<PAGE>
As filed with the Securities and Exchange Commission on
December 9, 1999
Registration Nos. 33-
811-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [x]
ACT OF 1940
Amendment No. [ ]
(Check appropriate box or boxes)
Fixed Income SHares
(Exact name of registrant as specified in charter)
c/o PIMCO Advisory Services, 1345 Avenue of the Americas,
New York, New York 10105
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code
(212) 739-3502
_____________________________________
Stephen J. Treadway
PIMCO Funds Distributors LLC
2187 Atlantic Street
Stamford, Connecticut 06902
(Name and address of agent for service)
_____________________________________
Copy to:
J. B. Kittredge, Jr., Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
_____________________________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
_____________________________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- -------------------------------------------------------------------------------
FIXED INCOME SHARES ("FISH") PROSPECTUS
- -------------------------------------------------------------------------------
FISH: SERIES C ("SERIES C PORTFOLIO") AND SERIES M ("SERIES M PORTFOLIO")
__________ __, 2000
This Prospectus explains what you should know about each Portfolio before you
invest. Please read it carefully.
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.
FISH PORTFOLIOS PAY NO FEES TO PIMCO ADVISORY SERVICES ("PAS"), PIMCO ADVISORS
OR TO ANY OF THEIR OTHER SERVICE PROVIDERS, AND PAS HAS AGREED TO PAY ALL
EXPENSES OF THE PORTFOLIOS INDEFINITELY. SHARES OF THE PORTFOLIOS ARE
AVAILABLE ONLY TO REGISTERED INVESTMENT ADVISORS ("RIAS") WHO ARE APPROVED BY
PAS AND HAVE SEPARATELY AGREED TO PAY A FEE TO PAS. AS A RESULT, CLIENTS
INVESTING IN THE PORTFOLIOS PAY NO ADDITIONAL COSTS OR EXPENSES.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
RISK/RETURN SUMMARY
The following summaries identify the investment objective, principal
investments and strategies, principal risks, performance information and fees
and expenses of each Portfolio. A more detailed "Summary of Principal Risks"
describing principal risks of investing in a Portfolio begins on p. 4.
It is possible to lose money on investments in a Portfolio. 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.
1
- -------------------------------------------------------------------------------
FISH: SERIES C
- -------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS AND STRATEGIES
INVESTMENT OBJECTIVE
Seeks maximum total return, consistent with preservation of capital and prudent
investment management
PORTFOLIO FOCUS
Intermediate maturity fixed income securities
CREDIT QUALITY
B to Aaa; maximum 20% below Baa
AVERAGE PORTFOLIO DURATION
3-6 years
DIVIDEND FREQUENCY
Declared daily and distributed monthly
FISH: Series C seeks to achieve its investment objective by investing in a
portfolio of U.S. and foreign fixed income instruments of the following types:
o corporate debt securities, including convertible securities and corporate
commercial paper;
o inflation-indexed bonds issued by corporations;
o structured notes, including hybrid or "indexed" securities, catastrophe bonds
and loan participations;
o delayed funding loans and revolving credit facilities;
o bank certificates of deposit, fixed time deposits and bankers' acceptances;
o repurchase agreements and reverse repurchase agreements;
o debt securities issued by states or local governments and their agencies,
authorities and other instrumentalities;
o obligations of foreign governments and their subdivisions, agencies and
instrumentalities; and
o obligations of international agencies or supranational entities.
The Portfolio may invest up to 20% of its assets in high yield securities
("junk bonds") rated B or higher by Standard & Poor's Rating Service ("S&P") or
Moody's Investors Service, Inc. ("Moody's") or, if unrated, determined by the
Portfolio's investment adviser or sub-adviser to be of comparable quality. The
Portfolio may invest up to 25% 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 in instruments of any maturity, and the average
portfolio duration of this Portfolio normally varies within a three- to
six-year time frame based on the adviser's or sub-adviser's forecast for
interest rates. 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.
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. Rather than investing directly in the securities in which it
primarily invests, the Portfolio may use other investment techniques to gain
exposure to market movements related to such securities, such as entering into
a series of contracts to buy or sell such securities. The "total return" sought
by the Portfolio consists of income earned on its 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 RISKS
Among the principal risks of investing in the Portfolio, which could adversely
affect its net asset value, yield and total return, are:
o Interest Rate Risk
o Credit Risk
o Market Risk
o Foreign Investment Risk
o Derivatives Risk
o Liquidity Risk
o Management Risk
o Concentration Risk
o Currency Risk
o Leveraging Risk
o Issuer Risk
Please see "Summary of Principal Risks" for a description of these and other
principal risks of investing the Portfolio.
PERFORMANCE INFORMATION
No performance information is available for the Portfolio because it has not
yet been in operation for a full calendar year.
2
- -------------------------------------------------------------------------------
FISH: SERIES M
- -------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS AND STRATEGIES
INVESTMENT OBJECTIVE
Seeks maximum total return, consistent with preservation of capital and prudent
investment management
PORTFOLIO FOCUS
Intermediate maturity mortgage-backed securities
CREDIT QUALITY
B to Aaa; maximum 20% below Baa
AVERAGE PORTFOLIO DURATION
3-6 years
DIVIDEND FREQUENCY
Declared daily and distributed monthly
FISH: Series M seeks to achieve its investment objective by investing primarily
in a portfolio of mortgage- and other asset-backed securities, including
collateralized mortgage obligations ("CMOs").
The Portfolio may invest in instruments of any maturity, and the average
portfolio duration of this Portfolio normally varies within a three- to
six-year time frame based on the investment adviser's or sub-adviser's forecast
for interest rates.
The Portfolio may invest up to 20% of its assets in high yield mortgage-backed
securities ("junk bonds") rated B or higher by Moody's or S&P or, if unrated,
determined by the Portfolio's investment adviser or sub-adviser to be of
comparable quality.
The Portfolio may invest up to 35% of its assets in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government securities").
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. Rather than investing directly in the securities in which it
primarily invests, the Portfolio may use other investment techniques to gain
exposure to market movements related to such securities, such as entering into
a series of contracts to buy or sell such securities. The "total return" sought
by the Portfolio consists of income earned on its 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 RISKS
Among the principal risks of investing in the Portfolio, which could adversely
affect its net asset value, yield and total return, are:
o Mortgage Risk
o Interest Rate Risk
o Credit Risk
o Market Risk
o Derivatives Risk
o Liquidity Risk
o Management Risk
o Concentration Risk
o Currency Risk
o Leveraging Risk
o Issuer Risk
Please see "Summary of Principal Risks" for a description of these and other
principal risks of investing the Portfolio.
PERFORMANCE INFORMATION
No performance information is available for the Portfolio because it has not
yet been in operation for a full calendar year.
3
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 summarized 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 Portfolios, their investments and the
related risks. There is no guarantee that a Portfolio will be able to achieve
its investment objective.
INTEREST RATE RISK
As interest rates rise, the value of fixed income securities in a Portfolio's
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 RISK
A Portfolio could lose money if the issuer or guarantor of a fixed 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 YIELD RISK
Each Portfolio, through its investments in HIGH YIELD SECURITIES and UNRATED
SECURITIES of similar credit quality (commonly known as "junk 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 predominantly 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 to market for high yield
securities and reduce the Portfolio's ability to sell its high yield securities
(liquidity risk).
MARKET RISK
The market price of securities owned by a Portfolio may go up or 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.
ISSUER RISK
The value of a security may 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 and services.
LIQUIDITY RISK
Liquidity risk exists when particular investments are difficult to purchase or
sell, possibly preventing a Portfolio from selling such ILLIQUID SECURITIES at
an advantageous time or price. The Series C Portfolio's investments in FOREIGN
SECURITIES, and each of the Portfolio's investments in DERIVATIVES or
securities with substantial market and/or credit risk tend to have the greatest
exposure to liquidity risk.
DERIVATIVES RISK
Each Portfolio may use DERIVATIVES, which are financial contracts whose value
depends on, or is 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 may sometimes use derivatives as 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
may involve risks different from, or greater than, the risks associated with
investing directly in securities and other traditional investments.
4
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. In addition, a Portfolio's use of derivatives may increase the
taxes payable by shareholders.
MORTGAGE RISK
The Series M Portfolio, which purchases MORTGAGE-RELATED SECURITIES, is subject
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 the
Portfolio because it will have to reinvest that money at the lower prevailing
interest rates.
FOREIGN INVESTMENT RISK
The Series C Portfolio, which invests in part in FOREIGN FIXED INCOME
SECURITIES, may experience more rapid and extreme changes in value than a
Portfolio that invests exclusively in fixed income securities of U.S.
companies. The securities markets of many foreign countries are relatively
small, with a 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 the Portfolio's investments in a foreign
country. In the event of nationalization, expropriation or other confiscation,
the 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 the
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 MARKETS RISK
Foreign investment risk may be particularly high to the extent that the Series
C Portfolio invests in EMERGING MARKET FIXED INCOME SECURITIES of issuers 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 RISK
Because the Series C Portfolio invests directly in foreign currencies or in
securities that trade in, and receive revenues in, FOREIGN CURRENCIES, it is
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 Fund, or by the
imposition of currency controls or other political developments in the U.S. or
abroad.
CONCENTRATION RISK
Concentration of investments in a small number of issuers, industries or
foreign currencies increases risk. Each Portfolio is "non-diversified," which
means that it may invest a greater percentage of its assets in the securities
of a single issuer than "diversified" funds. 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.
LEVERAGING RISK
Each of the Portfolios may engage in transactions that give rise to a form of
leverage. Such 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, will cause
a Portfolio
5
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 securities.
SMALLER COMPANY RISK
The general risks associated with fixed income securities are particularly
pronounced for securities issued by companies with smaller market
capitalizations. These companies may have limited product lines, markets or
financial resources or they may depend on a few key employees. As a result,
they may be subject to greater levels of credit, market and issuer risk.
Securities of smaller companies may trade less frequently and in lesser
volumes than more wisely held securities and their values may fluctuate
more sharply than other securities. Companies with medium-sized market
capitalizations may have risks similar to those of smaller companies.
MANAGEMENT RISK
Each Portfolio is subject to management risk because it is an actively managed
investment portfolio. Each Portfolio's sub-adviser and each individual
portfolio manager will apply investment techniques and risk analyses in making
investment decisions for the Portfolios, but there can be no guarantee that
these will produce the desired results.
MANAGEMENT OF THE PORTFOLIOS
INVESTMENT ADVISER, SUB-ADVISER AND ADMINISTRATOR
PIMCO Advisors, L.P. serves as the investment adviser for the Portfolios.
Pacific Investment Management Company ("PIMCO") services as the sub-adviser for
the Portfolios. PAS serves as the administrator (the "Administrator") and sole
trading desk (the "Trading Desk") for purchases and redemptions of Portfolio
shares. Subject to the supervision of the Board of Trustees, PIMCO is
responsible for managing the investment activities of the Portfolios, PIMCO
Advisors, L.P. is responsible for managing the Portfolios' business affairs,
and the Administrator is responsible for other administrative matters.
PIMCO Advisors, L.P. is located at 840 Newport Center Drive, Newport Beach,
California 92660.
PIMCO is located at 840 Newport Center Drive, 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
Portfolios. As of June 30, 1999, PIMCO had approximately $172 billion in assets
under management.
The Administrator is located at 1345 Avenue of the Americas, New York, New York
10105.
ADVISORY FEES
Neither Portfolio pays any advisory or other fees.
INDIVIDUAL PORTFOLIO MANAGERS
The following individuals have primary responsibility for managing the noted
Portfolios since their inception.
PORTFOLIO
PORTFOLIO MANAGER RECENT PROFESSIONAL EXPERIENCE
- --------- ---------- ------------------------------
Series C Portfolio
Series M Portfolio
DISTRIBUTOR
The Portfolios' Distributor is PIMCO Funds Distributors LLC, a wholly owned
subsidiary of PIMCO Advisors. The Distributor, located at 2187 Atlantic Street,
Stamford, CT 06902, is a broker-dealer registered with the SEC.
PURCHASES AND REDEMPTIONS
PURCHASING SHARES
Investors may purchase Portfolio shares at the relevant net asset value ("NAV")
of that Portfolio without a sales charge or other fee.
SHARES OF THE PORTFOLIOS ARE OFFERED EXCLUSIVELY TO RIAS APPROVED BY PAS.
o TIMING OF PURCHASE ORDERS AND SHARE PRICE CALCULATIONS. A purchase order
received by PAS, the Portfolio's trading desk ("Trading Desk"), prior to 12:00
p.m., Eastern time, on a day the Portfolios are
6
open for business, provided payment has been made by wiring federal funds to
Investors Fiduciary Trust Company, the Portfolio's custodian, will be effected
at that day's NAV. An order received after 12:00 p.m., Eastern time will be
effected at the NAV determined on the next business day. The Portfolios are
"open for business" on each day the New York Stock Exchange is open for
trading. Purchase orders will be accepted only on days on which the
Portfolios are open for business.
o INITIAL INVESTMENT. RIAs may open an account by submitting an executed Client
Agreement, a copy of which is mailed to PAS at 1345 Avenue of the Americas, New
York, NY 10105.
o ADDITIONAL INVESTMENTS. RIAs may purchase additional shares of the Portfolios
only by calling the Trading Desk or placing the order via pre-arranged
electronic transmission, and wiring federal funds to the Transfer Agent.
o OTHER PURCHASE INFORMATION. Purchases of a Portfolio's shares will be made
only in full shares. Certificates for shares will not be issued. The payment
for shares to be purchased shall be wired to the Portfolio's Transfer Agent.
Before wiring federal funds, the investor must place an order via electronic
transmission or by calling the Trading Desk at 1-212-739-3535.
Each of the Portfolios, acting through the Administrator, 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, when, in the judgment of
management, such suspension or rejection is in the best interests of the
Portfolios.
An investor should invest in the Portfolios for long-term investment purposes
only. The Portfolios, acting through the Administrator, each reserve the right
to restrict purchases of Portfolio shares when a pattern of frequent purchases
and sales made in response to short-term fluctuations in share price appears
evident. Notice of any such restrictions, if any, will vary according to the
particular circumstances.
o REDEMPTION BY TELEPHONE OR ELECTRONIC TRANSMISSION. Shares can be redeemed
only through pre-arranged electronic transmission or by calling the Trading
Desk at 1-212-739-3535. RIAs should state the Portfolio from which the shares
are to be redeemed, the number or dollar amount of the shares to be redeemed
and the account number.
Each RIA authorizes the Trading Desk to act on telephone instructions from any
person representing himself to be the RIA, and reasonably believed by the
Trading Desk to be genuine. Neither the Portfolios nor the Trading Desk may be
liable for any loss, cost or expense for acting on instructions believed by the
party receiving such instructions to be genuine and in accordance with the
procedures described in this Prospectus. RIAs should realize that by electing
the telephone redemption option, they may be giving up a measure of security
that they might have if they were to redeem their shares via electronic
transmission.
There may be delays in exercising telephone redemption privileges during
periods of abnormal market activity. During periods of volatile economic or
market conditions, RIAs may wish to consider transmitting redemptions order by
electronic transmission.
o OTHER REDEMPTION INFORMATION. Redemption requests for Portfolio shares are
effected at the NAV per share next determined after receipt of a redemption
request by the Trading Desk. A redemption request received by the Transfer
Agent prior to 12:00 p.m., Eastern time, on a day the Portfolios are open for
business, is effected on that day. A redemption request received after that
time is effected on the next business day.
Redemption proceeds will be wired to the RIA within one business day after the
redemption request, but may take up to three business days. Redemption proceeds
will be sent by wire only. The Portfolios may suspend the right of redemption
or postpone the payment date at times when the New York Stock Exchange is
closed, or during certain other periods as permitted under the federal
securities laws.
Each Portfolio agrees to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the Portfolio's net assets during any 90-day period for any
one RIA. It is highly unlikely that shares would
7
ever be redeemed in kind. However, in consideration of the best interests of
the remaining investors, each Portfolio reserves the right to pay any
redemption proceeds exceeding this amount in whole or in part by a
distribution in kind of securities held by the Portfolio in lieu of cash.
When shares are redeemed in kind, the redeeming RIA 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 shares is determined by dividing
the total value of a Portfolio's investments and other assets attributable to
that Portfolio, less any liabilities, by the total number of shares outstanding
of that 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.
Investments initially valued in foreign currencies are converted to U.S.
dollars using foreign 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 foreign currencies in relation to the U.S. dollar. The value of securities
traded in foreign markets or denominated in foreign currencies may be affected
significantly on a day that the New York Stock Exchange is closed and an
investor is not able to buy or redeem shares.
Portfolio shares are valued at 12:00 p.m., Eastern time on each day that the
New York Stock Exchange and the Portfolios are open. For purposes of
calculating the NAV, information that becomes known to the Portfolios or their
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
12:00 p.m. Eastern time.
PORTFOLIO DISTRIBUTIONS
Each Portfolio distributes substantially all of its net investment income to
shareholders investing in the Portfolio in the form of dividends. An investment
in Portfolio shares begins earning dividends on the shares the day after the
Portfolio receives the related purchase payment. Dividends are paid monthly on
the last business day of the month.
In addition, each Portfolio distributes any net capital gains it earns from the
sale of portfolio securities to shareholders investing in the Portfolio no less
frequently than annually. Net short-term capital gains may be paid more
frequently.
A Portfolio's dividend and capital gain distributions will be paid only in
cash. Dividends will not reinvest.
8
TAX CONSEQUENCES
o TAXES ON PORTFOLIO DISTRIBUTIONS. A shareholder subject to U.S. federal
income tax will be subject to tax on Portfolio distributions. For federal
income tax purposes, Portfolio distributions will be taxable to the shareholder
as either ordinary income or capital gains.
Portfolio dividends (i.e., distributions of investment income) are taxable to
shareholders investing in the Portfolio as ordinary income. Federal taxes on
Portfolio distributions of gains are determined by how long the Portfolio owned
the investments that generated the gains, rather than how long a shareholder
has owned the shares. Distributions of gains from investments that a Portfolio
owned for more than 12 months will generally be taxable to shareholders as
capital gains. Distributions of gains from investments that the Portfolio owned
for 12 months or less will generally be taxable as ordinary income.
Portfolio distributions are taxable to shareholders even if they are paid from
income or gains earned by a Portfolio prior to the shareholder's investment and
thus were included in the price paid for the shares. For example, a shareholder
who purchases shares on or just before the record date of a Portfolio
distribution will pay full price for the shares and may receive a portion of
his or her investment back as a taxable distribution.
A Portfolio's investment in certain debt obligations (including obligations
issued with market discount, zero-coupon bonds, pay-in-kind securities,
catastrophe bonds, and metal-indexed notes) may cause the
Portfolio to recognize taxable income in excess of the cash generated by
such obligations. Thus, the Portfolio could be required at times to
liquidate other investments in order to distribute all of its net income
and gain annually.
The Series C Portfolio's investment in foreign securities may be subject to
foreign withholding taxes. In that case, the Portfolio's yield on these
securities would be decreased. Shareholders generally will not be entitled to
claim a credit or deduction with respect to foreign taxes. In addition, the
Portfolio's investment in foreign securities or foreign currencies may
increase or accelerate the Portfolio's recognition of ordinary income and may
affect the timing or amount of the Portfolio's distributions.
o TAXES ON REDEMPTION OF SHARES. Any gain resulting from the sale of Portfolio
shares will generally be subject to federal income tax.
This section relates only to federal income tax; the consequences under other
tax laws may differ. Shareholders should consult their tax advisors as to the
possible application of foreign, state and local income tax laws to Portfolio
dividends and capital distributions. Please see the Statement of Additional
Information for additional information regarding the tax aspects of investing
in the Portfolios.
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 "Summary
Information" 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 Portfolio, 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 SELECTION
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
9
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. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. 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 include zero coupon securities,
which tend to be subject to greater market risk than interest-paying securities
of similar maturities.
CORPORATE DEBT SECURITIES
Corporate debt securities are subject to the risk of the issuer's inability to
meet principal and interest payments on the obligation and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness 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.
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. Each Portfolio may invest in floating
rate debt instruments ("floaters") and engage in 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 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 15% of its net assets in any combination of inverse floater,
interest only, or principal only securities.
FOREIGN SECURITIES
Investing in foreign securities involves special risks and considerations not
typically associated with investing in U.S. securities. RIAs should consider
carefully the substantial risks involved for the Series C Portfolio, which
invests 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.
The Series M Portfolio 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.
10
EMERGING MARKET SECURITIES. The Series C Portfolio may invest up to 15% of its
assets in securities of issuers based in developing (or "emerging market")
countries. 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 and 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 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.
The Series C Portfolio 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 the 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 CURRENCIES
The Series C Portfolio, which may that invest directly in foreign currencies or
in securities that trade in, or receive revenues in, foreign currencies, is
subject to currency risk. Foreign currency 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, significant uncertainty
surrounds the recent introduction of the euro (a common currency unit for the
European Union) in January 1999 and the effect it may have on the value of
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. The Series C Portfolio 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 the Portfolio's exposure to changes in the value of the currency it
will deliver and increases its exposure to changes in the value of the currency
it will receive for the duration of the contract. The effect on the value of
the 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. The 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 the 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. The
Portfolio may use one currency (or a basket of currencies) to hedge against
adverse changes in the value of another currency (or basket of currencies) when
exchange rates between the two currencies are positively correlated. The
Portfolio will segregate assets determined to
11
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.
HIGH YIELD SECURITIES
Securities rated lower than Baa by Moody's Investors Service, Inc. ("Moody's")
or lower than BBB by Standard & Poor's Ratings 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 predominantly
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 the Prospectus 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.
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.
INFLATION-INDEXED BONDS
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of 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.
DERIVATIVES
Each 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 objectives 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
12
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, 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 (taxed at ordinary income tax rates
when distributed) than if the Portfolio had not used such instruments.
CONVERTIBLE SECURITIES
Each Portfolio may invest in convertible securities. Convertible securities are
generally preferred stocks and other securities, including fixed income
securities and warrants, that are 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
13
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.
While the Portfolios intend to invest primarily in fixed income securities,
each may invest in convertible securities or equity securities. While some
countries or companies may be regarded as favorable investments, pure fixed
income opportunities may be unattractive or limited due to insufficient supply,
or legal or technical restrictions. In such cases, a Portfolio may consider
equity securities or convertible securities to gain exposure to such
investments.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Series M Portfolio invests primarily in mortgage- or other asset-backed
securities. Mortgage-related securities include mortgage pass-through
securities, collateralized mortgage obligations ("CMOs"), commercial
mortgage-backed securities, mortgage dollar rolls, stripped 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.
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 the 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 the Portfolio's yield
to maturity from these securities. The Portfolio may not invest more than 5% of
its net assets in any combination of IO, PO, or inverse floater securities. The
Portfolio may invest in other asset-backed securities that have been offered to
investors.
MUNICIPAL BONDS
Municipal bonds are generally issued by state and local governments and their
agencies, authorities and other instrumentalities. 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.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Series C Portfolio may invest in fixed- and floating-rate loans, which
investments generally will be in the form of loan participations and
assignments of portions of such loans. Participations and assignments involve
special types of risk, including credit risk, interest rate risk, liquidity
risk, and the risks of being a lender. If the 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.
DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES
The Series C Portfolio may also enter into, or acquire participations in,
delayed Funding loans and revolving credit facilities, in which a lender agrees
to make loans up to a maximum amount upon demand by the borrower during a
specified term. These commitments may have the effect of requiring the
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 the Portfolio is committed to advance additional Portfolios, 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.
14
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 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.
SHORT SALES
Each Portfolio may make short sales as part of its overall 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. For these purposes, a Portfolio may also hold
or have the right to acquire securities which, without the payment of any
further consideration, are convertible into or exchangeable for the securities
sold short. 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 (other than a "short sale against
the box") 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.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
Each Portfolio may purchase securities which it is eligible to purchase on a
when-issued basis, may purchase and sell such securities for delayed delivery
and may make contracts to purchase such securities for a fixed price at a
future date beyond normal settlement time (forward commitments). When-issued
transactions, delayed delivery purchases and forward commitments involve a risk
of loss if the value of the securities declines prior to the settlement date.
This risk is in addition to the risk that the Portfolio's other assets will
decline in 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.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements, in which the Portfolio
purchases a security from a bank or broker-dealer that 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.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS AND OTHER BORROWINGS
Each Portfolio may enter into reverse repurchase agreements and dollar rolls,
subject to the Portfolio's limitations on borrowings. A reverse repurchase
agreement or dollar roll involves the sale of a security by a Portfolio and its
agreement to repurchase the instrument at a specified time and price, and may
be considered a form of borrowing for some purposes. A 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 reverse
repurchase agreements. A Portfolio also may borrow money for investment
purposes subject to any policies of the Portfolio currently described in this
Prospectus or in the Statement of Additional Information. Reverse repurchase
agreements, dollar rolls and other forms of borrowings may create leveraging
risk for a Portfolio.
CATASTROPHE BONDS
Each Portfolio may invest in "catastrophe bonds," which are fixed income
securities for which the return of principal and payment of interest is
contingent on the non-occurrence of a specific "trigger" catastrophic event,
such as a hurricane or an earthquake. If a trigger event occurs, a Portfolio
may lose a portion or all of its principal invested in the bond. Catastrophe
bonds often provide for an extension of maturity to process and audit loss
claims where a trigger event has, or possibly has, occurred. An extension of
maturity may increase volatility. Catastrophe bonds may also expose the
Portfolio to certain unanticipated risks including credit risk, adverse
regulatory or jurisdictional interpretations, and adverse tax consequences.
Catastrophe bonds may also be subject to liquidity risk.
PORTFOLIO TURNOVER
The length of time a Portfolio has held a particular security is 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
15
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 taxed at ordinary income tax
rates when distributed). The trading costs and tax effects associated with
portfolio turnover may adversely affect a Portfolio's performance.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% 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.
INVESTMENT IN OTHER INVESTMENT COMPANIES
Each Portfolio may invest up to 10% of its assets in securities of other
investment companies, such as closed-end management investment companies, or in
pooled accounts or other investment vehicles which invest in foreign markets.
As a shareholder of an investment company, a Portfolio may indirectly bear
service and other fees which are in addition to the fees the Portfolio pays its
service providers.
TEMPORARY DEFENSIVE STRATEGIES
For temporary or defensive purposes, each Portfolio may invest without limit in
U.S. debt securities, including 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 IN INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio may be changed by the Board of
Trustees without the approval of the RIAs investing in the Portfolio. Unless
otherwise stated, all other investment policies of the Portfolios may be
changed by the Board of Trustees without the approval of the RIAs investing in
the Portfolios.
PERCENTAGE INVESTMENT LIMITATIONS
Unless otherwise stated, all percentage limitations on Portfolio investments
listed in this Prospectus will apply at the time of investment. A Portfolio
would not violate these limitations unless an excess or deficiency were to
occur or exist immediately after and as a result of an investment.
OTHER INVESTMENTS AND TECHNIQUES
The Portfolios may invest in other types of securities and use a variety of
investment techniques and strategies which are not described in this
Prospectus. These securities and techniques may 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.
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
A Portfolio's investments may range in quality from securities 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. The following
terms are generally used to describe the credit quality of fixed income
securities.
HIGH QUALITY DEBT SECURITIES are those rated in one of the two highest rating
categories (the highest category for commercial paper) or, if unrated, deemed
comparable by PIMCO.
16
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 predominately 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 INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicated a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
17
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries, high rates of return
on funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS SERVICES
CORPORATE MUNICIPAL BOND RATINGS
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions that debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
18
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 is also 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 is
also 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 subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from A for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
19
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 a short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished
to S&P by the issuer or obtained from other sources it considers reliable. S&P
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.
20
FISH: SERIES C AND SERIES M
INVESTMENT ADVISER
PIMCO Advisors, L.P. , 840 Newport Center Drive, Newport Beach, CA 92660
INVESTMENT SUB-ADVISER
Pacific Investment Management Company, 840 Newport Center Drive, Suite 300,
Newport Beach, CA 92660
ADMINISTRATOR/TRADING DESK
PIMCO Advisory Services, 1345 Avenue of the Americas, New York, NY 10105
CUSTODIAN
Investors Fiduciary Trust Company, 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
Ropes & Gray, One International Place, Boston, MA 02110
The Portfolios' Statement of Additional Information ("SAI") includes additional
information about the Portfolios. The SAI is incorporated by reference into
this Prospectus, which means it is part of this Prospectus for legal purposes.
You may get free copies of the SAI, request other information about a
Portfolio, or make inquiries by calling the Administrator at
1-212-739-3535.
You may review and copy information about the Portfolios, including their 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 Portfolios 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. 20549-6009. You may need to refer to the Portfolios' file
number under the Investment Company Act, which is 811-______.
21
- -------------------------------------------------------------------------------
FIXED INCOME SHARES
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER ___, 1999
_______________________________________________________________________________
This Statement of Additional Information is not a prospectus, and should be
read in conjunction with the prospectus of Fixed Income SHares (the "Trust"),
as supplemented from time to time. Through one Prospectus, dated November __,
1999, the Trust offers two series of shares: FISH: Series C and FISH: Series M
(each a "Portfolio").
Copies of the Prospectus, which is incorporated by reference (legally a part
of) into this Statement of Additional Information, may be obtained free of
charge at the following address and telephone number:
PIMCO Advisory Services
1345 Avenue of the Americas
New York, New York 10105
1-212-739-3535
TABLE OF CONTENTS
PAGE
THE TRUST 1
INVESTMENT OBJECTIVES AND POLICIES 1
U.S. Government Securities 1
Borrowing 1
[Preferred Stock 2]
Corporate Debt Securities 2
High Yield Securities ("Junk Bonds") 3
Loan Participations and Assignments 4
Participation on Creditors Committees 4
Variable and Floating Rate Securities 5
Mortgage-Related and Asset-Backed Securities 5
Convertible Securities 9
[Equity-Linked Securities 10]
Foreign Securities 10
Foreign Currencies 12
Bank Obligations 13
Commercial Paper 14
Money Market Instruments 14
Derivative Instruments 14
When-Issued, Delayed Delivery and Forward Commitment Transactions 22
Warrants to Purchase Securities 22
Repurchase Agreements 22
Securities Loans 23
[Stocks of Small and Medium Capitalization Companies 23]
Illiquid Securities 24
Inflation-Indexed Bonds 24
Delayed Funding Loans and Revolving Credit Facilities 25
Catastrophe Bonds 25
Hybrid Instruments 26
Precious Metals and Metal-Indexed Notes 26
INVESTMENT RESTRICTIONS 27
Fundamental Investment Restrictions 27
Non-Fundamental Investment Restrictions 29
MANAGEMENT OF THE TRUST 29
Trustees and Officers 29
Trustees' Compensation 32
Investment Adviser 33
Portfolio Management Agreements 34
Portfolio Administrator 35
PORTFOLIO TRANSACTIONS AND BROKERAGE 35
Investment Decisions and Portfolio Transactions 35
Brokerage and Research Services 35
Portfolio Turnover 37
i
NET ASSET VALUE 37
TAXATION 38
Distributions 39
Sales of Shares 40
Backup Withholding 41
Options, Futures, Forward Contracts and Swap Agreements 41
Passive Foreign Investment Companies 41
Foreign Currency Transactions 41
Foreign Taxation 42
Original Issue Discount and Pay-In-Kind Securities 42
Other Taxation 43
OTHER INFORMATION 43
Capitalization 44
Performance Information 44
Calculation of Yield 45
Calculation of Total Return 45
Potential College Cost Table 52
[Year 2000 Readiness Disclosure 55]
Compliance Efforts Related to the Euro 56
Voting Rights 56
Certain Ownership of Trust Shares 56
Custodian 57
Independent Accountants 57
Transfer Agent 58
Legal Counsel 58
Registration Statement 58
ii
THE TRUST
Fixed Income SHares (the "Trust"), is an open-end management investment company
("mutual fund") that currently consists of two separate diversified investment
portfolios, the Series C Portfolio and the Series M Portfolio.
The Trust was organized as a Massachusetts business trust on November 3, 1999.
INVESTMENT OBJECTIVES AND POLICIES
In addition to the principal investment strategies and the principal risks of
the Portfolios described in the Prospectus, each Portfolio may employ other
investment practices and may be subject to additional risks which are described
below. Certain strategies and/or risks described below may not apply to each
Portfolio. Unless a strategy or policy described below is specifically
prohibited by the investment restrictions listed in the Prospectus, by the
investment restrictions under "Investment Restrictions" in this Statement of
Additional Information, or by applicable law, a Portfolio may engage in each of
the practices described below.
The Portfolios' sub-adviser, which is responsible for making investment
decisions for the Portfolios, is referred to in this section and the remainder
of this Statement of Additional Information as the "Sub-Adviser."
[U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or 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 include securities
that have no coupons, or have been stripped of their unmatured interest
coupons, individual interest coupons from such securities that trade
separately, and evidences of receipt of such securities. Such securities may
pay no cash income, and are purchased at a deep discount from their value at
maturity. Because interest on zero coupon securities is not distributed on a
current basis but is, in effect, compounded, zero coupon securities tend to be
subject to greater market risk than interest-paying securities of similar
maturities. Custodial receipts issued in connection with so-called trademark
zero coupon securities, such as CATs and TIGRs, are not issued by the U.S.
Treasury, and are therefore not U.S. Government securities, although the
underlying bond represented by such receipt is a debt obligation of the U.S.
Treasury. Other zero coupon Treasury securities (e.g., STRIPs and CUBEs) are
direct obligations of the U.S. Government.]
BORROWING
Subject to the limitations described under "Investment Restrictions" below,
each Portfolio may be permitted to borrow for temporary purposes and/or for
investment purposes. Such a practice will result in leveraging of a
Portfolio's assets and may cause a Portfolio to liquidate positions when it
would not be advantageous to do so. This borrowing may be unsecured.
Provisions of the Investment Company Act of 1940, as amended ("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. As
noted under "Investment Restrictions," the Portfolios are subject to
limitations on borrowings which are more strict than those imposed by the 1940
Act. Any borrowings for temporary administrative purposes in excess of 5% of
the Portfolio's total assets will require the Portfolio to maintain continuous
asset coverage. If the 300% asset coverage should decline as a result of
market
1
fluctuations or other reasons, a Portfolio may be required to sell some
of its holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint
to sell securities at that time. Borrowing will tend to exaggerate the effect
on net asset value of any increaseor decrease in the market value of a
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.
From time to time, the Trust may enter into, and make borrowings for temporary
purposes related to the redemption of shares under, a credit agreement with
third-party lenders. Borrowings made under such a credit agreement will be
allocated between the Portfolios pursuant to guidelines approved by the Board
of Trustees.
In addition to borrowing for temporary purposes, a Portfolio may enter into
reverse repurchase agreements if permitted to do so under its investment
restrictions. 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. The Portfolio will
segregate assets determined to be liquid by the Adviser or the Portfolio's
Sub-Adviser in accordance with procedures established by the Board of Trustees
and equal (on a daily mark-to-market basis) to its obligations under reverse
repurchase agreements with broker-dealers (but not banks). 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. Reverse
repurchase agreements will be subject to the Portfolios' limitations on
borrowings as specified under "Investment Restrictions" below.
[PREFERRED STOCK
Each Portfolio may invest in preferred stock. Preferred stock is a form of
equity ownership in a corporation. The dividend on a preferred stock is a
fixed payment which the corporation is not legally bound to pay. Certain
classes of preferred stock are convertible, meaning the preferred stock is
convertible into shares of common stock of the issuer. By holding convertible
preferred stock, a Portfolio can receive a steady stream of dividends and still
have the option to convert the preferred stock to common stock.]
CORPORATE DEBT SECURITIES
Each Portfolio may invest in corporate debt securities and/or hold their assets
in these securities for cash management purposes. The investment return of
corporate debt securities reflects interest earnings and changes in the market
value of the security. The market value of a corporate debt obligation may be
expected to rise and fall inversely with interest rates generally. There also
exists the risk that the issuers of the securities may not be able to meet
their obligations on interest or principal payments at the time called for by
an instrument.
