<PAGE>
As filed with the Securities and Exchange Commission on February 12, 1997
Registration Nos. 2-91889
811-4060
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. 21 / X /
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 / X /
Amendment No. 22 / X /
CASH ACCUMULATION TRUST
(Exact Name of Registrant as Specified in Charter)
800 Newport Center Drive
Newport Beach, CA 92660
(Address of principal executive offices)
(714) 760-4867
(Registrant's telephone number, including area code)
Approximate Date of Proposed Offering: As soon as practicable after this Post-
Effective Amendment becomes effective.
Name and address
of agent for service Copy to
- -------------------- -------
Newton B. Schott, Jr., Esq. Douglass N. Ellis, Jr., Esq.
2187 Atlantic Street Ropes & Gray
Stamford, Connecticut 06902 One International Place
Boston, Massachusetts 02110
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on February 1, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ X / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to Rule 24f-2(a) under the Investment Company Act of
1940, the Registrant has registered an indefinite number or amount of its shares
of beneficial interest under the Securities Act of 1933. The Registrant filed a
Rule 24f-2 Notice with respect to the Registrant's fiscal year ended September
30, 1996 on November 27, 1996.
This Post-Effective Amendment relates solely to the Active Short-Term Fund. No
information relating to any other series of the registrant is amended or
superseded hereby.
<PAGE>
CASH ACCUMULATION TRUST
CROSS-REFERENCE SHEET
Part A: Information Required
in a Prospectus Prospectus Caption
--------------- ------------------
1. . . . . . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . . . . . Schedule of Fees
3. . . . . . . . . . . . . . . . . . . N/A
4. . . . . . . . . . . . . . . . . . . Investment Objective and Policies;
Characteristics and Risks of
Securities and Investment
Techniques; General Policies; Net
Asset Value; Yields; Description
of The Trust
5. . . . . . . . . . . . . . . . . . . Manager of the Fund; Schedule of
Fees; Back Cover
5A. . . . . . . . . . . . . . . . . . . N/A
6. . . . . . . . . . . . . . . . . . . Description of the Trust;
Dividends; Taxes
7. . . . . . . . . . . . . . . . . . . Investment Objective and Policies;
How to Buy Shares; Net Asset Value
8. . . . . . . . . . . . . . . . . . . How to Redeem
9. . . . . . . . . . . . . . . . . . . None
-2-
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Part B: Information Required in a Statement of Statement of Additional
Additional Information Information Caption
---------------------- -------------------
10. . . . . . . . . . . . . . Cover Page
11. . . . . . . . . . . . . . Table of Contents
12. . . . . . . . . . . . . . N/A
13. . . . . . . . . . . . . . Investment Objectives,
Policies and Restrictions;
Credit and Market Risk
14. . . . . . . . . . . . . . Management of the Fund
15. . . . . . . . . . . . . . Management of the Fund
16. . . . . . . . . . . . . . Investment Advisory and
Other Services
17. . . . . . . . . . . . . . Portfolio Transactions and
Brokerage
18. . . . . . . . . . . . . . Organization and
Capitalization of the Trust
19. . . . . . . . . . . . . . Net Income, Yields and
Valuation; Redemptions
20. . . . . . . . . . . . . . Taxes
21. . . . . . . . . . . . . . Investment Advisory and
Other Services
22. . . . . . . . . . . . . . Net Income, Yields and
Valuation
23. . . . . . . . . . . . . . N/A
-3-
<PAGE>
SUBJECT TO COMPLETION; DATED MARCH __, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A POST-
EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THE SECURITIES
OFFERED HEREBY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE POST-EFFECTIVE AMENDMENT TO 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 SALES 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 SUCH STATE.
ACTIVE SHORT-TERM FUND
800 Newport Center Drive
Newport Beach, California 92660
PROSPECTUS
April __, 1997
The Active Short-Term Fund (the "Fund") is a newly organized, open-end,
diversified management investment company organized as a series of Cash
Accumulation Trust (the "Trust"). The Fund's investment objective is current
income to the extent consistent with preservation of capital and liquidity. The
Fund seeks to achieve its objective by investing in a portfolio of short-term
fixed income instruments. While the Fund intends to invest in short-term
securities, it is NOT A MONEY MARKET FUND.
Shares of the Fund are offered without a sales charge at net asset value.
The net asset value will be set initially at $10 per share, and will thereafter
vary with the value of the Fund's investments. INVESTMENTS IN THE FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
This Prospectus concisely presents the information which investors ought to
know before investing. Please read this Prospectus carefully and keep it for
further reference.
A Statement of Additional Information (the "SAI") dated April __, 1997, as
supplemented from time to time is available free of charge by writing to PIMCO
Funds Distribution Company, 2187 Atlantic Street, Stamford, Connecticut 06902,
or by telephoning
<PAGE>
(800) 628-1237 or (203) 352-4900. The SAI, which contains more detailed
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
SCHEDULE OF FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . . . . . . . . . 2
GENERAL POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CHARACTERISTICS AND RISKS OF SECURITIES
AND INVESTMENT TECHNIQUES. . . . . . . . . . . . . . . . . . . . . . . . . 8
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
YIELDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
HOW TO REDEEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
DESCRIPTION OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . .29
APPENDIX A
DESCRIPTION OF DURATION . . . . . . . . . . . . . . . . . . . . . . . . A-1
i
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SCHEDULE OF FEES
Maximum initial sales charge imposed upon purchases. . . None
Maximum sales charge imposed on reinvested dividends . . None
Maximum deferred sales charge. . . . . . . . . . . . . . None
ANNUAL FUND
OPERATING EXPENSES
(As a percentage of average net assets)
---------------------------------------
Total Fund
Advisory Administrative Operating
Fees 12b-1 Fees Fees Expenses
0.20% None 0.20% 0.40%
EXAMPLE: You would pay the following
expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption
at the end of each time period:
----------------------------------------
1 Year 3 Years
$_____ $______
The purpose of this table is to assist an investor in understanding the
various costs and expenses of the Fund that are borne directly or indirectly by
shareholders. Annual Operating Expenses for the Fund are based on estimated
expenses for the Fund's first fiscal year. NOTE: THE FIGURES SHOWN IN THE
EXAMPLE ARE ENTIRELY HYPOTHETICAL. THEY ARE NOT REPRESENTATIONS OF PAST OR
FUTURE PERFORMANCE OR EXPENSES. ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE
OR LESS THAN SHOWN.
1
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INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to achieve its objective of current income to the extent
consistent with preservation of capital and liquidity through investment in the
different types of securities described below. The Fund is designed to generate
returns equal to or better than that of the Merrill Lynch 91 Day Treasury Bill
Index over a full interest rate cycle.
The Fund invests in a variety of securities (including "money market"
instruments) rated B or better by at least one major rating agency or unrated
but considered by the Fund's adviser to be a comparable quality. Under normal
conditions, no more than 15% of the assets of the Fund will be invested in
securities rated below investment grade or unrated and determined by the Fund's
adviser to be of comparable quality, and no more than 20% of the Fund's assets
will be invested in securities that do not carry a rating from at least one
nationally recognized statistical rating organization (NRSRO).
The instruments in which the Fund may invest include:
-- Prime commercial paper and master demand notes.
-- Short-term U.S. Government Securities. "U.S. Government Securities"
are securities that are issued or guaranteed by the United States
Government or its agencies, authorities or instrumentalities. Some
are backed by the full faith and credit of the U.S. Treasury (e.g.,
Treasury Bills and obligations of the Government National Mortgage
Association (GNMA) and obligations of the Small Business
Administration) while others are not backed by the full faith and
credit of the U.S. Government, but instead are backed only by the
credit instrumentality, or by the discretionary authority of the
U.S. Government to purchase the issuing entity's obligations.
Agencies or instrumentalities whose obligations are not backed by
the full faith and credit of the U.S. Government include, among
others, the Federal Home Loan Mortgage Corporation (FHLMC), Federal
Home Loan Banks, the Federal National Mortgage Association (FNMA),
the Tennessee Valley Authority and the Bank for Cooperatives.
-- Short-term securities issued or guaranteed by any state or political
subdivision thereof within the United States, or any agency, authority
or instrumentality of the foregoing.
-- Short-term corporate debt securities.
-- Short-term debt securities that are backed by pools of commercial or
consumer finance loans, residential loans or commercial property
loans.
2
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-- Certificates of deposit, bankers' acceptances and other bank
obligations (when and if such other bank obligations become available
in the future) issued by a bank having total assets of at least $2
billion as of the date of the bank's most recently published financial
statements. In addition to the foregoing, the Fund may also invest in
certificates of deposit [of $100,000 or less] of domestic banks and
savings and loan associations, regardless of total assets[, if the
certificates of deposit are fully insured as to principal by the
Federal Deposit Insurance Corporation. If the principal amount of a
certificate of deposit plus accrued interest exceeds $100,000, then
the excess will not be so insured].
The Fund may invest up to 100% of its assets in obligations issued by
banks, and up to 10% of its assets in obligations issued by a single bank
(or other nongovernmental issuer). If the bank is a domestic bank, it must
be a member of the Federal Deposit Insurance Corporation. This does not
prevent the Fund from investing in obligations issued by foreign branches
of domestic banks and there is currently no limit on the portion of the
Fund's assets that may be invested in these obligations. If the bank is
foreign, the obligation must be issued by a domestic branch or domestic
subsidiary and the obligation must, in the opinion of the Fund's adviser,
be of a quality comparable to the other debt securities which may be
purchased by the Fund. There are special risks associated with investments
in such foreign bank obligations, including the risks associated with
foreign political, economic and legal developments (see below) and the fact
that foreign banks may not be subject to regulatory requirements the same
as or similar to those that apply to domestic banks.
-- Short-term fixed income securities issued or guaranteed by qualified
foreign governments and their agencies. A qualified foreign
government is a national government of a developed foreign country
with outstanding fixed income securities in excess of $50 billion.
-- Short-term fixed income securities issued or guaranteed by
supranational entities such as The Industrial Bank for Reconstruction
and Development, the Asian Development Bank, and others.
-- Structured variable rate notes which provide for full payment at
maturity.
-- Other fixed income and money market instruments.
The Fund may invest some or all of its assets in any of the foregoing
instruments, depending upon its adviser's view of market and broader economic
conditions.
3
<PAGE>
The Fund may purchase any of the foregoing instruments through firm
commitment arrangements with domestic commercial banks and registered broker-
dealers and may enter into repurchase agreements with domestic commercial banks
and registered broker-dealers with respect to any securities that are
permissible investments for the Fund. The Fund will enter into firm commitment
arrangements and repurchase agreements only with banks and brokers-dealers which
the Fund's adviser determines present [minimal] credit risks.
The Fund may invest in foreign securities, which may be subject to risks of
foreign political, economic and legal developments. These investments are also
considered to be riskier than U.S. investments because there may not be as much
publicly available information about the issuers. Those issuers may also have
different auditing and financial reporting standards and their securities may be
less liquid and more volatile than comparable U.S. securities. The Fund will
invest in these securities only when the Fund's manager believes the risks are
[minimal].
The Fund may invest in adjustable rate securities, which may be U.S.
Government Securities or securities of other issuers. Unlike fixed income
securities that pay a fixed rate of interest, adjustable rate securities may
allow the Fund to participate in increases in interest rates through periodic
adjustments of the rate payable on the securities. However, the Fund will not
benefit from increases in interest rates to the extent that market rates of
interest rise to the point where they cause the current interest rate on the
adjustable rate security to exceed the maximum allowable annual or lifetime
reset limits (or "cap rates") for the security. In this event, the value of the
adjustable rate securities held by the Fund will likely decrease. Also, the
value of adjustable rate securities held by the Fund could vary due to market
interest rate changes during interim periods between coupon reset dates for the
adjustable rate securities. During periods of falling market rates of interest,
the coupon rate on adjustable rate securities will also fall. As a result,
adjustable rate securities ordinarily offer significantly less potential for
capital appreciation than do securities that pay fixed rates of interest.
Adjustable rate securities that are collateralized by mortgages or other types
of debt obligations involve the risk of loss of principal if the obligors of the
underlying obligations default in payment of the obligations. Historically,
adjustable rate mortgages have had a higher default rate than fixed rate
mortgages.
The Fund may invest in asset-backed securities. Asset-backed securities
are certain pooled assets of an issuer which are repackaged or "securitized"
into collateralized securities and sold to investors. The maturing asset-backed
market, coupled with investors' search for specific maturities and higher
yields, has created a demand for increasing complex securities. The types of
asset-backed securities in which the Fund may invest include credit card
receivable securities, automobile loan securities and collateralized mortgage
obligations ("CMOs"). The Fund will not purchase so-called "interest only"
securities or CMOs backed by such securities.
4
<PAGE>
GENERAL POLICIES
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and broker-dealers
for the purpose of achieving income. These are agreements by which the Fund
acquires a portfolio eligible security (such as a U.S. Government Security) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed upon price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market interest rate unrelated to
the coupon rate on the purchased security. Repurchase agreements will provide
that the value of the underlying security will always be greater than or equal
to the repurchase price. Such transactions afford an opportunity for the Fund
to earn a return on temporarily available cash at no market risk, although there
is a risk that the seller may default on its obligation to pay the agreed-upon
sum on the redelivery date. Such a default may subject the Fund to expenses,
delays and risks of loss. While the underlying security in a repurchase
agreement transaction may have a much longer maturity, the repurchase agreements
themselves usually run for less than 7 days, and the Fund will not, without
shareholder approval, enter into a repurchase agreement if as a result more than
15% of the Fund's net assets would be invested in "illiquid securities." The
staff of the Securities and Exchange Commission is currently of the view that
repurchase agreements maturing in 7 days or more are illiquid securities.
LOANS OF PORTFOLIO SECURITIES
For the purposes of achieving income, the Fund may lend its portfolio
securities to broker-dealers and other financial institutions under contracts
calling for collateral in U.S. Government Securities, cash or cash equivalents
(negotiable certificates of deposit, bankers' acceptances or letters of credit)
at all times equal to at least the market value of the securities lent. The
Fund will continue to benefit from interest on the securities lent and will also
receive either interest, through investment of cash collateral in the Fund's
permissible investments, or lending fees, if the collateral is U.S. Government
Securities. The Fund may pay fees to the party arranging the loan. Any voting
rights, or rights to consent, relating to securities lent pass to the borrower.
However, if a material event affecting the investment occurs, such loans will be
called so that the securities may be voted by the Fund.
MATURITIES OF PORTFOLIO SECURITIES
The Fund will be managed so that the dollar-weighted average maturity of
its portfolio will at no time exceed 3 years. All of the Fund's investments in
fixed rate securities and structured variable rate notes will, at the time of
investment, have remaining maturities of 3 years or less. Floating rate
instruments (for which the coupon resets every 6 months or less, off of a
standard short term rate benchmark) will individually have a maximum maturity of
5
5
<PAGE>
years. Floating rate instruments that do not meet these criteria will be
treated similarly to fixed rate instruments above. Amortizing instruments will
be treated for these purposes as having a maturity equal to the average weighted
life of the investment. If as a result of changes in market conditions (such as
prepayments) the weighted average life of a security held by the Fund extends
beyond allowable limitations, the security will be sold within a reasonable time
period in consideration of general market conditions. When the Fund has
purchased a security subject to a repurchase agreement, the amount and maturity
of the investment will be determined by reference to the amount and term of the
repurchase agreement rather than those of the underlying security. In the case
of certain variable or floating rate instruments or instruments subject to
certain demand or put arrangements, the maturity of the instrument will be
determined by reference to the time remaining until the next readjustment of the
interest rate or until the principal amount can be recovered through exercise of
the demand or put right. The stated maturity of such securities may be greater
than 5 years.
DURATION
Individual securities will be purchased with a maximum parallel effective
duration of 3 years from settlement date. Any holding that extends beyond this
limitation subsequent to purchase will be sold within a reasonable time period
in consideration of market conditions. The Fund will be managed so that the
average parallel effective duration of its portfolio will not exceed 1.5 years.
The Fund expects the average duration of its portfolio, over time, to be
approximately 0.75 years. Please refer to Appendix A to this Prospectus for
more information regarding duration.
The Fund also intends to maintain a "credit spread duration" not greater
than 3 years. Credit spread duration measures the portfolio's sensitivity to
changes in credit spreads, i.e., the differences in yields between issues of
different credit quality, in contrast to effective parallel duration, which
measures the portfolio's sensitivity for changes in the absolute levels of
interest rates. Credit spreads are typically much less volatile than absolute
levels of interest rates; thus, such a longer credit spread duration is
tolerable.
The Fund also intends to maintain a "mortgage spread duration" not greater
than 3 years. Mortgage spread duration is a similar concept to credit spread
duration, except that it applies to mortgage instruments: Mortgage spread
duration measures the portfolio's sensitivity to changes in mortgage spread,
i.e., the difference in yields between mortgage instruments of different credit
quality.
DIVERSIFICATION
With the exception of U.S. Government and agency securities, and repurchase
agreements thereon, no single issuer's securities, or repurchase agreements
collateralized thereby, will account for more than [10%] of the Fund's assets.
6
<PAGE>
LIQUIDITY
To maintain the Fund's liquidity, at least [25%] of the Fund's assets will
at all times be maintained in securities maturing within 2 weeks. The Fund's
adviser will continually monitor the Fund's net inflows and outflows to
determine whether a higher percentage is appropriate at any time.
CREDIT RISK
All investments of the Fund will be instruments that are rated at least B
or, if unrated, determined by the Fund's adviser to be of comparable quality.
No more than 15% of the Fund's assets will be invested in below investment grade
securities (rated below Baa by Moody's Investors Service, Inc. ("Moody's") or
BBB by Standard & Poor's Ratings Group ("S&P")), and no more than 20% of the
Fund's assets will be invested in unrated securities. Securities rated below
investment grade may be referred to colloquially as "junk bonds." The Fund will
be managed so as to maintain an [average rating of A or equivalent.] Neither
the adviser's determination nor the ratings assigned by rating agencies
constitute an assurance against default by the issuers of instruments held by
the Fund. For a description of rating agency rating categories, see the SAI.
In determining whether a security is a suitable investment for the Fund,
reference will be made to the quality of the security, including its rating, at
the time of purchase. The Fund may or may not dispose of a portfolio security
as a result of a change in the security's rating, depending on an evaluation of
the security in light of the Fund's investment objective and policies.
FUNDAMENTAL POLICIES
The investment objective of the Fund and, except as otherwise indicated,
the investment policies of the Fund are not fundamental and may be changed
without shareholder approval.
CHARACTERISTICS AND RISKS OF SECURITIES
AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities and
investment techniques used by the Fund, and discusses certain concepts relevant
to the investment policies of the Fund. Additional information about the Fund's
investments and investment practices may be found in the SAI.
U.S. GOVERNMENT SECURITIES
7
<PAGE>
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 Fund's shares. Some U.S. Government
Securities, such as Treasury bills, notes and bonds, and securities guaranteed
by 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 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 bonds, represented by such
receipts are debt obligations of the U.S. Treasury. Other zero coupon Treasury
securities (i.e., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
CORPORATE DEBT SECURITIES
Corporate debt securities include corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate income-
producing securities may also include forms of preferred or preference stock.
The rate of interest on a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a reference rate. See
"Variable and Floating Rate Securities" below. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are rated below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Such securities are sometimes referred to as "junk
bonds," and may be subject to greater market fluctuations, less liquidity and
greater risk of loss of income or principal, including a greater possibility of
default or bankruptcy of the issuer of such securities, than are more highly
rated debt securities. Moody's also describes securities rated Baa as having
speculative characteristics. The Fund's adviser seeks to minimize these risks
through diversification, in-depth credit analysis and attention to current
development in interest rates and market conditions. Investments in high yield
securities are discussed separately below; see "High Yield Securities ("Junk
Bonds")."
8
<PAGE>
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 Fund 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 Treasury bill rate. The interest rate on
a floater resets periodically, typically every 6 months. While, because of the
interest rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, the Fund will participate in any
declines in interest rates as well.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Fund may invest up to all of its assets in mortgage- or asset-backed
securities. The value of some mortgage- or asset-backed securities in which the
Fund invest may be particularly sensitive to changes in prevailing interest
rates, and, like other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Fund's adviser to forecast interest rates and other economic factors
correctly.
MORTGAGE PASS-THROUGH SECURITIES are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property in
which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). 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 the Fund to a lower rate
of return upon reinvestment of principal. Also, if a 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.
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 GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage-related securities created by non-
governmental
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issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS are hybrid mortgage-related
instruments. Similar to a bond, interest and pre-paid principal on a CMO are
paid, in most cases, semi-annually. CMOs may be collaterized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage pass-
through securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, are first returned to investors
holding the shortest maturity class; investors holding the longer maturity
classes receive principal only after the preceding classes have been retired.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government Securities by
the Fund, 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 the Fund's diversification tests.
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.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements, as described above under
"General Policies." If the counterparty agreeing to a repurchase agreement
should default, as a result of bankruptcy or otherwise, the Fund will seek to
sell the securities which it holds, which action could involve procedural costs
or delays in addition to a loss on the securities if their value should fall
below their repurchase price.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS, AND OTHER BORROWINGS
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A reverse repurchase agreement is a form of leverage that involves the sale
of a security by the Fund and its agreement to repurchase the instrument at a
specified time and price. The Fund will maintain a segregated account consisting
of liquid assets, such as cash, U.S. Government Securities or other debt
obligations eligible for purchase by the Fund, to cover its obligations under
reverse repurchase agreements.
The Fund may enter into dollar rolls, in which the Fund sells mortgage-
backed or other securities for delivery in the current month and simultaneously
contracts to purchase substantially similar securities on a specified future
date. In the case of dollar rolls involving mortgage-backed securities, the
mortgage-backed securities that are purchased will be of the same type and will
have the same interest rate as those sold, but will be supported by different
pools of mortgages. The Fund forgoes principal and interest paid during the
roll period on the securities sold in a dollar roll, but the Fund is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Fund also could be compensated through the receipt of fee
income equivalent to a lower forward price. The Fund will maintain a segregated
account consisting of liquid assets, such as cash, U.S. Government Securities or
other debt obligations eligible for purchase by the Fund, to cover its
obligations under dollar rolls.
Dollar rolls and reverse repurchase agreements will be subject to the
Fund's limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings), to 33 1/3% of the Fund's total assets.
[Apart from transactions involving reverse repurchase agreements and dollar
rolls, the Fund will not borrow money, except for temporary administrative
purposes.]
DELAYED DELIVERY, WHEN-ISSUED, AND FORWARD COMMITMENT TRANSACTIONS
The Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. These transactions involve a commitment
by the Fund to purchase or sell securities for a predetermined price or yield,
with payment and delivery taking place more than 7 days in the future, or after
a period longer than the customary settlement period for that type of security.
When such purchases are outstanding, the Fund will set aside and maintain until
the settlement date in a segregated account liquid assets, such as cash, U.S.
