normally hedge at least 75% of
its exposure to foreign currency to reduce the risk of loss due to
fluctuations in currency exchange rates. In addition, the
Portfolio may lend its portfolio securities to brokers, dealers
and other financial institutions to earn income.
- --------------------------------------------------------------------------------
Principal Under certain conditions, generally in a market where the value of
Risks both S&P 500 derivatives and fixed income securities are
declining, the Portfolio may experience greater losses than would
be the case if it invested directly in a portfolio of S&P 500
stocks. Among the principal risks of investing in the Portfolio,
which could adversely affect its net asset value, yield and total
return, are:
. Market Risk . Interest Rate . Mortgage Risk
. Issuer Risk Risk . Leveraging Risk
. Derivatives Risk . Liquidity Risk . Management Risk
. Credit Risk . Foreign Investment
Risk
. Currency Risk
Please see "Summary of Principal Risks" following the Portfolio
Summaries for a description of these and other risks of investing
in the Portfolio.
- --------------------------------------------------------------------------------
Performance The top of the next page shows summary performance information for
Information the Portfolio in a bar chart and an Average Annual Total Returns
table. The information provides some indication of the risks of
investing in the Portfolio by showing changes in its performance
from year to year and by showing how the Portfolio's average
annual returns compare with the returns of a broad-based
securities market index. The bar chart and the information to its
right show performance of the Portfolio's Administrative Class
Shares. The bar chart and table do not reflect Variable Contract
fees and expenses. If they did, performance would have been lower.
No performance information has been provided for Institutional
Class shares because they were not offered prior to the date of
this Prospectus. For the same periods, Institutional Class shares
would have had higher annual returns than Administrative Class
shares, even though they are invested in the same portfolio of
securities, because Institutional Class shares pay lower total
annual operating expenses. Past performance is no guarantee of
future results.
29 PIMCO Variable Insurance Trust
<PAGE>
PIMCO StocksPLUS Growth and Income Portfolio (continued)
Calendar Year Total Returns -- Administrative Class
[GRAPH] Highest and Lowest
98 99 Quarter Returns
------ ------ (for periods shown
30.11% 19.85% in the bar chart)
--------------------
Highest (4th Qtr.
'98) 21.95%
--------------------
Lowest (3rd Qtr.
'98) -8.82%
Calendar Year End (through 12/31)
Average Annual Total Returns (for periods ended 12/31/99)
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio
Inception
1 Year (12/31/97)
---------------------------------------------------------------------------------
Administrative Class 19.85% 24.87%
---------------------------------------------------------------------------------
S&P 500 Index(1) 21.04% 24.75%
---------------------------------------------------------------------------------
</TABLE>
(1) The Standard & Poor's 500 Composite Stock Price Index is an
unmanaged index of common stocks. It is not possible to invest
directly in the index.
- --------------------------------------------------------------------------------
Fees and These tables describe the fees and expenses you may pay if you buy
Expenses and hold Institutional Class or Administrative Class shares of the
of the Portfolio:
Portfolio
Shareholder Fees (fees paid directly from your investment) None
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total Annual Net Portfolio
Advisory Service Other Portfolio Operating Expense Operating
Share Class Fees Fees Expenses Expenses Reduction(3) Expenses
-------------------------------------------------------------------------------------
Institutional 0.40% None 0.11%(1) 0.51% (0.01%) 0.50%
-------------------------------------------------------------------------------------
Administrative 0.40% 0.15% 0.10%(2) 0.65% 0.00% 0.65%
-------------------------------------------------------------------------------------
</TABLE>
(1) "Other Expenses" which are based on estimated amounts for the
initial fiscal year of the class, reflect a 0.10%
administrative fee and 0.01% representing the class' estimated
pro rata Trustee's fees.
(2) "Other Expenses" reflects a 0.10% administrative fee.
(3) PIMCO has contractually agreed to reduce total annual
portfolio operation expenses for the Institutional and
Administrative Class shares to the extent they would exceed,
due to the payment of organizational expenses and Trustees'
fees, 0.50% and 0.65%, respectively, of average daily net
assets. Under the Expense Limitation Agreement, PIMCO may
recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
Examples. The Examples are intended to help you compare the cost
of investing in Institutional Class or Administrative Class shares
of the Portfolio with the costs of investing in other mutual
funds. The Examples assume that you invest $10,000 in the noted
class of shares for the time periods indicated, and then redeem
all your shares at the end of those periods. The Examples also
assume that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the
Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional $51 $163 $284 $640
-----------------------------------------------------------------------------------
Administrative 66 208 362 810
-----------------------------------------------------------------------------------
</TABLE>
Prospectus 30
<PAGE>
Summary of Principal Risks
The value of your investment in a Portfolio changes with the
values of that Portfolio's investments. Many factors can affect
those values. The factors that are most likely to have a material
effect on a particular Portfolio's portfolio as a whole are called
"principal risks." The principal risks of each Portfolio are
identified in the Portfolio Summaries and are described in this
section. Each Portfolio may be subject to additional principal
risks and risks other than those described below because the types
of investments made by a Portfolio can change over time.
Securities and investment techniques mentioned in this summary and
described in greater detail under "Characteristics and Risks of
Securities and Investment Techniques" appear in bold type. That
section and "Investment Objectives and Policies" in the Statement
of Additional Information also include more information about the
Portfolio, their investments and the related risks. There is no
guarantee that a Portfolio will be able to achieve its investment
objective.
Interest As interest rates rise, the value of fixed income securities held
Rate Risk by a Portfolio are likely to decrease. Securities with longer
durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than securities with shorter
durations.
Credit A Portfolio could lose money if the issuer or guarantor of a fixed
Risk income security, or the counterparty to a derivatives contract,
repurchase agreement or a loan of portfolio securities, is unable
or unwilling to make timely principal and/or interest payments, or
to otherwise honor its obligations. Securities are subject to
varying degrees of credit risk, which are often reflected in
credit ratings. Municipal bonds are subject to the risk that
litigation, legislation or other political events, local business
or economic conditions, or the bankruptcy of the issuer could have
a significant effect on an issuer's ability to make payments of
principal and/or interest.
High Portfolios that invest in high yield securities and unrated
Yield securities of similar credit quality (commonly known as "junk
Risk bonds") may be subject to greater levels of interest rate, credit
and liquidity risk than Portfolios that do not invest in such
securities. High yield securities are considered predominately
speculative with respect to the issuer's continuing ability to
make principal and interest payments. An economic downturn or
period of rising interest rates could adversely affect the market
for high yield securities and reduce a Portfolio's ability to sell
its high yield securities (liquidity risk).
Market The market price of securities owned by a Portfolio may go up or
Risk down, sometimes rapidly or unpredictably. Securities may decline
in value due to factors affecting securities markets generally or
particular industries represented in the securities markets. The
value of a security may decline due to general market conditions
which are not specifically related to a particular company, such
as real or perceived adverse economic conditions, changes in the
general outlook for corporate earnings, changes in interest or
currency rates or adverse investor sentiment generally. They may
also decline due to factors which affect a particular industry or
industries, such as labor shortages or increased production costs
and competitive conditions within an industry. Equity securities
generally have greater price volatility than fixed income
securities.
Issuer The value of a security may decline for a number of reasons which
Risk directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's goods or
services.
Liquidity Liquidity risk exists when particular investments are difficult to
Risk purchase or sell. A Portfolio's investments in illiquid securities
may reduce the returns of the Portfolio because it may be unable
to sell the illiquid securities at an advantageous time or price.
Portfolios with principal investment strategies that involve
foreign securities, derivatives or securities with substantial
market and/or credit risk tend to have the greatest exposure to
liquidity risk.
31 PIMCO Variable Insurance Trust
<PAGE>
Derivatives Derivatives are financial contracts whose value depends on, or is
Risk derived from, the value of an underlying asset, reference rate or
index. The various derivative instruments that the Portfolios may
use are referenced under "Characteristics and Risks of Securities
and Investment Techniques--Derivatives" in this Prospectus and
described in more detail under "Investment Objectives and
Policies" in the Statement of Additional Information. The
Portfolios typically use derivatives as a substitute for taking a
position in the underlying asset and/or part of a strategy
designed to reduce exposure to other risks, such as interest rate
or currency risk. The Portfolios may also use derivatives for
leverage, in which case their use would involve leveraging risk. A
Portfolio's use of derivative instruments involves risks different
from, or possibly greater than, the risks associated with
investing directly in securities and other traditional
investments. Derivatives are subject to a number of risks
described elsewhere in this section, such as liquidity risk,
interest rate risk, market risk, credit risk and management risk.
They also involve the risk of mispricing or improper valuation and
the risk that changes in the value of the derivative may not
correlate perfectly with the underlying asset, rate or index. A
Portfolio investing in a derivative instrument could lose more
than the principal amount invested. Also, suitable derivative
transactions may not be available in all circumstances and there
can be no assurance that a Portfolio will engage in these
transactions to reduce exposure to other risks when that would be
beneficial.
Mortgage A Portfolio that purchases mortgage-related securities is subject
Risk to certain additional risks. Rising interest rates tend to extend
the duration of mortgage-related securities, making them more
sensitive to changes in interest rates. As a result, in a period
of rising interest rates, a Portfolio that holds mortgage-related
securities may exhibit additional volatility. This is known as
extension risk. In addition, mortgage-related securities are
subject to prepayment risk. When interest rates decline, borrowers
may pay off their mortgages sooner than expected. This can reduce
the returns of a Portfolio because the Portfolio will have to
reinvest that money at the lower prevailing interest rates.
Foreign A Portfolio that invests in foreign securities may experience more
(Non- rapid and extreme changes in value than a Portfolio that invests
U.S.) exclusively in securities of U.S. companies. The securities
Investment markets of many foreign countries are relatively small, with a
Risk limited number of companies representing a small number of
industries. Additionally, issuers of foreign securities are
usually not subject to the same degree of regulation as U.S.
issuers. Reporting, accounting and auditing standards of foreign
countries differ, in some cases significantly, from U.S.
standards. Also, nationalization, expropriation or confiscatory
taxation, currency blockage, political changes or diplomatic
developments could adversely affect a Portfolio's investments in a
foreign country. In the event of nationalization, expropriation or
other confiscation, a Portfolio could lose its entire investment
in foreign securities. Adverse conditions in a certain region can
adversely affect securities of other countries whose economies
appear to be unrelated. To the extent that a Portfolio invests a
significant portion of its assets in a concentrated geographic
area like Eastern Europe or Asia, the Portfolio will generally
have more exposure to regional economic risks associated with
foreign investments.
Emerging Foreign investment risk may be particularly high to the extent
Markets that a Portfolio invests in emerging market securities of issuers
Risk based in countries with developing economies. These securities may
present market, credit, currency, liquidity, legal, political and
other risks different from, or greater than, the risks of
investing in developed foreign countries.
Currency Portfolios that invest directly in foreign currencies or in
Risk securities that trade in, and receive revenues in, foreign (non-
U.S.) currencies are subject to the risk that those currencies
will decline in value relative to the U.S. dollar, or, in the case
of hedging positions, that the U.S. dollar will decline in value
relative to the currency being hedged.
Currency rates in foreign countries may fluctuate significantly
over short periods of time for a number of reasons, including
changes in interest rates, intervention (or the failure to
intervene) by U.S. or foreign governments, central banks or
supranational entities such as the International Monetary
Prospectus 32
<PAGE>
Fund, or by the imposition of currency controls or other political
developments in the U.S. or abroad. As a result, a Portfolio's
investments in foreign currency-denominated securities may reduce
the returns of a Portfolio.
Issuer Focusing investments in a small number of issuers, industries or
Non- foreign currencies increases risk. Portfolios that are "non-
Diversifi- diversified" may invest a greater percentage of their assets in
cation the securities of a single issuer (such as bonds issued by a
Risk particular state) than Portfolios that are "diversified."
Portfolios that invest in a relatively small number of issuers are
more susceptible to risks associated with a single economic,
political or regulatory occurrence than a more diversified
portfolio might be. Some of those issuers also may present
substantial credit or other risks. Similarly, a Portfolio may be
more sensitive to adverse economic, business or political
developments if it invests a substantial portion of its assets in
the bonds of similar projects or from issuers in the same state.
Leveraging Certain transactions may give rise to a form of leverage. Such
Risk transactions may include, among others, reverse repurchase
agreements, loans of portfolios securities, and the use of when-
issued, delayed delivery or forward commitment transactions. The
use of derivatives may also create leveraging risk. To mitigate
leveraging risk, PIMCO will segregate liquid assets or otherwise
cover the transactions that may give rise to such risk. The use of
leverage may cause a Portfolio to liquidate portfolio positions
when it may not be advantageous to do so to satisfy its
obligations or to meet segregation requirements. Leverage,
including borrowing, may cause a Portfolio to be more volatile
than if the Portfolio had not been leveraged. This is because
leverage tends to exaggerate the effect of any increase or
decrease in the value of a Portfolio's portfolio securities.
Management Each Portfolio is subject to management risk because it is an
Risk actively managed investment portfolio. PIMCO and each individual
portfolio manager will apply investment techniques and risk
analyses in making investment decisions for the Portfolio, but
there can be no guarantee that these will produce the desired
results.
PIMCO Variable Insurance Trust
33
<PAGE>
Management of the Portfolios
Investment PIMCO serves as investment adviser and the administrator (serving
Adviser in its capacity as administrator, the "Administrator") for the
and Portfolios. Subject to the supervision of the Board of Trustees,
Adminis- PIMCO is responsible for managing the investment activities of the
trator Portfolios and the Portfolios' business affairs and other
administrative matters.
PIMCO's address is 840 Newport Center Drive, Suite 300, Newport
Beach, California 92660. Organized in 1971, PIMCO provides
investment management and advisory services to private accounts of
institutional and individual clients and to mutual funds. As of
December 31, 1999, PIMCO had approximately $186 billion in assets
under management.
Advisory Each Portfolio pays PIMCO fees in return for providing investment
Fees advisory services. For the fiscal year ended December 31, 1999,
the Portfolios paid monthly advisory fees to PIMCO at the
following annual rates (stated as a percentage of the average
daily net assets of each Portfolio taken separately):
<TABLE>
<CAPTION>
Portfolio Advisory Fees
-------------------------------------------------------------
<S> <C>
Money Market Portfolio 0.30%
Short-Term Bond Portfolio 0.35%
High Yield Bond and Strategic Balanced Portfolios 0.50%
Global Bond and Foreign Bond Portfolios 0.60%
Emerging Markets Bond Portfolio 0.65%
All other Portfolios 0.40%
</TABLE>
Effective April 1, 2000, the Portfolios pay monthly advisory fees
to PIMCO at the following annual rates (stated as a percentage of
the average daily net assets of each Portfolio taken separately):
<TABLE>
<CAPTION>
Portfolio Advisory Fees
---------------------------------------------------------------
<S> <C>
Money Market Portfolio 0.15%
StocksPLUS Growth and Income and Strategic Balanced
Portfolios 0.40%
Emerging Markets Bond Portfolio 0.45%
All other Portfolios 0.25%
</TABLE>
Adminis- Each Portfolio pays for the administrative services it requires
trative under a fee structure which is essentially fixed. Shareholders of
Fees each class of each Portfolio pay an administrative fee to PIMCO,
computed as a percentage of the Portfolio's assets attributable in
the aggregate to that class of shares. PIMCO, in turn, provides or
procures administrative services for shareholders and also bears
the costs of various third-party services required by the
Portfolios, including audit, custodial, portfolio accounting,
legal, transfer agency and printing costs. The result of this fee
structure is an expense level for shareholders of each Portfolio
that, with limited exceptions, is precise and predictable under
ordinary circumstances.
