<PAGE>
As filed with the Securities and Exchange Commission on November 22, 1996
File No. 33-12113, 811-5028
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 31 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 35 [X]
PIMCO Funds
(Exact Name of Registrant as Specified in Charter)
840 Newport Center Drive
Newport Beach, California 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(714) 760-4867
Robert W. Helm, Esq. R. Wesley Burns
Dechert Price & Rhoads Pacific Investment Management Company
1500 K Street, N.W. 840 Newport Center Drive
Washington, D.C. 20005 Newport Beach, California 92660
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] 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
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Proposed Maximum
Offering
Title of Number Price per Proposed Amount of
Securities of Shares Share (within Maximum Registration
Being Being 15 days of Offering Fee
Registered Registered filing) Price
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Indefinite* N/A N/A N/A
Beneficial
Interest,
Par Value
$.0001
</TABLE>
* Registrant has elected to register an indefinite number of shares of
beneficial interest pursuant to Rule 24f-2 under the Investment Company Act of
1940. Registrant filed the Notice required by Rule 24f-2 on May 30, 1996.
<PAGE>
CROSS-REFERENCE SHEET
REQUIRED BY RULE 495
UNDER THE SECURITIES ACT OF 1933
The enclosed Prospectuses, Statement of Additional Information, and Part
C relate to PIMCO Funds (the "Trust"), an investment company currently
consisting of 20 separate series (the "Funds").
PART A
This Prospectus relates solely to the Institutional Class and
Administrative Class shares of the Real Return Bond Fund series of the Trust.
The Prospectus for all other series of the Trust were included in Post-Effective
Amendment No. 30, filed on October 31, 1996.
Information Required in Prospectus
----------------------------------
<TABLE>
<CAPTION>
Item Number Heading
- ----------- -------
<S> <C>
1 Cover Page
2 Prospectus Summary, Expense Information
3 Financial Highlights
4 Investment Objectives and Policies;
Characteristics and Risks of Securities and
Investment Techniques; Other Information
5 Management of the Trust
5A Information Contained in Registrant's Annual Report
6 Dividends, Distributions and Taxes; Other Information
7 Purchase of Shares; Net Asset Value
8 Redemption of Shares
9 Not Applicable
</TABLE>
<PAGE>
PART A
This Prospectus relates solely to the Class A, Class B, and Class C shares of
the Real Return Bond Fund series of the Trust. The Prospectuses for all other
series of the Trust were included in Post-Effective Amendment No. 30, filed on
October 31, 1996.
Information Required in Prospectus
----------------------------------
<TABLE>
<CAPTION>
Item Number Heading
- ----------- -------
<S> <C>
1 Cover Page
2 Schedule of Fees
3 Financial Highlights
4 Investment Objectives and Policies;
Characteristics and Risks of Securities and
Investment Techniques
5 Management of the Trust
5A Information Contained in Registrant's
Annual Report
6 Distributions; Taxes; Description of the Trust
7 How to Buy Shares; General; Alternative Purchase
Arrangements; Exchange Privilege; Distributor and
Distribution and Servicing Plans; How Net Asset
Value is Determined
8 How to Redeem
9 Not Applicable
</TABLE>
<PAGE>
PART B
This statement of Additional Information relates solely to the Real Return Bond
Fund series of the Trust. The Statement of Additional Information for all other
series of the Trust was included in Post-Effective Amendment No.30, filed on
October 31, 1996.
Information Required in Statement of Additional Information
-----------------------------------------------------------
<TABLE>
<CAPTION>
Item Number Heading
- ----------- -------
<S> <C>
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Objectives and Policies; Investment
Restrictions
14 Trustees and Officers
15 Voting Rights
16 Management of the Trust; Distribution of Trust
Shares; Custodian, Transfer Agent and Dividend
Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Other Information
19 Distribution of Trust Shares; Net Asset Value
20 Taxation
21 Distribution of Trust Shares
22 Performance Information
23 Financial Statements
</TABLE>
<PAGE>
[LOGO OF PIMCO]
PIMCO FUNDS
-----------
Pacific Investment Management Series
PIMCO Real Return Bond Fund
PROSPECTUS
- --------------------------------------------------------------------------------
February , 1997
<PAGE>
PIMCO FUNDS
PROSPECTUS
February , 1997
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") consisting of twenty separate investment portfolios, one of
which, the PIMCO Real Return Bond Fund (the "Fund") is described in this
Prospectus. The Fund has its own investment objective and policies. The Trust
is designed to provide access to the professional investment management
services offered by Pacific Investment Management Company ("PIMCO"), which
serves as investment adviser to the Fund.
Information about the investment objective of the Fund, along with a
detailed description of the types of securities in which the Fund may invest,
and of investment policies and restrictions applicable to the Fund, are set
forth in this Prospectus. There can be no assurance that the investment
objective of the Fund will be achieved. Because the market value of the Fund's
investments will change, the investment returns and net asset value per share
of the Fund also will vary.
The Fund offers two classes of shares in this Prospectus: the "Institutional
Class" and the "Administrative Class." Through a separate prospectus, the Fund
offers three additional classes of shares, Class A shares, Class B shares and
Class C shares. See "Other Information--Multiple Classes of Shares." Shares of
the Institutional Class are offered primarily for direct investment by
investors such as pension and profit sharing plans, employee benefit trusts,
endowments, foundations, corporations, and other institutions. They also are
offered through certain financial intermediaries that charge their customers
transaction or other fees with respect to the customers' investment in the
Fund. Shares of the Administrative Class are offered primarily through
employee benefit plan alliances and the Fund pays service fees to such
entities for services they provide to shareholders of that Class. Shares of
each class of the Fund are offered for sale at the relevant next determined
net asset value for that class with no sales charge.
The Fund may invest in derivative instruments, some of which may be
particularly sensitive to changes in prevailing interest rates. Unexpected
changes in interest rates may adversely affect the value of the Fund's
investments in particular derivative instruments.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. It should be read and retained for
ready reference to information about the Fund. A Statement of Additional
Information, dated February , 1997, as supplemented from time to time,
containing additional and more detailed information about the Fund, has been
filed with the Securities and Exchange Commission and is hereby incorporated
by reference into this Prospectus. It is available without charge and may be
obtained by writing or calling:
PIMCO Funds
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
Telephone: (800) 927-4648 (Current Shareholders)
(800) 800-0952 (New Accounts)
INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Expense Information..................................................... 5
Investment Objective and Policies....................................... 6
Investment Restrictions................................................. 8
Characteristics and Risks of Securities and Investment Techniques....... 9
Management of the Trust................................................. 18
Purchase of Shares...................................................... 19
Redemption of Shares.................................................... 21
Portfolio Transactions.................................................. 23
Net Asset Value......................................................... 24
Dividends, Distributions and Taxes...................................... 24
Other Information....................................................... 25
</TABLE>
<PAGE>
PIMCO FUNDS
PROSPECTUS SUMMARY
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund"), organized as a Massachusetts business trust on February 19,
1987. The Trust consists of twenty separate investment portfolios, one of
which, the PIMCO Real Return Bond Fund (the "Fund") is described in this
Prospectus.
INVESTMENT OBJECTIVE OF THE FUND
The investment objective of the Fund is to seek to realize maximum real
return, consistent with the preservation of real capital and prudent
investment management. The Fund normally invests at least 65% of its assets in
inflation-indexed bonds, rated at least A by Moody's Investor Services, Inc.
("Moody's") or Standard & Poor's ("S&P"), (or, if unrated, determined by the
Adviser to be of comparable quality). The Fund may invest up to 20% of its
assets in foreign currency-denominated securities, and may invest beyond this
limit in U.S. dollar-denominated securities of foreign issuers. The Fund may
be attractive to those investors seeking to hedge against inflation risk. See
"Investment Objective and Policies--Real Return" for a description of real
return.
INVESTMENT RISKS AND CONSIDERATIONS
The following are some of the primary risks relevant to an investment in the
Fund and to the securities in which the Fund invests. Investors should read
the Prospectus carefully for a more complete discussion of the risks relating
to an investment in the Fund. The value of all securities and other
instruments held by the Fund will vary from time to time in response to a wide
variety of market factors. Consequently, the net asset value per share of the
Fund will vary. The net asset value per share of the Fund may be less at the
time of redemption than it was at the time of investment. While the value of
most fixed income securities can be expected to vary inversely with changes in
prevailing interest rates, i.e., as interest rates rise, market value tends to
decrease, and vice versa, this may not be true in the case of inflation-
indexed bonds. See "Characteristics and Risks of Securities and Investment
Techniques--Inflation-Indexed Bonds" for additional information.
Investors should carefully consider the possible tax consequences from
investing in the Fund. The Fund invests primarily in securities that for tax
purposes may be considered to have been issued originally at a discount.
Accordingly, the Fund may be required to make annual distributions to
shareholders in excess of the cash received by the Fund in a given period from
those investments. See "Characteristics and Risks of Securities and Investment
Techniques--Inflation-Indexed Bonds," and "Dividends, Distributions and Taxes"
for additional information.
The Fund may invest in securities of foreign issuers, which may be subject
to additional risk factors, including foreign currency and political risks,
not applicable to securities of U.S. issuers. The Fund's investment techniques
may involve a form of borrowing, which may tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the Fund's
portfolio and may require liquidation of portfolio positions when it is not
advantageous to do so. The Fund may sell securities short, which exposes the
Fund to a risk of loss if the value of the security sold short should
increase.
The Fund may use derivative instruments, consisting of futures, options,
options on futures, and swap agreements, for hedging purposes or as part of
its investment strategies. Use of these instruments may involve certain costs
and risks, including the risk that the Fund could not close out a position
when it would be most advantageous to do so, the risk of an imperfect
correlation between the value of the securities being hedged and the value of
the particular derivative instrument, and the risk that unexpected changes in
interest rates may adversely affect the value of the Fund's investments in
particular derivative instruments.
The Fund offers its shares to both individual and institutional investors.
Institutional shareholders, some of whom also may be investment advisory
clients of PIMCO, may hold large positions in the Fund. Such shareholders may
on occasion make large redemptions of their holdings in the Fund to meet their
liquidity needs, in connection with strategic adjustments to their overall
portfolio of investments, or for other purposes. Large redemptions from the
Fund could require the Adviser to liquidate portfolio positions when it is not
most desirable to do so. Liquidation of portfolio holdings also may cause the
Fund to realize capital gains.
3
<PAGE>
The Fund is "non-diversified" for purposes of the Investment Company Act of
1940, meaning that it may invest a greater percentage of its assets in the
securities of one issuer than "diversified" funds. As a "non-diversified"
portfolio, the Fund may be more susceptible to risks associated with a single
economic, political or regulatory occurrence than a diversified portfolio might
be. See "Investment Objective and Policies" and "Characteristics and Risks of
Securities and Investment Techniques" for additional information.
INVESTMENT ADVISER AND FUND ADMINISTRATOR
Pacific Investment Management Company ("PIMCO") serves as investment adviser
("Adviser") to the Trust, and also serves as the Trust's administrator. The
Adviser is an investment management firm established in 1971 that had
approximately $ billion of assets under management as of November 30, 1996.
The Adviser is a subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"), which
had approximately $ billion of assets under management as of November 30,
1996. See "Management of the Trust."
PURCHASE OF SHARES
This Prospectus describes two classes of shares of the Fund: the
"Institutional Class" and the "Administrative Class." Shares of the
Institutional Class are offered primarily for direct investment by
institutional investors. They also are offered through certain financial
intermediaries that charge their customers transaction or other fees with
respect to the customers' investment in the Fund. Shares of the Administrative
Class are offered primarily through employee benefit plan alliances and the
Fund pays service fees to such entities for services they provide to
shareholders of that class.
Shares of the Institutional Class and Administrative Class of the Fund are
offered at the relevant next determined net asset value with no sales charge.
The minimum initial investment for shares of either class is $5,000,000. Shares
of either class may also be offered to clients of the Adviser, and its
affiliates. See "Purchase of Shares."
REDEMPTIONS AND EXCHANGES
Institutional Class and Administrative Class shares of the Fund may be
redeemed without cost at the relevant net asset value per share of the class of
the Fund next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price.
Institutional Class and Administrative Class shares of the Fund may be
exchanged for shares of the same class of any other Fund of the Trust offered
generally to the public on the basis of relative net asset values, except that
only private account clients of PIMCO may purchase shares of the PIMCO
International Bond Fund. Shares of the Fund may also be exchanged for shares of
the same class of a series of the PIMCO Funds: Multi-Manager Series, an
affiliated mutual fund family, comprised primarily of equity portfolios managed
by the subsidiary partnerships of PIMCO Advisors. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
The Fund will distribute dividends from net investment income at least
monthly, and any net realized capital gains at least annually. All dividends
and distributions will be reinvested automatically at net asset value in
additional shares of the same class of the Fund, unless cash payment is
requested. Dividends from net investment income with respect to Administrative
Class shares will be lower than those paid with respect to Institutional Class
shares, reflecting the payment of service fees by that class. See "Dividends,
Distributions and Taxes."
4
<PAGE>
PIMCO FUNDS
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES (EACH CLASS):
<TABLE>
<S> <C>
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Redemption Fee........................................................... None
Exchange Fee............................................................. None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
12b-1
ADVISORY ADMINISTRATIVE (SERVICE) TOTAL
FEE FEE FEE EXPENSES
-------- -------------- --------- --------
<S> <C> <C> <C> <C>
Institutional Class Shares........ 0.25% 0.25% None 0.50%
Administrative Class Shares....... 0.25% 0.25% 0.25% 0.75%
</TABLE>
For a more detailed discussion of the Fund's fees and expenses, see "Fund
Administrator," "Advisory and Administrative Fees," and "Service Fees" under the
caption "Management of the Trust."
EXAMPLE OF FUND EXPENSES:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) a hypothetical 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Class Shares........ $5 $16 $28 $63
Administrative Class Shares....... $8 $24 $42 $93
</TABLE>
The above tables are provided to assist investors in understanding the
various expenses which may be borne directly or indirectly in connection with
an investment in the Fund. This example should not be considered a
representation of past or future expenses or performance. Actual expenses may
be higher or lower than those shown.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Fund are
described below. There can be no assurance that the investment objective of
the Fund will be achieved. Because the market value of the Fund's investments
will change, the net asset value per share of the Fund also will vary.
Specific portfolio securities eligible for purchase by the Fund, investment
techniques that may be used by the Fund, and the risks associated with these
securities and techniques are described more fully under "Characteristics and
Risks of Securities and Investment Techniques" in the Prospectus and
"Investment Objectives and Policies" in the Statement of Additional
Information.
The investment objective of the Fund is to seek to realize maximum real
return, consistent with the preservation of real capital and prudent
investment management. For a discussion of "real return," see below. It
attempts to achieve this objective by investing under normal circumstances at
least 65% of its total assets, measured at the time of investment, in
inflation-indexed bonds issued by U.S. and foreign governments, their agencies
or instrumentalities. Inflation-indexed bonds are government-issued fixed
income securities whose principal value is periodically adjusted according to
the rate of inflation. Such bonds generally are issued at an interest rate
lower than usual government bonds, but are expected to retain their value
against inflation over time. For a more complete discussion of inflation-
indexed bonds, including the risks associated with investing in such
securities, see "Characteristics and Risks of Securities and Investment
Techniques--Inflation-Indexed Bonds." See "Dividends, Distributions and Taxes"
for information about the possible tax consequences of investing in inflation-
indexed bonds.
In selecting securities for the Fund, the Adviser utilizes economic
forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Fund's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Adviser's outlook for the U.S. and foreign
economies, the financial markets, and other factors. All securities purchased
by the Fund must be rated at least A by Moody's or S&P, (or, if unrated,
determined by the Adviser to be of comparable quality), and the Fund will
maintain a minimum average quality of Aa.
In addition to inflation-indexed bonds issued by U.S. and foreign
governments, the Fund may also invest in the following types of securities,
which may be issued by domestic or foreign entities and denominated in U.S.
dollars or foreign currencies: other securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities ("U.S. Government
securities"); corporate debt securities, including corporate inflation-indexed
bonds; convertible securities and corporate commercial paper; mortgage-backed
and other asset-backed securities; structured notes and loan participations;
bank certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; obligations of
foreign governments or their subdivisions, agencies and instrumentalities; and
obligations of international agencies or supranational entities. Fixed income
securities may have fixed, variable, or floating rates of interest, including
rates of interest that vary inversely at a multiple of a designated or
floating rate, or that vary according to changes in relative values of
currencies.
The Fund must normally invest at least 65% of its total assets in "bonds."
For this purpose, the Fund considers the various types of debt or fixed income
securities in which it invests, as specifically described elsewhere in this
Prospectus, to be "bonds" as referenced in the Fund's name. The use of this
name is not meant to restrict the Fund's investment to the narrow category of
debt securities that are formally called "bonds."