Government Securities or other debt obligations eligible for purchase by the
Fund, in an amount sufficient to meet its settlement obligations. Typically, no
income accrues on securities the Fund has committed to purchase prior to the
time delivery of the securities is made, although the Fund may earn income on
securities it has deposited in a segregated account. When purchasing a security
on a when-issued, delayed delivery or forward commitment basis, the Fund assumes
the rights and risks of ownership of the security, including the risk of price
and yield fluctuations, and takes such fluctuations into account when
determining its net asset value. Because the Fund is not required to pay for
the security until the delivery date, these risks are in addition to the risks
associated with the Fund's other
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investments. If the Fund remains substantially fully invested at a time when
delayed delivery, when-issued or forward commitment purchases are outstanding,
the purchases may result in a form of leverage. When the Fund has sold a
security on a delayed delivery, when-issued or forward commitment basis, the
Fund does not participate in future gains or losses with respect to the
security. If the other party to a transaction fails to a deliver or pay for the
securities, the Fund could miss a favorable price or yield opportunity or could
suffer a loss. The Fund may dispose of or renegotiate a transaction after it is
entered into, and may sell when-issued or forward commitment securities before
they are delivered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Fund may purchase or sell
securities on a delayed delivery, when-issued or forward commitment basis.
FOREIGN SECURITIES
The Fund may invest directly in fixed income securities of non-U.S.
issuers.
The Fund will limit its foreign investments to securities of issuers based
in developed countries (including Newly Industrialized Countries ("NICs"), such
as Taiwan, South Korea and Mexico). The Fund limits its investments in
securities of issuers based in NICs to 10% of its net assets. Investing in the
securities of issuers in any foreign country involves special risks and
considerations not typically associated with investing in U.S. companies.
Shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
These risks include: differences in accounting, auditing and financial
reporting standards; generally higher commission rates on foreign portfolio
transactions; the possibility of nationalization, expropriation or confiscatory
taxation; adverse changes in investment or exchange control regulations (which
may include suspension of the ability to transfer currency from a country); and
political instability which could affect U.S. investments in foreign countries.
Additionally, foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including taxes withheld from
payments on those securities. Foreign securities often trade with less
frequency and volume than domestic securities and therefore may exhibit greater
price volatility. Additional risks associated with an investment in foreign
securities may include higher custodial fees than apply to domestic custodial
arrangements and transaction costs of foreign currency conversions. Changes in
foreign exchange rates also will affect the value of securities denominated or
quoted in currencies other than the U.S. dollar.
The Fund may invest in Brady Bonds. Brady Bonds are securities created
through the exchange of existing commercial bank loans to sovereign entities for
new obligations in connection with debt restructurings under a debt
restructuring plan introduced by former U.S. Secretary of the Treasury Nicholas
F. Brady. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar), and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government Securities. In light of
the residual risk of Brady Bonds and, among other
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factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Fund will not be subject to restructuring arrangements or to
requests for a new credit, which may cause the Fund to suffer a loss of interest
or principal on any of its holdings. For further information, see the SAI.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of 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, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, by currency controls
or by political developments in the U.S. or abroad. Currencies in which the
Fund's assets are denominated may be devalued against the U.S. dollar, resulting
in a loss to the Fund.
The Fund may buy and sell foreign currencies on a spot and forward basis to
reduce the risks of adverse changes in foreign exchange rates. A forward
foreign currency exchange contract 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 contract, the Fund
"locks in" the exchange rate between the currency it will deliver and the
currency it will receive from the duration of the contract. As a result, the
Fund 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. The effect on the value of the Fund is similar to selling
securities denominated in one currency and purchasing securities denominated in
another. Contracts to sell foreign currency would limit any potential gain
which might be realized by a Fund if the value of the hedged currency increases.
The Fund may enter into these contracts only for the purpose of hedging against
foreign exchange risk arising from the Fund's investment or anticipated
investment in securities denominated on foreign currencies. The Fund 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 Fund may invest for hedging purposes in options on foreign currencies
and foreign currency futures and options thereon. The Fund also may invest in
foreign currency exchange-related securities, such as foreign currency warrants
or other instruments whose return is linked to foreign currency exchange rates.
[The Fund will hedge at least 75% of its exposure to foreign currency.] For a
description of these instruments, see "Derivative Instruments" below and the
SAI.
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HIGH YIELD SECURITIES ("JUNK BONDS")
The Fund may invest up to 15% of its assets in fixed income securities
rated lower than Baa by Moody's or lower than BBB by S&P but rated at least B by
Moody's or S&P (or, if not rated, determined by the Fund's adviser to be of
comparable quality). Securities rated lower than Baa by Moody's or lower than
BBB by S&P are sometimes referred to as "junk bonds." Securities rated Baa are
considered by Moody's to have some speculative characteristics. Investors
should consider the following risks associated with high yield securities before
investing in the Fund.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Fund to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield
securities defaults, the Fund may incur additional expenses to seek recovery.
In the case of high yield securities structured as zero coupon or payment-in-
kind securities, the market prices of such securities are affected to a greater
extent by interest rate changes, and therefore tend to be more volatile than
securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause larger fluctuations
in the daily net asset value of the Fund's shares. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last
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rated. The Fund's adviser does not rely solely on credit ratings when selecting
securities for the Fund, and develops its own independent analysis of issuer
credit quality. If a credit rating agency changes the rating of a portfolio
security held by the Fund, the Fund may retain the portfolio security if the
Fund's adviser deems it in the best interest of shareholders.
DERIVATIVE INSTRUMENTS
The Fund may purchase and write call and put options on securities,
securities indexes and foreign currencies, and enter into futures contracts and
use options on futures contracts, as further described below. The Fund also may
enter into swap agreements with respect to foreign currencies, interest rates
and securities indexes. The Fund may use these techniques only to hedge against
changes in interest rates, foreign currency exchange rates or securities prices.
The Fund will maintain segregated accounts consisting of liquid assets, such as
cash, U.S. Government Securities or other debt obligations eligible for purchase
by the Fund (or, as permitted by applicable regulation, enter into certain
offsetting positions), to cover its obligations under options, futures and swaps
to avoid leveraging of the Fund.
The Fund considers derivative instruments to consist of securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, and not to include those securities whose payment of
principal and/or interest depend upon cash flows from underlying assets, such as
mortgage- or asset-backed securities. The Fund may invest up to all of its
assets in derivative instruments, subject only to the Fund's investment
objective and policies. The value of some derivative instruments in which the
Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Fund's adviser to forecast interest rates and other economic factors
correctly. If the Fund's adviser incorrectly forecasts such factors and has
taken positions in derivative instruments contrary to prevailing market trends,
the Fund could be exposed to the risk of loss.
The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If the Fund's
adviser incorrectly forecasts interest rates, market values or other economic
factors in utilizing a derivatives strategy for the Fund, the Fund might have
been in a better position if it had not entered into the transaction at all.
The use of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments. While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in related investments, or due to the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell a portfolio security at a disadvantageous time, because the Fund is
required to maintain asset coverage or
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offsetting positions in connection with transactions in derivative instruments,
and the possible inability of the Fund to close out or to liquidate its
derivatives positions.
OPTIONS ON SECURITIES, SECURITIES INDEXES, AND CURRENCIES. The Fund may
purchase put options on securities and indexes. One purpose of purchasing put
options is to protect holdings in an underlying or related security against a
substantial decline in market value. The Fund may also purchase call options on
securities and indexes. One purpose of purchasing call options is to protect
against substantial increases in prices of securities the Fund 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 specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.
The Fund 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. The Fund may write a call or put option
only if the option is "covered" by the Fund's holding a position in the
underlying securities or by other means which would permit immediate
satisfaction of the Fund's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series.
The Fund may write covered straddles consisting of a combination of a call
and a put written on the same underlying security. A straddle will be covered
when sufficient assets are deposited to meet the Fund's immediate obligations.
The Fund may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate
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its obligation under the option and must deliver the underlying securities at
the exercise price. If a put or call option purchased by the Fund 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
Fund 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 the Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the option
markets, the Fund may be unable to close out a position.
The Fund may buy or sell put and call options on foreign currencies.
Currency options traded on U.S. or other exchanges may be subject to position
limits, which may limit the ability of the Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller and generally do not have as much market liquidity as exchange-traded
options. The Fund may be required to treat as illiquid over-the-counter options
purchased and securities being used to cover certain written over-the-counter
options.
SWAP AGREEMENTS. The Fund may enter into interest rate, index and currency
exchange rate swap agreements. These transactions would be entered into in an
attempt to obtain a particular return when it is considered desirable to do so,
possibly at a lower cost to the Fund than if the Fund had invested directly in
the asset that yielded the desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a
"notional amount," I.E., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Forms
of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or "floor"; and
interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund'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"). The Fund's current obligations under a swap agreement
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will be accrued daily (offset against amounts owed to the Fund), and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of liquid assets such as cash,
U.S. Government Securities or other debt obligations eligible for purchase by
the Fund, to avoid any potential leveraging of the Fund's portfolio.
Obligations under swap agreements so covered will not be construed to be "senior
securities" for purposes of the Fund's investment restriction concerning senior
securities. [The Fund 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 Fund's assets.]
Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Fund's 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 the greater than 7 days, swap agreements may be
considered to be illiquid investments. Moreover, the Fund 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 Fund will
enter into swap agreements only with counterparties that meet certain standards
for creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Fund by the Internal Revenue Code may limit
the Fund's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
the Fund's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may invest in
interest rate futures contracts and options thereon ("futures options"), and may
also invest in foreign currency futures contracts and options thereon.
There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on
both the hedged securities in the Fund and the hedging vehicle, so that the
portfolio return might have been greater had hedging not been attempted. There
can be no assurance that a liquid market will exist at a time when the Fund
seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason
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may prevent the Fund from liquidating an unfavorable position, and the Fund
would remain obligated to meet margin requirements until the position is closed.
The Fund may write covered straddles consisting of a call and a put written
on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Fund's immediate obligations. The
Fund may use the same liquid assets to cover both the call and put options where
the exercise price of the call and put are the same, or the exercise price of
the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
The Fund will 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 Fund will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission, or, with respect to positions in financial futures
and related options that do not qualify as "bona fide hedging" positions, will
enter such positions only to the extent that aggregate initial margin deposits
plus premiums paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5% of the Fund's
net assets.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within 7 days in the ordinary course of business at approximately
the amount at which the Fund 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 7 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 whose
disposition is restricted under the federal securities laws (other than
securities issued pursuant to Rule 144A under the Securities Act of 1933 and
certain commercial paper that the Fund's adviser has determined to be liquid
under procedures approved by the Trust's Board of Trustees). Transactions in
illiquid securities may involve relatively higher transaction costs.
NET ASSET VALUE
Normally, the Fund will value its portfolio securities which mature in 60
days or less by using the "amortized cost" method of valuation, whereas other
portfolio securities will be valued based on current market quotations or, in
the absence of market quotations, by other means approved by the trustees of the
Trust. The use of amortized cost means that the net asset value of the Fund's
shares will be less affected by minor shifts in the market value of its
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shorter term portfolio securities, even though the market value of such
securities may change as a result of variations in the level of prevailing
interest rates and yield relationships. The Fund will value its shares once on
each day the New York Stock Exchange is open, as of the close of regular trading
on the Exchange.
YIELDS
Consideration of liquidity, safety and preservation of capital mean that
the Fund may not necessarily invest in instruments paying the highest available
yield at any particular time. Shareholders comparing the Fund's yield with
those of alternative investments (such as savings accounts, various types of
bank deposits and other short term funds, including money market funds) should
consider such things as liquidity, minimum balance requirements, penalties for
early withdrawal and the impact of taxes on alternative types of investments.
Yield information may be useful in reviewing the Fund's performance and
providing a basis for comparison with other investment alternatives. However,
unlike bank deposits or other investments which pay a fixed yield for a stated
period of time, mutual fund yields fluctuate.
The Fund may advertise its Yield and its Effective Yield. The Yield of the
Fund is based upon the income earned by the Fund over a 7-day period and then
annualized, i.e., the income earned in the period is assumed to be earned every
7 days over a 52-week period and stated as a percentage of the investment.
Effective Yield is calculated similarly but, when annualized, the income earned
by the investment is assumed to be reinvested in Fund shares and thus compounded
in the course of a 52-week period. Effective Yield will be higher than Yield
because of the compounding effect of this assumed reinvestment.
HOW TO BUY SHARES
Shares of the Fund are continuously offered through PIMCO Funds
Distribution Company (the "Distributor"), the Fund's principal underwriter, and
may be offered through other firms which are members of the National Association
of Securities Dealers, Inc. and which have dealer agreements with the
Distributor ("participating brokers") or which have agreed to act as introducing
brokers for the Distributor ("introducing brokers").
Shares of the Fund are offered for sale at the net asset value next
determined after receipt by the Fund of an order in proper form. There is no
sales charge to the investor.
There are two ways to purchase shares: either (1) through your dealer or
broker which has a dealer agreement or (2) directly by mailing an Account
Application with payment, as described below under the heading "Direct
Investment," to the Distributor (if no dealer is named in the application, the
Distributor may act as a dealer).
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The minimum initial investment is $100,000 and the minimum additional
investment is $10,000.
INVESTMENTS THROUGH YOUR BROKER
Brokerage firms provide varying arrangements for their clients to purchase
and redeem Fund shares. For information about your brokerage firm's
arrangements, including information about procedures for forwarding purchase and
redemption orders to the Fund and crediting dividends to your account, contact
your broker. Some firms may establish higher minimum investment requirements
than set forth above. Firms may arrange with their clients for other investment
or administrative services. Such firms may independently establish and charge
additional amounts to their clients for such services, and are responsible for
transmitting to their clients a schedule of any such fees, which may reduce
their clients' return. Firms will ordinarily hold Fund shares in nominee or
street name as agent for and on behalf of their customers. In such instances,
the Fund's transfer agent (the "Transfer Agent") will have no information with
respect to or control over accounts of specific shareholders. Such shareholders
may obtain access to their accounts and information about their accounts only
from their broker. In addition, certain privileges with respect to the purchase
and redemption of shares or the reinvestment of dividends may not be available
through such firms. Some firms may participate in a program allowing them
access to their clients' accounts for servicing including, without limitation,
transfers of registration and dividend payee changes, and may perform functions
such as generation of confirmation statements and disbursements of cash
dividends. This Prospectus should be read in connection with such firms'
material regarding their fees and services.
DIRECT INVESTMENT
Investors who wish to invest in the Fund directly, rather than through a
participating broker, may do so by opening an account through the
Distributor. To open an account, an investor should complete the Account
Application, which can be obtained by calling (800) 800-0952 or by writing to
PIMCO Funds at 840 Newport Center Drive, Suite 360, Newport Beach, California
92260. All shareholders who open direct accounts through the Distributor
will receive from the Distributor individual confirmations of each purchase,
redemption, dividend reinvestment or transfer of Fund shares, including the
total number of Fund shares owned as of the confirmation date. Information
regarding direct investment or any other features offered by the Fund may be
obtained by calling (800) 800-0952.
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<PAGE>
PURCHASES BY MAIL. Investors who wish to invest directly may send a check
payable to PIMCO Funds Distribution Company along with a completed Account
Application to:
PIMCO Funds
840 Newport Center Drive, Suite 360
Newport Beach, California 92660
Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any bank that is a
member of the Federal Reserve System can normally be converted into federal
funds within two business days after receipt of the check. Checks drawn on a
non-member bank may take up to 15 days to convert into federal funds.
SUBSEQUENT PURCHASES BY MAIL. Subsequent direct purchases can be made
as indicated above by mailing a check with (1) a letter specifying the amount
of the investment and the shareholder's name and account number or (2) the
additional investment portion of a confirmation statement. All payments
should be made payable to PIMCO Funds. Checks should be mailed to the
address above under "Purchases by Mail."
CHANGES IN ACCOUNT REGISTRATION. For an account maintained through the
Distributor (rather than a participating broker), changes in registration
information or account privileges may be made by writing to the Fund's
transfer agent, Investors Fiduciary Trust Company (the "Transfer Agent"), at
127 West 10th Street, Kansas City, Missouri 64105, or by use of forms which
are available from the Distributor. A signature guarantee is required. See
"Signature Guarantee" under "How to Redeem."
ALL PURCHASES
A purchase order does not become effective until the custodian has federal
funds immediately available to it, whether by direct wire or conversion of other
forms of payment, prior to the close of regular trading on the New York Stock
Exchange on days the Exchange is open (generally, weekdays other than normal
holidays). Orders received in good order by the Fund or its agents prior to the
close of regular trading on the Exchange (normally 4:00 p.m.) Eastern time) will
be executed at the net asset value calculated at the close of regular trading on
that day and begin to earn dividends on the next day, except that orders
received in good order and accompanied by full payment in federal funds (or
converted into federal funds before the close of regular trading on the
Exchange) will begin to earn dividends on the day the order is received. The
Distributor will promptly forward orders received by it for shares of the Fund.
Participating brokers are responsible for forwarding their customers' orders.
The Distributor and the Fund are not responsible for any delay by your broker in
forwarding an order to the Fund. The Fund and the Distributor reserve the right
to reject any purchase order for any reason.
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<PAGE>
HOW TO REDEEM
Shareholders may withdraw all or any portion of their investments in the
Fund by redeeming shares at the Fund's net asset value. Shareholders may redeem
shares of the Fund, with 24 hours advance notice, on any day that the New York
Stock Exchange is open for business.
ACCOUNTS MAINTAINED WITH A BROKER
If your account is maintained with a participating broker, you may redeem
by submitting a written withdrawal request to your broker. For the convenience
of their customers, participating brokers may also offer checkwriting, debit
card and telephone redemption services, and may charge fees for these services.
For more information, contact your participating broker.
ACCOUNTS MAINTAINED THROUGH THE DISTRIBUTOR
If you maintain your account directly through the Distributor (rather than
through a participating broker), you may redeem shares from your account (1) by
submitting a written redemption request directly to the Transfer Agent, or (2)
by telephone redemption (unless you have elected in writing not to utilize this
option). Your original Account Application permits you to redeem by written
request and to elect one or more of the additional redemption procedures
described below. You may change the instructions indicated on your original
Account Application, or may request additional redemption options, only by
transmitting written directors to the Transfer Agent. Requests to institute or
change any of the additional redemption procedures will require a signature
guarantee. Redemption proceeds will normally be mailed to the redeeming
shareholder within one business day after receipt of the redemption request in
good order by the Fund's Transfer Agent, except where those shares have recently
been purchased by personal check.
WRITTEN REQUESTS. To redeem shares in writing (whether or not
represented by certificates), send the following items to PIMCO Funds, 840
Newport Center Drive, Suite 360, Newport Beach, California 92660: (1) a
written request for redemption signed by all registered owners exactly as the
account is registered on the Transfer Agent's records, including fiduciary
titles, if any, and specifying the account number, the dollar amount or
number of shares to be redeemed and the name of the Fund; (2) a guarantee of
all signatures on the written request or on the share certificate or
accompanying stock power, as described below under "Signature Guarantee"; and
(3) any additional documents which may be required by the Transfer Agent for
redemption by corporations, partnerships or other organizations, executors,
administrators, trustees, custodians or guardians, or if the redemption is
requested by anyone other than the shareholder(s) of record. Transfers of
shares are subject to the same requirements. A signature guarantee is not
required for redemptions of $50,000 or less, requested by and payable to all
shareholders of record for the account, to be sent to the address of record
for that account. To avoid delay in redemption or transfer,
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<PAGE>
shareholders having any questions about these requirements should contact the
Transfer Agent in writing or by calling (800) 800-0952 before submitting a
request. Redemption or transfer requests will not be honored until all required
documents in the proper form have been received by the Transfer Agent.
TELEPHONE REDEMPTIONS. The Fund accepts telephone requests for redemption
of uncertificated shares for amounts up to $50,000 from shareholders who
maintain their account through the Distributor. (Telephone redemptions are not
available for shareholders who have elected in writing not to utilize this
option.) The proceeds of a telephone redemption will be sent to the shareholder
at his address as set forth in the Account Application or in a subsequent
written authorization with a signature guarantee. By completing an Account
Application, an investor agrees that the Fund shall not be liable for any loss
incurred by the investor by reason of the Fund accepting unauthorized telephone
redemption requests for his account if the Fund reasonably believes the request
is genuine, unless the investor has specifically elected in writing not to
utilize the telephone redemption service. Thus, shareholders risk possible
losses in the event of a telephone redemption not authorized by them. The Fund
will employ reasonably procedures to confirm that shareholders' telephone
instructions are genuine, and, if it does not, it may be liable for any losses
due to unauthorized or fraudulent instructions. The Fund will require a form of
personal identification prior to acting upon telephone instructions, will
provide written confirmations of such transactions and will record shareholders'
instructions.
A shareholder making a telephone redemption should call the Fund at
(800) 927-4648 or should send a facsimile to (714) 760-4456 and state (i) the
name of the shareholder as it appears on the Transfer Agent's records, (ii)
his account number with the Fund, (iii) the amount to be withdrawn and (iv)
the name of the person requesting the redemption. Usually the proceeds are
sent to the investor on the next Fund business day after the redemption is
effected. If the redemption request is received after the closing of the
Exchange, the redemption is effected on the following Fund business day at
that day's net asset value and the proceeds are usually sent to the investor
on the second Fund business day following receipt of the request. The Fund
reserves the right to terminate or modify the telephone redemption service at
any time. During times of severe disruptions in the securities markets, the
volume of calls may make it difficult to redeem by telephone, in which case a
shareholder may wish to send a written request for redemption as described
under "Written Requests" above. Telephone communications may be recorded by
the Distributor or the Transfer Agent.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If a shareholder who maintains his
account through the Distributor has given authorization for expedited wire
redemptions, shares can be redeemed and the proceeds sent by wire transfer to a
single previously designated bank account. Requests received by the Fund prior
to the close of regular trading on the New York Stock Exchange will result in
shares being redeemed that day at the next determined net asset value and
normally the proceeds being sent to the designated bank account the following
business day. The bank must be a member of the Federal Reserve wire system.
Delivery of
24
<PAGE>
the proceeds of a wire redemption request may be delayed by the Fund for up to 7
days if the Distributor deems it appropriate under then current market
conditions. Once authorization is on file, the Fund will honor requests by any
person by telephone at (800) 927-4648 or by written instructions. The Fund
cannot be responsible for the efficiency of the Federal Reserve wire system or
the shareholder's bank. The Fund does not currently charge for wire transfers.
The shareholder is responsible for any charges imposed by the shareholder's
bank. The minimum amount that may be wired is $25,000. The Fund reserves the
right to change this minimum or to terminate the wire redemption privilege at
any time. Shares purchased by check may not be redeemed by wire transfer until
such shares have been owned (i.e., paid for) for at least 15 days. Expedited
wire transfer redemptions may be authorized by completing a form available from
the Distributor. Wire redemptions may not be used to redeem shares in
certificated form. To change the name of the single designated bank account to
receive wire redemption proceeds, it is necessary to send a written request with
signature(s) guaranteed to PIMCO Funds, 840 Newport Center Drive, Suite 360,
Newport Beach, California 92660.