For the fiscal year ended December 31, 1999, the Portfolios paid
PIMCO monthly administrative fees at the following annual rates:
<TABLE>
<CAPTION>
Portfolio Administrative Fees
--------------------------------------------------------------
<S> <C>
Money Market Portfolio 0.20%
Global Bond and Foreign Bond Portfolios 0.30%
Emerging Markets Bond Portfolio 0.35%
All other Portfolios 0.25%
</TABLE>
Effective April 1, 2000, the Portfolios pay PIMCO monthly
administrative fees at the following annual rates:
<TABLE>
<CAPTION>
Portfolio Administrative Fees
--------------------------------------------------------------
<S> <C>
StocksPLUS Growth & Income Portfolio 0.10%
Money Market, Short-Term Bond, and Strategic
Balanced Portfolios 0.20%
High Yield Portfolio 0.35%
Emerging Markets Bond Portfolio 0.40%
Global Bond and Foreign Bond Portfolios 0.50%
All other Portfolios 0.25%
</TABLE>
Prospectus
34
<PAGE>
PIMCO may use its assets and resources, including its profits
from advisory or administrative fees paid by a Portfolio, to pay
insurance companies for services rendered to current and
prospective owners of Variable Contracts, including the provision
of support services such as providing information about the Trust
and the Portfolios, the delivery of Trust documents, and other
services. Any such payments are made by PIMCO and not by the Trust
and PIMCO does not receive any separate fees for such expenses.
Individual The table below provides information about the individual
Portfolio portfolio managers responsible for management of the Trust's
Managers Portfolios, including their occupations for the past five years.
<TABLE>
<CAPTION>
Portfolio Portfolio Manager Since Recent Professional Experience
-------------------------------------------------------------------------------------------------------
<C> <C> <C> <S>
Money Market Paul A. McCulley 9/99* Executive Vice President, PIMCO. He has
Short-Term Bond 9/99* managed fixed income assets since joining
PIMCO in 1999. Prior to joining PIMCO, Mr.
McCulley was associated with Warburg Dillon
Read as a Managing Director from 1992-1999
and Head of Economic and Strategy Research
for the Americas from 1995-1999, where he
managed macro research world-wide.
Low Duration Bond William H. Gross 2/99* Managing Director, Chief Investment Officer
Total Return Bond 12/97* and a founding partner of PIMCO. He leads a
Total Return Bond II 5/99* team which manages the Strategic Balanced
Strategic Balanced ** and StocksPLUS Portfolio.
StocksPLUS 12/97*
Growth and Income
Real Return Bond John B. Brynjolfsson 9/99* Executive Vice President, PIMCO. He joined
PIMCO as a Portfolio Manager in 1989, and
has managed fixed income accounts for
various institutional clients and funds
since that time.
High Yield Bond Benjamin L. Trosky 4/98* Managing Director, PIMCO. He joined PIMCO as
a Portfolio Manager in 1990.
Long-Term U.S. Government Bond James M. Keller 4/00 Executive Vice President, PIMCO. He joined
PIMCO as a Portfolio Manager in 1996, and
has managed fixed income accounts for
various institutional clients since that
time.
Foreign Bond Lee R. Thomas, III 2/99* Managing Director and Senior International
Global Bond ** Portfolio Manager, PIMCO. He joined PIMCO as
a Portfolio Manager in 1995, and has managed
fixed income accounts for various
institutional clients and funds since that
time. Prior to joining PIMCO, he was
associated with Investcorp as a member of
the management committee responsible for
global securities and foreign exchange
trading.
Emerging Markets Bond Mohamed A. El-Erian ** Managing Director, PIMCO. He joined PIMCO as
a Portfolio Manager in 1999. Prior to
joining PIMCO, he was a Managing Director
from 1998-1999 for Salomon Smith
Barney/Citibank, where he was head of
emerging markets research. Prior to that he
was associated with the International
Monetary Fund as a Deputy Director and
Advisor from 1983-1998.
</TABLE>
-------
* Since inception of the Portfolio.
** Portfolio has not commenced operation as of the date of this
Prospectus.
Distributor The Trust's Distributor is PIMCO Funds Distributors LLC, a wholly
owned subsidiary of PIMCO Advisors L.P. The Distributor, located
at 2187 Atlantic Street, Stamford CT 06902, is a broker-dealer
registered with the Securities and Exchange Commission.
Investment Options--
Institutional Class and Administrative Class Shares
Effective April 1, 2000, the Trust offers investors Institutional
Class and Administrative Class shares of the Portfolios in this
Prospectus. On that date, outstanding shares of the Trust were
designated Administrative Class Shares. The Trust does not charge
any sales charges (loads) or other fees in connection with
purchases, sales (redemptions) or exchanges of Institutional Class
or Administrative Class shares. Administrative Class shares are
subject to a higher level of operating expenses than Institutional
Class shares due to an additional service fee paid by
Administrative Class shares as described below. Therefore,
Institutional Class shares will generally pay higher dividends and
have a more favorable investment return than Administrative Class
shares.
35 PIMCO Variable Insurance Trust
<PAGE>
. Service Fees--Administrative Class Shares. The Trust has
adopted an Administrative Services Plan (the "Plan") for the
Administrative Class shares of each Portfolio. The Plan allows the
Portfolios to use its Administrative Class assets to reimburse
financial intermediaries that provide services relating to
Administrative Class shares. The services that will be provided
under the Plan include, among other things, teleservicing support
in connection with Portfolios; delivery of current Trust
prospectuses and other shareholder communications; recordkeeping
services; 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 investors' interests in one or more
Portfolios; provision and administration of insurance features for
the benefit of investors in connection with the Portfolios;
receiving, aggregating and forwarding purchase and redemption
orders; processing dividend payments; issuing investor reports and
transaction confirmations; providing subaccounting services;
general account administration activities; and providing such
similar services as the Trust may reasonably request to the extent
the service provider is permitted to do so under applicable
statutes, rules or regulation. The Plan also permits reimbursement
for services in connection with the administration of plans or
programs that use Administrative Class shares of the Portfolios as
their funding medium and for related expenses.
The Plan permits a Portfolio to make total reimbursements at an
annual rate of 0.15% of the Portfolio's average daily net assets
attributable to its Administrative Class shares. Because these
fees are paid out of a Portfolio's Administrative Class assets on
an ongoing basis, over time they will increase the cost of an
investment in Administrative Class shares and may cost an investor
more than other types of sales charges.
. Arrangements with Service Agents. Institutional Class and
Administrative Class shares of the Portfolios may be offered
through certain brokers and financial intermediaries ("service
agents") that have established a shareholder servicing
relationship with the Trust on behalf of their customers. The
Trust pays no compensation to such entities other than service
and/or distribution fees paid with respect to Administrative Class
shares. Service agents may impose additional or different
conditions than the Trust on purchases, redemptions or exchanges
of Portfolio shares by their customers. Service agents may also
independently establish and charge their customers transaction
fees, account fees and other amounts in connection with purchases,
sales and redemptions of Portfolio shares in addition to any fees
charged by the Trust. These additional fees may vary over time and
would increase the cost of the customer's investment and lower
investment returns. Each service agent is responsible for
transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions
regarding purchases, redemptions and exchanges. Shareholders who
are customers of service agents should consult their service
agents for information regarding these fees and conditions.
Purchases and Redemptions
Purchasing Investors do not deal directly with the Portfolios to purchase and
Shares redeem shares. Please refer to the prospectus for the Separate
Account for information on the allocation of premiums and on
transfers of accumulated value among sub-accounts of the Separate
Account that invest in the Portfolios.
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
Prospectus 36
<PAGE>
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 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 when trading on
the New York Stock 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.
Redeeming Shares may be redeemed without charge on any day that the net
Shares 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.
Redemption's of Portfolio shares may be suspended when trading on
the New York Stock Exchange is restricted or during an emergency
which makes it impractical 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 Securities and
Exchange Commission for the protection of investors. Under these
and other unusual circumstances, the Trust may suspend redemption
or postpone payment for more than seven days, as permitted by law.
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.
How Portfolio Shares Are Priced
The net asset value ("NAV") of a Portfolio's Institutional and
Administrative Class shares is determined by dividing the total
value of a Portfolio's investments and other assets attributable
to that class, less any liabilities, by the total number of shares
outstanding of that class.
Except for the Money Market Portfolio, for purposes of
calculating NAV, portfolio securities and other assets for which
market quotes are available are stated at market value. Market
value is generally determined on the basis of last reported sales
prices, or if no sales are reported, based on quotes obtained from
a quotation reporting system, established market makers, or
pricing services. Certain securities or investments for which
daily market quotations are not readily available may be valued,
pursuant to guidelines established by the Board of Trustees, with
reference to other securities or indices. Short-term investments
having a maturity of 60 days or less are generally valued at
amortized cost. Exchange traded options, futures and options on
futures are valued at the settlement price determined by the
exchange. Other securities for which market quotes are not readily
available are valued at fair value as determined in good faith by
the Board of Trustees or persons acting at their direction.
The Money Market Portfolio's securities are valued using the
amortized cost method of valuation, which 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.
37 PIMCO Variable Insurance Trust
<PAGE>
Investments initially valued in currencies other than the U.S.
dollar are converted to U.S. dollars using exchange rates obtained
from pricing services. As a result, the NAV of a Portfolio's
shares may be affected by changes in the value of currencies in
relation to the U.S. dollar. The value of securities traded in
markets outside the United States or denominated in currencies
other than the U.S. dollar may be affected significantly on a day
that the New York Stock Exchange is closed and an investor is not
able to purchase, redeem or exchange shares.
Portfolio shares are valued at the close of regular trading
(normally 4:00 p.m., Eastern time) (the "NYSE Close") on each day
that the New York Stock Exchange is open. For purposes of
calculating the NAV, the Portfolios normally use pricing data for
domestic equity securities received shortly after the NYSE Close
and do not normally take into account trading, clearances or
settlements that take place after the NYSE Close. Domestic fixed
income and foreign securities are normally priced using data
reflecting the earlier closing of the principal markets for those
securities. Information that becomes known to the Portfolios or
its agents after the NAV has been calculated on a particular day
will not generally be used to retroactively adjust the price of a
security or the NAV determined earlier that day.
In unusual circumstances, instead of valuing securities in the
usual manner, the Portfolios may value securities at fair value or
estimate their value as determined in good faith by the Board of
Trustees, generally based upon recommendations provided by PIMCO.
Fair valuation may also be used if extraordinary events occur
after the close of the relevant market but prior to the NYSE
Close.
Under certain circumstances, the per share NAV of the
Administrative Class shares of the Portfolios may be lower than
the per share NAV of the Institutional Class shares as a result of
the daily expense accruals of the service fees paid by
Administrative Class shares. Generally, for Portfolio that pay
income dividends, those dividends are expected to differ over time
by approximately the amount of the expense accrual differential
between the two classes.
Tax Consequences
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.
Prospectus 38
<PAGE>
Characteristics and Risks of
Securities and Investment Techniques
This section provides additional information about some of the
principal investments and related risks of the Portfolios
described under the "Portfolio Summaries" above. It also describes
characteristics and risks of additional securities and investment
techniques that may be used by the Portfolios from time to time.
Most of these securities and investment techniques are
discretionary, which means that PIMCO can decide whether to use
them or not. This Prospectus does not attempt to disclose all of
the various types of securities and investment techniques that may
be used by the Portfolios. As with any mutual fund, investors in
the Portfolios rely on the professional investment judgment and
skill of PIMCO and the individual portfolio managers. Please see
"Investment Objectives and Policies" in the Statement of
Additional Information for more detailed information about the
securities and investment techniques described in this section and
about other strategies and techniques that may be used by the
Portfolios.
Securities Most of the Portfolios in this prospectus seek maximum total
Selection return. The total return sought by a Portfolio consists of both
income earned on a Portfolio's investments and capital
appreciation, if any, arising from increases in the market value
of a Portfolio's holdings. Capital appreciation of fixed income
securities generally results from decreases in market interest
rates or improving credit fundamentals for a particular market
sector or security.
In selecting securities for a Portfolio, PIMCO develops an
outlook for interest rates, foreign currency exchange rates and
the economy; analyzes credit and call risks, and uses other
security selection techniques. The proportion of a Portfolio's
assets committed to investment in securities with particular
characteristics (such as quality, sector, interest rate or
maturity) varies based on PIMCO's outlook for the U.S. and foreign
economies, the financial markets and other factors.
PIMCO attempts to identify areas of the bond market that are
undervalued relative to the rest of the market. PIMCO identifies
these areas by grouping bonds into the following sectors: money
markets, governments, corporates, mortgages, asset-backed and
international. Sophisticated proprietary software then assists in
evaluating sectors and pricing specific securities. Once
investment opportunities are identified, PIMCO will shift assets
among sectors depending upon changes in relative valuations and
credit spreads. There is no guarantee that PIMCO's security
selection techniques will produce the desired results.
U.S. U.S. Government securities are obligations of and, in certain
Government cases, guaranteed by, the U.S. Government, its agencies or
Securities government-sponsored enterprises. U.S. Government Securities are
subject to market and interest rate risk, and may be subject to
varying degrees of credit risk. 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.
Muncipal Municipal bonds are generally issued by states and local
Bonds governments and their agencies, authorities and other
instumentalities. Municipal bonds are subject to interest rate,
credit and market risk. The ability of an issuer to make payments
could be affected by litigation, legislation or other political
events or the bankruptcy of the issuer. Lower rated municipal
bonds are subject to greater credit and market risk than higher
quality municipal bonds. The types of municipal bonds in which the
Portfolios may invest include municipal lease obligations. The
Portfolios may also invest in securities issued by entities whose
underlying assets are municipal bonds.
Mortgage- Each Portfolio (except the Money Market Portfolio) may invest all
Related of its assets in mortgage- and asset-backed securities. Mortgage-
and Other related securities include mortgage pass-through securities,
Asset- collateralized mortgage obligations ("CMOs"), commercial mortgage-
Backed backed securities, mortgage dollar rolls, CMO residuals, stripped
Securities mortgage-backed securities ("SMBSs") and other securities that
directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property.
39 PIMCO Variable Insurance Trust
<PAGE>
The value of some mortgage- or asset-backed securities may be
particularly sensitive to changes in prevailing interest rates.
Early repayment of principal on some mortgage-related securities
may expose a Portfolio to a lower rate of return upon reinvestment
of principal. 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 shorten or extend the effective maturity of the security
beyond what was anticipated at the time of purchase. If
unanticipated rates of prepayment on underlying mortgages increase
the effective maturity of a mortgage-related security, the
volatility of the security can be expected to increase. The value
of these securities may fluctuate in response to the market's
perception of the creditworthiness of the issuers. Additionally,
although mortgages and mortgage-related securities are generally
supported by some form of government or private guarantee and/or
insurance, there is no assurance that private guarantors or
insurers will meet their obligations.
One type of SMBS has one class receiving all of the interest from
the mortgage assets (the interest-only, or "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 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. A Portfolio
may not invest more than 5% of its net assets in any combination
of IO, PO, or inverse floater securities. The Portfolios may
invest in other asset-backed securities that have been offered to
investors.
Loan Certain Portfolios may invest in fixed- and floating-rate loans,
Participa- which investments generally will be in the form of loan
tions participations and assignments of portions of such loans.
and Participations and assignments involve special types of risk,
Assignments including credit risk, interest rate risk, liquidity risk, and the
risks of being a lender. If a Portfolio purchases a participation,
it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the
borrower.
Corporate Corporate debt securities are subject to the risk of the issuer's
Debt inability to meet principal and interest payments on the
Securities obligation and may also be subject to price volatility due to such
factors as interest rate sensitivity, market perception of the
credit-worthiness of the issuer and general market liquidity. When
interest rates rise, the value of corporate debt securities can be
expected to decline. Debt securities with longer maturities tend
to be more sensitive to interest rate movements than those with
shorter maturities.
High Securities rated lower than Baa by Moody's Investors Service, Inc.
Yield ("Moody's") or lower than BBB by Standard & Poor's Ratings
Securities Services ("S&P") are sometimes referred to as "high yield" or
"junk" bonds. Investing in high yield securities involves special
risks in addition to the risks associated with investments in
higher-rated fixed income securities. While offering a greater
potential opportunity for capital appreciation and higher yields,
high yield securities typically entail greater potential price
volatility and may be less liquid than higher-rated securities.
High yield securities may be regarded as predominately speculative
with respect to the issuer's continuing ability to meet principal
and interest payments. They may also be more susceptible to real
or perceived adverse economic and competitive industry conditions
than higher-rated securities.
. Credit Ratings and Unrated Securities. Rating agencies are
private services that provide ratings of the credit quality of
fixed income securities, including convertible securities.
Appendix A to this Offering Memorandum describes the various
ratings assigned to fixed income securities by Moody's and S&P.