The Fund is "non-diversified" for purposes of the Investment Company Act of
1940 ("1940 Act"), meaning that it may invest a greater percentage of its
assets in the securities of one issuer than "diversified" funds. As a "non-
diversified" portfolio, the Fund may be more susceptible to risks associated
with a single economic, political or regulatory occurrence than a diversified
portfolio might be.
6
<PAGE>
PIMCO FUNDS
REAL RETURN
"Real Return," or "Inflation Adjusted Return," as referenced in the name and
investment objective of the Fund, is a measure of the change in purchasing
power of money invested in a particular instrument after adjusting for
inflation. An investment in a security generating a high nominal return (such
as a typical U.S. Government Treasury Bond), may not generate a high real
return once inflation is considered. For example, an instrument generating a 9%
nominal return at a time when inflation is 6% has a real return of
approximately 3%; that is, the purchasing power of the money invested in that
instrument would only increase by approximately 3%. On the other hand, an
inflation-indexed instrument generating a 5% real return would generate a 5%
return, regardless of the rate of inflation. As stated above, the investment
objective of the Fund is to seek to achieve maximum real return. The total
return (not adjusted for inflation) attained by this Fund may be less than the
total return attained by other of the PIMCO Funds that do not invest primarily
in inflation-indexed securities.
The Fund will seek income consisting of interest and dividends from
underlying securities, and capital appreciation, reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares), or realized from the purchase and sale of securities and
use of futures and options, or gains from favorable changes in foreign currency
exchange rates. Generally, over the long term, a portfolio investing primarily
in fixed income securities is not expected to achieve as high a rate of return
as that obtained by a portfolio that invests primarily in equity securities. At
the same time, the market risk and price volatility of a fixed income portfolio
is expected to be less than that of an equity portfolio, so that a fixed income
portfolio is generally considered to be a more conservative investment. The
change in market value of fixed income securities (and therefore their capital
appreciation or depreciation) is largely a function of changes in the current
level of interest rates.
In the case of inflation-indexed bonds, changes in market value are tied to
the relationship between nominal interest rates and the rate of inflation. 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 increase at a faster rate
than inflation, real interest rates might increase, leading to a decrease in
value of inflation-indexed bonds.
MODIFIED REAL DURATION
In managing fixed income securities, one of the principal tools generally
used by the Adviser is "duration," which is a measure of the expected life of a
fixed income security on a present value basis, incorporating a bond's yield,
coupon interest payments, final maturity and call features. Because of the
unique features of inflation-indexed bonds, the Adviser utilizes a modified
form of duration (the "modified real duration") which measures price changes in
such bonds as a result of changes in real, rather than nominal interest rates.
Although there is no limit on the modified real duration of the Fund, it is
expected that the average modified real duration of the Fund will normally vary
approximately with the range of the average modified real duration of all
inflation-indexed bonds issued by the U.S. Treasury in the aggregate.
CREDIT QUALITY
The Fund may make use of average portfolio credit quality standards to assist
institutional investors whose own investment guidelines limit their investments
accordingly. In determining the Fund's overall dollar-weighted average quality,
unrated securities are treated as if rated, based on the Adviser's view of
their comparability to rated securities. The Fund's use of average quality
criteria is intended to be a guide for those institutional investors whose
investment guidelines require that assets be invested according to comparable
criteria. Reference to an overall average quality rating for the Fund does not
mean that all securities held by the Fund will be rated in that category or
higher. The Fund's investments may range in quality from securities rated in
the lowest category in which the Fund is permitted to invest to securities
rated in the highest category (as rated by Moody's or S&P or, if unrated,
determined by the Adviser to be of comparable quality). The percentage of the
Fund's assets invested in securities in a particular rating category will vary.
All securities purchased by the Fund must be rated at least A by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality), and
the Fund will maintain a minimum average quality of Aa.
7
<PAGE>
INVESTMENT RESTRICTIONS
The Fund's investment objective, as set forth under "Investment Objective
and Policies," and the investment restrictions set forth below are fundamental
policies of the Fund and may not be changed with respect to the Fund without
shareholder approval by vote of a majority of the outstanding shares of the
Fund. Under these restrictions, the Fund may not:
(1) invest in a security if, as a result of such investment, more than
25% of its total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto);
(2) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate or interests therein;
(3) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit the Fund, subject to
restrictions described in this Prospectus and in the Statement of
Additional Information, from purchasing, selling or entering into futures
contracts, options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate, securities-
related or foreign currency-related hedging instrument, including swap
agreements and other derivative instruments, subject to compliance with any
applicable provisions of the federal securities or commodities laws;
(4) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that the Fund may (i) borrow from banks or
enter into reverse repurchase agreements, or employ similar investment
techniques, and pledge its assets in connection therewith, but only if
immediately after each borrowing there is asset coverage of 300% and (ii)
enter into transactions in options, futures, options on futures, and other
derivative instruments as described in this Prospectus and in the Statement
of Additional Information (the deposit of assets in escrow in connection
with the writing of covered put and call options and the purchase of
securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for
futures contracts, and commitments entered into under swap agreements or
other derivative instruments will not be deemed to be pledges of the Fund's
assets);
(5) lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances
and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and
(c) lend its portfolio securities in an amount not to exceed one-third of
the value of its total assets, provided such loans are made in accordance
with applicable guidelines established by the Securities and Exchange
Commission and the Trustees of the Trust;
(6) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under the federal securities laws; or
(7) maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except on such conditions as
may be set forth in this Prospectus and in the Statement of Additional
Information.
The Fund is also subject to non-fundamental restrictions and policies (which
may be changed without shareholder approval) relating to the investment of its
assets and activities. See "Investment Restrictions" in the Statement of
Additional Information.
Unless otherwise indicated, all limitations applicable to Fund investments
(as stated above and elsewhere in this Prospectus and in the Statement of
Additional Information) apply only at the time a transaction is entered into.
Any subsequent change in a rating assigned by any rating service to a security
(or, if unrated, deemed to be of comparable quality), or change in the
percentage of Fund assets invested in certain securities or other instruments,
or change in the average duration of the Fund's investment portfolio,
resulting from market fluctuations or other changes in the Fund's total assets
will not require the Fund to dispose of an investment until the Adviser
determines that it is practicable to sell or close out the investment without
undue market or tax consequences to the Fund. In the event that ratings
services assign different ratings to the same security, the Adviser will
determine which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned ratings.
8
<PAGE>
PIMCO FUNDS
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 Statement of
Additional Information.
INFLATION-INDEXED BONDS
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than typical bonds, but are expected to
retain their principal value over time. The interest rate on these bonds is
fixed at issuance, but over the life of the bond this interest may be paid on
an increasing principal value, which has been adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially have
maturities of ten years, though it is anticipated that other maturities will be
issued in the future. The securities will pay interest on a semi-annual basis,
equal to a fixed percentage of the inflation-adjusted principal amount. For
example, if 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 will be reduced. Although repayment of
the bond principal upon maturity (as adjusted for inflation) is guaranteed (in
the case of U.S. Treasury inflation-indexed bonds), the current market value of
the bond is not. The Fund may also invest in other inflation related bonds
which may or may not provide a similar guarantee. If such a guarantee is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal.
Changes in market value in the case of inflation-indexed bonds are tied to
the relationship between nominal interest rates and the rate of inflation. If
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of inflation-
indexed bonds. In contrast, if nominal interest rates increased at a faster
rate than inflation, real interest rates might rise, leading to a decrease in
value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds. As
such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility 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 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.
9
<PAGE>
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Dividends, Distributions and Taxes" for
information about the possible tax consequences of investing in inflation-
indexed bonds.
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 Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. Government securities include securities
that have no coupons, or have been stripped of their unmatured interest
coupons, individual interest coupons from such securities that trade
separately, and evidences of receipt of such securities. Such securities may
pay no cash income, and are purchased at a deep discount from their value at
maturity. Because interest on zero coupon securities is not distributed on a
current basis but is, in effect, compounded, zero coupon securities tend to be
subject to greater market risk than interest-paying securities of similar
maturities. Custodial receipts issued in connection with so-called trademark
zero coupon securities, such as CATs and TIGRs, are not issued by the U.S.
Treasury, and are therefore not U.S. Government securities, although the
underlying bond represented by such receipt is a debt obligation of the U.S.
Treasury. Other zero coupon Treasury securities (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 principal value of certain
corporate debt securities may also be indexed to adjust for inflation. 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.
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 six 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.
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 may exhibit greater price volatility
than a fixed rate obligation of similar credit quality. The Fund has adopted a
policy under which the Fund will not invest more than 5% of its net assets in
any combination of inverse floater, interest only ("IO"), or principal only
("PO") securities. See "Mortgage-Related and Other Asset-Backed Securities" for
a discussion of IOs and POs.
10
<PAGE>
PIMCO FUNDS
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Fund may invest in mortgage- or asset-backed securities. The value of
some mortgage- or asset-backed securities 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 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. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security, and may have
the effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of purchase. To the extent that
unanticipated rates of prepayment on underlying mortgages increase the
effective maturity of a mortgage-related security, the volatility of such
security can be expected to increase.
Payment of principal and interest on some mortgage pass-through securities
(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 the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers) may
be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") 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 collateralized 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 first class has 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.
11
<PAGE>
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, such as CMO residuals or
stripped mortgage-backed securities ("SMBS"), and may be structured in classes
with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class),
while the other class will receive all of the principal (the principal-only, or
"PO" class). The yield to maturity on an IO class is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on the Fund's yield to maturity from these securities. The Fund
has adopted a policy under which the Fund will not invest more than 5% of its
net assets in any combination of IO, PO, or inverse floater securities. The
Fund may invest in other asset-backed securities that have been offered to
investors. For a discussion of the characteristics of some of these
instruments, see the Statement of Additional Information.
REPURCHASE AGREEMENTS
For the purpose of achieving income, the Fund may enter into repurchase
agreements, which entail the purchase of a portfolio eligible security from a
bank or broker-dealer that agrees to repurchase the security at the Fund's cost
plus interest within a specified time (normally one day). If the party agreeing
to repurchase should default, as a result of bankruptcy or otherwise, the 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. The Fund will not invest more
than 15% of its net assets (taken at current market value) in repurchase
agreements maturing in more than seven days.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS, AND OTHER BORROWINGS
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 assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, maturing not later than the
expiration of the reverse repurchase agreement, 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 assets determined to be liquid by the Adviser
in accordance with procedures established by the Board of Trustees, 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.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the Fund may lend its portfolio
securities to brokers, dealers, and other financial institutions, provided: (i)
the loan is secured continuously by collateral consisting of U.S. Government
securities, cash or cash equivalents (negotiable certificates of deposit,
bankers' acceptances or letters of credit) maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the
12
<PAGE>
PIMCO FUNDS
securities loaned; (ii) the Fund may at any time call the loan and obtain the
return of the securities loaned; (iii) the Fund will receive any interest or
dividends paid on the loaned securities; and (iv) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of
the Fund.
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 seven days in the future, or after
a period longer than the customary settlement period for that type of security.
When such purchases are outstanding, the Fund will set aside and maintain until
the settlement date in a segregated account assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees,
in an amount sufficient to meet the purchase price. Typically, no income
accrues on securities 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 investments. If the Fund remains substantially
fully invested at a time when when-issued, delayed delivery, or forward
commitment purchases are outstanding, the purchases may result in a form of
leverage. When the Fund has sold a security on a when-issued, delayed delivery,
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 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 when-issued, delayed delivery, or
forward commitment basis.
SHORT SALES
The Fund may from time to time effect short sales as part of its overall
portfolio management strategy, including the use of derivative instruments, or
to offset potential declines in value of long positions in similar securities
as those sold short. A short sale (other than a short sale against the box) is
a transaction in which the Fund sells a security it does not own at the time of
the sale in anticipation that the market price of that security will decline.
To the extent that the Fund engages in short sales, it must (except in the case
of short sales "against the box") maintain asset coverage in the form of assets
determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, in a segregated account, or otherwise
cover its position in a permissible manner. A short sale is "against the box"
to the extent that the Fund contemporaneously owns, or has the right to obtain
at no added cost, securities identical to those sold short.
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 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
13
<PAGE>
price volatility. Additional costs associated with an investment in foreign
securities may include higher custodial fees than apply to domestic custodial
arrangements and transaction costs of foreign currency conversions. Changes in
foreign exchange rates also will affect the value of securities denominated or
quoted in currencies other than the U.S. dollar.
The 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 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 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 Statement of Additional
Information.
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 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 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. 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 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 risk arising from the Fund's investment or anticipated
investment in securities denominated in foreign currencies. The Fund also may
enter into these contracts for purposes of increasing exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another. The 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 will segregate assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, in
a segregated account to cover forward currency contracts entered into for non-
hedging purposes.
The Fund may invest 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 and other
instruments whose return is linked to foreign currency exchange rates. The Fund
will use these techniques to hedge at least 75% of its exposure to foreign
currency. For a description of these instruments, see "Derivative Instruments"
below and the Statement of Additional Information.
14
<PAGE>
PIMCO FUNDS
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 to hedge against
changes in interest rates, foreign currency exchange rates or securities prices
or as part of its overall investment strategy. The Fund may also purchase and
sell options relating to foreign currencies for purposes of increasing exposure
to a foreign currency or to shift exposure to foreign currency fluctuations
from one country to another. The Fund will maintain segregated accounts
consisting of assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, (or, as permitted by
applicable regulation, enter into certain offsetting positions) to cover its
obligations under options, futures, and swaps to 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 value of some derivative
instruments in which the Fund invest 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 Adviser to forecast interest rates and other
economic factors correctly. If the Adviser incorrectly forecasts such factors
and has taken positions in derivative instruments contrary to prevailing market
trends, the 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 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 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 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.
15
<PAGE>
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 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 options 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, equity 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 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 assets determined to be liquid by the Adviser
in accordance with procedures established by the Board of Trustees, to avoid
any potential leveraging of the 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
16
<PAGE>
PIMCO FUNDS
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 Adviser's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid 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 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 ("CFTC"), 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.
Certain illiquid securities may require pricing at fair value as determined in
good faith under the supervision of the Board of Trustees. The Adviser may be
subject to significant delays in disposing of illiquid securities, and
transactions in illiquid securities may entail registration expenses and other
transaction costs that are higher than transactions in liquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Illiquid
17
<PAGE>
securities are considered to include, among other things, written over-the-
counter options, securities or other liquid assets being used as cover for such
options, repurchase agreements with maturities in excess of seven days, certain
loan participation interests, fixed time deposits which are not subject to
prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale (such as privately placed debt securities) and other
securities 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 PIMCO has determined to be liquid under
procedures approved by the Board of Trustees).
MANAGEMENT OF THE TRUST
The business affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are Guilford C. Babcock, Thomas P. Kemp, Brent
R. Harris, Vern O. Curtis, and William J. Popejoy. Additional information about
the Trustees and the Trust's executive officers may be found in the Statement
of Additional Information under the heading "Management--Trustees and
Officers."
INVESTMENT ADVISER
Pacific Investment Management Company ("PIMCO") serves as investment adviser
("Adviser") to the Fund pursuant to an investment advisory contract. The
Adviser is an investment counseling firm founded in 1971, and had approximately
$ billion in assets under management as of November 30, 1996. PIMCO is a
subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority
interest in PIMCO Advisors is held by PIMCO Partners, G.P., a general
partnership between Pacific Investment Management Company, a California
corporation and indirect wholly owned subsidiary of Pacific Mutual Life
Insurance Company ("Pacific Mutual"), and PIMCO Partners, LLC, a limited
liability company controlled by the PIMCO Managing Directors. PIMCO's address
is 840 Newport Center Drive, Suite 360, Newport Beach, California 92660. PIMCO
is registered as an investment adviser with the Securities and Exchange
Commission ("SEC") and as a commodity trading advisor with the CFTC.
The Adviser manages the investment and reinvestment of the assets of the
Fund. The Adviser is responsible for placing orders for the purchase and sale
of the Fund's investments directly with brokers or dealers selected by it in
its discretion. See "Portfolio Transactions."
The Fund's portfolio manager, who is responsible for the day-to-day
management of the Fund, is John Brynjolfsson, Vice President, PIMCO. Mr.
Brynjolfsson joined PIMCO in 1989 and has managed the Fund since its inception,
February , 1997.
FUND ADMINISTRATOR
PIMCO also serves as administrator to the Fund pursuant to an administration
agreement. PIMCO provides administrative services to the Fund, which include
clerical help and accounting, bookkeeping, internal audit services, and certain
other services required by the Fund, preparation of reports to the Fund's
shareholders and regulatory filings. In addition, PIMCO, at its own expense,
arranges for the provision of legal, audit, custody, transfer agency and other
services for 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.