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
deemed to be comparable in quality to corporate debt securities in which the
Portfolio may invest. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies.
Among the corporate debt securities in which the Portfolios may invest are
convertible securities. A convertible debt security is a bond, debenture,
note, or other security that entitles the holder to acquire common stock or
other equity securities of the same or a different issuer. 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
2
securities rank senior to common stock in a corporation's capital structure
and, therefore, generally entail less risk than the corporation's common stock.
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.
HIGH YIELD SECURITIES ("JUNK BONDS")
Each of the Portfolios may invest in debt/fixed income securities of domestic
or foreign issuers that meet minimum ratings criteria set forth for a
Portfolio, or, if unrated, are of comparable quality in the opinion of the
Portfolio's Sub-Adviser. A description of the ratings categories used is set
forth in the Prospectus.
A security is considered to be below "investment grade" quality if it is either
(1) not rated in one of the four highest rating categories by one of the
Nationally Recognized Statistical Rating Organizations ("NRSROs") (i.e., rated
Ba or below by Moody's Investors Service, Inc. ("Moody's") or BB or below by
Standard & Poor's Ratings Services ("S&P")) or (2) if unrated, determined by
the Sub-Adviser to be of comparable quality to obligations so rated.
Investment in high yield securities generally provides greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but it also typically entails greater price volatility as
well as principal and income risk. High yield securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The market for these securities is
relatively new, and many of the outstanding high yield securities have not
endured a major business recession. A long-term track record on default rates,
such as that for investment grade corporate bonds, does not exist for this
market. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt/fixed income
securities. Each Portfolio of the Trust may continue to hold such securities
following a decline in their rating if in the opinion of the Adviser or the
Sub-Adviser, as the case may be, it would be advantageous to do so.
Investments in high yield securities that are eligible for purchase by the
Portfolios are described as "speculative" by both Moody's and S&P.
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 than investments in higher rated debt securities, high yield
securities typically entail greater potential price volatility and may be less
liquid than investment grade debt. High yield securities may be regarded as
predominantely speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and achievement of a Portfolio's investment objective
may, to the extent of its investments in high yield securities, depend more
heavily on the Sub-Adviser's creditworthiness analysis than would be the case
if the Portfolio were investing in higher quality 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 are likely to be 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/fixed income 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. Even though such securities do not pay current interest in cash, a
Portfolio
3
nonetheless is required to accrue interest income on these investments and to
distribute the interest income on a current basis. Thus, a Portfolio could be
required at times to liquidate other investments in order to satisfy its
distribution requirements.
Prices of high yield/high risk securities have been found to be less sensitive
to interest rate changes than more highly rated investments, but more sensitive
to economic downturns or individual corporate developments. 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. Lower liquidity in secondary markets could adversely affect the
value of high yield/high risk securities held by the Portfolios. While lower
rated securities typically are less sensitive to interest rate changes than
higher rated securities, the market prices of high yield/high risk securities
structured as "zero coupon" or "pay-in-kind" securities may be affected to a
greater extent by interest rate changes. See the Prospectus for further
information regarding high yield/high risk securities. For instance, 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.
Debt securities are purchased and sold principally in response to current
assessments of future changes in business conditions and the levels of interest
rates on debt/fixed income securities of varying maturities, the availability
of new investment opportunities at higher relative yields, and current
evaluations of an issuer's continuing ability to meet its obligations in the
future. The average maturity or duration of the debt/fixed income securities
in a Portfolio's portfolio may vary in response to anticipated changes in
interest rates and to other economic factors. Securities may be bought and
sold in anticipation of a decline or a rise in market interest rates. In
addition, a Portfolio may sell a security and purchase another of comparable
quality and maturity (usually, but not always, of a different issuer) at
approximately the same time to take advantage of what are believed to be
short-term differentials in values or yields.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Each Portfolio may invest in fixed- and floating-rate loans arranged through
private negotiations between an issuer of debt instruments and one or more
financial institutions ("lenders"). Generally, a Portfolio's investments in
loans are expected to take the form of loan participations and assignments of
portions of loans from third parties.
Large loans to corporations or governments may be shared or syndicated among
several lenders, usually banks. A Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender.
Participations and assignments involve special types of risk, including
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. In
assignments, a Portfolio's rights against the borrower may be more limited than
those held by the original lender.
PARTICIPATION ON CREDITORS COMMITTEES
A 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 the Portfolio an "insider" of the issuer for
purposes of the federal securities laws, and therefore may restrict the
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 would participate on such committees only when the
Adviser and the Sub-
4
Adviser believe that such participation is necessary or desirable to enforce
the Portfolio's rights as a creditor or to protect the value of securities held
by the Portfolio.
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The
adjustment intervals may be regular, and range from daily up to annually, or
may be event based, such as based on a change in the prime rate.
The Portfolios may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or U.S. Treasury bill rate. The interest
rate on a floater resets periodically, typically every six months. Because of
the interest rate reset feature, floaters provide a Portfolio with a certain
degree of protection against rises in interest rates, but generally do not
allow the Portfolio to participate fully in appreciation resulting from any
general decline in interest rates.
Each Portfolio 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 generally will exhibit
greater price volatility than a fixed rate obligation of similar credit
quality. See "Mortgage-Related and Asset-Backed Securities" below.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
The Portfolios may invest in mortgage-related securities, and in other
asset-backed securities (unrelated to mortgage loans) that are offered to
investors currently or in the future. 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. The value of some mortgage-related or asset-backed
securities in which the Portfolios invest may be particularly sensitive to
changes in prevailing interest rates, and, like other fixed income investments,
the ability of a Portfolio to successfully utilize these instruments may
depending part upon the ability of the Sub-Adviser to forecast interest rates
and other economic factors correctly. See "Mortgage Pass-Through Securities"
below. Certain debt securities are also secured with collateral consisting of
mortgage-related securities. See "Collateralized Mortgage Obligations" below.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage Pass-Through Securities are
securities representing interests in ''pools'' of mortgage loans secured by
residential or commercial real property. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association
("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. Early repayment of principal on some
mortgage-related securities (arising from prepayments of principal due to sale
of the underlying property, refinancing, or foreclosure, net of fees and costs
which may be incurred) may expose a Portfolio to a lower rate of return upon
reinvestment of principal. Also, if a
5
security subject to prepayment has been purchased at a premium, the value of
the premium would be lost in the event of prepayment. Like other fixed income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value
of mortgage-related securities with prepayment features may not increase as
much as other fixed income securities. To the extent that unanticipated rates
of prepayment on underlying mortgages increase the effective maturity of a
mortgage-related security, the volatility of such security can be expected to
increase.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the GNMA) or guaranteed by agencies or instrumentalities of the
U.S. Government (in the case of securities guaranteed by the Federal National
Mortgage Association (''FNMA'') or the Federal Home Loan Mortgage Corporation
(''FHLMC''). The principal governmental guarantor of mortgage-related
securities is the GNMA. GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. 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 U.S. Government) include the FNMA and the 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/services 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 U.S. Government. Instead, they are supported only by
the discretionary authority of the U.S. Government to purchase the agency's
obligations.
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 U.S. Government. Instead, they are supported only
by the discretionary authority of the U.S. Government to purchase the agency's
obligations.
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 services 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. A
Portfolio may buy mortgage-related securities without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Sub-Adviser determines that the
securities meet the Portfolio's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. A Portfolio will not
purchase mortgage-related securities or any other assets which in the
Sub-Adviser's opinion are illiquid if, as a
6
result, more than 15% of the value of the Portfolio's net assets (taken at
market value at the time of investment) will be invested in illiquid securities.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to a Portfolio's
industry concentration restrictions, see "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. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. 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 begin to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government securities by
a Portfolio, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Portfolio's diversification tests.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each semi-annual 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
7
allocated to the retirement of the individual classes of bonds in the order of
their stated maturities. Payment of principal on the mortgage loans in the
collateral pool in excess of the amount of FHLMC's minimum sinking fund
obligation for any payment date are paid to the holders of the CMOs as
additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired
in advance of its scheduled maturity date.
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. 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 stripped mortgage-backed securities. 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.
STRIPPED MORTGAGE-BACKED 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 "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,
the 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.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
developed fairly recently. 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.
8
OTHER ASSET-BACKED SECURITIES. Similarly, the Adviser and Sub-Adviser expect
that other asset-backed securities (unrelated to mortgage loans) will be
offered to investors in the future and may be purchased by the Portfolios.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust whose assets consist
of a pool of motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interest on CARSSM are passed through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARSSM may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If
the letter of credit is exhausted, the trust may be prevented from realizing
the full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with a Portfolio's investment objectives and policies, the Adviser
and Sub-Adviser also may invest in other types of asset-backed securities.
CONVERTIBLE SECURITIES
Each Portfolio may invest in convertible securities. The Portfolios'
Sub-Adviser will select convertible securities to be purchased by the Portfolio
based primarily upon its evaluation of the fundamental investment
characteristics and growth prospects of the issuer of the security. As a fixed
income security, a convertible security tends to increase in market value when
interest rates decline and to decrease in value when interest rates rise. While
convertible securities generally offer lower interest or dividend yields than
non-convertible fixed income securities of similar quality, their value tends
to increase as the market value of the underlying stock increases and to
decrease when the value of the underlying stock decreases.
The Portfolios may invest in so-called ''synthetic convertible securities,''
which are composed of two or more different securities whose investment
characteristics, taken together, resemble those of convertible securities. For
example, the Portfolios may purchase a non-convertible debt security and a
warrant or option. The synthetic convertible differs from the true convertible
security in several respects. Unlike a true convertible security, which is a
single security having a unitary market value, a synthetic convertible
comprises two or more separate securities, each with its own market value.
Therefore, the ''market value'' of a synthetic convertible is the sum of the
values of its fixed income component and its convertible component. For this
reason, the values of a synthetic convertible and a true convertible security
may respond differently to market fluctuations.
[EQUITY-LINKED SECURITIES
Each Portfolio may invest up to [____]% of its net assets in equity-linked
securities. Equity-linked securities are privately issued securities whose
investment results are designed to correspond generally to the performance of a
specified stock index or "basket" of stocks, or sometimes a single stock. To
the extent that a Portfolio invests in an equity-linked security whose return
corresponds to the performance of a foreign securities index or one or more
foreign stocks, investing in equity-linked securities will involve risks
similar to the risks of investing in foreign equity securities. See "Foreign
Securities" in this Statement of Additional Information. In addition, the
Portfolios bear the risk that the issuer of an equity-linked security may
default on its obligations under the security. Equity-linked securities may be
considered illiquid and thus subject to the Portfolios' restrictions on
investments in illiquid securities.]
9
FOREIGN SECURITIES
The Series C Portfolio may invest in U.S. dollar or foreign
currency-denominated corporate debt securities of foreign issuers; foreign
equity securities, including preferred securities of foreign issuers; certain
foreign 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 Series C Portfolio may invest in American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") or Global Depository Receipts ("GDRs").
ADRs are dollar-denominated receipts issued generally by domestic banks and
represent the deposit with the bank of a security of a foreign issuer. EDRs
are foreign currency-denominated receipts similar to ADRs and are issued and
traded in Europe, and are publicly traded on exchanges or over-the-counter in
the United States. GDRs may be offered privately in the United States and also
trade in public or private markets in other countries. ADRs, EDRs and GDRs may
be issued as sponsored or unsponsored programs. In sponsored programs, an
issuer has made arrangements to have its securities trade in the form of ADRs,
EDRs or GDRs. In unsponsored programs, the issuer may not be directly involved
in the creation of the program. Although regulatory requirements with respect
to sponsored and unsponsored programs are generally similar, in some cases it
may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies.
These include: differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, 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. Changes in foreign exchange
rates will affect the value of those securities which are denominated or
quoted in currencies other than the U.S. dollar.
The risks of investing in foreign securities are particularly high when
securities of issuers based in developing (or ''emerging market'') countries
are involved. Investing in emerging market countries involves certain risks
not typically associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: greater risks of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; greater social, economic and
political uncertainty and instability (including the risk of war); more
substantial government involvement in the economy; less government supervision
and regulation of the securities markets and participants in those markets;
controls on foreign investment and limitations on repatriation of invested
capital and on the Portfolio's ability to exchange local currencies for U.S.
dollars; unavailability of currency hedging techniques in certain emerging
market countries; the fact that companies in emerging market countries may be
smaller, less seasoned and newly organized 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 greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets. In
addition, a number of emerging market countries restrict, to various degrees,
foreign investment in securities, and high rates of 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. Also, any change in the leadership or politics of emerging market
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.
10
A Series C 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.
SPECIAL RISKS OF INVESTING IN RUSSIAN AND OTHER EASTERN EUROPEAN SECURITIES.
The Series C Portfolio may invest its assets in securities of issuers located
in Russia and in other Eastern European countries. The political, legal and
operational risks of investing in the securities of Russian and other Eastern
European issuers, and of having assets custodied within these countries, may be
particularly acute. Investments in Eastern European countries may involve
acute risks of nationalization, expropriation and confiscatory taxation. The
communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. Also, certain Eastern European countries, which do not
have market economies, are characterized by an absence of developed legal
structures governing private and foreign investments and private property.
In addition, governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of a
Portfolio's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Portfolio's cash and securities, the
Portfolio's investment in such countries may be limited or may be required to
be effected through intermediaries. The risk of loss through governmental
confiscation may be increased in such circumstances.
Investments in securities of Russian issuers may involve a particularly high
degree of risk and special considerations not typically associated with
investing in U.S. and other more developed markets, many of which stem from
Russia's continuing political and economic instability and the slow-paced
development of its market economy. Investments in Russian securities should be
considered highly speculative. Such risks and special considerations include:
(a) delays in settling portfolio transactions and the risk of loss arising out
of Russia's system of share registration and custody (see below); (b)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (c) difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information; (d) the general financial condition of Russian
companies, which may involve particularly large amounts of inter-company
debt; and (e) the risk that the Russian tax system will not be reformed to
prevent inconsistent, retroactive and/or exorbitant taxation or, in the
alternative, the risk that a reformed tax system may result in the inconsistent
and unpredictable enforcement of the new tax laws. Also, there is the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented
since the dissolution of the Soviet Union and could follow radically
different political and/or economic policies to the detriment of investors,
including non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors, a return to the
centrally planned economy that existed prior to the dissolution of the
Soviet Union, or the nationalization of privatized enterprises.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of companies is normally
recorded. Ownership of shares (except where shares are held through
depositories that meet the requirements of the 1940 Act) is defined according
to entries in the company's share register and normally evidenced by "share
extracts" from the register or, in certain limited circumstances, by formal
share certificates. However, there is no central registration system for
shareholders and these services are carried out by the companies themselves or
by registrars located throughout Russia. The share registrars are controlled
by the issuer of the securities, and investors are provided with few legal
rights against such registrars. These registrars are not necessarily subject
to effective state supervision nor are they licensed with any governmental
entity. It is possible for the Portfolio to lose its registration through
fraud, negligence or even mere oversight. While the Portfolio will endeavor to
ensure that its interest continues to be appropriately recorded, which may
involve a custodian or other agent inspecting the share register and obtaining
extracts of share registers through regular confirmations, these extracts have
no legal enforceability and it is possible that subsequent illegal amendment or
other
11
fraudulent act may deprive the Portfolio of its ownership rights or
improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration.
Also, although a Russian public enterprise with more than 500 shareholders is
required by law to contract out the maintenance of its shareholder register to
an independent entity that meets certain criteria, this regulation has not
always been strictly enforced in practice. Because of this lack of
independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the
Portfolio from investing in the securities of certain Russian companies deemed
suitable by the Portfolio's Sub-Adviser. Further, this also could cause a
delay in the sale of Russian securities held by the Portfolio if a potential
purchaser is deemed unsuitable, which may expose the Portfolio to potential
loss on the investment.
FOREIGN CURRENCIES
The Series C Portfolio may enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. In
addition, the Portfolio may buy and sell foreign currency futures contracts and
options on foreign currencies and foreign currency futures.
A forward foreign currency exchange contract 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. By entering into a forward foreign currency
exchange contract, the Portfolio "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration of
the contract. As a result, the Portfolio reduces its exposure to changes in
the value of the currency it will deliver and increases its exposure to changes
in the value of the currency it will exchange into. Contracts to sell foreign
currencies would limit any potential gain which might be realized by the
Portfolio if the value of the hedged currency increases. The Portfolio may
enter into these contracts for the purpose of hedging against foreign exchange
risks arising from the Portfolios' investment or anticipated investment in
securities denominated in foreign currencies. Suitable hedging transactions
may not be available in all circumstances. Also, such hedging transactions
may not be successful and may eliminate any chance for the Portfolio to
benefit from favorable fluctuations inrelevant foreign currencies.
The Series C Portfolio may also enter into forward foreign currency exchange
contracts for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one currency to another. To the
extent that it does so, the Portfolio will be subject to the additional risk
that the relative value of currencies will be different than anticipated by the
Portfolio's Sub-Adviser. The 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 the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees to cover forward currency contracts
entered into for non-hedging purposes. The Portfolio may also use foreign
currency futures contracts and related options on currencies for the same
reasons for which forward foreign currency exchange contracts are used.
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
12
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 (taken at market value at the time of investment) would be invested in
such deposits, repurchase agreements maturing in more than seven days and other
illiquid assets. Each Portfolio may also hold funds on deposit with its
sub-custodian bank in an interest-bearing account for temporary purposes.
Each Portfolio limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of
the Federal Reserve System or are examined by the Comptroller of the Currency
or whose deposits are insured by the Federal Deposit Insurance Corporation. A
Portfolio also may invest in certificates of deposit of savings and loan
associations (federally or state chartered and federally insured) having total
assets in excess of $1 billion.
The Portfolios limit their investments in foreign bank obligations to
obligations of foreign banks (including United States branches of foreign
banks) which at the time of investment (i) have more than $10 billion, or the
equivalent in other currencies, in total assets; (ii) are among the 75 largest
foreign banks in the world in terms of total assets; (iii) have branches or
agencies (limited purpose offices which do not offer all banking services) in
the United States; and (iv) in the opinion of the Sub-Adviser, are of an
investment quality comparable to obligations of United States banks in which
the Portfolios may invest. Subject to each Portfolio'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 above.
Obligations of foreign banks involve certain risks associated with investing in
foreign securities described under "Foreign Securities" above, 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.
COMMERCIAL PAPER
Each Portfolio may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Portfolios consists of U.S. dollar-denominated obligations of
domestic issuers, or foreign currency-denominated obligations of domestic or
foreign issuers which, at the time of investment, are (i) rated "P-1" or "P-2"
by Moody's or "A-1" or "A-2" or better by S&P, (ii) issued or guaranteed as to
principal and interest by issuers or guarantors having an existing debt
security rating of "A" or better by Moody's or "A" or better by S&P, or (iii)
securities which, if not rated, are, in the opinion of the Sub-Adviser, of an
investment quality comparable to rated commercial paper in which the Portfolio
may invest. The rate of return on commercial paper may be linked or indexed to
the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
13
MONEY MARKET INSTRUMENTS
Each of the Portfolios may invest at least a portion of its assets in the
following kinds of money market instruments: (1) short-term U.S. Government
securities; (2) certificates of deposit, bankers' acceptances and other bank
obligations rated in the two highest rating categories by at least two NRSROs,
or, if rated by only one NRSRO, in such agency's two highest grades, or, if
unrated, determined to be of comparable quality by the Adviser or the
Sub-Adviser. Bank obligations must be those of a bank that has deposits in
excess of $2 billion or that is a member of the Federal Deposit Insurance
Corporation. A Portfolio may invest in obligations of U.S. branches or
subsidiaries of foreign banks ("Yankee dollar obligations") or foreign branches
of U.S. banks ("Eurodollar obligations"); (3) commercial paper rated in the two
highest rating categories by at least two NRSROs, or, if rated by only one
NRSRO, in such agency's two highest grades, or, if unrated, determined to be of
comparable quality by the Adviser or the Sub-Adviser; (4) corporate obligations
with a remaining maturity of 397 days or less whose issuers have outstanding
short-term debt obligations rated in the highest rating category by at least
two NRSROs, or, if rated by only one NRSRO, in such agency's highest grade, or,
if unrated, determined to be of comparable quality by the Adviser or the
Sub-Adviser; and (5) repurchase agreements with domestic commercial banks or
registered broker-dealers.
DERIVATIVE INSTRUMENTS
The following describes certain derivative instruments and products in which
certain Portfolios may invest and risks associated therewith.
The Portfolios might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. Also, suitable
derivative and/or hedging transactions may not be available in all
circumstances and there can be no assurance that a Portfolio will be able to
identify or employ a desirable derivative and/or hedging transaction at any
time or from time to time.
OPTIONS ON SECURITIES AND INDEXES. As described under "Characteristics and
Risks of Securities and Investment Techniques--Derivatives" in the Prospectus,
the Portfolios may purchase and sell both put and call options on equity, 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 National Association of Securities Dealers Automated Quotations
("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. Among other reasons, a Portfolio may purchase put options
to protect holdings in an underlying or related security against a decline in
market value, and may purchase call options to protect against increases in the
prices of securities it intends to purchase pending its ability to invest in
such securities in an orderly manner.
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 the Sub-Adviser in accordance with procedures
established by the Board of Trustees in such amount are segregated) upon
conversion or exchange of other securities held by the
14
Portfolio. For a call option on an index, the option is covered if the
Portfolio segregates assets determined to be liquid by the Adviser or the
Sub-Adviser in accordance with procedures established by the Board of
Trustees in an amount equal to the contract value of the index. A call
option is also covered if the Portfolio holds a call on the same security
or index as the call written where the exercise price of the call held is
(i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written, provided the
difference is segregated by the Portfolio in assets determined to be liquid
by the Adviser or the Sub-Adviser in accordance with procedures established
by the Board of Trustees. A put option on a security or an index is "covered"
if the Portfolio segregates assets determined to be liquid by the Sub-Adviser
in accordance with procedures established by the Board of Trustees equal to
the exercise price. 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 segregated by the Portfolio in assets determined to be
liquid by the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees.
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). In
addition, 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. There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Portfolio will realize a capital loss. If
the premium received from a closing sale transaction is more than the premium
paid to purchase the option, the Portfolio will realize a capital gain or, if
it is less, the Portfolio will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and demand,
interest rates, the current market price of the underlying security or index in
relation to the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is an asset
of the Portfolio. The premium received for an option written by a Portfolio is
recorded as a deferred credit. The value of an option purchased or written is
marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.
OTC OPTIONS. The Portfolios may enter into over-the-counter ("OTC") options
transactions only with primary dealers in U.S. Government securities and only
pursuant to agreements that will assure that the relevant Portfolio will at all
times have the right to repurchase the option written by it from the dealer at
a specified formula price. Over-the-counter options in which the Portfolios
may invest differ from traded options in that they are two-party contracts,
with price and other terms negotiated between buyer and seller, and generally
do not have as much market liquidity as exchange-traded options. The Portfolios
may be required to treat as illiquid over-the-counter options purchased and
securities being used to cover certain written over-the-counter options, and
they will treat the amount by which such formula price exceeds the intrinsic
value of the option (i.e., the amount, if any, by which the market price of the
underlying security exceeds the exercise price of the option) as an illiquid
investment.
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
15
of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless. If a
Portfolio were unable to close out a covered call option that it had written on
a security, it would not be able to sell the underlying security unless the
option expired without exercise. As the writer of a covered call option, a
Portfolio forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above
the sum of the premium and the exercise price of the call but, as long as its
obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. 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. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Portfolio may be unable to
close out a position. Similarly, 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.
In the case of a written call option on a securities index, the Portfolio will
own corresponding securities whose historic volatility correlates with that of
the index.
FOREIGN CURRENCY OPTIONS. The Portfolios may buy or sell put and call options
on foreign currencies as a hedge against changes in the value of the U.S.
dollar (or another currency) in relation to a foreign currency in which a
Portfolio's securities may be denominated. In addition, each of the Portfolios
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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Portfolio may use
interest rate, foreign currency or index futures contracts. The Portfolios may
invest in foreign exchange futures contracts and options thereon (''futures
options'') that are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system as an adjunct to
their securities activities. In addition, each Portfolio may purchase and
sell futures contracts on various securities indexes (''Index Futures'')
and related options for hedging purposes and for investment purposes. A
Portfolio's purchase and sale of Index Futures is limited to contracts and
exchanges which have been approved by the Commodity Futures Trading
Commission (''CFTC''). Through the use of Index Futures and related options,
a Portfolio may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. A Portfolio may also avoid potential market
and liquidity problems which may result from increases in positions already
held by the Portfolio.
16
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. An Index Future 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 a securities index ("Index") at the close of
the last trading day of the contract and the price at which the index contract
was originally written. Although the value of an Index might be a function of
the value of certain specified securities, no physical delivery of these
securities is made. A unit is the value of the relevant Index from time to
time. Entering into a contract to buy units is commonly referred to as buying
or purchasing a contract or holding a long position in an Index. Index Futures
contracts can be traded through all major commodity brokers. A Portfolio's
purchase and sale of Index Futures is limited to contracts and exchanges which
have been approved by the CFTC. A Portfolio will ordinarily be able to close
open positions on the futures exchange on which Index Futures are then traded
at any time up to and including the expiration day. As described below, a
Portfolio will be required to segregate initial margin in the name of the
futures broker upon entering into an Index Future. Variation margin will be
paid to and received from the broker on a daily basis as the contracts are
marked to market. For example, when a Portfolio has purchased an Index Future
and the price of the relevant Index has risen, that position will have
increased in value and the Portfolio will receive from the broker a variation
margin payment equal to that increase in value. Conversely, when a Portfolio
has purchased an Index Future and the price of the relevant Index has declined,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker.
A Portfolio may close open positions on the futures exchanges on which Index
Futures are traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day), with settlement made with
the appropriate clearing house. Because the specific procedures for trading
foreign stock Index Futures on futures exchanges are still under development,
additional or different margin requirements as well as settlement procedures
may be applicable to foreign stock Index Futures at the time a Portfolio
purchases such instruments. Positions in Index Futures may be closed out by a
Portfolio only on the futures exchanges upon which the Index Futures are then
traded.
The following example illustrates generally the manner in which Index Futures
operate. The Standard & Poor's 100 Stock Index is composed of 100 selected
common stocks, most of which are listed on the New York Stock Exchange. The S&P
100 Index assigns relative weightings to the common stocks included in the
Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract
would be worth $18,000 (100 units x $180). The Index Future specifies that no
delivery of the actual stocks making up the Index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the actual level
of the Index at the expiration of the contract. For example, if a Portfolio
enters into a futures contract to buy 100 units of the S&P 100 Index at a
specified future date at a contract price of $180 and the S&P 100 Index is at
$184 on that future date, the Portfolio will gain $400 (100 units x gain of
$4). If the Portfolio enters into a futures contract to sell 100 units of the
Index at a specified future date at a contract price of $180 and the S&P 100
Index is at $182 on that future date, the Portfolio will lose $200 (100 units x
loss of $2).
A public market exists in futures contracts covering a number of Indexes as
well as financial instruments and foreign currencies, including but not limited
to: 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 European Currency Unit ("ECU"). It is expected that other futures
contracts in which the Portfolios may invest will be developed and traded
in the future.
Each of the Portfolios may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder
17
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 holder
acquires a short position and the writer is assigned the opposite long position.
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 in the case of futures options, for which an established
over-the-counter market exists.
When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to segregate a specified amount of assets determined to
be liquid by the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees ("initial margin"). The margin required
for a futures contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. Margin requirements on
foreign exchanges may be different than U.S. exchanges. The initial margin is
in the nature of a performance bond or good faith deposit on the futures
contract which is returned to the Portfolio upon termination of the contract,
assuming all contractual obligations have been satisfied. Each Portfolio
expects to earn interest income on its initial margin deposits. A futures
contract held by a Portfolio is valued daily at the official settlement price
of the exchange on which it is traded. Each day the Portfolio pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Portfolio but is instead a
settlement between the Portfolio and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset value,
each Portfolio will mark to market its open futures positions.
A Portfolio is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (i.e.,
with the 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. Any transaction costs must also
be included in these calculations.
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. The Portfolios may only
enter into futures contracts or futures options which are standardized and
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system. The Portfolios may enter into
positions in futures contracts and related options for "bona fide hedging"
purposes (as such term is defined in applicable regulations of the CFTC), for
example, to hedge against changes in interest rates, foreign currency exchange
rates or securities prices. In addition, the Portfolios may utilize futures
contracts for investment 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 segregate (and
mark-to-market on a daily basis) assets determined to be liquid by the Adviser
or the Sub-Adviser in accordance with procedures established by the Board of
Trustees that, when added to the amounts deposited with a futures commission
merchant as margin, are equal to the total market value of the futures
contract. Alternatively, the Portfolio may "cover" its position by
purchasing a
18
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 segregate (and mark-to-market
on a daily basis) assets determined to be liquid by the Adviser or the
Sub-Adviser in accordance with procedures established by the Board of Trustees
that are equal to the market value of the instruments underlying the contract.
Alternatively, the Portfolio may "cover" its position by owning the instruments
underlying the contract (or, in the case of an Index Future, 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 segregate
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser or the Sub-Adviser in accordance with procedures established by the
Board of Trustees that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Portfolio may cover
its position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Portfolio to purchase the same futures contract at a
price not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, a Portfolio will segregate
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser or the Sub-Adviser in accordance with procedures established by the
Board of Trustees that equal the purchase price of the futures contract, less
any margin on deposit. Alternatively, the Portfolio may cover the position
either by entering into a short position in the same futures contract, or by
owning a separate put option permitting it to sell the same futures contract so
long as the strike price of the purchased put option is the same or higher than
the strike price of the put option sold by the Portfolio.
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. Some of the risk may be
caused by an imperfect correlation between movements in the price of the
futures contract and the price of the security or other investment being
hedged. The hedge will not be fully effective where there is such imperfect
correlation. Also, an incorrect correlation could result in a loss on both the
hedged securities in a Portfolio and the hedging vehicle, so that the portfolio
return might have been greater had hedging not been attempted. For example, if
the price of the futures contract moves more than the price of the hedged
security, a Portfolio would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. 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.
To compensate for imperfect correlations, a Portfolio may purchase or sell
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Portfolio may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches. 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. Also, suitable hedging transactions may not be available in all
circumstances.
19
Additionally, the price of Index Futures may not correlate perfectly with
movement in the relevant index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index
and futures markets. Second, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market, and as a
result, the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures
market may also cause temporary price distortions. In addition, trading hours
for foreign stock Index Futures may not correspond perfectly to hours of
trading on the foreign exchange to which a particular foreign stock Index
Future relates. This may result in a disparity between the price of Index
Futures and the value of the relevant index due to the lack of continuous
arbitrage between the Index Futures price and the value of the underlying
index.
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 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. Some foreign exchanges may be principal markets so that no
common clearing facility exists and a trader may look only to the broker for
performance of the contract. 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. In addition, unless a Portfolio hedges against fluctuations in
the exchange rate between the U.S. dollar and the currencies in which trading
is done on foreign exchanges, any profits that a Portfolio might realize in
trading could be eliminated by adverse changes in the exchange rate, or the
Portfolio could incur losses as a result of those changes. The value of some
derivative instruments in which the Portfolios may 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 the
Sub-Adviser to forecast interest rates and other economic factors correctly.
If the Sub-Adviser incorrectly forecasts such factors and has taken positions
in derivative instruments contrary to prevailing market trends, the Portfolios
could be exposed to risk of loss. In addition, a Portfolio's use of such
instruments may cause the Portfolio to realize higher amounts of short-term
capital gains (generally taxed to shareholders at ordinary income tax rates)
than if the Portfolio had not used such instruments.
SWAP AGREEMENTS. The Portfolios may enter into equity index swap agreements
for purposes of attempting to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks.
20
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
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,
or in a "basket" of securities representing a particular index.
Most swap agreements entered into by the Portfolios will 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 counter party
will be covered by segregating assets determined to be liquid by the Adviser or
the Sub-Adviser in accordance with procedures established by the Board of
Trustees, to avoid any potential leveraging of the Portfolio's portfolio.
Obligations under swap agreements so covered will not be construed to be
"senior securities" for purposes of a 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 will depend on the Sub-Adviser's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Portfolio bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Portfolios will
enter into swap agreements only with counter parties that meet certain
standards of creditworthiness (generally, such counter parties would have to be
eligible counter parties under the terms of the Portfolios' repurchase
agreement guidelines). 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.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
A Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. These transactions involve a commitment by the Portfolio to
purchase or sell securities for a predetermined price or yield, with payment
and delivery taking place more than seven days in the future, or after a period
longer than the customary settlement period for that type of security. When
delayed delivery purchases are outstanding, the Portfolio will segregate until
the settlement date assets determined to be liquid by the Adviser or the
Sub-Adviser in accordance with procedures established by the Board of Trustees
in an amount sufficient to meet the purchase price. Typically, no income
accrues on securities purchased on a delayed delivery basis prior to the time
delivery of the securities is made, although a Portfolio may earn income on
segregated securities. When purchasing a security on a delayed delivery 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 a 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 delayed
delivery purchases are outstanding, the delayed delivery purchases may result
in a form of leverage. When the Portfolio has sold a security on a delayed
delivery basis, the Portfolio does not participate in future gains or losses
with respect to the security. If the other party to a delayed delivery
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 delayed delivery transaction after it
is entered into, and may sell when-issued 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
delayed delivery basis.
21
Each Portfolio may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the
Portfolio either (i) segregates until the settlement date assets determined to
be liquid by the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees in an amount sufficient to meet the
purchase price or (ii) enters into an offsetting contract for the forward sale
of securities of equal value that it owns. Each Portfolio may enter into
forward commitments for the purchase or sale of foreign currencies. Forward
commitments may be considered securities in themselves. They involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Portfolio's other assets. A Portfolio may dispose of a commitment prior to
settlement and may realize short-term profits or losses upon such disposition.
WARRANTS TO PURCHASE SECURITIES
Each of the Portfolios may invest in 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.
REPURCHASE AGREEMENTS
For the purposes of maintaining liquidity and achieving income, each Portfolio
may enter into repurchase agreements with domestic commercial banks or
registered broker/dealers. A repurchase agreement is a contract under which a
Portfolio would acquire a security for a relatively short period (usually not
more than one week) subject to the obligation of the seller to repurchase and
the Portfolio to resell such security at a fixed time and price (representing
the Portfolio's cost plus interest). In the case of repurchase agreements with
broker-dealers, the value of the underlying securities (or collateral) will be
at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the collateral securities. This risk includes the risk of procedural costs or
delays in addition to a loss on the securities if their value should fall below
their repurchase price. The Adviser and the Sub-Adviser, as appropriate, will
monitor the creditworthiness of the counter parties.
SECURITIES LOANS
Subject to certain conditions described in the Prospectus and below, each
Portfolio may make secured loans of its portfolio securities to brokers,
dealers and other financial institutions amounting to no more than 33_% of its
total assets. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. However, such loans will be made only to broker-dealers that are
believed by the Adviser or the Sub-Adviser to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral consisting of U.S.
Government securities, cash or cash equivalents (negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal at all times to the market
value of the securities lent. The borrower pays to the lending Portfolio an
amount equal to any dividends or interest received on the securities lent. The
Portfolio may invest only the cash collateral received in interest-bearing,
short-term securities or receive a fee from the borrower. In the case of cash
collateral, the Portfolio typically pays a rebate to the lender. Although
voting rights or rights to consent with respect to the loaned securities pass
to the borrower, the Portfolio retains the right to call the loans and obtain
the return of the securities loaned at any time on reasonable notice, and it
will do so in order that the securities may be voted by the Portfolio if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Portfolio may also call such loans in
order to sell the securities involved. Each Portfolio's performance will
continue to reflect changes in the value of the securities loaned and will also
reflect the
22
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.