ALL REDEMPTIONS
If investors purchase shares with a check, the Fund may withhold redemption
proceeds until it can be reasonably assured that payment has been collected on
the check, which may take 15 or more days. To avoid such withholding, investors
should purchase shares by certified or official bank check or by wire transfer.
Dividends are paid through the day on which the shares are redeemed.
There is no charge by the Distributor with respect to redemptions; however,
a participating broker who processes a redemption for an investor may charge
customary commissions for its services. Dealers and other financial services
firms are responsible for transmitting their customers' redemption orders, and
neither the Fund nor the Distributor is responsible for such firms' delays in
order transmission. Requests for redemption received by the Distributor by the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m.
Eastern time) on a regular business day, and requests for redemption received by
brokers or other firms prior to the close of regular trading on the Exchange on
a regular business day and received by the Distributor prior to the close of the
Distributor's business that day, will be effected at the net asset value
effective at the close of regular trading on the Exchange on that day. Requests
received by the Distributor after the close of regular trading on the Exchange
(or received by such time by brokers or other firms and received by the
Distributor after its close of business) will be confirmed at the net asset
value effective at the close of regular trading on the next business day.
SIGNATURE GUARANTEE
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature and guaranteed by any of the
following entities: U.S. banks, foreign banks having U.S. correspondent banks,
credit unions, savings
25
<PAGE>
associations, U.S. registered dealers and brokers, municipal securities dealers
and brokers, Government Securities dealers and brokers, national securities
exchanges, registered securities associations and clearing agencies (each an
"Eligible Guarantor Institution"). The Transfer Agent reserves the right to
reject any signature guarantee pursuant to its written signature guarantee
standards or procedures, which may be revised in the future to permit it to
reject signature guarantees from Eligible Guarantor Institutions that do not,
based on credit guidelines, satisfy such written standards or procedures.
If the procedures of the redemption (i) exceed $50,000, (ii) are to be paid
to a person other than the record owner (which may be the shareholder's broker),
(iii) are to be sent other than to the account record owner's address as listed
in the Transfer Agent's records, or (iv) are to be paid to a corporation,
partnership, trust or fiduciary (other than the shareholder's broker where the
broker is the record owner), the signature(s) on the redemption request and on
the certificates, if any, or stock power must be guaranteed as described above.
The Fund may change the signature guarantee requirements from time to time upon
notice to shareholders, which may be given by means of a new Prospectus or
prospectus supplement.
SMALL ACCOUNTS
The Fund reserves the right to redeem involuntarily any shares in a
shareholder's account in excess of an amount set from time to time by the
Trustees of the Trust and to redeem involuntarily all shares in a shareholder's
account if the dollar value of such account is less than a minimum amount (not
to exceed $_____ ) set from time to time by the Trustees. Shareholders will be
notified before any such redemptions are made and will have at least 30 days to
purchase shares in order to bring their account up to the required minimum.
MANAGEMENT OF THE FUND
Columbus Circle Investors ("CCI" or the "Adviser") is the investment
manager of the Fund and, under the supervision of the Trust's Trustees, directs
the investment of the Fund's assets. Reference in this Prospectus to "the
adviser" or "the Fund's adviser" are references to CCI. Pursuant to the Trust's
Agreement and Declaration of Trust, the Trustees supervise the affairs of the
Fund as conducted by CCI.
CCI also advises other mutual funds and private accounts and is registered
as an investment adviser with the SEC. Investment decisions made by CCI with
respect to the Fund are made by a committee rather than by a single person
acting as portfolio manager. No person is primarily responsible for making
recommendations to that committee.
CCI is a general partnership with PIMCO Advisors L.P. ("PALP") and Columbus
Circle Investors Management Inc., a wholly-owned subsidiary of PALP, as its
only partners. PALP is a Delaware limited partnership. The general partner of
PALP, PIMCO Partners, G.P., has two partners: (i) an indirect wholly-owned
subsidiary of Pacific Mutual Life
26
<PAGE>
Insurance Company; and (ii) PIMCO Partners, L.L.C. ("LLC"), a limited liability
company owned and controlled by a group consisting of William H. Gross, Dean S.
Meiling, James F. Muzzy, William F. Podlich, III, Frank B. Rabinovitch, Brent R.
Harris, John L. Hague, William S. Thompson, Jr., William C. Powers, David H.
Edington and Benjamin L. Trosky (collectively, the "Managing Directors"). PIMCO
Partners, G.P. has substantially delegated its control of PALP to an Equity
Board and an Operating Board of PALP. The activities of PALP are controlled by
its Operating Board except that certain non-routine or extraordinary actions may
not be effected by the Operating Board without the approval of PALP's Equity
Board. The Operating Board has in turn delegated the authority to manage day-
to-day operations and policies to an Operating Committee. Because of the
ability to designate a majority of the Members of the Operating Board, Pacific
Investment Management Company and the Managing Directors could be said to
control PALP and, through PALP, CCI, although the Managing Directors disclaim
such authority.
Under a Investment Advisory Contract between the Trust and CCI, the Fund
pays CCI a monthly advisory fee at an annual rate of 0.20% of its average daily
net asset value.
PALP serves as administrator (the "Administrator") to the Fund pursuant to
an administration agreement with the Fund. The Administrator provides or
procures administrative services for the Fund, which include clerical help and
accounting, bookkeeping, internal audit services and certain other services
required by the Fund, and preparation of reports to the Fund's shareholders and
regulatory filings. The Administrator has retained its subsidiary, Pacific
Investment Management Company to provide such services as sub-administrator.
The Administrator and/or the sub-administrator may also retain other affiliates
to provide certain of these services. In addition, the Administrator, at its
own expense, arranges for the provision of legal, audit, custody, transfer
agency (including sub-transfer agency and other administrative services) and
other services necessary for the ordinary operation of the Fund, and is
responsible for the costs of registration of the Fund's shares and the printing
of prospectuses and shareholder reports for current shareholders. In addition
to providing and/or procuring such administrative services, PALP and Pacific
Investment Management Company also provide executive and other personnel for the
management of the Trust.
The Fund (and not the Administrator) is responsible for the following
expenses: (i) salaries and other compensation of any of the Trust's executive
officers and employees who are not officers, directors, stockholders, or
employees of PALP, CCI, or their subsidiaries or affiliates; (ii) taxes and
governmental fees; (iii) brokerage fees and commissions and other portfolio
transaction expenses; (iv) the costs of borrowing money, including interest
expenses; (v) fees and expenses of the Trustees who are not "interested persons"
of PALP, CCI or the Trust, and any counsel retained exclusively for their
benefit; (vi) extraordinary expenses, including costs of litigation and
indemnification expenses; and (vii) expenses which are capitalized in accordance
with generally accepted accounting principles.
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<PAGE>
For providing or procuring administrative services to the Fund as described
above, the Administrator receives monthly fees from the Fund at an annual rate
of 0.20% of the average daily net assets of the Fund.
The investment advisory, administration and sub-administration agreements
for the Fund may be terminated by the Trustees, or by PALP, CCI or Pacific
Investment Management Company (as the case may be) on 60 days' written notice.
In addition, these agreements may be terminated by a majority of the Trustees
that are not interested persons of the Trust, CCI, PALP or Pacific Investment
Management Company (as the case may be) on 60 days' written notice. Following
their initial two-year terms, the agreements will continue from year to year if
approved by the Trust's Trustees. However, the administration agreement may not
be terminated by PALP until after its initial two-year term.
PIMCO Funds Distribution Company (the "Distributor") is the principal
underwriter of the Fund. The Distributor is a wholly-owned subsidiary of PALP.
DIVIDENDS
The Fund declares daily dividends of all of the net investment income of
the Fund and expects to pay shareholders on the third Thursday of the month such
dividends as are declared through the date of payment. If all of an investor's
shares of the Fund are redeemed at any time during a month, all dividends
accrued to date for the Fund will be paid together with the redemption proceeds.
Shareholders begin earning dividends on the day that the Fund receives federal
funds as payment for the shares and will continue to earn dividends through the
day on which shares are redeemed. Dividends of the Fund are paid in additional
shares of the Fund, based on its net asset value on the payment date, by credit
to the shareholder's account with the participating broker. At the
shareholder's election, dividends may be paid in cash rather than in additional
shares. Investors whose shares are held in a broker "street name" account
should consult their broker for information about their broker's practice
concerning the crediting of Fund dividends to the investor's account with the
broker.
TAXES
The Fund plans to distribute substantially all of its net investment income
and net realized short-term capital gains, if any, to its shareholders on a
current basis and substantially all of its net realized long-term capital gains,
if any, at least annually. So long as it does so and otherwise satisfies the
requirements for being taxed as a regulated investment company, the Fund itself
does not pay federal income tax on the amount distributed. Shareholders will
receive an annual statement detailing federal tax information about dividends
and distributions paid to shareholders during or with respect to the preceding
calendar year.
Dividends of net interest or other ordinary income of the Fund and
distributions of its short-term capital gains, if any, are taxable to
shareholders as ordinary income for federal
28
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income tax purposes and will not qualify for the dividends-received deduction.
Distributions paid from long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long the shareholders
have held their shares and will not qualify for the dividends-received
deduction.
To avoid imposition of a non-deductible federal excise tax, the Fund will
distribute prior to calendar year-end substantially all of its ordinary income
on a calendar year basis, and substantially all of the capital gain net income
the Fund realizes in the one-year period ending October 31, that has not
previously been distributed.
Distributions will be taxable as described above whether received in cash
or in additional shares. A dividend paid to a shareholder by the Fund in
January of a year generally is deemed to have been paid by the Fund on December
31 of the preceding year, if the dividend was declared and payable to
shareholders of record on a date in October, November or December of that
preceding year.
The Fund does not expect distributions to be exempt generally from state
and local taxes, although in some states dividends attributable to interest paid
on U.S. Government Securities held by the Fund may be exempt from state and
local taxes. Shareholders should consult with their tax advisers about the
status of such dividends in their own states and localities.
The foregoing is only a general summary of the federal income tax
consequences of investing in the Fund. Shareholders should consult with their
own tax advisers to determine the specific tax consequences of investments in
the Fund in light of their particular situations.
DESCRIPTION OF THE TRUST
The Trust was organized on April 27, 1984 as a Massachusetts business trust
and is a diversified open-end management investment company. The Trust has an
unlimited number of authorized shares of beneficial interest which may be
divided into an unlimited number of series of such shares, and which presently
consist of the series of shares constituting the Fund as well as a second series
of shares constituting the National Money Market Fund. The Fund was organized
as a series of the Trust on December 17, 1996. The Trustees may, without
shareholder approval, establish one or more additional series, or, also without
shareholder approval, terminate any series and distribute such series' assets to
its shareholders. These shares are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as to which
shareholders are entitled to vote. The shares of each series vote individually
by series on all matters except those matters as to which the Investment Company
Act of 1940 requires shares of the series to vote together as a single class.
When the Trustees determine that a matter affects only the interests of one or
more series, only shareholders of the affected series shall be entitled to vote
on that matter. There will not normally be annual
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shareholders' meetings. Shareholders may remove Trustees from office by votes
cast at a meeting of shareholders or by written consent. Shares are freely
transferable.
Shareholders could, under certain circumstances, be held personally liable
for the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of that liability is considered remote.
Shareholders may direct any questions they may have about the Fund to their
broker or to PIMCO Funds, 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660 (telephone (800) 800-0952).
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APPENDIX A
DESCRIPTION OF DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of "term to
maturity." Traditionally, a fixed income security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a fixed
income security provides its final payment, taking no account of the pattern of
the security's payments prior to maturity. In contrast, duration incorporates a
bond's yield, coupon interest payments, final maturity and call features into
one measure. Duration management is one of the fundamental tools used by the
Fund's adviser.
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being equal, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of 10 or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The
stated final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest rate
exposure.
A-1
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Finally, the duration of a fixed income security may vary over time
in response to changes in interest rates and other market factors. In these and
other similar situations, the Fund's adviser will use more sophisticated
analytical techniques that incorporate the anticipated economic life of a
security into the determination of its interest rate exposure.
Credit spread duration is similar to duration, but measures price
sensitivity to a change in credit spreads, i.e. differences in yields between
issues of different credit quality. For example, a floating rate corporate
security with 10 years to maturity which resets every 90 days will have a
duration of 90 days, but a credit spread duration similar to a 10 year fixed
rate bond.
Mortgage spread duration is similar to credit spread duration, except that
it applies to mortgage instruments: mortgage spread duration measures the
portfolio's sensitivity to mortgage spread changes, i.e. differences in yields
between mortgage instruments of different credit quality.
A-2
<PAGE>
CASH ACCUMULATION TRUST
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
INVESTMENT ADVISER
Columbus Circle Investors
One Station Place
Stamford, CT 06902
ADMINISTRATOR
PIMCO Advisors L.P.
800 Newport Center Drive
Newport Beach, CA 92660
DISTRIBUTOR
PIMCO Funds Distribution Company
2187 Atlantic Street
Stamford, CT 06902
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
INDEPENDENT ACCOUNTANTS
Price Waterhouse L.L.P.
1055 Broadway
Kansas City, MO 64105
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH __, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A POST-
EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THE SECURITIES
OFFERED HEREBY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALES 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 SUCH STATE.
CASH ACCUMULATION TRUST
ACTIVE SHORT-TERM FUND
STATEMENT OF ADDITIONAL INFORMATION
April __, 1997
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated April __,
1997 of the Active Short-Term Fund as supplemented from time to time, and should
be read in conjunction therewith. A copy of the Prospectus may be obtained from
PIMCO Funds Distribution Company, 2187 Atlantic Street, Stamford,
Connecticut 06902.
1
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TABLE OF CONTENTS
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. . . . . . . . . . . . . 3
CREDIT AND MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . . . . 29
PORTFOLIO TRANSACTIONS AND BROKERAGE. . . . . . . . . . . . . . . . . . . 30
MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . . . . . . . . . . . . 31
INVESTMENT ADVISORY AND OTHER SERVICES. . . . . . . . . . . . . . . . . . 37
ORGANIZATION AND CAPITALIZATION OF THE TRUST. . . . . . . . . . . . . . . 40
NET INCOME, YIELDS AND VALUATION. . . . . . . . . . . . . . . . . . . . . 42
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
DESCRIPTION OF INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 46
APPENDIX A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
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INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of the Active Short-Term Fund (the
"Fund") of Cash Accumulation Trust (the "Trust") are summarized on the front
page of the Prospectus and in the text of the Prospectus following the captions
"Investment Objective and Policies" and "General Policies." For a description
of the investments which the Fund may make, see "Description of Investments."
For a description of the relevant rating categories established by five major
rating agencies, see Appendix A.
Columbus Circle Investors, the manager of the Fund ("CCI" or the
"Manager"), will monitor the Fund's investments in light of general economic and
market conditions and the creditworthiness of the issuers of the Fund's
portfolio securities, including the creditworthiness of issuers of master demand
notes insofar as it relates to the ability of the issuer to make payments on
demand. The Fund does not expect to invest more than 5% of its total assets in
master demand notes in the foreseeable future. As described in the Prospectus,
after purchase by the Fund, a security may cease to be rated, its rating may be
reduced below the minimum required for purchase by the Fund, or the security may
otherwise cease to be eligible for purchase by the Fund. No such event will
require the sale of such security by the Fund. However, the Manager or the
Trust's Trustees will consider any such event in determining whether the Fund
should continue to hold the security.
The Fund, consistent with its investment objective, attempts to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic and money
market conditions and trends. The Fund also invests to take advantage of what
are believed to be temporary disparities in the yields of the different segments
of the high-grade money market or among particular instruments within the same
segment of the market. These policies may result in frequent changes in the
Fund's portfolio. See "Portfolio Transactions and Brokerage."
REPURCHASE AGREEMENTS
As is disclosed in the text of the Prospectus following the caption
"General Policies - Repurchase Agreements," there is a risk that in a repurchase
agreement the seller may fail to repurchase the underlying security. In such
event, the Fund would attempt to dispose of the underlying security in the
market or would hold the underlying security until maturity. However, the Fund
may be subject to various delays and risks of loss in attempting to dispose of
the underlying security, including (a) possible declines in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto, (b) possible reduced levels of income and lack of access to income
during this period and (c) expenses involved in the enforcement of the Fund's
rights.
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FIRM COMMITMENTS
As described in the text of the Prospectus following the caption
"Investment Objective and Policies," the Fund may enter into firm commitment
agreements with banks or broker-dealers for the purchase of securities at an
agreed-upon price on a specified future date. Such agreements might be entered
into, for example, when the Fund anticipates a decline in the yield of
securities of a given issuer and is able to obtain a more advantageous yield by
committing currently to purchase securities to be issued later.
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 Fund's 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 Bank, those of the Federal National Mortgage Association ("FNMA"), and
those of the Student Loan Marketing Association are not supported by the full
faith and credit of the U.S. Government, but 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.
INFLATION-INDEXED BONDS
The Fund may invest in inflation-indexed bonds, which are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of ten years, although it is anticipated that securities with
other maturities will be issued in the future. The securities will pay interest
on a semi-annual basis, equal to a fixed percentage of
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the inflation-adjusted principal amount. For example, if an investor
purchased an inflation-indexed bond with a par value of $1,000 and a 3% real
rate of return coupon (payable 1.5% semi-annually), and inflation over the
first six months were 1%, the mid-year par value of the bond would be $1,010
and the first semi-annual interest payment would be $15.15 ($1,010 times
1.5%). If inflation during the second half of the year reached 3%, the
end-of-year par value of the bond would be $1,030 and the second semi-annual
interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Fund may
also invest in other inflation-related bonds which may or may not provide a
similar guarantee. If such a guarantee of principal is not provided, the
adjusted principal value of the bond repaid at maturity may be less than the
original principal. The value of inflation-indexed bonds is expected to change
in response to changes in real interest rates. Real interest rates in turn are
tied to the relationship between nominal interest rates and the rate of
inflation. Therefore, if inflation were to rise at a faster rate than nominal
interest rates, real interest rates might decline, leading to an increase in
value of inflation-indexed bonds. In contrast, if nominal interest rates
increased at a faster rate than inflation, real interest rates might rise,
leading to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop. Lack of a
liquid market may impose the risk of higher transaction costs and the
possibility the Fund may be forced to liquidate positions when it would not be
advantageous to do so. There also can be no assurance that the U.S. Treasury
will issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
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
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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.
BORROWING
Subject to the limitations described under "Investment Restrictions" below,
the Fund may be permitted to borrow for temporary purposes and/or for investment
purposes. Such a practice will result in leveraging of the Fund's assets and
may cause the Fund to liquidate portfolio positions when it would not be
advantageous to do so. This borrowing may be unsecured. Provisions of the
Investment Company Act of 1940 (the "1940 Act") require the Fund 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 Fund's total assets made for
temporary administrative purposes. Any borrowings for temporary administrative
purposes in excess of 5% of the Fund's total assets must maintain continuous
asset coverage. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing will tend to exaggerate
the effect on net asset value of any increase or decrease in the market value of
the Fund's portfolio. Money borrowed will be subject to interest costs which
may or may not be recovered by appreciation of the securities purchased. The
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
In addition to borrowing for temporary purposes, the Fund may enter into
reverse repurchase agreements if permitted to do so under its specific
limitations on borrowings. A reverse repurchase agreement involves the sale of
a portfolio-eligible security by the Fund, coupled with its agreement to
repurchase the instrument at a specified time and price. Reverse repurchase
agreements involve the risk that the market value of securities retained by the
Fund may decline below the repurchase price of the securities sold by the Fund
which it is obligated to repurchase. Reverse repurchase agreements will be
subject to the Fund's limitations on borrowings as specified under "Investment
Restrictions" below.
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PREFERRED STOCK
The Fund 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,
the Fund can receive a steady stream of dividends and still have the option to
convert it to common stock.
CORPORATE DEBT SECURITIES
The Fund may invest in corporate debt securities. 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.
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 the Fund's
portfolio may be varied 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 security may be
sold and another of comparable quality and maturity (usually, but not always, of
a different issuer) purchased at approximately the same time to take advantage
of what are believed to be short-term differentials in values or yields.
The Fund'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 Fund, or, if unrated, are deemed to
be comparable in quality to corporate debt securities in which the Fund 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 Fund 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
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until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to non-convertible debt securities. Convertible securities rank
senior to common stock in a corporation's capital structure and, therefore,
generally entail less risk than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by the Fund is
called for redemption, the Fund 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. The Fund generally would invest in
convertible securities for their favorable price characteristics and total
return potential and would normally not exercise an option to convert.
HIGH YIELD SECURITIES ("JUNK BONDS")
The Fund may invest in debt/fixed income securities of domestic or foreign
issuers that meet minimum ratings criteria set forth for the Fund, or if
unrated, are of comparable quality in the opinion of the Fund's Manager. A
description of the ratings categories used is set forth in Appendix A to this
Statement of Additional Information.
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 Services, Inc. ("Moody's") or BB or below by
Standard & Poor's Corporation ("S&P")) or (2) if unrated, determined by the
Manager to be of comparable quality to obligations so rated.
The Fund may purchase high yield securities (as defined in the Prospectus).
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 and
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. The Fund may
continue to hold such securities following a decline in their rating if in the
opinion of the Manager it would be advantageous to do so. Investments in high
yield securities that are eligible for purchase by the Fund 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
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be less liquid than investment grade debt. High yield securities may be
regarded as predominately 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 the Fund's
investment objective may, to the extent of its investments in high yield
securities, depend more heavily on the Manager's creditworthiness analysis
than would be the case if the Fund 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 Fund 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.
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 Fund 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 Fund. 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. 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.
See Appendix A to this Statement of Additional Information for further
information regarding high yield/high risk securities.
PARTICIPATION ON CREDITORS COMMITTEES
The Fund 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 Fund.
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Such participation may subject the Fund to expenses such as legal fees and
may make the Fund an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Fund's ability to trade in or
acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws governing the rights of creditors and debtors. The Fund would
participate on such committees only when the Manager believes that such
participation is necessary or desirable to enforce the Fund's rights as a
creditor or to protect the value of securities held by the Fund.
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 Fund 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 the Fund with a certain degree
of protection against rises in interest rates. However, the Fund would
generally participate less in appreciation resulting from any general decline in
interest rates.
The Fund 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 will generally exhibit greater
price volatility than a fixed rate obligation of similar credit quality.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (see "Mortgage Pass-Through
Securities" below). Certain debt securities are also secured with collateral
consisting of mortgage-related securities (see "Collateralized Mortgage
Obligations" below).
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal
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payments. In effect, these payments are a "pass-through" of the monthly
payments made by the individual borrowers on their residential or commercial
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA, a wholly owned U.S. Government corporation within the Department of
Housing and Urban Development, 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 United States Government) include the FNMA and the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. FNMA purchases conventional
(I.E., not insured or guaranteed by any government agency) residential mortgages
from a list of approved seller/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 United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the twelve Federal Home Loan Banks and
now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no
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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 Fund's investment quality
standards. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund 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 Manager determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Fund will not
purchase mortgage-related securities or any other assets which in the
Manager's opinion are illiquid if, as a result, more than 15% of the value of
the Fund's total assets will be illiquid.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund'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 Fund takes 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. Monthly payment of principal received from the
pool of underlying mortgages, including
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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 therefore partially
guarded (but only partially) against a sooner than desired return of
principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (E.G., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B, or
C Bond currently being paid off. When the Series A, B, and C Bonds are paid in
full, interest and principal on the Series Z Bond begins to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each 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 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.