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 PIMCO or its 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 PIMCO or the Trust, and any
counsel retained exclusively for their benefit; (vi) extraordinary expenses,
including costs of litigation and indemnification expenses; (vii) expenses,
such as organizational expenses, which are capitalized in accordance with
generally accepted accounting principles; and (viii) any expenses allocated or
allocable to a specific class of shares, which include fees payable with
respect to the Administrative Class shares and may include certain other
expenses as permitted by the Trust's Multi-Class Plan adopted pursuant to Rule
18f-3 under the 1940 Act and subject to review and approval by the Trustees.
18
<PAGE>
PIMCO FUNDS
ADVISORY AND ADMINISTRATIVE FEES
The PIMCO Funds feature fixed advisory and administrative fee rates. For
providing investment advisory and administrative services to the Fund as
described above, PIMCO receives monthly advisory fees from the Fund at an
annual rate of 0.25%, and monthly administrative fees at an annual rate of
0.25%, based on the average daily net assets of the Fund.
Both the investment advisory contract and administration agreement for the
Fund may be terminated by the Trustees at any time on 60 days' written notice.
The investment advisory contract may be terminated by PIMCO on 60 days' written
notice. Following the expiration of the two-year period commencing with the
effectiveness of the administration agreement, it may be terminated by PIMCO on
60 days' written notice. Following their initial two-year terms, the investment
advisory contract and administration agreement will continue from year to year
if approved by the Trustees.
SERVICE FEES
The Trust has adopted an Administrative Services Plan and a Distribution Plan
(the "Plans") with respect to the Administrative Class shares of the Fund.
Under the terms of each Plan, the Trust is permitted to reimburse, out of the
Administrative Class assets of the Fund, in an amount up to 0.25% on an annual
basis of the average daily net assets of that class, financial intermediaries
that provide services in connection with the distribution of shares or
administration of plans or programs that use Fund shares as their funding
medium, and to reimburse certain other distribution-related expenses. The same
entity may not receive both distribution and administrative services fees with
respect to the same assets but may with respect to separate assets receive fees
under both a Distribution Plan and Administrative Services Plan. Fees paid
pursuant to either type of Plan may be paid for shareholder service and the
maintenance of accounts and therefore may constitute "service fees" for
purposes of applicable rules of the National Association of Securities Dealers,
Inc. Each Plan has been adopted in accordance with the requirements of Rule
12b-1 under the 1940 Act and will be administered in accordance with the
provisions of that rule, except that shareholders will not have the voting
rights set forth in Rule 12b-1 with respect to the Administrative Services Plan
that they will have with respect to the Distribution Plan. For more complete
disclosure regarding the Plans and their terms, see the Statement of Additional
Information.
Institutional Class shares of the Fund may also be offered through certain
brokers and financial intermediaries ("service agents") that have established a
shareholder servicing relationship with the Trust on behalf of their customers.
The Fund pays no compensation to such entities. Service agents may impose
additional or different conditions on the purchase or redemption of Fund shares
by their customers and may charge their customers transaction or other account
fees on the purchase and redemption of Fund shares. Each service agent is
responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding
purchases and redemptions. Shareholders who are customers of service agents
should consult their service agent for information regarding these fees and
conditions.
DISTRIBUTOR
Shares of the Fund are distributed through PIMCO Funds Distribution Company
(the "Distributor"), an indirect wholly owned subsidiary of PIMCO Advisors. The
Distributor, which is located at 2187 Atlantic Street, Stamford, Connecticut
06902, is a broker-dealer registered with the SEC.
PURCHASE OF SHARES
The Fund offers its shares in five classes: "Institutional Class,"
"Administrative Class," "Class A," "Class B," and "Class C." This Prospectus
relates only to the Institutional Class and Administrative Class shares of the
Fund. For information regarding Class A, Class B, and Class C shares, see
"Other Information--Multiple Classes of Shares" below.
Shares of the Institutional Class are offered primarily for direct investment
by investors such as pension and profit-sharing plans, employee benefit trusts,
endowments, foundations, corporations and other institutions. They also are
offered through certain financial intermediaries that charge their customers
transaction or other fees with
19
<PAGE>
respect to their customers' investment in the Fund. Shares of the
Administrative Class are offered primarily through employee benefit plan
alliances and the Fund pays service fees to such entities for services they
provide to shareholders of that Class.
Shares of either the Institutional Class or the Administrative Class of the
Fund may be purchased at the relevant net asset value of that class without a
sales charge. The minimum initial investment for shares of either class is
$5,000,000. Shares of either class may also be offered to clients of the
Adviser and its affiliates.
Pension and profit-sharing plans, employee benefit trusts and employee
benefit plan alliances and "wrap account" programs established with broker-
dealers or financial intermediaries may purchase shares of either class only if
the plan or program for which the shares are being acquired will maintain an
omnibus or pooled account for the Fund and will not require the Fund to pay any
type of administrative payment per participant account to any third party.
Shares of the Institutional Class may also be offered through fee-based
programs sponsored and maintained by a registered broker-dealer and approved by
the Distributor pursuant to which each investor pays an asset based fee at an
annual rate of at least .50% of the assets in the account to a financial
intermediary for investment advisory and/or administrative services.
INITIAL INVESTMENT
An account may be opened by completing and signing a Client Registration
Application and mailing it to PIMCO Funds at the following address: 840 Newport
Center Drive, Suite 360, Newport Beach, California 92660. A Client Registration
Application may be obtained by calling (800) 800-0952.
Except as provided below, purchases of shares can only be made by wiring
federal funds to Investors Fiduciary Trust Company (the "Transfer Agent"), 127
West 10th Street, Kansas City, Missouri 64105. Before wiring federal funds, the
investor must first telephone the Trust at (800) 927-4648 to receive
instructions for wire transfer, and the following information will be
requested: name of authorized person; shareholder name; shareholder account
number; name of Fund and share class; amount being wired; and wiring bank name.
Shares may be purchased without first wiring federal funds if the proceeds of
the investment are derived from an advisory account maintained by the investor
with PIMCO, PIMCO Advisors or one of their affiliates; from surrender or other
payment from an annuity, insurance, or other contract held by Pacific Mutual
Life Insurance Company; or from an investment by broker-dealers, institutional
clients or other financial intermediaries which have established a shareholder
servicing relationship with the Trust on behalf of their customers.
All purchase orders are effected at the relevant net asset value for that
class next determined after receipt of the purchase order. A purchase order,
together with payment in proper form, received by the Transfer Agent prior to
the close of business (ordinarily 4:00 p.m., Eastern time) on a day the Trust
is open for business will be effected at that day's net asset value. An order
received after the close of business will be effected at the net asset value
determined on the next business day. The Trust is "open for business" on each
day the New York Stock Exchange is open for trading, which excludes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Purchase
orders will be accepted only on days on which the Trust is open for business.
If a purchase order for shares is received prior to 12:00 noon, Eastern time,
and payment in federal funds is received by the Transfer Agent by the close of
the federal funds wire on the day the purchase order is received, dividends
will accrue starting that day. If a purchase order is received after 12:00
noon, Eastern time, and payment in federal funds is received by the Transfer
Agent by the close of the federal funds wire on the day the purchase order is
received, or as otherwise agreed to by the Trust, the order will be effected at
that day's net asset value, but dividends will not begin to accrue until the
following business day.
ADDITIONAL INVESTMENTS
Additional investments may be made at any time at the relevant net asset
value for that class by calling the Trust and wiring federal funds to the
Transfer Agent as outlined above.
20
<PAGE>
PIMCO FUNDS
OTHER PURCHASE INFORMATION
Purchases of the Fund's Institutional Class and Administrative Class shares
will be made in full and fractional shares. In the interest of economy and
convenience, certificates for shares will not be issued.
The Trust and the Distributor each reserves the right, in its sole
discretion, to suspend the offering of shares of the Fund or to reject any
purchase order, in whole or in part, when, in the judgment of management, such
suspension or rejection is in the best interests of the Trust; to waive the
minimum initial investment for certain investors; and to redeem shares if
information provided in the Client Registration Application should prove to be
incorrect in any manner judged by the Trust to be material (e.g., in a manner
such as to render the shareholder ineligible to purchase shares of the Fund).
Purchases and sales of Fund shares should be made for long-term investment
purposes only. The Trust and Adviser each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in share price
appears evident.
Institutional Class and Administrative Class shares of the Fund are not
qualified or registered for sale in all states. Prospective investors should
inquire as to whether shares of the Fund are available for offer and sale in
their state of residence. Shares of the Fund may not be offered or sold in any
state unless registered or qualified in that jurisdiction or unless an
exemption from registration or qualification is available.
Investors may, subject to the approval of the Trust, purchase shares of the
Fund with liquid securities that are eligible for purchase by the Fund
(consistent with the Fund's investment policies and restrictions) and that have
a value that is readily ascertainable in accordance with the Trust's valuation
policies. These transactions will be effected only if the Adviser intends to
retain the security in the Fund as an investment. Assets so purchased by the
Fund will be valued in generally the same manner as they would be valued for
purposes of pricing the Fund's shares, if such assets were included in the
Fund's assets at the time of purchase. The Trust reserves the right to amend or
terminate this practice at any time.
RETIREMENT PLANS
Shares of the Fund are available for purchase by retirement plans, including
Keogh plans, 401(k) plans, 403(b) plans and Individual Retirement Accounts. The
administrator of a plan or employee benefits office can provide participants or
employees with detailed information on how to participate in the plan and how
to elect the Fund as an investment option. Participants in a retirement or
savings plan may be permitted to elect different investment options, alter the
amounts contributed to the plan, or change how contributions are allocated
among investment options in accordance with the plan's specific provisions. The
plan administrator or employee benefits office should be consulted for details.
For questions about participant accounts, participants should contact their
employee benefits office, the plan administrator, or the organization that
provides recordkeeping services for the plan. Investors who purchase shares
through retirement plans should be aware that plan administrators may aggregate
purchase and redemption orders for participants in the plan. Therefore, there
may be a delay between the time the investor places his order with the plan
administrator, and the time the order is forwarded to the Transfer Agent for
execution.
REDEMPTION OF SHARES
REDEMPTIONS BY MAIL
Institutional Class and Administrative Class shares may be redeemed by
submitting a written request to PIMCO Funds, 840 Newport Center Drive, Suite
360, Newport Beach, California 92660, stating the Fund from which the shares
are to be redeemed, the class of shares, the number or dollar amount of the
shares to be redeemed and the account number. The request must be signed
exactly as the names of the registered owners appear on the Trust's account
records, and the request must be signed by the minimum number of persons
designated on the Client Registration Application that are required to effect a
redemption.
21
<PAGE>
REDEMPTIONS BY TELEPHONE OR OTHER WIRE COMMUNICATION
If an election is made on the Client Registration Application (or
subsequently in writing), redemptions of shares may be requested by calling the
Trust at (800) 927-4648, by sending a facsimile to (714) 760-4456, or by other
means of wire communication. Investors should state the Fund and class from
which the shares are to be redeemed, the number or dollar amount of the shares
to be redeemed and the account number. Redemption requests of an amount of
$10,000,000 or more may be initiated by telephone, but must be confirmed in
writing by an authorized party prior to processing.
In electing a telephone redemption, the investor authorizes PIMCO and the
Transfer Agent to act on telephone instructions from any person representing
himself to be the investor, and reasonably believed by PIMCO and the Transfer
Agent to be genuine. Neither the Trust nor its Transfer Agent will be liable
for any loss, cost or expense for acting on instructions (whether in writing or
by telephone) believed by the party receiving such instructions to be genuine
and in accordance with the procedures described in this Prospectus.
Shareholders should realize that by electing the telephone or wire redemption
option, they may be giving up a measure of security that they might have if
they were to redeem their shares in writing. Furthermore, interruptions in
telephone service may mean that a shareholder will be unable to effect a
redemption by telephone when desired. The Transfer Agent provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone instructions are genuine (written confirmation is also
provided for redemption requests received in writing). All telephone
transactions are recorded, and PIMCO or the Transfer Agent may request certain
information in order to verify that the person giving instructions is
authorized to do so. All redemptions, whether initiated by letter or telephone,
will be processed in a timely manner and proceeds will be forwarded by wire in
accordance with the redemption policies of the Trust detailed below. See
"Redemption of Shares--Other Redemption Information."
Shareholders may decline telephone exchange or redemption privileges after an
account is opened by instructing the Transfer Agent in writing at least seven
business days prior to the date the instruction is to be effective.
Shareholders may experience delays in exercising telephone redemption
privileges during periods of abnormal market activity. During periods of
volatile economic or market conditions, shareholders may wish to consider
transmitting redemption orders by telegram, facsimile or overnight courier.
OTHER REDEMPTION INFORMATION
Payment of the redemption price will ordinarily be wired to the investor's
bank one business day after the tender request, but may take up to seven
business days. Redemption proceeds will be sent by wire only to the bank name
designated on the Client Registration Application. The Trust may suspend the
right of redemption or postpone the payment date at times when the New York
Stock Exchange is closed, or during certain other periods as permitted under
the federal securities laws.
For shareholder protection, a request to change information contained in an
account registration (for example, a request to change the bank designated to
receive wire redemption proceeds) must be received in writing, signed by the
minimum number of persons designated on the Client Registration Application
that are required to effect a redemption, and accompanied by a signature
guarantee from any eligible guarantor institution, as determined in accordance
with the Trust's procedures. Shareholders should inquire as to whether a
particular institution is an eligible guarantor institution. A signature
guarantee cannot be provided by a notary public. In addition, corporations,
trusts and other institutional organizations are required to furnish evidence
of the authority of the persons designated on the Client Registration
Application to effect transactions for the organization.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem Institutional Class and Administrative Class
shares in any account for their then-current value (which will be promptly paid
to the investor) if at any time, due to redemption by the investor, the shares
in the account do not have a value of at least $100,000 ($10,000 with respect
to accounts opened before January 1, 1995). A shareholder will receive advance
notice of a mandatory redemption and will be given at least 30 days to bring
the value of its account up to at least $100,000, or $10,000, as the case may
be.
22
<PAGE>
PIMCO FUNDS
The Trust agrees to redeem shares of the Fund solely in cash up to the lesser
of $250,000 or 1% of the net assets during any 90-day period for any one
shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption proceeds
exceeding this amount in whole or in part by a distribution in kind of
securities held by the Fund in lieu of cash. It is highly unlikely that shares
would ever be redeemed in kind. If shares are redeemed in kind, however, the
redeeming shareholder should expect to incur transaction costs upon the
disposition of the securities received in the distribution.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the same class of any other
Fund of the Trust based on the respective net asset values of the shares
involved, except that shares of the PIMCO International Fund are available only
to private account clients of PIMCO. An exchange may be made by following the
redemption procedure described above under "Redemptions by Mail" or, if the
telephone redemption option has been elected, by calling the Trust at (800)
927-4648. Shares of the Fund may also be exchanged for shares of the same class
of a series of the PIMCO Funds: Multi-Manager Series, an affiliated mutual fund
family comprised primarily of equity portfolios managed by the subsidiary
partnerships of PIMCO Advisors. Shareholders interested in such an exchange may
request a prospectus for these funds by contacting the PIMCO Funds at the same
address and telephone number as the Trust.
Exchanges may be made only with respect to other Funds of the Trust, or PIMCO
Funds: Multi-Manager Series, registered in the state of residence of the
investor or where an exemption from registration is available. An exchange
order is treated the same as a redemption followed by a purchase and may result
in a capital gain or loss for tax purposes, and special rules may apply in
computing tax basis when determining gain or loss. See "Taxation" in the
Statement of Additional Information.
The Trust reserves the right to modify or revoke the exchange privilege of
any shareholder or to limit or reject any exchange. Although the Trust will
attempt to give shareholders prior notice whenever it is reasonably able to do
so, it may impose these restrictions at any time.
PORTFOLIO TRANSACTIONS
Pursuant to the advisory contract, the Adviser places orders for the purchase
and sale of portfolio investments for the Fund's accounts with brokers or
dealers selected by it in its discretion. In effecting purchases and sales of
portfolio securities for the account of the Fund, the Adviser will seek the
best price and execution of the Fund's orders. In doing so, the Fund may pay
higher commission rates than the lowest available when the Adviser believes it
is reasonable to do so in light of the value of the brokerage and research
services provided by the broker effecting the transaction. The Adviser also may
consider sales of shares of the Trust as a factor in the selection of broker-
dealers to execute portfolio transactions for the Trust.