Ratings assigned by a rating agency are not absolute standards of
credit quality and do not evaluate market risks. Rating agencies
may fail to make timely changes in credit ratings and an issuer's
current financial condition may be better or worse than a rating
indicates. A Portfolio will not necessarily sell a security when
its rating is reduced below its rating at the time of purchase.
PIMCO does not rely solely on credit ratings, and develops its own
analysis of issuer credit quality.
Prospectus 40
<PAGE>
A Portfolio may purchase unrated securities (which are not rated
by a rating agency) if its portfolio manager determines that the
security is of comparable quality to a rated security that the
Portfolio may purchase. Unrated securities may be less liquid than
comparable rated securities and involve the risk that the
portfolio manager may not accurately evaluate the security's
comparative credit rating. Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for
issuers of higher-quality fixed income securities. To the extent
that a Portfolio invests in high yield and/or unrated securities,
the Portfolio's success in achieving its investment objective may
depend more heavily on the portfolio manager's creditworthiness
analysis than if the Portfolio invested exclusively in higher-
quality and rated securities.
Variable Variable and floating rate securities provide for a periodic
and adjustment in the interest rate paid on the obligations. Each
Floating Portfolio may invest in floating rate debt instruments
Rate ("floaters") and (except for the Money Market Portfolio) engage in
Securities credit spread trades. While floaters provide a certain degree of
protection against rises in interest rates, a Portfolio will
participate in any declines in interest rates as well. Each
Portfolio (except the Money Market Portfolio) may also invest in
inverse floating rate debt instruments ("inverse floaters"). An
inverse floater may exhibit greater price volatility than a fixed
rate obligation of similar credit quality. A Portfolio may not
invest more than 5% of its assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation- Inflation-indexed bonds are fixed income securities whose
Indexed principal value is periodically adjusted according to the rate of
Bonds inflation. If the index 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. For bonds that do not provide a similar
guarantee, 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
are tied to the relationship between nominal interest rates and
the rate of inflation. If nominal interest rates increase at a
faster rate than inflation, real interest rates may rise, leading
to a decrease in value of inflation-indexed bonds. Short-term
increases in inflation may lead to a decline in value. 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.
Event- Each Portfolio (except the Money Market Portfolio) may invest in
Linked "event-linked bonds," which are fixed income securities for which
Bonds the return of principal and payment of interest is contingent on
the non-occurrence of a specific "trigger" event, such as a
hurricane, earthquake or other physical or weather-related
phenomenon. Some event-linked bonds are commonly referred to as
"catastrophe bonds." If a trigger event occurs, a Portfolio may
lose a portion or all of its principal invested in the bond.
Event-linked bonds often provide for an extension of maturity to
process and audit loss claims where a trigger event has, or
possibly has, occurred. Event-linked 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. Event-linked bonds
may also be subject to liquidity risk.
Convertible Each Portfolio may invest in convertible securities. Convertible
and securities are generally preferred stocks and other securities,
Equity including fixed income securities and warrants, that are
Securities convertible into or exercisable for common stock at a stated price
or rate. The price of a convertible security will normally vary in
some proportion to changes in the price of the underlying common
stock because of this conversion or exercise feature. However, the
value of a convertible security may not increase or decrease as
rapidly as the underlying common stock. A convertible security
will normally also provide income and is subject to interest rate
risk. Convertible securities may be lower-rated securities subject
to greater levels of credit risk. A Portfolio may be forced to
convert a security before it would otherwise choose, which may
have an adverse effect on the Portfolio's ability to achieve its
investment objective.
41 PIMCO Variable Insurance Trust
<PAGE>
While the Fixed Income 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 convertible securities or equity securities to gain
exposure to such investments.
Equity securities generally have greater price volatility than
fixed income securities. The market price of equity securities
owned by a Portfolio may go up or down, sometimes rapidly or
unpredictably. Equity securities may decline in value due to
factors affecting equity securities markets generally or
particular industries represented in those markets. The value of
an equity security may also decline for a number of reasons which
directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's goods or
services.
Foreign Investing in the securities of issuers in any foreign country
(Non- involves special risks and considerations not typically associated
U.S.) with investing in U.S. companies. Shareholders should consider
Securities carefully the substantial risks involved for Portfolios that
invest in securities issued by foreign companies and governments
of foreign countries. 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; and political instability. Individual foreign
economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product,
rates of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments position. The securities
markets, values of securities, yields and risks associated with
foreign securities markets may change independently of each other.
Also, 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.
Investments in foreign securities may also involve higher
custodial costs than domestic investments and additional
transaction costs with respect to foreign currency conversions.
Changes in foreign exchange rates also will affect the value of
securities denominated or quoted in foreign currencies.
Certain Portfolios also may invest in sovereign debt issued by
governments, their agencies or instrumentalities, or other
government-related entities. Holders of sovereign debt may be
requested to participate in the rescheduling of such debt and to
extend further loans to governmental entities. In addition, there
is no bankruptcy proceeding by which defaulted sovereign debt may
be collected.
. Emerging Market Securities. The Emerging Markets Bond
Portfolio invests primarily in securities of issuers based in
countries with developing (or "emerging market") economies, while
the Short-Term Bond and Low Duration Bond Portfolios may invest up
to 5% of their assets in such securities and each remaining
Portfolio that may invest in foreign securities may invest up to
10% of its assets in such securities. Investing in emerging market
securities imposes risks different from, or greater than, risks of
investing in domestic securities or in foreign, developed
countries. These risks include: smaller market capitalization of
securities markets, which may suffer periods of relative
illiquidity; significant price volatility; restrictions on foreign
investment; possible repatriation of investment income and
capital. In addition, foreign investors may be required to
register the proceeds of sales; future economic or political
crises could lead to price controls, forced mergers, expropriation
or confiscatory taxation, seizure, nationalization, or creation of
government monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar, and
devaluation may occur subsequent to 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.
Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and
instability; more substantial governmental involvement in the
economy; less governmental supervision and regulation;
unavailability of currency hedging techniques; companies that are
newly organized and small; differences in auditing and financial
reporting standards, which may result in unavailability of
material information about issuers; and less developed legal
systems. In addition, emerging securities markets may have
different
Prospectus 42
<PAGE>
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 be
delayed in disposing of a portfolio security. Such a delay could
result in possible liability to a purchaser of the security.
Each Portfolio (except the Total Return Bond II and Long-Term
U.S. Government Portfolios) may invest in Brady Bonds, which are
securities created through the exchange of existing commercial
bank loans to sovereign entities for new obligations in connection
with a debt restructuring. Investments in Brady Bonds may be
viewed as speculative. Brady Bonds acquired by a Portfolio may be
subject to restructuring arrangements or to requests for new
credit, which may cause the Portfolio to suffer a loss of interest
or principal on any of its holdings.
Foreign A Portfolio that invests directly in foreign currencies or in
(Non- securities that trade in, or receive revenues in, foreign
U.S.) currencies will be subject to currency risk. Foreign currency
Currencies exchange rates may fluctuate significantly over short periods of
time. They generally are determined by supply and demand in the
foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates
and other complex factors. Currency exchange rates also can be
affected unpredictably by intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, or by
currency controls or political developments. For example,
uncertainty surrounds the introduction of the euro (a common
currency unit for the European Union) and the effect it may have
on the value of European currencies as well as securities
denominated in local European currencies. These and other
currencies in which the Portfolios' assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the
Portfolios.
. Foreign Currency Transactions. Portfolios that invest in
securities denominated in foreign currencies may enter into
forward foreign currency exchange contracts and invest in foreign
currency futures contracts and options on foreign currencies and
futures. A forward foreign currency exchange contract, which
involves an obligation to purchase or sell a specific currency at
a future date at a price set at the time of the 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 receive for the duration of the contract. The
effect on the value of a Portfolio is similar to selling securities
denominated in one currency and purchasing securities denominated
in another currency. A contract to sell foreign currency would
limit any potential gain which might be realized if the value of
the hedged currency increases. A Portfolio may enter into these
contracts to hedge against foreign exchange risk, to increase
exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one currency to another. Suitable
hedging transactions may not be available in all circumstances and
there can be no assurance that a Portfolio will engage in such
transactions at any given time or from time to time. Also, such
transactions may not be successful and may eliminate any chance for
a Portfolio to benefit from favorable fluctuations in relevant
foreign currencies. 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. The Portfolio
will segregate assets determined to be liquid by PIMCO in
accordance with procedures established by the Board of Trustees to
cover its obligations under forward foreign currency exchange
contracts entered into for non-hedging purposes.
Repurchase Each Portfolio may enter into repurchase agreements, in which the
Agreements Portfolio purchases a security from a bank or broker-dealer and
agrees to repurchase the security at the Portfolio's cost plus
interest within a specified time. If the party agreeing to
repurchase should default, the Portfolio will seek to sell the
securities which it holds. This could involve procedural costs or
delays in addition to a loss on the securities if their value
should fall below their repurchase price. Repurchase agreements
maturing in more than seven days are considered illiquid
securities.
43 PIMCO Variable Insurance Trust
<PAGE>
Reverse Each Portfolio may enter into reverse repurchase agreements and
Repurchase dollar rolls, subject to the Portfolio's limitations on
Agreements, borrowings. A reverse repurchase agreement or dollar roll involves
Dollar the sale of a security by a Portfolio and its agreement to
Rolls and repurchase the instrument at a specified time and price, and may
Other be considered a form of borrowing for some purposes. A Portfolio
Borrowings will segregate assets determined to be liquid by PIMCO in
accordance with procedures established by the Board of Trustees to
cover its obligations under reverse repurchase agreements, dollar
rolls, and other borrowings. Reverse repurchase agreements, dollar
rolls and other forms of borrowings may create leveraging risk for
a Portfolio.
Each Portfolio may borrow money to the extent permitted under the
Investment Company Act of 1940 ("1940 Act"), as amended. This
means that, in general, a Portfolio may borrow money from banks
for any purpose on a secured basis in an amount up to 1/3 of the
Portfolio's total assets. A Portfolio may also borrow money for
temporary administrative purposes on an unsecured basis in an
amount not to exceed 5% of the Portfolio's total assets.
Derivatives Each Portfolio (except the Money Market Portfolio) may, but is not
required to, use derivative instruments for risk management
purposes or as part of its investment strategies. Generally,
derivatives are financial contracts whose value depends upon, or
is derived from, the value of an underlying asset, reference rate
or index, and may relate to stocks, bonds, interest rates,
currencies or currency exchange rates, commodities, and related
indexes. Examples of derivative instruments include options
contracts, futures contracts, options on futures contracts and
swap agreements. Each Portfolio may invest all of its assets in
derivative instruments, subject to the Portfolio's objective and
policies. A portfolio manager may decide not to employ any of
these strategies and there is no assurance that any derivatives
strategy used by a Portfolio will succeed. A description of these
and other derivative instruments that the Portfolios may use are
described under "Investment Objectives and Policies" in the
Statement of Additional Information.
A Portfolio's use of derivative instruments involves risks
different from, or greater than, the risks associated with
investing directly in securities and other more traditional
investments. A description of various risks associated with
particular derivative instruments is included in "Investment
Objectives and Policies" in the Statement of Additional
Information. The following provides a more general discussion of
important risk factors relating to all derivative instruments that
may be used by the Portfolios.
Management Risk. Derivative products are highly specialized
instruments that require investment techniques and risk analyses
different from those associated with stocks and bonds. The use of
a derivative requires an understanding not only of the underlying
instrument but also of the derivative itself, without the benefit
of observing the performance of the derivative under all possible
market conditions.
Credit Risk. The use of a derivative instrument involves the risk
that a loss may be sustained as a result of the failure of another
party to the contract (usually referred to as a "counterparty") to
make required payments or otherwise comply with the contract's
terms.
Liquidity Risk. Liquidity risk exists when a particular
derivative instrument is difficult to purchase or sell. If a
derivative transaction is particularly large or if the relevant
market is illiquid (as is the case with many privately negotiated
derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price.
Leverage Risk. Because many derivatives have a leverage
component, adverse changes in the value or level of the underlying
asset, reference rate or index can result in a loss substantially
greater than the amount invested in the derivative itself. Certain
derivatives have the potential for unlimited loss, regardless of
the size of the initial investment. When a Portfolio uses
derivatives for leverage, investments in that Portfolio will tend
to be more volatile, resulting in larger gains or losses in
response to market changes. To limit leverage risk,
Prospectus 44
<PAGE>
each Portfolio will segregate assets determined to be liquid by
PIMCO 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
derivative instruments.
Lack of Availability. Because the markets for certain derivative
instruments (including markets located in foreign countries) are
relatively new and still developing, suitable derivatives
transactions may not be available in all circumstances for risk
management or other purposes. There is no assurance that a
Portfolio will engage in derivatives transactions at any time or
from time to time. A Portfolio's ability to use derivatives may
also be limited by certain regulatory and tax considerations.
Market and Other Risks. Like most other investments, derivative
instruments are subject to the risk that the market value of the
instrument will change in a way detrimental to a Portfolio's
interest. If a portfolio manager incorrectly forecasts the values
of securities, currencies or interest rates or other economic
factors in using derivatives for a Portfolio, the Portfolio might
have been in a better position if it had not entered into the
transaction at all. 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 other Portfolio investments. A
Portfolio may also have to buy or sell a security at a
disadvantageous time or price because the Portfolio is legally
required to maintain offsetting positions or asset coverage in
connection with certain derivatives transactions.
Other risks in using derivatives include the risk of mispricing
or improper valuation of derivatives and the inability of
derivatives to correlate perfectly with underlying assets, rates
and indexes. Many derivatives, in particular privately negotiated
derivatives, are complex and often valued subjectively. Improper
valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Portfolio. Also, the value
of derivatives may not correlate perfectly, or at all, with the
value of the assets, reference rates or indexes they are designed
to closely track. In addition, a Portfolio's use of derivatives
may cause the Portfolio to realize higher amounts of short-term
capital gains (generally taxed at ordinary income tax rates) than
if the Portfolio had not used such instruments.
Delayed The Portfolios may also enter into, or acquire participations in,
Funding delayed funding loans and revolving credit facilities, in which a
Loans and lender agrees to make loans up to a maximum amount upon demand by
Revolving the borrower during a specified term. These commitments may have
Credit the effect of requiring a Portfolio to increase its investment in
Facilities a company at a time when it might not otherwise decide to do so
(including at a time when the company's financial condition makes
it unlikely that such amounts will be repaid). To the extent that
a Portfolio is committed to advance additional funds, it will
segregate assets determined to be liquid by PIMCO in accordance
with procedures established by the Board of Trustees in an amount
sufficient to meet such commitments. Delayed funding loans and
revolving credit facilities are subject to credit, interest rate
and liquidity risk and the risks of being a lender.
When- Each Portfolio may purchase securities which it is eligible to
Issued, purchase on a when-issued basis, may purchase and sell such
Delayed securities for delayed delivery and may make contracts to purchase
Delivery such securities for a fixed price at a future date beyond normal
and settlement time (forward commitments). When-issued transactions,
Forward delayed delivery purchases and forward commitments involve a risk
Commitment of loss if the value of the securities declines prior to the
Trans- settlement date. This risk is in addition to the risk that the
actions Portfolio's other assets will decline in the value. Therefore,
these transactions may result in a form of leverage and increase a
Portfolio's overall investment exposure. 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 segregated to cover
these positions.
45 PIMCO Variable Insurance Trust
<PAGE>
Investment Each Portfolio may invest up to 10% of its assets in securities of
in Other other investment companies, such as closed-end management
Investment investment companies, or in pooled accounts or other investment
Companies vehicles which invest in foreign markets. As a shareholder of any
investment company, a Portfolio may indirectly bear service and
other fees which are in addition to the fees the Portfolio pays
its service providers.
Subject to the restrictions and limitations of the 1940 Act, each
Portfolio may, in the future, elect to pursue its investment
objective by investing in one or more underlying investment
vehicles or companies that have substantially similar investment
objectives, policies and limitations as the Portfolio.