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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 CMO residuals or 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.
CMO RESIDUALS. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest only class of stripped mortgage-backed securities. See "Other Mortgage-
Related Securities--Stripped Mortgage-Backed Securities." In addition, if a
series of a CMO includes a class that bears interest at an adjustable rate, the
yield to maturity on the related CMO residual will also be extremely sensitive
to changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances the Fund may fail to recoup some or all of its initial
investment in a CMO residual.
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CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to the Fund's limitations on investment in illiquid securities.
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 the Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund 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 only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Fund's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES. Similarly, the Manager expects that
other asset-backed securities (unrelated to mortgage loans) will be offered
to investors in the future. Several types of asset-backed securities have
already been offered to investors, including Certificates for Automobile
Receivables-SM- ("CARS-SM-"). CARS-SM- represent undivided fractional interests
in a trust whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS-SM- are passed through
monthly to certificate holders, and are generally guaranteed up to
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certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the trustee or originator of the
trust. An investor's return on CARS-SM- may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit
is exhausted, the trust may be prevented from realizing the full amount due
on a sales contract because of state law requirements and restrictions
relating to foreclosure sales of vehicles and the obtaining of deficiency
judgments following such sales or because of depreciation, damage or loss of
a vehicle, the application of federal and state bankruptcy and insolvency
laws, or other factors. As a result, certificate holders may experience
delays in payments or losses if the letter of credit is exhausted.
Consistent with the Fund's investment objectives and policies, the Manager
also may invest in other types of asset-backed securities.
FOREIGN SECURITIES
The Fund may invest in U.S. dollar or foreign currency-denominated
corporate debt securities of foreign issuers; 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.
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; higher rates of inflation;
less government supervision and regulation of the securities markets and
participants
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in those markets; controls on foreign investment and limitations on
repatriation of invested capital and on the Fund'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.
The Fund may enter into forward foreign currency exchange contracts to
reduce the risks of adverse changes in foreign exchange rates. 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 fund "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
Fund 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 Fund if the value of the hedged
currency increases. The Fund may enter into these contracts for the purpose of
hedging against foreign exchange risks arising from the Fund's investment or
anticipated investment in securities denominated in foreign currencies. Such
hedging transactions may not be successful and may eliminate any chance for the
Fund to benefit from favorable fluctuations in relevant foreign currencies. In
addition, the Fund may buy and sell foreign currency futures contracts and
options on foreign currencies and foreign currency futures.
The Fund 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 Fund will be subject to the additional risk that the
relative value of currencies will be different than anticipated by the Fund's
Manager. The Fund 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 Fund may be required to segregate assets to cover forward
currency contracts entered into for non-hedging purposes. The Fund 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 Fund may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued
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against funds deposited in a commercial bank for a definite period of time
and earning a specified return. Bankers' acceptances are negotiable drafts
or bills of exchange, normally drawn by an importer or exporter to pay for
specific merchandise, which are "accepted" by a bank, meaning, in effect,
that the bank unconditionally agrees to pay the face value of the instrument
on maturity. Fixed time deposits are bank obligations payable at a stated
maturity date and bearing interest at a fixed rate. Fixed time deposits may
be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions
on the right to transfer a beneficial interest in a fixed time deposit to a
third party, although there is no market for such deposits. The Fund 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 would be
invested in such deposits, repurchase agreements maturing in more than seven
days and other illiquid assets. The Fund may also hold funds on deposit with
its sub-custodian bank in an interest-bearing account for temporary purposes.
The Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $2 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. The
Fund 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 Fund limits its 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) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies (limited
purpose offices which do not offer all banking services) in the United States;
and (iv) in the opinion of the Manager, are of an investment quality comparable
to obligations of United States banks in which the Fund may invest. Subject to
the Trust's limitations 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 the Fund's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein. Obligations of foreign banks
involve certain risks associated with investing in foreign securities described
under "Foreign Securities" above.
COMMERCIAL PAPER
The Fund 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 Funds consists of U.S. dollar-denominated obligations of
domestic issuers, or, foreign currency-denominated
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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 Manager, of an investment quality comparable to
rated commercial paper in which the Fund 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.
DERIVATIVE INSTRUMENTS
The following describes certain derivative instruments and products in
which the Fund may invest (to the extent described in the Prospectus) and the
risks associated therewith.
OPTIONS ON SECURITIES AND INDEXES. The Fund may, to the extent specified
in the Prospectus, purchase and sell both put and call options on fixed income
or other securities or indexes in standardized contracts traded on foreign or
domestic securities exchanges, boards of trade, or similar entities, or quoted
on 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.
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.)
The Fund 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 Fund 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 liquid assets
are placed in a segregated account by its custodian) upon conversion or exchange
of other securities held by the Fund. For a call option on an index, the option
is covered if the Fund maintains with its custodian liquid assets in an amount
equal to the contract value of the index. A call option is also covered if the
Fund 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
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difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. A put option on a security or an index is "covered" if
the Fund maintains liquid assets in a segregated account with its custodian.
A put option is also covered if the Fund holds a put on the same security or
index as the put written where the exercise price of the put held is (i)
equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian.
If an option written by the Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
The Fund 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 Fund 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 Fund will realize a capital gain or, if it is less,
the Fund 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 the Fund is an asset
of the Fund. The premium received for an option written by the Fund 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 Fund will 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 Fund will at all times have the
right to repurchase the option written by it from the dealer at a specified
formula price. The Fund 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.
It is the present policy of the Fund not to enter into any OTC option
transaction if, as a result, more than 15% of the Fund's net assets would be
invested in (i) OTC options purchased by the Fund, (ii) the illiquid portion
(determined under the foregoing formula) of
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OTC options written by the Fund, and (iii) other illiquid investments as set
forth below under the heading "Investment Restrictions."
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund 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 the Fund
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 or other cover
unless the option expired without exercise. As the writer of a covered call
option, the Fund forgoes, during the option's life, the opportunity to profit
from increases in the market value of the security covering the call option
above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the Fund is
covered by an option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may be mitigated by
changes in the value of the Fund's securities during the period the option was
outstanding.
FOREIGN CURRENCY OPTIONS. The Fund 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 the Fund to reduce foreign currency risk using such
options. Over-the-counter options differ from traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectuses. An interest rate, foreign currency or index
futures contract provides for the future sale by one
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party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified
price and time. A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal
to the difference between the value of the index at the close of the last
trading day of the contract and the price at which the index contract was
originally written. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of these
securities is made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including: the S&P 500; the S&P Midcap 400; the Nikkei 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 will be developed and traded in the future.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true.
The Fund 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 the Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets ("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
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returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Fund expects to earn interest
income on its initial margin deposits. A futures contract held by the Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day the Fund 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 the Fund but is instead a settlement between the Fund and the broker
of the amount one would owe the other if the futures contract expired. In
computing daily net asset value, the Fund will mark to market its open futures
positions.
The Fund 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 Fund.
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. In general, the Fund
intends to enter into positions in futures contracts and related options only
for "bona fide hedging" purposes. With respect to positions in futures and
related options that do not constitute bona fide hedging positions, the Fund
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
Fund'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, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may
"cover" its position by purchasing a put option on the same futures contract
with a strike price as high or higher than the price of the contract held by the
Fund.
When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).
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When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets 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 Fund 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, in the case of an index futures contract, by holding a separate call option
permitting the Fund to purchase the same futures contract at a price not higher
than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that
equal the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund 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 Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which the Fund may enter into futures, futures options
or forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. 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.
For example, if the price of the futures contract moves more than the price of
the hedged security, the Fund would experience either a loss or gain on the
future which is not completely offset by movements in the price of the hedged
securities. To compensate for imperfect correlations, the Fund 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, the Fund 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.
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
24
<PAGE>
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
the Fund seeks to close out a futures or a futures option position, and the Fund
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. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Trust's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
SWAP AGREEMENTS. The Fund may enter into swap agreements to hedge against
changes in interest rates, foreign currency exchange rates or securities prices.
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. 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 in the
relevant investments or instruments.
Most swap agreements entered into by the Fund calculate the obligations of
the parties to the agreement on a "net basis." Consequently, the Fund'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"). The Fund's current obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Fund) and any accrued but unpaid
25
<PAGE>
net amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account. Obligations under swap agreements so covered will not be
construed to be "senior securities" for purposes of the Fund's investment
restriction concerning senior securities. The Fund 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 Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Manager'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, the Fund 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 Fund will enter
into swap agreements only with counterparties that meet certain standards of
creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Fund's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
the Fund's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. These transactions involve a commitment by the Fund 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 Fund will set aside and maintain assets
until the settlement date in a segregated account, 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 the Fund may earn income on securities it has deposited in a segregated
account. When purchasing a security on a delayed delivery basis, the Fund
assumes the rights and risks of ownership of the security, including the risk of
price and yield fluctuations, and takes such fluctuations into account when
determining its net asset value. Because the Fund is not required to pay for
the security until the delivery date, these risks are in addition to the risks
associated with the Fund's other investments. If the Fund 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 Fund has
sold a security on a delayed delivery basis, the Fund 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
Fund could miss a favorable price or yield opportunity or could suffer a loss.
The Fund may dispose of or renegotiate a delayed
26
<PAGE>
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 Funds may
purchase or sell securities on a delayed delivery basis.
The Fund may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the Fund
either (i) holds, and maintains until the settlement date in a segregated
account, assets 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. The Fund may also 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 Fund's other assets. The Fund may dispose
of a commitment prior to settlement and may realize short-term profits or losses
upon such disposition.
WARRANTS TO PURCHASE SECURITIES
The Fund 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 the Fund 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.
NOTE ON SHAREHOLDER APPROVAL
The Prospectus describes the investment objective of the Fund. The
Prospectus also identifies some of the policies of the Fund which are
fundamental and may be changed only with the approval of the shareholders.
Unless otherwise indicated, the objective and investment policies of the Fund
are not fundamental and may be changed without shareholder approval. Approval
by the shareholders of the Fund requires approval by the holders of a majority
of the outstanding shares of the Fund. As used in this Statement of Additional
Information, the term "majority of the outstanding shares" of the Fund means the
lesser of (i) 67% of the shares of the Fund represented at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the outstanding shares of the Fund.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies of the
Fund and, accordingly, without the approval of the holders of a majority of the
outstanding shares of the Fund, the Fund will not:
27
<PAGE>
(1) With respect to 75% of its total assets, purchase any security if,
as a result, more than 5% of its total assets (based on current value) would
then be invested in the securities of a single issuer. This limitation does
not apply to U.S. Government Securities (as defined in the Prospectus).
(2) With respect to 75% of its total assets, acquire more than 10% of
the outstanding voting securities of any issuer.
(3) Invest more than 25% of its total assets in any one industry. This
restriction does not apply to U.S. Government Securities or to bank
obligations. For purposes of this restriction, telephone, gas and electric
public utilities are each regarded as separate industries and finance
companies whose financing activities are related primarily to the activities
of their parent companies are classified in the industry of their parents.
(4) Make short sales of securities, maintain a short position or
purchase securities on margin, except that the Fund may obtain short-term
credits as necessary for the clearance of security transactions.
(5) Borrow money except for temporary or emergency purposes and then
only in an amount not exceeding 33 1/3% of its total assets taken at cost;
provided, however, that the Fund may loan its securities as described in the
Prospectus under the caption "General Policies - Loans of Portfolio
Securities."
(6) Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies. This
restriction does not apply to repurchase agreements or loans of portfolio
securities.
(7) Act as an underwriter of securities of other issuers except that,
in the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(8) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, securities which are secured by
interests in real estate, and securities which represent interests in real
estate, and it may acquire and dispose of real estate or interests in real
estate acquired through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.
(9) Purchase or sell commodities or commodity contracts, except that
the fund may purchase and sell financial futures contracts and options and
may enter into foreign exchange contracts and other financial transactions
not involving physical commodities.
(10) Issue senior securities, except for permitted borrowings or as
otherwise permitted under the 1940 Act.
28
<PAGE>
The percentages and percentage limitations set forth above or in the
Prospectus will apply at the time of the purchase of a security and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security.
In addition, it is contrary to the Fund's present policy, which may be
changed without shareholder vote, to purchase any illiquid security, including
any securities whose disposition is restricted under federal securities laws and
securities that are not readily marketable, if, as a result, more than 15% of
the Fund's total assets (based on current value) would then be invested in such
securities. The staff of the Securities and Exchange Commission is presently of
the view that repurchase agreements maturing in more than seven days are subject
to this restriction. Until that position is revised, modified or rescinded, the
Fund will conduct its operations in a manner consistent with this view. This
limitation on investment in illiquid securities does not apply to certain
restricted securities, including securities issued pursuant to Rule 144A under
the Securities Act of 1933 and certain commercial paper, that the Manager has
determined to be liquid under procedures approved by the Board of Trustees.
CREDIT AND MARKET RISK
The portfolio securities of the Fund are subject to credit risk and market
risk. Credit risk relates to the ability of the issuer of an obligation to make
timely payments of principal and interest. In a repurchase agreement
transaction, credit risk relates to the performance by the other party of its
obligation to repurchase the underlying security from the Fund. Obligations of
issuers are subject to the provisions of bankruptcy, insolvency and other laws,
such as the Federal Bankruptcy Reform Act of 1978, affecting the rights and
remedies of creditors.
Market risk relates to changes in the market value of a security as a
result of variations in the level of prevailing interest rates and yield
relationships among particular segments of the fixed income market or the U.S.
Government Securities market. Generally, prices tend to fluctuate less for
higher quality issues than for lower quality issues, and, for any given change
in the level of interest rates, prices for shorter maturity issues tend to
fluctuate less than for longer maturity issues. By restricting the maturity of
its investments and purchasing only high-quality instruments, the Fund seeks
relatively smaller changes in the value of its portfolio securities resulting
from market factors than would be the case for a longer term or lower grade bond
fund.
The value of the securities (other than inverse floaters) in the Fund's
portfolio can be expected to vary inversely to the changes in prevailing
interest rates. Thus, if interest rates increase after a security is purchased,
that security, if sold, might be sold at less than cost. Conversely, if
interest rates decline after purchase, the security, if sold, might be sold at a
profit. In either instance, if the security were held to maturity, no gain or
loss would normally
29
<PAGE>
be realized as a result of these fluctuations. Substantial redemptions of
shares of the Fund could require the sale of portfolio investments in the Fund
at a time when a sale might not be desirable.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In general, the Fund will purchase securities with the expectation of
holding them to maturity. However, the Fund may engage in short-term trading to
attempt to take advantage of short-term market variations. The Fund may also
sell securities prior to maturity to meet redemptions or as a result of a
revised management evaluation of the issuer. The Fund will have a high
portfolio turnover due to the short maturities of the securities held in its
portfolio.
In placing orders for the purchase and sale of portfolio securities for the
Fund, the Manager will always seek the best price and execution. It is expected
that portfolio transactions will generally be with issuers or dealers in money
market instruments acting as principal. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
Accordingly, the Fund is not expected to pay significant brokerage commissions.
Some of the Fund's portfolio transactions are placed with dealers who
provide the Manager with supplementary investment and statistical information or
furnish market quotations to the Fund or other advisory accounts or investment
companies advised by the Manager. The business would not be so placed if the
Fund would not thereby obtain the best price and execution. Although it is not
possible to assign an exact dollar value to these services, they may, to the
extent used, tend to reduce the expenses of the Manager. The services may also
be used by the Manager in connection with its other advisory accounts and in
some cases may not be used with respect to the Fund.
Certain officers of the Manager have responsibility for portfolio
management of certain other investment companies and investment accounts which
may invest in securities in which the Fund also invests. When one or more of
these other investment companies or accounts and the Fund desire to purchase or
sell the same security at or about the same time, purchase and sale orders will
ordinarily be placed and confirmed separately but may be combined to the extent
practicable on a pro rata basis in proportion to the amounts desired to be
purchased or sold for each. It is believed that the ability of the Fund to
participate in larger volume transactions will in some cases produce better
executions for the Fund. However, in some cases, these procedures could have a
detrimental effect on the price and amount of a security available to the Fund
or the price at which a security may be sold.
30
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES
The Trustees 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 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).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------
<S> <C>
E. Philip Cannon Trustee of the Trust and PIMCO Funds:
2401 Claremont Lane Multi-Manager Series ("PFMMS");
Houston, TX 77019 Headmaster, St. John's School, Houston,
Age 56 Texas. Formerly, Trustee, PIMCO Advisors
Funds ("PAF"), General Partner, J.B.
Poindexter & Co., Houston, Texas (private
partnership), and Partner, Iberia
Petroleum Company (oil and gas
production). 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 of the Trust and PFMMS. Formerly,
434 Stable Lane Trustee, PAF, Chairman, Executive Vice
Lake Forest, IL 60045 President and Director, Cunningham &
Age 69 Walsh, Inc., Chicago (advertising agency).
- -------------------------------------------------------------------------------------------------
Gary A. Childress Trustee of the Trust and PFMMS; Chairman
11 Longview Terrace and Director, Bellefonte Lime Company,
Madison, CT 06443 Inc.; Chief Executive Officer, Woodings &
Age 62 Verona Toolworks Inc. Mr. Childress is a
partner in GenLime, L.P., a private
limited partnership, which has filed a
petition in bankruptcy within the last
five years. Formerly, Trustee, PAF.
- -------------------------------------------------------------------------------------------------
(*) William D. Trustee of the Trust and PFMMS; Chairman
Cvengros of the Board of PFMMS; Chief Executive
800 Newport Center Officer, President, and member of the
Drive Operating Board, Operating Committee, and
Newport Beach, CA Equity Board, PIMCO Advisors L.P.;
92660 Director, PIMCO Funds Distribution Company
Age 48 ("PFDCO"). Formerly, Trustee, PAF,
President, PFMMS, and Director, Vice
Chairman, and Chief Investment Officer,
Pacific Mutual Life Insurance Company
("Pacific Mutual").
- -----------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------
<S> <C>
Gary L. Light Trustee of the Trust and PFMMS; Partner,
12220 N. Meridian E.V.A. Investors Inc. (private
Street, #145 investments); Consultant to and, prior to
Carmel, IN 46032 March, 1987, Executive Vice President,
Age 59 Mayflower Corporation (trucking and
transportation); Vice Chairman and Chief
Executive Officer, Sofamor Danek (medical
devices). Formerly, Trustee, PAF.
- -------------------------------------------------------------------------------------------------
Richard L. Nelson President, Nelson Financial Consultants;
8 Cherry Hills Lane Director, Wynn's International, Inc.;
Newport Beach, CA Trustee, Pacific Select Fund. Formerly,
92660 Partner, Ernst & Young.
Age 66
- -------------------------------------------------------------------------------------------------
Lyman W. Porter Professor of Management at the University
2639 Bamboo Street of California, Irvine, Trustee, Pacific
Newport Beach, CA Select Fund.
92660
Age 66
- -------------------------------------------------------------------------------------------------
(*) Robert A. Trustee of the Trust and PFMMS; Vice
Prindiville President, PIMCO Advisors L.P. Formerly,
2187 Atlantic Street Trustee, PAF, President and Director,
Stamford, CT 06903 Thomson Advisory Group, Inc., Director and
Age 61 Chairman, PFDCO, Executive Vice President,
PIMCO Advisors L.P.
- -------------------------------------------------------------------------------------------------
Alan Richards President, Alan Richards Consulting, Inc.;
P.O. Box 675760 Trustee, Pacific Select Fund; Director,
18132 Camino de Western National Corporation. Formerly,
Estrellas President, Chief Executive Officer and
Rancho Santa Fe, CA Director, E.F. Hutton Insurance Group,
92067 Inc., Chairman of the Board, Chief
Age 66 Executive Officer and President, E.F.
Hutton Life Insurance Company, Director,
E.F. Hutton & Company, Inc.
- -------------------------------------------------------------------------------------------------
Joel Segall Trustee of the Trust and PFMMS. Formerly,
11 Linden Shores Trustee, PAF, President and University
Branford, CT 06405 Professor, Bernard M. Baruch College, The
Age 73 City University of New York, Deputy Under
Secretary for International Affairs,
United States Department of Labor,
Professor of Finance, University of
Chicago, Board of Managers, Coffee, Sugar
and Cocoa Exchange.
- -------------------------------------------------------------------------------------------------
W. Bryant Stooks Trustee of the Trust and PFMMS; President,
1530 E. Montebello Bryant Investments, Ltd. Formerly,
Phoenix, AZ 85014 Trustee, PAF, President, Senior Vice
Age 56 President, Director and Chief Executive
Officer, Archirodon Group Inc., Partner,
Arthur Andersen & Co.
- -------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------
<S> <C>
Gerald M. Thorne Trustee of the Trust and PFMMS. Formerly,
5 Leatherwood Lane Trustee, PAF, President and Director,
Savannah, GA 31414 Firstar National Bank of Milwaukee,
Age 58 Chairman, President and Director, Firstar
National Bank of Sheboygan, Director,
Bando-McGlocklin.
- -----------------------------------------------------------------------------------------------
</TABLE>
* Trustee is an "interested person" of the Trust (as defined in Section
2(a)(19) of the Investment Company Act).
OFFICERS
The chart below sets forth the name, address, age, position(s) with the
Trust, and principal occupation(s) during the past five years of each officer of
the Trust. Except as shown, each officer's principal occupation and business
experience for the last five years have been with the employer(s) indicated,
although in some cases the officer may have held different positions with such
employer(s). Unless otherwise indicated, the business address of all persons
listed below is 840 Newport Center Drive, Suite 360, Newport Beach, California
92660:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITION(S) WITH THE PRINCIPAL OCCUPATION(S) DURING THE
AGE TRUST PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen J. Treadway President President, PFMMS;
2187 Atlantic Street Executive Vice President,
Stamford, CT 06902 PIMCO Advisors L.P.;
Age 49 Director, Chairman and
President, PFDCO.
Formerly, Executive Vice
President, Smith Barney
Inc.
- ------------------------------------------------------------------------------------------------------------
R. Wesley Burns Vice President Executive Vice President,
Age 37 PFMMS; President, PIMCO
Funds: Pacific Investment
Management Series
("PIMS"); Executive Vice
President, Pacific
Investment Management
Company ("Pacific
Investment Management").
Formerly, Vice President,
PAF.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Newton B. Schott, Vice President Vice President and
Jr. and Clerk Secretary, PFMMS; Senior
2187 Atlantic Street Vice President-Legal and
Stamford, CT 06902 Secretary, PIMCO Advisors
Age 54 L.P.; Director, Executive
Vice President, Chief
Administrative Officer
and Secretary, PFDCO.