The Adviser manages the Fund without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-term
trading by provisions of the federal tax laws. The use of futures contracts and
other derivative instruments with relatively short maturities may tend to
exaggerate the portfolio turnover rate for some of the Fund. Trading in fixed
income securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. The use of futures
contracts may involve the payment of commissions to futures commission
merchants. The higher the rate of portfolio turnover of the Fund, the higher
all these transaction costs borne by the Fund generally will be.
Some securities considered for investment by the Fund may also be appropriate
for other clients served by the Adviser. If a purchase or sale of securities
consistent with the investment policies of the Fund and one or more of these
clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the Fund and clients in
a manner deemed fair and reasonable by the Adviser.
23
<PAGE>
NET ASSET VALUE
The net asset value per share of each of the Institutional Class and
Administrative Class of the Fund is determined as of the close of trading on
the New York Stock Exchange (ordinarily 4:00 p.m., Eastern time) by dividing
the total market value of the Fund's portfolio investments and other assets
attributable to that class, less any liabilities, by the number of total
outstanding shares of that class. Net asset value will not be determined on
days on which the New York Stock Exchange is closed.
Portfolio securities and other assets for which market quotations are readily
available are stated at market value. Market value is determined on the basis
of last reported sales prices, or if no sales are reported, as is the case for
most securities traded over-the-counter, at the mean between representative bid
and asked quotations obtained from a quotation reporting system or from
established market makers. Fixed income securities, including those to be
purchased under firm commitment agreements (other than obligations having a
maturity of 60 days or less), are normally valued on the basis of quotations
obtained from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using foreign exchange quotations received from independent
dealers. Short-term investments having a maturity of 60 days or less are valued
at amortized cost, when the Board of Trustees determines that amortized cost is
their fair value. Certain fixed income securities for which daily market
quotations are not readily available may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to fixed income securities
whose prices are more readily obtainable and whose durations are comparable to
the securities being valued. Subject to the foregoing, other securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
The Fund's liabilities are allocated among its classes. The total of such
liabilities allocated to a class plus that class' distribution and/or servicing
fees and any other expenses specially allocated to that class are then deducted
from the class' proportionate interest in the Fund's assets, and the resulting
amount for each class is divided by the number of shares of that class
outstanding to produce the "net asset value" per share. Under certain
circumstances, the per share net asset value of the Administrative Class shares
of the Fund may be lower than the per share net asset value of the
Institutional Class shares as a result of the daily expense accruals of the
service fee applicable to the Administrative Class shares. Generally, those
dividends are expected to differ over time by approximately the amount of the
expense accrual differential between the Fund's classes.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shares begin earning dividends on the effective date of purchase, provided
notification deadlines are met. See "Purchase of Shares." Dividends are
declared daily from net investment income to shareholders of record at the
close of the previous business day, and distributed to shareholders monthly.
Any net realized capital gains from the sale of portfolio securities will be
distributed no less frequently than once yearly. Dividend and capital gain
distributions of the Fund will be reinvested in additional shares of the Fund
unless the shareholder elects to have them paid in cash. Dividends from net
investment income with respect to Administrative Class shares will be lower
than those paid with respect to Institutional Class shares, reflecting the
payment of service fees by that class.
The Fund intends to qualify as a regulated investment company annually and to
elect to be treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended. As such, the Fund generally will not pay
federal income tax on the income and gains it pays as dividends to its
shareholders. In order to avoid a 4% federal excise tax, the Fund intends to
distribute each year substantially all of its net income and gains.
Distributions received by tax-exempt shareholders will not be subject to
federal income tax to the extent permitted under applicable tax law. To the
extent that a shareholder is not exempt from tax on Fund distributions, such
shareholder will be subject to tax on dividends received from the Fund,
regardless of whether received in
24
<PAGE>
PIMCO FUNDS
cash or reinvested in additional shares. All shareholders must treat dividends,
other than capital gain dividends or dividends that represent a return of
capital to shareholders, as ordinary income. Dividends designated by the Fund
as capital gain dividends are taxable to shareholders as long-term capital gain
except as provided by an applicable tax exemption. Any distributions that are
not from the Fund's net investment income or net capital gain may be
characterized as a return of capital to shareholders or, in some cases, as
capital gain. Certain dividends declared in October, November or December of a
calendar year are taxable to shareholders (who otherwise are subject to tax on
dividends) as though received on December 31 of that year if paid to
shareholders during January of the following calendar year. For state income
tax purposes, interest on some Federal obligations generally is not exempt from
taxation, whether received directly by a shareholder or through distributions
of investment company taxable income (for example, interest on FNMA and GNMA
Certificates). The Fund will advise shareholders annually of the amount and
nature of the dividends paid to them.
Coupon payments received by the Fund from inflation-indexed bonds will be
includable in the Fund's gross income in the period in which they accrue.
Periodic adjustments for inflation in the principal value of these securities
also may give rise to original issue discount, which, likewise, will be
includable in the Fund's gross income on a current basis. See "Taxation--
Original Issue Discount" in the Statement of Additional Information. Amounts
includable in the Fund's gross income become subject to tax-related
distribution requirements. Accordingly, the Fund may be required to make annual
distributions to shareholders in excess of the cash received in a given period
from these investments. As a result, the Fund may be required to liquidate
certain investments at a time when it is not advantageous to do so. If the
principal value of an inflation-indexed bond is adjusted downward in any period
as a result of deflation, the reduction may be treated as a loss to the extent
the reduction exceeds coupon payments received in that period; in that case,
the amount distributable by the Fund may be reduced and amounts distributed
previously in the taxable year may be characterized in some circumstances as a
return of capital.
Taxable shareholders should note that the timing of their investment could
have undesirable tax consequences. If shares are purchased on or just before
the day the Fund declares a dividend, taxable shareholders will pay full price
for the shares and may receive a portion of their investment back as a taxable
distribution.
The preceding discussion relates only to federal income tax; the consequences
under other tax laws may differ. For additional information relating to the tax
aspects of investing in the Fund, see the Statement of Additional Information.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on February 19,
1987. The Board of Trustees may establish additional portfolios in the future.
The capitalization of the Trust consists solely of an unlimited number of
shares of beneficial interest with a par value of $0.0001 each. When issued,
shares of the Trust are fully paid, non-assessable and freely transferable.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust itself would be unable to meet
its obligations, and thus should be considered remote.
MULTIPLE CLASSES OF SHARES
In addition to Institutional Class and Administrative Class shares, the Fund
offers Class A shares, Class B shares, and Class C shares. These other classes
of the Fund may have different sales charges and expense levels,
25
<PAGE>
which will affect performance. Investors may contact the Distributor at (800)
426-0107 for more information concerning other classes of shares of the Fund.
This Prospectus relates only to the Institutional Class shares and
Administrative Class shares of the Fund.
VOTING
Shareholders have the right to vote on the election of Trustees and on any
and all matters on which the law or the Declaration of Trust states they may be
entitled to vote. The Trust is not required to hold regular annual meetings of
Trust shareholders and does not intend to do so. Shareholders of a class of
shares have separate voting rights with respect to matters that only affect
that class. See "Other Information--Voting Rights" in the Statement of
Additional Information.
The Declaration of Trust provides that the holders of not less than two-
thirds of the outstanding shares of the Trust may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Trust.
Shares entitle their holders to one vote per share (with proportionate voting
for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of a Fund (or the Trust) means the vote of
the lesser of: (1) 67% of the shares of the Fund (or the Trust) present at a
meeting, if the holders of more than 50% of the outstanding shares are present
in person or by proxy; or (2) more than 50% of the outstanding shares of the
Fund (or the Trust).
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and total return for each
class of shares of the Fund in advertisements or reports to shareholders or
prospective investors. Quotations of yield for the Fund or a class thereof will
be based on the investment income per share (as defined by the SEC) during a
particular 30-day (or one-month) period (including dividends and interest),
less expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the maximum public offering price
per share on the last day of the period. Quotations of average annual total
return for the Fund or a class thereof will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund or class over periods of one, five and ten years (up to the life of the
Fund), reflect the deduction of a proportional share of Fund or class expenses
(on an annual basis), and assume that all dividends and distributions are
reinvested when paid.
The Trust also may provide current distribution information to its
shareholders in shareholder reports or other shareholder communications, or in
certain types of sales literature provided to prospective investors. Current
distribution information for a particular class of the Fund will be based on
distributions for a specified period (i.e., total dividends from net investment
income), divided by the relevant class net asset value per share on the last
day of the period and annualized. The rate of current distributions does not
reflect deductions for unrealized losses from transactions in derivative
instruments such as options and futures, which may reduce total return. Current
distribution rates differ from standardized yield rates in that they represent
what a class of a Fund has declared and paid to shareholders as of the end of a
specified period rather than the Fund's actual net investment income for that
period.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Lehman Brothers Aggregate Bond Index, the
Merrill Lynch 1 to 3 Year Treasury Index, the Lehman Intermediate and 20+ Year
Treasury Blend Index, the Lehman BB Intermediate Corporate Index, indexes
prepared by Lipper Analytical Services, the J.P. Morgan Global Index, the
Salomon Brothers World Government Bond Index-10 Non U.S.-Dollar Hedged and the
J.P. Morgan Government Bond Index Non U.S.-Dollar Hedged, and other entities or
organizations which track the performance of investment companies or investment
advisers. Unmanaged indexes (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses. PIMCO may also
report to shareholders or to the public in advertisements concerning the
performance of PIMCO as adviser to clients other than the Trust, and on the
comparative
26
<PAGE>
PIMCO FUNDS
performance or standing of PIMCO in relation to other money managers. Such
comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information, whether related
to the Fund or to the Adviser, should be considered in light of the Fund's
investment objectives and policies, characteristics and quality of the
portfolio, and the market conditions during the time period indicated, and
should not be considered to be representative of what may be achieved in the
future. For a description of the methods used to determine yield and total
return for the Fund, see the Statement of Additional Information.
Investment results of the Fund will fluctuate over time, and any presentation
of the Fund's total return or yield for any prior period should not be
considered as a representation of what an investor's total return or yield may
be in any future period. The Trust's Annual Report contains additional
performance information for the Fund and is available upon request, without
charge, by calling (800) 927-4648 (Current Shareholders), or (800) 800-0952
(New Accounts).
27
<PAGE>
[LOGO OF PIMCO]
PIMCO FUNDS
Pacific Investment Management Series
INVESTMENT ADVISER AND ADMINISTRATOR
Pacific Investment Management Company
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
ACCOUNTANTS
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W., Suite 500
Washington, DC 20005
PROSPECTUS
- --------------------------------------------------------------------------------
February , 1997
<PAGE>
PIMCO FUNDS
- ----------------- PROSPECTUS
February , 1997
PIMCO REAL RETURN BOND FUND
Pacific
Investment
Management
Series
P I M C O (LOGO)
<PAGE>
PIMCO Funds: Pacific Investment Management Series
PROSPECTUS
February , 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PIMCO Funds (the "Trust") is an open-end series management investment company
offering twenty separate investment portfolios, one of which, the Real Return
Bond Fund (the "Fund") is described in this Prospectus. The Fund has its own
investment objective and strategies. The Trust is designed to provide access to
the professional investment management services offered by Pacific Investment
Management Company ("Pacific Investment Management"), which serves as investment
adviser (the "Adviser") to the Fund. The address of PIMCO Funds is 840 Newport
Center Drive, Suite 360, Newport Beach, CA 92660.
The Fund offers three classes of shares in this Prospectus: Class A shares
(generally sold subject to an initial sales charge), Class B shares (sold
subject to a contingent deferred sales charge) and Class C shares (sold subject
to an asset based sales charge). Through a separate prospectus, the Fund offers
two additional classes of shares, Institutional Class shares and Administrative
Class shares. See "Alternative Purchase Arrangements" below.
THE FUND MAY INVEST IN DERIVATIVE INSTRUMENTS, SOME OF WHICH MAY BE PARTICULARLY
SENSITIVE TO CHANGES IN PREVAILING INTEREST RATES. UNEXPECTED CHANGES IN
INTEREST RATES MAY ADVERSELY AFFECT THE VALUE OF THE FUND'S INVESTMENTS IN
PARTICULAR DERIVATIVE INSTRUMENTS.
This Prospectus concisely describes the information investors should know before
investing in Class A, Class B or Class C shares of the Fund. Please read this
Prospectus carefully and keep it for further reference.
Information about the investment objective of the Fund, along with a detailed
description of the types of securities in which each Fund may invest and of
investment policies and restrictions applicable to each Fund, is set forth in
this Prospectus. There can be no assurance that the investment objective of the
Fund will be achieved. Because the market value of the Fund's investments will
change, the investment returns and net asset value per share of the Fund also
will vary.
A Statement of Additional information dated February , 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 800-426-0107. The Statement of Additional Information, which
contains more detailed information about the Fund, has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
in this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary........................................................... X
Schedule of Fees............................................................. X
Investment Objective and Policies............................................ X
Characteristics and Risks of Securities and Investment Techniques............ X
Performance Information...................................................... X
How to Buy Shares............................................................ X
General...................................................................... X
Alternative Purchase Arrangements............................................ X
Exchange Privilege........................................................... X
How to Redeem................................................................ X
Distributor and Distribution and Servicing Plans............................. X
How Net Asset Value is Determined............................................ X
Distributions................................................................ X
Taxes........................................................................ X
Management of the Trust...................................................... X
Description of the Trust..................................................... X
Mailings to Shareholders..................................................... X
</TABLE>
<PAGE>
PIMCO Funds: Pacific Investment Management Series
Prospectus Summary
Pacific Investment Management Company (the "Adviser") is the investment adviser
of the Fund. Pacific Investment Management Company is one of the premier fixed
income investment management firms in the U.S. As of September 30, 1996, Pacific
Investment Management Company had over $83 billion in assets under management.
Pacific Investment Management Company invests in all sectors of the fixed income
market, using its total return philosophy--seeking capital appreciation as well
as yield.
The investment objective of the Fund is to seek to realize maximum real return,
consistent with the preservation of real capital and prudent investment
management. The Fund normally invests at least 65% of its assets in inflation-
indexed bonds, rated at least A by Moody's Investor Services, Inc. ("Moody's")
or Standard and Poor's ("S&P"), (or, if unrated, determined by the Adviser to be
of comparable quality). The Fund may invest up to 20% of its assets in foreign
currency-denominated securities, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. The Fund may be attractive to
those investors seeking to hedge against inflation risk. See "Investment
Objectives and Policies-Real Return" for a description of real return.
The Fund may invest in securities of foreign issuers, which may be subject to
additional risk factors, including foreign currency and political risks, not
applicable to securities of U.S. issuers. The Fund's investment techniques may
involve a form of borrowing, which may tend to exaggerate the effect on net
asset value of any increase or decrease in the market value of the Fund's
portfolio and may require liquidation of portfolio positions when it is not
advantageous to do so. The Fund may sell securities short, which exposes the
Fund to a risk of loss if the value of the security sold short should increase.
The Fund may use derivative instruments, consisting of futures, options,
options on futures, and swap agreements, for hedging purposes or as part of its
investment strategy. Use of these instruments may involve certain costs and
risks, including the risk that the Fund could not close out a position when it
would be most advantageous to do so, the risk of an imperfect correlation
between the value of the securities being hedged and the value of the particular
derivative instrument, and the risk that unexpected changes in interest rates
may adversely affect the value of the Fund's investments in particular
derivative instruments. Unless otherwise indicated, all limitation applicable to
Fund investments (as stated in this Prospectus and in the Statement of
Additional Information) apply only at the time a transaction is entered into.
Any subsequent change in a rating assigned by any rating service to a security
(or, if unrated, deemed to be of comparable quality), or change in the
percentage of Fund assets invested in certain securities or other instruments,
or change in the average duration of the Fund's investment portfolio, resulting
from market fluctuations or other changes in the Fund's total assets will not
require the Fund to dispose of an investment until the Adviser determines that
is practicable to sell or close out the investment without undue market or tax
consequences to the Fund. In the event that ratings services assign different
ratings to the same security, the Adviser will determine which rating it
believes best reflects the security's quality and risk at that time, which may
be the higher of the several assigned ratings.
The Fund offers its shares to both individual and institutional investors.
Institutional shareholders, some of whom also may be investment advisory clients
of Pacific Investment Management, may hold large positions in the Fund. Such
shareholders may on occasion make large redemptions of their holdings in the
Fund to meet their liquidity needs, in connection with strategic adjustments to
their overall portfolio of investments, or for other purposes. Large redemptions
from the Fund could require the Adviser to liquidate portfolio positions when it
is not most desirable to do so. Liquidation of portfolio holdings also may cause
the Fund to realize capital gains.