[STOCKS OF SMALL AND MEDIUM CAPITALIZATION COMPANIES
Each of the Portfolios may invest in common stock of companies with market
capitalizations that are small compared to those of other publicly traded
companies. Generally, small market capitalization is considered to be less than
$1.5 billion and large market capitalization is considered to be more than $5
billion. Investments in larger companies present certain advantages in that
such companies generally have greater financial resources, more extensive
research and development, manufacturing, marketing and service capabilities,
and more stability and greater depth of management and technical personnel.
Investments in smaller, less seasoned companies may present greater
opportunities for growth but also may involve greater risks than customarily
are associated with more established companies. The securities of smaller
companies may be subject to more abrupt or erratic market movements than
larger, more established companies. These companies may have limited
product lines, markets or financial resources, or they may be dependent upon a
limited management group. Their securities may be traded in the over-the-counter
market or on a regional exchange, or may otherwise have limited liquidity. As a
result of owning large positions in this type of security, a Portfolio is
subject to the additional risk of possibly having to sell portfolio securities
at disadvantageous times and prices if redemptions require the Portfolio to
liquidate its securities positions. In addition, it may be prudent for a
Portfolio with a relatively large asset size to limit the number of relatively
small positions it holds in securities having limited liquidity in order to
minimize its exposure to such risks, to minimize transaction costs, and to
maximize the benefits of research. As a consequence, as a Portfolio's asset
size increases, the Portfolio may reduce its exposure to illiquid small
capitalization securities, which could adversely affect performance.
Each Portfolio may also invest in stocks of companies with medium market
capitalizations. Whether a U.S. issuer's market capitalization is medium is
determined by reference to the capitalization for all issuers whose equity
securities are listed on a United States national securities exchange or which
are reported on NASDAQ. Issuers with market capitalizations within the range of
capitalization of companies included in the S&P Mid Cap 400 Index may be
regarded as being issuers with medium market capitalizations. Such investments
share some of the risk characteristics of investments in stocks of companies
with small market capitalizations described above, although such companies tend
to have longer operating histories, broader product lines and greater financial
resources, and their stocks tend to be more liquid and less volatile than those
of smaller capitalization issuers.]
ILLIQUID SECURITIES
Each Portfolio may invest in securities that are illiquid so long as no more
than 15% of the net assets of the Portfolio (taken at market value at the time
of investment) would be invested in such securities. Certain illiquid
securities may require pricing at fair value as determined in good faith under
the supervision of the Board of Trustees. The Sub-Adviser may be subject to
significant delays in disposing of illiquid securities, and transactions in
illiquid securities may entail registration expenses and other transaction
costs that are higher than those for transactions in liquid securities.
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), securities that are subject to legal or
contractual restrictions on resale (such as privately placed debt securities),
and other securities which legally or in the Adviser's or the Sub-Adviser's
opinion may be deemed illiquid (not including securities issued pursuant to
Rule 144A under the Securities Act of 1933 and certain commercial paper that
the Adviser or the Sub-Adviser has determined to be liquid under procedures
approved by the Board of Trustees).
23
INFLATION-INDEXED BONDS
The Portfolios may invest in inflation-indexed bonds, which are fixed income
securities whose value is periodically adjusted according to the rate of
inflation. Two structures are common. The U.S. Treasury and some other issuers
utilize a structure that accrues inflation into the principal value of the
bond. Most other issuers pay out the Consumer Price Index ("CPI") accruals as
part of a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of
approximately 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 the rate of
inflation over the first six months was 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 year's 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. A
Portfolio 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 amount.
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 the rate of inflation rises 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
increase 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 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.
24
DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES
The Portfolios may also 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. 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 a time when the company's financial condition makes it unlikely that
such amounts will be repaid).
The Portfolios may acquire a participation interest in delayed funding loans or
revolving credit facilities from a bank or other financial institution. See
"Loan Participations and Assignments." The terms of the participation require
a Portfolio to make a pro rata share of all loans extended to the borrower and
entitles a Portfolio to a pro rata share of all payments made by the borrower.
Delayed funding loans and revolving credit facilities usually provide for
floating or variable rates of interest. To the extent that a Portfolio is
committed to advance additional funds, it will at all times segregate assets,
determined to be liquid by the Adviser or the Sub-Adviser in accordance with
procedures established by the Board of Trustees, in an amount sufficient to
meet such commitments.
CATASTROPHE BONDS
The Portfolios may invest in "catastrophe bonds." Catastrophe bonds are fixed
income securities, for which the return of principal and payment of interest
is contingent on the non-occurrence of a specific "trigger" catastrophic event,
such as a hurricane or an earthquake. 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 catastrophe 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 catastrophe 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,
catastrophe bonds may also expose a Portfolio to certain unanticipated risks
including but not limited to issuer (credit) default, adverse regulatory or
jurisdictional interpretations [and adverse tax consequences].
Catastrophe 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
"Characteristics and Risks of Securities and Investment Techniques--Illiquid
Securities" in the Prospectus. 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. Catastrophe
bonds are typically rated, and the Portfolio will only invest in catastrophe
bonds that meet the credit quality requirements for the Portfolio.
HYBRID INSTRUMENTS
The Portfolios may invest in "hybrid" or indexed securities. 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.
25
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 a Portfolio.
Accordingly, no Portfolio will invest more than 5% of its assets (taken at
market value at the time of investment) in hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be deemed
to be investment companies as defined in the 1940 Act. As a result, a
Portfolio's 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.
PRECIOUS METALS AND METAL-INDEXED NOTES
The Portfolios may invest in notes, the principal amount or redemption price of
which is indexed to, and thus varies directly with, changes in the market price
of gold bullion or other precious metals ("Metal-Indexed Notes"). It is
expected that the value of Metal-Indexed Notes will be as volatile as the price
of the underlying metal.
The Portfolios will only purchase Metal-Indexed Notes which are rated
investment grade or are issued by issuers that have outstanding debt
obligations rated investment grade or commercial paper rated in the top rating
category by any NRSRO, or Metal-Indexed Notes issued by issuers that the
Sub-Adviser has determined to be of similar creditworthiness. Debt obligations
rated in the fourth highest rating category by an NRSRO are considered to have
some speculative characteristics. The Metal-Indexed Notes might be backed by a
bank letter of credit, performance bond or might be otherwise secured, and any
such security, which would be held by the Portfolio's custodian, would be taken
into account in determining the creditworthiness of the securities. The
Portfolios might purchase unsecured Metal-Indexed Notes if the issuer thereof
met the Portfolio's credit standards without any such security. While the
principal amount or redemption price of Metal-Indexed Notes would vary with the
price of the resource, such securities would not be secured by a pledge of the
resource or any other security interest in or claim on the resource. In the
case of Metal-Indexed Notes not backed by a performance bond, letter of credit
or similar security, it is expected that such securities generally would not be
secured by any other specific assets.
The Portfolios anticipate that if Metal-Indexed senior securities were to be
purchased, such securities would be issued by precious metals or commodity
brokers or dealers, by mining companies, by commercial banks or by other
financial institutions. Such issuers would issue notes to hedge their
inventories and reserves of the resource, or to borrow money at a relatively
low cost (which would include the nominal rate of interest paid on
Metal-Indexed Notes, described below, and the cost of hedging the issuer's
metals exposure). The Portfolios would not purchase a Metal-Indexed Note
issued by a broker or dealer if as a result of such purchase more than 5% of
the value of the Portfolio's total assets would be invested in securities of
such issuer. The Portfolios might purchase Metal-Indexed Notes from brokers or
dealers which are not also securities brokers or dealers. Precious metals or
commodity brokers or dealers are not subject to supervision or regulation by
any governmental authority or self-regulatory organization in connection with
the issuance of Metal-Indexed Notes.
Until fairly recently, there were no Metal-Indexed Notes outstanding and
consequently there is no secondary trading market for such securities.
Although a limited secondary market might develop among institutional traders,
there is no assurance that such a market will develop. No public market is
expected to develop, since the Portfolios expect that Metal-Indexed Notes will
not be registered under the 1933 Act, and therefore disposition of such
securities, other than to the issuer thereof (as described below), would be
dependent upon the availability of an exemption from such registration.
26
Any Metal-Indexed Notes which the Portfolios might purchase generally will have
maturities of one year or less. Such notes, however, will be subject to being
called for redemption by the issuer on relatively short notice. In addition,
it is expected that the Metal-Indexed Notes will be subject to being put by the
Portfolios to the issuer or to a stand-by broker meeting the credit standards
set forth above, with payments being received by the Portfolios on no more than
seven days' notice. A stand-by broker might be a securities broker-dealer, in
which case the Portfolios' investment will be limited by applicable regulations
of the Securities and Exchange Commission (the "SEC"). The put feature of the
Metal-Indexed Notes will ensure liquidity even in the absence of a secondary
trading market. The securities will be repurchased upon exercise of the
holder's put at the specified exercise price, less repurchase fees, if any,
which are not expected to exceed 1% of the redemption or repurchase proceeds.
Depending upon the terms of particular Metal-Indexed Notes, there might be a
period as long as five days between the date upon which a Portfolio notifies
the issuer of the exercise of the put and determination of the sale price.
It is expected that any Metal-Indexed Notes which the Portfolios might purchase
will bear interest or pay preferred dividends at relatively nominal rates under
2% per annum. A Portfolio's holdings of such senior securities therefore would
not generate appreciable current income, and the return from such senior
securities would be primarily from any profit on the sale or maturity thereof
at a time when the price of the relevant precious metal is higher than it was
when the senior securities were purchased.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies of each of
the Portfolios and may not be changed with respect to either Portfolio without
shareholder approval by vote of a majority of the outstanding voting securities
of that Portfolio. Under these restrictions, neither of the Portfolios may:
(1) borrow money in excess of 10% of the value (taken at the lower of cost or
current value) of such Portfolio's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will
be repaid before any additional investments are purchased;
(2) invest in a security if, as a result of such investment, more than 25% of
its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase agreements
with respect thereto);
(3) with respect to [75]% of its assets, invest in a security if, as a result
of such investment, more than 5% of its total assets (taken at market value at
the time of such investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(4) with respect to [75]% of its assets, invest in a security if, as a result
of such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(5) purchase or sell real estate, although it may purchase securities secured
by real estate or interests therein, or securities issued by companies in the
real estate industry or which invest in real estate or interests therein;
27
(6) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Portfolio
may engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(7) 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 transactions in options, futures,
and options on futures, and except that effecting short sales will be deemed
not to constitute a margin purchase for purposes of this restriction;
(8) borrow money, or pledge, mortgage or hypothecate its assets, except that a
Portfolio may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts as described in the Prospectus
and in this Statement of Additional Information (the deposit of assets in
escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis and
collateral arrangements with respect to initial or variation margin deposits
for futures contracts, options on futures contracts, and forward foreign
currency contracts will not be deemed to be pledges of such Portfolio's assets);
(9) issue senior securities, except insofar as such Portfolio may be deemed to
have issued a senior security by reason of borrowing money in accordance with
the Portfolio's borrowing policies (for purposes of this investment
restriction, collateral, escrow, or margin or other deposits with respect to
the making of short sales, the purchase or sale of futures contracts or related
options, purchase or sale of forward foreign currency contracts, and the
writing of options on securities are not deemed to be an issuance of a senior
security);
(10) lend any funds or other assets, except that such Portfolio may,
consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures, or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans, (b) enter into repurchase agreements
and reverse repurchase agreements, and (c) lend its portfolio securities in an
amount not to exceed one-third of the value of its total assets, provided such
loans are made in accordance with applicable guidelines established by the SEC
and the Trustees of the Trust; or
(11) 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 restriction
(which may be changed without shareholder approval) and, unless otherwise
indicated, may not:
(1) invest more than 15% of the net assets of a Portfolio (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include repurchase agreements maturing in more than
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide withdrawal penalties upon prepayment
(other than overnight deposits), or other securities which legally or in the
Adviser's or Sub-Adviser's opinion may be deemed illiquid (other than
securities issued pursuant to Rule 144A under the 1933 Act and certain
commercial paper that the Adviser or Sub-Adviser has determined to be liquid
under procedures approved by the Board of Trustees).
Unless otherwise indicated, all limitations applicable to a Portfolio's
investments apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a security, or
change in the percentage of a Portfolio's assets invested in certain securities
or other instruments resulting from market
28
fluctuations or other changes in a Portfolio's total assets, will not require
the Portfolio to dispose of an investment. In the event that ratings services
assign different ratings to the same security, the Adviser or Sub-Adviser will
determine which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned ratings.
The phrase "shareholder approval," as used in the Prospectus and this Statement
of Additional Information, and the phrase a "vote of a majority of the
outstanding voting securities," as used herein, mean the affirmative vote of
the lesser of (1) more than 50% of the outstanding shares of the Portfolio or
the Trust, as the case may be, or (2) 67% or more of the shares of the
Portfolio or the Trust, as the case may be, present at a meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business of the Trust is 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 Massachusetts 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 officers of the Trust, their ages, and a description of their
principal occupations during the past five years are listed below. Except as
shown, each Trustee's and officer's principal occupation and business
experience for the last five years have been with the employer(s) indicated,
although in some cases the Trustee may have held different positions with such
employer(s). Unless otherwise indicated, the business address of the persons
listed below is [c/o PIMCO Advisory Services, 1345 Avenue of the Americas, New
York, New York 10105.]
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S) PRINCIPAL OCCUPATION(S) DURING
AGE WITH THE TRUST 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, TX 77019 investment firm. Formerly, Headmaster, St. John's
Age 58 School, Houston, Texas; Trustee of PIMCO
Advisors Funds ("PAF") and Cash Accumulation
Trust ("CAT"); General Partner, J.B. Poindexter &
Co., Houston, Texas, a private partnership; and
Partner, Iberia Petroleum Company, an oil and gas
production company. Mr. Cannon was a director of
WNS Inc., a retailing company which filed a petition
in bankruptcy within the last five years.
Donald P. Carter Trustee Formerly, Trustee of PAF and CAT; Chairman,
434 Stable Lane Executive Vice President and Director, Cunningham
Lake Forest, IL 60045 & Walsh, Inc., Chicago, an advertising agency.
Age 72
29
Gary A. Childress Trustee Private investor. Formerly, Chairman and Director,
11 Longview Terrace Bellefonte Lime Company, Inc. Mr. Childress is a
Madison, CT 06443 partner in GenLime, L.P., a private limited
Age 65 partnership, which has filed a petition in bankruptcy
within the last five years. Formerly, Trustee of PAF
and CAT.
William D. Cvengros* Trustee Chairman of the Board of the Trust; Chief Executive
800 Newport Center Drive Officer, President, and member of the Management
Newport Beach, CA 92660 Board, PIMCO Advisors; President and Chief
Age 50 Executive Officer, Value Advisors LLC; Co-
Chairman, The Emerging Markets Income Fund,
Inc., The Emerging Markets Income Fund II, Inc.,
The Emerging Markets Floating Rate Fund, Inc.,
Global Partners Income Fund, Inc., Municipal
Partners Fund, Inc., and Municipal Partners Fund II,
Inc.; Chairman and Director, PIMCO Funds: Global
Investors Series plc and PIMCO Global Advisors
(Ireland) Limited. Formerly, Trustee of PAF and
CAT; President of the Trust; Director, Vice
Chairman, and Chief Investment Officer, Pacific Life
Insurance Company ("Pacific Life"); and Director,
PIMCO Funds Distribution Company (currently,
PIMCO Funds Distributors LLC).
Richard L. Nelson Trustee President, Nelson Financial Consultants; Director,
8 Cherry Hills Lane Wynn's International, Inc., a building supplies
Newport Beach, CA 92660 company; and Trustee, Pacific Select Fund.
Age 69 Formerly, Partner, Ernst & Young.
Lyman W. Porter Trustee Professor of Management at the University of
2639 Bamboo Street California, Irvine; and Trustee, Pacific Select Fund.
Newport Beach, CA 92660
Age 69
Alan Richards Trustee Retired Chairman of E.F. Hutton Insurance Group;
7381 Elegans Place Former Director of E.F. Hutton and Company, Inc.;
Carlsbad, CA 92009 Chairman of IBIS Capital, LLC, a reverse mortgage
Age 69 company; Director, Inspired Arts, Inc.; Former
Director of Western National Corporation.
Joel Segall Trustee Formerly, Trustee of PAF and CAT, President and
11 Linden Shores University Professor, Bernard M. Baruch College,
Branford, CT 06405 The City University of New York; Deputy Under
Age 76 Secretary for International Affairs, United States
Department of Labor; Professor of Finance,
University of Chicago; and Board of Managers,
Coffee, Sugar and Cocoa Exchange.
30
W. Bryant Stooks Trustee President, Bryant Investments, Ltd.; Director,
1530 E. Montebello American Agritec LLC, a manufacturer of
Phoenix, AZ 85014 hydrophonics products; and Director, Valley Isle
Age 59 Excursions, Inc., a tour operator. Formerly, Trustee
of PAF and CAT, President, Senior Vice President,
Director and Chief Executive Officer, Archirodon
Group Inc.; Partner, Arthur Andersen & Co.
Gerald M. Thorne Trustee Director, UPI Inc., a plastics company, and
5 Leatherwood Lane American Orthodontics Corp. Formerly, Trustee of
Savannah, GA 31414 PAF and CAT; Director, Kaytee, Inc., a birdseed
Age 61 company; President and Director, Firstar National
Bank of Milwaukee; Chairman, President and
Director, Firstar National Bank of Sheboygan;
Director, Bando-McGlocklin, a small business
investment company.]
Stephen J. Treadway* Trustee, President Executive Vice President, PIMCO Advisors;
2187 Atlantic Street and Chairman and President, PIMCO Funds Distributors
Stamford, CT 06902 Chief Executive LLC ("PFD"); Executive Vice President, Value
Age 52 Officer Advisors LLC; Chairman, Municipal Advantage
Fund, Inc. and The Central European Value Fund,
Inc.; President, The Emerging Markets Income Fund,
Inc., The Emerging Markets Income Fund II, Inc.,
The Emerging Markets Floating Rate Fund, Inc.,
Global Partners Income Fund, Inc., Municipal
Partners Fund, Inc. and Municipal Partners Fund II,
Inc. Formerly, Trustee, President and Chief
Executive Officer of CAT; Executive Vice President,
Smith Barney Inc.
[R. Wesley Burns Executive Vice Trustee and President, PIMS; Managing Director,
Age 40 President Pacific Investment Management; Trustee and
President, PIMCO Variable Insurance Trust
("PVIT"); Director and President, PIMCO
Commercial Mortgage Securities Trust, Inc.
("PCM"); Director, PIMCO Funds: Global Investors
Series plc, and PIMCO Global Advisors (Ireland)
Limited. Formerly, Executive Vice President,
Pacific Investment Management, PAF and CAT.
31
Newton B. Schott, Jr. Vice President and Executive Vice President, Chief Administrative
2187 Atlantic Street Secretary Officer, General Counsel and Secretary, PFD; Senior
Stamford, CT 06902 Vice President, Value Advisors LLC; Executive
Age 57 Vice President, The Emerging Markets Income
Fund, Inc., The Emerging Markets Income Fund II,
Inc., The Emerging Markets Floating Rate Fund,
Inc., The Central European Value Fund, Inc., Global
Partners Income Fund, Inc., Municipal Advantage
Fund, Inc., Municipal Partners Fund, Inc. and
Municipal Partners Fund II, Inc. Formerly, Vice
President and Clerk of PAF and CAT.
Jeffrey M. Sargent Vice President Vice President and Manager Shareholder Services
Age 36 and Fund Administration, Pacific Investment
Management; Senior Vice President of PIMS, PVIT
and PCM.
Richard M. Weil Vice President General Counsel, PIMCO Advisors. Formerly, Vice
Age 36 President, Bankers Trust Company; Associate,
Simpson, Thatcher & Bartlett.
John P. Hardaway Treasurer Senior Vice President and Manager of Fund
Age 42 Operations Accounting, Pacific Investment
Management; Treasurer, PIMS, PVIT and PCM.
Formerly, Vice President, Pacific Investment
Management.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Fund Taxation,
Age 35 Pacific Investment Management; Assistant
Treasurer, PIMS, PVIT and PCM. Formerly,
Director of Financial Reporting, Carl J. Brown &
Co.; Tax Manager, Price Waterhouse LLP.
Garlin G. Flynn Assistant Secretary Specialist, Pacific Investment Management;
Age 53 Secretary, PIMS, PVIT and PCM. Formerly, Senior
Fund Administrator, Pacific Investment
Management; Senior Mutual Fund Analyst, PIMCO
Advisors Institutional Services.]
</TABLE>
* Trustee is an "interested person" of the Trust (as defined in Section
2(a)(19) of the 1940 Act).
TRUSTEES' COMPENSATION
Trustees, other than those affiliated with PIMCO Advisors, the Sub-Adviser, or
Pacific Investment Management, receive an annual retainer of $[___], plus
$[2,000] for each Board of Trustees meeting attended ($[1,000] if the meeting
is attended by telephone), and $[1,000] for each Audit and Performance
Committee meeting attended, plus reimbursement of related expenses. Each
Audit and Performance Committee member receives an additional annual retainer
of $[2,000], the Chairman of the Audit and Performance Committees receives
an additional annual retainer of $[2,000], the Chairman of the Independent
Trustees receives an additional annual retainer of $[6,000], and each Vice
Chairman of the Independent Trustees receives an additional annual retainer
of $[3,000]. If in the judgment of the Independent Trustees, it is necessary
or appropriate for any Independent Trustee, including the Chairman, to perform
services in connection with extraordinary Portfolio activities or
circumstances, the Trustee shall be compensated for such services at the
rate of $[2,000] per day, plus reimbursement of reasonable expenses. Trustees
do not currently receive any pension or retirement benefits from the Trust or
the Fund Complex (see
32
below). [ The Trust has adopted a deferred
compensation plan for the Trustees which permits the Trustees to defer their
receipt of compensation from the Trust, at their election, in accordance with
the terms of the plan. ]
[The following table sets forth information regarding compensation expected to
be paid to those Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust for its first fiscal year by the Trust, and the Total
Compensation paid to such Trustees by the Fund Complex for calendar 1999:]
(1) (2) (3)
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM TRUST AND
[NAME OF TRUSTEE FROM TRUST FUND COMPLEX((1))
- ---------------- ------------- -----------------
E. Philip Cannon $57,000.00 $ 57,000.00
Donald P. Carter $66,500.00 $ 66,500.00
Gary A. Childress $58,000.00 $ 58,000.00
Richard L. Nelson $58,500.00 $ 96,500.00
Lyman W. Porter $57,000.00 $ 96,000.00
Alan Richards $62,000.00 $100,000.00
Joel Segall $58,000.00 $ 58,000.00
W. Bryant Stooks $56,500.00 $ 56,500.00
Gerald M. Thorne $57,500.00 $ 57,500.00]
INVESTMENT ADVISER
PIMCO Advisors, L.P. serves as investment adviser to each of the Portfolios
pursuant to an investment advisory agreement ("Advisory Agreement") between
PIMCO Advisors and the Trust. PIMCO Advisors was organized as a limited
partnership under Delaware law in 1987. PIMCO Partners, G.P. ("PGP") and PIMCO
Advisors Holdings L.P. ("PAH") are the general partners of PIMCO Advisors. PGP
is a general partnership between PIMCO Holding LLC ("PH LLC"), a Delaware
limited liability company and an indirect wholly-owned subsidiary of Pacific
Life Insurance Company, and PIMCO Partners LLC, a California limited liability
company controlled by the current Managing Directors and two former Managing
Directors of Pacific Investment Management (collectively, the "Managing
Directors"). PGP is the sole general partner of PAH. PGP and PAH have equal
right, power and authority to manage and control the business and affairs of
PIMCO Advisors and to take any action deemed necessary or desirable by them in
connection with the business of PIMCO Advisors.
PGP and PAH have substantially delegated their management and control of PIMCO
Advisors to a Management Board. Pursuant to the terms of the delegation of
authority by PGP and PAH, the Management Board of PIMCO Advisors is composed of
(i) the Chief Executive Officer of PIMCO Advisors; (ii) six other persons
designated by PGP; (iii) three disinterested persons designated by
representatives of the Public General Partner or, if there is no Public General
Partner, PGP or its successor as general partner of PIMCO Advisors; (iv) the
Chief
__________________________
((1)) The amounts listed in column (3) include total compensation paid to the
Trustees for their services as Trustees of the Trust (for all Trustees) and
Pacific Select Fund (for Messrs. Nelson, Porter, and Richards) for 1999. By
virtue of having PIMCO Advisors or an affiliate of PIMCO Advisors as investment
adviser, the Trust and Pacific Select Fund were considered to be part of the
same "Fund Complex" for these purposes.
33
Executive Officer and one Managing Director of each of the two Investment
Managing Companies having the greatest total income, determined as of the date
of appointment; and (v) one Managing Director of each of two other Investment
Managing Companies designated from time to time by the Management Board upon
the recommendation of the Nominating Committee. PAH is a Public General
Partner for the purposes set forth above.
The Management Board has in turn delegated the authority to manage day-to-day
operations and policies to an Executive Committee. The Executive Committee is
composed of four members. The members of the Executive Committee are William
D. Cvengros, Brent R. Harris, Glenn S. Schafer and William S. Thompson, Jr.
PIMCO Advisors, PGP and PAH are located at 800 Newport Center Drive, Newport
Beach, California 92660. PIMCO Advisors and its subsidiary partnerships had
approximately $256 billion of assets under management as of September 30, 1999.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Portfolios
and for managing, either directly or through others selected by the Adviser,
the investment of the Portfolios. PIMCO Advisors also furnishes to the Board of
Trustees periodic reports on the investment performance of each Portfolio. For
each of the Portfolios, PIMCO Advisors has engaged an affiliate to serve as the
Sub-Adviser. If the Sub-Adviser ceases to manage a Portfolio, PIMCO Advisors
will either assume full responsibility for the management of that Portfolio, or
retain a new Sub-Adviser subject to the approval of the Trustees and, if
required, the shareholders.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Portfolios in accordance with applicable laws and regulations. The
investment advisory services of PIMCO Advisors to the Trust are not exclusive
under the terms of the Advisory Agreement. PIMCO Advisors is free to, and
does, render investment advisory services to others.
The Advisory Agreement will continue in effect with respect to a Portfolio for
two years from its effective date, and thereafter on a yearly basis, provided
such continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Portfolio, or by the Board of Trustees,
and (ii) by 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 Advisory Agreement. The Advisory Agreement may be terminated
without penalty by vote of the Trustees or the shareholders of the Trust, by
the Adviser, on 60 days' written notice to the other party and will terminate
automatically in the event of its assignment, or by vote of a majority of the
Trustees who are not interested persons of PIMCO Advisors, on 60 days' written
notice to PIMCO Advisors.
The Adviser receives no investment advisory or other fees from the Portfolios.
Agreement with Allianz AG
On October 31, 1999, PIMCO Advisors, PAH and Allianz AG announced that they
have reached a definitive agreement for Allianz, a German insurance company, to
acquire majority ownership of PIMCO Advisors and its subsidiaries, including
Pacific Investment Management, Cadence, NJF and Parametric (the "Allianz
Transaction"). In the Allianz Transaction, Allianz will acquire all of PAH,
the publicly traded general partner of PIMCO Advisors. Pac Life will retain an
approximately 30% interest in PIMCO Advisors after the Allianz Transaction.
The consummation of the Allianz Transaction is subject to the approval of the
public unitholders of PAH, as well as to certain regulatory and client
approvals. The approval of the Board of Trustees of the Trust and the
shareholders of the Funds and Portfolios will be sought in connection with
the Allianz Transaction. The Allianz Transaction is expected to be completed
by the end of the first quarter of 2000.
This Statement of Additional Information will be supplemented or revised if the
Allianz Transaction does not occur substantially as set forth above.
34
PORTFOLIO MANAGEMENT AGREEMENTS
PIMCO Advisors serves as the investment adviser for the Portfolios. The
Adviser employs a Pacific Management Company as the Sub-Adviser to provide
investment advisory services to each Portfolio pursuant to portfolio management
agreements (each a "Portfolio Management Agreement") between the Adviser and
the Portfolio's Sub-Adviser. [Add info re: Pacific Investment Management
Company]
PORTFOLIO ADMINISTRATOR
PIMCO Advisory Services ("PAS") serves as administrator (and is referred to in
this capacity as the "Administrator") to the Portfolios pursuant to an
administration agreement (the "Administration Agreement") with the Trust. The
Administrator provides or procures administrative services to the Portfolios,
which include clerical help and accounting, bookkeeping, internal audit
services and certain other services they require, and preparation of reports to
the Trust's shareholders and regulatory filings. PAS may retain affiliates to
provide services as sub-administrators. In addition, the Administrator
arranges at its own expense for the provision of legal, audit, custody,
transfer agency and other services necessary for the ordinary operation of the
Portfolios, and is responsible for the costs of registration of the Trust's
shares and the printing of prospectuses and shareholder reports for current
shareholders. Under the Administration Agreement, the Administrator has agreed
to provide or procure these services, and to bear these expenses at no charge
to the Portfolios.
The Administrator has also agreed to bear all costs of the Trust's operations.
The Administration Agreement may be terminated by the Trust at any time by vote
of (1) a majority of the Trustees, (2) a majority of the outstanding voting
securities of the Trust, or (3) by a majority of the Trustees who are not
interested persons of the Trust or PIMCO Advisors, on 60 days' written notice
to PIMCO Advisors.
DISTRIBUTION OF TRUST SHARES
DISTRIBUTOR
PIMCO Funds Distributors LLC (the "Distributor") serves as the principal
underwriter of each Portfolio of the Trust's shares pursuant to a distribution
contract with the Trust. The offering of the Trust's shares is continuous. The
Distributor is not obligated to sell any specific amount of the Trust's shares.
The Trust, on behalf of the Portfolios, pays the Distributor no fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS AND PORTFOLIO TRANSACTIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser and the Sub-Adviser are made with a view to achieving
their respective investment objectives. Investment decisions are the product of
many factors in addition to basic suitability for the particular client
involved (including the Trust). Some securities considered for investment by
the Portfolios may also be appropriate for other clients served by the Adviser
or the Sub-Adviser. 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. If a purchase or sale of securities consistent with the
investment policies of a Portfolio and one or more of these clients is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and clients in a manner deemed fair and
reasonable by the Adviser or Sub-Adviser. Particularly when investing in less
liquid or illiquid securities of smaller capitalization companies, such
allocation may take into account the asset size of a Portfolio in determining
whether the allocation of an investment is suitable. As a result, larger
Portfolios may become more concentrated in more liquid securities than smaller
Portfolios or private accounts of the Adviser or the Sub-Adviser pursuing a
small capitalization investment strategy, which could adversely affect
performance. The Adviser or the Sub-Adviser may aggregate orders for the
Portfolios with simultaneous transactions entered into on behalf of its other
clients so long as price and transaction expenses are averaged either for the
portfolio transaction or for that day. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling the
security. In some instances, one client may sell a particular security to
another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price
and allocated between such clients in a manner which in the Adviser's or the
Sub-Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each.
35
There may be circumstances when purchases or sales of portfolio securities for
one or more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed-income securities,
which are traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction.
Transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
The Adviser and/or the Sub-Adviser places orders for the purchase and sale of
portfolio securities, options and futures contracts and buys and sells such
securities, options and futures for the Trust through a substantial number of
brokers and dealers. In so doing, the Adviser or Sub-Adviser uses its best
efforts to obtain for the Trust the most favorable price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions as described below. In seeking the most favorable price and
execution, the Adviser or Sub-Adviser, having in mind the Trust's best
interests, considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience and
financial stability of the broker-dealer involved and the quality of service
rendered by the broker-dealer in other transactions.
The Adviser or, pursuant to the portfolio management agreements, the
Sub-Adviser, places orders for the purchase and sale of portfolio investments
for a Portfolio's accounts with brokers or dealers selected by it in its
discretion. In effecting purchases and sales of portfolio securities for the
accounts of the Portfolios, the Adviser and the Sub-Adviser will seek the best
price and execution of the Portfolios' orders. In doing so, a Portfolio may pay
higher commission rates than the lowest available when the Adviser or
Sub-Adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction, as discussed below. The Adviser and the Sub-Adviser also may
consider sales of shares of the Trust as a factor in the selection of
broker-dealers to execute portfolio transactions for the Trust.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser and the Sub-Adviser receive research services from many
broker-dealers with which the Adviser and the Sub-Adviser place the Trust's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such matters as general economic and security
market reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser and the Sub-Adviser in advising various of
their clients (including the Trust), although not all of these services are
necessarily useful and of value in managing the Trust. The advisory fees paid
by the Trust are not reduced because the Adviser and the Sub-Adviser receive
such services.
In reliance on the "safe harbor" provided by Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), the Adviser and the
Sub-Adviser may cause the Trust to pay broker-dealers which provide them with
"brokerage and research services" (as defined in the 1934 Act) an amount of
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, the Adviser or the Sub-Adviser may also consider
36
sales of shares of the Trust as a factor in the selection of broker-dealers
to execute portfolio transactions for the Trust.
The Adviser or the Sub-Adviser may place orders for the purchase and sale of
exchange-listed portfolio securities with a broker-dealer that is an affiliate
of the Adviser or Sub-Adviser where, in the judgment of the Adviser or
Sub-Adviser, 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 the
Adviser or the Sub-Adviser 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 the Adviser or Sub-Adviser 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, the Adviser, or Sub-Adviser 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
A change in the securities held by a Portfolio is known as "portfolio
turnover." The Sub-Adviser manages the Portfolios without regard generally to
restrictions on portfolio turnover. The use of futures contracts and other
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. High
portfolio turnover (E.G., greater than 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. The higher the rate of portfolio turnover of a Portfolio, the
higher these transaction costs borne by the Portfolio generally will be. Such
sales may result in realization of taxable capital gains (including short-term
capital gains which are taxed when distributed to shareholders who are
individuals at ordinary income tax rates). See "Taxation." Each Portfolio
expects that its portfolio turnover rate will not exceed __% for its first
fiscal year.
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
As indicated in the Prospectus under the heading "How Portfolio Shares are
Priced," the net asset value ("NAV") of a Portfolio's shares is determined by
dividing the total value of a Portfolio's portfolio investments and other
assets attributable to that Portfolio, less any liabilities, by the total
number of shares outstanding of that Portfolio.
37
For purposes of calculating the 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 quotes 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.
Investments initially valued in foreign currencies are converted to U.S.
dollars using foreign 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 foreign currencies in relation to the U.S. dollar. The value of securities
traded in foreign markets or denominated in foreign currencies may be affected
significantly on a day that the New York Stock Exchange is closed and an
investor is not able to buy, redeem or exchange shares. In particular,
calculation of the NAV may not take place contemporaneously with the
determination of the prices of foreign securities used in NAV calculations.
Portfolio shares are valued at 12:00 p.m., Eastern time ("Noon"), 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 Noon and do not normally take into account trading,
clearances or settlements that take place after Noon. 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 their agents after the NAV has been
calculated on a particular day will not generally be used to retroactively
adjust the price of the 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 Advisors or the Sub-Adviser. Fair valuation
may also be used by the Board of Trustees if extraordinary events occur after
the close of the relevant market but prior to Noon.
Each Portfolio's liabilities are allocated among its classes. The total of such
liabilities allocated to a class plus that class's distribution and/or
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. Under certain circumstances, the per share net asset value of classes of
shares of the Portfolios with higher service and/or distribution fees
applicable to such shares may be lower than the per share net asset value of
the classes of shares with lower or no service and/or distribution fees as a
result of the higher daily expense accruals of the service and/or distribution
fees applicable to such classes. 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.
The Trust expects that the holidays upon which the Exchange will be closed are
as follows: 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.
TAXATION
The following discussion is general in nature and should not be regarded as an
exhaustive presentation of all possible tax ramifications. You should consult
a qualified tax adviser regarding your investment in a Portfolio.