Short Each Portfolio may make short sales as part of its overall
Sales portfolio management strategies or to offset a potential decline
in value of a security. A short sale involves the sale of a
security that is borrowed from a broker or other institution to
complete the sale. Short sales expose a Portfolio to the risk that
it will be required to acquire, convert or exchange securities to
replace the borrowed securities (also known as "covering" the
short position) at a time when the securities sold short have
appreciated in value, thus resulting in a loss to the Portfolio. A
Portfolio making a short sale must segregate assets determined to
be liquid by PIMCO in accordance with procedures established by
the Board of Trustees or otherwise cover its position in a
permissible manner.
Illiquid Each Portfolio may invest up to 15% (10% in the case of the Money
Securities Market Portfolio) of its net assets in illiquid securities.
Certain illiquid securities may require pricing at fair value as
determined in good faith under the supervision of the Board of
Trustees. A portfolio manager 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. 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. Restricted securities, i.e.,
securities subject to legal or contractual restrictions on resale,
may be illiquid. However, some restricted securities (such as
securities issued pursuant to Rule 144A under the Securities Act
of 1933 and certain commercial paper) may be treated as liquid,
although they may be less liquid than registered securities traded
on established secondary markets.
Loans of For the purpose of achieving income, each Portfolio may lend its
Portfolio portfolio securities to brokers, dealers, and other financial
Securities institutions provided a number of conditions are satisfied,
including that the loan is fully collateralized. Please see
"Investment Objectives and Policies" in the Statement of
Additional Information for details. When a Portfolio lends
portfolio securities, its investment performance will continue to
reflect changes in the value of the securities loaned, and the
Portfolio will also receive a fee or interest on the collateral.
Securities lending involves the risk of loss of rights in the
collateral or delay in recovery of the collateral if the borrower
fails to return the security loaned or becomes insolvent. A
Portfolio may pay lending fees to a party arranging the loan.
Portfolio The length of time a Portfolio has held a particular security is
Turnover not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio
turnover." Each Portfolio may engage in frequent and active
trading of portfolio securities to achieve its investment
objective, particularly during periods of volatile market
movements. High portfolio turnover (e.g., over 100%) involves
correspondingly greater expenses to a Portfolio, including
brokerage commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestments in other
securities. Such sales may also result in realization of taxable
capital gains, including short-term capital gains (which are
generally taxed at ordinary income tax rates). The trading costs
and tax effects associated with portfolio turnover may adversely
effect the Portfolio's performance.
Prospectus 46
<PAGE>
Temporary For temporary or defensive purposes, the Portfolios may invest
Defensive without limit in U.S. debt securities, including taxable
Positions securities and short-term money market securities, when PIMCO
deems it appropriate to do so. When a Portfolio engages in such
strategies, it may not achieve its investment objective.
Changes The investment objective of each Portfolio is fundamental and may
in not be changed without shareholder approval. Unless otherwise
Investment stated, all other investment policies of the Portfolios may be
Objectives changed by the Board of Trustees without shareholder approval.
and
Policies
Percentage Unless otherwise stated, all percentage limitations on Portfolio
Investment investments listed in this Prospectus will apply at the time of
Limitations investment. A Portfolio would not violate these limitations unless
an excess or deficiency occurs or exists immediately after and as
a result of an investment.
Other The Portfolios may invest in other types of securities and use a
Investments variety of investment techniques and strategies which are not
and described in this Prospectus. These securities and techniques may
Techniques subject the Portfolios to additional risks. Please see the
Statement of Additional Information for additional information
about the securities and investment techniques described in this
Prospectus and about additional securities and techniques that may
be used by the Portfolios.
47 PIMCO Variable Insurance Trust
<PAGE>
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Prospectus
48
<PAGE>
Financial Highlights
The financial highlights table is intended to help a shareholder
understand the Portfolio's financial performance for the period of
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 a particular class of shares of a Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, the
Portfolio's independent auditors. Their report, along with full
financial statements, appears in the Trust's Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Net Asset Net Realized Total Income Dividends Dividends in Distributions Distributions
Year or Value Net and Unrealized (Loss) from from Net Excess of Net from Net in Excess of
Period Beginning Investment Gain (Loss) on Investment Investment Investment Realized Net Realized
Ended of Period Income(b) Investments Operations Income Income Capital Gains Capital Gains
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market
Administrative Class
12/31/1999(a) $ 1.00 $0.01 $ 0.00 $ 0.01 $(0.01) $ 0.00 $ 0.00 $ 0.00
Short-Term
Administrative Class
12/31/1999(a) $10.00 $0.13 $ 0.00 (b) $0.13 $(0.13) $ 0.00 $ 0.00 $ 0.00
Low Duration
Administrative Class
12/31/1999(e) $10.00 $0.50 $(0.25)(b) $ 0.25 $(0.51) $ 0.00 $ 0.00 $ 0.00
Real Return
Administrative Class
12/31/1999(a) $10.00 $0.20 $(0.20)(b) $ 0.00 $(0.20) $ 0.00 $ 0.00 $ 0.00
Total Return
Administrative Class
12/31/1999 $10.09 $0.58 $(0.64)(b) $(0.06) $(0.58) $ 0.00 $ 0.00 $ 0.00
12/31/1998(h) 10.00 0.56 0.28 (b) 0.84 (0.56) 0.00 (0.19) 0.00
Total Return II
Administrative Class
12/31/1999(j) $10.00 $0.32 $(0.18)(b) $ 0.14 $(0.32) $ 0.00 $ 0.00 $ 0.00
High Yield
Administrative Class
12/31/1999 $ 9.67 $0.77 $(0.49)(b) $ 0.28 $(0.77) $ 0.00 $ 0.00 $ 0.00
12/31/1998(l) 10.00 0.51 (0.34)(b) 0.17 (0.50) 0.00 0.00 0.00
Long-Term U.S. Government
Administrative Class
12/31/1999(m) $10.00 $0.36 $ 0.78 (b) $(0.42) $(0.36) $ 0.00 $ 0.00 $ 0.00
Foreign Bond
Administrative Class
12/31/1999(e) $10.00 $0.41 $(0.49)(b) $(0.08) $(0.41) $ 0.00 $ 0.00 $(0.09)
StocksPLUS Growth and Income
Administrative Class
12/31/1999 $12.58 $0.76 $ 1.65 (b) $ 2.41 $(0.61) $(0.82) $ 0.00 $ 0.00
12/31/1998(h) 10.00 0.30 2.68 (b) 2.98 (0.29) (0.11) 0.00 0.00
</TABLE>
- -------
(a) Commenced operations on September 30, 1999.
(b) Per share amounts based on average number of shares outstanding during the
period.
(e) Commenced operations on February 16, 1999.
(h) Commenced operations on December 31, 1997.
(j) Commenced operations on May 28, 1999.
(l) Commenced operations on April 30, 1998.
(m) Commenced operations on April 30, 1999.
49 PIMCO Variable Insurance Trust
<PAGE>
<TABLE>
<CAPTION>
Ratio of Net
Tax Basis Net Asset Net Assets Ratio of Investment
Return Value End Expenses to Income to Portfolio
of Total End Total of Period Average Average Turnover
Capital Distributions of Period Return (000's) Net Assets Net Assets Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 $(0.01) $ 1.00 1.30 % $ 3,605 0.50%*(c) 5.14%* N/A
$0.00 $(0.13) $10.00 1.32 % $ 3,040 0.60%*(d) 5.17%* N/A
$0.00 $(0.51) $ 9.74 2.56 % $ 5,149 0.65%*(f) 5.74%* 11%
$0.00 $(0.20) $ 9.80 (0.03)% $ 3,000 0.65%*(g) 7.72%* 23%
$0.00 $(0.58) $ 9.45 (0.58)% $ 3,877 0.65% (i) 5.96% 102%
0.00 (0.75) 10.09 8.61 3,259 0.65 5.55 139
$0.00 $(0.32) $ 9.82 1.41 % $ 5,128 0.65%*(k) 5.38%* 378%
$0.00 $(0.77) $ 9.18 3.01 % $151,020 0.75% 8.25% 13%
0.00 (0.50) 9.67 1.80 49,761 0.75 7.90* 13
$0.00 $(0.36) $ 9.22 (4.28)% $ 7,173 0.65%*(n) 5.55%* 294%
$0.00 $(0.50) $ 9.42 (0.78)% $ 5,215 1.10%*(o)(p) 4.83%* 285%
$0.00 $(1.43) $13.56 19.85 % $230,412 0.65% 5.69% 34%
0.00 (0.40) 12.58 30.11 58,264 0.65 5.30 61
</TABLE>
- -------
* Annualized.
(c) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 1.27%* for the
period ended December 31, 1999.
(d) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 1.42%* for the
period ended December 31, 1999.
(f) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 0.78%* for the
period ended December 31, 1999.
(g) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 0.92%* for the
period ended December 31, 1999.
(i) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 0.69% for the
period ended December 31, 1999.
(k) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 0.78%* for the
period ended December 31, 1999.
(n) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 0.71%* for the
period ended December 31, 1999.
(o) If the investment manager had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 1.25%* for the
period ended December 31, 1999.
(p) Ratio of net expenses to average net assets excluding interest expense is
0.90%.
Prospectus 50
<PAGE>
Other Information
Performance The following table provides information concerning the historical
Information total return performance of the Institutional Class shares of
of certain series of PIMCO Funds: Pacific Investment Management
Similar Series ("PIMS"). Each PIMS series has investment objectives,
Funds policies and strategies substantially similar to those of its
respective PIMCO Variable Insurance Trust ("PVIT") Portfolio and
is currently managed by the same portfolio manager. While the
investment objectives and policies of each PIMS series and its
respective PVIT Portfolio are similar, they are not identical and
the performance of the PIMS series and the PVIT 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 PVIT
Portfolios or the future performance of any PVIT Portfolio or its
portfolio manager. Consequently, potential investors should not
consider this performance data as an indication of the future
performance of any PVIT Portfolio or of its portfolio manager.
The performance data shown below reflects the operating expenses
of the Institutional Class of each PIMS series. The operating
expenses for the Institutional Class of the PIMS Low Duration,
Global Bond and Foreign Bond Funds are lower than the operating
expenses for the Institutional Class of the corresponding PVIT
Portfolios. Furthermore, the operating expenses of the
Institutional Class of each PIMS series in the table are lower
than the operating expenses of each Administrative Class of the
corresponding PVIT Portfolio. As such, performance would have been
lower for those series and classes if the PVIT 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.
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.
51 PIMCO Variable Insurance Trust
<PAGE>
Average Annual Total Return for Similar Series of PIMS Institutional Class
and for Benchmark Indices for Periods Ended December 31, 1999
<TABLE>
<CAPTION>
Since Inception
1 Year 3 Years 5 Years Inception Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PIMCO Money Market Fund/1/ 4.90 % 5.19% 5.38% 4.72% 3/1/91
Salomon 3-Month Treasury Bill/2/ 4.73 5.01 5.20
PIMCO Short-Term Fund/3/ 5.24 5.83 6.73 6.41 10/7/87
Salomon 3-Month Treasury Bill/2/ 4.73 5.01 5.20
PIMCO Low Duration Fund 2.97 6.10 7.25 7.80 5/11/87
Merrill Lynch 1-3 yr.
Treasury/4/ 3.06 5.56 6.51
PIMCO Real Return Bond Fund 5.72 N/A N/A 5.13 1/29/97
Lehman Inflation Linked
Treasury/5/ 2.36 N/A N/A
PIMCO Total Return Fund II (1.07) 6.06 8.07 7.25 12/30/91
Lehman Brothers Aggregate
Bond/6/ (0.82) 5.73 7.73
PIMCO Long-Term U.S. Government
Fund/7/ (7.99) 6.27 9.72 10.35 7/1/91
Lehman Long-Term Treasury/8/ (8.74) 6.03 9.08
PIMCO Global Bond Fund/9/ (4.29) 2.19 7.68 6.57 11/23/93
J.P. Morgan Global
(Unhedged)/10/ (5.07) 3.54 6.69
PIMCO Foreign Bond Fund/11/ 1.56 7.00 12.04 9.76 12/3/92
J.P. Morgan Non-U.S.
(Hedged)/12/ 2.48 8.54 11.14
PIMCO Emerging Markets Bond
Fund/13/ 26.58 N/A N/A 3.45 7/31/97
J.P. Morgan Emerging Markets/14/ 25.99 N/A N/A
PIMCO Strategic Balanced Fund/15/ 11.56 18.35 N/A 18.74 6/28/96
S & P 500 Index 21.04 27.56 N/A
</TABLE>
- -------
/1/ Prior to November 1995 and November 1999 the Money Market Fund was managed
by a different portfolio manager.
/2/ The Salomon 3-Month Treasury Bill Index is an unmanaged index representing
monthly return equivalents of yield averages of the last 3 month Treasury
Bill issues. It is not possible to invest directly in the index.
/3/ Prior to January 1998 and August 1999 the Short-Term Fund was managed by
different portfolio managers.
/4/ The Merrill Lynch 1-3 Year Treasury Index consists of all public U.S.
Treasury obligations having maturities from one to 2.99 years. It is not
possible to invest directly in the index.
/5/ The Lehman Brothers Inflation Linked Treasury Index is an unmanaged market
index consisting of the U.S. Treasury Inflation Protected Securities
market. It is not possible to invest directly in the index.
/6/ The Lehman Brothers Aggregate Bond Index is an unmanaged index of
investment grade, U.S. dollar-denominated fixed income securities of
domestic issuers having a maturity greater than one year. It is not
possible to invest directly in the index.
/7/ Prior to July 1997 and April 2000 the Long-Term U.S. Government Fund was
managed by different portfolio managers.
/8/ The Lehman Long-Term Treasury Index is an unmanaged index of U.S. Treasury
issues with maturities greater than 10 years. It is not possible to invest
directly in the index.
/9/ Prior to July 1995, the Global Bond Fund was managed by a different
portfolio manager.
/10/ The J.P. Morgan Global (Unhedged) Index is an unmanaged market index
representative of the total return performance in U.S. dollars on an
unhedged basis of major world bond markets. It is not possible to invest
directly in the index.
/11/ Prior to July 1995, the Foreign Bond Fund was managed by a different
portfolio manager.
/12/ The J.P. Morgan Non-U.S. (Hedged) Index is an unmanaged market index
representative of the total return performance in U.S. dollars of major
non-U.S. bond markets. It is not possible to invest directly in the index.
/13/ Prior to August 1999 the Emerging Markets Bond Fund was managed by a
different portfolio manager.
/14/ The J.P. Morgan Emerging Markets Bond Index Plus is an unmanaged market
index which tracks the total returns for external-currency denominated debt
instruments of emerging markets. It is not possible to invest directly in
the index.
/15/ Prior to January 1998 the Strategic Balanced Fund was managed by a
different portfolio manager.
Prospectus
52
<PAGE>
Appendix A
Description of Securities Ratings
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 PIMCO 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.
High Quality Debt Securities are those rated in one of the two
lightest rating categories (the hightest category for commercial
pages) or, if unrated, deemed comparable by PIMCO.
Investment Grade Debt Securities are those rated in one of the
four highest rating categories, or if unrated deemed comparable by
PIMCO.
Below Investment Grade High Yield Securities ("Junk Bonds") are
those rated lower than Baa by Moody's or BBB by S&P and comparable
securities. They are deemed predominantly speculative with respect
to the issuer's ability to repay principal and interest.
Following is a description of Moody's and S&P's rating categories
applicable to fixed income securities.
Moody's Corporate and Municipal Bond Ratings
Investors
Service, Aaa: Bonds which are rated Aaa are judged to be of the best
Inc. 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.
Prospectus A-1
<PAGE>
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 Moody's short-term debt ratings are opinions of the ability of
Short- issuers to repay punctually senior debt obligations which have an
Term Debt original maturity not exceeding one year. Obligations relying upon
Ratings 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 Corporate and Municipal Bond Ratings Investment Grade
& Poor's
Ratings AAA: Debt rated AAA has the highest rating assigned by Standard &
Services 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.
A-2 PIMCO Variable Insurance Trust
<PAGE>
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
Prospectus A-3
<PAGE>
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 A Standard & Poor's commercial paper rating is a current
Paper assessment of the likelihood of timely payment of debt having an
Rating original maturity of no more than 365 days. Ratings are graded
Definitions 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 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.