Specific portfolio securities eligible for purchase by the Fund, investment
techniques that may be used by the Fund, and the risks associated with these
securities and techniques are described more fully under "Characteristics and
Risks of Securities and Investment Techniques" in the Prospectus and "Investment
Objective and Policies" in the Statement of Additional Information.
<PAGE>
4 PIMCO FUNDS - Pacific Investment Management Series
- -----------------------------------------------------------------
SCHEDULE OF FEES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION
EXPENSES CLASS A CLASS B CLASS C
SHARES SHARES SHARES
<S> <C> <C> <C>
Maximum initial sales charge imposed on purchases
(as a percentage of offering price at time of
purchase)................................................................ 4.75% None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of net asset value at
time of purchase)........................................................ None None None
Maximum contingent deferred sales
charge ("CDSC") (as a percentage
of original purchase price) ............................................. 1%(1) 5%(2) 1%(3)
Redemption Fee............................................................ None None None
Exchange Fee.............................................................. None None None
</TABLE>
(1) Imposed only in certain circumstances where Class A shares are purchased
without a sales charge at the time of purchase. See "Alternative Purchase
Arrangements" in this Prospectus.
(2) The maximum CDSC is imposed on shares redeemed in the first year. For
shares held longer than one year, the CDSC declines according to the
schedules set forth under "Deferred Sales Charge Alternative--Class B
Shares" in this Prospectus.
(3) The CDSC on Class C shares is imposed only on shares redeemed in the first
year.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series
- ------------------------------------------------------------------------ 5
<TABLE>
<CAPTION>
EXAMPLE: You would pay the EXAMPLE: You would pay the
following expenses on a $1,000 following expenses on a
ANNUAL FUND investment assuming (1) 5% annual $1,000 investment assuming
OPERATING EXPENSES return and (2) redemption at the end of (1) 5% annual return
(As a percentage of average net assets) each time period: and (2) no redemption:
- ------------------------------------------------------------------------------------------------------------------------------------
Admini- Total Fund
Advisory strative 12b-1 Operating 1 3 5 10 1 3 5 10
Real Return Bond Fund Fee Fee Fee Expenses Year Years Years Years Year Years Years Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares............. .25% .40% .25%/1/ .90% $ $ $ $ $ $ $ $
Class B Shares............. .25 .40 1.00 /2/ 1.65
Class C Shares............. .25 .40 1.00 /2/ 1.65
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ 12b-1 fees represent servicing fees which are paid annually to the
Distributor and repaid to participating brokers, certain banks and other
financial intermediaries. See "Distributor and Distribution and Servicing
Plans."
/2/ 12b-1 fees which equal or are less than .25% represent servicing fees which
are paid annually to the Distributor and repaid by the Distributor to
participating brokers, certain banks and other financial intermediaries. 12b-1
fees which exceed .25% represent aggregate distribution and servicing fees. See
"Distributor and Distribution and Servicing Plans."
<PAGE>
The purpose of the foregoing tables is to assist investors in understanding the
various costs and expenses of the Trust that are borne directly or indirectly by
Class A, Class B and Class C shareholders of the Fund. Class A, Class B and
Class C shares of the Fund were not offered prior to the date of this
Prospectus. The Examples for Class A shares assume payment of the current
maximum applicable sales load. Due to the 12b-1 distribution fee imposed on
Class B and Class C shares, a Class B or Class C shareholder of the Fund may,
depending on the length of time the shares are held, pay more than the economic
equivalent of the maximum front-end sales charges permitted by relevant rules of
the National Association of Securities Dealers, Inc.
NOTE: THE FIGURES SHOWN IN THE EXAMPLES 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.
<PAGE>
<PAGE>
8 PIMCO FUNDS - Pacific Investment Management Series
-------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Fund are
described below. There can be no assurance that the investment objective of the
Fund will be achieved. The value of all securities and other instruments held by
the Fund will vary from time to time in response to a wide variety of market
factors. Consequently, the net asset value per share of the Fund will vary. The
net asset value per share of the Fund may be less at the time of redemption than
it was at the time of investment. While the value of most fixed income
securities can be expected to vary inversely with changes in prevailing interest
rates, i.e., as interest rates rise, market value tends to decrease, and vice
versa, this may not be true in the case of inflation-indexed bonds. See
"Characteristics and Risks of Securities and Investment Techniques--Inflation-
Indexed Bonds" for additional information.
Investors should carefully consider the possible tax consequences from investing
in the Fund. The Fund invests primarily in securities that for tax purposes may
be considered to have been issued originally at a discount. Accordingly, the
Fund may be required to make annual distributions to shareholders in excess of
the cash received by the Fund in a given period from those investments. See
"Characteristics and Risks of Securities and Investment Techniques--Inflation-
Indexed Bonds," and "Dividends, Distributions and Taxes" for additional
information.
<PAGE>
9
The investment objective of the Fund is to seek to realize maximum real return,
consistent with the preservation of real capital and prudent investment
management. For a discussion of "real return," see below. It attempts to achieve
this objective by investing under normal circumstances at least 65% of its total
assets, measured at the time of investment, in inflation-indexed bonds issued by
U.S. and foreign governments, their agencies or instrumentalities. Inflation-
indexed bonds are government-issued fixed income securities whose principal
value is periodically adjusted according to the rate of inflation. Such bonds
generally are issued at an interest rate lower than usual government bonds, but
are expected to retain their value against inflation over time. For a more
complete discussion of inflation-indexed bonds, including the risks associated
with investing in such securities, see "Characteristics and Risks of Securities
and Investment Techniques--Inflation-Indexed Bonds." See "Dividends,
Distributions and Taxes" for information about the possible tax consequences of
investing in inflation-indexed bonds.
In selecting securities for the Fund, the Adviser utilizes economic forecasting,
interest rate anticipation, credit and call risk analysis, foreign currency
exchange rate forecasting, and other security selection techniques. The
proportion of the Fund's assets committed to investment in securities with
particular characteristics (such as maturity, type and coupon rate) will vary
based on the Adviser's outlook for the U.S. and foreign economies, the financial
markets, and other factors. All securities purchased by the Fund must be rated
at least A by Moody's or S&P, (or, if unrated, determined by the Adviser to be
of comparable quality), and the Fund will maintain a minimum average quality of
Aa.
In addition to inflation-indexed bonds issued by U.S. and foreign governments,
the Fund may also invest in the following types of securities, which may be
issued by domestic or foreign entities and denominated in U.S. dollars or
foreign currencies: other securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government securities");
corporate debt securities, including corporate inflation-indexed bonds;
convertible securities and corporate commercial paper; mortgage-backed and other
asset-backed securities; structured notes and loan participations; bank
certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; and
obligations of international agencies or supranational entities. Fixed income
securities may have fixed, variable, or floating rates of interest, including
rates of interest that vary inversely at a multiple of a designated or floating
rate, or that vary according to changes in relative values of currencies.
<PAGE>
The Fund must normally invest at least 65% of its total assets in "bonds." For
this purpose, the Fund considers the various types of debt or fixed income
securities in which it invests, as specifically described elsewhere in this
Prospectus, to be "bonds" as referenced in the Fund's name. The use of this name
is not meant to restrict the Fund's investment to the narrow category of debt
securities that are formally called "bonds."
The Fund is "non-diversified" for purposes of the Investment Company Act of 1940
("1940 Act"), meaning that it may invest a greater percentage of its assets in
the securities of one issuer than "diversified" funds. As a "non-diversified"
portfolio, the Fund may be more susceptible to risks associated with a single
economic, political or regulatory occurrence than a diversified portfolio might
be.
<PAGE>
REAL RETURN
"Real Return," or "Inflation Adjusted Return," as referenced in the name and
investment objective of the Fund, is a measure of the change in purchasing power
of money invested in a particular instrument after adjusting for inflation. An
investment in a security generating a high nominal return (such as a typical
U.S. Government Treasury bond) may not generate a high real return once
inflation is considered. For example, an instrument generating a 9% nominal
return at a time when inflation is 6% has a real return of approximately 3%;
that is, the purchasing power of the money invested in that instrument would
only increase by approximately 3%. On the other hand, an inflation-indexed
instrument generating a 5% real return would generate a 5% return regardless of
the rate of inflation. As stated above, the investment objective of the Fund is
to seek to achieve maximum real return. The total return (not adjusted for
inflation) attained by this Fund may be less than the total return attained by
other of the PIMCO Funds that do not invest primarily in inflation-indexed
securities.
The Fund will seek income consisting of interest and dividends from underlying
securities, and capital appreciation, reflected in unrealized increases in value
of portfolio securities (realized by the shareholder only upon selling shares),
or realized from the purchase and sale of securities and use of futures and
options, or gains from favorable changes in foreign currency exchange rates.
Generally, over the long term, a portfolio investing primarily in fixed income
securities is not expected to achieve as high a rate of return as that obtained
by a portfolio that invests primarily in equity securities. At the same time,
the market risk and price volatility of a fixed income portfolio is expected to
be less than that of an equity portfolio, so that a fixed income portfolio is
generally considered to be a more conservative investment. The change in market
value of fixed income securities (and therefore their capital appreciation or
depreciation) is largely a function of changes in the current level of interest
rates.
In the case of inflation-indexed bonds, changes in market value are tied to the
relationship between nominal interest rates and the rate of inflation. 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 increase at a faster rate
than inflation, real interest rates might increase, leading to a decrease in
value of inflation-indexed bonds.
MODIFIED REAL DURATION
In managing fixed income securities, one of the principal tools generally used
by the Adviser is "duration," which is a measure of the expected life of a fixed
income security on a present value basis, incorporating a bond's yield, coupon
interest payments, final maturity and call features. Because of the unique
features of inflation-indexed bonds, the Adviser utilizes a modified form of
duration (the "modified real duration") which measures price changes in such
bonds as a result of changes in real, rather than nominal interest rates.
Although there is no limit on the modified real duration of the Fund, it is
expected that the average modified real duration of the Fund will normally vary
approximately with the range of the average modified real duration of all
inflation-indexed bonds issued by the U.S. Treasury in the aggregate.
CREDIT QUALITY
The Fund may make use of average portfolio credit quality standards to assist
institutional investors whose own investment guidelines limit their investments
accordingly. In determining the Fund's overall dollar-weighted average quality,
unrated securities are treated as if rated, based on the Adviser's view of their
comparability to rated securities. The Fund's use of average quality criteria is
intended to be a guide for those institutional investors whose investment
guidelines require that assets be invested according to comparable criteria.
Reference to an overall average quality rating for the Fund does not mean that
all securities held by the Fund will be rated in that category or higher. The
Fund's investments may range in quality from securities rated in the lowest
category in which the Fund is permitted to invest to securities rated in the
highest category (as rated by Moody's or S&P or, if unrated, determined by the
Adviser to be of comparable quality). The percentage of the Fund's assets
invested in securities in a particular rating category will vary. All securities
purchased by the Fund must be rated at least A by Moody's or S&P (or, if
unrated, determined by the Adviser to be of comparable quality), and the Fund
will maintain a minimum average quality of Aa.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 15
- --------------------------------------------------------------------------------
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 Statement of Additional
Information.
INFLATION-INDEXED BONDS
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than typical bonds, but are expected to
retain their principal value over time. The interest rate on these bonds is
fixed at issuance, but over the life of the bond this interest may be paid on an
increasing principal value, which has been adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially have
maturities of ten years, though it is anticipated that other maturities will
be issued in the future. The securities will pay interest on a semi-annual
basis, equal to a fixed percentage of the inflation-adjusted principal amount.
For example, if 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
($1,101 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 $15.15 ($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 will be reduced. Although repayment of the
bond principal upon maturity (as adjusted for inflation) is guaranteed (in the
case of U.S. Treasury inflation-indexed bonds), the current market value of the
bond is not. The Fund may also invest in other inflation related bonds which may
or may not provide a similar guarantee. If such a guarantee is not provided,
the adjusted principal value of the bond repaid at maturity may be less than the
original principal.
Changes in market value in the case of inflation-indexed bonds are tied to the
relationship between nominal interest rates and the rate of inflation. If
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of inflation-
indexed bonds. In contrast, if nominal interest rates increased at a faster rate
than inflation, real interest rates might rise, leading to a decrease in value
of inflation-indexed bonds.
While these securities are expected to be protected from long-term inflationary
trends, short-term increases in inflation may lead to a decline in value. If
interest rates rise due to reasons other than inflation (for example, due to
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds. As
such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility 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 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.
Moreover, there can be no assurance that the CPI-U or any foreign inflation
index will accurately measure the real rate of inflation in the prices of goods
and services. Moreover, there can be no assurance that the rate of inflation in
a foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Dividends, Distributions and Taxes" for
information about the possible tax consequences of investing in
inflation-indexed bonds.
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 Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts issued
in connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities
(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 principal value of certain corporate debt securities
may also be indexed to adjust for inflation. 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.
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 six 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.
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 may exhibit greater price volatility
than a fixed rate obligation of similar credit quality. The Fund has adopted a
policy under which the Fund will not invest more than 5% of its net assets in
any combination of inverse floater, interest only ("IO"), or principal only
("PO") securities. See "Mortgage-Related and Other Asset-Backed Securities" for
a discussion of IOs and POs.
<PAGE>
16 PIMCO FUNDS - Pacific Investment Management Series
- --------------------------------------------------------------------------------
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Fund may invest in mortgage- or asset-backed securities. The value of some
mortgage- or asset-backed securities 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 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. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security, and may have the
effect of shortening or extending the effective maturity of the security beyond
what was anticipated at the time of purchase. To the extent that unanticipated
rates of prepayment on underlying mortgages increase the effective maturity of a
mortgage-related security, the volatility of such security can be expected to
increase.
Payment of principal and interest on some mortgage pass-through securities (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 the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage-related
securities created by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers) may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance and letters of credit, which may be issued by governmental entities,
private insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") 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 collateralized 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 first class has 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.
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, such as CMO residuals or stripped
mortgage-backed securities ("SMBS"), and may be structured in classes with
rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only, or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. The Fund has adopted
a policy under which the Fund will not invest more than 5% of its net assets in
any combination of IO, PO, or inverse floater securities. The Fund may invest in
other asset-backed securities that have been offered to investors. For a
discussion of the characteristics of some of these instruments, see the
Statement of Additional Information.
REPURCHASE AGREEMENTS
For the purpose of achieving income, the Fund may enter into repurchase
agreements, which entail the purchase of a portfolio eligible security from a
bank or broker-dealer that agrees to repurchase the security at the Fund's cost
plus interest within a specified time (normally one day). If the party agreeing
to repurchase should default, as a result of bankruptcy or otherwise, the 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. The Fund will not invest more
than 15% of its net assets (taken at current market value) in repurchase
agreements maturing in more than seven days.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 17
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS, AND OTHER BORROWINGS
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 assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, maturing not later than the expiration of
the reverse repurchase agreement, 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 assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, 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.
<PAGE>
18 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the Fund may lend its portfolio securities
to brokers, dealers, and other financial institutions, provided: (i) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash or cash equivalents (negotiable certificates of deposit, bankers'
acceptances or letters of credit) maintained on a daily mark-to-market basis in
an amount at least equal to the current market value of the securities loaned;
(ii) the Fund may at any time call the loan and obtain the return of the
securities loaned; (iii) the Fund will receive any interest or dividends paid on
the loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed 33/1//3% of the total assets of the Fund.
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 seven days in the future, or after a period
longer than the customary settlement period for that type of security. When such
purchases are outstanding, the Fund will set aside and maintain until the
settlement date in a segregated account, assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, in
an amount sufficient to meet the purchase price. Typically, no income accrues on
securities 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 investments. If the Fund remains substantially fully invested at a
time when when-issued, delayed delivery, or forward commitment purchases are
outstanding, the purchases may result in a form of leverage. When the Fund has
sold a security on a when-issued, delayed delivery, 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 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 when-issued, delayed delivery, or forward commitment basis.
SHORT SALES
The Fund may from time to time effect short sales as part of its overall
portfolio management strategy, including the use of derivative instruments, or
to offset potential declines in value of long positions in similar securities as
those sold short. A short sale (other than a short sale against the box) is a
transaction in which the Fund sells a security it does not own at the time of
the sale in anticipation that the market price of that security will decline. To
the extent that the Fund engages in short sales, it must (except in the case of
short sales "against the box") maintain asset coverage in the form of assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in a segregated account, or otherwise cover its
position in a permissible manner. A short sale is "against the box" to the
extent that the Fund contemporaneously owns, or has the right to obtain at no
added cost, securities identical to those sold short.
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 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
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 19
---------------------------------------------------------------------
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 costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial arrangements
and transaction costs of foreign currency conversions. Changes in foreign
exchange rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
The 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 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 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 Statement of Additional Information.