38
Each Portfolio intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of 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 (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Qualifying Income Test") and (b) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the value of the
Portfolio's total assets is represented by cash, cash items (including
receivables), U.S. Government securities, securities of other regulated
investment companies and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Portfolio's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities (other than U.S.
Government securities or the securities of other regulated investment
companies) of any one issuer or of two or more issuers which the Portfolio
controls and which are engaged in the same, similar or related trades or
businesses. In order to qualify for the special tax treatment accorded
regulated investment companies, each Portfolio must distribute each taxable
year an amount at least equal to the sum of (i) 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) and (ii) 90% of its
tax-exempt interest, net of expenses allocable thereto. For purposes of the
Qualifying Income Test, the Treasury Department is authorized to promulgate
regulations under which gains from foreign currencies (and options, futures,
and forward contracts on foreign currency) would not constitute qualifying
income if such gains are not directly related to investing in securities
(or options and futures with respect to stock or securities). To date, such
regulations have not been issued.
In years when a Portfolio distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital.
A return of capital is not taxable to a shareholder and has the effect of
reducing the shareholder's basis in the shares.
[The proper tax treatment of income or loss realized by the retirement or sale
of certain Metal-Indexed Notes and catastrophe bonds is unclear. The Portfolios
will report such income or loss as capital or ordinary income or loss in a
manner consistent with any Internal Revenue Service position on the subject
following the publication of such a position. Gain or loss from the sale or
exchange of preferred stock indexed to the price of a natural resource is
expected to be capital gain or loss to the Portfolios.]
DISTRIBUTIONS
As a regulated investment company, each Portfolio generally will not be subject
to U.S. federal income tax on its investment company taxable income and on its
net capital gains (that is, 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 the 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, each Portfolio must distribute during each calendar
year an amount at least equal to the sum of (1) 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) 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.
Shareholders subject to U.S. federal income tax will be subject to tax on
dividends received from a Portfolio, regardless of whether received in cash or
reinvested in additional shares. Such distributions will be taxable
39
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.
Distributions received by tax-exempt shareholders generally will not be subject
to federal income tax to the extent permitted under applicable tax law. All
shareholders must treat dividends, other than capital gain dividends,
exempt-interest dividends, if any, and dividends that represent a return of
capital to shareholders, as ordinary income. In particular, distributions
derived from short-term gains will be treated as ordinary income. Dividends, if
any, derived from interest on certain U.S. Government securities may be exempt
from state and local taxes, although interest on mortgage-backed U.S.
Government securities is generally not so exempt.
Dividends designated by a Portfolio as capital gain dividends derived from the
Portfolio's net capital gains are taxable to shareholders as long-term capital
gains except as provided by an applicable tax exemption. Any distributions
that are not from a Portfolio's net investment income or net capital gains may
be characterized as a return of capital to shareholders or, in some cases, as
capital gain. Each Portfolio will advise shareholders annually of the amount
and nature of the dividends paid to them.
The tax status of each Portfolio and the distributions which it may make are
summarized in the Prospectus under the captions "Portfolio Distributions" and
"Tax Consequences." All dividends and distributions of a Portfolio, whether
received in shares or cash, are taxable and must be reported on each
shareholder's federal income tax return.
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 capital gains may be
characterized as a return of capital to shareholders or, in some cases, as
capital gain. The tax treatment of dividends and distributions will be the
same whether a shareholder reinvests them in additional shares or elects to
receive them in cash. In addition, Portfolios that invest in other investment
companies will not be able to offset gains realized by one underlying
investment company against losses realized by another underlying investment
company. A Portfolio's investment in other investment companies could
therefore affect the amount, timing and character of distributions to its
shareholders.
Taxable shareholders should note that the timing of their investment or
redemptions could have undesirable tax consequences. Dividends and
distributions on shares of a Portfolio are generally subject to federal income
tax as described herein to the extent they do not exceed the Portfolio's
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder's investment. Such
distributions are likely to occur in respect of shares purchased at a time when
the net asset value of a Portfolio reflects gains that are either unrealized,
or realized but not distributed. Such realized gains may be required to be
distributed even when a Portfolio's net asset value also reflects unrealized
losses.
SALES OF SHARES
Upon the disposition of shares of a Portfolio (whether by redemption, sale or
exchange), a shareholder 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. Long-term capital gains will
generally be taxed at a federal income tax rate of 20% to shareholders who are
individuals. 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.
40
[BACKUP WITHHOLDING
A Portfolio may be required to withhold 31% of all taxable distributions
payable to shareholders who fail to provide the Portfolio with their correct
taxpayer identification number or to make required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified
in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal tax liability.]
OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP AGREEMENTS
To the extent such investments are permissible for a Portfolio, the Portfolio's
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles and foreign currencies will be subject to special tax
rules (including mark-to-market, constructive sale, straddle, wash sale and
short sale rules), the effect of which may be to accelerate income to the
Portfolio, defer losses to the Portfolio, cause adjustments in the holding
periods of the Portfolio's securities, convert long-term capital gains into
short-term capital gains and convert short-term capital losses into long-term
capital losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders, including the Portfolios.
FOREIGN CURRENCY TRANSACTIONS
A Portfolio's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value
of the foreign currency concerned.
FOREIGN TAXATION
Income received by the Portfolios from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser and the Sub-Adviser intend to manage the
Portfolios with the intention of minimizing foreign taxation in cases where it
is deemed prudent to do so.
ORIGINAL ISSUE DISCOUNT AND PAY-IN-KIND SECURITIES
Current federal tax law requires the holder of a U.S. Treasury or other fixed
income zero coupon security to accrue as income each year a portion of the
discount at which the security was purchased, even though the holder receives
no interest payment in cash on the security during the year. In addition,
pay-in-kind securities will give rise to income which is required to be
distributed and is taxable even though the Portfolio holding the security
receives no interest payment in cash on the security during the year.
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 (including certain pay-in-kind
securities) may be treated as a dividend for U.S. 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
41
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.
Each Portfolio that holds the foregoing kinds of securities may be required to
pay out as an income distribution each year an amount which is greater than the
total amount of cash interest the Portfolio actually received. Such
distributions may be made from the cash assets of the Portfolio or by
liquidation of portfolio securities, if necessary. The Portfolio may realize
gains or losses from such liquidations. In the event the Portfolio realizes net
capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.
OTHER TAXATION
Distributions also may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally
are taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations
which, if the interest were received directly by a resident of such state,
would be exempt from such state's income tax ("qualifying federal
obligations"). However, some states may exempt all or a portion of such
distributions from income tax to the extent the shareholder is able to
establish that the distribution is derived from qualifying federal obligations.
Moreover, for state income tax purposes, interest on some federal obligations
generally is not exempt from taxation, whether received directly by a
shareholder or through distributions of investment company taxable income (for
example, interest on FNMA Certificates and GNMA Certificates). Each Portfolio
will provide information annually to shareholders indicating the amount and
percentage of its 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. The Trust is organized as a
Massachusetts business trust. Under current law, so long as each Portfolio
qualifies for the federal income tax treatment described above, it is believed
that neither the Trust nor any Portfolio will be liable for any income or
franchise tax imposed by Massachusetts. Shareholders, in any event, are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Portfolio.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an Agreement and
Declaration of Trust dated November ___, 1999. The capitalization of the Trust
consists solely of an unlimited number of shares of beneficial interest. 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.
42
Shares begin earning dividends on Portfolio shares the day after the Trust
receives the purchase payment from the shareholder. Net investment income from
interest and dividends, if any, will be declared and paid [quarterly] to
shareholders of record by the Portfolio. Any net capital gains from the sale
of portfolio securities will be distributed no less frequently than once
annually. Net short-term capital gains may be paid more frequently. A
Portfolio's dividend and capital gain distributions will be paid only in cash.
Dividends will not reinvest.
Under Massachusetts law, shareholders could, under certain circumstances, be
held liable for the obligations of the Trust. However, the Agreement and
Declaration of Trust (the ''Declaration of Trust'') of the Trust disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
also provides for indemnification out of a Portfolio's property for all loss
and expense of any shareholder investing in that Portfolio held liable on
account of being or having been such a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which such disclaimer is inoperative or the
Portfolio of which he or she is or was a shareholder is unable to meet its
obligations, and thus should be considered remote.
PERFORMANCE INFORMATION
From time to time the Trust may make available certain information about the
performance of one or both of the Portfolios. Information about a Portfolio's
performance is based on that Portfolio's record to a recent date and is not
intended to indicate future performance.
The total return and yield of the shares of the Portfolios may be included in
advertisements or other written material. When a Portfolio's total return is
advertised, it will be calculated for the past year, the past five years, and
the past ten years (or if the Portfolio has been offered for a period shorter
than one, five or ten years, that period will be substituted) since the
establishment of the Portfolio, as more fully described below. Total return
for each Portfolio 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). Total return may be advertised 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.
The Portfolios may also provide current distribution information to the
shareholders in reports or other communications, or in certain types of sales
literature provided to prospective investors. Current distribution information
for a particular Portfolio will be based on distributions for a specified
period (I.E., total dividends from net investment income), divided by the
relevant net asset value per share on the last day of the period and
annualized. 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 period.
Performance information is computed separately for each Portfolio. Each
Portfolio may from time to time include in advertisements or in information
furnished to present or prospective shareholders the yield of its shares, the
total return of its shares, and the ranking of those performance figures
relative to such figures for groups of mutual funds categorized by Lipper
Analytical Services as having the same investment objectives. Information
provided to any newspaper or similar listing of the Portfolio's net asset
values and public offering prices will separately present each class of shares.
The Portfolios also may compute current distribution rates and use this
information in their Prospectus and Statement of Additional Information, in
reports to current shareholders, or in certain types of sales literature
provided to prospective investors.
43
Investment results of the Portfolios will fluctuate over time, and any
representation of the Portfolio's 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 and Semi-Annual
Reports contain additional performance information for the Portfolios and are
available upon request, without charge, by calling the telephone numbers listed
on the cover of this Statement of Additional Information.
CALCULATION OF YIELD
Quotations of yield for certain of the Portfolios will be based on all
investment income per share (as defined by the SEC) during a particular 30-day
(or one month) period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of
the period, according to the following formula:
YIELD = 2[( a-b + 1)6 -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
The yield of a Portfolio will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses of the
Trust allocated to the Portfolio. These factors, possible differences in the
methods used in calculating yield should be considered when comparing a
Portfolio's yield to yields published for other investment companies and other
investment vehicles. Yield should also be considered relative to changes in
the value of a Portfolio's shares. These yields do not take into account any
applicable contingent deferred sales charges.
The Trust, in its advertisements, may refer to pending legislation from time to
time and the possible impact of such legislation on investors, investment
strategy and related matters. This would include any tax proposals and their
effect on marginal tax rates and tax-equivalent yields. At any time in the
future, yields and total return may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
CALCULATION OF TOTAL RETURN
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 assume that all dividends and
distributions are reinvested when paid. Quotations of total return may also be
shown for other periods. The Portfolios may also, with respect to certain
periods of less than one year, provide total return information for that period
that is unannualized. Under applicable regulations, any such information is
required to be accompanied by standardized total return information.
44
Performance information for a Portfolio may also be compared to: (i) the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, the Morgan Stanley Capital International EAFE (Europe, Australia, Far
East) Index, the Morgan Stanley Capital International Emerging Markets Free
Index, the International Finance Corporation Emerging Markets Index, the Baring
Emerging Markets Index, or other unmanaged indexes that measure performance of
a pertinent group of securities; (ii) other groups of mutual funds tracked by
Lipper Analytical Services ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank mutual funds on overall performance or other criteria; and (iii) the
Consumer Price Index (measure for inflation) to assess the real rate of return
from an investment in the Portfolios. Unmanaged indexes (I.E., other than
Lipper) generally do not reflect deductions for administrative and management
costs or expenses. The Adviser and the Sub-Adviser may also report to
shareholders or to the public in advertisements concerning the performance of
the Adviser and/or the Sub-Adviser as advisers to clients other than the Trust,
and on the comparative performance or standing of the Adviser and/or the
Sub-Adviser in relation to other money managers. Such comparative information
may be compiled or provided by independent ratings services or by news
organizations. Any performance information, whether related to the Portfolios,
the Adviser or the Sub-Adviser, should be considered in light of the
Portfolios' investment objectives and policies, characteristics and quality,
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.
The total return of each series may be used to compare the performance of a
Portfolio's shares against certain widely acknowledged standards or indexes for
stock and bond market performance, against interest rates on certificates of
deposit and bank accounts, against the yield on money market funds, against the
cost of living (inflation) index, and against hypothetical results based on a
fixed rate of return.
The S&P's Composite Index of 500 Stocks (the "S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is
composed almost entirely of common stocks of companies listed on the New York
Stock Exchange, although the common stocks of a few companies listed on the
American Stock Exchange or traded over-the-counter are included. The 500
companies represented include 380 industrial, 10 transportation, 39 utilities
and 71 financial services concerns. The S&P 500 represents about 73% of the
market value of all issues traded on the New York Stock Exchange.
The S&P's 400 Mid-Cap Index (the "S&P 400 Mid-Cap Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 400 stocks of companies whose capitalization range from $100 million
to over $5 billion and which represent a wide range of industries. As of
February 26, 1999, approximately 25% of the 400 stocks were stocks listed on
the National Association of Securities Dealers Automated Quotations ("NASDAQ")
system, 73% were stocks listed on the New York Stock Exchange and 2% were
stocks listed on the American Stock Exchange. The Standard & Poor's Midcap 400
Index P/TR consists of 400 domestic stocks chosen for market size (median
market capitalization of $1.54 billion), liquidity and industry group
representation. It is a market value-weighted index (stock price times shares
outstanding), with each stock affecting the index in proportion to its market
value. The index is comprised of industrials, utilities, financials and
transportation, in size order.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market value-weighted and
unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks relative to the base measure of 100.00 on February
5, 1971. The NASDAQ Index is composed entirely of common stocks of companies
traded over-the-counter and often through the NASDAQ system. Only those
over-the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Russell 2000 Small Stock Index is an unmanaged index of the 2000 smallest
securities in the Russell 3000 Index, representing approximately 7% of the
Russell 3000 Index. The Russell 3000 Index represents approximately 98% of the
U.S. equity market by capitalization. The Russell 1000 Index is composed of
the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Index
represents the universe of stocks from which
45
most active money managers typically select. This large cap index is highly
correlated with the S&P 500. The Russell 1000 Value Index contains stocks
from the Russell 1000 Index with a less-than-average growth orientation.
It represents the universe of stocks from which value managers typically select.
The Lehman Government Bond Index (the "SL Government Index") is a measure of
the market value of all public obligations of the U.S. Treasury; all
publicly-issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the SL Government Index.
The Lehman Government/Corporate Bond Index (the "SL Government/Corporate
Index") is a measure of the market value of approximately 5,000 bonds. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher by an NRSRO.
BanXquote Money Market, a service of Masterfund Inc., provides the average rate
of return paid on 3-month certificates of deposit offered by major banks and
the average rate paid by major banks on bank money market funds. The Donoghue
Organization, Inc., a subsidiary of IBC USA Inc., publishes the Money Fund
Report which lists the 7-day average yield paid on money market funds.
From time to time, the Trust may use, in its advertisements or information
furnished to present or prospective shareholders, data concerning the
performance and ranking of certain countries' stock markets, including
performance and ranking data based on annualized returns over one-, three-,
five- and ten-year periods. The Trust may also use data about the portion of
world equity capitalization represented by U.S. securities. As of December
31, 1998, the U.S. equity market capitalization represented approximately 40%
of the equity market capitalization of all the world's markets. This compares
with 52% in 1980 and 70% in 1972.
From time to time, the Trust may use, in its advertisements and other
information relating to certain of the Portfolios, data concerning the
performance of stocks relative to that of fixed income investments and relative
to the cost of living over various periods of time. [The table below sets
forth the annual returns for each calendar year from 1973 through 1998 (as well
as a cumulative return and average annual return for this period) for the S&P
500 and Treasury bills (using the formula set forth after the table) as well as
the rates of inflation (based on the Consumer Price Index) during such periods.
46
Consumer Price
Period S&P 500 Treasury Bills Index
- ------ ------- -------------- --------------
1973 -14.7 6.9 8.8
1974 -26.5 8.0 12.2
1975 37.2 5.8 7.0
1976 23.8 5.0 4.8
1977 -7.2 5.1 6.8
1978 6.5 7.2 9.0
1979 18.4 10.4 13.3
1980 32.4 11.2 12.4
1981 -4.9 14.7 8.9
1982 21.4 10.5 3.8
1983 22.5 8.8 3.8
1984 6.3 9.9 3.9
1985 32.2 7.7 3.8
1986 18.5 6.1 1.1
1987 5.2 5.5 4.4
1988 16.8 6.3 4.4
1989 31.5 8.4 4.6
1990 -3.2 7.8 6.1
1991 30.5 5.6 3.1
1992 7.7 3.5 2.9
1993 10.1 2.9 2.7
1994 1.3 3.9 2.7
1995 37.4 5.6 2.7
1996 23.1 5.2 3.3
1997 33.4 5.3 1.7
1998 28.6 4.9 1.6
Cumulative Return
1973-1998 2,667.2% 478.0% 285.6%
Average Annual Return
1973-1998 13.6% 7.0% 5.3%
The average returns for Treasury bills were computed using the following
method. For each month during a period, the Treasury bill having the shortest
remaining maturity (but not less than one month) was selected. (Only the
remaining maturity was considered; the bill's original maturity was not
considered). The return for the selected Treasury bill was computed based on
the price of the bill as of the last trading day of the previous month and the
price on the last trading day of the current month. The price of the bill (P)
at each time (t) is given by:
Pt = [ 1-rd ]
----
[ 360 ]
where,
r = decimal yield on the bill at time t (the average of bid and ask quotes); and
d = the number of days to maturity as of time t.
Advertisements and information relating to the Portfolios may use data
comparing the performance of stocks of medium-sized companies to that of other
companies. The following table sets forth the annual returns for each
47
year from March 1981 (inception of Mid-Cap Index) through December 31, 1998
(as well as a cumulative return and average annual return for this period) for
stocks of medium-sized companies (based on the Standard & Poor's Mid-Cap
Index), stocks of small companies (based on the Russell 2000 Index) and
stocks of larger companies (based on the S&P 500).
Small Mid-Size Large
Period Companies Companies Companies
- ------ --------- --------- ---------
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
1997 22.8 32.3 33.4
1998 -2.6 19.1 28.6
Cumulative Return
2/28/81-12/31/98 710.5% 1,784.5% 1,616.9%
Average Annual Return
2/28/81-12/31/98 12.4% 17.9% 17.3%
From time to time, the Trust may use, in its advertisements and other
information relating to the Portfolios, data concerning the relevant
performance and volatility of portfolios consisting of all stocks, portfolios
consisting of all bonds and portfolios consisting of stocks and bonds blended
with stocks of companies engaged in the extraction, processing, distribution or
marketing of gold and other precious metals. The following table shows the
annual returns for each calendar year from 1988 through 1998 (as well as
cumulative return and average annual return for this period) for an all-stock
portfolio (using the S&P 500), an all-bond portfolio (using the Ibbotson's
Long-Term Corporate Bond Index), and for a hypothetical portfolio with 45% of
its assets in stocks comprising the S&P 500, 45% in bonds comprising the
Ibbotson's Long-Term Corporate Bond Index and 10% in stocks comprising the
Philadelphia Gold & Silver Index.
48
RETURN AND CUMULATIVE VALUES OF STOCKS, BONDS, SAVINGS RATES
VS. BALANCED PORTFOLIO (ASSUMING REBALANCING AT YEAR-ENDS)
ANNUAL RETURNS
Small Co. S&P 500 LT. Corp.
Stocks Stocks Bonds T-Bills Gold Index Balanced*
-------- ------- -------- ------- ---------- -------
1988 22.87% 16.81% 10.70% 6.35% -20.70% 9.03%
1989 10.18% 31.49% 16.23% 8.37% 37.83% 26.43%
1990 -21.56% -3.17% 6.78% 7.83% -19.09% -0.97%
1991 44.63% 30.55% 19.89% 5.59% -16.75% 21.71%
1992 23.35% 7.67% 9.39% 3.51% -11.75% 5.07%
1993 20.98% 9.99% 13.17% 2.89% 85.01% 23.46%
1994 3.11% 1.31% -5.76% 3.90% -17.12% -3.12%
1995 34.46% 37.43% 27.20% 5.60% 10.14% 29.01%
1996 17.62% 23.07% 1.40% 5.21% -3.05% 10.46%
1997 22.78% 33.36% 12.95% 5.26% -36.45% 17.19%
1998 -7.31% 28.58% 10.76% 4.86% -12.43% 16.46%
STANDARD
DEVIATION
88-98 17.80% 13.34% 8.37% 1.60% 32.69% 10.35%
CUMULATIVE
88-98 325.3% 575.6% 210.2% 78.0% -40.8% 349.5%
ANNUALIZED
88-98 19.0% 17.8% 10.8% 5.4% -4.7% 12.4%
*Balanced:
- ----------
Stocks 45%
Bonds 45%
Gold 10%
Small Co. 0%
T-Bills 0%
From time to time, the Trust may use, in its advertisements and other
information, data concerning the average price-to-earnings ("P/E") ratios of
"Value Stocks" and "Growth Stocks." For these purposes, the P/E ratios of
Value Stocks are measured by the P/E ratios of the stocks comprising the
Russell 1000 Value Index, and the P/E ratios of Growth Stocks are measured by
the P/E ratios of the stocks comprising the Russell 1000 Growth Index. Both
the Russell 1000 Value Index and Russell 1000 Growth Index are unmanaged
indexes, and it is not possible to invest directly in either index. The table
below sets forth the average P/E ratio of Value Stocks and the Average P/E
ratio of Growth Stocks for the period beginning December 31, 1992 and ending
March 31, 1999.
49
Average P/E ratio
-----------------
Period
Ending Growth Stocks Value Stocks
- ------ ------------- ------------
12/31/92 21.76 21.40
3/31/93 21.59 22.36
6/30/93 20.86 21.41
9/30/93 20.25 21.05
12/31/93 18.33 17.84
3/31/94 18.07 17.69
6/30/94 16.70 16.31
9/30/94 15.98 15.28
12/31/94 15.98 14.97
3/31/95 15.80 14.62
6/30/95 16.50 14.87
9/30/95 17.85 16.17
12/31/95 17.91 15.82
3/31/96 18.24 16.07
6/30/96 18.57 15.93
9/30/96` 18.88 15.80
12/31/96 20.45 17.03
3/31/97 20.28 16.78
6/30/97 22.85 18.44
9/30/97 23.80 19.60
12/31/97 22.93 19.06
3/31/98 26.46 21.32
6/30/98 26.55 20.69
9/30/98 25.77 19.31
12/31/98 31.31 22.92
3/31/99 39.46 24.33
Advertisements and information relating to the Portfolios may use data
comparing the performance of a hypothetical investment in Growth Stocks, Value
Stocks, "Bonds" and "Savings Accounts." For these purposes, the performance of
an investment in "Bonds" is measured by the Lehman Aggregate Bond Index, an
unmanaged index representative of the U.S. taxable fixed income universe. It
is not possible to invest in this index. The performance of an investment in
"Savings Accounts" is measured by the return on 3-month U.S. Treasury bills.
Similarly, advertisements and information relating to the Portfolios may use
data comparing the performance of a hypothetical investment in "Stocks," Bonds
and Savings Accounts. For these purposes, the performance of the investment in
"Stocks" is measured by the S&P 500, while the performance of Bonds and Savings
Accounts is measured as discussed above. The table below sets forth the value
at March 31, 1999 of a hypothetical $10,000 investment in Stocks, Growth
Stocks, Value Stocks, Bonds and Savings Accounts made at March 31, 1979.
March 31, 1999 Value of $10,000
Asset Category Investment made at March 31, 1979
- -------------- ---------------------------------
Growth Stocks $247,076
Value Stocks $231,697
Stocks $126,624
Bonds $ 67,584
Savings Accounts $ 39,985
From time to time, the Trust may use, in its advertisements and other
information, data comparing the average annual total return of "Small-Caps,"
which are stocks represented by the Ibbotson's Small Company Stock
50
Total Return Index, and "Large-Caps," which are stocks represented by the
Ibbotson's Large Company Stock Total Return Index. Both indexes are
unmanaged indexes, and it is not possible to invest directly in either
index. For example, for the period from December 31, 1925 through
December 31, 1998, the average annual total return of Small-Caps was
12.4%, and for Large-Caps was 11.2%.
Advertisements and other information and other information relating to the
Portfolios may list the annual total returns of certain asset classes during
specified years. In such advertisements, the return of "Small Company Stocks"
will be measured by the Russell 2000 Index of small company stocks, the returns
of "Large Company Stocks" will be measured by the S&P 500, and the return of
"Intermediate-Term Government Bonds" will be measured by a one-bond portfolio
with a 5-year maturity as measured by Ibbotson Associates. The following table
sets for the average return of these asset classes for the specified years.
Domestic Asset Class Annual Total Return
-------------------- -------------------
1990 Intermediate-Term Government Bonds +9.7%
1991 Small Company Stocks +22.9%
1992 Small Company Stocks +31.5%
1993 Small Company Stocks +21.0%
1994 U.S. Treasury Bills +3.9%
1995 Large Company Stocks +37.4%
1996 Large Company Stocks +23.0%
1997 Large Company Stocks +33.4%
1998 Large Company Stocks +28.6%
The Trust may use, in its advertisements and other information, data concerning
the projected cost of a college education in future years based on 1997/1998
costs of college (using tuition and fees only) and an assumed rate of increase
for such costs. For example, the table below sets forth the projected cost of
four years of college at a public college and a private college assuming a
steady increase in both cases of 3% per year. In presenting this information,
the Trust is making no prediction regarding what will be the actual growth rate
in the cost of a college education, which may be greater or less than 3% per
year and may vary significantly from year to year. The Trust makes no
representation that an investment in any of the Portfolios will grow at or
above the rate of growth of the cost of a college education.
POTENTIAL COLLEGE COST TABLE
Start Public Private Start Public Private
Year College College Year College College
- ----- ------- ------- ----- ------- -------
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306 2012 $20,278 $89,061
COSTS ASSUME A STEADY INCREASE IN THE ANNUAL COST OF COLLEGE OF 3% PER YEAR
FROM A 1996-97 BASE YEAR AMOUNT. ACTUAL RATES OF INCREASE MAY BE MORE OR LESS
THAN 3% AND MAY VARY.
51
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 category* during the period from 1974 through 1998 was:
Stocks: 14.9%
Bonds: 9.9%
T-Bills: 7.0%
Inflation: 5.2%
* RETURNS OF UNMANAGED INDEXES DO NOT REFLECT PAST OR FUTURE PERFORMANCE OF THE
FIXED INCOME SHARES. STOCKS ARE REPRESENTED BY IBBOTSON'S LARGE COMPANY STOCK
TOTAL RETURN INDEX. BONDS ARE REPRESENTED BY IBBOTSON'S LONG-TERM CORPORATE
BOND INDEX. TREASURY BILLS ARE REPRESENTED BY IBBOTSON'S TREASURY BILL INDEX
AND INFLATION IS REPRESENTED BY THE COST OF LIVING INDEX. THESE ARE ALL
UNMANAGED INDEXES, 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 20 years
from 1979 through 1998, the average annual return of stocks comprising the
Ibbotson's Large Company Stock Total Return Index ranged from -4.91% to 37.4%
while the annual return of a hypothetical portfolio comprised 40% of such
common stocks, 40% of bonds comprising the Ibbotson's Long-term Corporate bond
Index and 20% of Treasury bills comprising the Ibbottson's Treasury Bill Index
(a "mixed portfolio") would have ranged from [ ]% to 28.2% over the same
period. The average annual returns of each investment category* for each of
the years from 1979 through 1998 is set forth in the following table.
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------ ------ ------- -------- ---------
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% 3.87% 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%
52
* RETURNS OF UNMANAGED INDEXES DO NOT REFLECT PAST OR FUTURE PERFORMANCE OF THE
FIXED INCOME SHARES. STOCKS ARE REPRESENTED BY IBBOTSON'S LARGE COMPANY STOCK
TOTAL RETURN INDEX. BONDS ARE REPRESENTED BY IBBOTSON'S LONG-TERM CORPORATE
BOND INDEX. TREASURY BILLS ARE REPRESENTED BY IBBOTSON'S TREASURY BILL INDEX
AND INFLATION IS REPRESENTED BY THE COST OF LIVING INDEX. TREASURY BILLS ARE
ALL UNMANAGED INDEXES, 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 advertisements and other materials examples designed
to demonstrate the effect of compounding when an investment is maintained over
several or many years. For example, the following table shows the annual and
total contributions necessary to accumulate $200,000 of savings (assuming a
fixed rate of return) over various periods of time:
Investment Annual Total Total
Period Contribution Contribution Saved
- ---------- ------------ ------------ --------
30 Years $1,979 $59,370 $200,000
25 Years $2,955 $73,875 $200,000
20 Years $4,559 $91,180 $200,000
15 Years $7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
THIS HYPOTHETICAL EXAMPLE ASSUMES A FIXED 7% RETURN COMPOUNDED ANNUALLY AND A
GUARANTEED RETURN OF PRINCIPAL. THE EXAMPLE IS INTENDED TO SHOW THE BENEFITS
OF A LONG-TERM, REGULAR INVESTMENT PROGRAM, AND IS IN NO WAY REPRESENTATIVE OF
ANY PAST OR FUTURE PERFORMANCE OF THE FIXED INCOME SHARES. 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 THE FIXED INCOME SHARES
SHOULD BE AWARE THAT THE PORTFOLIOS OF FIXED INCOME SHARES MAY EXPERIENCE IN
THE FUTURE PERIODS OF NEGATIVE GROWTH.
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 1998:
% of Income for Individuals
Aged 65 Years and Older in 1997*
--------------------------------
Social Security
Year and Pension Plans Other
- ----- ----------------- -----
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 Fund
Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund 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
53
the Adviser and the Sub-Adviser, including descriptions of assets under
management and client base, and opinions of the author(s) regarding the
skills of personnel and employees of the Adviser or the Sub-Adviser who
have portfolio management responsibility. From time to time, the Trust
may include references to or reprints of such publications or reports
in its advertisements and other information relating to the Portfolios.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested
in one or more of the Portfolios over a specified period of time and may use
charts and graphs to display that growth.
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 the Sub-Adviser who assist with portfolio management and research
activities on behalf of the Portfolios.
Ibbotson Associates ("Ibbotson") may analyze the risk and returns of the
Portfolios and relevant benchmark market indexes in a variety of market
conditions. Based on its independent research and analysis, Ibbotson may
develop, from time to time, model portfolios of the Portfolios which indicate
how, in Ibbotson's opinion, a hypothetical investor with a 5+ year investment
horizon might allocate his or her assets among the Portfolios. Ibbotson bases
its model portfolios on five levels of investor risk tolerance which it
developed and defines as ranging from "Very Conservative" (low volatility;
emphasis on capital preservation, with some growth potential) to "Very
Aggressive" (high volatility; emphasis on long-term growth potential).
However, neither Ibbotson nor the Trust offers Ibbotson's model portfolios as
investments. Moreover, neither the Trust, the Adviser, the Sub-Adviser nor
Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
[YEAR 2000 READINESS DISCLOSURE
Many of the world's computer systems may be unable to correctly recognize,
interpret or use dates beyond the year 1999 (the "Year 2000 Problem"). This
inability might lead to significant business disruptions. PIMCO Advisors is
taking steps to ensure that its computer systems will function properly. PIMCO
Advisors has designated a team of information and business professionals (the
"Year 2000 Team") to address the Year 2000 Problem and has developed a written
"Year 2000 Plan."
The Year 2000 Plan consists of five general phases: Awareness, Assessment,
Remediation, Testing and Implementation. The Year 2000 Plan and budget were
prepared and approved by PIMCO Advisors' Management Board on July 21, 1998.
During the Awareness phase, the Year 2000 Team informed the employees of the
Adviser and its subsidiaries, including their highest levels of management,
about the Year 2000 Problem. During the Assessment phase, the Year 2000 Team
prepared an inventory of information technology ("IT") and non-IT systems used
by the Adviser, its subsidiaries and Pacific Investment Management. Systems
were classified as software, hardware or embedded chips. Separately, systems
were also classified as mission critical or non-mission critical. As the
inventory was compiled and verified, each system was preliminarily assessed for
Year 2000 compliance. This preliminary assessment was made by obtaining
manufacturers' representations that a given product is Year 2000 compliant or
other evidence of compliance. Systems for which no such evidence can be
obtained were identified as candidates for correction or replacement
("Remediation"). During the Remediation phase, software, hardware and embedded
chips identified during the Assessment phase to be non-Year 2000 compliant are
corrected or replaced. Necessarily, further corrections and replacements may
need to be made after the Remediation phase has been completed as a result of
problems identified during the Testing phase or otherwise. During the Testing
phase, the Adviser performs internal testing, point-to-point testing and
industry testing programs. Testing generally will be performed in order of
criticality, with mission-critical systems receiving the highest priority.
PIMCO Advisors does not plan to test non-mission critical systems that are not
used in its business (E.G., software applications incidently installed on PCs).
Several subsidiaries of the Adviser plan on participating in the Securities
Industry Association industry-wide testing forum. During the Implementation
phase, systems that have been tested and identified as being Year 2000
compliant are put into normal business operation and contingency plans are
finalized.
54
As with all investment advisers, the business operations of the Adviser, its
investment advisory subsidiaries and Pacific Investment Management are heavily
dependent upon a complete worldwide network of financial systems that utilize
date fields. The ability of the Adviser, its investment advisory subsidiaries
and Pacific Investment Management to endure any adverse effects of the
transition to the Year 2000 are highly dependent upon the efforts of third
parties, particularly issuers, brokers, dealers and custodians. The failure of
third party organizations to resolve their own processing issues with respect
to the Year 2000 Problem in a timely manner could have a material adverse
effect on the Adviser's business. As of the date of this Statement of
Additional Information, the management of each of the Adviser, its investment
advisory subsidiaries and Pacific Investment Management believes that the
transition to the Year 2000 will not have a material adverse effect on its
business or operations. However, complications as yet unidentified may
arise in internal or external systems or with data providers, other
securities firms or institutions, issuers, counterparties or other entities
or even with general economic conditions related to the Year 2000 Problem.
The Year 2000 problem may be particularly acute with respect to
foreign markets and securities of foreign issuers in which the Portfolios
invest due to a potential lack of Year 2000 compliance efforts in foreign
markets or by foreign companies. Although the Adviser's efforts and
expenditures in connection with the Year 2000 Problem are substantial, there
can be no assurances that shareholders will not suffer from disruptions or
adverse results arising as a consequence of the Year 2000 Problem.]
COMPLIANCE EFFORTS RELATED TO THE EURO
Another potential computer system problem may arise in conjunction with the
recent introduction of the euro. Whether introducing the euro to financial
companies' systems will be problematic is not fully known; however, the cost
associated with making systems recognize the euro is not currently expected to
be material.
VOTING RIGHTS
Under the Declaration of Trust, 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 Declaration of Trust. 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. Shareholders may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. In the
event that such a request was made, the Trust has represented that it would
assist with any necessary shareholder communications. 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). Each Portfolio has identical voting rights except that
each Portfolio has exclusive voting rights on any matter submitted to
shareholders that relates solely to that Portfolio, and has separate voting
rights on any matter submitted to shareholders in which the interests of one
Portfolio differ from the interests of any other Portfolio. Each Portfolio has
exclusive voting rights with respect to matters pertaining to any distribution
or servicing plan or agreement applicable to that Portfolio. These shares are
entitled to vote at meetings of shareholders. Matters submitted to shareholder
vote must be approved by each Portfolio separately except (i) when required by
the 1940 Act shares shall be voted together and (ii) when the Trustees have
determined that the matter does not affect Portfolios, then only shareholders
of the Portfolio(s) affected shall be entitled to vote on the matter. The
shares of the Portfolios will vote together except when the vote of a single
Portfolio is required as specified above or otherwise by the 1940 Act.