A-4 PIMCO Variable Insurance Trust
<PAGE>
-------------------------------------------------------------------
PIMCO INVESTMENT ADVISER AND ADMINISTRATOR
Variable PIMCO, 840 Newport Center Drive, Suite 300, Newport Beach, CA
Insurance 92660
Trust
-------------------------------------------------------------------
CUSTODIAN
State Street Bank & Trust Co., 801 Pennsylvania, Kansas City, MO
64105
-------------------------------------------------------------------
TRANSFER AGENT
National Financial Data Services, 330 W. 9th Street, 4th Floor,
Kansas City, MO 64105
-------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105
-------------------------------------------------------------------
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, D.C.
20006
-------------------------------------------------------------------
<PAGE>
The Trust's Statement of Additional Information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Portfolios. The SAI and the financial statements included in the Portfolios'
most recent annual report to shareholders are incorporated by reference into
this Prospectus, which means they are part of this Prospectus for legal
purposes. The Portfolios' annual report discusses the market conditions and
investment strategies that significantly affected each Portfolio's performance
during its last fiscal year.
You may get free copies of any of these materials, request other information
about a Portfolio, or make shareholder inquiries by calling the Trust at
1-888-746-2688 or by writing to:
PIMCO Variable Insurance Trust
840 Newport Center Drive
Suite 300
Newport Beach, CA 92660
You may review and copy information about the Trust, including its SAI, at the
Securities and Exchange Commission's public reference room in Washington, D.C.
You may call the Commission at 1-800-SEC-0330 for information about the
operation of the public reference room. You may also access reports and other
information about the trust on the Commission's Web site at www.sec.gov. You may
get copies of this information, with payment of a duplication fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-0102. You
may need to refer to the Trust's filed number under the Investment Company Act,
which is 811-8399.
P I M C O
FUNDS
PIMCO Funds
840 Newport Center Drive
Suite 300
Newport Beach, CA 92660
<PAGE>
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 thirteen separate
investment portfolios (the "Portfolios"): the PIMCO Money Market Portfolio; the
PIMCO Short-Term Bond Portfolio; the PIMCO Low Duration Bond Portfolio; the
PIMCO Real Return Bond Portfolio; the PIMCO High Yield Bond Portfolio; the PIMCO
Total Return Bond Portfolio; the PIMCO Total Return Bond Portfolio II; the PIMCO
Long-Term U.S. Government Bond Portfolio; the PIMCO Global Bond Portfolio; the
PIMCO Foreign Bond Portfolio; the PIMCO Emerging Markets Bond Portfolio
(together, the "Fixed Income Portfolios"); the PIMCO Strategic Balanced
Portfolio; and the PIMCO StocksPLUS Growth and Income Portfolio.
Pacific Investment Management Company ("PIMCO" or the "Adviser"), 840
Newport Center Drive, Suite 300, Newport Beach, California 92660, is investment
adviser to the Portfolios. 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 April 1, 2000 (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 300
Newport Beach, California 92660
Telephone: (888) 746-2688
The Trust's most recent Semi-Annual Report to shareholders, and the
financial statements appearing in the Semi-Annual Report, are incorporated by
reference into this Statement of Additional Information. A copy of the Semi-
Annual Report may be obtained free of charge at the address and telephone number
listed above.
April 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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DESCRIPTION OF THE TRUST............................................................. 1
INVESTMENT OBJECTIVES AND POLICIES................................................... 1
U.S. Government Securities...................................................... 1
Municipal Bonds................................................................. 1
Mortgage-Related and Other Asset-Backed Securities.............................. 3
Loan Participations............................................................. 8
Corporate Debt Securities....................................................... 9
High Yield Securities ("Junk Bonds")............................................ 9
Variable and Floating Rate Securities........................................... 10
Inflation-Indexed Bonds......................................................... 11
Event-Linked Bonds.............................................................. 12
Convertible Securities.......................................................... 12
Warrants To Purchase Securities................................................. 13
Foreign Securities.............................................................. 13
Foreign Currency Transactions................................................... 15
Foreign Currency Exchange-Related Securities.................................... 17
Borrowing....................................................................... 18
Derivative Instruments.......................................................... 19
Hybrid Instruments.............................................................. 27
Delayed Funding Loans and Revolving Credit Facilities........................... 28
When-Issued, Delayed Delivery, and Forward Commitment Transactions.............. 28
Short Sales..................................................................... 29
Illiquid Securities............................................................. 29
Loans of Portfolio Securities................................................... 30
Participation on Creditors Committees........................................... 30
Bank Obligations................................................................ 30
INVESTMENT RESTRICTIONS.............................................................. 31
Fundamental Investment Restrictions............................................. 31
Non-Fundamental Investment Restrictions......................................... 32
MANAGEMENT OF THE TRUST.............................................................. 33
Trustees and Officers........................................................... 33
Compensation Table.............................................................. 37
Control Persons and Principal Holders of Securities............................. 38
Investment Adviser.............................................................. 40
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Code of Ethics.................................................................. 42
Administrator................................................................... 42
DISTRIBUTION OF TRUST SHARES......................................................... 44
Distributor and Multi-Class Plan................................................ 44
Administrative Services Plan for Administrative Class Shares.................... 45
Purchases and Redemptions....................................................... 46
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................. 46
Investment Decisions............................................................ 46
Brokerage and Research Services................................................. 46
Portfolio Turnover.............................................................. 48
NET ASSET VALUE...................................................................... 48
TAXATION............................................................................. 50
Distributions................................................................... 51
Sales of Shares................................................................. 51
Options, Futures and Forward Contracts, and Swap Agreements..................... 51
Short Sales..................................................................... 52
Passive Foreign Investment Companies............................................ 52
Foreign Currency Transactions................................................... 53
Foreign Taxation................................................................ 53
Original Issue Discount......................................................... 54
Inflation-Indexed Bonds......................................................... 54
Other Taxation.................................................................. 55
OTHER INFORMATION.................................................................... 55
Capitalization.................................................................. 55
Performance Information......................................................... 55
Voting Rights................................................................... 63
Custodian....................................................................... 64
Independent Accountants......................................................... 64
Counsel......................................................................... 64
Registration Statement.......................................................... 64
Financial Statements............................................................ 65
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DESCRIPTION OF THE TRUST
The Trust is a Delaware business trust established under a Trust Instrument
dated October 3, 1997. The Trust is an open-end investment company comprised of
separate portfolios, each of which is treated as a separate portfolio. Each
Portfolio (except the Real Return Bond, Global Bond, Foreign Bond, and Emerging
Markets Bond Portfolios) is diversified, which means that, with respect to 75%
of its total assets, the Portfolio will not invest more than 5% of its assets in
the securities of any single issuer.
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.
Municipal Bonds
Each Portfolio may invest in securities issued by states, municipalities
and other political subdivisions, agencies, authorities and instrumentalities of
states and multi-state agencies or authorities. The ability of a Portfolio to
invest in securities other than Municipal Bonds is limited by a requirement of
the Internal Revenue Code that at least 50% of the Portfolio's total assets be
invested in Municipal Bonds at the end of each calendar quarter. See "Taxation".
Municipal Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and multi-
state agencies or authorities.
The Portfolios may invest in municipal lease obligations. A lease is not a
full faith and credit obligation of the issuer and is usually backed only by the
borrowing government's unsecured pledge to make annual appropriations for lease
payments. There have been challenges to the legality of lease financing in
numerous states, and, from time to time, certain municipalities have considered
not appropriating money for lease payments. In deciding whether to purchase a
lease obligation, the Portfolios will assess the financial condition of the
borrower, the merits of the project, the level of public support for the
project, and the legislative history of lease financing in the state. These
securities may be less readily marketable than other municipals. A Portfolio
may also purchase unrated lease obligations if determined by PIMCO to be of
comparable quality to rated securities in which the Portfolio is permitted to
invest.
The Portfolios may seek to enhance their yield through the purchase of
private placements. These securities are sold through private negotiations,
usually to institutions or mutual Portfolios, and may have
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resale restrictions. Their yields are usually higher than comparable public
securities to compensate the investor for their limited marketability. A
Portfolio may not invest more than 15% of its net assets in illiquid securities,
including unmarketable private placements.
Some longer-term Municipal Bonds give the investor the right to "put" or
sell the security at par (face value) within a specified number of days
following the investor's request - usually one to seven days. This demand
feature enhances a security's liquidity by shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If a demand
feature terminates prior to being exercised, a Portfolio would hold the longer-
term security, which could experience substantially more volatility.
The Portfolios may invest in municipal warrants, which are essentially call
options on Municipal Bonds. In exchange for a premium, they give the purchaser
the right, but not the obligation, to purchase a Municipal Bond in the future. A
Portfolio might purchase a warrant to lock in forward supply in an environment
where the current issuance of bonds is sharply reduced. Like options, warrants
may expire worthless and they may have reduced liquidity. A Portfolio will not
invest more than 5% of its net assets in municipal warrants.
The Portfolios may invest in Municipal Bonds with credit enhancements such
as letters of credit, municipal bond insurance and Standby Bond Purchase
Agreements ("SBPAs"). Letters of credit that are issued by a third party,
usually a bank, to enhance liquidity and ensure repayment of principal and any
accrued interest if the underlying Municipal Bond should default. Municipal
bond insurance, which is usually purchased by the bond issuer from a private,
nongovernmental insurance company, provides an unconditional and irrevocable
guarantee that the insured bond's principal and interest will be paid when due.
Insurance does not guarantee the price of the bond or the share price of any
Portfolio. The credit rating of an insured bond reflects the credit rating of
the insurer, based on its claims-paying ability. The obligation of a municipal
bond insurance company to pay a claim extends over the life of each insured
bond. Although defaults on insured Municipal Bonds have been low to date and
municipal bond insurers have met their claims, there is no assurance this will
continue. A higher-than-expected default rate could strain the insurer's loss
reserves and adversely affect its ability to pay claims to bondholders. The
number of municipal bond insurers is relatively small, and not all of them have
the highest rating. An SBPA is a liquidity facility provided to pay the purchase
price of bonds that cannot be re-marketed. The obligation of the liquidity
provider (usually a bank) is only to advance Portfolios to purchase tendered
bonds that cannot be remarketed and does not cover principal or interest under
any other circumstances. The liquidity provider's obligations under the SBPA are
usually subject to numerous conditions, including the continued creditworthiness
of the underlying borrower.
The Portfolios may invest in Residual Interest Bonds, which are created by
dividing the income stream provided by an underlying bond to create two
securities, one short term and one long term. The interest rate on the short-
term component is reset by an index or auction process normally every seven to
35 days. After income is paid on the short-term securities at current rates, the
residual income goes to the long-term securities. Therefore, rising short-term
interest rates result in lower income for the longer-term portion, and vice
versa. The longer-term bonds can be very volatile and may be less liquid than
other Municipal Bonds of comparable maturity. A Portfolio will not invest more
than 10% of its total assets in Residual Interest Bonds.
The Portfolios also may invest in participation interests. Participation
interests are various types of securities created by converting fixed rate bonds
into short-term, variable rate certificates. These securities have been
developed in the secondary market to meet the demand for short-term, tax-exempt
securities. The Portfolios will invest only in securities deemed tax-exempt by a
nationally recognized bond counsel, but there is no guarantee the interest will
be exempt because the IRS has not issued a definitive ruling on the matter.
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Municipal Bonds are subject to credit and market risk. Generally, prices
of higher quality issues tend to fluctuate less with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues.
The Portfolios may purchase and sell portfolio investments to take
advantage of changes or anticipated changes in yield relationships, markets or
economic conditions. The Portfolios may also sell Municipal Bonds due to
changes in PIMCO's evaluation of the issuer or cash needs resulting from
redemption requests for Portfolio shares. The secondary market for Municipal
Bonds typically has been less liquid than that for taxable debt/fixed income
securities, and this may affect the Portfolio's ability to sell particular
Municipal Bonds at then-current market prices, especially in periods when other
investors are attempting to sell the same securities.
Prices and yields on Municipal Bonds are dependent on a variety of factors,
including general money- market conditions, the financial condition of the
issuer, general conditions of the Municipal Bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of Municipal Bonds may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
Obligations of issuers of Municipal Bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of interest and principal on their Municipal Bonds may be materially
affected or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for Municipal Bonds or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments might affect all or
a substantial portion of a Portfolio's Municipal Bonds in the same manner.
Each Portfolio may purchase custodial receipts representing the right to
receive either the principal amount or the periodic interest payments or both
with respect to specific underlying Municipal Bonds. In a typical custodial
receipt arrangement, an issuer or third party owner of Municipal Bonds deposits
the bonds with a custodian in exchange for two classes of custodial receipts.
The two classes have different characteristics, but, in each case, payments on
the two classes are based on payments received on the underlying Municipal
Bonds. In no event will the aggregate interest paid with respect to the two
classes exceed the interest paid by the underlying Municipal Bond. Custodial
receipts are sold in private placements. The value of a custodial receipt may
fluctuate more than the value of a Municipal Bond of comparable quality and
maturity.
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
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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.
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, PIMCO
determines that the securities meet the Trust's quality
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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 PIMCO'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
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.
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.
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
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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.
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 "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
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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.
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, PIMCO 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 Receivables(SM)
("CARS(SM)"). CARS(SM) 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 CARS(SM) 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 CARS(SM) 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, PIMCO
also may invest in other types of asset-backed securities.
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. The
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Portfolios may participate in such syndications, or can buy part of a loan,
becoming a part lender. 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.
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
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at what PIMCO 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 loan
participations are considered to be debt obligations for purposes of the Trust's
investment restriction relating to the lending of funds or assets by a
Portfolio.
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 PIMCO's research in an attempt to avoid situations where
fraud or misrepresentation could adversely affect the Portfolios.
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
PIMCO's opinion comparable in quality to corporate debt securities in which the
Portfolio may invest. Corporate income-producing securities may include forms
of preferred or preference stock. The rate of interest on a corporate debt
security may be fixed, floating or variable, and may vary inversely with respect
to a reference rate. 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.
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 Ratings Services ("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." For a discussion of securities rated
below investment grade, see "High Yield Securities ("Junk Bonds")" below.
High Yield Securities ("Junk Bonds")
Investments in securities rated below investment grade that are eligible
for purchase by certain of the Portfolios and in particular, by the High Yield
Bond, and Emerging Markets 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.
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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.
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.
PIMCO seeks to reduce these risks through diversification, credit analysis and
attention to current developments and trends in both the economy and financial
markets.
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. PIMCO 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.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last rated.
PIMCO does not rely solely on credit ratings when selecting securities for the
Portfolio, and develops its own independent analysis of issuer credit quality.
If a credit rating agency changes the rating of a portfolio security held by a
Portfolio, the Portfolio may retain the portfolio security if PIMCO deems it in
the best interest of shareholders.
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 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 floating rate debt
instruments ("floaters") and (except for the Money Market Portfolio) 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.
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. A credit spread
trade is an investment
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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.
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. Two structures are
common. The U.S. Treasury and some other issuers use a structure that accrues
inflation into the principal value of the bond. Most other issuers pay out the
CPI accruals as part of a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of
five, ten or thirty years, although it is possible that securities with other
maturities will be issued in the future. The U.S. Treasury securities 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 resulted in the whole years' inflation equaling 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 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
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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.
Event-Linked Bonds
Each of the Portfolios (except the Money Market Portfolio) may invest in
"event-linked bonds." Event-linked 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, earthquake., or
other physical or weather-related phenomenon. They may be issued by government
agencies, insurance companies, reinsurers, special purpose corporations or other
on-shore or off-shore entities. 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. For some event-linked bonds, the trigger event or
losses may be based on company-wide losses, index-portfolio losses, industry
indices, or readings of scientific instruments rather than specified actual
losses. Often the event-linked bonds provide for extensions of maturity that are
mandatory, or optional at the discretion of the issuer, in order to process and
audit loss claims in those cases where a trigger event has, or possibly has,
occurred. In addition to the specified trigger events, event-linked bonds may
also expose the Portfolio to certain unanticipated risks including but not
limited to issuer (credit) default, adverse regulatory or jurisdictional
interpretations, and adverse tax consequences.
Event-linked bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Illiquid Securities" below. 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. Event-linked
bonds are typically rated, and a Portfolio will only invest in catastrophe bonds
that meet the credit quality requirements for the Portfolio.