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 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 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. 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 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 risk arising
from the Fund's investment or anticipated investment in securities denominated
in foreign currencies. The Fund also may enter into these contracts for purposes
of increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. The 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 will segregate assets determined
to be liquid by the Adviser in accordance with procedures established by the
Board of Trustees, in a segregated account to cover forward currency contracts
entered into for non-hedging purposes.
The Fund may invest 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 and other
instruments whose return is linked to foreign currency exchange rates. The Fund
will use these techniques to hedge at least 75% of its exposure to foreign
currency. For a description of these instruments, see "Derivative Instruments"
below and the Statement of Additional Information.
<PAGE>
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 to hedge against changes
in interest rates, foreign currency exchange rates or securities prices or as
part of its overall investment strategy. The Fund may also purchase and sell
options relating to foreign currencies for purposes of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
country to another. The Fund will maintain segregated accounts consisting of
assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its obligations
under options, futures, and swaps to 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 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 Adviser to forecast interest rates and other economic
factors correctly. If the Adviser incorrectly forecasts such factors and has
taken positions in derivative instruments contrary to prevailing market trends,
the 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 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 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)
<PAGE>
22 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
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 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 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 options 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, equity 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
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 23
---------------------------------------------------------------------
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 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 assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, to avoid any potential
leveraging of the 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 Adviser's ability to predict correctly
whether certain types of investments are likely to produce greater returns than
other investments. Because they are two-party contracts and because they may
have terms of greater than seven days, swap agreements may be considered to be
illiquid 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 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 ("CFTC"), 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. Certain
illiquid securities may require pricing at fair value as determined in good
faith under the supervision of the Board of Trustees. The Adviser may be subject
to significant delays in disposing of illiquid securities, and transactions in
illiquid securities may entail registration expenses and other transaction costs
that are higher than transactions in liquid securities. The term "illiquid
securities" for
<PAGE>
24 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
this purpose means securities that cannot be disposed of within seven 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 seven days, certain loan participation interests, fixed
time deposits which are not subject to prepayment or provide for withdrawal
penalties upon prepayment (other than overnight deposits), securities that are
subject to legal or contractual restrictions on resale (such as privately placed
debt securities) and other securities 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 Pacific
Investment Management has determined to be liquid under procedures approved by
the Board of Trustees).
PERFORMANCE INFORMATION
From time to time the Trust may make available certain information about the
performance of the Class A, Class B and Class C shares of the
Fund. Performance information is computed separately for the Fund's Class A,
Class B and Class C shares in accordance with the formulas described below.
Because Class B and Class C shares bear the expense of the distribution fee
attending the deferred sales charge (Class B) and asset based sales charge
(Class C) alternatives and certain other expenses, it is expected that, under
normal circumstances, the level of performance of the Fund's Class B and Class C
shares will be lower than that of the Fund's Class A shares.
The Trust may, from time to time, include the yield and total return for each
class of shares of the Fund in advertisements or reports to shareholders or
prospective investors. Quotations of yield for the Fund or a class thereof will
be based on the investment income per share (as defined by the SEC) during a
particular 30-day (or one-month) period (including dividends and interest), less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the maximum public offering price
per share on the last day of the period. Quotations of average annual total
return for the Fund or a class thereof will be expressed in terms of the average
annual compounded rate of return of a hypothetical investment in the Fund or
class over periods of one, five and ten years (up to the life of the Fund),
reflect the deduction of a proportional share of Fund or class expenses (on an
annual basis), and assume that all dividends and distributions are reinvested
when paid.
The Trust also may provide current distribution information to its shareholders
in shareholder reports or other shareholder communications, or in certain types
of sales literature provided to prospective investors. Current distribution
information for a particular class of the Fund will be based on distributions
for a specified period (i.e., total dividends from net investment income),
divided by the relevant class net asset value per share on the last day of the
period and annualized. The rate of current distributions does not reflect
deductions for unrealized losses from transactions in derivative instruments
such as options and futures, which may reduce total return. Current distribution
rates differ from standardized yield rates in that they represent what a class
of a Fund has declared and paid to shareholders as of the end of a specified
period rather than the Fund's actual net investment income for that period.
Performance information for the Fund may also be compared to various unmanaged
indices, such as the Lehman Brothers Aggregate Bond Index, the Merrill Lynch 1
to 3 Year Treasury Index, the Lehman Intermediate and 20+ Year Treasury Blend
Index, the Lehman BB Intermediate Corporate Index, indexes prepared by Lipper
Analytical Services, the J.P. Morgan Global Index, the Salomon Brothers World
Government Bond Index-10 Non U.S.-Dollar Hedged and the J.P. Morgan Government
Bond Index Non U.S.-Dollar Hedged, and other entities or organizations which
track the performance of investment companies or investment advisers. Unmanaged
indexes (i.e., other than Lipper) generally do not reflect deductions for
administrative and management costs and expenses. The Adviser may also report to
shareholders or to the public in advertisements concerning the performance of
the Adviser as adviser to clients other than the Trust, and on the comparative
performance or standing of the Adviser in relation to other money managers. Such
comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information, whether related
to the Fund or to the Adviser, should be considered in light of the Fund's
investment objectives and policies, characteristics and quality of the
portfolio, and the market conditions during the time period indicated, and
should not be considered to be representative of what may be achieved in the
future. For a description of the methods used to determine yield and total
return for the Fund, see the Statement of Additional Information.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 25
---------------------------------------------------------------------
Investment results of the Fund will fluctuate over time, and any presentation
of the Fund's total return or yield for any prior period should not be
considered as a representation of what an investor's total return or yield may
be in any future period.
HOW TO BUY SHARES
Class A, B and C shares of the Fund are continuously offered through the Trust's
principal underwriter, PIMCO Funds Distribution Company (the "Distributor"), and
through other firms which have dealer agreements with the Distributor
("participating brokers") or which have agreed to act as introducing brokers for
the Distributor ("introducing brokers").
There are two ways to purchase Class A, B or C 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 dealer).
The Fund currently offers and sells three classes of shares in this Prospectus
(Class A, Class B and Class C). Institutional Class shares and Administrative
Class shares of the Fund are offered through a separate prospectus. Shares may
be purchased at a price equal to their net asset value per share next determined
after receipt of an order, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase in the case of
Class A shares (the "initial sales charge alternative"), (ii) on a contingent
deferred basis in the case of Class B shares (the "deferred sales charge
alternative"), or (iii) by the deduction of an ongoing asset based sales charge
in the case of Class C shares (the "asset based sales charge alternative"). In
certain circumstances, Class A and Class C shares are also subject to a
contingent deferred sales charge. See "Alternative Purchase Arrangements."
Purchase payments for Class B and Class C shares are fully invested at the net
asset value next determined after acceptance of the trade. Purchase payments for
Class A shares, less the applicable sales charge, are invested at the net asset
value next determined after acceptance of the trade.
All purchase orders received by the Distributor prior to the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time), on a
regular business day, are processed at that day's offering price. However,
orders received by the Distributor from dealers or brokers after the offering
price is determined that day will receive such offering price if the orders were
received by the dealer or broker from its customer prior to such determination
and were transmitted to and received by the Distributor prior to its close of
business that day (normally 5:00 p.m. Eastern time) or, in the case of certain
retirement plans, received by the Distributor prior to 10:00 a.m. Eastern time
on the next business day. Purchase orders received on other than a regular
business day will be executed on the next succeeding regular business day. The
Distributor, in its sole discretion, may accept or reject any order for purchase
of Fund shares. The sale of shares will be suspended during any period in which
the New York Stock Exchange (the "Exchange") is closed for other than weekends
or holidays, or if permitted by the rules of the SEC when trading on the
Exchange is restricted or during an emergency which makes it impracticable for
the Fund to dispose of its securities or to determine fairly the value of its
net assets, or during any other period permitted by the SEC for the protection
of investors.
Except for purchases through the PIMCO Auto Invest plan, the PIMCO Auto Exchange
plan and tax-qualified programs referred to below, the minimum initial
investment in Class A, B or C shares of the Trust is $1,000 and in any Fund is
$250, and the minimum additional investment is $100 per Fund. For information
about dealer commissions, see "Alternative Purchase Arrangements" below. Persons
selling Fund shares may receive different compensation for selling Class A,
Class B or Class C shares. Normally Trust shares purchased through
participating brokers are held in the investor's account with that broker.
DIRECT INVESTMENT Investors who wish to invest in Class A, B or C shares of the
Trust directly, rather than through a participating broker, may do so by opening
an account with the Distributor. To open an account, an investor should complete
the Account Application included with this Prospectus. All shareholders who
open direct accounts with the Distributor will receive from the Distributor
individual confirmations of each purchase, redemption, dividend reinvestment,
exchange or transfer of Trust shares, including the total number of Trust shares
owned as of the confirmation date except that purchases which result from the
reinvestment of daily-accrued dividends and/or distributions will be confirmed
once each calendar quarter. See "Distributions" below. Information regarding
direct investment or any other features or plans offered by the Trust may be
obtained by calling the Distributor at 800-426-0107 or by calling your broker.
<PAGE>
26 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
PURCHASE BY MAIL Investors who wish to invest directly may send a check payable
to PIMCO Funds Distribution Company, along with a completed application form to:
PIMCO Funds Distribution Company
P.O. Box 5866
Denver, CO 80217-5866
Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any 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. In all cases, the purchase
price is based on the net asset value next determined after the purchase order
and check are accepted, even though the check may not yet have been converted
into federal funds.
SUBSEQUENT PURCHASES OF SHARES Subsequent purchases of Class A, B or C shares
can be made as indicated above by mailing a check with a letter describing the
investment or with the additional investment portion of a confirmation
statement. Except for subsequent purchases through the PIMCO Auto Invest plan,
the PIMCO Auto Exchange plan, tax-qualified programs and PIMCO Fund Link
referred to below, and except during periods when an Automatic Withdrawal plan
is in effect, the minimum subsequent purchase is $100 in the Fund. All payments
should be made payable to PIMCO Funds Distribution Company and should clearly
indicate the shareholder's account number. Checks should be mailed to the
address above under "Purchase by Mail."
TAX-QUALIFIED RETIREMENT PLANS The Distributor makes available retirement plan
services and documents for Individual Retirement Accounts (IRAs), for which
First National Bank of Boston serves as trustee. These accounts include
Simplified Employee Pension Plan (SEP) and Salary Reduction Simplified Employee
Pension Plan (SAR/SEP) IRA accounts and prototype documents. In addition,
prototype documents are available for establishing 403(b)(7) Custodial Accounts
with First National Bank of Boston as custodian. This type of plan is available
to employees of certain non-profit organizations.
The Distributor also makes available prototype documents for establishing Money
Purchase and/or Profit Sharing Plans and 401(k) Retirement Savings Plans.
Investors should call the Distributor at 800-426-0107 for further information
about these plans and should consult with their own tax advisers before
establishing any retirement plan. Investors who maintain their accounts with
participating brokers should consult their broker about similar types of
accounts that may be offered through the broker. The minimum initial and
subsequent investment in the Fund for tax-qualified plans is $25.
PIMCO AUTO INVEST The PIMCO Auto Invest plan provides for periodic investments
into the shareholder's account with the Trust by means of automatic transfers of
a designated amount from the shareholder's bank account. Investments may be
made monthly or quarterly, and may be in any amount subject to a minimum of $50
per month for each Fund in which shares are purchased through the plan. Further
information regarding the PIMCO Auto Invest plan is available from the
Distributor or participating brokers. You may enroll by completing the
appropriate section on the PIMCO Funds Account Application, or you may obtain an
Auto-Invest Application by calling the Distributor or your broker.
PIMCO AUTO EXCHANGE The PIMCO Auto Exchange plan establishes regular, periodic
exchanges from one Fund to another. The plan provides for regular investments
into a shareholder's account in a specific Fund by means of automatic exchanges
of a designated amount from another Fund account of the same class of shares and
with identical account registration.
Exchanges may be made monthly or quarterly, and may be in any amount subject to
a minimum of $50 for each Fund whose shares are purchased through the plan.
Further information regarding the PIMCO Auto Exchange plan is available from the
Distributor at 800-426-0107 or participating brokers. You may enroll by
completing an application which may be obtained from the Distributor or by
telephone request at 800-426-0107. For more information on exchanges, see
"Exchange Privilege".
PIMCO FUND LINK (Does not apply to shares held in broker "street name"
accounts.) PIMCO Fund Link ("Fund Link") connects your Fund account with a bank
account. Fund Link may be used for subsequent purchases and for redemptions and
other transactions described under "How to Redeem." Purchase transactions are
effected by electronic funds transfers from the shareholder's account at a U.S.
bank or other financial institution that is an Automated Clearing House ("ACH")
member. Investors may use Fund Link to make subsequent purchases of shares in
amounts from $50 to $10,000. To initiate such purchases, call 800-852-8457.
All such calls will be recorded. Fund Link is normally established within 45
days of receipt of an Application by Shareholder Services, Inc. (the "Transfer
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 27
---------------------------------------------------------------------
Agent"). The minimum investment by Fund Link is $50 per Fund. Shares will be
purchased on the regular business day the Distributor receives the funds through
the ACH system, provided the funds are received before the close of regular
trading on the New York Stock Exchange. If the funds are received after the
close of regular trading, the shares will be purchased on the next regular
business day.
Fund Link privileges must be requested on the PIMCO Funds Account Application.
To establish Fund Link on an existing account, complete a Fund Link Application,
which is available from the Distributor or your broker, with signatures
guaranteed from all shareholders of record for the account. See "Signature
Guarantee" under "General" below. Such privileges apply to each shareholder of
record for the account unless and until the Distributor receives written
instructions from a shareholder of record canceling such privileges. Changes of
bank account information must be made by completing a new Fund Link Application
signed by all owners of record of the account, with all signatures guaranteed.
The Distributor, the Transfer Agent and the Fund may rely on any telephone
instructions believed to be genuine and will not be responsible to shareholders
for any damage, loss or expenses arising out of such instructions. The Fund
reserves the right to amend, suspend or discontinue Fund Link privileges at any
time without prior notice.
GENERAL
Changes in registration or account privileges may be made in writing to the
Transfer Agent. Signature guarantees may be required. See "Signature Guarantee"
below.
All correspondence must include the account number and must be sent to:
PIMCO Funds Distribution Company
P.O. Box 5866
Denver, CO 80217-5866
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 a U.S.
correspondent bank, credit unions, savings 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 Distributor 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. The Trust may change the signature guarantee
requirements from time to time upon notice to shareholders, which may be given
by means of a new or supplemented Prospectus.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers investors three classes of shares in this Prospectus (Class A,
Class B and Class C) which bear sales charges in different forms and amounts and
which bear different levels of expenses. Through a separate prospectus, the Fund
offers two additional classes of shares, Institutional Class shares and
Administrative Class shares, to pension and profit sharing plans, employee
benefit plans, endowments, foundations, corporations and other institutions,
Institutional Class and Administrative Class shares are sold without sales
charges and have different expenses than Class A, Class B and Class C shares. As
a result of lower sales charges and/or operating expenses, Administrative Class
and Institutional Class shares are generally expected to achieve a higher
investment return than Class A , Class B or Class C shares. To obtain more
information about Institutional Class or Administrative Class shares, please
call the Distributor at 800-426-0107.
The alternative purchase arrangements are designed to enable a retail investor
to choose the method of purchasing Fund shares that is most beneficial to the
investor based on all factors to be considered, which include: the amount and
intended length of the investment, the particular Fund and whether the investor
intends to exchange shares for shares of other Funds. Generally, when making an
investment decision, investors should at least consider the anticipated life of
an intended investment in the Fund, the accumulated distribution and servicing
fees plus contingent deferred sales charges on Class B or Class C shares, the
initial sales charge plus accumulated servicing fees on Class A shares (plus a
contingent deferred sales charge in certain circumstances), the possibility that
the anticipated higher return on Class A shares due to the lower ongoing charges
will offset the initial sales charge paid on such shares, the automatic
conversion of Class B shares to Class A shares and the difference in the
contingent deferred sales charges applicable to Class A, B and C shares.
<PAGE>
28 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
CLASS A: The initial sales charge alternative (Class A) might be preferred by
investors purchasing shares of sufficient aggregate value to qualify for
reductions in the initial sales charge applicable to such shares. Similar
reductions are not available on the contingent deferred sales charge alternative
(Class B) or the asset based sales charge alternative (Class C). Class A shares
are subject to a servicing fee but are not subject to a distribution fee and,
accordingly, such shares are expected to pay correspondingly higher dividends on
a per share basis. However, because initial sales charges are deducted at the
time of purchase, not all of the purchase payment for Class A shares is invested
initially. Class B and Class C shares might be preferable to investors who wish
to have all purchase payments invested initially, although remaining subject to
higher distribution and servicing fees and, for certain periods, being subject
to a contingent deferred sales charge. An investor who qualifies for an
elimination of the Class A initial sales charge should also consider whether he
or she anticipates redeeming shares in a time period which will subject such
shares to a contingent deferred sales charge as described below. See "Initial
Sales Charge Alternative -- Class A Shares -- Class A Deferred Sales Charge"
below.