The Trust's shares do not have cumulative voting rights. Therefore, the
holders 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.
CERTAIN OWNERSHIP OF TRUST SHARES
55
As of [_____], the Trust believes that the Trustees and officers of the Trust,
as a group, owned less than [__] percent of each class of each Portfolio and of
the Trust as a whole. As of [_____], the following persons owned of record or
beneficially [__]% or more of the noted class of shares of the following
Portfolios [NOTE: TO BE UPDATED]:
Percentage of Percentage of
Shares of Outstanding Outstanding
Beneficial Shares of Shares of
Ownership Class Owned Portfolio Owned
----------- -------------- ---------------
* 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.
** Shares are believed to be held only as nominee.
CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas City,
Missouri 64105, serves as custodian for assets of each Portfolio. Pursuant to
a separate sub-custody agreement between IFTC and State Street Bank and Trust
Company ("State Street"), State Street serves as subcustodian of the Trust for
the custody of the foreign securities acquired by the Portfolios. Under the
agreement, State Street may hold foreign securities at its principal offices
and its 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 or other exemptions 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 currently 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, although the
Trustees reserve the right to delegate their selection responsibilities in
light of recent amendments to Rule 17f-5 under the 1940 Act, in which case the
factors for consideration would differ from those referenced above. Currently,
the Board of Trustees reviews annually the continuance of foreign custodial
arrangements for the Trust, but reserves the right to discontinue this practice
as permitted by the recent amendments to Rule 17f-5. 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
56
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, Missouri 64105, serves
as the independent public accountants for the Portfolios.
PricewaterhouseCoopers LLP provides audit services, accounting assistance, and
consultation in connection with SEC filings.
TRANSFER AGENT
National Financial Data Services, 330 West 9th Street, 4th Floor, Kansas City,
Missouri 64105, serves as the Transfer Agent for the Trust's shares.
LEGAL COUNSEL
Ropes & Gray, One International Place, Boston, Massachusetts 02110 serves as
legal 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 statements filed with
the SEC under the 1933 Act with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statements, 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 relevant registration statement, each such
statement being qualified in all respects by such reference.
57
PART C. OTHER INFORMATION
Item 23. Exhibits.
The letter of each exhibit relates to the exhibit designation in Form
N-1A:
(a) Agreement and Declaration of Trust, filed herewith.
(b) Form of Bylaws, filed herewith.
(c) Article III (Shares) and Article V (Shareholders' Voting Powers
and Meetings) of the Agreement and Declaration of Trust, filed
herewith.
(d) (1) Form of Investment Advisory Agreement, filed herewith.
(2) Form of Portfolio Management Agreement with Pacific Investment
Management Company, filed herewith.
(e) Distribution Contract (1).
(f) Not applicable.
(g) Form of Custody and Investment Accounting Agreement with Investors
Fiduciary Trust Company (1).
(h)
(1) Form of Administration Agreement between the Trust and PIMCO
Advisory Services, filed herewith.
(2) Form of Transfer Agency Agreement (1).
(i) Opinion and Consent of Counsel (1).
(j) Not applicable.
(k) Not applicable.
(l) Initial Capital Agreement (1).
(m) Not applicable.
(n) Not applicable.
1
- ---------------------
(1) To be filed by amendment.
2
Item 24. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is made to Article VIII, Section 1, of the Registrant's Agreement and
Declaration of Trust, which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to the Trust's
Agreement and Declaration of Trust, its Bylaws or otherwise, the Registrant is
aware that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by trustees, officers or controlling persons of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustees, officers or controlling persons in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of Investment Advisor and Portfolio
Managers.
Unless otherwise stated, the principal business address of each organization
listed in 840 Newport Center Drive, Newport Beach, CA 92660.
PIMCO Advisors L.P.
<TABLE>
<CAPTION>
Name Position with Advisor Other Affiliates
- ---- --------------------- ----------------
<S> <C> <C>
Walter E. Auch, Sr. Member of Management Board Management Consultant;
Director, Fort Dearborn Fund,
Shearson VIP Fund, Shearson
Advisors Fund, Shearson TRAK
Fund, Banyan Land Trust,
Banyan Land Fund II, Banyan
Mortgage Fund, Allied
Healthcare Products, Inc., First
Western Inc., DHR Group and
Geotech Industries.
3
William R. Benz Member of Management Board See Pacific Investment
Management Company.
David B. Breen Member of Management Board Director, Managing Director
and Chief Executive Officer,
Cadence Capital Management,
Inc.,; Managing Director and
Chief Executive Officer,
Cadence Capital Management.
Donald A. Chiboucas Member of Management Board Director, Columbus Circle
Investors Management, Inc.;
Managing Director, Columbus
Circle Investors.
Kenneth W. Corba Member of Management Board. None.
Managing Director and Chief
Investment Officer of PIMCO
Equity Advisors.
William D. Cvengros Chief Executive Officer and Trustee and Chairman of the
President, Member of Trust; Director, PIMCO Funds
Management Board Distributors LLC, Chief
Executive Officer and President,
Value Advisors LLC; Director,
PIMCO Funds Advertising
Agency; Director, President and
Chief Executive Officer,
Thomson Advisory Group, Inc.
Walter B. Gerken Chairman and Member of Director and Managing Director,
Management Board PIMCO Management, Inc.;
Managing Director, Pacific
Investment Management
Company; Senior Vice
President, PIMCO Funds:
Pacific Investment Management
Series, PIMCO Variable
Insurance Trust; Director and
Vice President, StocksPLUS
Management, Inc.; Member of
PIMCO Partners LLC.
4
Brent R. Harris Member of Management Board Director and Managing Director,
PIMCO Management, Inc.;
Managing Director, Pacific
Investment Management
Company; Director and Vice
President, StocksPLUS
Management, Inc.; Chairman of
the Board and Trustee, PIMCO
Funds: Pacific Investment
Management Series, PIMCO
Variable Insurance Trust and
PIMCO Commercial Mortgage
Securities Trust, Inc.; Member
of PIMCO Partners LLC.
Donald R. Kurtz Member of Management Board Donald R. Kurt Member of
Management Board. Formerly,
Vice President of Internal Asset
Management, General Motors
Investment Corp.; Director,
Thomson Advisory Group L.P.
George A. Long Member of Management Board Chairman and Chief Executive
Officer of Oppenheimer Capital.
James McCaughan Member of Management Board Chief Executive Officer,
Oppenheimer Capital.
James F. McIntosh Member of Management Board Executive Director, Allen
Matkins, Leck, Gamble &
Mallory LLP. Formerly,
Director, Pacific Investment
Management Company.
Kenneth H. Mortenson Member of Management Board Managing Director of
Oppenheimer Capital.
William F. Podlich, III Member of Management Board Director and Managing Director,
PIMCO Management, Inc.;
Managing Director, Pacific
Investment Management Company;
Vice President,
5
PIMCO Commercial Mortgage
Securities Trust, Inc.; Member
of PIMCO Partners LLC.
William C. Powers. Member of Management Board See Pacific Investment
Management Company.
Glenn W. Schafer Member of Management Board Board President and Director,
Pacific Mutual Holding
Company, Pacific LifeCorp,
Pacific Life Insurance
Company, Pacific Financial
Asset Management Corp.,
PMRealty Advisors, Inc.;
Director, Pacific Mutual
Distributors, Inc., Mutual
Distributors, Inc., Mutual
Service Corporation,
UnitedPlanners' Group, Inc.,
Thomson Advisory Group.
Thomas C. Sutton Member of Management Board Chairman, Chief Executive
Officer and Director, Pacific
William S. Thomson, Jr. Mutual
Holding Company, Pacific
LifeCorp, Pacific Life Insurance
Company, Pacific Financial
Asset Management Corp.;
Director, Pacific Mutual
Distributors, Inc., Mutual
Service Corporation, United
Planners' Group, Inc., PMRealty
Advisors, Inc.
William S. Thomson, Jr. Member of Management Board; Director, Managing Director and
Chairman, Executive Committee Chief Executive Committee
Fitzgerald Officer, PIMCO
Management, Inc.; Chief
Executive Officer and Managing
Director, Pacific Investment
Management Company;
Member, President and Chief
6
Executive Officer, PIMCO
Partners LLC; Director and
President, StocksPLUS
Management, Inc.; Vice
President, PIMCO Variable
Insurance Trust, PIMCO Funds:
Pacific Investment
Management Series, and
PIMCO Commercial Mortgage
Securities Trust, Inc.; Director,
Thomson Advisory Group, Inc.
Robert M. Fitzgerald Senior Vice President and Chief Financial Officer and
Chief Financial Officer Treasurer, PIMCO Funds
Distributors, LLC, Columbus
Circle Investors, Columbus
Circle Investors Management,
Inc., Cadence Capital
Management, Inc., NFJ
Investment Group, NFJ
Management, Inc., Parametric
Portfolio Associates, Parametric
Management, Inc., PIMCO
Management, Inc., Pacific
Investment Management
Company, and StocksPLUS
Management, Inc.; Chief
Financial Officer and Assistant
Treasurer, Cadence Capital
Management; Senior Vice
President and Chief Financial
Officer, Value Advisors LLC;
Chief Financial Officer,
Columbus Circle Trust
Company; Chief Financial
Officer and Treasurer, PIMCO
Funds Advertising Agency;
Senior Vice President, Chief
Financial Officer and Treasurer,
Thomson Advisory Group, Inc.
Benjamin L. Trosky Member of Management Board Managing Director, Pacific
7
Investment Management
Company; Director and
Managing Director, PIMCO
Management, Inc.; Senior Vice
President, PIMCO Commercial
Mortgage Securities Trust, Inc.,;
Member of PIMCO Partners LLC.
Bradley W. Paulson Vice President Vice President and Secretary,
PIMCO Global Advisors
(Europe) Limited, PIMCO
Global Advisors (Japan)
Limited; Vice President, Pacific
Investment Management
Company.
Kenneth M. Poovey Chief Operating Officer and Executive Vice President and
General Counsel General Counsel, Value
Advisors LLC and Thomson
Advisory Group, Inc.
Stephen J. Treadway Executive Vice President Chairman, President, and Chief
Executive Officer, PIMCO
Funds Advertising Agency, Inc.,
PIMCO Funds Distributors
LLC, and Trustee, President and
Chief Executive Officer of the
Trust; Executive Vice President,
Value Advisors LLC.
Robert S. Venable Vice President None.
James G. Ward Senior Vice President, Senior Vice President, Human
Human Resources Resources, Value Advisors
LLC; Senior Vice President,
Thomson Advisory Group, Inc.
Richard M. Weil Senior Vice President - Senior Vice President, Assistant
Legal, Secretary Secretary, PIMCO Management,
Inc.; Secretary , Cadence Capital Management,
8
Inc., NFJ Investment Group,
NFJ Management, Inc.,
Parametric Portfolio Associates,
Parametric Management, Inc.,
and StocksPLUS Management,
Inc.; Assistant Secretary,
Columbus Circle Investors,
Columbus Circle Investors
Management, Inc.; Cadence
Capital Management, PIMCO
Funds Advertising Agency, Inc.
and Pacific Management
Investment Company; Senior
Vice President, Legal, Secretary
Value Advisors LLC, Thomson
Advisors LLC, Thomson
Advisory Group, Inc., and Vice
President of the Trust.
Frank C. Poli Vice President, Director of Compliance Officer, PIMCO
Compliance Funds Distributors LLC.
Vinh T. Nguyen Vice President, Controller Vice President, Controller,
Columbus Circle Investors
Management, Inc., Cadence
Capital Management, Inc., NFJ
Management, Inc., Parametric
Management, Inc., StocksPLUS
Management, Inc., PIMCO
Funds Advertising Agency, Inc.,
PIMCO Funds Distributors
LLC, and Value Advisors LLC;
Controller, Pacific Investment
Management Company and
PIMCO Management, Inc.
Timothy R. Clark Vice President, Mutual Funds Senior Vice President, PIMCO
Division Funds Distributors LLC.
Newton B. Schott, Jr. Senior Vice President, Mutual Director, Executive Vice
Funds Division President, Chief Administrative
Officer, General Counsel and
9
Secretary, PIMCO Funds
Distributors LLC and PIMCO
Funds Advertising Agency, Inc.;
Chief Legal Officer and
Secretary, Columbus Circle
Investors, Columbus Circle
Investors Management, Inc.;
Senior Vice President, Mutual
Fund Division; General Counsel
and Secretary, Columbus Circle
Trust Company; Vice President
and Secretary, the Trust; Senior
Vice President, Value Advisors
LLC.
Diane P. Dubois Vice President, Finance None.
Ernest L. Schmider Senior Vice President See Pacific Investment
Management Company.
</TABLE>
Pacific Investment Management Company ("PIMCO")
<TABLE>
<CAPTION>
Name Position with Portfolio Manager Other Affiliations
- ---- ------------------------------- ------------------
<S> <C> <C>
George C. Allan Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Tamara J. Arnold Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Michael R. Assay Vice President Vice President,
PIMCO Management, Inc.
Leslie A. Barbi Senior Vice President Senior Vice President,
PIMCO Management, Inc.
William R. Benz, II Managing Director Director and Managing
Director, PIMCO Management, Inc.;
Member of PIMCO Partners LLC.
Member of
10
Management Board,
PIMCO Advisors L.P.
Gregory A. Bishop Vice President None.
Andrew Brick Senior Vice President Senior Vice President,
PIMCO Management, Inc.
John B. Brynjolfsson Vice President Vice President,
PIMCO Management, Inc.
R. Wesley Burns Managing Director Executive Vice President,
PIMCO Management, Inc. and the Trust;
President, PIMCO Funds:
Pacific Investment Management Series;
President and Director,
PIMCO Commercial Mortgage Securities Trust, Inc.;
President and Trustee,
PIMCO Variable Insurance Trust;
Director, PIMCO Global Advisors (Ireland)
Limited and PIMCO Advisors Funds plc.
Carl J. Cohen Vice President Vice President,
PIMCO Management, Inc.
Jerry L. Coleman Vice President Vice President,
PIMCO Management, Inc.
Doug Cummings Vice President Vice President,
PIMCO Management, Inc.
Wendy W. Cupps Vice President Vice President,
PIMCO Management, Inc.
Chris Dialynas Director Managing Director,
PIMCO Management, Inc.
David J. Dorff Vice President
Michael Dow Vice President Vice President, PIMCO
11
Management, Inc.
and PIMCO Funds:
Pacific Investment Management Series.
Anita Dunn Vice President Senior Vice President,
PIMCO Management, Inc.
A. Benjamin Ehlert Executive Vice President Executive Vice President,
PIMCO Management, Inc.
Robert A. Ettl Senior Vice President and Vice President,
Chief Operations Officer PIMCO Management, Inc.
Anthony L. Faillace Vice President Vice President,
PIMCO Management, Inc.
Robert M. Fitzgerald Chief Financial Officer See PIMCO Advisors, L.P.
and Treasurer
Ursula T. Frisch Vice President Vice President,
PIMCO Management, Inc. and
PIMCO Funds: Pacific Investment
Management Series.
William H. Gross Managing Director See PIMCO Advisors L.P.
John L. Hague Managing Director Director, PIMCO Management, Inc.,
Member of PIMCO Partners LLC.
Gordon C. Hally Executive Vice President Executive Vice President,
PIMCO Management, Inc.
Pasi M. Hamalainen Executive Vice President Executive Vice President,
PIMCO Management, Inc.
John P. Hardaway Senior Vice President Vice President, PIMCO Management, Inc.;
Treasurer of the Trust, PIMCO Funds:
Pacific Investment Management Series,
PIMCO Commercial Mortgage Securities Trust, Inc.,
12
and PIMCO Variable Insurance Trust.
Brent R. Harris Managing Director See PIMCO Advisors L.P.
Joseph Hattesohl Vice President and Manager of Vice President, PIMCO Management, Inc.;
Fund Taxation Assistant Treasurer, the Trust, PIMCO Funds:
Pacific Investment Management Series,
PIMCO Variable Insurance Trust,
and PIMCO Commercial Mortgage
Securities Trust, Inc.
Raymond C. Hayes Vice President Vice President, PIMCO Management, Inc.
Robert G. Herin Vice President Vice President, PIMCO Management, Inc.
David C. Hinman Vice President Vice President, PIMCO Management, Inc.
Liza Hocson Vice President Vice President, PIMCO Management, Inc.
Douglas M. Hodge Executive Vice President Executive Vice President, PIMCO Management, Inc.
Brent L. Holden Executive Vice President Executive Vice President, PIMCO Management, Inc.
Dwight F. Holloway, Jr. Vice President Vice President, PIMCO Management, Inc.
Jane T. Howe Vice President Vice President, PIMCO Management, Inc.
Mark Hudoff Vice President Vice President, PIMCO Management, Inc.
Margaret E. Isberg Executive Vice President Executive Vice President,
PIMCO Management, Inc.;
13
Senior Vice President, PIMCO Funds:
Pacific Investment Management Series.
James M. Keller Vice President Vice President, PIMCO Management, Inc.
Sharon K. Kilmer Executive Vice President None.
Thomas J. Kelleher Vice President Vice President, PIMCO Management, Inc.
Raymond G. Kennedy Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Mark R. Kiesel Vice President Vice President, PIMCO Management, Inc.
Steven P. Kirkbaumer Vice President None.
John S. Loftus Executive Vice President Executive Vice President,
PIMCO Management, Inc.;
Vice President and Assistant Secretary,
StocksPLUS Management, Inc.
David Lown Vice President Vice President, PIMCO Management, Inc.
Andre J. Mallegol Vice President Vice President, PIMCO Management, Inc.
Michael E. Martini Vice President Vice President, PIMCO Management, Inc.
Dean S. Meiling Managing Director Director and Managing Director,
PIMCO Management, Inc.;
Vice President, PIMCO Funds:
Pacific Investment Management Series and
PIMCO Commercial Mortgage Securities Trust, Inc.;
Member of PIMCO Partners LLC.
14
Joseph V. McDevitt Executive Vice President Vice President, PIMCO Management, Inc.
James F. Muzzy Managing Director Director and Managing Director,
PIMCO Management, Inc.; Vice President,
PIMCO Funds: Pacific
Investment Management Series;
Director and Vice President,
StocksPLUS Management, Inc.;
Member of PIMCO Partners LLC.
Doris S. Nakamura Vice President
Vinh T. Nguyen Controller See PIMCO Advisors L.P.
Douglas J. Ongaro Vice President Vice President, PIMCO Management, Inc.
and PIMCO Funds:
Pacific Investment Series.
Thomas J. Otterbein Vice President Vice President, PIMCO Management, Inc.
Victoria M. Paradis Vice President Vice President, PIMCO Management, Inc.
Bradley W. Paulson Vice President Vice President and Secretary,
Vice President PIMCO Global Advisors (Europe)
Limited, PIMCO Global Advisors (Japan) Limited.
Elizabeth M. Philipp Vice President Vice President,
PIMCO Management, Inc.
David J. Pittman Vice President None.
William F. Podlich, III Managing Director See PIMCO Advisors L.P.
William C. Powers Managing Director Director and Managing Director,
PIMCO Management,
15
Inc.; Senior Vice President
PIMCO Commercial Mortgage Securities Trust, Inc.;
Member of PIMCO Partners LLC.
Member of Management Board, PIMCO Advisors L.P.
Edward P. Rennie Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Terry A. Randall Vice President
Scott L. Roney Vice President Vice President, PIMCO Management, Inc.
Michael J. Rosborough Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Seth R. Ruthen Vice President Vice President, PIMCO Management, Inc.
Jeffrey M. Sargent Vice President and Manager Vice President of the Trust,
Shareholder Services and PIMCO Management, Inc.;
Fund Administration Senior Vice President, PIMCO Funds:
Pacific Investment Management Series,
PIMCO Variable Insurance Trust, and PIMCO
Commercial Mortgage Securities Trust, Inc.
Ernest L. Schmider Executive Vice President, Secretary, Executive Vice President,
Chief Administrative and Legal Secretary, Chief Administrative
Officer and Legal Officer,
PIMCO Management, Inc.;
Director, Assistant Secretary,
Assistant Treasurer, StocksPLUS Management, Inc.;
Secretary, PIMCO Partners LLC.
Leland T. Scholey Senior Vice President Senior Vice President,
PIMCO Management, Inc.,
and PIMCO Funds: Pacific Investment
Management Series.
16
Richard W. Selby Senior Vice President and None.
Chief Technology Officer
Denise C. Seliga Vice President Vice President, PIMCO Management, Inc.
Rita J. Seymour Vice President Vice President, PIMCO Management, Inc.
Christopher Sullivan Vice President Vice President, PIMCO Management, Inc.
Cheryl L. Sylwester Vice President Vice President, PIMCO Management, Inc.
Lee R. Thomas, III Managing Director Director and Managing Director,
PIMCO Management, Inc.;
Member of PIMCO Partners LLC.
William S. Thomson, Jr. Director, Managing Director, See PIMCO Advisors L.P.
Chief Executive Officer
Benjamin L. Trosky Managing Director See PIMCO Advisors L.P.
Richard E. Tyson Vice President Vice President, PIMCO Management, Inc.
Peter A. Van de Zilver Vice President Vice President, PIMCO Management, Inc.
Marilyn Wegener Vice President Vice President, PIMCO Management, Inc.
Richard M. Weil Assistant Secretary See PIMCO Advisors L.P.
Paul C. Westhead Vice President Vice President, PIMCO Management, Inc.
Kristen M. Wilsey Vice President Vice President, PIMCO Management, Inc.
and PIMCO Funds: Pacific Investment
Management Series.
17
George H. Wood Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Michael A. Yetter Vice President Vice President, PIMCO Management, Inc.
David Young Vice President Vice President, PIMCO Management, Inc.
</TABLE>
Item 27. Principal Underwriters.
(a) PIMCO Funds Distributors LLC (the "Distributor") serves as
Distributor of shares for the Registrant and also of PIMCO Funds:
Multi-Manager Series and PIMCO Funds: Pacific Investment Management Series.
The Distributor is a wholly owned subsidiary of PIMCO Advisors L.P., the
Registrant's Adviser.
(b)
Name and Principal Positions and Officers Positions and Offices
Business Address* with Underwriter with Registrant
- ---------------- ---------------------- ---------------------
Jeffrey L. Booth Vice President Vice President, PIMCO
Funds Advertising
Agency, Inc.
James D. Bosch Regional Vice President None.
Deborah P. Brennan Vice President None.
Timothy R. Clark Senior Vice President None.
Jonathan P. Fessel Vice President None.
Robert M. Fitzgerald Chief Financial Officer
and Treasurer None.
Michael J. Gallagher Vice President None.
David S. Goldsmith Vice President None.
Ronald H. Gray Vice President None.
18
John B. Hussey Vice President None.
Edward W. Janeczek Senior Vice President None.
Stephen R. Jobe Vice President Vice President, PIMCO
Funds Advertising
Agency, Inc.
Jonathan C. Jones Vice President None.
Raymond Lazcano Vice President None.
William E. Lynch Senior Vice President None.
Kevin D. Maloney Compliance Officer None.
Jacqueline A. McCarthy Vice President None.
Andrew J. Meyers Executive Vice President Executive Vice
President, PIMCO Funds
Advertising Agency, Inc.
Fiora N. Moyer Regional Vice President None.
Philip J. Neugebauer Vice President Vice President, Director
of Compliance,
PIMCO Advisors L.P.
Vinh T. Nguyen Vice President, Controller None.
Joffrey H. Pearlman Regional Vice President None.
Glynne P. Pisapia Regional Vice President None.
Francis C. Poli Compliance Officer Vice President,
Director of Compliance,
PIMCO Advisors L.P.
Mark J. Porterfield Vice President, Vice President,
Compliance Officer Compliance Officer,
PIMCO Advisors L.P.
Newton B. Schott, Jr. Executive Vice President, Vice President and
Chief Administrative Secretary.
Officer, General Counsel
and Secretary
19
Robert M. Smith Vice President None.
Ellen Z. Spear Vice President Vice President, PIMCO
Funds Advertising
Agency, Inc.
Daniel W. Sullivan Vice President None.
William H. Thomas, Jr. Regional Vice President None.
Stephen J. Treadway Chairman, President and Executive Vice
Chief Executive Officer President, PIMCO
Advisors L.P. and
Trustee.
Paul H. Troyer Senior Vice President None.
Brian F. Trumbore Executive Vice President None.
Richard M. Weil Assistant Secretary None.
- ---------------------
The principal business address for all individuals listed is 2187 Atlantic
Street, Stamford, CT 06902, except for Messrs. Fitzgerald, Maloney, Nguyen,
Poli and Weil, for whom the address is 800 Newport Center Drive, Newport Beach,
CA 92660.
(c) The Registrant has no principal underwriter that is not an affiliated
person of the Registrant or an affiliated person of such an affiliated person.
Item 28. Location of Accounts and Records.
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of Investors Fiduciary
Trust Company, 21 West 10th Street, Kansas City, Missouri 64105, and
Shareholder Services, Inc., P.O. Box 5866, Denver, CO 80217.
Item 29. Management Services.
Not Applicable.
20
Item 30. Undertakings.
Not Applicable.
21
NOTICE
A copy of the Agreement and Declaration of Trust of Fixed Income SHares (the
"Trust"), together with all amendments thereto, is on file with the Secretary
of State of The Commonwealth of Massachusetts and notice is hereby given that
this instrument is executed on behalf of the Trust by an officer of the Trust
as an officer and not individually and that the obligations of or arising out
of this instrument are not binding upon any of the Trustees of the Trust or
shareholders of any series of the Trust individually but are binding only upon
the assets and property of the Trust or the respective series.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of New York, and the State of New York on the 5th day of November, 1999.
FIXED INCOME SHARES
By: STEPHEN J. TREADWAY
_______________________
Stephen J. Treadway,
President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
Name Capacity Date
- ---- -------- -----
STEPHEN J. TREADWAY
- ------------------- Trustee, President (principal November 5, 1999
Stephen J. Treadway executive), and Treasurer
(principal financial officer
and principal accounting officer)
22
EXHIBIT INDEX
Exhibit No. Exhibit Name
- ---------- ------------
(a) Form of Agreement and Declaration of Trust.
(b) Form of First Bylaws.
(c) Article III (Shares) and Article V
(Shareholders' Voting Powers and Meetings)
of the Agreement and Declaration of Trust.
(d)(1) Form of Investment Advisory Agreement.
(d)(2) Form of Portfolio Management Agreement with
Pacific Investment Management Company.
(h)(1) Form of Administration Agreement between the
Trust and PIMCO Advisory Services.
23
<PAGE>
Fixed Income SHares
AGREEMENT AND DECLARATION OF TRUST
----------------------------------
THIS AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts this
3rd day of November, 1999 by the Trustees hereunder and the holders of shares
of beneficial interest issued hereunder and to be issued hereunder as
hereinafter provided:
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an
investment company; and
WHEREAS, the Trustees have agreed, effective upon execution of this
Agreement and Declaration of Trust by the second of the two initial Trustees
named on the signature page hereof, to manage all property coming into their
hands as trustees of a Massachusetts voluntary association with transferable
shares in accordance with the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets, which they may from time to time acquire in any
manner as Trustee hereunder, IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares in this Trust as hereinafter set forth.
ARTICLE I
Name and Definitions
SECTION 1. This Trust shall be known as "Fixed Income SHares" and the
Trustees shall conduct the business of the Trust under that name or any other
name as they may from time to time determine.
SECTION 2. DEFINITIONS. Whenever used herein, unless otherwise required
by the context or specifically provided:
(a) "Trust" refers to the Massachusetts business trust established by
this Agreement and Declaration of Trust, as amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust named in Article IV
hereof or elected in accordance with such Article;
1
(c) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust or in the Trust property belonging to any
Series of the Trust or in any class of Shares of the Trust (as the context may
require) shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(f) The terms "Commission" and "principal underwriter" shall have the
meanings given them in the 1940 Act;
(g) "Declaration of Trust" or "Declaration" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust, as amended from time
to time;
(i) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision;
(j) "Series" refers to Series of Shares established and designated under
or in accordance with the provisions of Article III;
(k) "Multi-Class Series" refers to Series of Shares established and
designated as Multi-Class Series under or in accordance with the provisions of
Article III, Section 6; and
(l) The terms "class" and "class of Shares" refer to each class of Shares
into which the Shares of any Multi-Class Series may from time to time be
divided in accordance with the provisions of Article III.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in government securities, mortgage-backed securities, and corporate
bonds.
2
ARTICLE III
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial interest in
the Trust shall at all times be divided into an unlimited number of Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and
holders of the Shares of any Series or class shall be entitled to receive
dividends, when and as declared with respect thereto in the manner provided in
Article VI, Section 1 hereof. Except as otherwise provided in Section 6 of
this Article III with respect to Shares of Multi-Class Series, no Share shall
have any priority or preference over any other Share of the same Series with
respect to dividends or distributions upon termination of the Trust or of such
Series made pursuant to Article VIII, Section 4 hereof. Except as otherwise
provided in Section 6 of this Article III with respect to Shares of Multi-Class
Series, all dividends and distributions shall be made ratably among all
Shareholders of a particular Series from the assets belonging to such Series
according to the number of Shares of such Series held of record by such
Shareholders on the record date for any dividend or distribution or on the date
of termination, as the case may be. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust. The Trustees may from time to time divide or combine the Shares of
any particular Series or class into a greater or lesser number of Shares of
that Series or class without thereby changing the proportionate beneficial
interest of the Shares of that Series or class in the assets belonging to that
Series or attributable to that class or in any way affecting the rights of
Shares of any other Series or class.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each Series
and class. No certificates certifying the ownership of Shares shall be issued
except as the Trustees may otherwise determine from time to time. The Trustees
may make such rules as they consider appropriate for the transfer of Shares of
each Series and class and similar matters. The record books of the Trust as
kept by the Trust or any transfer or similar agent, as the case may be, shall
be conclusive as to who are the Shareholders of each Series and class and as to
the number of Shares of each Series and class held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. The Trustees shall accept
investments in the Trust from such persons and on such terms and for such
consideration as they from time to time authorize.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall
be held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder
3
during the continuance of the Trust shall not operate to terminate the same
nor entitle the representative of any deceased Shareholder to an accounting
or to take any action in court or elsewhere against the Trust or the Trustees,
but entitles such representative only to the rights of said deceased
Shareholder under this Trust. Ownership of Shares shall not entitle the
Shareholder to any title in or to the whole or any part of the Trust property
or right to call for a partition or division of the same or for an accounting,
nor shall the ownership of Shares constitute the Shareholders partners.
Neither the Trust nor the Trustees, nor any officer, employee or agent of the
Trust, shall have any power to bind personally any Shareholders, nor except as
specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder
may at any time personally agree to pay.
SECTION 5. POWER OF TRUSTEES TO CHANGE PROVISIONS RELATING TO SHARES.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as
provided elsewhere herein, the Trustees shall have the power to amend this
Declaration of Trust, at any time and from time to time, in such manner as the
Trustees may determine in their sole discretion, without the need for
Shareholder action, so as to add to, delete, replace or otherwise modify any
provisions relating to the Shares contained in this Declaration of Trust for
the purpose of (i) responding to or complying with any regulations, orders,
rulings or interpretations of any governmental agency or any laws, now or
hereafter applicable to the Trust, or (ii) designating and establishing Series
or classes in addition to those established in Section 6 of this Article III;
provided that before adopting any such amendment without Shareholder approval
the Trustees shall determine that it is consistent with the fair and equitable
treatment of all Shareholders. The establishment and designation of any Series
of Shares in addition to the Series established and designated in Section 6 of
this Article III shall be effective upon the execution by a majority of the
then Trustees of an amendment to this Declaration of Trust, taking the form of
a complete restatement or otherwise, setting forth such establishment and
designation and the relative rights and preferences of such Series, or as
otherwise provided in such instrument. The establishment and designation of
any class of Shares shall be effective upon either the execution by a majority
of the then Trustees of an amendment to this Declaration of Trust or the
adoption by vote or written consent of a majority of the then Trustees of a
resolution setting forth such establishment and designation and the relative
rights and preferences of such class and such eligibility requirements for
investment therein as the Trustees may determine, or as otherwise provided in
such amendment or resolution.
Without limiting the generality of the foregoing, the Trustees may, for
the above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or classes of Shares (in addition to any
Series or classes already existing or otherwise) with such rights and
preferences and such eligibility requirements for investment therein as the
Trustees shall determine and reclassify any or all
4
outstanding Shares as shares of particular Series or classes in accordance
with such eligibility requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j)
of Section 6 of this Article III;
(c) combine one or more Series or classes of Shares into a single
Series or class on such terms and conditions as the Trustees shall determine;
(d) change or eliminate any eligibility requirements for investment in
Shares of any Series or class, including without limitation the power to
provide for the issue of Shares of any Series or class in connection with any
merger or consolidation of the Trust with another trust or company or any
acquisition by the Trust of part or all of the assets of another trust or
company;
(e) change the designation of any Series or class of Shares;
(f) change the method of allocating dividends among the various Series
and classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any
specific items of income or expense of the Trust to one or more Series or
classes of Shares; and
(h) specifically allocate assets to any or all Series of Shares or create
one or more additional Series of Shares which are preferred over all other
Series of Shares in respect of assets specifically allocated thereto or any
dividends paid by the Trust with respect to any net income, however determined,
earned from the investment and reinvestment of any assets so allocated or
otherwise and provide for any special voting or other rights with respect to
such Series or any classes of Shares thereof.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SERIES AND CLASSES. Without
limiting the authority of the Trustees set forth in Section 5, INTER ALIA, to
establish and designate any further Series or classes or to modify the rights
and preferences of any Series or class, the following Series shall be, and are
hereby, established and designated: "FISH: Series C" and "FISH: Series M."
Shares of each Series established in this Section 6 shall have the following
rights and preferences relative to Shares of each other Series, and Shares of
each class of a Multi-Class Series shall have such rights and preferences
relative to other classes of the same Series as are set forth below, together
with such other rights and preferences relative to such other classes as are
set forth in any resolution of the Trustees establishing and designating such
class of Shares:
5
(a) ASSETS BELONGING TO SERIES. Subject to the provisions of paragraph
(c) of this Section 6:
All consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall irrevocably belong to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of
account of the Trust. Such consideration, assets, income, earnings, profits
and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as belonging to any particular Series (collectively
"General Assets"), the Trustees shall allocate such General Assets to, between
or among any one or more of the Series established and designated from time to
time in such manner and on such basis as they, in their sole discretion, deem
fair and equitable, and any General Asset so allocated to a particular Series
shall belong to that Series. Each such allocation by the Trustees shall be
conclusive and binding upon the Shareholders of all Series for all purposes.
(b) LIABILITIES BELONGING TO SERIES. Subject to the provisions of
paragraph (c) of this Section 6:
The assets belonging to each particular Series shall be charged solely with the
liabilities of the Trust in respect to that Series, the expenses, costs,
charges and reserves attributable to that Series, and any general liabilities
of the Trust which are not readily identifiable as belonging to any particular
Series but which are allocated and charged by the Trustees to and among any one
or more of the Series established and designated from time to time in a manner
and on such basis as the Trustees in their sole discretion deem fair and
equitable. The liabilities, expenses, costs, charges and reserves so charged
to a Series are herein referred to as "liabilities belonging to" that Series.
Each allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of all Series
for all purposes.