Convertible Securities
Each Portfolio may invest in convertible securities, which may offer higher
income than the common stocks into which they are convertible.
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. 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.
Because of the conversion feature, the price of the convertible security
will normally fluctuate in some proportion to changes in the price of the
underlying asset, and as such is subject to risks relating to the activities of
the issuer and/or general market and economic conditions. The income component
of a convertible security may tend to cushion the security against declines in
the price of the underlying asset. However, the income component of convertible
securities causes fluctuations based upon changes in interest rates and the
credit quality of the issuer. In addition, convertible securities are often
lower-rated securities.
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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, which may have an adverse effect on
the Portfolio's ability to achieve its investment objective. 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 unless the security is called and conversion is forced.
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.
A Portfolio will not invest more than 5% of its net assets, valued at the
lower of cost or market, in warrants to purchase securities. Warrants acquired
in units or attached to securities will be deemed without value for purposes of
this restriction.
Foreign Securities
The Fixed Income Portfolios (except the Total Return Bond II and Long-Term
U.S. Government Portfolios) and the Strategic Balanced and StocksPLUS Growth and
Income 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 Money Market Portfolio
may invest in securities of foreign issuers only if they are U.S. dollar-
denominated.
Except for the Emerging Markets Bond Portfolio, each of the Portfolios will
concentrate its investments in securities of issuers based in developed
countries. However, the 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 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.
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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 (except the Total Return Bond II and
Long-Term U.S. Government 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, including Panama and Peru.
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. Brady Bonds are not considered to be U.S. Government securities. 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
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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 involve various risk factors, including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities in countries issuing Brady Bonds. 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 Fund, 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.
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.
The 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.
Foreign Currency Transactions
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.
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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. 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 PIMCO 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:
Lock In. When PIMCO 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 PIMCO wants to a eliminate substantially all of the risk
of owning a particular currency, and/or if PIMCO 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. PIMCO 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
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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 Warrants(SM) ("CEWs(SM)") 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
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 ("PERLs(SM)") 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
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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 ("PIPs(SM)") 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.
Borrowing
Each Portfolio may borrow money to the extent permitted under the
Investment Company Act of 1940 ("1940 Act"), as amended, and as interpreted,
modified or otherwise permitted by regulatory authority having jurisdiction,
from time to time. This means that, in general, a Portfolio may borrow money
from banks for any purpose on a secured basis in an amount up to 1/3 of the
Portfolio's total assets. A Portfolio may also borrow money for temporary
administrative purposes on an unsecured basis in an amount not to exceed 5% of
the Portfolio's total assets.
Specifically, provisions of the 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.
As noted below, a Portfolio also may enter into certain transactions,
including reverse repurchase agreements, mortgage dollar rolls, and sale-
buybacks, that can be viewed as constituting a form of borrowing or financing
transaction by the Portfolio. To the extent a Portfolio covers its commitment
under a reverse repurchase agreement (or economically similar transaction) by
the segregation 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. 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.
A Portfolio may enter into reverse repurchase agreements, mortgage dollar
rolls, and economically similar transactions. A reverse repurchase agreement
involves the sale of a portfolio-eligible security by a Portfolio, coupled with
its agreement to repurchase the instrument at a specified time and price. Under
a reverse repurchase agreement, the Portfolio continues to receive any principal
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and interest payments on the underlying security during the term of the
agreement. The Portfolio typically will segregate assets determined to be liquid
by PIMCO 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. 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. To the extent that positions in reverse repurchase
agreements are not covered through the segregation 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, among
other things, restrict the aggregate of such transactions (plus any other
borrowings) to 1/3 of a Portfolio's total assets.
A "mortgage dollar roll" is similar to a reverse repurchase agreement in
certain respects. In a "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
segregated liquid assets equal in value to the securities subject to repurchase
by the Portfolio. As with reverse repurchase agreements, to the extent that
positions in dollar roll agreements are not covered by segregated liquid assets
at least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Portfolios' restrictions 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.
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.
Derivative Instruments
In pursuing their individual objectives the Portfolios (except the 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 or as part of
their overall investment strategies, 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 (except the
Money Market and Long-Term U.S. Government Bond 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 interest rates and
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indexes of securities, and to the extent it may invest in foreign currency-
denominated securities, may enter into swap agreements with respect to foreign
currencies. 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 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 utilize these instruments
may depend in part upon the ability of PIMCO to forecast interest rates and
other economic factors correctly. If PIMCO 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. The Portfolios
might not employ any of the strategies described below, and no assurance can be
given that any strategy used will succeed. If PIMCO incorrectly forecasts
interest rates, market values or other economic factors in using 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. Also, suitable derivative
transactions may not be available in all circumstances.
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. In addition, a Portfolio's use of
such instruments may cause the Portfolio to realize higher amounts of short-term
capital gains (generally taxed at ordinary income tax rates) than if it had not
used such instruments.
Options on Securities and Indexes. A Portfolio may, to the extend
specified herein or in the Prospectus, 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.
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.)
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 PIMCO 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 PIMCO
in accordance with procedures established by the Board of
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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 segregated assets determined to be liquid by PIMCO 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 segregates assets determined to be liquid by PIMCO 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 segregated
assets determined to be liquid by PIMCO 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 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. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of an option of the
same series. 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.
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During the option period, the covered call writer has, in return for the
premium on the option, given up the opportunity to profit from a price increase
in the underlying security above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline. The writer of an option has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price. 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.
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.
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. A Portfolio may buy or sell put and call options on foreign
currencies either on exchanges or in the over-the-counter market. 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 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.
Futures Contracts and Options on Futures Contracts. Each of the Fixed
Income Portfolios (except the 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 StocksPLUS Growth
and Income Portfolio and the Strategic Balanced Portfolio may invest in interest
rate, stock index and foreign currency futures contracts and options thereon.
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
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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 225; the NYSE composite;
U.S. Treasury bonds; U.S. 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
euro. 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, as
specified for that Portfolio in the Prospectus. 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 PIMCO 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.
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.
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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 PIMCO 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 PIMCO 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 PIMCO 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 PIMCO in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
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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.
To the extent that securities with maturities greater than one year are
used to segregate assets 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. 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.
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.
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
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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,
to the extent it may invest in foreign currency-denominated securities, 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 segregation of assets determined to be liquid by PIMCO 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.
Whether a Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on PIMCO'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.
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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, PIMCO 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.
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.
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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.
Delayed Funding Loans and Revolving Credit Facilities
The Fixed Income Portfolios (except the Money Market Portfolio) may enter
into, or acquire participations in, delayed funding loans and revolving credit
facilities. Delayed funding loans and revolving credit facilities are borrowing
arrangements in which the lender agrees to make loans up to a maximum amount
upon demand by the borrower during a specified term. A revolving credit facility
differs from a delayed funding loan in that as the borrower repays the loan, an
amount equal to the repayment may be borrowed again during the term of the
revolving credit facility. Delayed funding loans and revolving credit facilities
usually provide for floating or variable rates of interest. These commitments
may have the effect of requiring a Portfolio to increase its investment in a
company at a time when it might not otherwise decide to do so (including at a
time when the company's financial condition makes it unlikely that such amounts
will be repaid). To the extent that a Portfolio is committed to advance
additional funds, it will at all times segregate assets, determined to be liquid
by PIMCO in accordance with procedures established by the Board of Trustees, in
an amount sufficient to meet such commitments.
The Fixed Income Portfolios may invest in delayed funding loans and
revolving credit facilities with credit quality comparable to that of issuers of
its securities investments. Delayed funding loans and revolving credit
facilities may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, a Portfolio may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. The Fixed Income Portfolios currently
intend to treat delayed funding loans and revolving credit facilities for which
there is no readily available market as illiquid for purposes of the Portfolios'
limitation on illiquid investments. For a further discussion of the risks
involved in investing in loan participations and other forms of direct
indebtedness see "Loan Participations." Participation interests in revolving
credit facilities will be subject to the limitations discussed in "Loan
Participations." Delayed funding loans and revolving credit facilities are
considered to be debt obligations for purposes of the Trust's investment
restriction relating to the lending of funds or assets by a Portfolio.
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. When such purchases are
outstanding, the Portfolio will segregate until the settlement date assets
determined to be liquid by PIMCO 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 segregated.
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, delayed delivery or
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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.
Short Sales
Each of the Portfolios 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 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 and dividends 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 PIMCO 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 of
the segregated assets 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.
Illiquid Securities
The Portfolios may invest up to 15% of their net assets in illiquid
securities (10% in the case of the 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 whose disposition is restricted under the federal securities laws
(other than securities issued pursuant to Rule 144A under the 1933 Act and
certain commercial paper that PIMCO 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, others may be
illiquid, and their sale may involve substantial delays and additional costs.
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Loans of Portfolio Securities
For the purpose of achieving income, each Portfolio may lend its 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 (negotiable certificates of deposits,
bankers' acceptances or letters of credit) 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 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.
Participation on Creditors Committees
A Portfolio (in particular, the 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 PIMCO 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.
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
Money Market Portfolio) would be invested in such deposits, repurchase
agreements maturing in more than seven days and other illiquid assets.
The Money Market, Low Duration, and Long-Term U.S. Government, Portfolios may
invest in the same types of bank obligations as the other Fixed Income
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.
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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.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Each Portfolio's investment objective as set forth in the Prospectus under
the heading "Principal Investments and Strategies," for each respective
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.
(1) A Portfolio may not concentrate its investments in a particular
industry, as that term is used in the Investment Company Act of 1940, as
amended, and as interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time (except that the Money
Market Portfolio may concentrate its investments in securities or
obligations issued by U.S. banks).
(2) A Portfolio may not, with respect to 75% of the Portfolio's total
assets, purchase the securities of any issuer, except securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, if, as a result (i) more than 5% of the Portfolio's
total assets would be invested in the securities of that issuer, or (ii)
the Portfolio would hold more than 10% of the outstanding voting securities
of that issuer. (This restriction is not applicable to the Real Return
Bond, Foreign Bond, Global Bond or the Emerging Markets Bond Portfolios.)
(3) A Portfolio may not borrow money or issue any senior security, except
as permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority
having jurisdiction, from time to time.
(4) A Portfolio may not make loans, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted, modified,
or otherwise permitted by regulatory authority having jurisdiction, from
time to time.
(5) Notwithstanding any other fundamental investment policy or limitation,
it is a fundamental policy of each Portfolio that it may pursue its
investment objective by investing in one or more underlying investment
companies or vehicles that have substantially similar investment
objectives, policies and limitations as the Portfolio.
(6) A Portfolio may not 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.
(7) A Portfolio may not purchase or sell commodities or commodities
contracts or oil, gas or mineral programs. This restriction shall not
prohibit a Portfolio, subject to restrictions described
31
<PAGE>
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.
(8) A Portfolio may not 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 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 PIMCO'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); or
(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 Global Bond and 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. 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.
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.
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
32
<PAGE>
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
PIMCO 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, PIMCO 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 business affairs of the Trust are managed under the direction of the
Trust's Board of Trustees. Subject to the provisions of the Trust's Declaration
of Trust, its By-Laws and Delaware law, the Trustees have all powers necessary
and convenient to carry out this responsibility, including the election and
removal of the Trust's officers.
The Trustees and Executive Officers of the Trust, their ages, their
business address and a description of their principal occupations during the
past five years are listed below. Unless otherwise indicated, the address of all
persons below is 840 Newport Center Drive, Suite 300, Newport Beach, California
92660.
<TABLE>
<CAPTION>
Position Principal Occupation(s)
Name, Address and Age with the Trust During the Past Five Years
- --------------------- -------------- --------------------------
<S> <C> <C>
Brent R. Harris* Chairman of the Board and Managing Director, PIMCO; Board of Governors,
Age 40 Trustee Investment Company Institute; Chairman and
Trustee, PIMCO Funds: Pacific Investment
Management Series; Chairman and Director,
PIMCO Commercial Mortgage Securities Trust,
Inc.
R. Wesley Burns* President and Trustee Managing Director, PIMCO; Trustee and
Age 40 President, PIMCO Funds: Pacific Investment
Management Series; Director and President,
PIMCO Commercial Mortgage Securities Trust,
Inc. Formerly Executive Vice President,
PIMCO Executive Vice President, PIMCO Funds:
Multi-Manager Series.
Guilford C. Babcock Trustee Associate Professor of Finance, University of
1500 Park Place Southern California; Trustee, PIMCO Funds:
San Marino, California 91108 Pacific Investment Management Series;
Age 68 Director, PIMCO Commercial Mortgage
Securities Trust, Inc.; Director, Growth Fund
of America and Fundamental Investors Fund of
the Capital Group; Director, Good Hope
Medical Foundation.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation(s)
Name, Address and Age with the Trust During the Past Five Years
- --------------------- -------------- --------------------------
<S> <C> <C>
E. Philip Cannon Trustee Proprietor, Cannon & Company, an affiliate of
3838 Olympia Inverness Management LLC, a private equity
Houston, Texas 77019 investment firm; Trustee of PIMCO Funds:
Age 59 Multi-Manager Series. Formerly, Headmaster,
St. John's School, Houston, Texas; Trustee of
PIMCO Advisors Funds ("PAF") and Cash
Accumulation Trust ("CAT"); General Partner,
J.B. Poindexter & Co., Houston, Texas, a
private equity investment firm; and Partner,
Iberia Petroleum Company, an oil and gas
production company.
Vern O. Curtis Trustee Private Investor; Trustee, PIMCO Funds:
14158 N.W. Bronson Creek Drive Pacific Investment Management Series;
Portland, Oregon 97229 Director, PIMCO Commercial Mortgage
Age 65 Securities Trust, Inc.; Director, Public
Storage Business Parks, Inc., (Real Estate
Investment Trust); Director, Fresh Choice,
Inc. (restaurant company). Formerly
charitable work, The Church of Jesus Christ
of Latter Day Saints.
J. Michael Hagan Trustee Retired from Furon Company (manufacturing)
6 Merced where he served as Chairman and CEO from June
San Clemente, California 92673 1991 to November 1999, and in other
Age 60 capacities since 1967. He was previously
associated with Ross Laboratories and
Standard Oil of California. Mr. Hagan serves
on the Boards of Directors for Ameron
International (manufacturing), Freedom
Communications, Remedy Temp (staffing) and
Saint-Gobain Company. He is also a member of
the Board of Regents at Santa Clara
University, the Board of Taller San Jose, and
the Board of Trustees of the South Coast
Repertory Theater.
Thomas P. Kemp Trustee Private Investor; Trustee, PIMCO Funds:
1141 Marine Drive Pacific Investment Management Series;
Laguna Beach, California 92651 Director, PIMCO Commercial Mortgage
Age 69 Securities Trust, Inc. Formerly Co-Chairman,
U.S. Committee to Assist Russian Reform;
Director, Union Financial Corp. (savings and
loan); Senior Consultant, World Cup 1994
Organizing Committee.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation(s)
Name, Address and Age with the Trust During the Past Five Years
- --------------------- -------------- --------------------------
<S> <C> <C>
William J. Popejoy Trustee President, Pacific Capital Investors;
29 Chatham Court Director, PacPro (vinyl assembly products;
Newport Beach, California 92660 formerly Western Printing); Trustee, PIMCO
Age 61 Funds: Pacific Investment Management Series;
Director, PIMCO Commercial Mortgage
Securities Trust, Inc. Formerly Director,
California State Lottery; Chief Executive
Officer, Orange County, California.
Michael G. Dow Senior Vice President Senior Vice President, PIMCO. Formerly Fixed
Age 36 Income Specialist, Salomon Brothers, Inc.;
Vice President Operations, Citibank NA Global
Consumer Banking Group.
William H. Gross Senior Vice President Managing Director, PIMCO; Senior Vice
Age 55 President, PIMCO Funds: Pacific Investment
Management Series.
Margaret Isberg Senior Vice President Managing Director, PIMCO.
Age 43
Jeffrey M. Sargent Senior Vice President Senior Vice President and Manager of
Age 37 Investment Operations Shareholder Services,
PIMCO; Senior Vice President, PIMCO
Commercial Mortgage Securities Trust, Inc.
and PIMCO Funds: Pacific Investment
Management Series; Vice President, PIMCO
Funds: Multi-Manager Series. Formerly, Vice
President, PIMCO.