Formerly, Vice President
and Clerk, PAF, Executive
Vice President, Secretary
and General Counsel,
Thomson Advisory Group
Inc. and PIMCO Advisors
L.P., Executive Vice
President, Secretary,
General Counsel and
Director, Thomson
McKinnon Inc.
- ------------------------------------------------------------------------------------------------------------
Teresa A. Wagner Vice President Vice President of PFMMS;
Age 34 Vice President, PIMS;
Vice President and
Manager of Fund
Administration, Pacific
Investment Management.
Formerly, Vice President
and Assistant Clerk, PAF,
Vice President, PIMCO
Advisors Institutional
Services, Finance
Director, Pacific
Financial Asset
Management Company.
- ------------------------------------------------------------------------------------------------------------
John P. Hardaway Treasurer Treasurer of PFMMS and
Age 39 PIMS; Vice President and
Manager of Fund
Operations, Pacific
Investment Management.
Formerly, Treasurer, PAF.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
PFDCO also serves as principal underwriter for PFMMS and PIMS.
TRUSTEES' COMPENSATION
The Trust's Agreement and Declaration of Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of the Trust
or that such indemnification would relieve any officer or Trustee of any
liability to
34
<PAGE>
the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties. The Trust,
at its expense, will provide liability insurance for the benefit of its Trustees
and officers.
The Trust does not pay any remuneration to Trustees who are interested
persons of the Trust or the Manager. Each of the Trust's Trustees, other than
Messrs. Nelson, Porter and Richards, previously served on the Board of PAF, a
mutual fund family advised by PIMCO Advisors L.P., an affiliate of the Manager,
and its affiliates. PAF ceased operations in connection with the reorganization
of its series with series of PFMMS or PIMS in transactions which took place on
January 17, 1997.
Fees paid to the disinterested Trustees for their services on behalf of the
Trust during the fiscal year ended September 30, 1996 aggregated $124,833. The
following table sets forth information concerning fees paid during the fiscal
year ended September 30, 1996 to persons who served as disinterested Trustees of
the Trust during such fiscal year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
(1) (2) (3)
TOTAL
NAME OF TRUSTEE AGGREGATE COMPENSATION
COMPENSATION FROM TRUST
FROM TRUST AND FUND
COMPLEX(1)
----------------------------------------------------------------
<S> <C> <C>
E. Philip Cannon $16,667 $50,000
----------------------------------------------------------------
Donald P. Carter $17,833 $53,500
----------------------------------------------------------------
Gary A. Childress $17,667 $53,000
----------------------------------------------------------------
Gary L. Light $18,333 $55,000
----------------------------------------------------------------
Richard L. Nelson N/A $14,333
----------------------------------------------------------------
Lyman W. Porter N/A $12,167
----------------------------------------------------------------
Alan Richards N/A $14,333
----------------------------------------------------------------
Joel Segall $19,833 $59,500
----------------------------------------------------------------
W. Bryant Stooks $17,833 $53,500
----------------------------------------------------------------
Gerald M. Thorne $16,667 $50,000
----------------------------------------------------------------
</TABLE>
(1) The amounts listed in column (3) for Messrs. Cannon, Carter,
Childress, Light, Segall, Stooks and Thorne include total compensation paid
for their services as Trustees of PAF for PAF's fiscal year ended September
30, 1996. The amounts listed in
35
<PAGE>
column (3) do not include pension/retirement benefits earned by these
Trustees for their services on behalf of PAF through its fiscal year ended
September 30, 1995 pursuant to a Trustees' Pension Plan for PAF (the "Pension
Plan"). The Trustees of PAF voted to terminate the Pension Plan as of September
28, 1995 and received lump-sum payments in January of 1996 in respect of
services rendered during periods prior to the fiscal year ended September 30,
1996. Of the amounts listed in column (3), E. Philip Cannon, Donald P. Carter,
Joel Segall and Gerald M. Thorne elected to have the payment of $50,000,
$38,500, $43,000, and $50,000, respectively, deferred under a deferred
compensation plan for PAF and CAT. The compensation listed in column (3) for
Messrs. Light and Segall does not include amounts which accrued pursuant to 1987
Deferred Fee Agreements with the Trust and PAF which terminated effective
December 14, 1995. These benefits were distributed to Messrs. Light and Segall
during 1996 in respect of services rendered during periods prior to the fiscal
year ended September 30, 1996. The amounts listed on column (3) for Messrs.
Nelson, Porter and Richards are amounts paid for services as Trustees of PFMMS.
36
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Columbus Circle Investors ("CCI") serves as Manager of the Fund. CCI is a
general partnership with PIMCO Advisors L.P. ("PALP") and Columbus Circle
Investors Management Inc., a wholly-owned subsidiary of PALP, as its only
partners. PALP is a Delaware limited partnership. The sole general partner of
PALP, PIMCO Partners, G.P., has two partners: (i) an indirect wholly-owned
subsidiary of Pacific Mutual Life Insurance Company; and (ii) PIMCO Partners,
L.L.C. ("LLC"), a limited liability company, all of the interests of which are
held directly by the Managing Directors of Pacific Investment Management Company
who are: William H. Gross, Dean S. Meiling, James F. Muzzy, William F. Podlich
III, Frank B. Rabinovitch, Brent R. Harris, John L. Hague, William S. Thompson,
Jr., William C. Powers, David H. Edington and Benjamin L. Trosky (collectively,
the "Managing Directors"). PIMCO Partners, G.P. has substantially delegated its
management and control of PALP to an Equity Board and an Operating Board of
PALP. The activities of PALP are controlled by its Operating Board except that
certain non-routine or extraordinary actions may not be effected by the
Operating Board without the approval of PALP's Equity Board. The Operating
Board has in turn delegated the authority to manage day-to-day operations and
policies to an Operating Committee. Because of the ability to designate a
majority of the members of the Operating Board, Pacific Investment Management
Company and the Managing Directors could be said to control PALP, and through
PALP, CCI, although Pacific Investment Management Company and the Managing
Directors disclaim such authority.
Pursuant to the Investment Advisory Agreement, the Manager is responsible
for making investment decisions and placing orders for the purchase and sale of
the Trust's investments directly with the issuers or with brokers or dealers
selected by it in its discretion. See "Portfolio Transactions." The Manager
also furnishes to the Board of Trustees, which has overall responsibility for
the business and affairs of the Trust, periodic reports on the investment
performance of each Fund.
Under the terms of the Investment Advisory Agreement, the Manager is
obligated to manage the Funds in accordance with applicable laws and
regulations. The investment advisory services of CCI to the Trust are not
exclusive under the terms of the Investment Advisory Contract. CCI is free to,
and does, render investment advisory services to others. The current Investment
Advisory Agreement was approved most recently by the Board of Trustees,
including a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons of such parties ("Independent
Trustees"), at a meeting held on February 9, 1997.
The Manager's compensation with respect to the Fund under the Investment
Advisory Agreement described in the Prospectus under the heading "Manager of the
Fund" is subject
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to reduction to the extent that in any year the expenses of the
Fund exceed the limits on investment company expenses imposed by any statute or
regulatory authority of any jurisdiction in which shares of the Fund are
qualified for offer and sale.
The Fund pays the Manager a monthly fee at the annual percentage rate of
0.20% based on the level of the Fund's average daily net asset value.
The Investment Advisory Agreement provides that it will continue in force
for two years from its date of execution, and from year to year thereafter, but
only so long as its continuance is approved at least annually by (i) the vote,
cast in person at a meeting called for that purpose, of a majority of the
Independent Trustees, and by (ii) the majority vote of either the full Board of
Trustees or the vote of a majority of the outstanding shares of the Fund. The
Investment Advisory Agreement automatically terminates on assignment, and is
terminable by either the Fund or the Manager on not more than 60 days' written
notice to the other party. If, at any time that the Investment Advisory
Agreement is submitted for approval by the shareholders of the Fund, the
shareholders of the Fund should fail to approve the Investment Advisory
Agreement, the Manager would continue to serve as manager and adviser with
respect to the Fund pending consideration by the Trustees of such further action
as they may deem to be in the best interests of the shareholders of the Fund.
The Investment Advisory Agreement provides that the Manager shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.
FUND ADMINISTRATOR
PALP serves as administrator (and is referred to in this capacity as the
"Administrator") to the Fund pursuant to an administration agreement (the
"Administration Agreement") with the Trust. The Administrator provides or
procures administrative services to the Fund, which include clerical help and
accounting, bookkeeping, internal audit services and certain other services
required by the Fund, and preparation of reports to the Fund's shareholders and
regulatory filings. PALP has retained Pacific Investment Management, as sub-
administrator, to provide such services pursuant to a sub-administration
agreement (the "Sub-Administration Agreement"). PALP may also retain other
affiliates to provide such services. 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 Fund, 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. The Administrator will be
compensated at an annual rate of 0.20% of the Fund's average daily net assets.
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Except for the expenses paid by the Administrator, the Trust bears all
costs of its operations. The Trust is responsible for the following expenses:
(i) salaries and other compensation of any of the Trust's executive officers and
employees who are not officers, directors, stockholders, or employees of the
Manager, the Administrator or their subsidiaries or affiliates; (ii) taxes and
governmental fees; (iii) brokerage fees and commissions and other portfolio
transaction expenses; (iv) costs of borrowing money, including interest
expenses; (v) fees and expenses of the Trustees who are not "interested persons"
of the Manager or the Trust, and any counsel retained exclusively for their
benefit; (vi) extraordinary expenses, including costs of litigation and
indemnification expenses; and (vii) expenses which are capitalized in accordance
with generally accepted accounting principles; and (viii) any expenses allocated
or allocable to a specific class of shares ("Class-specific expenses").
The Administration Agreement and Sub-Administration Agreement may be
terminated by the Trustees, PALP or Pacific Investment Management (as the case
may be) at any time on 60 days' written notice. Following their initial term of
two years, the Administration and Sub-Administration Agreements would continue
from year to year if approved by the Trustees.
The Administration Agreement is subject to annual approval by the Board of
Trustees, including a majority of the disinterested Trustees defined above. The
current Administration Agreement was last approved by the Board of Trustees,
including all of the disinterested Trustees who are not "interested persons" of
the Trust or Administrator, at a meeting held on February 9, 1997. In approving
the Administration Agreement, the Trustees determined that: (1) the
Administration Agreement is in the best interests of the Fund and its
shareholders; (2) the services to be performed under the Administration
Agreement are services required for the operation of the Fund; (3) the
Administrator is able to provide, or to procure, services for the Fund which are
at least equal in nature and quality to services that could be provided by
others; and (4) the fees to be charged pursuant to the Administration Agreement
are fair and reasonable in light of the usual and customary charges made by
others for services of the same nature and quality.
DISTRIBUTION AGREEMENT.
PIMCO Funds Distribution Company (the "Distributor") serves as the
distributor of the Fund's shares pursuant to a distribution contract
("Distribution Contract") with the Trust. The Distributor is a wholly owned
subsidiary of PALP. The Distribution Contract is terminable without penalty, at
any time, by the Fund by not more than 60 days' nor less than 30 days' written
notice to the Distributor, or by the Distributor upon not more than 60 days' nor
less than 30 days' written notice to the Trust. The Distributor is not
obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect for successive one-year
periods, provided that each such continuance is specifically approved (i) by the
vote of a majority of
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the Trustees who are not interested persons of the Trust (as defined in the
1940 Act) and who have no direct or indirect financial interest in the
Distribution Contract and (ii) by the vote of a majority of the entire Board
of Trustees cast in person at a meeting called for that purpose.
Although the Trust has no present intention to do so, it reserves the right
at any time to suspend the offering of the shares of the Fund.
CUSTODIAL ARRANGEMENTS.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105 ("IFTC") is the Fund's custodian. As such, IFTC holds in
safekeeping certificated securities and cash belonging to the Fund and, in such
capacity, is the registered owner of securities in book-entry form belonging to
the Fund. Upon instruction, IFTC receives and delivers cash and securities of
the Fund in connection with the transactions of the Fund and collects all
dividends and other distributions made with respect to the portfolio securities
of the Fund. IFTC also maintains certain accounts and records of the Fund.
ACCOUNTING SERVICES.
Pursuant to an agreement among PALP, IFTC and the Fund, IFTC calculates
the total net asset value, total net income and net asset value per share of
the Fund on a daily basis (and as otherwise may be required by the Investment
Company Act, that is, when there is a sufficient degree of trading in the
Fund's portfolio securities to affect its net asset value) and performs
certain accounting services for the Fund.
INDEPENDENT AUDITORS.
Price Waterhouse LLP, 1055 Broadway, Kansas City, Missouri 64105, has been
selected to serve as the independent public accountants for the Fund. Price
Waterhouse LLP provides audit services, accounting assistance, and consultation
in connection with Securities and Exchange Commission filings.
ORGANIZATION AND CAPITALIZATION OF THE TRUST
The organization of the Trust and the voting rights of shareholders are
summarized in the text of the Prospectus following the caption "Description of
the Trust."
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest, which may be divided into
an unlimited number of series of such shares, and which presently consist of the
series of shares constituting the Fund as well as a second series constituting
the National Money Market Fund. The Fund was organized as a series of the Trust
on December 17, 1996. Each share of a series represents
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an equal proportionate interest in that series with each other share of that
series and is entitled to a proportionate interest in the dividends and
distributions from that series. Upon termination of a series, whether
pursuant to liquidation of the series or otherwise, shareholders of that
series are entitled to share pro rata in the net assets of the series then
available for distribution to such shareholders. Shareholders have no
preemptive rights.
A copy of the Agreement and Declaration of Trust (the "Declaration of
Trust") establishing the Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts. The Declaration of Trust provides for the
perpetual existence of the Trust. The Trust or a series, however, may be
terminated at any time by vote of at least two-thirds of the outstanding shares
of an affected series or by the Trustees upon written notice to the
shareholders. Upon termination of the Trust or of a series, after paying or
otherwise providing for all charges, taxes, expenses and liabilities, whether
due or accrued or anticipated, of the Trust or of the series as may be
determined by the Trustees, the series shall, in accordance with such procedures
as the Trustees consider appropriate, reduce the remaining assets to
distributable form in cash or shares or other securities, or any combination
thereof, and distribute the proceeds to the shareholders of the series involved,
ratably according to the number of shares of such series held by the several
shareholders of the series on the date of termination.
The assets received by the Trust for the issue or sale of shares of a
series and all income, earnings, profits, losses and proceeds therefrom, subject
only to the rights of creditors, are allocated to that series, and constitute
the underlying assets of that series. The underlying assets of a series are
segregated and are charged with the expenses, including the organizational
expenses, in respect of that series and with a share of the general expenses of
the Trust as described above under "Investment Advisory and Other
Services." While the expenses of the Trust are allocated to the separate books
of account of the series, if more than one series has shares outstanding,
certain expenses may be legally chargeable against the assets of all series.
Under Massachusetts law, shareholders could, under certain circumstances,
be held liable for the obligations of the Trust. However, the Declaration of
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 provides for indemnification out of the
property of a series for all loss and expense of any shareholder of that series
held liable on account of being or having been a shareholder. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the series of which he was a shareholder would
be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by
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reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. The
Declaration of Trust provides for indemnification by the Trust of the
Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief
that his action was in or not opposed to the best interests of the Trust.
Such person may not be indemnified against any liability to the Trust or the
Trust shareholders to which he 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 office.
As described in the Prospectus, the Trust will not normally hold annual
shareholders' meetings. At such time as less than a majority of the Trustees
have been elected by the shareholders, the Trustees then in office will call a
shareholders' meeting for the election of Trustees. In addition, Trustees may
be removed from office by a written consent signed by the holders of two-thirds
of the outstanding shares and filed with the Trust's custodian or by a vote of
the holders of two-thirds of the outstanding shares at a meeting duly called for
the purpose, which meeting shall be held upon written request of the holders of
not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders, who have been such for at least six months and who hold
shares constituting 1% of the outstanding shares, stating that such shareholders
wish to communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Trust has undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders).
Except as otherwise disclosed in the Prospectus and in this Statement of
Additional Information, the Trustees shall continue to hold office and may
appoint their successors.
NET INCOME, YIELDS AND VALUATION
DETERMINATION OF NET INCOME
The net income of the Fund is determined as of the close of regular trading
(ordinarily 4:00 p.m. (Eastern Time)) on the New York Stock Exchange (the
"Exchange") on each day that the Exchange is open for trading. Net income
includes (i) all interest accrued and discount earned on the portfolio
investments of the Fund, minus (ii) amortized premium on such investments, plus
or minus (iii) all realized gains and losses on such investments, and minus (iv)
all expenses of the Fund.
YIELD
As summarized in the Prospectus under the heading "Yield," the "Yield" of
the Fund for a seven-day period (the "base period") will be computed by
determining the "net change in value" (calculated as set forth below) of a
hypothetical account having a balance of one
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share at the beginning of the period, dividing the net change in account
value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by
365/7 with the resulting yield figure carried to the nearest hundredth of one
percent. Net changes in value of a hypothetical account will include the
value of additional shares purchased with dividends from the original share
and dividends declared on both the original share and any such additional
shares, but will not include realized gains or losses or unrealized
appreciation or depreciation on portfolio investments. Yield may also be
calculated on a compound basis ("Effective Yield") which assumes that net
income is reinvested in Fund shares at the same rate as net income is earned
for the base period.
The Fund's Yield and Effective Yield will vary in response to fluctuations
in interest rates and in the expenses of the Fund. For comparative purposes the
current and effective yields should be compared to current and effective yields
offered by competing financial institutions for that base period only and
calculated by the methods described above.
VALUING THE FUND'S PORTFOLIO INVESTMENTS
The total net asset value of the Fund (the excess of its assets over
its liabilities) is determined by IFTC as of the close of regular trading on
the Exchange on each day the Exchange is open for trading. The Trust expects
that the days, other than weekend days, that the Exchange will not be open
will be New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's securities which mature in 60 days or less are valued using
the amortized cost method of valuation. This involves valuing a security at
cost on the date of acquisition and thereafter assuming a constant accretion of
a discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During such periods the yield to
investors in the Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities.
TAXES
The tax status of the Fund and the distributions which it may make are
summarized in the text of the Prospectus immediately following the caption
"Taxes."
The Fund intends to qualify each year as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code").
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If the Fund qualifies for taxation as a regulated investment company, the
Fund will not be subject to federal income tax on income paid to its
shareholders in the form of dividends or capital gain distributions. Except
where specifically noted, the remainder of this section assumes that the Fund
will so qualify.
If the Fund distributes amounts in excess of its current earnings and
profits, such distributions to shareholders would be treated as a return of
capital to the extent of a shareholder's basis in his or her shares, and
thereafter as capital gain. A return of capital is not taxable to a shareholder
and has the effect of reducing the shareholder's basis in the relevant shares.
Current federal tax law requires the holder of a 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. Accordingly, if the
Fund holds such securities, it may be required to pay out as an income
distribution each year an amount which is greater than the total amount of cash
interest actually received. Such distributions may be made from the cash assets
of the Fund or by liquidation of portfolio securities, if necessary. The Fund
may realize gains or losses from such liquidations. In the event the Fund
realized 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.
The Trust under which the Fund is created is organized as a Massachusetts
business trust. Under current law, so long as the Fund qualifies for federal
income tax treatment as described above, it is believed that neither the Trust
nor the Fund should be liable for any income or franchise tax in The
Commonwealth of Massachusetts.
The Fund is generally required to withhold and remit to the U.S. Treasury
31% of redemption proceeds and dividends from net investment income and capital
gains distributions credited to any shareholder account for which an incorrect
or no taxpayer identification number has been provided or where the Fund is
notified that the shareholder has under-reported income in the past (or the
shareholder fails to certify that he is not subject to such withholding).
Shareholders are advised to consult their own tax advisers for more
detailed information concerning the federal taxation of the Fund and the income
tax consequences of an investment in the Fund to its shareholders.
REDEMPTIONS
The procedures for redemptions and withdrawals are summarized in the
Prospectus following the caption "How to Redeem."
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The Fund may suspend the right of redemption for the Fund and may
postpone payment when the Exchange is closed for other than weekends or
holidays, or if permitted by the rules of the Securities and Exchange Commission
during periods when trading on the Exchange is restricted or during an emergency
which makes it impracticable for the Fund to dispose of its securities or fairly
to determine the value of the net assets of the Fund, or during any other period
permitted by the Securities and Exchange Commission for the protection of
investors.
The Fund will normally redeem a shareholder's shares for cash. However,
if in any 90-day period a shareholder seeks to redeem shares totaling the lesser
of $250,000 or 1% of the Fund's total assets, the Fund may, in unusual
circumstances, redeem any additional shares by payment in kind of securities
held in the portfolio of the Fund.
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DESCRIPTION OF INVESTMENTS
1. U.S. GOVERNMENT SECURITIES.
OBLIGATIONS BACKED BY FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT --
are bills, certificates of indebtedness, notes and bonds issued by (i) the U.S.
Treasury or (ii) agencies, authorities and instrumentalities of the U.S.
Government or other entities and backed by the full faith and credit of the U.S.
Government. Such obligations include, but are not limited to, obligations
issued by the Government National Mortgage Association, Farmers' Home
Administration and the Small Business Administration.
OTHER U.S. GOVERNMENT SECURITIES -- are bills, certificates of
indebtedness, notes, and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government which are supported by the right of the
issuer to borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but are not
limited to, obligations issued by the Tennessee Valley Authority, the Bank for
Cooperatives, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks, and the Federal National Mortgage Association.
U.S. Government Securities do not include securities issued or guaranteed
by state governments or instrumentalities.
2. MONEY MARKET INSTRUMENTS.
CERTIFICATES OF DEPOSIT - certificates issued against funds deposited in
a bank, are for a definite period of time, earn a specified rate of return, and
are normally negotiable.
BANKERS' ACCEPTANCES - short-term credit instruments used to finance the
import, export, transfer or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
EURODOLLAR OBLIGATIONS - obligations of foreign branches of U.S. banks.
YANKEEDOLLAR OBLIGATIONS - obligations of domestic branches or
subsidiaries of foreign banks.
COMMERCIAL PAPER - promissory notes issued by corporations (including
banks and bank holding companies), in order to finance their short-term credit
needs.
MASTER DEMAND NOTES - notes issued by corporations that are payable on
demand by either the holder or the issuer.
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CORPORATE OBLIGATIONS - bonds and notes issued by corporations in order
to finance longer term credit needs.
REPURCHASE AGREEMENTS - are agreements by which the Fund acquires a
security (usually a U.S. Government Security) and a simultaneous commitment from
the seller (a member bank of the Federal Reserve System or, to the extent
permitted by the Investment Company Act, a recognized securities dealer) to
repurchase the security at an agreed upon price and date. The resale price is
in excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. Such transactions
afford an opportunity for the Fund to earn a return on temporarily available
cash at no market risk, although the Fund may be subject to various delays and
risks of loss if the seller is unable to meet its obligation to repurchase.
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APPENDIX A
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized with regard to portfolio investments for the Fund
include Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc.