(c) APPORTIONMENT OF ASSETS ETC. IN CASE OF MULTI-CLASS SERIES. In the
case of any Multi-Class Series, to the extent necessary or appropriate to give
effect to the relative rights and preferences of any classes of Shares of such
Series, (i) any assets, income, earnings, profits, proceeds, liabilities,
expenses, charges, costs and reserves belonging or attributable to that Series
may be allocated or attributed to a particular class of Shares of that Series
or apportioned among two or more classes of Shares of that Series; and (ii)
Shares of any class of
6
such Series may have priority or preference over shares of other classes of
such Series with respect to dividends or distributions upon termination of the
Trust or of such Series or class or otherwise, provided that no Share shall
have any priority or preference over any other Shares of the same class and
that all dividends and distributions to Shareholders of a particular class
shall be made ratably among all Shareholders of such class according to the
number of Shares of such class held of record by such Shareholders on the
record date for any dividend or distribution or on the date of termination,
as the case may be.
(d) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES.
Notwithstanding any other provisions of this Declaration, including, without
limitation, Article VI, no dividend or distribution (including, without
limitation, any distribution paid upon termination of the Trust or of any
Series or class) with respect to, nor any redemption or repurchase of, the
Shares of any Series or class shall be effected by the Trust other than
from the assets belonging to such Series or attributable to such class,
nor shall any Shareholder of any particular Series or class otherwise have
any right or claim against the assets belonging to any other Series or
attributable to any other class except to the extent that such Shareholder
has such a right or claim hereunder as a Shareholder of such other Series
or class.
(e) VOTING. Notwithstanding any of the other provisions of this
Declaration, including, without limitation, Section 1 of Article V, the
Shareholders of any particular Series or class shall not be entitled to vote on
any matters as to which such Series or class is not affected. On any matter
submitted to a vote of Shareholders, all Shares of the Trust then entitled to
vote shall, except as otherwise provided in the By-Laws, be voted in the
aggregate as a single class without regard to Series or class of Shares, except
that (1) when required by the 1940 Act or when the Trustees shall have
determined that the matter affects one or more Series or classes of Shares
materially differently, Shares shall be voted by individual Series or class and
(2) when the matter affects only the interests of one or more Series or
classes, only Shareholders of such Series or classes shall be entitled to vote
thereon. There shall be no cumulative voting in the election of Trustees.
(f) EQUALITY. Except to the extent necessary or appropriate to give
effect to the relative rights and preferences of any classes of Shares of a
Multi-Class Series, all the Shares of each particular Series shall represent an
equal proportionate interest in the assets belonging to that Series (subject to
the liabilities belonging to that Series), and each Share of any particular
Series shall be equal to each other Share of that Series. All the Shares of
each particular class of Shares within a Multi-Class Series shall represent an
equal proportionate interest in the assets belonging to such Series that are
attributable to such class (subject to the liabilities attributable to such
class), and each Share of any particular class within a Multi-Class Series
shall be equal to each other Share of such class.
(g) FRACTIONS. Any fractional Share of a Series or class shall carry
proportionately all the rights and obligations of a whole Share of that Series
or class, including rights with
7
respect to voting, receipt of dividends and distributions, redemption of
Shares and termination of the Trust.
(h) EXCHANGE PRIVILEGE. The Trustees shall have the authority to provide
that the holders of Shares of any Series or class shall have the right to
exchange said Shares for Shares of one or more other Series or classes of
Shares in accordance with such requirements and procedures as may be
established by the Trustees.
(i) COMBINATION OF SERIES OR CLASSES. The Trustees shall have the
authority, without the approval of the Shareholders of any Series or class
unless otherwise required by applicable law, to combine the assets and
liabilities belonging to any two or more Series or attributable to any class
into assets and liabilities belonging to a single Series or attributable to a
single class.
(j) ELIMINATION OF SERIES OR CLASS. At any time that there are no Shares
outstanding of any particular Series previously established and designated, the
Trustees may amend this Declaration of Trust to abolish that Series and to
rescind the establishment and designation thereof, such amendment to be
effected in the manner provided in Section 5 of this Article III for the
establishment and designation of Series. At any time that there are no Shares
outstanding of any particular class previously established and designated of a
Multi-Series Class, the Trustees may abolish that class and rescind the
establishment and designation thereof, either by amending this Declaration of
Trust in the manner provided in Section 5 of this Article III for the
establishment and designation of classes (if such class was established and
designated by an amendment to this Declaration of Trust), or by vote or written
consent of a majority of the then Trustees (if such class was established and
designated by Trustee vote or written consent).
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of
his or her being or having been a Shareholder of the Trust or of a particular
Series or class and not because of his or her acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or, in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled out of the assets of the Series (or attributable to the class) of
which he or she is a Shareholder or former Shareholder to be held harmless from
and indemnified against all loss and expense arising from such liability.
SECTION 8. NO PREEMPTIVE RIGHTS. Shareholders shall have no preemptive
or other right to subscribe to any additional Shares or other securities issued
by the Trust.
SECTION 9. DERIVATIVE CLAIMS. No Shareholder shall have the right to
bring or maintain any court action, proceeding or claim on behalf of the Trust
or any Series without first making demand on the Trustees requesting the
Trustees to bring or maintain such action, proceeding or
8
claim. Such demand shall be excused only when the plaintiff makes a specific
showing that irreparable injury to the Trust or Series would otherwise result.
Such demand shall be mailed to the Secretary of the Trust at the Trust's
principal office and shall set forth in reasonable detail the nature of the
proposed court action, proceeding or claim and the essential facts relied
upon by the Shareholder to support the allegations made in the demand. The
Trustees shall consider such demand within 45 days of its receipt by the
Trust. In their sole discretion, the Trustees may submit the matter to a
vote of Shareholders of the Trust or Series, as appropriate. Any decision
by the Trustees to bring, maintain or settle (or not to bring, maintain or
settle) such court action, proceeding or claim, or to submit the matter to
a vote of Shareholders, shall be made by the Trustees in their business
judgment and shall be binding upon the Shareholders. Any decision by the
Trustees to bring or maintain a court action, proceeding or suit on behalf
of the Trust or a Series shall be subject to the right of the Shareholders
under Article V, Section 1 hereof to vote on whether or not such court
action, proceeding or suit should or should not be brought or maintained.
ARTICLE IV
The Trustees
SECTION 1. ELECTION AND TENURE. The two initial Trustees shall be
Stephen J. Treadway and Brian D. McCabe. The Trustees may fix the number of
Trustees, fill vacancies in the Trustees, including vacancies arising from an
increase in the number of Trustees, or remove Trustees with or without cause.
Each Trustee shall serve during the continued lifetime of the Trust until he or
she dies, resigns or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and until the election
and qualification of his or her successor. Any Trustee may resign at any time
by written instrument signed by him or her and delivered to any officer of the
Trust or to a meeting of the Trustees. Such resignation shall be effective
upon receipt unless specified to be effective at some other time. Except to
the extent expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal. The Shareholders may fix the number of Trustees
and elect Trustees at any meeting of Shareholders called by the Trustees for
that purpose and to the extent required by applicable law, including paragraphs
(a) and (b) of Section 16 of the 1940 Act.
SECTION 2. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The death,
declination, resignation, retirement, removal or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
SECTION 3. POWERS. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and they
shall have all powers necessary or
9
convenient to carry out that responsibility including the power to engage
in securities transactions of all kinds on behalf of the Trust. Without
limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with
this Declaration of Trust providing for the regulation and management of the
affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; they may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate; they may appoint from their own number and terminate one or more
committees consisting of two or more Trustees which may exercise the powers
and authority of the Trustees to the extent that the Trustees determine;
they may employ one or more custodians of the assets of the Trust and may
authorize such custodians to employ subcustodians and to deposit all or
any part of such assets in a system or systems for the central handling of
securities or with a Federal Reserve Bank, retain a transfer agent or a
shareholder servicing agent, or both, provide for the distribution of Shares by
the Trust, through one or more principal underwriters or otherwise, set record
dates for the determination of Shareholders with respect to various matters,
and in general delegate such authority as they consider desirable to any
officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, write
options with respect to or otherwise deal in any property rights relating to
any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own name or
in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or
sale of property by such corporation or issuer; and to pay calls or
subscriptions with respect to any security held in the Trust;
10
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall
deem proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall
deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other obligations
of any person; and to make contracts of guaranty or suretyship, or otherwise
assume liability for payment of such notes or other obligations;
(l) To purchase and pay for entirely out of Trust property such insurance
as they may deem necessary or appropriate for the conduct of the business of
the Trust, including, without limitation, insurance policies insuring the
assets of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters or
independent contractors of the Trust individually against all claims and
liabilities of every nature arising by reason of holding, being or having held
any such office or position, or by reason of any action alleged to have been
taken or omitted by any such person as Trustee, officer, employee, agent,
investment adviser, principal underwriter or independent contractor, including
any action taken or omitted that may be determined to constitute negligence,
whether or not the Trust would have the power to indemnify such person against
liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to adopt,
establish and carry out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity contracts as
a means of providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. The Trustees shall
not be required to obtain any court order to deal with any assets of the Trust
or take any other action hereunder.
11
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST. The Trustees are authorized
to pay or cause to be paid out of the principal or income of the Trust, or
partly out of principal and partly out of income, as they deem fair, all
expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including but not limited to, the Trustees' compensation and such expenses and
charges for the services of the Trust's officers, employees, administrators,
investment advisers or managers, principal underwriter, auditor, counsel,
custodian, transfer agent, shareholder servicing agent, and such other agents
or independent contractors, and such other expenses and charges, as the
Trustees may deem necessary or proper to incur.
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series or class, to pay directly, in advance
or arrears, for charges of the Trust's custodian or transfer, shareholder
servicing or similar agent, an amount fixed from time to time by the Trustees,
by setting off such charges due from such Shareholder from declared but unpaid
dividends owed such Shareholder and/or by reducing the number of Shares in the
account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
SECTION 6. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the assets
of the Trust shall at all times be considered as vested in the Trustees.
SECTION 7. ADVISORY, MANAGEMENT AND DISTRIBUTION CONTRACTS. Subject to
such requirements and restrictions as may be set forth in the By-Laws, the
Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory and/or management services for the Trust or for any
Series or class with any corporation, trust, association or other organization
(the "Manager"); and any such contract may contain such other terms as the
Trustees may determine, including without limitation, authority for a Manager
to determine from time to time without prior consultation with the Trustees
what investments shall be purchased, held, sold or exchanged and what portion,
if any, of the assets of the Trust shall be held uninvested and to make changes
in the Trust's investments. The Trustees may also, at any time and from time
to time, contract with the Manager or any other corporation, trust, association
or other organization, appointing it exclusive or nonexclusive distributor or
principal underwriter for the Shares, every such contract to comply with such
requirements and restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter, distributor or affiliate or agent of or for any
corporation, trust, association or other organization, or of or for any parent
or affiliate of any organization, with which an
12
advisory or management contract, or principal underwriter's or distributor's
contract or transfer, shareholder servicing or other agency contract may have
been or may hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with which
an advisory or management contract or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other agency contract may have
been or may hereafter be made also has an advisory or management contract, or
principal underwriter's or distributor's contract or transfer, shareholder
servicing or other agency contract with one or more other corporations, trusts,
associations or other organizations, or has other business or interests
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
SECTION 1. VOTING POWERS. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Article IV, Section 1, (ii)
with respect to any amendment of this Declaration of Trust to the extent and as
provided in Article VIII, Section 8, (iii) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(iv) with respect to the termination of the Trust or any Series or class to the
extent and as provided in Article VIII, Section 4, (v) to remove Trustees from
office to the extent and as provided in Article V, Section 7 and (vi) with
respect to such additional matters relating to the Trust as may be required by
this Declaration of Trust, the By-Laws or any registration of the Trust with
the Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one
vote as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person
or by proxy. A proxy with respect to Shares held in the name of two or more
persons shall be valid if executed by any one of them unless at or prior to
exercise of the proxy the Trust receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
At any time when no Shares of a Series or class are outstanding the Trustees
may exercise all rights of Shareholders of that Series or class with respect to
matters affecting that Series or class and
13
may with respect to that Series or class take any action required by law, this
Declaration of Trust or the By-Laws to be taken by the Shareholders thereof.
SECTION 2. VOTING POWER AND MEETINGS. Meetings of the Shareholders may
be called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders
may also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by
the Trustees. Notice of any meeting of Shareholders, stating the time and
place of the meeting, shall be given or caused to be given by the Trustees to
each Shareholder by mailing such notice, postage prepaid, at least seven days
before such meeting, at the Shareholder's address as it appears on the records
of the Trust, or by facsimile or other electronic transmission, at least seven
days before such meeting, to the telephone or facsimile number or e-mail or
other electronic address most recently furnished to the Trust (or its agent) by
the Shareholder. Whenever notice of a meeting is required to be given to a
Shareholder under this Declaration of Trust or the By-Laws, a written waiver
thereof, executed before or after the meeting by such Shareholder or his
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.
SECTION 3. QUORUM AND REQUIRED VOTE. Except when a larger quorum is
required by law, by the By-Laws or by this Declaration of Trust, 40% of the
Shares entitled to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series or classes is to vote as a single class separate
from any other Shares which are to vote on the same matters as a separate class
or classes, 40% of the Shares of each such class entitled to vote shall
constitute a quorum at a Shareholders' meeting of that class. Any meeting of
Shareholders may be adjourned from time to time by a majority of the votes
properly cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned within a reasonable time after the date set
for the original meeting without further notice. When a quorum is present at
any meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by law. If any
question on which the Shareholders are entitled to vote would adversely affect
the rights of any Series or class of Shares, the vote of a majority (or such
larger vote as is required as aforesaid) of the Shares of such Series or class
which are entitled to vote, voting separately, shall also be required to decide
such question.
SECTION 4. ACTION BY WRITTEN CONSENT. Any action taken by Shareholders
may be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records
of the meetings of
14
Shareholders. Such consent shall be treated for all purposes as a vote taken
at a meeting of Shareholders.
SECTION 5. RECORD DATES. For the purpose of determining the Shareholders
of any Series or class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 90 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series or class having the
right to notice of and to vote at such meeting and any adjournment thereof, and
in such case only Shareholders of record on such record date shall have such
right, notwithstanding any transfer of Shares on the books of the Trust after
the record date. For the purpose of determining the Shareholders of any Series
or class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be on
or before the date for the payment of such dividend or such other payment, as
the record date for determining the Shareholders of such Series or class having
the right to receive such dividend or distribution. Without fixing a record
date the Trustees may for voting and/or distribution purposes close the
register or transfer books for one or more Series or classes for all or any
part of the period prior to a meeting of Shareholders or the payment of a
distribution. Nothing in this Section shall be construed as precluding the
Trustees from setting different record dates for different Series or classes.
SECTION 6. ADDITIONAL PROVISIONS. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
SECTION 7. REMOVAL OF TRUSTEES. No natural person shall serve as Trustee
after the holders of record of not less than two-thirds of the outstanding
Shares have declared that such Trustee be removed from that office either by
declaration in writing filed with the Trust's custodian or by votes cast in
person or by proxy at a meeting called for the purpose. The Trustees shall
promptly call a meeting of Shareholders for the purpose of voting upon the
question of removal of any Trustee when requested in writing so to do by the
record holders of not less than 10 per centum of the outstanding Shares.
Whenever ten or more Shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate Shares having a net asset value of at least 1 per centum of the
outstanding Shares, shall apply to the Trustees in writing, stating that they
wish to communicate with other Shareholders with a view to obtaining signatures
to a request for a meeting pursuant to this Section and accompanied by a form
of communication and request which they wish to transmit, the Trustees shall
within five business days after receipt of such application either (a) afford
to such applicants access to a list of the names and addresses of all
Shareholders as recorded on the books of the Trust; or (b) inform such
applicants as to the approximate number of Shareholders of record, and the
approximate cost of transmitting to them the proposed communication and form of
request. If the Trustees elect to follow the course specified in clause (b),
the Trustees, upon the written request of such applicants, accompanied by a
tender of the material to be transmitted and of the
15
reasonable expenses of transmittal, shall, with reasonable promptness,
transmit such material to all Shareholders of record at their addresses
as recorded on the books of the Trust (or at the telephone or facsimile
number or e-mail or other electronic address most recently furnished to
the Trust (or its agent) by the Shareholder), unless within five business
days after such tender the Trustees shall transmit to such applicants and
file with the Commission, together with a copy of the material proposed to
be transmitted, a written statement signed by at least a majority of the
Trustees to the effect that in their opinion either such material contains
untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion. If the Commission
shall enter an order refusing to sustain any of the objections specified in the
written statement so filed, or if, after the entry of an order sustaining one
or more of such objections, the Commission shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Trustees shall transmit copies of such
material to all Shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
ARTICLE VI
Net Income, Distributions, and Redemptions and Repurchases
SECTION 1. DISTRIBUTIONS OF NET INCOME. The Trustees shall each year, or
more frequently if they so determine in their sole discretion, distribute to
the Shareholders of each Series, in Shares of that Series, cash or otherwise,
an amount approximately equal to the net income attributable to the
assets belonging to such Series and may from time to time distribute to the
Shareholders of each Series, in Shares of that Series, cash or otherwise, such
additional amounts, but only from the assets belonging to such Series, as they
may authorize. Except as otherwise permitted by paragraph (c) of Section 6 of
Article III in the case of Multi-Class Series, all dividends and distributions
on Shares of a particular Series shall be distributed pro rata to the holders
of that Series in proportion to the number of Shares of that Series held by
such holders and recorded on the books of the Trust at the date and time of
record established for the payment of such dividend or distributions.
The manner of determining net income, income, asset values, capital gains,
expenses, liabilities and reserves of any Series or class may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such
person as they may authorize at the times and in the manner provided in the
By-Laws. Determinations of net income of any Series or class and
determinations of income, asset value, capital gains, expenses and liabilities
made by the Trustees, or by such person as they may authorize, in good faith,
shall be binding on all parties concerned. The foregoing sentence shall not be
construed to protect any Trustee, officer or agent of the Trust against any
liability to the Trust or its security holders to which he or she would
otherwise be
16
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
If, for any reason, the net income of any Series or class determined at
any time is a negative amount, the pro rata share of such negative amount
allocable to each Shareholder of such Series or class shall constitute a
liability of such Shareholder to that Series or class which shall be paid out
of such Shareholder's account at such times and in such manner as the Trustees
may from time to time determine (x) out of the accrued dividend account of such
Shareholder, (y) by reducing the number of Shares of that Series or class in
the account of such Shareholder or (z) otherwise.
SECTION 2. REDEMPTIONS AND REPURCHASES. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the presentation
of a proper instrument of transfer together with a request directed to the
Trust or a person designated by the Trust that the Trust purchase such Shares
or in accordance with such other procedures for redemption as the Trustees may
from time to time authorize; and the Trust will pay therefor the net asset
value thereof, as determined in accordance with the By-Laws, next determined.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request is made. The obligation set
forth in this Section 2 is subject to the provision that in the event that any
time the New York Stock Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the Commission during periods when trading on
the New York Stock Exchange is restricted or during any emergency which makes
it impracticable for the Trust to dispose of the investments of the applicable
Series or to determine fairly the value of the net assets belonging to such
Series or attributable to any class thereof or during any other period
permitted by order of the Commission for the protection of investors, such
obligations may be suspended or postponed by the Trustees. The Trust may also
purchase or repurchase Shares at a price not exceeding the net asset value of
such Shares in effect when the purchase or repurchase or any contract to
purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or partly in
kind if the Trustees determine that such payment is advisable in the interest
of the remaining Shareholders of the Series the Shares of which are being
redeemed. In making any such payment wholly or partly in kind, the Trust
shall, so far as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the Series the
Shares of which are being redeemed. Subject to the foregoing, the fair value,
selection and quantity of securities or other property so paid or delivered as
all or part of the redemption price may be determined by or under authority of
the Trustees. In no case shall the Trust be liable for any delay of any
corporation or other person in transferring securities selected for delivery as
all or part of any payment in kind.
SECTION 3. REDEMPTIONS AT THE OPTION OF THE TRUST. The Trust shall have
the right at its option and at any time to redeem Shares of any Shareholder at
the net asset value thereof as described in Section 1 of this Article VI: (i)
if at such time such Shareholder owns Shares of
17
any Series or class having an aggregate net asset value of less than an amount
determined from time to time by the Trustees; or (ii) to the extent that such
Shareholder owns Shares equal to or in excess of a percentage determined from
time to time by the Trustees of the outstanding Shares of the Trust or of any
Series or class.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
SECTION 1. COMPENSATION. The Trustees as such shall be entitled to
reasonable compensation from the Trust; they may fix the amount of their
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.
SECTION 2. LIMITATION OF LIABILITY. The Trustees shall not be
responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
but nothing herein contained shall protect any Trustee against any liability to
which he or she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
ARTICLE VIII
Miscellaneous
SECTION 1. TRUSTEES, SHAREHOLDERS, ETC. NOT PERSONALLY LIABLE; NOTICE.
All persons extending credit to, contracting with or having any claim against
the Trust or any Series or class shall look only to the assets of the Trust,
or, to the extent that the liability of the Trust may have been expressly
limited by contract to the assets of a particular Series or attributable to a
particular class, only to the assets belonging to the relevant Series or
attributable to the relevant class, for payment under such credit, contract or
claim; and neither the Shareholders nor the Trustees, nor any of the Trust's
officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such Trustee would otherwise be
subject by reason of
18
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued on behalf of the Trust by the Trustees, by any officer or officers or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts and shall recite that the same
was executed or made by or on behalf of the Trust or by them as Trustee or
Trustees or as officer or officers or otherwise and not individually and that
the obligations of such instrument are not binding upon any of them or the
Shareholders individually but are binding only upon the assets and property of
the Trust or upon the assets belonging to the Series or attributable to the
class for the benefit of which the Trustees have caused the note, bond,
contract, instrument, certificate or undertaking to be made or issued, and may
contain such further recital as he or she or they may deem appropriate, but the
omission of any such recital shall not operate to bind any Trustee or Trustees
or officer or officers or Shareholders or any other person individually.
SECTION 2. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his or her own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and for nothing else,
and shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Declaration of Trust, and shall be under no
liability for any act or omission in accordance with such advice or for failing
to follow such advice. The Trustees shall not be required to give any bond as
such, nor any surety if a bond is required.
SECTION 3. LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
SECTION 4. TERMINATION OF TRUST, SERIES OR CLASS. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The
Trust may be terminated at any time by vote of at least 66-2/3% of the Shares
of each Series entitled to vote and voting separately by Series, or by the
Trustees by written notice to the Shareholders. Any Series or class may be
terminated at any time by vote of at least 66-2/3% of the Shares of that Series
or class, or by the Trustees by written notice to the Shareholders of that
Series or class.
Upon termination of the Trust (or any Series or class, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series (or the applicable Series or
attributable to the particular class, as the case may be), whether due or
accrued or anticipated as may be determined by the Trustees, the Trust shall,
in accordance with such procedures as the Trustees consider appropriate, reduce
the remaining
19
assets belonging, severally, to each Series (or the applicable Series or
attributable to the particular class, as the case may be), to distributable
form in cash or shares or other securities, or any combination thereof, and
distribute the proceeds belonging to each Series (or the applicable Series or
attributable to the particular class, as the case may be), to the Shareholders
of that Series (or class, as the case may be), as a Series (or class, as the
case may be), ratably according to the number of Shares of that Series (or
class, as the case may be) held by the several Shareholders on the date of
termination.
SECTION 5. MERGER AND CONSOLIDATION. The Trustees may cause the Trust to
be merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger or consolidation or
share exchange has been authorized by vote of a majority of the outstanding
Shares; provided that in all respects not governed by statute or applicable
law, the Trustees shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or consolidation.
SECTION 6. FILING OF COPIES, REFERENCE, HEADINGS. The original or a copy
of this instrument and of each amendment hereto shall be kept at the office of
the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of the Commonwealth of Massachusetts and with any other governmental
office where such filing may from time to time be required. Anyone dealing
with the Trust may rely on a certificate by an officer of the Trust as to
whether or not any such amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as if it were
the original, may rely on a copy certified by an officer of the Trust to be a
copy of this instrument or of any such amendments. In this instrument and in
any such amendment, references to this instrument, and all expressions like
"herein," "hereof" and "hereunder," shall be deemed to refer to this instrument
as amended or affected by any such amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or to
control or affect the meaning, construction or effect of this instrument.
This instrument may be executed in any number of counterparts each of which
shall be deemed an original.
SECTION 7. APPLICABLE LAW. This Declaration of Trust is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and,
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
SECTION 8. AMENDMENTS. This Declaration of Trust may be amended at any
time by an instrument in writing signed by a majority of the then Trustees when
authorized so to do by vote of a majority of the Shares entitled to vote with
respect to such amendment, except that amendments described in Article III,
Section 5 or Article III, Section 6 hereof or having the purpose of changing
the name of the Trust or of any Series or class of Shares or of supplying
20
any omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision contained herein shall not require
authorization by Shareholder vote.
SECTION 9. ADDRESSES. The address of the Trust is c/o PIMCO Advisory
Services, 1345 Avenue of the Americas, New York, New York, 10105. The address
of the Trustees is c/o PIMCO Advisory Services, 1345 Avenue of the Americas,
New York, New York, 10105.
21
IN WITNESS WHEREOF, the undersigned has hereunto set his hands and seal
for himself and for his successors and assigns this 2nd day of November, 1999.
STEPHEN J. TREADWAY
---------------------------------------
Stephen J. Treadway
Trustee
IN WITNESS WHEREOF, the undersigned has hereunto set his hands and seal
for himself and for his successors and assigns this 3rd day of November, 1999.
BRIAN D. McCABE
---------------------------------------
Brian D. McCabe
Trustee
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. Boston, November 3, 1999
Then personally appeared the above named Brian D. McCabe and acknowledged
the foregoing instrument to be his free act and deed, before me.
CHRISTINA B. WHEELER
-----------------------------------
Notary Public
My Commission Expires:
22
<PAGE>
BY-LAWS
OF
Fixed Income SHares
ARTICLE 1
Agreement and Declaration
of Trust and Principal Office
1.1 AGREEMENT AND DECLARATION OF TRUST. These By-Laws shall be subject to the
Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of Fixed Income SHares (the "Trust"), the
Massachusetts business trust established by the Declaration of Trust.
1.2 PRINCIPAL OFFICE OF THE TRUST. The principal office of the Trust shall be
located in Boston, Massachusetts.
ARTICLE 2
Meetings of Trustees
2.1 REGULAR MEETINGS. Regular meetings of the Trustees may be held without
call or notice at such places and at such times as the Trustees may from time
to time determine, provided that notice of the first regular meeting following
any such determination shall be given to absent Trustees.
2.2 SPECIAL MEETINGS. Special meetings of the Trustees may be held, at any
time and at any place designated in the call of the meeting, when called by the
Chairman of the Board, if any, the President or the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Clerk or
an Assistant Clerk or by the officer or the Trustees calling the meeting.
2.3 NOTICE. It shall be sufficient notice to a Trustee of a special meeting
to send notice by mail or courier at least forty-eight hours or by telegram at
least twenty-four hours before the meeting addressed to the Trustee at his or
her usual or last known business or residence address or to give notice to him
or her in person or by telephone at least twenty-four hours before the meeting.
Notice of a meeting need not be given to any Trustee if a written waiver of
notice, executed by him or her before or after the meeting, is filed with the
records of the meeting, or to any Trustee who attends the meeting without
protesting prior thereto or at its commencement the lack of notice to him or
her. Except as required by law, neither notice of a meeting nor a waiver of a
notice need specify the purposes of the meeting.
1
2.4 QUORUM. At any meeting of the Trustees a majority of the Trustees then in
office shall constitute a quorum. Any meeting may be adjourned from time to
time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice to any Trustee who was present at the time of such adjournment; notice
of the time and place of any adjourned session of such meeting shall, however,
be given in the manner provided in Section 2.3 of these By-Laws to each
Trustee who was not present at the time of such adjournment.
2.5 ACTION BY VOTE. When a quorum is present at any meeting, a majority of
Trustees present may take any action, except when a larger vote is expressly
required by law, by the Declaration of Trust or by these By-Laws.
2.6 ACTION BY WRITING. Except as required by law, any action required or
permitted to be taken at any meeting of the Trustees may be taken without a
meeting if a majority of the Trustees (or such larger proportion thereof as
shall be required by any express provision of the Declaration of Trust or these
By-Laws) consent to the action in writing and such written consents are filed
with the records of the meetings of the Trustees. Such consent shall be
treated for all purposes as a vote taken at a meeting of Trustees.
2.7 PRESENCE THROUGH COMMUNICATIONS EQUIPMENT. Except as required by law, the
Trustees may participate in a meeting of Trustees by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time, and
participation by such means shall constitute presence in person at a meeting.
ARTICLE 3
Officers
3.1 ENUMERATION; QUALIFICATION. The officers of the Trust shall be a
President, a Treasurer, a Clerk and such other officers, if any, as the
Trustees from time to time may in their discretion elect. The Trust may also
have such agents as the Trustees from time to time may in their discretion
appoint. If a Chairman of the Board is elected, he or she shall be a Trustee
and may but need not be a Shareholder; and any other officer may be but none
need be a Trustee or Shareholder. Any two or more offices may be held by the
same person.
3.2 ELECTION AND TENURE. The President, the Treasurer, the Clerk and such
other officers as the Trustees may in their discretion from time to time elect
shall each be elected by the Trustees to serve until his or her successor is
elected or qualified, or until he or she sooner dies, resigns, is removed or
becomes disqualified. Each officer shall hold office and each agent shall
retain authority at the pleasure of the Trustees.
2
3.3 POWERS. Subject to the other provisions of these By-Laws, each officer
shall have, in addition to the duties and powers herein and in the Declaration
of Trust set forth, such duties and powers as are commonly incident to the
office occupied by him or her as if the Trust were organized as a
Massachusetts business corporation and such other duties and powers as the
Trustees may from time to time designate.
3.4 PRESIDENT AND VICE PRESIDENTS. The President shall have the duties and
powers specified in these By-Laws and shall have such other duties and powers
as may be determined by the Trustees.
Any Vice Presidents shall have such duties and powers as shall be designated
from time to time by the Trustees.
3.5 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Trust shall
be the Chairman of the Board, the President or such other officer as is
designated by the Trustees and shall, subject to the control of the Trustees,
have general charge and supervision of the business of the Trust and, except as
the Trustees shall otherwise determine, preside at all meetings of the
Shareholders and of the Trustees. If no such designation is made, the
President shall be the Chief Executive Officer.
3.6 CHAIRMAN OF THE BOARD. If a Chairman of the Board of Trustees is elected,
he shall have the duties and powers specified in these By-Laws and shall have
such other duties and powers as may be determined by the Trustees.
3.7 TREASURER. The Treasurer shall be the chief financial and accounting
officer of the Trust, and shall, subject to the provisions of the Declaration
of Trust and to any arrangement made by the Trustees with a custodian,
investment adviser or manager, administrator or transfer, shareholder servicing
or similar agent, be in charge of the valuable papers, books of account and
accounting records of the Trust, and shall have such other duties and powers as
may be designated from time to time by the Trustees or by the President.
3.8 CLERK. The Clerk shall record all proceedings of the Shareholders and the
Trustees in books to be kept therefor, which books or a copy thereof shall be
kept at the principal office of the Trust. In the absence of the Clerk from
any meeting of the Shareholders or Trustees, an assistant Clerk, or if there be
none or if he or she is absent, a temporary clerk chosen at such meeting shall
record the proceedings thereof in the aforesaid books.
3.9 RESIGNATIONS AND REMOVALS. Any officer may resign at any time by written
instrument signed by him or her and delivered to the President or the Clerk or
to a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. The Trustees may remove
any officer with or without cause. Except to the extent expressly provided in
a written agreement with the Trust, no officer resigning and no
3
officer removed shall have any right to any compensation for any period
following his or her resignation or removal, or any right to damages on
account of such removal.
ARTICLE 4
Indemnification
4.1 TRUSTEES, OFFICERS, ETC. The Trust shall indemnify each of its Trustees
and officers (including persons who serve at the Trust's request as directors,
officers or trustees of another organization in which the Trust has any
interest as a shareholder, creditor or otherwise) (hereinafter referred to as a
"Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of any alleged act or
omission as a Trustee or officer or by reason of his or her being or having
been such a Trustee or officer, except with respect to any matter as to which
such Covered Person shall have been finally adjudicated in any such action,
suit or other proceeding not to have acted in good faith in the reasonable
belief that such Covered Person's action was in the best interest of the Trust
and except that no Covered Person shall be indemnified against any liability to
the Trust or its Shareholders to which such Covered Person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office. Expenses, including counsel fees so incurred by any such
Covered Person, may be paid from time to time by the Trust in advance of the
final disposition of any such action, suit or proceeding on the condition that
the amounts so paid shall be repaid to the Trust if it is ultimately determined
that indemnification of such expenses is not authorized under this Article.
4.2 COMPROMISE PAYMENT. As to any matter disposed of by a compromise payment
by any such Covered Person referred to in Section 4.1 above, pursuant to a
consent decree or otherwise, no such indemnification either for said payment or
for any other expenses shall be provided unless such compromise shall be
approved as in the best interests of the Trust, after notice that it involved
such indemnification, (a) by a disinterested majority of the Trustees then in
office; or (b) by a majority of the disinterested Trustees then in office; or
(c) by any disinterested person or persons to whom the question may be referred
by the Trustees, provided that in the case of approval pursuant to clause (b)
or (c) there has been obtained an opinion in writing of independent legal
counsel to the effect that such Covered Person appears to have acted in good
faith in the reasonable belief that his or her action was in the best interests
of the Trust and that such indemnification would not protect such person
against any liability to the Trust or its Shareholders to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
4
involved in the conduct of office; or (d) by vote of Shareholders holding
a majority of the Shares entitled to vote thereon, exclusive of any Shares
beneficially owned by any interested Covered Person. Approval by the
Trustees pursuant to clause (a) or (b) or by any disinterested person or
persons pursuant to clause (c) of this Section shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person
in accordance with any of such clauses as indemnification if such Covered
Person is subsequently adjudicated by a court of competent jurisdiction
not to have acted in good faith in the reasonable belief that such Covered
Person's action was in the best interests of the Trust or to have been
liable to the Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of such Covered Person's office.
4.3 INDEMNIFICATION NOT EXCLUSIVE. The right of indemnification hereby
provided shall not be exclusive of or affect any other rights to which any such
Covered Person may be entitled. As used in this Article 4, the term "Covered
Person" shall include such person's heirs, executors and administrators; an
"interested Covered Person" is one against whom the action, suit or other
proceeding in question or another action, suit or other proceeding on the same
or similar grounds is then or has been pending; and a "disinterested Trustee"
or "disinterested person" is a Trustee or a person against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending. Nothing contained
in this Article shall affect any rights to indemnification to which personnel
of the Trust, other than Trustees and officers, and other persons may be
entitled by contract or otherwise under law, nor the power of the Trust to
purchase and maintain liability insurance on behalf of any such person.
ARTICLE 5
Reports
5.1 GENERAL. The Trustees and officers shall render reports at the time and
in the manner required by the Declaration of Trust or any applicable law.
Officers shall render such additional reports as they may deem desirable or as
may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1 GENERAL. Except as from time to time otherwise provided by the Trustees,
the fiscal year of the Trust shall end on December 31 in each year.
5
ARTICLE 7
Seal
7.1 GENERAL. The seal of the Trust shall consist of a flat-faced die with the
word "Massachusetts," together with the name of the Trust and the year of its
organization cut or engraved thereon, but, unless otherwise required by the
Trustees, the seal shall not be necessary to be placed on, and its absence
shall not impair the validity of, any document, instrument or other paper
executed and delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 GENERAL. Except as the Trustees may generally or in particular cases
authorize the execution thereof in some other manner, all checks, notes, drafts
and other obligations and all registration statements and amendments thereto
and all applications and amendments thereto to the Securities and Exchange
Commission shall be signed by the Chairman, if any, the President, any Vice
President or the Treasurer or any of such other officers or agents as shall be
designated for that purpose by a vote of the Trustees.