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO. Formerly Vice
Age 47 President, PIMCO.
Raymond C. Hayes Vice President Vice President, PIMCO. Formerly Marketing
Age 55 Director, Pacific Financial Asset Management
Corporation.
Thomas J. Kelleher, III Vice President Vice President, PIMCO. Previously associated
Age 49 with Delaware Trust, Mellon Bank and Girard
Trust (bank trust departments).
Henrik P. Larsen Vice President Vice President and Manager, Fund
Age 30 Administration, PIMCO; Vice President, PIMCO
Commercial Mortgage Securities Trust, Inc.
Formerly Supervisor, PIMCO.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation(s)
Name, Address and Age with the Trust During the Past Five Years
- --------------------- -------------- --------------------------
<S> <C> <C>
Daniel T. Ludwig Vice President Account Manager, PIMCO. Formerly Vice
Age 41 President, Fidelity Investments;
Institutional Sales Representative, CS First
Boston.
Andre Mallegol Vice President Vice President, PIMCO. Formerly associated
Age 33 with Fidelity Investments Institutional
Services Company.
Scott Millimet Vice President Vice President, PIMCO. Formerly Executive
Age 42 Vice President with Back Bay Advisors.
James F. Muzzy Vice President Managing Director, PIMCO; Vice President,
Age 60 PIMCO Funds: Pacific Investment Management
Series.
Douglas J. Ongaro Vice President Vice President, PIMCO. Formerly Regional
Age 39 Marketing Manager, Charles Schwab & Co., Inc.
David J. Pittman Vice President Vice President, PIMCO. Formerly a senior
Age 52 executive with Bank of America, the Northern
Trust Co. and NationsBank.
Mark A. Romano Vice President Vice President, PIMCO. Previously associated
Age 41 with Wells Fargo's institutional money
management group and First Interstate's
Pacifica family of mutual funds.
William S. Thompson, Jr. Senior Vice President Chief Executive Officer and Managing
Age 54 Director, PIMCO; Vice President, PIMCO Funds:
Pacific Investment Management Series and
PIMCO Commercial Mortgage Securities Trust,
Inc.
John P. Hardaway Treasurer Senior Vice President and Manager of
Age 42 Investment Operations Accounting, PIMCO;
Treasurer, PIMCO Commercial Mortgage
Securities Trust, Inc.; PIMCO Funds: Pacific
Investment Management Series; PIMCO Funds:
Multi-Manager Series. Formerly Vice
President, PIMCO.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation(s)
Name, Address and Age with the Trust During the Past Five Years
- --------------------- -------------- --------------------------
<S> <C> <C>
Garlin G. Flynn Secretary Specialist, PIMCO; Secretary, PIMCO
Age 53 Commercial Mortgage Securities Trust, Inc.;
PIMCO Funds: Pacific Investment Management
Series; Assistant Secretary, PIMCO Funds:
Multi-Manager Series. Formerly Senior
Portfolio Administrator, PIMCO; Senior
Mutual Fund Analyst, PIMCO Advisors
Institutional Services.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Financial
Age 36 Reporting and Taxation, PIMCO. Assistant
Treasurer, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds: Pacific
Investment Management Series, and PIMCO
Funds: Multi-Manager Series. Formerly
Manager of Fund Taxation, PIMCO; Director of
Financial Reporting, Carl I. Brown & Co.
Michael J. Willemsen Assistant Secretary Manager, PIMCO; Assistant Secretary, PIMCO
Age 40 Commercial Mortgage Securities Trust, Inc.
and PIMCO Funds: Pacific Investment
Management Series. Formerly Project Lead,
PIMCO.
</TABLE>
- -------------------
*Each of Mr. Harris and Mr. Burns is an "interested person" of the Trust (as
that term is defined in the 1940 Act) because of his affiliations with PIMCO.
Compensation Table
For the fiscal year ending December 31, 1999, the Trust paid the following
compensation to the Trustees of the Trust:
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Compensation Trust and Fund Complex
Name and Position from Trust1 Paid to Trustees2
- --------------------------- ------------ -----------------------
<S> <C> <C>
Guilford C. Babcock $10,250 $78,750
Trustee
Vern O. Curtis $11,036 $81,619
Trustee
Thomas P. Kemp $10,250 $78,750
Trustee
William J. Popejoy $10,250 $78,750
Trustee
</TABLE>
- --------------------
37
<PAGE>
/1/Each Trustee, other than those affiliated with PIMCO 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 PIMCO or its affiliates, will
receive an additional annual retainer of $500.
/2/Each 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: Pacific Investment Management Series, a
registered open-end management investment company. For their services to PIMCO
Commercial Mortgage Securities Trust, Inc., each Director who is unaffiliated
with PIMCO 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 PIMCO or its affiliates, receives an
annual retainer of $500. For their services to PIMCO Funds: Pacific Investment
Management Series, each Trustee, other than those affiliated with PIMCO 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 PIMCO or its
affiliates, receives an additional annual retainer of $1,500.
Control Persons and Principal Holders of Securities
As of March 15, 2000, the following persons owned of record or beneficially 5%
or more of the shares of the following Portfolios:
<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Owned Portfolio
----------------------------------
<S> <C> <C>
Foreign Bond Portfolio
Pacific Investment Management Company 512,003.230 90.09%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Kemper Investors Life Insurance Co. 34,445.274 6.06%
Variable Annuity Separate Account
1 Kemper Drive, Building 3
Long Grove, Illinois 60049
High Yield Bond Portfolio
Golden American Life Insurance Company 16,515,851.045 96.93%*
1001 Jefferson Street, Suite 400
Wilmington, Delaware 19801
Long-Term U.S. Government Bond Portfolio
Western-Southern Life Assurance Company 296,364.747 36.88%*
400 Broadway
Cincinnati, Ohio 45202
Security Equity Life Insurance 289,430.895 36.02%*
84 Business Park Drive, Suite 303
Armonk, New York 10504
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Pacific Investment Management Company 217,280.526 27.04%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Low Duration Bond Portfolio
Pacific Investment Management Company 531,673.338 98.84%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Money Market Portfolio
Lincoln Benefit Life 2,378,573.920 69.71%*
206 South 13th Street, Suite 100
Lincoln, Nebraska 68508
Pacific Investment Management Company 1,033,630.510 30.29%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Real Return Bond Portfolio
Pacific Investment Management Company 308,242.714 100.00%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Short-Term Bond Portfolio
PFL Life Insurance Company 306,536.274 100.00%*
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
StocksPLUS Growth & Income Portfolio
Golden American Life Insurance Company 18,054,048.256 95.52%*
1001 Jefferson Street, Suite 400
Wilmington, Delaware 19801
Total Return Bond Portfolio
Pacific Investment Management Company 262,365.691 60.40%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Cova Financial Services Life Insurance Co. 95,912.538 22.08%
1 Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181
Lincoln Benefit Life 70,004.845 16.12%
206 South 13th Street, Suite 100
Lincoln, Nebraska 68508
Total Return Bond II Portfolio
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
Pacific Investment Management Company 322,707.418 61.25%*
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Security Equity Life Insurance 204,169.507 38.75%*
84 Business Park Drive, Suite 303
Armonk, New York 10504
</TABLE>
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Portfolio, and therefore may be presumed to "control" the Portfolio, as that
term is defined in the 1940 Act.
Investment Adviser
PIMCO serves as investment adviser to the Portfolios pursuant to an
investment advisory contract ("PIMCO Advisory Contract") between PIMCO and the
Trust. PIMCO is a subsidiary partnership of 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 ("Pacific Life"), and PIMCO
Partners LLC, a California limited liability company controlled by the current
Managing Directors and two former Managing Directors of PIMCO. PIMCO Partners,
G.P. is the sole general partner of PAH.
PIMCO is responsible for making investment decisions and placing orders for
the purchase and sale of the Portfolios' 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.
On October 31, 1999, PIMCO Advisors, PAH Partners G.P., certain of their
affiliates, and Allianz of America, Inc.("Allianz of America"), and certain
other parties named therein entered into an Implementation and Merger Agreement
pursuant to which Allianz of America will acquire majority ownership of PIMCO
Advisors and its subsidiaries, including PIMCO (the "Transaction"). Under the
terms of the Transaction, Allianz will acquire for cash approximately 70% of the
outstanding partnership interests in PIMCO Advisors, while the remainder will
continue to be owned indirectly by Pacific Life. The Transaction is currently
expected to be completed by the end of the first quarter of 2000.
Allianz AG, the parent of Allianz of America, is a publicly traded German
company which, together with its subsidiaries, comprises the world's second
largest insurance company as measured by premium income. Allianz AG is a leading
provider of financial services, particularly in Europe, and is represented in 68
countries world-wide through subsidiaries, branch and representative offices,
and other affiliated entities. The Allianz group currently has assets under
management of more than $390 billion, and in its last fiscal year wrote
approximately $50 billion in gross insurance premiums. After completion of the
Transaction, PIMCO and the Allianz group combined have over $650 billion in
assets under management.
Significant shareholders of Allianz AG currently include Dresdner Bank AG,
Deutsche Bank AG, Munich Reinsurance, and HypoVereinsbank. Following completion
of the Transaction, Dresdner Bank AG and Deutsche Bank AG, as well as certain
broker-dealers that might be deemed to be affiliated with these entities, such
as Bankers Trust Company, BT Alex Brown, Inc., Reinsurance, Deutsche Bank
Securities, Inc. and Dresdner Kleinwort Benson North America LLC (collectively,
the "Affiliated
40
<PAGE>
Brokers"), may be considered to be affiliated persons of PIMCO. Once the
Transaction is completed, absent an SEC exemption or other relief, the
Portfolios would generally be precluded from effecting principal transactions
with the Affiliated Brokers, and their ability to purchase securities being
underwritten by an Affiliated Broker or to utilize the Affiliated Brokers for
agency transactions would be subject to restrictions. PIMCO does not believe its
the restrictions on transactions with the Affiliated Brokers described above
will materially adversely affect their ability, post-closing, to provide
services to the Portfolios, the Portfolios' ability to take advantage of market
opportunities, or the Portfolios' overall performance.
The consummation of the Allianz Transaction is subject to the approval of
the public unit holders of PAH, as well as to certain regulatory and client
approvals, including the approval of the Board of Trustees of the Trust and the
approval of the shareholders of the Portfolios, and other conditions customary
to transactions of this kind.
This Statement of Additional Information will be supplemented or revised if
the Allianz Transaction does not occur substantially as set forth above.
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 do, 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, as supplemented on May 26,
1998, February 23, 1999 and December 1, 1999, and was approved by the
shareholders of all then-operational Portfolios on December 31, 1997 and March
3, 2000.
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 PIMCO, on 60 days' written notice by either
party to the contract and will terminate automatically if assigned.
Each Portfolio currently pays a monthly investment advisory fee at an
annual rate based on average daily net assets of the Portfolios as follows:
<TABLE>
<CAPTION>
Advisory
Portfolio Fee Rate
--------- --------
<S> <C>
Money Market Portfolio........................................... 0.15%
Strategic Balanced and StocksPLUS Growth and Income Portfolios... 0.40
Emerging Markets Bond Portfolio.................................. 0.45
All other Portfolios............................................. 0.25
</TABLE>
The advisory fees paid by each Portfolio that was operational during the
fiscal year ended December 31, 1999 was:
<TABLE>
<CAPTION>
Portfolio Advisory Fee
--------- ------------
<S> <C>
Money Marked Portfolio $ 2,444
Short-Term Bond Portfolio $ 2,715
Low Duration Bond Portfolio $ 17,747
Real Return Bond Portfolio $ 3,091
Total Return Bond Portfolio II $ 12,153
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Portfolio Advisory Fee
--------- ------------
<S> <C>
Total Return Bond Portfolio $ 12,917
High Yield Bond Portfolio $520,523
Long-Term U.S. Government Bond Portfolio $ 17,655
Foreign Bond Portfolio $ 26,461
StocksPLUS Growth and Income Portfolio $563,001
</TABLE>
Code of Ethics
PIMCO is subject to the Code of Ethics with respect to investment
transactions in which PIMCO's officers, directors and certain other persons have
a beneficial interest to avoid any actual or potential conflict or abuse of
their fiduciary position. The Code of Ethics contains several restrictions and
procedures designed to eliminate conflicts of interest including: (a) pre-
clearance of non-exempt personal investment transactions; (b) quarterly
reporting of personal securities transactions; (c) a prohibition against
personally acquiring securities in an initial public offering, entering into
uncovered short sales and writing uncovered options; (d) a seven day "black out
period" prior or subsequent to a Portfolio transaction during which portfolio
managers are prohibited from making certain transactions in securities which are
being purchased or sold by a client of such manager; (e) a prohibition, with
respect to certain investment personnel, from profiting in the purchase and
sale, or sale and purchase, of the same (or equivalent) securities within 60
calendar days; and (f) a prohibition against acquiring any security which is
subject to firm wide or, if applicable, a department restriction of PIMCO. The
Code of Ethics provides that exemptive relief may be given from certain of its
requirements, upon application.
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, as supplemented on
May 26, 1998 and February 23, 1999. 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 the foregoing 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):
42
<PAGE>
<TABLE>
<CAPTION>
Administrative
Portfolio Fee Rate
- --------- --------
<S> <C>
StocksPLUS Growth and Income Portfolio........................ 0.10%
Money Market, Short-Term Bond, and Strategic Balanced
Portfolios................................................... 0.20
High Yield Bond Portfolio..................................... 0.35
Emerging Markets Bond Portfolio............................... 0.40
Global Bond and Foreign Bond Portfolios....................... 0.50
All Other Portfolios.......................................... 0.25
</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 Administration
Agreement, it 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).
The administrative fees paid by each Portfolio that was operational during
the fiscal year ended December 31, 1999 was:
<TABLE>
<CAPTION>
Portfolio Administrative Fee
- --------- ------------------
<S> <C>
Money Market Portfolio $ 1,629
Short-Term Bond Portfolio $ 1,939
Low Duration Bond Portfolio $ 11,902
Real Return Bond Portfolio $ 1,932
Total Return Bond Portfolio $ 7,711
Total Return Bond II Portfolio $ 7,596
High Yield Bond Portfolio $260,261
Long-Term U.S. Government Bond Portfolio $ 11,034
Foreign Bond Portfolio $ 13,231
StocksPLUS Growth and Income Portfolio $351,876
</TABLE>
PIMCO has entered into an expense limitation agreement with the Trust,
pursuant to which PIMCO has agreed to waive or reduce its administrative fee so
that the total annual Portfolio operating expenses of each Portfolio do not
exceed, due to organizational expenses and/or the payment of the Portfolio's pro
rata share of the Trust's Trustees' fees, the total portfolio operating expenses
specified for that Portfolio in the table identifying the Portfolio's annual
portfolio operating expenses in the Portfolio's then-current prospectus, plus
0.49 basis points. Each Portfolio will at a later date reimburse PIMCO for
administrative fees waived by PIMCO during the previous 36 months, but only if,
after such reimbursement, the Portfolio's expense ratio does not exceed the
percentage described above. The agreement has a current term through December
31, 2000, and will automatically renew for one-year terms unless PIMCO provides
written notice to the Trust at least 30 days prior to the end of the then-
current term. In addition, the agreement will terminate upon termination of the
Administration
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Agreement, or may be terminated by the Trust, without payment of any penalty,
upon ninety (90) days' prior written notice to PIMCO.
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distributors LLC (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).
The Trust offers two classes of shares: the Institutional Class and the
Administrative Class. The Trust has adopted an Amended and Restated Multi-Class
Plan ("Multi-Class Plan") pursuant to Rule 18f-3 under the 1940 Act. Under the
Multi-Class Plan, shares of each class of each Portfolio represent an equal pro
rata interest in such Portfolio and, generally, have identical voting, dividend,
liquidation, and other rights, preferences, powers, restrictions, limitations,
qualifications and terms and conditions, except that: (a) each class has a
different designation; (b) each class of shares bears any class-specific
expenses allocated to it; and (c) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution or
service arrangements, and each class has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class.