("Fitch"), IBCA Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and
Thomson BankWatch, Inc. ("Thomson"). Set forth below is a description of the
relevant ratings of each such NRSRO. The NRSROs that may be utilized by MERUS
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds)
Description of the two highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2 and 3) in each rating category to indicate the
security's ranking within the category):
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 edged." 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 which make the
long-term risk appear somewhat larger than in Aaa securities.
Description of the two highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
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 higher rated issues only in small
degree.
A-1
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Description of the two highest long-term debt ratings by Duff:
AAA Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality Protection factors are strong.
AA Risk is modest but may vary slightly from time to time
AA- because of economic conditions.
Description of the two highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
IBCA's description of its two highest long-term debt ratings:
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
Thomson's description of its two highest long-term debt ratings:
A Company possesses an exceptionally strong balance sheet and earnings
record, translating into an excellent reputation and unquestioned
access to its natural money markets. If weakness or vulnerability
exists in any aspect of the company's business, it is entirely
mitigated by the strengths of the organization.
A-2
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A/B Company is financially very solid with a favorable track record and no
readily apparent weakness. Its overall risk profile, while low, is
not quite as favorable as for companies in the highest rating
category.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its two highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory
obligations. Prime-1 repayment capacity will normally be
evidenced by many of the following characteristics:
-Leading market positions in well-established industries.
-High rates of return on funds employed.
-Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
-Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
-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
capacity 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.
S&P's description of its two highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).
A-3
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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."
Duff's description of its two highest short-term debt ratings (Duff incorporates
gradations of "1+" (one plus) and "1-" (one minus) to assist investors in
recognizing quality differences within the highest rating category):
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Fitch's description of its two highest short-term debt ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin
of safety is not as great as for issues assigned F-1+ or F-1
ratings.
IBCA's description of its two highest short-term debt ratings:
A+ Obligations supported by the highest capacity for timely repayment.
A1 Obligations supported by a very strong capacity for timely
repayment.
A-4
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SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Thomson's description of its two highest short-term ratings:
TBW-1 The highest category; indicates the degree of safety regarding
timely repayment of principal and interest is very strong.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
A-5
<PAGE>
CASH ACCUMULATION TRUST
REGISTRATION STATEMENT ON FORM N-1A
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) None.
(b) Exhibits:
1.(a) Agreement and Declaration of Trust of Cash Accumulation
Trust (the "Trust" or "Registrant") dated April 27,
1984 and Amendment No. 1 dated June 19, 1984
incorporated by reference to Exhibit 1 to the Trust's
Registration Statement on Form N-1A (No. 2-91889),
filed on June 26, 1984 (the "Registration Statement").
(b) Amendment No. 2 to Agreement and Declaration of Trust
of the Trust dated August 9, 1984 incorporated by
reference to Exhibit 1 to Pre-Effective Amendment No. 1
to the Registration Statement, filed on September 12,
1984.
(c) Amendment No. 3 to Agreement and Declaration of Trust
of the Trust dated September 11, 1984 incorporated by
reference to Exhibit 2 to Post-Effective Amendment No.
1 to the Registration Statement, filed on February 1,
1985.
2.(a) By-Laws of the Trust incorporated by reference to
Exhibit 2 to Pre-Effective Amendment No. 1 to the
Registration Statement, filed on September 12, 1984.
(b) Amendment to By-Laws of the Trust dated July 25, 1990
incorporated by reference to Exhibit 2(b) to
Post-Effective Amendment No. 12 to the Registration
Statement, filed on November 16, 1992.
<PAGE>
(c) Amendment to By-Laws of the Trust dated May 24, 1991
incorporated by reference to Exhibit 2(c) to
Post-Effective Amendment No. 12 to the Registration
Statement, filed on November 16, 1992.
3. None
4.(a) Specimen Share Certificate of the National Money Market
Fund incorporated by reference to Exhibit 4 to
Pre-Effective Amendment No. 1 to the Registration
Statement, filed on September 12, 1984.
(b) Article III (shares) of the Agreement and Declaration
of Trust of the Trust, as amended, and Article 11
(shareholders' voting powers and meetings) of the
Trust's By-Laws, as amended, defining the rights of the
Trust's securities, are incorporated herein by
reference. See Exhibits 1 and 2 above.
5.(a) Management Contract between the Trust (on behalf of the
National Money Market Fund) and PIMCO Advisors L.P.
incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 18 to the Registration
Statement filed on January 20, 1995.
(b) Sub-Adviser Agreement for the Trust (on behalf of the
National Money Market Fund) between PIMCO Advisors L.P.
and Columbus Circle Investors incorporated by reference
to Exhibit 5(b) to Post-Effective Amendment No. 18 to
the Registration Statement, filed on January 20, 1995.
(c) Form of Investment Advisory Contract between the
Trust's Active Short-Term Fund and Columbus Circle
Investors is filed herewith.
6.(a) Selected Dealer Agreement between Thomson Investor
Services Inc. and Prudential Securities Inc. dated July
31, 1991 incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 12 to the Registration
Statement, filed on November 16, 1992.
-2-
<PAGE>
(b) Distributor's Contract dated November 16, 1994 between
the Trust (on behalf of the National Money Market Fund)
and PIMCO Advisors Distribution Company incorporated by
reference to Exhibit 6(c) to Post-Effective Amendment
No. 18 to the Registration Statement, filed on January
20, 1995.
(c) Form of Distributor's Contract between the Trust (on
behalf of the Active Short-Term Fund) and PIMCO Funds
Distribution Company is filed herewith.
7. None.
8.(a) Custody Agreement dated December 10, 1993 between the
Trust (on behalf of the National Money Market Fund) and
The Bank of New York incorporated by reference to
Exhibit 8 to Post-Effective Amendment No. 18 to the
Registration Statement filed on January 20, 1995.
(b) Custody and Transfer Agency Agreement between the Trust
(on behalf of the Active Short-Term Fund) and Investors
Fiduciary Trust Company, to be filed by Amendment.
9.(a) Shareholder Service Agreement dated October 31, 1984
between the Trust (on behalf of the National Money
Market Fund) and Shareholder Services, Inc.
incorporated by reference to Exhibit 9(a) to
Post-Effective Amendment No. 12 to the Registration
Statement, filed on November 16, 1992.
(b) Accounting Services Agreement dated October 31, 1984
among the Trust (on behalf of the National Money Market
Fund), Thomson McKinnon Asset Management Inc. and
Oppenheimer Asset Management Corporation incorporated
by reference to Exhibit 9(b) to Post-Effective
Amendment No. 12 to the Registration Statement, filed
on November 16, 1992.
(c) Organizational Expense Reimbursement Agreement dated
October, 1984 between the Trust (on behalf of the
National Money Market Fund) and Thomson McKinnon Asset
Management Inc. incorporated by reference to Exhibit
9(c) to
-3-
<PAGE>
Post-Effective Amendment No. 12 to the Registration
Statement, filed on November 16, 1992.
(d) Blue Sky Service Agreement dated December 11, 1990
between the Trust (on behalf of the National Money
Market Fund) and Thomson Advisory Group incorporated by
reference to Exhibit 9(d) to Post-Effective Amendment
No. 12 to the Registration Statement filed on
November 16, 1992.
(e) Form of Administration Agreement between the Trust (on
behalf of the Active Short-Term Fund) and PIMCO
Advisors L.P. is filed herewith.
(f) Form of Organizational Expense Reimbursement Agreement
between the Trust (on behalf of the Active Short-Term
Fund) and PIMCO Advisors L.P. is filed herewith.
10.(a) Opinion of Ropes & Gray incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1 to the
Registration Statement filed on September 12, 1984.
11. N/A.
12. None.
13. Investment Letter from Thomson McKinnon Asset
Management Inc. to the Trust incorporated by reference
to Exhibit 13 to Pre-Effective Amendment No. 1 to the
Registration Statement filed on September 12, 1984.
14. None.
15. Amended Distribution Plan for the Trust's National
Money Market Fund, as revised through October 26, 1989,
incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 9 to the Registration
Statement, filed on December 4, 1989.
16. Schedule for calculation of performance information
incorporated by reference to Post-Effective Amendment
No. 10 to the Registration Statement, filed on December
3, 1990.
-4-
<PAGE>
17. N/A.
18. None.
19.(a) Powers of Attorney for E. Philip Cannon, Donald P.
Carter, Emmet Cashin, Jr., Gary L. Light, Robert A.
Prindiville and Joel Segall incorporated by reference
to Post-Effective Amendment No. 8 to the Registration
Statement, filed on November 23, 1988.
(b) Power of Attorney for Robert A. Prindiville, E. Philip
Cannon, Donald P. Carter, Gary A. Childress, William D.
Cvengros, Gary L. Light, W. Bryant Stooks, Gerald M.
Thorne, Richard L. Nelson, Lyman W. Porter and Alan
Richards is filed herewith.
(c) Power of Attorney for John P. Hardaway is filed
herewith.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of December 31, 1996, there were 27,865 record holders of shares of
beneficial interest of the Trust's National Money Market Fund.
Item 27. INDEMNIFICATION.
Item 27 of the Trust's Registration Statement, filed with the Commission on
June 26, 1984, is incorporated herein by reference.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT
ADVISER.
(a) PIMCO Advisors L.P., manager of the Trust's National Money Market Fund
(referred to herein as PALP), was organized as a limited partnership under
Delaware law in 1987 and is registered as an investment adviser under the
Investment Advisers Act of 1940. PALP advises one mutual fund complex other
than the Trust, PIMCO Funds: Multi-Manager Series ("PFMMS"). PALP also has
various subsidiary partnerships
-5-
<PAGE>
which advise and manage mutual funds, individual accounts, profit-sharing and
pension funds and institutional accounts and act as sub-advisers to certain
mutual funds.
PIMCO Partners, G.P. ("PIMCO GP"), PALP's general partner, is a general
partnership with two partners: (i) an indirect wholly-owned subsidiary of
Pacific Mutual Life Insurance Company; and (ii) PIMCO Partners, L.L.C. ("LLC"),
a limited liability company, all of the interests of which are held directly by
the Managing Directors of Pacific Investment Management Company who are William
H. Gross, Dean S. Meiling, James F. Muzzy, William F. Podlich, III, Frank B.
Rabinovitch, Brent R. Harris, John L. Hague, William S. Thompson, Jr., William
C. Powers, David H. Edington and Benjamin L. Trosky (collectively, the "Managing
Directors"). PIMCO Partners, G.P. has substantially delegated its management
and control of PALP to an Equity Board and an Operating Board of PALP. The
activities of PALP are controlled by its Operating Board except that certain
non-routine or extraordinary actions may not be effected by the Operating Board
without the approval of PALP's Equity Board. The Operating Board has in turn
delegated the authority to manage day-to-day operations and policies to an
Operating Committee. The Operating Board is composed of twelve members, of
which seven (including the chairman) are designated by Pacific Investment
Management Company, a subsidiary general partnership of PALP. The Equity Board
is composed of twelve members including the chief executive officer of PALP,
three members designated by Pacific Financial Asset Management Company, the
chairman of the Operating Board, two members designated by LLC, two members
designated by holders of Series B Preferred Stock of Thomson Advisory Group
Inc., the former general partner of PALP, and three independent members.
Because of the ability to designate a majority of the Members of the Operating
Board, Pacific Investment Management Company and the Managing Directors could be
said to control PALP, although Pacific Investment Management Company and the
Managing Directors disclaim such authority.
Set forth below are the substantial business engagements during at least
the two past fiscal years of each director or officer of PALP and of each member
of PALP's Operating and Equity Boards:
NAME AND POSITION BUSINESS AND
WITH PALP OTHER CONNECTIONS
William D. Cvengros Trustee of the Trust; Trustee and Chairman, PFMMS;
President, Chief Director, PIMCO Funds Distribution Company
Executive Officer, ("PFDCO"); Director, Furon Corporation. Formerly,
Member of Equity and Trustee, PIMCO Advisors Funds ("PAF"), Vice
Operating Boards and Chairman, Chief Investment Officer and Director,
Operating Committee Pacific Mutual Life Insurance Company, Director
and Chairman, Pacific
-6-
<PAGE>
Financial Asset Management Company, Director,
Mutual Service Corporation, Director, Pacific
Equities Network, Director, PFAMCo UK Limited,
Non-Executive Director, Blairlogie Capital
Management Limited, Trustee and Vice President,
PFAMCo Funds, Chairman and Director, Parametric
Portfolio Associates, Inc., President, Chairman,
Chief Executive Officer, Director and Trustee of
various realty group trusts, and PMRealty
Advisors, Inc., President, Chief Executive Officer
and Director, NFJ Investment Group, Inc., Vice
President and Trustee, Pacific Select Fund,
Director, Cadence Capital Management Corporation
Irwin F. Smith Chairman, Managing Director, Chief Executive
Member of Operating and Officer and Chief Investment Officer, Columbus
Equity Boards and Circle Investors ("CCI") and Chairman, Columbus
Operating Committee Circle Investors Management Inc.; Formerly,
Chairman of Thomson Advisory Group L.P. ("TAGLP")
and of the Columbus Circle Investors Division of
TAGLP, Director and Chairman, Thomson Advisory
Group Inc. ("TAG Inc.")
Robert A. Prindiville Trustee of the Trust; Trustee of PFMMS. Formerly,
Vice President Director and Chairman, PFDCO, Trustee, PAF,
President of TAGLP, President and Director, TAG
Inc., Chairman of TIS
Donald K. Miller Chairman, Greylock Financial Inc.; Director of
Member of Equity Board Huffy Corporation, RPM, Inc. and Christensen
Boyles Corporation; Director, President and Chief
Executive Officer, TAG Inc. Formerly, Vice
Chairman, TAGLP, Director and Vice Chairman of TIS
Newton B. Schott, Jr. Secretary, CCI, Columbus Circle Investors
Senior Vice President Management Inc., Cadence Capital Management Inc.,
- Legal, and NFJ Management Inc. and Parametric Management
Secretary Inc.; Executive Vice President, Director,
Secretary and Chief Administrative Officer, PFDCO;
Vice President and Clerk of the Trust. Vice
President and Secretary of PFMMS. Formerly, Vice
President and Clerk, PAF, Executive Vice
President, Secretary and General Counsel, TAGLP,
Executive Vice
-7-
<PAGE>
President, Secretary and General Counsel, TAG
Inc., Executive Vice President and Secretary, TIS
Robert M. Fitzgerald Chief Financial Officer, Senior Vice President -
Chief Financial Finance and Controller, PFDCO; Senior Vice
Officer and President, Finance and Controller, CCI and
Treasurer Columbus Circle Investors Management Inc.;
Assistant Treasurer, Cadence Capital Management;
Treasurer, Cadence Capital Management Inc., NFJ
Investment Group, NFJ Management Inc., Parametric
Portfolio Associates, Parametric Management Inc.,
Pacific Investment Management Company, PIMCO
Management Inc. and StocksPLUS Management Inc.
Formerly, Chief Financial Officer, TPM Financial,
Vice President, Mechanics National Bank, and
Partner, Price Waterhouse
Donald A. Chiboucas Managing Director and President, CCI; Director and
Member of Operating Board President, Columbus Circle Investors Management
Inc. Formerly, Senior Executive Vice President,
TAGLP, President, Columbus Circle Investors
Division, TAGLP, Senior Executive Vice President,
TAG Inc.
Walter E. Auch, Sr. Management Consultant; Director of Fort Dearborn
Member of Equity Fund, Shearson VIP Fund, Shearson Advisors Fund,
Board 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. Formerly, Director, TAG Inc.
Donald R. Kurtz Formerly, Vice President of International Asset
Member of Equity Management, General Motors Investment Management
Board Corp. and Director, TAG Inc.
Kenneth M. Poovey Partner, Latham & Watkins
General Counsel and
Board Secretary
Sharon A. Cheever Vice President and Investment Counsel, Pacific
Vice President, Legal Mutual Life Insurance Company. Formerly,
and Assistant Assistant Vice President and Associate Counsel,
Secretary Pacific Mutual Life Insurance Company
-8-
<PAGE>
Ernest L. Schmider Vice President, Chief Administrative and Legal
Vice President, Legal Officer, Pacific Investment Management Company;
and Assistant Senior Vice President, Secretary, Chief
Secretary Administrator and Legal Officer, PIMCO Management
Inc.; Director, Assistant Secretary and Assistant
Treasurer, StocksPLUS Management Inc.
James F. McIntosh Executive Director, Allen Matkins, Leck, Gamble &
Member of Equity Mallory. Formerly, Director of Pacific Investment
Board Management Company
David B. Breed Director, Managing Director and Chief Executive
Member of Operating Officer, Cadence Capital Management Inc.; Managing
Board Director and Chief Executive Officer, Cadence
Capital Management
Walter B. Gerken Director, Mullin Consulting Inc.; Director,
Chairperson and Executive Services Corp. of Southern California.
Member of Equity Formerly, Director, Pacific Investment Management
Board Company, Chairman, Director, Chairman of Executive
Committee and Chief Executive Officer, Pacific
Mutual Life Insurance Company
William H. Gross Director and Managing Director, PIMCO Management
Member of Equity Inc.; Managing Director, Pacific Investment
Board and Operating Management Company; Senior Vice President, PIMCO
Board Funds; Director and Vice President, StocksPLUS
Management, Inc.; Member of PIMCO Partners LLC
Brent R. Harris Director and Managing Director, PIMCO Management
Member of Operating Inc.; Managing Director, Pacific Investment
Board Management Company; Director and Vice President,
StocksPLUS Management, Inc.; Chairman of the Board
and Trustee, PIMCO Funds and PIMCO Commercial
Mortgage Securities Trust, Inc.; Member of PIMCO
Partners LLC
Daniel S. Pickett Managing Director, CCI; Director, Columbus Circle
Member of Operating Investors Management, Inc.
Board
Dean S. Meiling Director and Managing Director, PIMCO Management
-9-
<PAGE>
Member of Operating Inc.; Managing Director, Pacific Investment
Board Management Company; Vice President, PIMCO Funds
and PIMCO Commercial Mortgage Securities Trust,
Inc.
James F. Muzzy Director and Managing Director, PIMCO Management
Member of Operating Board Inc.; Managing Director, Pacific Investment
Management Company; Vice President, PIMCO Funds;
Director and Vice President, StocksPLUS
Management, Inc.; Member of PIMCO Partners LLC
William F. Podlich III Director and Managing Director, PIMCO Management
Member of Equity Board Inc.; Managing Director, Pacific Investment
and Operating Board Management Company; Vice President, PIMCO
Commercial Mortgage Securities Trust, Inc.; Member
of PIMCO Partners LLC
William C. Powers Director and Managing Director, PIMCO Management
Member of Operating Board Inc.; Managing Director, Pacific Investment
Management Company; Senior Vice President, PIMCO
Commercial Mortgage Securities Trust, Inc.; Member
of PIMCO Partners LLC
Glenn S. Schafer President and Director, Pacific Mutual Life
Member of Equity Board Insurance Company; Chairman and Director, Mutual
Service Corporation, United Planners Group, Inc.,
Pacific Equities Network and Pacific Financial
Holding Company
Thomas C. Sutton Chairman, Chief Executive Officer and Director,
Member of Equity Board Pacific Mutual Life Insurance Company; Chairman,
Trustee and President, Pacific Select Fund;
Director, United Planners Group, Inc., Pacific
Equities Network, Mutual Services Corporation and
Pacific Financial Holding Company
William S. Thompson, Jr. Director, Managing Director and Chief Executive
Member of Equity Board; Officer, PIMCO Management Inc.; Chief Executive
Chairman and Member of Officer and Managing Director, Pacific Investment
Operating Board; Member Management Company; Director and President,
of Operating Committee StocksPLUS Management, Inc.; Vice President, PIMCO
Funds and PIMCO Commercial Mortgage Securities
Trust, Inc.
Stephen J. Treadway Director, Chairman and President, PFDCO; President
of
-10-
<PAGE>
Executive Vice the Trust; President, PFMMS. Formerly,
President Executive Vice President, Smith Barney Inc.
James Ward None
Vice President
Richard M. Weil Assistant Secretary, CCI, Columbus Circle
Senior Vice Investors Inc., Cadence Capital Management,
President, Legal Cadence Capital Management Inc., NFJ Management
Counsel Inc., Parametric Management Inc., Pacific
Investment Management Company, PIMCO Management
Inc. and PFDCO; Secretary, NFJ Investment Group,
Parametric Portfolio Associates, and StocksPLUS
Management, Inc.
The principal business address of PALP is 800 Newport Center Drive, Suite
100, Newport Beach, CA 92660. The address of PFDCO is 2187 Atlantic Street,
Stamford, CT 06902. The address of CCI and Columbus Circle Investors Management
Inc. is One Station Place, Stamford, CT 06902. The address of Cadence Capital
Management and Cadence Capital Management Inc. is Exchange Place, 53 State
Street, Boston, MA 02109. The address of NFJ Investment Group and NFJ
Management Inc. is 2121 San Jacinto, Suite 1840, Dallas, TX 75201. The address
of Parametric Portfolio Associates and Parametric Management Inc. is 7310
Columbia Center, 701 Fifth Avenue, Seattle, WA 98104. The address of Pacific
Financial Holding Company, Pacific Equities Network, Pacific Mutual Life
Insurance Company and Pacific Select Fund is 700 Newport Center Drive, Newport
Beach, CA 92660. The address of PIMCO Funds, PFMMS, Pacific Investment
Management Company, PIMCO Management Inc., PIMCO Commercial Mortgage Securities
Trust, Inc. and StocksPLUS Management, Inc. is 840 Newport Center Drive, Newport
Beach, CA 92660. The address of Mutual Service Corporation is 7108 Fairway
Drive, Palm Beach Gardens, FL 33418. The address of United Planners Group, Inc.
is 7333 East Double Tree Ranch Road, Scottsdale, AZ 85258.
(b) CCI, sub-adviser to the Trust's National Money Market Fund and
adviser to the Trust's Active Short-Term Fund, is a general partnership formed
on September 9, 1994 which is registered as an investment adviser under the
Investment Advisers Act of 1940. PALP and Columbus Circle Investors Management
Inc.("CCI Inc."), a wholly-owned subsidiary of PALP, are the general partners of
CCI. CCI consists of the personnel of the former Columbus Circle Investors
Division of TAGLP and the investment personnel of the former Mutual Funds
Division of TAGLP. CCI acts as sub-adviser to other mutual funds and also
advises and manages individual accounts, profit sharing and pension funds and
institutional accounts.
-11-
<PAGE>
Set forth below are the substantial business engagements during at
least the two past fiscal years of each director or officer of CCI:
NAME AND POSITION BUSINESS AND
WITH CCI OTHER CONNECTIONS
Irwin F. Smith Member of Equity and Operating Boards and
Chairman and Managing Operating Committee, PIMCO Advisors L.P.; Director
Director and Chairman, CCI Inc.
Donald A. Chiboucas Member of Operating Board, PIMCO Advisors L.P.;
President and Director and President, CCI Inc.
Managing Director
Louis P. Celentano Director and Vice President, CCI Inc.
Managing Director
Robert W. Fehrman Director, CCI Inc.