ARTICLE 9
Provisions Relating to the
Conduct of the Trust's Business
9.1 DETERMINATION OF NET ASSET VALUE. The Trustees or any officer or officers
or agent or agents of the Trust designated from time to time for this purpose
by the Trustees shall determine at least once daily the net income and the
value of all the assets belonging to any Series or attributable to any class of
Shares of the Trust on each day upon which the New York Stock Exchange is open
for unrestricted trading and at such other times as the Trustees shall
designate. In determining asset values, all securities for which
representative market quotations are readily available shall be valued at
market value, and all securities and other assets for which representative
market quotations are not readily available shall be valued at fair value, all
as determined in good faith by the Trustees or an officer or officers or agent
or agents, as aforesaid, in accordance with accounting principles generally
accepted at the time. Notwithstanding the foregoing, the assets belonging to
any Series or attributable to any class of Shares of the Trust may, if so
authorized by the Trustees, be valued in accordance with the amortized cost
method, and the asset value so determined, subject to the power of the Trustees
to alter the asset value so determined, less total liabilities belonging to
that Series or attributable to any class of Shares (exclusive of capital stock
and surplus) shall be the net asset value until a new asset value is determined
by the Trustees or such officers or agents. In determining the net asset value
the Trustees or such officers or agents may include in liabilities
6
such reserves for taxes, estimated accrued expenses and contingencies in
accordance with accounting principles generally accepted at the time as the
Trustees or such officers or agents may in their best judgment deem fair and
reasonable under the circumstances. The manner of determining net asset value
may from time to time be altered as necessary or desirable in the judgment of
the Trustees to conform it to any other method prescribed or permitted by
applicable law or regulation. Determinations of net asset value made by the
Trust or such officers or agents in good faith shall be binding on all parties
concerned. The foregoing sentence shall not be construed to protect any
Trustee, officer or agent of the Trust against any liability to the Trust or
its security holders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
ARTICLE 10
Amendments to the By-Laws
10.1 GENERAL. These By-Laws may be amended or repealed, in whole or in part,
by a majority of the Trustees then in office at any meeting of the Trustees, or
by written consent in lieu thereof.
ARTICLE 11
11.1 PROXY INSTRUCTIONS TRANSMITTED BY TELEPHONIC OR ELECTRONIC MEANS. The
placing of a Shareholder's name on a proxy pursuant to telephonic or
electronically transmitted instructions obtained pursuant to procedures
reasonably designed to verify that such instructions have been authorized by
such Shareholder shall constitute execution of such proxy by or on behalf of
such Shareholder.
7
<PAGE>
ARTICLE III
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial interest in
the Trust shall at all times be divided into an unlimited number of Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and
holders of the Shares of any Series or class shall be entitled to receive
dividends, when and as declared with respect thereto in the manner provided in
Article VI, Section 1 hereof. Except as otherwise provided in Section 6 of
this Article III with respect to Shares of Multi-Class Series, no Share shall
have any priority or preference over any other Share of the same Series with
respect to dividends or distributions upon termination of the Trust or of such
Series made pursuant to Article VIII, Section 4 hereof. Except as otherwise
provided in Section 6 of this Article III with respect to Shares of Multi-Class
Series, all dividends and distributions shall be made ratably among all
Shareholders of a particular Series from the assets belonging to such Series
according to the number of Shares of such Series held of record by such
Shareholders on the record date for any dividend or distribution or on the date
of termination, as the case may be. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust. The Trustees may from time to time divide or combine the Shares of
any particular Series or class into a greater or lesser number of Shares of
that Series or class without thereby changing the proportionate beneficial
interest of the Shares of that Series or class in the assets belonging to that
Series or attributable to that class or in any way affecting the rights of
Shares of any other Series or class.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each Series
and class. No certificates certifying the ownership of Shares shall be issued
except as the Trustees may otherwise determine from time to time. The Trustees
may make such rules as they consider appropriate for the transfer of Shares of
each Series and class and similar matters. The record books of the Trust as
kept by the Trust or any transfer or similar agent, as the case may be, shall
be conclusive as to who are the Shareholders of each Series and class and as to
the number of Shares of each Series and class held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. The Trustees shall accept
investments in the Trust from such persons and on such terms and for such
consideration as they from time to time authorize.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall
be held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder
1
during the continuance of the Trust shall not operate to terminate the same
nor entitle the representative of any deceased Shareholder to an accounting
or to take any action in court or elsewhere against the Trust or the Trustees,
but entitles such representative only to the rights of said deceased
Shareholder under this Trust. Ownership of Shares shall not entitle
the Shareholder to any title in or to the whole or any part of the Trust
property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust, shall have any power to bind personally any Shareholders,
nor except as specifically provided herein to call upon any Shareholder for the
payment of any sum of money or assessment whatsoever other than such as the
Shareholder may at any time personally agree to pay.
SECTION 5. POWER OF TRUSTEES TO CHANGE PROVISIONS RELATING TO SHARES.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as
provided elsewhere herein, the Trustees shall have the power to amend this
Declaration of Trust, at any time and from time to time, in such manner as the
Trustees may determine in their sole discretion, without the need for
Shareholder action, so as to add to, delete, replace or otherwise modify any
provisions relating to the Shares contained in this Declaration of Trust for
the purpose of (i) responding to or complying with any regulations, orders,
rulings or interpretations of any governmental agency or any laws, now or
hereafter applicable to the Trust, or (ii) designating and establishing Series
or classes in addition to those established in Section 6 of this Article III;
provided that before adopting any such amendment without Shareholder approval
the Trustees shall determine that it is consistent with the fair and equitable
treatment of all Shareholders. The establishment and designation of any Series
of Shares in addition to the Series established and designated in Section 6 of
this Article III shall be effective upon the execution by a majority of the
then Trustees of an amendment to this Declaration of Trust, taking the form of
a complete restatement or otherwise, setting forth such establishment and
designation and the relative rights and preferences of such Series, or as
otherwise provided in such instrument. The establishment and designation of
any class of Shares shall be effective upon either the execution by a majority
of the then Trustees of an amendment to this Declaration of Trust or the
adoption by vote or written consent of a majority of the then Trustees of a
resolution setting forth such establishment and designation and the relative
rights and preferences of such class and such eligibility requirements for
investment therein as the Trustees may determine, or as otherwise provided in
such amendment or resolution.
Without limiting the generality of the foregoing, the Trustees may, for the
above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or classes of Shares (in addition to any
Series or classes already existing or otherwise) with such rights and
preferences and such eligibility requirements for investment therein as the
Trustees shall determine and reclassify any or all
2
outstanding Shares as shares of particular Series or classes in
accordance with such eligibility requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j)
of Section 6 of this Article III;
(c) combine one or more Series or classes of Shares into a single Series
or class on such terms and conditions as the Trustees shall determine;
(d) change or eliminate any eligibility requirements for investment in
Shares of any Series or class, including without limitation the power to
provide for the issue of Shares of any Series or class in connection with any
merger or consolidation of the Trust with another trust or company or any
acquisition by the Trust of part or all of the assets of another trust or
company;
(e) change the designation of any Series or class of Shares;
(f) change the method of allocating dividends among the various Series
and classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any
specific items of income or expense of the Trust to one or more Series or
classes of Shares; and
(h) specifically allocate assets to any or all Series of Shares or create
one or more additional Series of Shares which are preferred over all other
Series of Shares in respect of assets specifically allocated thereto or any
dividends paid by the Trust with respect to any net income, however determined,
earned from the investment and reinvestment of any assets so allocated or
otherwise and provide for any special voting or other rights with respect to
such Series or any classes of Shares thereof.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SERIES AND CLASSES. Without
limiting the authority of the Trustees set forth in Section 5, INTER ALIA, to
establish and designate any further Series or classes or to modify the rights
and preferences of any Series or class, the following Series shall be, and are
hereby, established and designated: "FISH: Series C" and "FISH: Series M."
Shares of each Series established in this Section 6 shall have the
following rights and preferences relative to Shares of each other Series, and
Shares of each class of a Multi-Class Series shall have such rights and
preferences relative to other classes of the same Series as are set forth
below, together with such other rights and preferences relative to such other
classes as are set forth in any resolution of the Trustees establishing and
designating such class of Shares:
3
(a) ASSETS BELONGING TO SERIES. Subject to the provisions of paragraph
(c) of this Section 6:
All consideration received by the Trust for the issue or sale of Shares of
a particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall irrevocably belong to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of
account of the Trust. Such consideration, assets, income, earnings, profits
and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the Series established and designated from time to time in
such manner and on such basis as they, in their sole discretion, deem fair and
equitable, and any General Asset so allocated to a particular Series shall
belong to that Series. Each such allocation by the Trustees shall be
conclusive and binding upon the Shareholders of all Series for all purposes.
(b) LIABILITIES BELONGING TO SERIES. Subject to the provisions of
paragraph (c) of this Section 6:
The assets belonging to each particular Series shall be charged solely
with the liabilities of the Trust in respect to that Series, the expenses,
costs, charges and reserves attributable to that Series, and any general
liabilities of the Trust which are not readily identifiable as belonging to any
particular Series but which are allocated and charged by the Trustees to and
among any one or more of the Series established and designated from time to
time in a manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. The liabilities, expenses, costs, charges and
reserves so charged to a Series are herein referred to as "liabilities
belonging to" that Series. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(c) APPORTIONMENT OF ASSETS ETC. IN CASE OF MULTI-CLASS SERIES. In the
case of any Multi-Class Series, to the extent necessary or appropriate to give
effect to the relative rights and preferences of any classes of Shares of such
Series, (i) any assets, income, earnings, profits, proceeds, liabilities,
expenses, charges, costs and reserves belonging or attributable to that Series
may be allocated or attributed to a particular class of Shares of that Series
or apportioned among two or more classes of Shares of that Series; and (ii)
Shares of any class of
4
such Series may have priority or preference over shares of other classes of
such Series with respect to dividends or distributions upon termination of the
Trust or of such Series or class or otherwise, provided that no Share shall
have any priority or preference over any other Shares of the same class and
that all dividends and distributions to Shareholders of a particular class
shall be made ratably among all Shareholders of such class according to the
number of Shares of such class held of record by such Shareholders on the
record date for any dividend or distribution or on the date of termination,
as the case may be.
(d) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES.
Notwithstanding any other provisions of this Declaration, including, without
limitation, Article VI, no dividend or distribution (including, without
limitation, any distribution paid upon termination of the Trust or of any
Series or class) with respect to, nor any redemption or repurchase of, the
Shares of any Series or class shall be effected by the Trust other than from
the assets belonging to such Series or attributable to such class, nor shall
any Shareholder of any particular Series or class otherwise have any right or
claim against the assets belonging to any other Series or attributable to any
other class except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series or class.
(e) VOTING. Notwithstanding any of the other provisions of this
Declaration, including, without limitation, Section 1 of Article V, the
Shareholders of any particular Series or class shall not be entitled to vote on
any matters as to which such Series or class is not affected. On any matter
submitted to a vote of Shareholders, all Shares of the Trust then entitled to
vote shall, except as otherwise provided in the By-Laws, be voted in the
aggregate as a single class without regard to Series or class of Shares, except
that (1) when required by the 1940 Act or when the Trustees shall have
determined that the matter affects one or more Series or classes of Shares
materially differently, Shares shall be voted by individual Series or class and
(2) when the matter affects only the interests of one or more Series or
classes, only Shareholders of such Series or classes shall be entitled to vote
thereon. There shall be no cumulative voting in the election of Trustees.
(f) EQUALITY. Except to the extent necessary or appropriate to give
effect to the relative rights and preferences of any classes of Shares of a
Multi-Class Series, all the Shares of each particular Series shall represent an
equal proportionate interest in the assets belonging to that Series (subject to
the liabilities belonging to that Series), and each Share of any particular
Series shall be equal to each other Share of that Series. All the Shares of
each particular class of Shares within a Multi-Class Series shall represent an
equal proportionate interest in the assets belonging to such Series that are
attributable to such class (subject to the liabilities attributable to such
class), and each Share of any particular class within a Multi-Class Series
shall be equal to each other Share of such class.
(g) FRACTIONS. Any fractional Share of a Series or class shall carry
proportionately all the rights and obligations of a whole Share of that Series
or class, including rights with
5
respect to voting, receipt of dividends and distributions, redemption of
Shares and termination of the Trust.
(h) EXCHANGE PRIVILEGE. The Trustees shall have the authority to provide
that the holders of Shares of any Series or class shall have the right to
exchange said Shares for Shares of one or more other Series or classes of
Shares in accordance with such requirements and procedures as may be
established by the Trustees.
(i) COMBINATION OF SERIES OR CLASSES. The Trustees shall have the
authority, without the approval of the Shareholders of any Series or class
unless otherwise required by applicable law, to combine the assets and
liabilities belonging to any two or more Series or attributable to any class
into assets and liabilities belonging to a single Series or attributable to a
single class.
(j) ELIMINATION OF SERIES OR CLASS. At any time that there are no Shares
outstanding of any particular Series previously established and designated, the
Trustees may amend this Declaration of Trust to abolish that Series and to
rescind the establishment and designation thereof, such amendment to be
effected in the manner provided in Section 5 of this Article III for the
establishment and designation of Series. At any time that there are no Shares
outstanding of any particular class previously established and designated of a
Multi-Series Class, the Trustees may abolish that class and rescind the
establishment and designation thereof, either by amending this Declaration of
Trust in the manner provided in Section 5 of this Article III for the
establishment and designation of classes (if such class was established and
designated by an amendment to this Declaration of Trust), or by vote or written
consent of a majority of the then Trustees (if such class was established and
designated by Trustee vote or written consent).
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of
his or her being or having been a Shareholder of the Trust or of a particular
Series or class and not because of his or her acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or, in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled out of the assets of the Series (or attributable to the class) of
which he or she is a Shareholder or former Shareholder to be held harmless from
and indemnified against all loss and expense arising from such liability.
SECTION 8. NO PREEMPTIVE RIGHTS. Shareholders shall have no preemptive
or other right to subscribe to any additional Shares or other securities issued
by the Trust.
SECTION 9. DERIVATIVE CLAIMS. No Shareholder shall have the right to
bring or maintain any court action, proceeding or claim on behalf of the Trust
or any Series without first making demand on the Trustees requesting the
Trustees to bring or maintain such action, proceeding or
6
claim. Such demand shall be excused only when the plaintiff makes a
specific showing that irreparable injury to the Trust or Series would
otherwise result. Such demand shall be mailed to the Secretary of the
Trust at the Trust's principal office and shall set forth in reasonable
detail the nature of the proposed court action, proceeding or claim and the
essential facts relied upon by the Shareholder to support the allegations made
in the demand. The Trustees shall consider such demand within 45 days of its
receipt by the Trust. In their sole discretion, the Trustees may submit the
matter to a vote of Shareholders of the Trust or Series, as appropriate. Any
decision by the Trustees to bring, maintain or settle (or not to bring,
maintain or settle) such court action, proceeding or claim, or to submit the
matter to a vote of Shareholders, shall be made by the Trustees in their
business judgment and shall be binding upon the Shareholders. Any decision by
the Trustees to bring or maintain a court action, proceeding or suit on behalf
of the Trust or a Series shall be subject to the right of the Shareholders
under Article V, Section 1 hereof to vote on whether or not such court
action, proceeding or suit should or should not be brought or maintained.
7
ARTICLE V
Shareholders' Voting Powers and Meetings
SECTION 1. VOTING POWERS. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Article IV, Section 1, (ii)
with respect to any amendment of this Declaration of Trust to the extent and as
provided in Article VIII, Section 8, (iii) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(iv) with respect to the termination of the Trust or any Series or class to the
extent and as provided in Article VIII, Section 4, (v) to remove Trustees from
office to the extent and as provided in Article V, Section 7 and (vi) with
respect to such additional matters relating to the Trust as may be required by
this Declaration of Trust, the By-Laws or any registration of the Trust with
the Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one
vote as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person
or by proxy. A proxy with respect to Shares held in the name of two or more
persons shall be valid if executed by any one of them unless at or prior to
exercise of the proxy the Trust receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
At any time when no Shares of a Series or class are outstanding the Trustees
may exercise all rights of Shareholders of that Series or class with respect to
matters affecting that Series or class and may with respect to that Series or
class take any action required by law, this Declaration of Trust or the By-Laws
to be taken by the Shareholders thereof.
SECTION 2. VOTING POWER AND MEETINGS. Meetings of the Shareholders may
be called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders
may also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by
the Trustees. Notice of any meeting of Shareholders, stating the time and
place of the meeting, shall be given or caused to be given by the Trustees to
each Shareholder by mailing such notice, postage prepaid, at least seven days
before such meeting, at the Shareholder's address as it appears on the records
of the Trust, or by facsimile or other electronic transmission, at least seven
days before such meeting, to the telephone or facsimile number or e-mail or
other electronic address most recently furnished to the Trust (or its agent) by
the Shareholder. Whenever notice of a meeting is required to be given to a
Shareholder under this Declaration of Trust or the By-Laws, a written waiver
thereof, executed before or after the meeting by
8
such Shareholder or his attorney thereunto authorized and filed with the
records of the meeting, shall be deemed equivalent to such notice.
SECTION 3. QUORUM AND REQUIRED VOTE. Except when a larger quorum is
required by law, by the By-Laws or by this Declaration of Trust, 40% of the
Shares entitled to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series or classes is to vote as a single class separate
from any other Shares which are to vote on the same matters as a separate class
or classes, 40% of the Shares of each such class entitled to vote shall
constitute a quorum at a Shareholders' meeting of that class. Any meeting of
Shareholders may be adjourned from time to time by a majority of the votes
properly cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned within a reasonable time after the date set
for the original meeting without further notice. When a quorum is present at
any meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by law. If any
question on which the Shareholders are entitled to vote would adversely affect
the rights of any Series or class of Shares, the vote of a majority (or such
larger vote as is required as aforesaid) of the Shares of such Series or class
which are entitled to vote, voting separately, shall also be required to decide
such question.
SECTION 4. ACTION BY WRITTEN CONSENT. Any action taken by Shareholders
may be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records
of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
SECTION 5. RECORD DATES. For the purpose of determining the Shareholders
of any Series or class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 90 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series or class having the
right to notice of and to vote at such meeting and any adjournment thereof, and
in such case only Shareholders of record on such record date shall have such
right, notwithstanding any transfer of Shares on the books of the Trust after
the record date. For the purpose of determining the Shareholders of any Series
or class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be on
or before the date for the payment of such dividend or such other payment, as
the record date for determining the Shareholders of such Series or class having
the right to receive such dividend or distribution. Without fixing a record
date the Trustees may for voting and/or distribution purposes close the
register or transfer books for one or more Series or classes for all or any
part of the period prior to a meeting of
9
Shareholders or the payment of a distribution. Nothing in this Section
shall be construed as precluding the Trustees from setting different
record dates for different Series or classes.
SECTION 6. ADDITIONAL PROVISIONS. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
SECTION 7. REMOVAL OF TRUSTEES. No natural person shall serve as Trustee
after the holders of record of not less than two-thirds of the outstanding
Shares have declared that such Trustee be removed from that office either by
declaration in writing filed with the Trust's custodian or by votes cast in
person or by proxy at a meeting called for the purpose. The Trustees shall
promptly call a meeting of Shareholders for the purpose of voting upon the
question of removal of any Trustee when requested in writing so to do by the
record holders of not less than 10 per centum of the outstanding Shares.
Whenever ten or more Shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate Shares having a net asset value of at least 1 per centum of the
outstanding Shares, shall apply to the Trustees in writing, stating that they
wish to communicate with other Shareholders with a view to obtaining signatures
to a request for a meeting pursuant to this Section and accompanied by a form
of communication and request which they wish to transmit, the Trustees shall
within five business days after receipt of such application either (a) afford
to such applicants access to a list of the names and addresses of all
Shareholders as recorded on the books of the Trust; or (b) inform such
applicants as to the approximate number of Shareholders of record, and the
approximate cost of transmitting to them the proposed communication and form of
request. If the Trustees elect to follow the course specified in clause (b),
the Trustees, upon the written request of such applicants, accompanied by a
tender of the material to be transmitted and of the reasonable expenses of
transmittal, shall, with reasonable promptness, transmit such material to all
Shareholders of record at their addresses as recorded on the books of the Trust
(or at the telephone or facsimile number or e-mail or other electronic address
most recently furnished to the Trust (or its agent) by the Shareholder), unless
within five business days after such tender the Trustees shall transmit to such
applicants and file with the Commission, together with a copy of the material
proposed to be transmitted, a written statement signed by at least a majority
of the Trustees to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to make
the statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion. If the Commission
shall enter an order refusing to sustain any of the objections specified in the
written statement so filed, or if, after the entry of an order sustaining one
or more of such objections, the Commission shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Trustees shall transmit copies of such
material to all Shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
10
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made the _____ day of November, 1999 between Fixed Income
SHares ("Trust"), a Massachusetts business trust, and PIMCO Advisors L.P.
("Adviser"), a limited partnership.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
("Shares") in separate series with each such series representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Trust has established multiple series, including operational
series or series that are expected to be operational that are designated as the
FISH: Series C and FISH: Series M, such series together with any other series
subsequently established by the Trust, with respect to which the Trust desires
to retain the Adviser to render investment advisory services hereunder, and
with respect to which the Adviser is willing to do so, being herein
collectively referred to also as the "Portfolios"; and
WHEREAS, the Adviser is registered with the SEC as an investment adviser
under the Investment Advisers Act of 1940; and
WHEREAS, the Adviser is the parent company or an affiliate of other
companies that render investment advisory services and are registered as
investment advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Trust desires to retain the Adviser so that it and its
subsidiaries and affiliates will render investment advisory services to the
Portfolios in the manner and on the terms hereinafter set forth; and
WHEREAS, the Adviser is willing to render such services and engage its
subsidiaries, affiliates, and others to render such services to the Trust;
NOW THEREFORE, in consideration of the premises, the promises, and mutual
covenants herein contained, it is agreed between the parties as follows:
1. APPOINTMENT. The Trust hereby appoints the Adviser to provide
investment advisor services to the Trust with respect to the Portfolios for the
period and on the terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.
1
In the event the Trust establishes and designates additional series with
respect to which it desires to retain the Adviser to render investment advisory
services hereunder, it shall notify the Adviser in writing. If the Adviser is
willing to render such services it shall notify the Trust in writing, whereupon
such additional series shall become a Portfolio hereunder.
2. DUTIES. Subject to the general supervision of the Board of Trustees,
the Adviser shall provide general, overall advice and guidance with respect to
the Portfolios and provide advice and guidance to the Trust's Trustees. In
discharging these duties the Adviser shall, either directly or indirectly
through others ("Portfolio Managers") engaged by it pursuant to Section 3 of
this Agreement, provide continuous investment program for each Portfolio and
determine the composition of the assets of each Portfolio, including
determination of the purchase, retention, or sale of the securities, cash, and
other investments for the Portfolio. The Adviser (or Portfolio Manager) will
provide investment research and analysis, which may consist of a computerized
investment methodology, and will conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest, and the
Adviser (or Portfolio Manager) is hereby authorized to execute and perform such
services on behalf of the Portfolio. To the extent permitted by the investment
policies of the Portfolio, the Adviser (or Portfolio Manager) shall make
decisions for the Portfolio as to foreign currency matters and make
determinations as to the retention or disposition of foreign currencies or
securities or other instruments denominated in foreign currencies or derivative
instruments based upon foreign currencies, including forward foreign currency
contracts and options and futures on foreign currencies, and shall execute and
perform the same. The Adviser (or Portfolio Manager) will provide the services
under this Agreement for each Portfolio in accordance with the Portfolio's
investment objective or objectives, investment policies, and investment
restrictions as stated in the Trust's Registration Statement filed on Form N-1A
with the SEC as supplemented or amended from time to time.
In performing these duties, the Adviser, either directly or indirectly
through others selected by the Adviser:
(a) Shall conform with the 1940 Act and all rules and regulations
thereunder, all other applicable federal and state laws and regulations, with
any applicable procedures adopted by the Trust's Board of Trustees, and with
the provisions of the Trust's Registration Statement filed on Form N-1A as
supplemented or amended from time to time.
(b) Shall use reasonable efforts to manage each Portfolio so that it
qualifies as a regulated investment company under Subchapter M of the Internal
Revenue Code.
2
(c) Is responsible, in connection with its responsibilities under this
Section 2, for decisions to buy and sell securities and other investments for
the Portfolios, for broker-dealer and futures commission merchant ("FCM")
selection, and for negotiation of commission rates. The Adviser's (or
Portfolio Manager's) primary consideration in effecting a security or other
transaction will be to obtain the best execution for the Portfolio, taking into
account the factors specified in the Prospectus and Statement of Additional
Information for the Trust, as they may be amended or supplemented from time to
time. Subject to such policies as the Board of Trustees may determine and
consistent with Section 28(e) of the Securities Exchange Act of 1934, the
Adviser (or Portfolio Manager) shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Portfolio to pay a broker or dealer, acting as
agent, for effecting a portfolio transaction at a price in excess of the amount
of commission another broker or dealer would have charged for effecting that
transaction, if the Adviser (or Portfolio Manager) determines in good faith
that such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Adviser's (or Portfolio
Manager's) overall responsibilities with respect to the Portfolio and to their
other clients as to which they exercise investment discretion. To the extent
consistent with these standards, and in accordance with Section 11(a) of the
Securities Exchange Act of 1934 and Rule 11a2-(T) thereunder, and subject to
any other applicable laws and regulations, the Adviser (or Portfolio Manager)
is further authorized to allocate the orders placed by it on behalf of the
Portfolio to the Adviser (or Portfolio Manager) if it is registered as a broker
or dealer with the SEC, to its affiliate that is registered as a broker or
dealer with the SEC, or to such brokers and dealers that also provide research
or statistical research and material, or other services to the Portfolio or the
Adviser (or Portfolio Manager). Such allocation shall be in such amounts and
proportions as the Adviser shall determine consistent with the above standards,
and, upon request, the Adviser will report on said allocation regularly to the
Board of Trustees of the Trust indicating the broker-dealers to which such
allocations have been made and the basis therefor.
(d) May, on occasions when the purchase or sale of a security is deemed
to be in the best interest of a Portfolio as well as any other investment
advisory clients, to the extent permitted by applicable laws and regulations,
but shall not be obligated to, aggregate the securities to be so sold or
purchased with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Registration Statement. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Adviser (or Portfolio
Manager) in a manner that is fair and equitable in the judgment of the Adviser
(or Portfolio Manager) in the exercise of its fiduciary obligations to the
Trust and to such other clients.
3
(e) Will, in connection with the purchase and sale of securities for each
Portfolio, arrange for the transmission to the custodian for the Trust on a
daily basis, such confirmation, trade tickets, and other documents and
information, including, but not limited to, Cusip, Sedol, or other numbers that
identify securities to be purchased or sold on behalf of the Portfolio, as may
be reasonably necessary to enable the custodian to perform its administrative
and recordkeeping responsibilities with respect to the Portfolio, and, with
respect to portfolio securities to be purchased or sold through the Depository
Trust Company, will arrange for the automatic transmission of the confirmation
of such trades to the Trust's custodian.
(f) Will make available to the Trust, promptly upon request, any of the
Portfolios' investment records and ledgers as are necessary to assist the Trust
to comply with requirements of the 1940 Act and the Investment Advisers Act of
1940, as well as other applicable laws, and will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with such services which may be requested in order to ascertain
whether the operations of the Trust are being conducted in a manner consistent
with applicable laws and regulations.
(g) Will regularly report to the Trust's Board of Trustees on the
investment program for each Portfolio and the issuers and securities
represented in each Portfolio's portfolio, and will furnish the Trust's Board
of Trustees with respect to the Portfolios such periodic and special reports as
the Trustees may reasonably request.
3. APPOINTMENT OF PORTFOLIO MANAGERS. The Adviser may, at its expense
and subject to its supervision, engage one or more persons, including, but not
limited to, subsidiaries and affiliated persons of the Adviser, to render any
or all of the investment advisory services that the Adviser is obligated to
render under this Agreement including, for one or more of the Portfolios and,
to the extent required by applicable law, subject to the approval of the
Trust's Board of Trustees and/or the shareholders of one or more of the
Portfolios, a person to render investment advisory services including the
provision of a continuous investment program and the determination of the
composition of the securities and other assets of such Portfolio or Portfolios.
4. DOCUMENTATION. The Trust has delivered copies of each of the
following documents to the Adviser and will deliver to it all future amendments
and supplements thereto, if any:
(a) the Trust's Registration Statement as filed with the SEC and any
amendments thereto; and
(b) exhibits, powers of attorneys, certificates and any and all other
documents relating to or filed in connection with the Registration Statement
described above.
The Adviser has delivered to the Trust copies of the Adviser's and the
Portfolio Manager's Uniform Application for Investment Adviser Registration on
Form ADV, as filed with
4
the SEC. The Adviser agrees to provide the Trust with current copies of the
Adviser's and the Portfolio Manager's Forms ADV, and any supplements or
amendments thereto, as filed with the SEC.
5. RECORDS. The Adviser agrees to maintain and to preserve for the
periods prescribed under the 1940 Act any such records as are required to be
maintained by the Adviser with respect to the Portfolios by the 1940 Act. The
Adviser further agrees that all records which it maintains for the Portfolios
are the property of the Trust and it will promptly surrender any of such
records upon request.
6. EXPENSES. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its obligations under this
Agreement, except such expenses as are assumed by the Portfolios under this
Agreement and any expenses that are paid by a party other than the Trust under
the terms of any other agreement to which the Trust is a party or a third-party
beneficiary. The Adviser further agrees to pay or cause its subsidiaries or
affiliates to pay all salaries, fees, and expenses of any officer or Trustee of
the Trust who is an officer, director, or employee of the Adviser or a
subsidiary or affiliate of the Adviser. The adviser assumes and shall pay for
maintaining its staff and personnel and shall, at its own expense provide the
equipment, office space, and facilities necessary to perform its obligations
under this Agreement. The Adviser shall not, under the terms of this
Agreement, bear the following expenses (although the Adviser or an affiliate
may bear some or all of these expenses under one or more other agreements):
(a) Expenses of all audits by Trust's independent public accountants;
(b) Expenses of the Trust's transfer agent(s), registrar, dividend
disbursing agent(s), and shareholder recordkeeping services;
(c) Expenses of the Trust's custodial services, including recordkeeping
services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of each
Portfolio's net assets;
(e) Expenses of obtaining Portfolio Activity Reports for each Portfolio;
(f) Expenses of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, stockholders,
or employees of the Adviser, its subsidiaries or affiliates, or any Portfolio
Manager of the Trust;
(h) Taxes, if any, levied against the Trust or any of its Portfolios;
5
(i) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for any of the Portfolios;
(j) Costs, including the interest expenses, of borrowing money;
(k) Costs and/or fees incident to meetings of the Trust's shareholders,
the preparation and mailings of Prospectuses and reports of the Trust to is
shareholders, the filing of reports with regulatory bodies, the maintenance of
the Trust's existence and qualification to do business, and the registration of
shares with federal and state securities authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing certificates representing shares of the Trust;
(n) Trustees' fees and expenses to trustees who are not officers,
employees, or stockholders of the Adviser, its subsidiaries or affiliates, or
any Portfolio Manager of the Trust;
(o) The Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
(p) Association membership dues;
(q) Extraordinary expenses as may arise, including expenses incurred in
connection with litigation, proceedings, other claims and the legal obligations
of the Trust to indemnify its trustees, officers, employees, shareholders,
distributors, and agents with respect thereto; and
(r) Organizational and offering expenses and, if applicable,
reimbursement (with interest) of underwriting discounts and commissions.
7. LIABILITY. The Adviser shall give the Trust the benefit of the
Adviser's best judgment and efforts in rendering services under this Agreement.
The Adviser may rely on information reasonably believed by it to be accurate
and reliable. As an inducement for the Adviser's undertaking to render
services under this Agreement, the Trust agrees that neither the Adviser nor
its stockholders, partners, limited partners, officers, directors, employees,
or agents shall be subject to any liability for, or any damages, expenses or
losses incurred in connection with, any act or omission or mistake in judgment
connected with or arising out of any services rendered under this Agreement,
except by reason of willful misfeasance, bad faith, or gross
6
negligence in performance of the Adviser's duties, or by reason of reckless
disregard of the Adviser's investment advisory obligations and duties under
this Agreement.
8. INDEPENDENT CONTRACTOR. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Trust from time
to time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent.
9. COMPENSATION. The Adviser shall receive no investment advisory or
other fee from the Trust for the services provided under this Agreement.
10. NON-EXCLUSIVITY. It is understood that the services of the Adviser
hereunder are not exclusive, and the Adviser shall be free to render similar
services to other investment companies and other clients whether or not their
investment objectives are similar to those of any of the Portfolios.
11. TERM AND CONTINUATION. This Agreement shall take effect as of the
date hereof, and shall remain in effect, unless sooner terminated as provided
herein, with respect to a Portfolio for a period of two years following the
date set forth on the attached Schedule. This Agreement shall continue
thereafter on an annual basis with respect to a Portfolio provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Board of Trustees of the Trust, or (b) by vote of a majority of
the outstanding voting shares of the Portfolio, and provided continuance is
also approved by the vote of a majority of the Board of Trustees of the Trust
who are not parties to this Agreement of "interested persons" (as defined in
the 1940 Act) of the Trust, or the Adviser, cast in person at a meeting called
for the purpose of voting on such approval. This Agreement may not be
materially amended without a majority vote of the outstanding voting shares (as
defined in the 1940 Act) of the pertinent Portfolio or Portfolios.
However, any approval of this Agreement by the holders of a majority of
the outstanding shares (as defined in the 1940 Act) of a particular Portfolio
shall be effective to continue this Agreement with respect to such Portfolio
notwithstanding (a) that this Agreement has not been approved by the holders of
a majority of the outstanding shares of any other Portfolio or (b) that this
Agreement has not been approved by the vote of a majority of the outstanding
shares of the Trust, unless such approval shall be required by any other
applicable law or otherwise. This Agreement will terminate automatically with
respect to the services provided by the Adviser in event of its assignment, as
that term is defined in the 1940 Act, by the Adviser.
This Agreement may be terminated:
(a) by the Trust at any time with respect to the services provided by the
Adviser, without the payment of any penalty, by vote of a majority of the Board
of Trustees of the Trust or by a vote of a majority of the outstanding voting
shares of the
7
Trust or, with respect to a particular Portfolio, by vote of a majority of the
outstanding voting shares of such Portfolio, on 60 days' written notice to the
Adviser or, by a vote of a majority of the Trustees of the Trust who are not
"interested persons" (as such term is defined in the 1940 Act) of the Trust;
(b) by the Adviser at any time, without the payment of any penalty, upon
60 days' written notice to the Trust.
12. USE OF NAME. It is understood that the name "PIMCO Advisory
Services" or "PIMCO" or any derivative thereof or logo associated with those
names are the valuable property of the Adviser and its affiliates, and that the
Trust and/or the Portfolios have the right to use such names (or derivatives or
logos) only so long as this Agreement shall continue with respect to such Trust
and/or Portfolios. Upon termination of this Agreement, the Trust (or
Portfolio) shall forthwith cease to use such names (or derivatives or logos)
and, in the case of the Trust, shall promptly amend its Declaration of Trust to
change its name.
13. NOTICES. Notices of any kind to be given to the Adviser by the Trust
shall be in writing and shall be duly given if mailed or delivered to the
Adviser at 2187 Atlantic Street, Stamford, Connecticut, 06902, or to such other
address or to such individual as shall be specified by the Adviser. Notices of
any kind to be given to the Trust by the Adviser shall be in writing and shall
be duly given if mailed or delivered to 1345 Avenue of the Americas, New York,
New York, 10105, or to such other address or to such individual as shall be
specified by the Trust.