CLASS B: Class B shares might be preferred by investors who intend to invest in
the Fund for longer periods and who do not intend to purchase shares of
sufficient aggregate value to qualify for sales charge reductions applicable to
Class A shares. Both Class B and Class C shares can be purchased at net asset
value without an initial sales charge. However, unlike Class C shares, Class B
shares convert into Class A shares after the shares have been held for seven
years. After the conversion takes place, the shares will no longer be subject to
a contingent deferred sales charge, and will be subject to the servicing fees
charged for Class A shares which are lower than the distribution and servicing
fees charged on either Class B or Class C shares. See "Deferred Sales Charge
Alternative -- Class B Shares" below.
CLASS C: Class C shares might be preferred by investors who intend to purchase
shares which are not of sufficient aggregate value to qualify for Class A sales
charges of 1% or less and who wish to have all purchase payments invested
initially. Class C shares are preferable to Class B shares for investors who
intend to maintain their investment for intermediate periods and therefore may
also be preferable for investors who are unsure of the intended length of their
investment. Unlike Class B shares, Class C shares are not subject to a
contingent deferred sales charge after they have been held for one year and are
subject to only a 1% contingent deferred sales charge during the first year.
However, because Class C shares do not convert into Class A shares, Class B
shares are preferable to Class C shares for investors who intend to maintain
their investment in the Fund for long periods. See "Asset Based Sales Charge
Alternative -- Class C Shares" below.
In determining which class of shares to purchase, an investor should always
consider whether any waiver or reduction of a sales charge or a contingent
deferred sales charge is available. See generally "Initial Sales Charge
Alternative -- Class A Shares" and "Waiver of Contingent Deferred Sales Charges"
below.
There is no size limit on purchases of Class A shares. The maximum single
purchase of Class B shares accepted is $249,999. The maximum single purchase of
Class C shares accepted is $999,999. The Fund may refuse any order to purchase
shares.
For a description of the Distribution and Servicing Plans and distribution and
servicing fees payable thereunder with respect to Class A, Class B and Class C
shares, see "Distributor and Distribution and Servicing Plans" below.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES The contingent deferred sales charge
applicable to Class A and Class C shares is currently waived for (i) any partial
or complete redemption in connection with a distribution without penalty under
Section 72(t) of the Internal Revenue Code of 1986, as amended (the "Code") from
a retirement plan, including a 403(b)(7) plan or an IRA (a) upon attaining age
59 1/2, (b) as part of a series of substantially equal periodic payments, or (c)
in the case of an employer sponsored retirement plan, upon separation from
service and attaining age 55; (ii) any partial or complete redemption in
connection with a qualifying loan or hardship withdrawal from an employer
sponsored retirement plan; (iii) any complete redemption in connection with a
distribution from a qualified employer retirement plan in connection with
termination of employment or termination of the employer's plan and the transfer
to another employer's plan or to an IRA; (iv) any partial or complete redemption
following death or disability (as defined in the Code) of a shareholder
(including one who owns the shares as joint tenant with his or her spouse) from
an account in which the deceased or disabled is named, provided the redemption
is requested within one year of the death or initial determination of
disability; (v) any redemption resulting from a return of an excess contribution
to a qualified employer retirement plan or an IRA; or (vi) certain periodic
redemptions under an Automatic Withdrawal Plan from an account meeting certain
minimum balance requirements, in amounts meeting certain maximums established
from time to time by the Distributor; (vii) redemptions by Trustees, officers
and employees of the Trust and by directors, officers and employees of the
Distributor and the Adviser; (viii) redemptions effected pursuant to the Fund's
right to involuntarily redeem a shareholder's account if the aggregate net asset
value of shares held in such shareholder's
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 29
---------------------------------------------------------------------
account is less than a minimum account size specified in the prospectus; (ix)
involuntary redemptions caused by operation of law; (x) redemption of shares of
any Fund that is combined with another Fund, investment company, or personal
holding company by virtue of a merger, acquisition or other similar
reorganization transaction; (xi) redemptions by a shareholder who is a
participant making periodic purchases of not less than $50 through certain
employer sponsored savings plans that are clients of a broker-dealer with which
the Distributor has an agreement with respect to such purchases; or (xii)
redemptions effected by trustees or other fiduciaries who have purchased shares
for employer sponsored plans, the administrator for which has an agreement with
the Distributor with respect to such purchases.
The contingent deferred sales charge applicable to Class B shares is currently
waived for any partial or complete redemption (a) in connection with a
distribution without penalty under Section 72(t) of the Code from a 403(b)(7)
plan or an IRA upon attaining age 59 1/2 and (b) following death or disability
(as defined in the Code) of a shareholder (including one who owns the shares as
joint tenant with his or her spouse) from an account in which the deceased or
disabled is named, provided the redemption is requested within one year of the
death or initial determination of disability.
The Distributor may require documentation prior to waiver of the contingent
deferred sales charge for any class including distribution letters,
certification by plan administrators, applicable tax forms, death certificates,
physicians certificates, etc.
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
Class A shares are sold at a public offering price equal to their net asset
value per share plus a sales charge, as set forth below. As indicated below
under "Class A Deferred Sales Charge," certain investors that purchase
$1,000,000 or more of the Fund's Class A shares (and thus pay no initial sales
charge) may be subject to a 1% contingent deferred sales charge if they redeem
such shares during the first 18 months after their purchase.
<TABLE>
<CAPTION>
DISCOUNT OR
SALES COMMISSION
SALES CHARGE TO DEALERS
CHARGE AS % OF AS % OF
AS % OF THE PUBLIC PUBLIC
AMOUNT OF NET AMOUNT OFFERING OFFERING
PURCHASE VESTED PRICE PRICE
- -------- -------- ------ ---------
<S> <C> <C> <C>
$0-$49,999 4.99% 4.75% 4.00%
$50,000-$99,999 4.44% 4.25% 3.50%
$100,000-$249,999 3.90% 3.75% 3.00%
$250,000-$499,999 2.56% 2.50% 2.00%
$500,000-$999,999 1.78% 1.75% 1.50%
$1,000,000+ 0.00%/1/ 0.00%/1/ 0.50%
</TABLE>
/1/ As shown, investors that purchase more than $1,000,000 of any Fund's Class
A shares will not pay any initial sales charge on such purchase. However,
purchasers of $1,000,000 or more of Class A shares (other than those
<PAGE>
30 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
purchasers described below under "Sales at Net Asset Value" where no
commission is paid) will be subject to a contingent deferred sales charge
of 1% if such shares are redeemed during the first 18 months after such
shares are purchased unless such purchaser is eligible for a waiver of the
contingent deferred sales charge as described under "Waiver of Contingent
Deferred Sales Charge" above. See "Class A Deferred Sales Charge" below.
The Distributor will pay a commission to dealers who sell amounts of
$1,000,000 or more of Class A shares (or who sell Class A shares at net
asset value to certain employer-sponsored plans as outlined in "Sales at
Net Asset Value" according to the following schedule: 0.50% of the first
$2,000,000 and 0.25% of amounts over $2,000,000.
The Fund receives the entire net asset value of its Class A shares purchased by
investors. The Distributor receives the sales charge shown above less any
applicable discount or commission "reallowed" to participating brokers in the
amounts indicated in the table above. The Distributor may, however, elect to
reallow the entire sales charge to participating brokers for all sales with
respect to which orders are placed with the Distributor for the Fund
during a particular period. A participating broker who receives a reallowance
of 90% or more of the sales charge may be deemed to be an "underwriter" under
the Securities Act of 1933. During such periods as may from time to time be
designated by the Distributor, the Distributor will pay an additional amount of
up to 0.50% of the purchase price on sales of Class A shares of the
Fund purchased to each participating broker which obtains purchase orders in
amounts exceeding thresholds established from time to time by the Distributor.
Shares issued pursuant to the automatic reinvestment of income dividends or
capital gains distributions are issued at net asset value and are not subject to
any sales charges.
Under the circumstances described below, investors may be entitled to pay
reduced sales charges for Class A shares.
COMBINED PURCHASE PRIVILEGE Investors may qualify for a reduced sales charge by
combining purchases of the Class A shares of one or more Funds of the Trust into
a "single purchase," if the resulting purchase totals at least $50,000. The term
single purchase refers to: (i) a single purchase by an individual, or concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his spouse and their children under the age of 21 years
purchasing Class A shares of the Funds for his, her or their own account; (ii) a
single purchase by a trustee or other fiduciary purchasing shares for a single
trust, estate or fiduciary account although more than one beneficiary is
involved; or (iii) a single purchase for the employee benefit plans of a single
employer. For further information, consult the Statement of Additional
Information or call the Distributor at 800-426-0107 or your broker.
CUMULATIVE QUALITY DISCOUNT (RIGHT OF ACCUMULATION) A purchase of additional
Class A shares of any Fund of the Trust may qualify for a Cumulative Quantity
Discount at the rate applicable to the discount bracket obtained by adding:
(i) the investor's current purchase;
(ii) the value (at the close of business on the day of the current
purchase) of all Class A shares of any Fund of the Trust (other than
the Money Market Fund) held by the investor computed at the maximum
offering price; and
(iii) the value of all shares described in paragraph (ii) owned by another
shareholder eligible to be combined with the investor's purchase
into a "single purchase" as defined above under "Combined Purchase
Privilege."
For example, if you owned Class A shares of the Real Return Bond Fund worth
$25,000 at the current maximum offering price and wished to purchase Class A
shares of the Global Bond Fund worth an additional $30,000, the sales charge for
the $30,000 purchase would be at the 4.25% rate applicable to a single $55,000
purchase of shares of the Global Bond Fund, rather than the 4.75% rate.
An investor or participating broker must notify the Distributor whenever a
quantity discount or reduced sales charge is applicable to a purchase and must
provide the Distributor with sufficient information at the time of purchase to
verify that each purchase qualifies for the privilege or discount. Upon such
notification, the investor will receive the lowest applicable sales charge. The
quantity discounts described above may be modified or terminated at any time.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 31
---------------------------------------------------------------------
LETTER OF INTENT An investor may also obtain a reduced sales charge by means of
a written Letter of Intent, which expresses an intention to invest not less than
$50,000 within a period of 13 months in Class A shares of any Fund(s) of the
Trust (other than the Money Market Fund). Each purchase of shares under a Letter
of Intent will be made at the public offering price or prices applicable at the
time of such purchase to a single transaction of the dollar amount indicated in
the Letter. At the investor's option, a Letter of Intent may include purchases
of Class A shares of any Fund of the Trust made not more than 90 days prior to
the date the Letter of Intent is signed; however, the 13-month period during
which the Letter is in effect will begin on the date of the earliest purchase to
be included and the sales charge on any purchases prior to the Letter will not
be adjusted.
Investors qualifying for the Combined Purchase Privilege described above may
purchase shares of the Funds under a single Letter of Intent. For example, if at
the time you sign a Letter of Intent to invest at least $100,000 in Class A
shares of any Fund (other than the Money Market, Short-Term, Low Duration, Low
Duration II, Low Duration III and StocksPLUS Funds), you and your spouse each
purchase Class A shares of the Global Bond Fund worth $30,000 (for a total of
$60,000), it will only be necessary to invest a total of $40,000 during the
following 13 months in Class A shares of any of the Funds (other than the Money
Market, Short-Term, Low Duration, Low Duration II, Low Duration III and
StocksPLUS Funds) to qualify for the 3.75% sales charge on the total amount
being invested (the sales charge applicable to an investment of $100,000 in any
of the Funds (other than Money Market, Short-Term, Low Duration, Low Duration
II, Low Duration III and StocksPLUS Funds).
A Letter of Intent is not a binding obligation to purchase the full amount
indicated. The minimum initial investment under a Letter of Intent is 5% of such
amount. Shares purchased with the first 5% of such amount will be held in escrow
(while remaining registered in your name) to secure payment of the higher sales
charge applicable to the shares actually purchased in the event the full
intended amount is not purchased. If the full amount indicated is not purchased,
a sufficient amount of such escrowed shares will be involuntarily redeemed to
pay the additional sales charge applicable to the amount actually purchased, if
necessary. Dividends on escrowed shares, whether paid in cash or reinvested in
additional Fund shares, are not subject to escrow. When the full amount
indicated has been purchased, the escrow will be released.
If you wish to enter into a Letter of Intent in conjunction with your initial
investment in Class A shares of the Fund, you should complete the appropriate
portion of the Account Application included with this Prospectus. If you are a
current Class A shareholder desiring to do so you can obtain a form of Letter of
Intent by contacting the Distributor at 800-426-0107 or any broker participating
in this program.
REINSTATEMENT PRIVILEGE A Class A shareholder who has caused any or all of his
shares to be redeemed may reinvest all or any portion of the redemption proceeds
in Class A shares of any Fund of the Trust at net asset value without any sales
charge, provided that such reinvestment is made within 120 calendar days after
the redemption or repurchase date. Shares are sold to a reinvesting shareholder
at the net asset value next determined as described above. A reinstatement
pursuant to this privilege will not cancel the redemption transaction and,
consequently, any gain or loss so realized may be recognized for federal tax
purposes except that no loss may be recognized to the extent that the proceeds
are reinvested in shares of the same Fund within 30 days. The reinstatement
privilege may be utilized by a shareholder only once, irrespective of the number
of shares redeemed, except that the privilege may be utilized without limit in
connection with transactions whose sole purpose is to transfer a shareholder's
interest in the Fund to his Individual Retirement Account or other qualified
retirement plan account. An investor may exercise the reinstatement privilege by
written request sent to the Distributor or to the investor's broker.
SALES AT NET ASSET VALUE The Fund may sell its Class A shares at net asset value
without a sales charge to a) current or retired officers, trustees, directors or
employees of the Trust, the Adviser or the Distributor, to a spouse or child of
such person or to any trust, profit sharing or pension plan for the benefit of
any such person, b) current or retired trustees of Cash Accumulation Trust, a
registered investment company for which PIMCO Advisors L.P. acts as investment
adviser, c) current registered representatives and other full-time employees of
participating brokers or such persons' spouses, d) trustees or other fiduciaries
purchasing shares for certain employer sponsored plans that have at least 100
eligible participants or at least $1 million in total plan assets, e) trustees
or other fiduciaries purchasing shares for certain employer-sponsored plans, the
trustee, fiduciary or administrator for which has an agreement with the
Distributor with respect to such purchases, f) participants investing through
accounts known as "wrap accounts" established with brokers or dealers approved
by the Distributor where such brokers or dealers are paid a single, inclusive
fee for brokerage and investment management services, g) broker-dealers or
registered investment advisers affiliated with such broker-dealers with which
the Distributor has an agreement for the use of PIMCO Funds in particular
investment products for which a fee is charged, and h) trust accounts for which
trust companies affiliated with the Trust or the Adviser serve as trustee. As
described above, the Distributor will not pay any initial commission to dealers
upon the sale of Class A shares to the purchasers described in this paragraph
except for sales to purchasers described under d) or e) in this paragraph.
<PAGE>
32 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
CLASS A DEFERRED SALES CHARGE Investors who purchase $1,000,000 or more of Class
A shares (and, thus, purchase such shares without any initial sales charge) may
be subject to a 1% contingent deferred sales charge (the "Class A CDSC") if such
shares are redeemed within 18 months of their purchase. The Class A CDSC does
not apply to investors purchasing $1,000,000 or more of the Fund's Class A
shares if such investors are otherwise eligible to purchase Class A shares
without any sales charge because they are described under "Sales at Net Asset
Value" above.
For purchases subject to the Class A CDSC, a 1% CDSC will apply for any
redemption of such Class A shares that occurs within 18 months of their
purchase. No CDSC will be imposed if the shares redeemed have been acquired
through the reinvestment of dividends or capital gains distributions or if the
amount redeemed is derived from increases in the value of the account above the
amount of purchase payments subject to the CDSC. In determining whether a CDSC
is payable, it is assumed that Class A shares acquired through the reinvestment
of dividends and distributions are redeemed first, and thereafter that Class A
shares that have been held by an investor for the longest period of time are
redeemed first.
The Class A CDSC is currently waived in connection with certain redemptions as
described above under "Alternative Purchase Arrangements -- Waiver of Contingent
Deferred Sales Charge."
For more information about the Class A CDSC, call the Distributor at 800-426-
0107.