Managing Director
Marc Felman None
Managing Director
Amy M. Hogan Director, CCI Inc.
Managing Director
Daniel S. Pickett Member of Operating Board, PIMCO Advisors L.P.;
Managing Director Director, CCI Inc.
Anthony Rizza Director, CCI Inc.
Managing Director
Paul C. Tyborowski Director, CCI Inc.
Managing Director
-12-
<PAGE>
Winthrop S. Headley None
Vice President
Clifford G. Fox Director, CCI Inc.
Managing Director
Harold R. Snedcof None
Vice President
Sharon S. Weslow None
Vice President
Michele Montano None
Senior Vice
President
Cecelia Pastore None
Vice President
Paul A. Pantalena None
Vice President
Jacob Navon None
Senior Vice President
Mark Fishman None
Senior Vice President
Paul Meeks None
Vice President
Anne Maloney None
Vice President
Nathaniel J. Belknap None
Vice President
Newton B. Schott, Jr. See Item 28(a)
Secretary above
Robert M. Fitzgerald See Item 28(a) above
Senior Vice President,
Finance and Controller
Richard M. Weil Assistant Secretary, CCI Inc., Cadence Capital
Assistant Secretary Management Inc., NFJ Management Inc., Parametric
Management Inc., PIMCO Management Inc. and PFDCO;
Secretary, NFJ Investment Group, Parametric
Portfolio Associates and StocksPLUS Management,
Inc.; Senior Vice President, Legal Counsel, PIMCO
Advisors L.P.
The address of CCI and CCI Inc. is One Station Place, Stamford, CT 06902.
-13-
<PAGE>
Item 29. PRINCIPAL UNDERWRITERS.
(a) PFDCO, the Registrant's principal underwriter, also serves as
underwriter for PIMCO Funds and PFMMS. PFDCO is a wholly-owned subsidiary of
PALP.
(b) Information with respect to directors and officers of PFDCO is as
follows:
Positions and Offices Positions and
Names and Principal with Principal Offices with
Business Addresses Underwriter Registrant
- ------------------ --------------------- -----------------
Jeffrey L. Booth Vice President None
James D. Bosch Regional Vice None
President
William D. Cvengros Director Trustee
Robert M. Fitzgerald Chief Financial None
Officer and
Treasurer
Michael J. Gallagher Vice President None
David S. Goldsmith Vice President None
Ronald H. Gray Vice President None
John B. Hussey Vice President None
Edward W. Janeczek Senior Vice President None
Johnathan C. Jones Vice President None
Jaishree B. Kemraj Assistant Vice None
President and
Assistant
Controller
-14-
<PAGE>
William E. Lynch Senior Vice None
President
Jacqueline A. McCarthy Vice President None
Andrew J. Meyers Executive Vice None
President
Fioja Moyer Regional Vice None
President
Philip J. Neugebauer Vice President None
Joffrey H. Pearlman Regional Vice None
President
Glynne Pisapia Regional Vice None
President
Matthew M. Russell Vice President None
Newton B. Schott, Jr. Director, Executive Vice President;
Vice President, Chief Clerk
Administrative Officer
and Secretary
Robert M. Smith Vice President None
David P. Stone Regional Vice None
President
William H. Thomas, Jr. Regional Vice None
President
Stephen J. Treadway Director, Chairman President
and President
Paul H. Troyer Senior Vice None
President
-15-
<PAGE>
Brian F. Trumbore Executive Vice None
President
Timothy G. Uecker Vice President None
Richard M. Weil Assistant None
Secretary
Glenn A. Zimmerman Vice President None
The principal business address of each such individual is 2187 Atlantic
Street, Stamford, CT 06902.
(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 30. LOCATION OF ACCOUNTS AND RECORDS.
Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and the Rules promulgated thereunder include Registrant's
Clerk, Newton B. Schott, Jr.; PALP, the manager of the Registrant's National
Money Market Fund and administrator of the Registrant's Active Short-Term
Fund; CCI, the sub-adviser of the Registrant's National Money Market Fund and
the adviser of the Registrant's Active Short-Term Fund; PIMCO, the
sub-administrator of the Registrant's Active Short-Term Fund; PIMCO Funds
Distribution Company, the Trust's Distributor; The Bank of New York, the
custodian of the Registrant's National Money Market Fund; Investors Fiduciary
Trust Company ("IFTC"), the custodian of the Registrant's Active Short-Term
Fund; and Shareholder Services, Inc., the transfer agent and shareholder
servicing agent of the Trust's National Money Market Fund. The address of
PALP is 800 Newport Center Drive, Suite 100, Newport Beach, CA 92660; the
address of PIMCO is 840 Newport Center Drive, Suite 360, Newport Beach, CA
92660; the address of the Clerk is 2187 Atlantic Street, Stamford, CT 06902;
the address of CCI is One Station Place, Stamford, CT 06902; the address of
The Bank of New York is 110 Washington Street, New York, NY 10286; and the
address of the Shareholder Services Inc. is 3410 South Galena Street, Denver,
CO 80231; the address of PIMCO Funds Distribution Company is 2187 Atlantic
Street, Stamford, CT 06902; the address of IFTC is 127 West 10th Street,
Kansas City, MO 64105.
Item 31. MANAGEMENT SERVICES.
None.
-16-
<PAGE>
Item 32. UNDERTAKINGS.
(a) The Registrant undertakes to comply with Section 16(c) of the
Investment Company Act of 1940 as though such provisions of the Act
were applicable to the Registrant, except that the request referred to
in the third full paragraph thereof may only be made by shareholders
who hold in the aggregate at least 1 per centum of the outstanding
shares of the Registrant, regardless of the net asset value of the
shares held by such requesting shareholders.
(b) Registrant undertakes to file a post-effective amendment to the
Trust's Registration Statement within four to six months from the
effective date of this Post-Effective Amendment to include financial
information, which need not be certified, for the Trust's Active
Short-Term Fund.
(c) Registrant undertakes to furnish to each person to whom a prospectus
is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
-17-
<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust of Cash Accumulation
Trust, together with all amendments thereto (the "Trust") 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 Post-
Effective Amendment No. 21 to this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Stamford, and
the State of Connecticut on the 11th day of February, 1997.
CASH ACCUMULATION TRUST
By: /s/ Stephen J. Treadway
----------------------------
Stephen J. Treadway,
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 21 has been signed below by the following persons in the
capacities and on the dates indicated.
Name Capacity Date
- ---- -------- ----
/s/ Stephen J. Treadway President February 11, 1997
- ---------------------------
Stephen J. Treadway
/s/ Robert A. Prindiville Trustee February 11, 1997
- ---------------------------
Robert A. Prindiville
John P. Hardaway* Treasurer and Principal
- --------------------------- Financial and Accounting
John P. Hardaway Officer
William D. Cvengros* Trustee
- ---------------------------
William D. Cvengros
-4-
<PAGE>
Gary L. Light* Trustee
- ---------------------------
Gary L. Light
Joel Segall* Trustee
- ---------------------------
Joel Segall
Donald P. Carter* Trustee
- ---------------------------
Donald P. Carter
E. Philip Cannon* Trustee
- ---------------------------
E. Philip Cannon
Gary A. Childress* Trustee
- ---------------------------
Gary A. Childress
Richard L. Nelson* Trustee
- ---------------------------
Richard L. Nelson
Lyman W. Porter* Trustee
- ---------------------------
Lyman W. Porter
Alan Richards* Trustee
- ---------------------------
Alan Richards
W. Bryant Stooks* Trustee
- ---------------------------
W. Bryant Stooks
Gerald M. Thorne* Trustee
- ---------------------------
Gerald M. Thorne
* By: /s/ Robert A. Prindiville
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Robert A. Prindiville
Attorney-In-Fact
Date: February 11, 1997
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EXHIBIT INDEX
5(c). Form of Investment Advisory Contract between the Trust's Active
Short-Term Fund and Columbus Circle Investors.
6(c). Form of Distributor's Contract between the Trust's Active Short-Term
Fund and PIMCO Funds Distribution Company.
9(e). Form of Administration Agreement between the Trust's Active Short-
Term Fund and PIMCO Advisors L.P.
9(f). Form of Organizational Expense Reimbursement Agreement between the
Trust's Active Short-Term Fund and PIMCO Advisers L.P.
19(b) Power of Attorney for Robert A. Prindiville, E. Philip Cannon, Donald
P. Carter, Gary A. Childress, William D. Cvengros, Gary L. Light, W.
Bryant Stooks, Gerald M. Thorne, Richard L. Nelson, Lyman W. Porter
and Alan Richards.
19(c) Power of Attorney for John P. Hardaway.
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INVESTMENT ADVISORY CONTRACT
(Active Short-Term Fund)
CASH ACCUMULATION TRUST
2187 Atlantic Street
Stamford, Connecticut 06902
April __, 1997
Columbus Circle Investors
One Station Place
Stamford, Connecticut 06902
Dear Sirs:
This will confirm the agreement between the undersigned (the "Trust") and
Columbus Circle Investors (the "Adviser") as follows:
1. The Trust is an open-end investment company which currently has two
separate investment portfolios, one of which is subject to this agreement: the
Active Short-Term Fund (the "Fund"). Additional investment portfolios may be
established in the future. This Contract shall pertain to the Fund and to such
additional investment portfolios as shall be designated in Supplements to this
Contract, as further agreed between the Trust and the Adviser. The Trust
engages in the business of investing and reinvesting the assets of the Fund in
the manner and in accordance with the investment objective and restrictions
applicable to the Fund as specified in the currently effective Prospectus (the
"Prospectus") for the Trust included in the registration statement, as amended
from time to time (the "Registration Statement"), filed by the Trust under the
Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933
(the "1933 Act"). Copies of the documents referred to in the preceding sentence
have been furnished to the Adviser. Any amendments to those documents shall be
furnished to the Adviser promptly. Pursuant to a Distribution Contract, as
amended (the "Distribution Contract"), between the Trust and PIMCO Funds
Distribution Company (the "Distributor"), the Trust has employed the Distributor
to serve as principal underwriter for the shares of beneficial interest of the
Fund. Pursuant to an Administration Agreement ("Administration Agreement")
between the Trust and PIMCO Advisors L.P. ("PALP" or the "Administrator") the
Trust has retained the Administrator to provide the Fund with administrative and
other services.
2. The Trust hereby appoints the Adviser to provide the investment
advisory services specified in this Contract and the Adviser hereby accepts such
appointment.
<PAGE>
3. (a) The Adviser shall, at its expense, (i) employ or associate with
itself such persons as it believes appropriate to assist it in performing its
obligations under this Contract and (ii) provide all services, equipment and
facilities necessary to perform its obligations under this Contract.
(b) The Trust shall be responsible for all of its expenses and
liabilities, including compensation of its Trustees who are not affiliated with
the Adviser, the Distributor or any of their affiliates; taxes and governmental
fees; interest charges; fees and expenses of the Trust's independent accountants
and legal counsel; trade association membership dues; fees and expenses of any
custodian (including maintenance of books and accounts and calculation of the
net asset value of shares of the Trust), transfer agent, registrar and dividend
disbursing agent of the Trust; expenses of issuing, selling, redeeming,
registering and qualifying for sale shares of beneficial interest in the Trust;
expenses of preparing and printing share certificates, prospectuses and reports
to shareholders, notices, proxy statements and reports to regulatory agencies;
the cost of office supplies, including stationery; travel expenses of all
officers, Trustees and employees; insurance premiums; brokerage and other
expenses of executing portfolio transactions; expenses of shareholders'
meetings; organizational expenses; and extraordinary expenses. Notwithstanding
the foregoing, the Trust may enter into a separate agreement, which shall be
controlling over this Contract, as amended, pursuant to which some or all of the
foregoing expenses of this Section 3(b) shall be the responsibility of the other
party or parties to that agreement.
4. (a) The Adviser shall provide to the Trust investment guidance and policy
direction in connection with the management of the Fund, including oral and
written research, analysis, advice, and statistical and economic data and
information.
Consistent with the investment objectives, policies and restrictions
applicable to the Trust and the Fund, the Adviser will determine the securities
and other assets to be purchased or sold by the Fund and will determine what
portion of the Fund shall be invested in securities or other assets, and what
portion, if any, should be held uninvested.
The Trust will have the benefit of the investment analysis and research,
the review of current economic conditions and trends and the consideration of
long-range investment policy generally available to investment advisory clients
of the Adviser. It is understood that the Adviser will not use any inside
information pertinent to investment decisions undertaken in connection with this
Contract that may be in its possession or in the possession of any of its
affiliates, nor will the Adviser seek to obtain any such information.
(b) The Adviser also shall provide to the officers of the Trust
administrative assistance in connection with the operation of the Trust and the
Fund, which shall include (i) compliance with all reasonable requests of the
Trust for information, including information required in connection with the
Trust's filings with the Securities and Exchange Commission
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and state securities commissions, and (ii) such other services as the Adviser
shall from time to time determine to be necessary or useful to the
administration of the Trust and the Fund.
(c) As manager of the assets of the Fund, the Adviser shall make
investments for the account of the Fund in accordance with the Adviser's best
judgment and within the investment objectives, policies, and restrictions set
forth in the Prospectus, the 1940 Act and the provisions of the Internal Revenue
Code relating to regulated investment companies, subject to policy decisions
adopted by the Trust's Board of Trustees.
(d) The Adviser shall furnish to the Trust's Board of Trustees
periodic reports on the investment performance of the Trust and the Fund and on
the performance of its obligations under this Contract and shall supply such
additional reports and information as the Trust's officers or Board of Trustees
shall reasonably request.
(e) On occasions when the Adviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as other of its clients,
the Adviser, to the extent permitted by applicable law, may aggregate the
securities to be so sold or purchased in order to obtain the best execution of
the order or lower brokerage commissions, if any. The Adviser may also on
occasion purchase or sell a particular security for one or more clients in
different amounts. On either occasion, and to the extent permitted by
applicable law and regulations, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Trust and to such other customers.
(f) The Adviser may cause the Fund to pay a broker which provides
brokerage and research services to the Adviser a commission for effecting a
securities transaction in excess of the amount another broker might have
charged. Such higher commissions may not be paid unless the Adviser determines
in good faith that the amount paid is reasonable in relation to the services
received in terms of the particular transaction or the Adviser's overall
responsibilities to the Trust and any other of the Adviser's clients.
5. The Adviser shall give the Trust the benefit of the Adviser's best
judgment and efforts in rendering services under this Contract. As an
inducement to the Adviser's undertaking to render these services, the Trust
agrees that the Adviser shall not be liable under this Contract for any mistake
in judgment or in any other event whatsoever, PROVIDED that nothing in this
Contract shall be deemed to protect or purport to protect the Adviser against
any liability to the Trust or its shareholders to which the Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Adviser's duties under this Contract or by
reason of the Adviser's reckless disregard of its obligations and duties
hereunder.
6. In consideration of the services to be rendered by the Adviser under
this Contract, the Fund shall pay the Adviser a monthly fee on the first
business day of each
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month, based upon the average daily value (as determined on each business day at
the time set forth in the Prospectus for determining net asset value per share)
of the net assets of the Fund during the preceding month, at the annual rate of
0.20%.
If the fees payable to the Adviser pursuant to this paragraph 6 begin to
accrue before the end of any month or if this Contract terminates before the end
of any month, the fees for the period from that date to the end of that month or
from the beginning of that month to the date of termination, as the case may be,
shall be prorated according to the proportion which the period bears to the full
month in which the effectiveness or termination occurs. For purposes of
calculating the monthly fees, the value of the net assets of each Fund shall be
computed in the manner specified in the Prospectus for the computation of net
asset value. For purposes of this Contract, a "business day" is any day the New
York Stock Exchange is open for trading.
7. If the aggregate expenses of every character incurred by, or allocated
to, the Trust in any fiscal year, other than interest, taxes, brokerage
commissions and other portfolio transaction expenses, other expenditures which
are capitalized in accordance with generally accepted accounting principles and
any extraordinary expense (including, without limitation, litigation and
indemnification expense), but including the fees payable under this Contract
("includable expenses"), shall exceed the expense limitations applicable to the
Trust imposed by state securities laws or regulations thereunder, as these
limitations may be raised or lowered from time to time, the Adviser shall pay
the Trust an amount equal to that excess. With respect to portions of a fiscal
year in which this Contract shall be in effect, the foregoing limitations shall
be prorated according to the proportion which that portion of the fiscal year
bears to the full fiscal year. At the end of each month of the Trust's fiscal
year, the Adviser will review the includable expenses accrued during that fiscal
year to the end of the period and shall estimate the contemplated includable
expenses for the balance of that fiscal year. If, as a result of that review
and estimation, it appears likely that the includable expenses will exceed the
limitations referred to in this paragraph 7 for a fiscal year with respect to
the Trust, the monthly fees relating to the Trust payable to the Adviser under
this Contract and under the Administration Agreement for such month shall be
reduced, subject to a later reimbursement to reflect actual expenses, by an
amount equal to a pro rata portion (prorated on the basis of the remaining
months of the fiscal year, including the month just ended) of the amount by
which the includable expenses for the fiscal year (less an amount equal to the
aggregate of actual reductions made pursuant to this provision with respect to
prior months of the fiscal year) are expected to exceed the limitations provided
in this paragraph 7. For purposes of the foregoing, the value of the net assets
of the Fund shall be computed in the manner specified in paragraph 6, and any
payments required to be made by the Adviser shall be made once a year promptly
after the end of the Trust's fiscal year.
8. (a) This Contract shall become effective with respect to the Fund on
April __, 1997 (and, with respect to any amendment, or with respect to any
additional fund, the date of the amendment or Supplement hereto) and shall
continue in effect with respect to the Fund
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<PAGE>
for a period of more than two years from the date (or, with respect to any
additional fund, the date of the Supplement) only so long as the continuance is
specifically approved at least annually (i) by the vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund or by the
Trust's Board of Trustees and (ii) by the vote, cast in person at a meeting
called for the purpose, of a majority of the Trust's trustees who are not
parties to this Contract or "interested persons" (as defined in the 1940 Act) of
any such party.
(b) This Contract may be terminated with respect to the Fund (or any
additional fund) at any time, without the payment of any penalty, by a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund or by a vote of a majority of the Trust's entire Board of Trustees on
60 days' written notice to the Adviser or by the Adviser on 60 days' written
notice to the Trust. This Contract (or any Supplement hereto) shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
9. Except to the extent necessary to perform the Adviser's obligations
under this Contract, nothing herein shall be deemed to limit or restrict the
right of the Adviser, or any affiliate of the Adviser, or any employee of the
Adviser, to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
10. The investment management services of the Adviser to the Trust under
this Contract are not to be deemed exclusive as to the Adviser and the Adviser
will be free to render similar services to others.
11. This Contract shall be construed in accordance with the laws of the
State of California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act.
12. A copy of the Declaration of Trust, dated April 27, 1984, together
with all amendments thereto, is on file in the Office of The Secretary of the
Commonwealth of Massachusetts and notice is hereby given that this Contract has
been executed on behalf of the Trust by an officer of the Trust in his or her
capacity as officer and not individually. The obligations of this Contract
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.
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If the foregoing correctly sets forth the agreement between the Trust and
the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
CASH ACCUMULATION TRUST
By:
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Title:
ACCEPTED:
COLUMBUS CIRCLE INVESTORS
By:
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Title:
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<PAGE>
CASH ACCUMULATION TRUST
(Active Short-Term Fund)
DISTRIBUTOR'S CONTRACT
Distributor's Contract dated as of April __, 1997 by and between CASH
ACCUMULATION TRUST, a Massachusetts business trust (the "Trust"), and PIMCO
FUNDS DISTRIBUTION COMPANY ("PFDCO").
WHEREAS, the Trust and PFDCO are desirous of entering into an agreement
providing for the distribution of shares of the series of the Trust known as the
Active Short-Term Fund (the "Fund") and the provision of shareholder services by
PFDCO;
NOW THEREFORE, in consideration of the mutual agreements contained in the
Terms and Conditions of Distributor's Contract attached to and forming a part of
this Contract (the "Terms and Conditions"), the Trust hereby appoints PFDCO as a
distributor of shares of the Trust and as servicing agent of shareholders and
shareholder accounts of the Trust, and PFDCO hereby accepts such appointment,
all as set forth in the Terms and Conditions.
A copy of the Agreement and Declaration of Trust of the Trust, together
with all amendments thereto, is on file with the Secretary of The Commonwealth
of Massachusetts, and notice is hereby given that this instrument is executed by
an officer of the Trust in his or her capacity as officer and not individually,
and that the obligations of or arising out of this instrument are not binding
upon any of the Trustees or shareholders individually but are binding only upon
the assets and property of the Trust.
IN WITNESS WHEREOF, CASH ACCUMULATION TRUST and PIMCO FUNDS DISTRIBUTION
COMPANY have each caused this Distributor's Contract to be signed in duplicate
on its behalf, all as of the day and year first above written.
CASH ACCUMULATION TRUST
By:
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Title:
PIMCO FUNDS DISTRIBUTION COMPANY
By:
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Title:
<PAGE>
TERMS AND CONDITIONS
OF
DISTRIBUTOR'S CONTRACT
1. SALE OF SHARES TO PFDCO AND SALES BY PFDCO. PFDCO will have the
right, as principal, to sell shares of beneficial interest ("shares") of the
Fund directly to the public against orders therefor at net asset value. For
such purposes, PFDCO will have the right to purchase shares at net asset value.
PFDCO will also have the right, as agent, to sell shares of the Fund indirectly
to the public through broker dealers who are members of the National Association
of Securities Dealers, Inc. and who are acting as introducing brokers pursuant
to clearing agreements with PFDCO ("introducing brokers"), or to broker-dealers
which are members of the National Association of Securities Dealers, Inc. and
who have entered into selling agreements with PFDCO ("participating brokers"),
in each case against orders therefor. The price for introducing brokers and
participating brokers shall likewise be net asset value.
Prior to the time of transfer of any shares by the Fund to, or on the order
of, PFDCO or any introducing broker or participating broker, PFDCO shall pay or
cause to be paid to the Fund or to its order an amount in New York clearing
house funds equal to the applicable net asset value of the shares. Upon receipt
of registration instructions in proper form, PFDCO will transmit or cause to be
transmitted such instructions to the Fund or its agent for registration of the
shares purchased.
On every sale, the Fund shall receive the net asset value of the shares.
The net asset value of shares shall be determined in the manner provided in the
Agreement and Declaration of Trust and By-laws of the Trust, as then amended.
2. FEES. PFDCO shall not be entitled to receive any fees for its
services as distributor of the Fund's shares hereunder.
3. RESERVATION OF RIGHT NOT TO SELL. The Trust reserves the right to
refuse at any time or times to sell any of the Fund's shares for any reason
deemed adequate by it.
4. USE OF SUB-AGENTS; NON-EXCLUSIVITY; SALES OF SHARES BY THE TRUST.
PFDCO may employ such sub-agents, including one or more participating brokers or
introducing brokers, for the purposes of selling shares of the Fund as PFDCO, in
its sole discretion, shall deem advisable or desirable. PFDCO may enter into
similar arrangements with other issuers. The Fund reserves the right to issue
its shares at any time directly to its shareholders as a stock dividend or stock
split and to sell shares to its shareholders or other persons at not less than
net asset value.