14. PORTFOLIO OBLIGATION. A copy of the Trust's Agreement and
Declaration of Trust is on file with the Secretary of the Commonwealth of
Massachusetts and notice is hereby given that the Agreement has been executed
on behalf of the Trust by a trustee of the Trust in his or her capacity as
trustee and not individually. The obligations of this Agreement shall only be
binding upon the assets and property of the Trust and shall not be binding upon
any trustee, officer, or shareholder of the Trust individually.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
16. MISCELLANEOUS. (a) This Agreement shall be governed by the laws of
Massachusetts, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rule or order of the SEC thereunder.
(b) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable. To the extent that any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise with regard to any party hereunder, such provisions with respect
to other parties hereto shall not be affected thereby.
8
(c) The captions in this Agreement are included for convenience only and
in no way define any of the provisions hereof or otherwise affect their
construction or effect.
9
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below on the day and year first above
written.
FIXED INCOME SHARES
By: ________________________________
Title:
PIMCO ADVISORS L.P.
Attest: ___________________________ By: ________________________________
Title: Sr. Fund Administrator Title: Executive Vice President
10
<PAGE>
FIXED INCOME SHARES
PORTFOLIO MANAGEMENT AGREEMENT
------------------------------
AGREEMENT made this __ day of November, 1999 between PIMCO Advisors L.P.
("Adviser"), a limited partnership, and Pacific Investment Management Company
(the "Portfolio Manager"), a partnership.
WHEREAS, Fixed Income SHares (the "Trust") is registered with the
Securities and Exchange Commission ("SEC") as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
("Shares") in separate series, with each such series representing interests in
a separate portfolio; and
WHEREAS, the Trust has established multiple series, including operational
series or series that are expected to be operational that are designated as the
FISH: Series C and FISH: Series M, such series together with any other series
subsequently established by the Trust, being collectively referred to
hereinafter as the "Series"; and
WHEREAS, the Portfolio Manager is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940 ("Advisers Act"); and
WHEREAS, the Trust has retained the Adviser to render management services
to the Portfolios (as defined below) pursuant to an Investment Advisory
Agreement dated as of November __, 1999, as from time to time amended,
supplemented or modified, and such Agreement authorizes the Adviser to engage
Portfolio Managers to discharge the Adviser's responsibilities with respect to
the management of the Series; and
WHEREAS, the Adviser desires to retain the Portfolio Manager to furnish
investment advisory services to one or more of the Series of the Trust, and the
Portfolio Manager is willing to furnish such services to such Series and the
Adviser in the manner and on the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Adviser and the
Portfolio Manager as follows:
1. APPOINTMENT. The Adviser hereby appoints Pacific Investment
Management Company to act as Portfolio Manager to the FISH: Series C and FISH:
Series M (the "Portfolios") for the periods and on the terms set forth in this
Agreement. The Portfolio Manager accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
1
In the event the Adviser wishes to retain the Portfolio Manager to render
investment advisory services to one or more Series other than the Portfolios,
the Adviser shall notify the Portfolio Manager in writing. If the Portfolio
Manager is willing to render such services, it shall notify the Adviser in
writing.
2. PORTFOLIO MANAGEMENT DUTIES. Subject to the supervision of the
Trust's Board of Trustees and the Adviser, the Portfolio Manager will provide a
continuous investment program for the Portfolios and determine the composition
of the assets of the Portfolios, including determination of the purchase,
retention, or sale of the securities, cash, and other investments for the
Portfolios. The Portfolio Manager will provide investment research and
analysis, which may consist of computerized investment methodology, and will
conduct a continuous program of evaluation, investment, sales, and reinvestment
of the Portfolios' assets by determining the securities and other investments
that shall be purchased, entered into, sold, closed, or exchanged for the
Portfolios, when these transactions should be executed, and what portion of the
assets of the Portfolios should be held in the various securities and other
investments in which they may invest, and the Portfolio Manager is hereby
authorized to execute and perform such services on behalf of the Portfolios. To
the extent permitted by the investment policies of the Portfolios, the
Portfolio Manager shall make decisions for the Portfolios as to foreign
currency matters and make determinations as to the retention or disposition of
foreign currencies or securities or other instruments denominated in foreign
currencies, or derivative instruments based upon foreign currencies, including
forward foreign currency contracts and options and futures on foreign
currencies and shall execute and perform the same on behalf of the Portfolios.
The Portfolio Manager will provide the services under this Agreement in
accordance with the Portfolios' investment objective or objectives, investment
policies, and investment restrictions as stated in the Trust's Registration
Statement filed on Form N-1A with the SEC, as supplemented or amended from time
to time, copies of which shall be sent to the Portfolio Manager by the Adviser.
In performing these duties, the Portfolio Manager:
a. Shall conform with the 1940 Act and all rules and regulations
thereunder, all other applicable federal and state laws and regulations, with
any applicable procedures adopted by the Trust's Board of Trustees, and with
the provisions of the Trust's Registration Statement filed on Form N-1A, as
supplemented or amended from time to time.
b. Shall use reasonable efforts to manage each Portfolio so that it
qualifies as a regulated investment company under Subchapter M of the Internal
Revenue Code.
2
c. Is responsible, in connection with its responsibilities under this
Section 2, for decisions to buy and sell securities and other investments for
the Portfolios, for broker-dealer and futures commission merchant ("FCM")
selection, and for negotiation of commission rates. The Portfolio Manager's
primary consideration in effecting a security or other transaction will be to
obtain the best execution for the Portfolios, taking into account the factors
specified in the Prospectus and Statement of Additional Information for the
Trust, as they may be amended or supplemented from time to time. Subject to
such policies as the Board of Trustees may determine and consistent with
Section 28(e) of the Securities Act of 1934, the Portfolio Manager shall not be
deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Portfolios to
pay a broker or dealer, acting as agent, for effecting a portfolio transaction
at a price in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Portfolio Manager
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Portfolio Manager's overall responsibilities with respect to the Portfolios and
to its other clients as to which it exercises investment discretion. To the
extent consistent with these standards, and in accordance with Section 11(a) of
the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and subject
to any other applicable laws and regulations, the Portfolio Manager is further
authorized to allocate the orders placed by it on behalf of the Portfolios to
the Portfolio Manager if it is registered as a broker or dealer with the SEC,
to its affiliate that is registered as a broker or dealer with the SEC, or to
such brokers and dealers that also provide research or statistical research and
material, or other services to the Portfolios or the Portfolio Manager. Such
allocation shall be in such amounts and proportions as the Portfolio Manager
shall determine consistent with the above standards, and, upon request, the
Portfolio Manager will report on said allocation to the Adviser and Board of
Trustees of the Trust, indicating the brokers or dealers to which such
allocations have been made and the basis therefor.
d. May, on occasions when the purchase or sale of a security is deemed
to be in the best interest of the Portfolios as well as any other investment
advisory clients, to the extent permitted by applicable laws and regulations,
but shall not be obligated to, aggregate the securities to be so sold or
purchased with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Registration Statement. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Portfolio Manager in
a manner that is fair and
3
equitable in the judgment of the Portfolio Manager in the exercise of its
fiduciary obligations to the Trust and to such other clients.
e. Will, in connection with the purchase and sale of securities for the
Portfolios, arrange for the transmission to the custodian for the Trust on a
daily basis, such confirmation, trade tickets, and other documents and
information, including, but not limited to, Cusip, Sedol, or other numbers that
identify securities to be purchased or sold on behalf of the Portfolios, as may
be reasonably necessary to enable the custodian to perform its administrative
and recordkeeping responsibilities with respect to the Portfolios, and, with
respect to portfolio securities to be purchased or sold through the Depository
Trust Company, will arrange for the automatic transmission of the confirmation
of such trades to the Trust's custodian.
f. Will assist the custodian and recordkeeping agent(s) for the Trust in
determining or confirming, consistent with the procedures and policies stated
in the Registration Statement for the Trust, the value of any portfolio
securities or other assets of the Portfolios for which the custodian and
recordkeeping agent(s) seek assistance from the Portfolio Manager or identify
for review by the Portfolio Manager.
g. Will make available to the Trust and Adviser, promptly upon request,
the Portfolios' investment records and ledgers as are necessary to assist the
Trust to comply with the requirements of the 1940 Act and the Advisers Act, as
well as other applicable laws, and will furnish to regulatory authorities
having the requisite authority any information or reports in connection with
such services which may be requested in order to ascertain whether the
operations of the Trust are being conducted in a manner consistent with
applicable laws and regulations.
h. Will regularly report to the Trust's Board of Trustees on the
investment program for the Portfolios and the issuers and securities
represented in the Portfolios' portfolio, and will furnish the Trust's Board of
Trustees with respect to the Portfolios such periodic and special reports as
the Trustees may reasonably request.
i. Shall be responsible for making reasonable inquiries and for
reasonably ensuring that any employee of the Portfolio Manager has not, to the
best of the Portfolio Manager's knowledge:
i. been convicted, in the last ten (10) years, of any felony or
misdemeanor involving the purchase or sale of any security or arising out of
such person's conduct as an underwriter, broker, dealer,
4
investment adviser, municipal securities dealer, government securities broker,
government securities dealer, transfer agent, or entity or person required to
be registered under the Commodity Exchange Act, or as an affiliated person,
salesman, or employee of any investment company, bank, insurance company, or
entity or person required to be registered under the Commodity Exchange Act; or
ii. been permanently or temporarily enjoined by reason of any misconduct,
by order, judgment, or decree of any court of competent jurisdiction from
acting as an underwriter, broker, dealer, investment adviser, municipal
securities dealer, government securities broker, government securities dealer,
transfer agent, or entity or person required to be registered under the
Commodity Exchange Act, or as an affiliated person, salesman or employee of any
investment company, bank, insurance company, or entity or person required to be
registered under the Commodity Exchange Act, or from engaging in or continuing
any conduct or practice in connection with any such activity or in connection
with the purchase or sale of any security.
3. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager has reviewed
the Registration Statement for the Trust filed with the SEC and represents and
warrants that, with respect to the disclosure about the Portfolio Manager or
information relating, directly or indirectly, to the Portfolio Manager, such
Registration Statement contains, as of the date hereof, no untrue statement of
any material fact and does not omit any statement of a material fact which was
required to be stated therein or necessary to make the statements contained
therein not misleading. The Portfolio Manager further represents and warrants
that it is a duly registered investment adviser under the Advisers Act and a
duly registered investment adviser in all states in which the Portfolio Manager
is required to be registered. The Adviser has received a current copy of the
Portfolio Manager's Uniform Application for Investment Adviser Registration on
Form ADV, as filed with the SEC. The Portfolio Manager agrees to provide the
Adviser with current copies of the Portfolio Manager's Form ADV, and any
supplements or amendments thereto, as filed with the SEC.
4. EXPENSES. During the term of this Agreement, the Portfolio Manager
will pay all expenses incurred by it and its staff and for their activities in
connection with its services under this Agreement. The Portfolio Manager shall
not be responsible for any of the following:
a. Expenses of all audits by the Trust's independent public accountants;
b. Expenses of the Trust's transfer agent(s), registrar, dividend
disbursing agent(s), and shareholder recordkeeping services;
5
c. Expenses of the Trust's custodial services, including recordkeeping
services provided by the custodian;
d. Expenses of obtaining quotations for calculating the value of the
Portfolios' net assets;
e. Expenses of obtaining Portfolio Activity Reports for the Portfolios;
f. Expenses of maintaining the Trust's tax records;
g. Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, stockholders,
or employees of Adviser, its subsidiaries or affiliates, or any Portfolio
Manager of the Trust;
h. Taxes, if any, levied against the Trust or any of its Series;
i. Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolios;
j. Costs, including the interest expenses, of borrowing money;
k. Costs and/or fees incident to meetings of the Trust's shareholders,
the preparation and mailings of prospectuses and reports of the Trust to its
shareholders, the filing of reports with regulatory bodies, the maintenance of
the Trust's existence, and the registration of shares with federal and state
securities or insurance authorities;
l. The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
m. Costs of printing stock certificates representing shares of the Trust;
n. Trustees' fees and expenses to trustees who are not officers,
employees, or stockholders of the Portfolio Manager or any affiliate thereof;
o. The Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
p. Association membership dues;
6
q. Extraordinary expenses of the Trust as may arise, including expenses
incurred in connection with litigation, proceedings and other claims and the
legal obligations of the Trust to indemnify its trustees, officers, employees,
shareholders, distributors, and agents with respect thereto; and
r. Organizational and offering expenses and, if applicable,
reimbursement (with interest) of underwriting discounts and commissions.
5. COMPENSATION. [For the services provided, the Adviser will pay the
Portfolio Manager a fee accrued and computed daily and payable monthly, based
on the average daily net assets of the Portfolios at the annual rate of __% of
the average daily net assets of the Portfolios.]
6. SEED MONEY. The Adviser agrees that the Portfolio Manager shall not
be responsible for providing money for the initial capitalization of the Trust
or Portfolios.
7. COMPLIANCE.
a. The Portfolio Manager agrees that it shall immediately notify the
Adviser and the Trust in the event (i) that the SEC has censured the Portfolio
Manager; placed limitations upon its activities, functions or operations;
suspended or revoked its registration as an investment adviser; or has
commenced proceedings or an investigation that may result in any of these
actions, and (ii) upon having a reasonable basis for believing that a Portfolio
has ceased to qualify or might not qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code. The Portfolio Manager further
agrees to notify the Adviser and the Trust immediately of any material fact
known to the Portfolio Manager that is not contained in the Registration
Statement or prospectus for the Trust, or any amendment or supplement thereto,
or of any statement contained therein that becomes untrue in any material
respect.
b. The Adviser agrees that it shall immediately notify the Portfolio
Manager in the event (i) that the SEC has censured the Adviser or the Trust;
placed limitations upon either of their activities, functions, or operations;
suspended or revoked the Adviser's registration as an investment adviser; or
has commenced proceedings or an investigation that may result in any of these
actions, and (ii) upon having a reasonable basis for believing that a Portfolio
has ceased to qualify or might not qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code.
8. INDEPENDENT CONTRACTOR. The Portfolio Manager shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly
7
provided herein or authorized by the Adviser from time to time, have no
authority to act for or represent the Adviser in any way or otherwise be
deemed its agent. The Portfolio Manager understands that unless expressly
provided herein or authorized from time to time by the Trust, the Portfolio
Manager shall have no authority to act for or represent the Trust in any way or
otherwise be deemed the Trust's agent.
9. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Portfolio Manager hereby agrees that all records which
it maintains for the Portfolios are the property of the Trust and further
agrees to surrender promptly to the Trust any of such records upon the Trust's
or the Adviser's request, although the Portfolio Manager may, at its own
expense, make and retain a copy of such records. The Portfolio Manager further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
the records required to be maintained by Rule 31a-1 under the 1940 Act and to
preserve the records required by Rule 204-2 under the Advisers Act for the
period specified in the Rule.
10. COOPERATION. Each party to this Agreement agrees to cooperate with
each other party and with all appropriate governmental authorities having the
requisite jurisdiction (including, but not limited to, the SEC) in connection
with any investigation or inquiry relating to this Agreement or the Trust.
11. SERVICES NOT EXCLUSIVE. It is understood that the services of the
Portfolio Manager are not exclusive, and nothing in this Agreement shall
prevent the Portfolio Manager (or its affiliates) from providing similar
services to other clients, including investment companies (whether or not their
investment objectives and policies are similar to those of the Portfolios) or
from engaging in other activities.
12. LIABILITY. Except as provided in Section 13 and as may otherwise be
required by the 1940 Act or the rules thereunder or other applicable law, the
Adviser agrees that the Portfolio Manager, any affiliated person of the
Portfolio Manager, and each person, if any, who, within the meaning of Section
15 of the Securities Act of 1933 (the "1933 Act") controls the Portfolio
Manager shall not be liable for, or subject to any damages, expenses, or losses
in connection with, any act or omission connected with or arising out of any
services rendered under this Agreement, except by reason of willful
misfeasance, bad faith, or gross negligence in the performance of the Portfolio
Manager's duties, or by reason of reckless disregard of the Portfolio Manager's
obligations and duties under this Agreement.
13. INDEMNIFICATION. The Portfolio Manager agrees to indemnify and hold
harmless the Adviser, any affiliated person within the meaning of Section
2(a)(3) of the 1940 Act ("affiliated person") of the Adviser and each person,
if any, who, within the meaning of Section 15 of the 1933 Act, controls
("controlling person") the Adviser (collectively, "Adviser Indemnified
Persons") against any and all losses, claims,
8
damages, liabilities or litigation (including legal and other expenses),
to which the Adviser or such affiliated person or controlling person may
become subject under the 1933 Act, 1940 Act, the Advisers Act, under any
other statute, at common law or otherwise, arising out of the Portfolio
Manager's responsibilities to the Trust which (i) may be based upon any
misfeasance, malfeasance, or nonfeasance by the Portfolio Manager, any of its
employees or representatives, or any affiliate of or any person acting on
behalf of the Portfolio Manager (other than an Adviser Indemnified Person),
or (ii) may be based upon any untrue statement or alleged untrue statement of a
material fact contained in a registration statement or prospectus covering the
Shares of the Trust, the Portfolios or any Series, or any amendment thereof or
any supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if such a statement or omission was made in reliance
upon information furnished to the Adviser, the Trust, or any affiliated person
of the Trust by the Portfolio Manager or any affiliated person of the Portfolio
Manager (other than an Adviser Indemnified Person); provided, however, that in
no case is the Portfolio Manager's indemnity in favor of the Adviser or any
affiliated person or controlling person of the Adviser deemed to protect such
person against any liability to which any such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of his duties, or by reason of his reckless disregard of
obligations and duties under this Agreement.
The Adviser agrees to indemnify and hold harmless the Portfolio Manager,
any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act of
the Portfolio Manager and each controlling person of the Portfolio Manager
(collectively, "Pacific Investment Management Company Indemnified Persons")
against any and all losses, claims, damages, liabilities or litigation
(including legal and other expenses) to which the Portfolio Manager or such
affiliated person or controlling person may become subject under the 1933 Act,
the 1940 Act, the Advisers Act, under any other statute, at common law or
otherwise, arising out of the Adviser's responsibilities as adviser of the
Trust which (i) may be based upon any misfeasance, malfeasance, or nonfeasance
by the Adviser, any of its employees or representatives or any affiliate of or
any person acting on behalf of the Adviser (other than a Pacific Investment
Management Company Indemnified Person) or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering Shares of the Trust, the
Portfolios or any Series, or any amendment thereof or any supplement thereto,
or the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement therein not misleading,
unless such statement or omission was made in reliance upon written information
furnished to the Adviser or any affiliated person of the Adviser by the
Portfolio Manager or any affiliated person of the Portfolio Manager (other than
a Pacific Investment Management Company Indemnified Person); provided however,
that in no case is the indemnity of the Adviser in favor of the Portfolio
Manager, or any affiliated
9
person or controlling person of the Portfolio Manager deemed to protect
such person against any liability to which any such person would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence
in the performance of his duties, or by reason of his reckless disregard of
obligations and duties under this Agreement.
14. DURATION AND TERMINATION. This Agreement shall take effect as of the
date hereof. This Agreement shall remain in effect for two years from such date
and continue thereafter on an annual basis with respect to the Portfolios;
provided that such annual continuance is specifically approved at least
annually (a) by the vote of a majority of the Board of Trustees of the Trust or
(b) by the vote of a majority of the outstanding voting shares of the
Portfolios, and provided that continuance is also approved by the vote of a
majority of the Board of Trustees of the Trust who are not parties to this
Agreement or "interested persons" (as such term is defined in the 1940 Act) of
the Trust, the Adviser, or the Portfolio Manager, cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may not be
materially amended without (1) a majority vote of the outstanding shares (as
defined in the 1940 Act) of the Portfolios, except to the extent permitted by
any exemption or exemptions that may be granted upon application made to the
SEC or by any applicable SEC rule, and (2) the prior written consent of the
Portfolio Manager and the Adviser. This Agreement may be terminated:
a. by the Trust at any time with respect to the services provided by the
Portfolio Manager, without the payment of any penalty, by vote of (1) a
majority of the Trustees of the Trust; (2) a majority of the Trustees of the
Trust who are not parties to this Agreement or "interested persons" (as such
term is defined in the 1940 Act) of the Trust, the Adviser or the Portfolio
Manager; or (3) a majority of the outstanding voting shares of the Portfolios,
on 60 days' written notice to the Portfolio Manager;
b. by the Portfolio Manager at any time, without the payment of any
penalty, upon 60 days' written notice to the Trust; or
c. by the Adviser at any time, without the payment of any penalty, upon
60 days' written notice to the Portfolio Manager.
However, any approval of this Agreement by the holders of a majority of
the outstanding shares (as defined in the 1940 Act) of a particular Portfolio
shall be effective to continue this Agreement with respect to such Portfolio
notwithstanding (a) that this Agreement has not been approved by the holders of
a majority of the outstanding shares of any other Portfolio or (b) that this
Agreement has not been approved by the vote of a majority of the outstanding
shares of the Trust, unless such approval shall be required by any other
applicable law or otherwise. This Agreement will terminate automatically with
respect to the services provided by the Portfolio
10
Manager in event of its assignment, as that term is defined in the 1940 Act,
by the Portfolio Manager.
15. AGREEMENT AND DECLARATION OF TRUST. A copy of the Agreement and
Declaration of Trust for the Trust is on file with the Secretary of the
Commonwealth of Massachusetts. The Agreement and Declaration of Trust has been
executed on behalf of the Trust by a Trustee of the Trust in his capacity as
Trustee of the Trust and not individually. The obligations of this Agreement
shall be binding upon the assets and property of the Trust and shall not be
binding upon any Trustee, officer, or shareholder of the Trust individually.
16. MISCELLANEOUS.
a. This Agreement shall be governed by the laws of Massachusetts,
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act, the Advisers Act or rules or orders of the SEC thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
c. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby, and to this extent, the provisions of this
Agreement shall be deemed to be severable. To the extent that any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise with regard to any party hereunder, such provisions with respect
to other parties hereto shall not be affected thereby.
d. The parties hereto acknowledge and agree that the Trust is an express
third party beneficiary to this Agreement. Except as provided in the preceding
sentence, the parties agree that this Agreement is not intended to benefit, or
create any right or cause of action in or on behalf of, any other person or
entity.
e. With respect to any actions brought by the Adviser or the Trust
against the Portfolio Manager, the Portfolio Manager: (i) consents to the
subject matter and in personam jurisdiction and venue in the United States
District Court for the District of Massachusetts; (ii) waives the right to
contest the subject matter and in personam jurisdiction and venue in the United
States District Court for the District of Massachusetts on any ground; and
(iii) agrees that service of process upon it can be made either in person or by
certified or registered mail, return receipt requested, _____________________,
or any other address designated by the Adviser as the address to which notices
pursuant
11
to this Agreement should be sent. The Portfolio Manager agrees that service
to such address shall be deemed to constitute sufficient service of process
under both the federal and state rules of civil procedure wherever the case is
filed. In the event it is determined that the United States District Court for
the District of Massachusetts should lack subject matter jurisdiction for any
reason, the Portfolio Manager consents to the subject matter and in personam
jurisdiction and venue in a Massachusetts State court of competent
jurisdiction in _____ County.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first above written.
PIMCO ADVISORS L.P.
_______________________________ By:___________________________
Attest: Title:
Title:
PACIFIC INVESTMENT MANAGEMENT
COMPANY
________________________________ By:____________________________
Attest: Title:
Title:
12
<PAGE>
ADMINISTRATION AGREEMENT
ADMINISTRATION AGREEMENT, made this [___] day of November, 1999, between
Fixed Income SHares (the "Trust"), a Massachusetts business trust, and PIMCO
Advisory Services (the "Administrator" or "PAS").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment Company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
("Shares") in separate series, with each such series representing interests in
a separate portfolio of securities and other assets; and
WHEREAS, the Trust has established multiple series, including FISH: Series
C and FISH: Series M (each a "Portfolio"); and
WHEREAS, the Trust wishes to retain PAS to provide administrative and
other services to the Trust with respect to the Portfolios in the manner and on
the terms hereinafter set forth; and
WHEREAS, PAS is willing to furnish such services in the manner and on the
terms hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints PAS as Administrator to
provide the administrative and other services with respect to the Portfolios
for the period and on the terms set forth in this Agreement. The Administrator
accepts such appointment and agrees during such period to render the services
herein set forth for the compensation herein provided.
In the event the Trust establishes and designates additional series with
respect to which it desires to retain the Administrator to render
administrative and other services hereunder, it shall notify the Administrator
in writing. If the Administrator is willing to render such services, it shall
notify the Trust in writing, whereupon such additional series shall become a
Portfolio hereunder.
2. DUTIES. Subject to the general supervision of the Board of Trustees,
the Administrator shall provide all organizational, administrative and other
services reasonably necessary for the operation of the Portfolios other than
the investment advisory services
1
provided by PIMCO Advisors, L.P. pursuant to its Investment Advisory Agreement
with the Trust.
(a) ADMINISTRATIVE SERVICES. Subject to the approval or consent of the
Board of Trustees, the Administrator shall provide or procure, at the
Administrator's expense, services to include the following: (i) coordinating
matters relating to the operation of the Portfolios, including any necessary
coordination among the adviser or advisers to the Portfolios, the custodian(s),
transfer agent(s), dividend disbursing agent(s), and recordkeeping agent(s)
(including pricing and valuation of the Portfolios), accountants, attorneys,
and other parties performing services or operational functions for the
Portfolios; (ii) providing the Portfolios with the services of a sufficient
number of persons competent to perform such administrative and clerical
functions as are necessary to ensure compliance with federal securities laws,
as well as other applicable laws, and to provide effective administration of
the Portfolios; (iii) maintaining, or supervising the maintenance by third
parties, of such books and records of the Trust and the Portfolios as may be
required by applicable federal or state law other than the records and ledgers
maintained under the Investment Advisory Agreement; (iv) preparing or
supervising the preparation by third parties of all federal, state, and local
tax returns and reports of the Portfolios required by applicable law; (v)
preparing, filing, and arranging for the distribution of proxy materials and
periodic reports to financial intermediaries investing in the Portfolios as
required by applicable law; (vi) preparing and arranging for the filing of such
registration statement and other documents with the SEC and other federal and
state regulatory authorities as may be required to register the shares of the
Portfolios and qualify the Trust to do business or as otherwise required by
applicable law; (vii) taking such other action with respect to the Portfolios
as may be required by applicable law, including, without limitation, the rules
and regulations of the SEC and of state securities commissions and other
regulatory agencies; and (viii) providing the Portfolios with adequate
personnel, office space, communications facilities, and other facilities
necessary for the Portfolios' operations as contemplated in this Agreement.
(b) OTHER SERVICES. Subject to the approval or consent of the Board of
Trustees, the Administrator shall also provide or procure on behalf of the
Trust and the Portfolios, and at the expense of the Administrator, the
following services to the Portfolios: (i) custodian services to provide for
the safekeeping of the Portfolios' assets; (ii) recordkeeping services to
maintain the portfolio accounting records for the Portfolios; (iii) transfer
agency services to maintain the portfolio accounting records for the
Portfolios; and (iv) dividend disbursing services for the Portfolios. The
services to be provided under (iii) and (iv) of this Section 2(b) shall be
commensurate with the level of services reasonably necessary for
institutional investors. The Trust may be a party to any agreement with any
person or persons engaged to provide the services referred to in this
Section 2(b).
2
(c) ORGANIZATIONAL SERVICES. The Administrator shall provide the Trust
and the Portfolios, at the Administrator's expense, with the services necessary
to organize any Portfolios that commence operations on or after the date of
this Agreement so that such Portfolios can conduct business as described in the
Trust's Registration Statement.
(d) The Administrator shall also make its officers and employees
available to the Board of Trustees and officers of the Trust for consultation
and discussions regarding the administration of the Portfolios and services
provided to the Portfolios under this agreement.
(e) In performing these services, the Administrator:
(i) Shall conform with the 1940 Act and all rules and regulations
thereunder, all other applicable federal and state laws and regulations, with
any applicable procedures adopted by the Trust's Board of Trustees, and with
the provisions of the Trust's Registration Statement filed on Form N-1A as
supplemented or amended from time to time.
(ii) Will make available to the Trust, promptly upon request, any of the
Portfolios' books and records as are maintained under this Agreement, and will
furnish to regulatory authorities having the requisite authority any such books
and records and any information or reports in connection with the
Administrator's services under this Agreement that may be requested in order to
ascertain whether the operations of the Trust are being conducted in a manner
consistent with applicable laws and regulations.
(iii) Will regularly report to the Trust's Board of Trustees on the
services provided under this Agreement and will furnish the Trust's Board of
Trustees with respect to the Portfolios such periodic and special reports as
the Trustees may reasonably request.
3. DOCUMENTATION. The Trust has delivered copies of each of the following
documents to the Administrator and will deliver to it all future amendments and
supplements thereto, if any:
(a) the Trust's Registration Statement as filed with the SEC and any
amendments thereto; and
(b) exhibits, powers of attorneys, certificates and any and all other
documents relating to or filed in connection with the Registration Statement
described above.
3
4. INDEPENDENT CONTRACTOR. The Administrator shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees of the Trust
from time to time, have no authority to act for or represent the Trust in any
way or otherwise be deemed its agent.
5. COMPENSATION. The Trust shall pay no compensation to the
Administrator for the services rendered under this Agreement.
6. NON-EXCLUSIVITY. It is understood that the services of the
Administrator hereunder are not exclusive, and the Administrator shall be free
to render similar services to other investment companies and other clients.
7. EXPENSES. During the term of this Agreement, the Administrator will
pay all expenses incurred by it in connection with its obligations under this
Agreement, except such expenses as are those of the Portfolios under this
Agreement. The Administrator shall pay for maintaining its staff and personnel
and shall, at its own expense provide the equipment, office space, and
facilities necessary to perform its obligations under this Agreement. In
addition, the Administrator shall, at its expense, furnish to the Trust:
(a) Services by the Trust's independent public accountants to perform all
audits;
(b) Services of the Trust's transfer agent(s), registrar, dividend
disbursing agent(s), and shareholder recordkeeping services;
(c) Services of the Trust's custodian, including any recordkeeping
services provided by the custodian;
(d) Services of obtaining quotations for calculating the value of each
Portfolio's net assets;
(e) Services of obtaining Portfolio Activity Reports for each Portfolio;
(f) Services of maintaining the Trust's tax records;
(g) Services, including procurement of legal services, incident to
meetings of the Trust's shareholders, the preparation and mailing of
prospectuses and reports of the Trust to its shareholders, the filing of
reports with regulatory bodies, the maintenance of the Trust's existence and
qualification to do business, and the registration of shares with federal and
state securities authorities (except as described in subsection (f) below);
4
(h) Procurement of ordinary legal services, including the services that
arise in the ordinary course of business for a Massachusetts business trust
registered as an open-end management investment company;
(i) Certificates representing shares of the Trust;
(j) The Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
(k) Association membership dues; and
(l) Services to organize and offer shares of the Trust and the Portfolios.
The Trust shall bear the following expenses:
(a) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, stockholders,
or employees of the Administrator or its subsidiaries or affiliates;
(b) Taxes, if any, levied against the Trust or any of its Portfolios;
(c) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for any of the Portfolios;
(d) Costs, including the interest expenses, of borrowing money;
(e) Fees and expenses of trustees who are not officers, employees, or
stockholders of PAS or its subsidiaries or affiliates, and the fees and
expenses of any counsel, accountants, or any other persons engaged by such
trustees in connection with the duties of their office with the Trust;
(f) Extraordinary expenses, including extraordinary legal expenses and
federal and state securities registration fees and expenses to the extent
authorized by the Trust's Board of Trustees, as may arise, including expenses
incurred in connection with litigation, proceedings, other claims and the legal
obligations of the Trust to indemnify its trustees, officers, employees,
shareholders, distributors, and agents with respect thereto;
(g) Organizational and offering expenses of the Trust and the Portfolios
to the extent authorized by the Trust's Board of Trustees, and any other
expenses which are capitalized in accordance with generally accepted accounting
principles; and
5
(h) Any expenses allocated or allocable to a specific Portfolio,
including fees paid pursuant to an administrative services or distribution plan.
8. LIABILITY. The Administrator shall give the Trust the benefit of the
Administrator's best efforts in rendering services under this Agreement. The
Administrator may rely on information reasonably believed by it to be accurate
and reliable. As an inducement for the Administrator's undertaking to render
services under this Agreement, the Trust agrees that neither the Administrator
nor its stockholders, officers, directors, or employees shall be subject to any
liability for, or any damages, expenses or losses incurred in connection with,
any act or omission or mistake in judgment connected with or arising out of any
services rendered under this Agreement, except by reason of willful
misfeasance, bad faith, or gross negligence in performance of the
Administrator's duties, or by reason of reckless disregard of the
Administrator's obligations and duties under this Agreement. This provision
shall govern only the liability to the Trust of the Administrator and that of
its stockholders, officers, directors, and employees, and shall in no way
govern the liability to the Trust or the Administrator or provide a defense for
any other person, including persons that provide services for the Portfolios as
described in Section 2(b) or (c) of this Agreement.
9. TERM AND CONTINUATION. This Agreement shall take effect as of the
date hereof, and shall remain in effect, unless sooner terminated as provided
herein, until two years from the date of this Agreement, and shall continue
thereafter on an annual basis with respect to each Portfolio, provided that
such continuance is specifically approved at least annually (a) by the vote of
a majority of the Board of Trustees of the Trust, or (b) by vote of a majority
of the outstanding voting shares of the Portfolios, and provided continuance is
also approved by the vote of a majority of the Board of Trustees of the Trust
who are not parties to this Agreement or "interested persons" (as defined in
the 1940 Act) of the Trust, or PAS, cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated:
(a) by the Trust at any time with respect to the services provided by the
Administrator by vote of (1) a majority of the Trustees of the Trust; (2) a
majority of the Trustees of the Trust who are not "interested persons" (as such
term is defined in the 1940 Act) of the Trust or PAS; or (3) a majority of the
outstanding voting shares of the Trust or, with respect to a particular
Portfolio, by vote of a majority of the outstanding voting shares of such
Portfolio, on 60 days' written notice to the Administrator; and
(b) by the Administrator at any time, without the payment of any penalty,
upon 60 days' written notice to the Trust.
6
10. USE OF NAME. It is understood that the name "PIMCO Advisory
Services" or "PAS" or any derivative thereof or logo associated with those
names are the valuable property of PAS and its affiliates.
11. NOTICES. Notices of any kind to be given to the Administrator by the
Trust shall be in writing and shall be duly given if mailed or delivered to the
Administrator at 1345 Avenue of the Americas, New York, New York 10105, or to
such other address or to such individual as shall be specified by the
Administrator. Notices of any kind to be given to the Trust by the
Administrator shall be in writing and shall be duly given if mailed or
delivered to 1345 Avenue of the Americas, New York, New York 10105, or to such
other address or to such individual as shall be specified by the Trust.
12. TRUST OBLIGATION. A copy of the Trust's Agreement and Declaration of
Trust, as amended, is on file with the Secretary of the Commonwealth of
Massachusetts, and notice is hereby given that the Agreement has been executed
on behalf of the Trust by a trustee of the Trust in his or her capacity as
trustee and not individually. The obligations of this Agreement shall only be
binding upon the assets and property of the Trust and shall not be binding
upon any trustee, officer, or shareholder of the Trust individually.
13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
14. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of Massachusetts,
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or order of the SEC thereunder.
(b) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
agreement shall be deemed to be severable. To the extent that any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise with regard to any party hereunder, such provisions with respect
to other parties hereto shall not be affected thereby.
(c) The captions in this Agreement are included for convenience only and
in no way define any of the provisions hereof or otherwise affect their
construction or effect.
(d) This Agreement may not be assigned by the Trust or the Administrator
without the consent of the other party.
7
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below on the day and year first above
written.
Fixed Income SHares
By: _________________________________
Title: Executive Vice President
PIMCO ADVISORY SERVICES
By: _________________________________
Title: Chief Executive Officer
8