Each class of shares bears any class specific expenses allocated to such
class, such as expenses related to the distribution and/or shareholder servicing
of such class. In addition, each class may, at the Trustees' discretion, also
pay a different share of other expenses, not including advisory or custodial
fees or other expenses related to the management of the Trust's assets, if these
expenses are actually incurred in a different amount by that class, or if the
class receives services of a different kind or to a different degree than the
other classes. All other expenses are allocated to each class on the basis of
the net asset value of that class in relation to the net asset value of the
particular Portfolio. In addition, each class may have a differing sales charge
structure, and differing exchange and conversion features.
Administrative Services Plan for Administrative Class Shares
The Trust has adopted an Administrative Services Plan (the "Administrative
Plan") with respect to the Administrative Class shares of each Portfolio.
Under the terms of the Administrative Plan, the Trust is permitted to
reimburse, out of the assets attributable to the Administrative Class shares of
each Portfolio, in an amount up to 0.15% on an annual basis of the average daily
net assets of that class, financial intermediaries that provide certain
administrative services for Administrative Class shareholders. Such services
may include, but are not limited to, the following functions: receiving,
aggregating and processing shareholder orders; furnishing shareholder sub-
accounting; providing and maintaining elective shareholder services such as
check writing and wire transfer
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services; providing and maintaining pre-authorized investment plans;
communicating periodically with shareholders; acting as the sole shareholder of
record and nominee for shareholders; maintaining accounting records for
shareholders; answering questions and handling correspondence from shareholders
about their accounts; and performing similar account administrative services.
Fees paid pursuant to the Administrative Plan may be paid for shareholder
services and the maintenance of shareholder accounts, and therefore may
constitute "service fees" for purposes of applicable rules of the National
Association of Securities Dealers, Inc.
Each Administrative Plan provides that it may not be amended to materially
increase the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (ii) those 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 operation of the Plan or any agreements related to it (the "Plan
Trustees"), cast in person at a meeting called for the purpose of voting on the
Plan and any related amendments.
The Administrative Plan also provides that it may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Trustees defined above. In addition, the Administrative Plan
further provides that it shall continue in effect so long as such continuance is
specifically approved at least annually by the Trustees and the disinterested
Trustees defined above. The Administrative Plan provides that any person
authorized to direct the disposition of monies paid or payable by a class
pursuant to the Plan or any related agreement shall provide to the Trustees, and
the Board shall review at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.
The Administrative Plan is a "reimbursement plan," which means that fees
are payable to the relevant financial intermediary only to the extent necessary
to reimburse expenses incurred pursuant to such plan. The Administrative Plan
further provides that expenses payable under the Plan may be carried forward for
reimbursement for up to twelve months beyond the date in which the expense is
incurred, subject to the limit that not more that 0.15% of the average daily net
assets of Administrative Class shares may be used in any month to pay expenses
under the Plan.
Institutional and Administrative Class shares of the Trust may also be
offered through certain brokers and financial intermediaries ("service agents")
that have established a shareholder servicing relationship with the Trust on
behalf of their customers. The Trust pays no compensation to such entities
other than service fees paid with respect to Administrative Class shares.
Service agents may impose additional or different conditions than the Trust on
the purchase, redemption or exchanges of Trust shares by their customers.
Service agents may also independently establish and charge their customers
transaction fees, account fees and other amounts in connection which purchases,
sales and redemption of Trust shares in addition to any fees charged by the
Trust. Each service agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Shareholders who are customers
of service agents should consult their service agents for information regarding
these fees and conditions.
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.
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.
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A shareholder may exchange Institutional and Administrative Class shares of
any Portfolio for Institutional and Administrative Class 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 PIMCOs 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
PIMCO'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.
PIMCO 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, PIMCO 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, PIMCO, 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
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<PAGE>
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.
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,
PIMCO receives research services from many broker-dealers with which PIMCO
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 PIMCO 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 PIMCO receives such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, PIMCO
may cause the Trust to pay a broker-dealer which provides "brokerage and
research services" (as defined in the Act) to PIMCO 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.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, PIMCO may also consider sales of shares of the Trust as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Trust, which may result in the payment of 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.
PIMCO may place orders for the purchase and sale of exchange-listed
portfolio securities with a broker-dealer that is an affiliate of PIMCO where,
in the judgment of PIMCO, such firm will be able to obtain a price and execution
at least as favorable as other qualified broker-dealers.
Pursuant to rules of the SEC, a broker-dealer that is an affiliate of PIMCO
may receive and retain compensation for effecting portfolio transactions for a
Portfolio on a national securities exchange of which the broker-dealer is a
member if the transaction is "executed" on the floor of the exchange by another
broker which is not an "associated person" of the affiliated broker-dealer, and
if there is in effect a written contract between PIMCO and the Trust expressly
permitting the affiliated broker-dealer to receive and retain such compensation.
SEC rules further require that commissions paid to such an affiliated
broker-dealer, or PIMCO by a Portfolio on exchange transactions not exceed
"usual and customary brokerage commissions." The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time."
Portfolio Turnover
PIMCO 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
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portfolio turnover rate for each of the following Portfolios generally is not
expected to exceed the indicated rate: Short-Term Bond Portfolio - 100%; Low
Duration Bond Portfolio - 250%; Real Return Bond Portfolio - 1,000%; High Yield
Bond Portfolio - 75%; Total Return Bond Portfolio - 175%; Total Return Bond
Portfolio II - 175%; Long-Term U.S. Government Bond Portfolio - 500%; Foreign
Bond Portfolio - 1,000%; Global Bond Portfolio - 1,000%; Emerging Markets Bond
Portfolio - 1,000%; Strategic Balanced Portfolio - 100%; and StocksPLUS Growth
and Income 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 of a Portfolios' Institutional and Administrative Class
shares is determined once on each day as of 4:00 p.m. Eastern time, or as of
such other time designated by the New York Stock Exchange (the "Exchange") as
the close of trading for that day ("closing"). Net asset value will not be
determined on any day on which the Exchange is closed. The Exchange is closed
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. The net asset value of a Portfolios'
Institutional and Administrative Class shares is determined by dividing the
total value of a Portfolio's investments and other assets attributable to that
class less any liabilities, by the total number of shares outstanding of that
class.
In determining net asset values, the Portfolios use price data received
shortly after 4:00 p.m. Eastern time believed to reflect the current market
value of the securities held by the Portfolios as of the closing of the
Exchange. The Portfolios intend to use these prices regardless of the impact of
any post-closing adjustments to securities prices, as long as, in the view of
the Portfolios, such prices represent the current market value of the securities
as of the time selected by the Portfolios for the calculation of net asset
value. 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 of a Portfolios Institutional and Administrative Class shares
may be affected significantly on days when investors do not have access to the
Portfolios.
For all Portfolios other than the 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
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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 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 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 PIMCO under procedures established by the Board of
Trustees to be of high quality with minimal credit risks.
Each Portfolio's liabilities are allocated among its classes. The total of
such liabilities allocated to a class plus that class's servicing fees and any
other expenses specially allocated to that class are then deducted from the
class's proportionate interest in the Portfolio's assets, and the resulting
amount for each class is divided by the number of shares of that class
outstanding to produce the class's "net asset value" per share. Generally, for
Portfolios that pay income dividends, those dividends are expected to differ
over time by approximately the amount of the expense accrual differential
between a particular Portfolio's classes.
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
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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.
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
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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 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 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.
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.
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<PAGE>
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.
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.
52
<PAGE>
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, PIMCO 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 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 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.
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<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.
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
54
<PAGE>
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 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.
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.
The Trust may, from time to time, include the yield and effective yield of
the 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 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 Money Market Portfolio assumes that all
dividends received during an annual period have been reinvested. Calculation of
"effective yield" begins with the
55
<PAGE>
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) (To the power of 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)(To the power of 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.
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.
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<PAGE>
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 PIMCO, 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.
For the one month period ended December 31, 1999, the yield of the
following Portfolios was as follows (all numbers are annualized):
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<PAGE>
<TABLE>
<CAPTION>
Yield for Period
Portfolio Ended December 31, 1999
- --------- -----------------------
<S> <C>
Money Market Portfolio 5.47%
Short-Term Bond Portfolio 5.33%
Low Duration Bond Portfolio 6.62%
Real Return Bond Portfolio 6.44%
Total Return Bond II Portfolio 6.02%
Total Return Bond Portfolio 6.62%
High Yield Bond Portfolio 9.30%
Long-Term U.S. Government Bond Portfolio 6.26%
Foreign Bond Portfolio 6.36%
StocksPLUS Growth and Income Portfolio 5.91%
</TABLE>
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<PAGE>
The table below sets forth the average annual total return of the following
Portfolios for the periods ended December 31, 1999.
Total Return for Periods Ended December 31, 1999
<TABLE>
<CAPTION>
Since Inception Inception
of Portfolio Date of
Portfolio (Cumulative) Portfolio
--------- --------------- ---------
<S> <C> <C>
Money Market Portfolio 1.30% 9/30/99
- ------------------------------------------------------------------------------------------
Short-Term Bond Portfolio 1.32% 9/30/99
- ------------------------------------------------------------------------------------------
Low Duration Bond Portfolio 2.56% 2/16/99
- ------------------------------------------------------------------------------------------
Real Return Bond Portfolio -0.03% 9/30/99
- ------------------------------------------------------------------------------------------
Total Return Bond Portfolio 3.91%* 12/31/97
- ------------------------------------------------------------------------------------------
Total Return II Bond Portfolio 1.41% 5/28/99
- ------------------------------------------------------------------------------------------
High Yield Bond Portfolio 4.86% 4/30/98
- ------------------------------------------------------------------------------------------
Long-Term U.S. Government Bond Portfolio -4.28% 4/30/99
- ------------------------------------------------------------------------------------------
Foreign Bond Portfolio -0.78% 2/16/99
- ------------------------------------------------------------------------------------------
StocksPLUS Growth and Income Portfolio 24.87%* 12/31/97
- ------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
For the month ended December 31, 1999, the current distribution rates
(annualized) for the following Portfolios were as follows:
<TABLE>
<CAPTION>
Distribution
Fund Rate
---- ------------
<S> <C>
Money Market Portfolio 5.30%
- ----------------------------------------------------------------------------------
Short-Term Bond Portfolio 5.66%
- ----------------------------------------------------------------------------------
Low Duration Bond Portfolio 7.92%
- ----------------------------------------------------------------------------------
Real Return Bond Portfolio 6.54%
- ----------------------------------------------------------------------------------
Total Return Bond Portfolio 6.22%
- ----------------------------------------------------------------------------------
Total Return II Bond Portfolio 5.87%
- ----------------------------------------------------------------------------------
High Yield Bond Portfolio 8.81%
- ----------------------------------------------------------------------------------
Long-Term U.S. Government Bond Portfolio 6.01%
- ----------------------------------------------------------------------------------
Foreign Bond Portfolio 6.01%
- ----------------------------------------------------------------------------------
StocksPLUS Growth and Income Portfolio N/A
- ----------------------------------------------------------------------------------
</TABLE>
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 "PIMS") or PIMCO Funds: Multi-Manager Series ("MMS")
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 current 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.
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<PAGE>
The following table shows which Fund of PIMS or MMS corresponds to each
Portfolio of the Trust:
Portfolio Fund
- --------- ----
Money Market Portfolio Money Market Fund
Short-Term Bond Portfolio Short-Term Fund
Low Duration Bond Portfolio Low Duration Fund
Real Return Bond Portfolio Real Return Bond Fund
Total Return Bond Portfolio Total Return Fund
Total Return Bond Portfolio II Total Return Fund II
High Yield Bond Portfolio High Yield Fund
Long-Term U.S. Government Bond Portfolio Long-Term U.S. Government Fund
Global Bond Portfolio Global Bond Fund
Foreign Bond Portfolio Foreign Bond Fund
Emerging Markets Bond Portfolio Emerging Markets Bond Fund
Strategic Balanced Portfolio Strategic Balanced Fund
StocksPLUS Growth and Income Portfolio StocksPLUS Fund
The yield of the Institutional Class of the Money Market Fund for the seven
day period ended December 31, 1999 was 5.75%. The effective yield of the
Institutional Class of the Money Market Fund for the seven day period ended
December 31, 1999 was 5.91%.
For the one month period ended December 31, 1999, the yield of the
Institutional Class of the Funds was as follows (all numbers are annualized):
<TABLE>
<CAPTION>
SEC Yield for Period
Fund Ended December 31, 1999
- ---- -----------------------
<S> <C>
Money Market Fund 5.69%
Short-Term Fund 5.87%
Low Duration Fund 6.67%
Real Return Bond Fund 6.60%
Total Return Fund 6.65%
Total Return Fund II 6.18%
High Yield Fund 9.46%
Long-Term U.S. Government Fund 6.11%
Global Bond Fund 6.82%
Foreign Bond Fund 6.80%
Strategic Balanced Fund 6.35%
StocksPLUS Fund 6.34%
</TABLE>
The average annual total returns of the Institutional Class shares of the
corresponding Funds of PIMS and MMS are provided in the Trust's prospectus under
the caption "Performance Information of Similar Funds."
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<PAGE>
For the month ended December 31, 1999, the current distribution rates
(annualized) for the Institutional Class shares of the following Funds were as
follows:
<TABLE>
<CAPTION>
Fund Distribution Rate
- ---- -----------------
<S> <C>
Money Market Fund 5.54%
Short-Term Fund 5.87%
Low Duration Fund 6.63%
Real Return Bond Fund 7.36%
Total Return Fund 6.45%
Total Return Fund II 5.87%
High Yield Fund 8.97%
Long-Term U.S. Government Fund 5.56%
Global Bond Fund 7.52%
Foreign Bond Fund 6.08%
Strategic Balanced Fund N/A
StocksPLUS Fund 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 1975 to 1999 was:
*Stocks: 17.3%
Bonds: 9.7%
T-Bills: 6.9%
Inflation: 4.8%
*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
1999 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 1975-1999, the average annual return of stocks comprising the Ibbotson's
Large Company Stock Total Return Index ranged from -7.2% 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 Ibbotson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -1.2% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1975
through 1999 is set forth in the following table.
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<PAGE>
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- -------- ------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
1998 28.58% 10.76% 4.86% 1.61% 16.70%
1999 21.04% -7.45% 4.68% 2.68% 5.86%
</TABLE>
*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 Large Company 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
1999 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:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
---------- ------------ ------------ -----
<S> <C> <C> <C>
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
</TABLE>
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
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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.
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 1997:
% of Income for Individuals
Aged 65 Years and Older in 1997*
--------------------------------
Year Social Security Other
- ---- and Pension Plans -----
-----------------
1997 43% 57%
* 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 PIMCO,
including descriptions of assets under management and client base, and opinions
of the author(s) regarding the skills of personnel and employees of PIMCO 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.
From time to time, the Trust may set forth in its advertisements and other
materials the names of and additional information regarding investment analysts
employed by PIMCO who assist with portfolio management and research activities
on behalf of the Portfolios. The following lists various analysts associated
with PIMCO: Jane Howe, Mark Hudoff, Doris Nakamura and Ray Kennedy.
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
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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. Shareholders of a class of shares have different voting
rights with respect to matters that affect only that class.
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).
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.
Custodian
State Street Bank and Trust Company ("State Street"), 801 Pennsylvania,
Kansas City, Missouri 64105 serves as custodian for assets of all Portfolios.
Under the custody agreement, State Street may hold the foreign securities at its
principal office at 225 Franklin Street, Boston. Massachusetts 02110, and at
State Street's branches, and subject to approval by the Board of Trustees, at a
foreign branch of a qualified U.S. bank, with an eligible foreign subcustodian,
or with an eligible foreign securities depository.
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. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Trust; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Trust assets. The Board of Trustees reviews annually the
continuance of foreign custodial arrangements for the Trust. No assurance can
be given that the Trustees' appraisal of the risks in connection with foreign
custodial arrangements will always be correct or 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
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105, serves as
independent public accountants for all Portfolios. PricewaterhouseCoopers LLP
provides audit services and consultation in connection with review of SEC and
IRS filings.
Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
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
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securities offered hereby, ertain 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 December 31, 1999 for the fiscal
year then ended, including notes thereto and the report of
PricewaterhouseCoopers LLP thereon dated February 15, 2000, are incorporated by
reference from the Trust's 1999 Annual Report.
65