5. REPURCHASE OF SHARES. PFDCO will act as agent for the Fund in
connection with the repurchase and redemption of shares by the Fund upon the
terms and conditions set forth in the then current prospectus and statement of
additional information of the Fund (collectively, the "prospectus") or as the
Trust acting through its Trustees may otherwise direct. PFDCO may employ such
sub-agents, including one or
<PAGE>
more participating brokers or introducing brokers, for the purpose as PFDCO, in
its sole discretion, shall deem to be advisable or desirable.
6. BASIS OF PURCHASES AND SALES OF SHARES. PFDCO's obligation to sell
shares hereunder shall be on a best efforts basis only and PFDCO shall not be
obligated to sell any specific number of shares. Shares will be sold by PFDCO
only against orders therefor. PFDCO will not purchase shares from anyone other
than the Trust except in accordance with Section 5, and will not take "long" or
"short" positions in shares contrary to the Agreement and Declaration of Trust
of the Trust, as amended.
7. RULES OF NASD, ETC. PFDCO will conform to the Rules of the National
Association of Securities Dealers, Inc. and the securities laws of any
jurisdiction in which it sells, directly or indirectly, any shares of the Fund.
PFDCO also agrees to furnish to the Trust sufficient copies of any agreement or
plans it intends to use in connection with any sales of shares of the Fund in
adequate time for the Trust to file and clear them with the proper authorities
before they are put in use, and not to use them until so filed and cleared.
8. INDEPENDENT CONTRACTOR. PFDCO shall be an independent contractor and
neither PFDCO nor any of its officers or employees as such, is or shall be an
employee of the Trust. PFDCO is responsible for its own conduct and the
employment, control and conduct of its agents and employees and for injury to
such agents or employees or to others through its agents or employees. PFDCO
assumes full responsibility for its agents and employees under applicable
statutes and agrees to pay all employer taxes thereunder.
9. REGISTRATION AND QUALIFICATION OF SHARES. The Trust agrees to execute
such papers and to do such acts and things as shall from time to time be
reasonably requested by PFDCO for the purpose of qualifying and maintaining
qualification of the shares of the Fund for sale under the so-called Blue Sky
laws of any state or for maintaining the registration of the Fund and the Trust
under the Securities Act of 1933 (the "1933 Act") and the Investment Company Act
of 1940 (together with the rules and regulations thereunder, the "1940 Act"), to
the end that there will be available for sale from time to time such number of
shares as PFDCO may reasonably be expected to sell. The Trust shall advise
PFDCO promptly of (a) any action of the Securities and Exchange Commission or
any authorities of any state or territory, of which it may be advised, affecting
the registration or qualification of the Trust, the Fund or the shares thereof,
or rights to offer such shares for sale and (b) the happening of any event which
makes untrue any statement or which requires the making of any change in the
registration statement or prospectus of the Fund in order to make the statements
therein not misleading.
10. EXPENSES. The Fund will pay or reimburse PFDCO for all expenses of
qualifying shares of the Fund for sale under the securities or so-called "Blue
Sky" laws of any State. PFDCO will pay all expenses of preparing, printing and
distributing advertising and sales literature (apart from expenses of
registering shares under the 1933
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Act and the 1940 Act and the preparation and printing of prospectuses and
reports as required by said Acts and the direct expenses of the issue of shares,
except that PFDCO will pay the cost of the preparation and printing of
prospectuses and shareholders' reports used by it in the sale of Fund shares).
11. SECURITIES TRANSACTIONS. The Trust agrees that PFDCO may effect a
transaction on any national securities exchange of which it is a member for the
account of the Trust and the Fund which is permitted by Section 11(a) of the
Securities Exchange Act of 1934.
12. INDEMNIFICATION OF TRUST. PFDCO agrees to indemnify and hold harmless
the Trust and each person who has been, is, or may hereafter be, a Trustee of
the Trust against expenses reasonably incurred by any of them in connection with
any claim or in connection with any action, suit or proceeding to which any of
them may be a party, which arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact, or out of any alleged
misrepresentation or omission to state a material fact, on the part of PFDCO or
any agent or employee of PFDCO or any other person for whose acts PFDCO is
responsible or is alleged to be responsible, unless such misrepresentation or
omission was made in reliance upon written information furnished by the Trust,
PROVIDED, that in no event shall anything contained in this Agreement be
construed to protect the Trust or any such person against any liability to which
the Trust or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties
under this Agreement. PFDCO also agrees likewise to indemnify and hold harmless
the Trust and each such person in connection with any claim or in connection
with any action, suit or proceeding which arises out of or is alleged to arise
out of PFDCO's failure to exercise reasonable care and diligence with respect to
its services rendered in connection with investment, reinvestment, employee
benefit and other plans for shares. The term "expenses" includes amount paid in
satisfaction of judgments or in settlements which are made with PFDCO's consent.
The foregoing rights of indemnification shall be in addition to any other rights
to which the Trust or a Trustee may be entitled as a matter of law.
13. INDEMNIFICATION OF PFDCO. The Trust agrees to indemnify and hold
harmless PFDCO, its several officers, employees and directors, and any person
who controls PFDCO within the meaning of Section 15 of the 1933 Act, against
expenses reasonably incurred by any of them in connection with any claim or in
connection with any action, suit or proceeding to which any of them may be a
party, which arises out of or is alleged to arise out of any misrepresentation
or omission to state a material fact, or out of any alleged misrepresentation or
omission to state a material fact in the Trust's registration statement or
prospectus, provided that in no event shall anything contained in this Agreement
be construed so as to protect PFDCO against any liability to the Trust or its
shareholders to which PFDCO would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties
under this Agreement.
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<PAGE>
14. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of any
penalty, in the event of its assignment. This Agreement may be amended only if
such amendment be approved either by action of the Trustees of the Trust or at a
meeting of the shareholders of the Trust by the affirmative vote of a majority
of the outstanding shares of the Trust, and by a majority of the Trustees of the
Trust who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of this Agreement by vote cast in
person at a meeting called for the purpose of voting on such approval.
15. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT. This Agreement
shall take effect upon the date first above written and shall remain in full
force and effect continuously until terminated:
(a) Either by the Fund or PFDCO by not more than sixty days' nor less
than thirty days' written notice delivered or mailed by registered mail,
postage prepaid, to the other party; or
(b) Automatically at the close of business one year from the date
hereof, or upon the expiration of one year from the effective date of the
last continuance of this Agreement, whichever is later, if the continuance
of this Agreement is not specifically approved at least annually by the
Trustees of the Trust or the shareholders of the Fund by the affirmative
vote of a majority of the outstanding shares of the Fund, and by a majority
of the Trustees of the Trust who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of
this Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval.
Action by the Fund under (a) above may be taken either (i) by vote of the
Trustees of the Trust, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund. The requirement under (b) above that the
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act.
Termination of this Agreement pursuant to this Section 15 shall be without
the payment of any penalty.
16. CERTAIN DEFINITIONS. For the purposes of this Agreement, the
"affirmative vote of a majority of the outstanding shares" means the affirmative
vote, at a duly called and held meeting of shareholders, (a) of the holders of
67% or more of the shares of the Trust or the Fund, as the case may be, present
(in person or by proxy) and entitled to vote at such meeting, if the holders of
more than 50% of the outstanding shares of the Trust or the Fund, as the case
may be, entitled to vote at such meeting are present in person or by proxy, or
(b) of the holders of more than 50% of the outstanding shares of the Trust or
the Fund, as the case may be, entitled to vote at such meeting, whichever is
less.
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<PAGE>
For the purposes of this Agreement, the terms "interested persons" and
"assignment" shall have the meanings defined in the 1940 Act, subject, however,
to such exemptions as may be granted by the Securities and Exchange Commission
under said Act. Certain other items used herein that are not otherwise defined
have the meaning given in the current prospectus of the Fund or constituent
agreements or documents of the Trust.
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CASH ACCUMULATION TRUST
ADMINISTRATION AGREEMENT
ADMINISTRATION AGREEMENT, made this ____ day of April, 1997 between CASH
ACCUMULATION TRUST, a Massachusetts business trust (the "Trust"), and PIMCO
Advisors L.P., a general partnership organized under the laws of California (the
"Administrator" or "PALP").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "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 one series, which is designated as the
Active Short-Term Fund with respect to which the Trust desires to retain the
Administrator to render administrative services hereunder, and with respect to
which the Administrator is willing to do so, such series being herein referred
to as the "Fund"; and
WHEREAS, pursuant to an Investment Advisory Contract dated April __, 1997,
between the Trust and Columbus Circle Investors ("CCI") (the "Investment
Advisory Contract"), the Trust has retained CCI to provide investment advisory
services with respect to the Fund in the manner and on the terms set forth
therein; and
WHEREAS, the Trust wishes to retain PALP to provide administrative and
other services to the Trust with respect to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, PALP 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 Fund hereby appoints PALP as administrator to
provide administrative and other services with respect to the Fund for the
period and on the terms set forth in this Agreement. The Administrator accepts
such appointment and agrees
<PAGE>
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 Fund hereunder.
2. DUTIES. Subject to the general supervision of the Board of Trustees,
the Administrator shall provide or arrange for the provision of all
administrative and other services reasonably necessary for the operation of the
Fund other than the investment advisory services provided pursuant to the
Investment Advisory Contract.
(a) ADMINISTRATIVE SERVICES. These services shall include the
following: (i) coordinating matters relating to the operation of the Fund
including any necessary coordination among the adviser or advisers to the
Fund, the custodian, transfer agent, dividend disbursing agent, and
recordkeeping agent (including pricing and valuation of the Fund),
accountants, attorneys, and other parties performing services or
operational functions for the Fund; (ii) providing the Fund, at the
Administrator's expense, with the services of a sufficient number of
persons competent to perform such administrative and clerical functions as
are necessary to ensure compliance with federal securities laws as well as
other applicable laws and to provide effective administration of the Fund;
(iii) maintaining or supervising the maintenance by third parties of such
books and records of the Trust and the Fund as may be required by
applicable federal or state law other than the records and ledgers
maintained under the Investment Advisory Contract; (iv) preparing or
supervising the preparation by third parties of all federal, state, and
local tax returns and reports of the Fund required by applicable law; (v)
preparing, filing, and arranging for the distribution of proxy materials
and periodic reports to shareholders of the Fund as required by applicable
law; (vi) preparing and arranging for the filing of such registration
statements and other documents with the SEC and other federal and state
regulatory authorities as may be required to register the shares of the
Fund and qualify the Trust to do business or as otherwise required by
applicable law; (vii) taking such other action with respect to the Fund 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 Fund, at the Administrator's
expense, with adequate personnel, office space, communications facilities,
and other facilities necessary for the Fund's operations as contemplated in
this Agreement.
(b) OTHER SERVICES. The Administrator shall also procure on behalf
of the Trust and the Fund, and at the expense of the Administrator, the
following persons to provide services to the Fund: (i) a custodian or
custodians for the Fund to provide for
-2-
<PAGE>
the safekeeping of the Fund's assets; (ii) a recordkeeping agent to
maintain the portfolio accounting records for the Fund; (iii) a transfer
agent for the Fund; and (iv) a dividend disbursing agent for the Fund. The
Trust may be a party to any agreement with any of the persons referred to
in this Section 3(b).
(c) The Administrator shall also make its officers and employees
available to the Board of Trustees and officers of the Trust for
consultation and discussions regarding the administration of the Fund and
services provided to the Fund under this agreement.
(d) In performing these services, the Administrator:
(i) Shall conform with the 1940 Act and all rules and
regulations thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the Trust's Board of
Trustees, and with the provisions of the Trust's Registration Statement
filed 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 Fund's 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 Funds such periodic and special
reports as the Trustees may reasonably request.
3. DOCUMENTATION. The Trust has delivered copies of each of the
following documents to the Administrator and will deliver to it all future
amendments and supplements thereto, if any:
(a) the Trust's Registration Statement as filed with the SEC and any
amendments thereto; and
(b) exhibits, powers of attorneys, certificates and any and all other
documents relating to or filed in connection with the Registration
Statement described above.
4. INDEPENDENT CONTRACTOR. The Administrator shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein
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<PAGE>
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. As compensation for the services rendered under this
Agreement, the Trust shall pay to the Administrator a monthly fee, calculated as
a percentage (on an annual basis) of the average daily value of the net assets
of the Fund during the preceding month. The fee rate applicable to the Fund
shall be set forth in a schedule to this Agreement. The fees payable to the
Administrator for the Fund shall be computed and accrued daily and paid monthly.
If the Administrator shall serve for less than any whole month, the foregoing
compensation shall be prorated.
6. NON-EXCLUSIVITY. It is understood that the services of the
Administrator hereunder are not exclusive, and the Administrator shall be free
to render similar services to other investment companies and other clients.
7. EXPENSES. During the term of this Agreement, the Administrator will
pay all expenses incurred by it in connection with its obligations under this
Agreement, except such expenses as are assumed by the Fund under this Agreement,
and any expenses that are paid under the terms of the Investment Advisory
Contract. The Administrator assumes and shall pay for maintaining its staff and
personnel and shall, at its own expense, provide the equipment, office space,
office supplies (including stationery), and facilities necessary to perform its
obligations under this Agreement. In addition, the Administrator shall bear the
following expenses under this Agreement:
(a) Expenses of all audits by Trust's independent public accountants;
(b) Expenses of the Trust's transfer agent, registrar, dividend
disbursing agent, and shareholder recordkeeping services;
(c) Expenses of the Trust's custodial services, including any
recordkeeping services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Fund's net assets;
(e) Expenses of obtaining Portfolio Activity Reports for the Fund;
(f) Expenses of maintaining the Trust's tax records;
(g) Costs and/or fees, including legal fees, incident to meetings of
the Trust's shareholders, the preparation, printing and mailings of
prospectuses, notices and proxy statements 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
-4-
<PAGE>
business, and the expense of issuing, redeeming, registering and qualifying
for sale, shares with federal and state securities authorities;
(h) The Trust's ordinary legal fees, including the legal fees that
arise in the ordinary course of business for a Massachusetts business trust
registered as an open-end management investment company;
(i) Costs of printing certificates, if any, representing shares of
the Trust;
(j) The Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums; and
(k) Association membership dues.
The Trust shall bear the following expenses:
(a) Salaries and other compensation or expenses, including travel
expenses, of any of the Trust's executive officers and employees, if
any, who are not officers, directors, stockholders, partners or
employees of the Administrator or its subsidiaries or affiliates;
(b) Taxes and governmental fees, if any, levied against the Trust or
the Fund;
(c) Brokerage fees and commissions, and other portfolio transaction
expenses incurred for the Fund;
(d) Costs, including the interest expenses, of borrowing money;
(e) Fees and expenses, including travel expenses, and fees and
expenses of legal counsel retained for their benefit, of trustees of
the trust who are not officers, employees, partners or shareholders of
the Administrator or its subsidiaries or affiliates;
(f) Extraordinary expenses, including extraordinary legal expenses,
as may arise including expenses incurred in connection with
litigation, proceedings, other claims and the legal obligations of the
Trust to indemnify its trustees, officers, employees, shareholders,
distributors, and agents with respect thereto;
(g) Organizational and offering expenses of the Trust and the Fund,
and any other expenses which are capitalized in accordance with
generally accepted accounting principles; and
-5-
<PAGE>
(h) Any expenses allocated or allocable to a specific class of
shares.
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 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 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
Fund as described in Section 2(b) of this Agreement.
9. TERM AND CONTINUATION. This Agreement shall take effect as of the
date indicated above, and shall remain in effect unless sooner terminated as
provided herein, for two years from such date, and shall continue thereafter on
an annual basis with respect to the Fund 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 Fund, 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
the Administrator, 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, without the payment of any penalty, by vote
of a majority of the entire Board of Trustees of the Trust, or by a vote of
majority of the outstanding voting shares of the Fund, on 60 days' written
notice to the Administrator; or
(b) by the Administrator at any time after the expiration of the two-year
period commencing with the date of its effectiveness, without the payment
of any penalty, upon 60 days' written notice to the Trust.
10. 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 800 Newport Center Drive, Newport Beach, California 92660, or
to such other address or to such individual as shall be specified by the
Administrator. Notices of any kind to be given to the Trust by the
Administrator shall be in writing and shall be duly given if mailed or delivered
to
-6-
<PAGE>
840 Newport Center Drive, Newport Beach, California 92660, with a copy to
Columbus Circle Investors, 2187 Atlantic Street, Stamford, Connecticut 06902, or
to such other address or to such individual as shall be specified by the Trust.
11. TRUST OBLIGATION. A copy of the Trust's Agreement and Declaration of
Trust together with all amendments thereto is on file with the Secretary of the
Commonwealth of Massachusetts, and notice is hereby given that this Agreement
has been executed on behalf of the Trust by an officer of the Trust in his or
her capacity as officer 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.
12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
13. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of California,
provided that nothing herein shall be construed in a manner inconsistent
with the 1940 Act, the Investment Advisers Act of 1940, or any rule or
order of the SEC thereunder.
(b) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable. To the extent that any
provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise with regard to any party, hereunder,
such provisions with respect to other parties hereto shall not be affected
thereby.
(c) The captions in this Agreement are included for convenience only
and in no way define any of the provisions hereof or otherwise affect their
construction or effect.
(d) This Agreement may not be assigned by the Trust or the
Administrator without the consent of the other party.
-7-
<PAGE>
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.
CASH ACCUMULATION TRUST
By: ___________________________
Title:
PIMCO ADVISORS L.P.
By: ___________________________
Title:
-8-
<PAGE>
Schedule to
Administration Agreement
Fund Fee
- ---- ---
Active Short-Term Fund 0.20%
-9-
<PAGE>
FORM OF ORGANIZATIONAL EXPENSE REIMBURSEMENT AGREEMENT
Cash Accumulation Trust
Active Short-Term Fund
PIMCO Advisors L.P.
This Agreement is made as of this ___ day of ______, 1997, by and between Cash
Accumulation Trust (the "Trust") on behalf of its Active Short-Term Fund (the
"Fund") and PIMCO Advisors L.P. ("PALP").
WHEREAS, the Trust is registered as an open-end management series investment
company under the Investment Company Act of 1940 and is in the process of
registering and organizing the Fund;
WHEREAS, there have been and will be certain organizational expenses incurred as
a part of such registration and organization, which are properly expenses of the
Fund, that have been and will in the future be paid by PALP by reason of the
fact that the Fund was not or will not be capitalized when such expenses
otherwise became due and payable;
WHEREAS, such organizational expenses include expenses necessary to organize and
establish the Fund and to create the necessary relationships and legal
qualifications to enable it to commence business and operations, including, but
not limited to, such expenses as outside legal counsel's fees and independent
public accountant's fees (such expenses are hereinafter referred to as
"Organizational Expenses");
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed as follows:
1. Upon the issuance and sale of shares of the Fund to the public, the Trust
shall reimburse and pay to PALP up to $50,000 of the amount expended by PALP for
Organizational Expenses for the Fund.
2. Such reimbursement shall be paid by the Trust, out of the assets of the
Fund, to PALP upon demand, without interest, and in no event later than five
years from the commencement of operations of the Fund. Upon demand for payment,
PALP shall present copies of invoices or receipts, and copies of canceled checks
or other evidence of payment by PALP of the Organizational Expenses for which it
is demanding reimbursement.
<PAGE>
3. A copy of the Agreement and Declaration of Trust of the Trust, together with
all amendments thereteo, is on file with the Secretary of The Commonwealth of
Massachusetts and notice is hereby given that this instrument is executed on
behalf of the Trustees of the Trust as Trustees and not individually, and the
obligations of or arising out of this instrument are not binding upon any of the
Trustees or shareholders individually but are binding only upon the assets and
property of the Fund.
PIMCO ADVISORS L.P.
By:_______________________
Title:
CASH ACCUMULATION TRUST
By:_______________________
Title:
-2-
<PAGE>
POWER OF ATTORNEY
We, the undersigned Trustees of PIMCO Funds: Multi-Manager Series and Cash
Accumulation Trust, hereby severally constitute and appoint Robert A.
Prindiville, Stephen J. Treadway, Newton B. Schott, Jr., R. Wesley Burns, Teresa
A. Wagner and Joseph B. Kittredge, Jr., our true and lawful attorneys, with full
power to each of them to sign for us, and in our name and in the capacities
indicated below, any and all amendments (including post-effective amendments) to
the Registration Statements of PIMCO Funds: Multi-Manager Series and Cash
Accumulation Trust on Form N-1A and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorney lawfully
could do or cause to be done by virtue hereof.
Name: Capacity: Date:
- ---- -------- ----
/s/ Robert A. Prindiville Trustee February 9, 1997
- ----------------------------- ------------------
Robert A. Prindiville
/s/ E. Philip Cannon Trustee February 9, 1997
- ----------------------------- ------------------
E. Philip Cannon
/s/ Donald P. Carter Trustee February 9, 1997
- ----------------------------- ------------------
Donald P. Carter
/s/ Gary A. Childress Trustee February 9, 1997
- ----------------------------- ------------------
Gary A. Childress
/s/ William D. Cvengros Trustee February 9, 1997
- ----------------------------- ------------------
William D. Cvengros
/s/ Gary L. Light Trustee February 9, 1997
- ----------------------------- ------------------
Gary L. Light
Trustee February 9, 1997
- ----------------------------- ------------------
Joel Segall
/s/ W. Bryant Stooks Trustee February 9, 1997
- ----------------------------- ------------------
W. Bryant Stooks
<PAGE>
/s/ Gerald M. Thorne Trustee February 9, 1997
- ----------------------------- ------------------
Gerald M. Thorne
/s/ Richard L. Nelson Trustee February 9, 1997
- ----------------------------- ------------------
Richard L. Nelson
/s/ Lyman W. Porter Trustee February 9, 1997
- ----------------------------- ------------------
Lyman W. Porter
/s/ Alan Richards Trustee February 9, 1997
- ----------------------------- ------------------
Alan Richards
<PAGE>
POWER OF ATTORNEY
I, the undersigned Treasurer and Principal Financial and Accounting Officer
of PIMCO Funds: Multi-Manager Series and Cash Accumulation Trust, hereby
constitute and appoint Robert A. Prindiville, Stephen J. Treadway, Newton B.
Schott, Jr. and Joseph B. Kittredge, Jr., and each of them singly, my true and
lawful attorneys, with full power to them and each of them, to sign for me, and
in my name and in the capacities indicated below, any and all amendments
(including post-effective amendments) to the Registration Statements of PIMCO
Funds: Multi-Manager Series and Cash Accumulation Trust on Form N-1A and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys full power and authority to do and perform each and every act and
thing requisite or necessary to be done in the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys or any of them lawfully could do or cause to be done by
virtue hereof.
Name: Capacity: Date:
- ---- -------- ----
/s/ John P. Hardaway Treasurer and Principal 2/9/97
- ---------------------- Financial and Accounting
John P. Hardaway Officer