PARTICIPATING BROKERS Investment dealers and other financial intermediaries
provide varying arrangements for their clients to purchase and redeem Fund
shares. Some may establish higher minimum investment requirements than set
forth above. Firms may arrange with their clients for other investment or
administrative services and may independently establish and charge additional
amounts to their clients for such services, which charges would reduce clients'
return. Firms also may hold Fund shares in nominee or street name as agent for
and on behalf of their customers. In such instances, the Trust's 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 disbursement of cash dividends. This Prospectus should be read
in connection with such firms' material regarding their fees and services.
DEFERRED SALES CHARGE ALTERNATIVE - CLASS B SHARES
Class B shares are sold at their current net asset value without any initial
sales charge. The full amount of an investor's purchase payment will be invested
in shares of the Fund. A contingent deferred sales charge ("CDSC") will be
imposed on Class B shares if an investor redeems an amount which causes the
current value of the investor's account for the Fund to fall below the total
dollar amount of purchase payments subject to the CDSC, except that no CDSC is
imposed if the shares redeemed have been acquired through the reinvestment of
dividends or capital gains distributions or if the amount redeemed is derived
from increases in the value of the account above the amount of purchase payments
subject to the CDSC.
Class B shares are not available for purchase by employer sponsored retirement
plans.
Whether a CDSC is imposed and the amount of the CDSC will depend on the number
of years since the investor made a purchase payment from which an amount is
being redeemed. Purchases are subject to the CDSC according to the following
schedule:
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 33
----------------------------------------------------------------------
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
---------------------- ---------------------
First.................... 5
Second................... 4
Third.................... 3
Fourth................... 3
Fifth.................... 2
Sixth.................... 1
Seventh.................. 0
Eighth................... *
* Class B shares convert into Class A shares as described below.
In determining whether a CDSC is payable, it is assumed that the purchase
payment from which a redemption is made is the earliest purchase payment from
which a redemption or exchange has not already been fully effected.
In determining whether an amount is available for redemption without incurring a
CDSC, the purchase payments made for all Class B shares in the shareholder's
account with the particular Fund are aggregated, and the current value of all
such shares is aggregated. Any CDSC imposed on a redemption of Class B shares is
paid to the Distributor.
Class B shares are subject to higher distribution fees than Class A shares for a
fixed period after their purchase, after which they automatically convert to
Class A shares and are no longer subject to such higher distribution fees.
Class B shares of the Fund automatically convert into Class A shares after they
have been held for seven years.
For sales of Class B shares made and services rendered to Class B shareholders,
the Distributor intends to make payments to participating brokers, at the time a
shareholder purchases Class B shares, of 4% of the purchase amount. During such
periods as may from time to time be designated by the Distributor, the
Distributor will pay selected participating brokers an additional amount of up
to 0.50% of the purchase price on sales of Class B shares of the Fund purchased
to each participating broker which obtains purchase orders in amounts exceeding
thresholds established from time to time by the Distributor.
The Class B CDSC is currently waived in connection with certain redemptions as
described above under "Alternative Purchase Arrangements -- Waiver of Contingent
Deferred Sales Charges."
For more information about the Class B CDSC, call the Distributor at 800-426-
0107.
ASSET BASED SALES CHARGE ALTERNATIVE - CLASS C SHARES
Class C shares are sold at their current net asset value without any initial
sales charge. A CDSC is imposed on Class C shares if an investor redeems an
amount which causes the current value of the investor's account for the Fund to
fall below the total dollar amount of purchase payments subject to the CDSC,
except that no CDSC is imposed if the shares redeemed have been acquired through
the reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of purchase payments subject to the CDSC. All of an investor's purchase payments
are invested in shares of the Fund.
Whether a CDSC is imposed and the amount of the CDSC will depend on the number
of years since the investor made a purchase payment from which an amount is
being redeemed. Purchases are subject to the CDSC according to the following
schedules:
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
------------------------ ---------------------
First................ 1
Thereafter........... 0
<PAGE>
34 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
In determining whether a CDSC is payable, it is assumed that the purchase
payment from which the redemption is made is the earliest purchase payment (from
which a redemption or exchange has not already been effected).
The following example will illustrate the operation of the CDSC:
Assume that an individual opens an account and makes a purchase payment of
$10,000 for Class C shares of the Fund and that six months later the value
of the investor's account for the Fund has grown through investment
performance and reinvestment of distributions to $11,000. The investor then
may redeem up to $1,000 from the Fund ($11,000 minus $10,000) without
incurring a CDSC. If the investor should redeem $3,000, a CDSC would be
imposed on $2,000 of the redemption (the amount by which the investor's
account for the Fund was reduced below the amount of the purchase payment).
At the rate of 1%, the CDSC would be $20.
In determining whether an amount is available for redemption without incurring a
CDSC, the purchase payments made for all Class C shares in the shareholder's
account with the Fund are aggregated, and the current value of all such shares
is aggregated. Any CDSC imposed on a redemption of Class C shares is paid to the
Distributor.
Unlike Class B shares, Class C shares do not automatically convert to any other
class of shares of the Fund.
Except as described below, for sales of Class C shares made and services
rendered to Class C shareholders, the Distributor expects to make payments to
participating brokers, at the time the shareholder purchases Class C shares, of
1.00% (representing 0.75% distribution fees and 0.25% servicing fees) of the
purchase amount. For sales of Class C shares made to participants making
periodic purchases of not less than $50 through certain employer sponsored
savings plans which are clients of a broker-dealer with which the Distributor
has an agreement with respect to such purchases, no payments are made at the
time of purchase. During such periods as may from time to time be designated by
the Distributor, the Distributor will pay an additional amount of up to 0.50% of
the purchase price on sales of Class C shares of the Fund purchased to each
participating broker which obtains purchase orders in amounts exceeding
thresholds established from time to time by the Distributor.
The Class C CDSC is currently waived in connection with certain redemptions as
described above under "Alternative Purchase Arrangements -- Waiver of Contingent
Deferred Sales Charges."
For more information about the Class C CDSC, contact the Distributor at 800-426-
0107.
EXCHANGE PRIVILEGE
A shareholder may exchange Class A, Class B and Class C shares of the Fund for
the same Class of shares of any other Fund of the Trust in an account with
identical registration on the basis of their respective net asset values. Class
A, B and C shares of the Fund may also be exchanged for shares of the same Class
of a series of PIMCO Funds: Multi-Manager Series, an affiliated mutual fund
family comprised primarily of equity portfolios managed by the subsidiary
partnerships of PIMCO Advisors L.P. There are currently no exchange fees or
charges for Class A, B or C shares. Except with respect to tax-qualified
programs and exchanges effected through the PIMCO Auto Exchange plan, exchanges
are subject to the $250 minimum initial purchase requirement for each Fund. An
exchange will constitute a taxable sale for federal income tax purposes.
Investors who maintain their account with the Distributor may exchange shares by
a written exchange request sent to PIMCO Funds Distribution Company, P.O. Box
5866, Denver, CO 80217-5866 or, unless the investor has specifically declined
telephone exchange privileges on the Account Application or elected in writing
not to utilize telephone exchanges, by a telephone request to the Transfer Agent
at 800-852-8457. The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and may be liable for any
losses due to unauthorized or fraudulent instructions if it fails to employ such
procedures. The Trust will require a form of personal identification prior to
acting on a caller's telephone instructions, will provide written confirmations
of such transactions and will record telephone instructions. Exchange forms are
available from the Distributor at 800-426-0107 and may be used if there will be
no change in the registered name or address of the shareholder. Changes in
registration information or account
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 35
---------------------------------------------------------------------
privileges may be made in writing to the Transfer Agent, Shareholder Services,
Inc., P.O. Box 5866, Denver, Colorado 80217-5866, or by use of forms which are
available from the Distributor. A signature guarantee is required. See
"Signature Guarantee" under "General." Telephone exchanges may be made between
9:00 a.m. Eastern time and the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. Eastern time) on any day the Exchange is open
(generally weekdays other than normal holidays). The Trust reserves the right
to refuse exchange purchases if, in the judgment of the Adviser, the purchase
would adversely affect the Fund and its shareholders. In particular, a pattern
of exchanges characteristic of "market-timing" strategies may be deemed by the
Adviser to be detrimental to the Fund. Although the Trust has no current
intention of terminating or modifying the exchange privilege, it reserves the
right to do so at any time. Except as otherwise permitted by SEC regulations,
the Trust will give 60 days' advance notice to shareholders of any termination
or material modification of the exchange privilege. For further information
about exchange privileges, contact your participating broker or call the
Transfer Agent at 800-426-0107.
With respect to Class B and Class C shares, or Class A shares subject to a CDSC,
if less than all of an investment is exchanged out of the Fund, any portion of
the investment attributable to capital appreciation and/or reinvested dividends
or capital gains distributions will be exchanged first, and thereafter any
portions exchanged will be from the earliest investment made in the Fund from
which the exchange was made. Shareholders should take into account the effect of
any exchange on the applicability of any CDSC that may be imposed upon any
subsequent redemption.
AUTO EXCHANGE Investors may also select the PIMCO Auto Exchange plan which
establishes automatic periodic exchanges. For further information on automatic
exchanges see "PIMCO Auto Exchange" under "How to Buy Shares."
HOW TO REDEEM
Class A, B or C shares may be redeemed through a participating broker, by
telephone, by submitting a written redemption request directly to the Transfer
Agent (for non-broker accounts) or through an Automatic Withdrawal Plan or PIMCO
Fund Link.
A CDSC may apply to a redemption of Class A, Class B or Class C shares. See
"Alternative Purchase Arrangements" above. Shares are redeemed at their net
asset value next determined after a proper redemption request has been received,
less any applicable CDSC. There is no charge by the Distributor (other than an
applicable CDSC) with respect to a redemption; 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 obligated to
transmit orders promptly. Requests for redemption received by dealers or other
firms prior to the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) on a regular business day and received by the
Distributor prior to the close of the Distributor's business day will be
confirmed at the net asset value effective as of the closing of the Exchange on
that day, less any applicable CDSC.
DIRECT REDEMPTION A shareholder's original Account Application permits the
shareholder to redeem by written request and by telephone (unless the
shareholder specifically elects not to utilize telephone redemptions) and to
elect one or more of the additional redemption procedures described below. A
shareholder may change the instructions indicated on his original Account
Application, or may request additional redemption options, only by transmitting
a written direction 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
seven days or, in the case of wire transfer or Fund Link redemptions, sent to
the designated bank account within one business day. Fund Link redemptions may
be received by the bank on the second or third business day. In cases where
shares have recently been purchased by personal check, redemption proceeds may
be withheld until the check has been collected, which may take up to 15 days.
To avoid such withholding, investors should purchase shares by certified or bank
check or by wire transfer.
WRITTEN REQUESTS (Does not apply to shares held in broker "street name"
accounts.) To redeem shares in writing, a shareholder must send the following
items to the Fund's Transfer Agent, Shareholder Services, Inc., P.O.
<PAGE>
36 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
Box 5866, Denver, Colorado 80217-5866: (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 and the dollar amount or number of shares to be redeemed; (2) for
certain redemptions described below, a guarantee of all signatures on the
written request or on the share certificate or accompanying stock power, if
required, as described 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, shareholders having any questions about these
requirements should contact the Transfer Agent in writing or by calling 1-800-
426-0107 before submitting a request. REDEMPTION TRANSFER REQUESTS WILL NOT BE
HONORED UNTIL ALL REQUIRED DOCUMENTS IN THE PROPER FORM HAVE BEEN RECEIVED BY
THE TRANSFER AGENT.
If the proceeds of the redemption (i) exceed $50,000, (ii) are to be paid to a
person other than the record owner, (iii) are to be sent to an address other
than the address of the account on the Transfer Agent's records, or (iv) are to
be paid to a corporation, partnership, trust or fiduciary, the signature(s) on
the redemption request and on the certificates, if any, or stock power must be
guaranteed as described above, except that the Distributor may waive the
signature guarantee requirement for redemptions up to $2,500 by a trustee of a
qualified retirement plan, the administrator for which has an agreement with the
Distributor.
TELEPHONE REDEMPTIONS (Does not apply to shares held in broker "street name"
accounts.) The Trust accepts telephone requests for redemption of shares for
amounts up to $50,000 within any 7 calendar day period, except for investors who
have specifically declined telephone redemption privileges on the Account
Application or elected in writing not to utilize telephone redemptions. The
proceeds of a telephone redemption will be sent to the record shareholder at his
record address. Changes in account information must be made in a written
authorization with a signature guarantee. See "Signature Guarantee" under
"General." Telephone redemptions will not be accepted during the 30-day period
following any change in an account's record address.
By completing an Account Application, an investor agrees that the Trust, the
Distributor and the Transfer Agent shall not be liable for any loss incurred by
the investor by reason of the Trust accepting unauthorized telephone redemption
requests for his account if the Trust reasonably believes the instructions to be
genuine. Thus, shareholders risk possible losses in the event of a telephone
redemption not authorized by them. The Trust may accept telephone redemption
instructions from any person identifying himself as the owner of an account or
the owner's broker where the owner has not declined in writing to utilize this
service. The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and may be liable for any
losses due to unauthorized or fraudulent instructions if it fails to employ such
procedures. The Trust will require a form of personal identification prior to
acting on a caller's telephone instructions, will provide written confirmations
of such transactions and will record telephone instructions.
A shareholder making a telephone redemption should call the Transfer Agent at
800-852-8457 and state (i) the name of the shareholder as it appears on the
Transfer Agent's records, (ii) his account number with the Trust, (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 Trust
business day after the redemption is effected, provided the redemption request
is received prior to the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) that day. If the redemption request is
received after the closing of the Exchange, the redemption is effected on the
following Trust business day at that day's net asset value and the proceeds are
usually sent to the investor on the second following Trust business day. The
Trust 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.
FUND LINK REDEMPTIONS (Does not apply to shares held in broker "street name"
accounts.) If a shareholder has established Fund Link, the shareholder may
redeem shares by telephone and have the redemption proceeds sent to a designated
account at a financial institution. Fund Link is normally established within 45
days of receipt of the Application by the Transfer Agent. To use Fund Link for
redemptions, call the Transfer Agent at 800-852-8457. Subject to the
limitations set forth above under "Telephone Redemptions," the Distributor, the
Trust and the Transfer Agent may rely on instructions by any registered owner
believed to be genuine and will not be responsible to any shareholder for any
loss, damage or expense arising out of such instructions. Requests received by
the Transfer Agent prior to the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. Eastern time) on a business day will be processed
at the net asset value on that day and the proceeds (less any CDSC) will
normally be sent to the designated bank account on the following business day
and received by the bank on the second or third business day. If the redemption
request is received after
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 37
---------------------------------------------------------------------
the close of regular trading on the Exchange, the redemption is effected on the
following business day. Shares purchased by check may not be redeemed through
Fund Link until such shares have been owned (i.e., paid for) for at least 15
days. Changes in bank account information must be made by completing a new Fund
Link Application, signed by all owners of record of the account, with all
signatures guaranteed. See "Signature Guarantee" under "General." See "PIMCO
Fund Link" under "How to Buy Shares" for information on establishing the Fund
Link privilege. The Trust may terminate the Fund Link program at any time
without notice to shareholders.
EXPEDITED WIRE TRANSFER REDEMPTIONS (Does not apply to shares held in broker
"street name" accounts.) If a shareholder has given authorization for expedited
wire redemption, shares can be redeemed and the proceeds sent by federal wire
transfer to a single previously designated bank account. Requests received by
the Trust prior to the close of the Exchange will result in shares being
redeemed that day at the next determined net asset value (less any CDSC) 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 the proceeds of a wire redemption request may be delayed by the
Trust for up to 7 days if the Distributor deems it appropriate under then
current market conditions. Once authorization is on file, the Trust will honor
requests by any person identifying himself as the owner of an account or the
owner's broker by telephone at 800-852-8457 or by written instructions. The
Trust cannot be responsible for the efficiency of the Federal Reserve wire
system or the shareholder's bank. The Trust 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 $2,500. The Trust
reserves the right to change this minimum or to terminate the wire redemption
privilege. 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 bank account designated to
receive wire redemption proceeds, it is necessary to send a written request with
signatures guaranteed to PIMCO Funds Distribution Company, P.O. Box 5866,
Denver, CO 80217-5866. See "Signature Guarantee" under "General."
AUTOMATIC WITHDRAWAL PLAN An investor who owns or buys shares of the Fund having
a net asset value of $10,000 or more may open an Automatic Withdrawal Plan and
have a designated sum of money (not less than $100) paid monthly (or quarterly)
to the investor or another person. Such a plan may be established by completing
the appropriate section of the PIMCO Funds Account Application or you may obtain
an Automatic Withdrawal Plan Application from the Distributor or your broker. If
an Automatic Withdrawal Plan is set up after the account is established
providing for payment to a person other than the record shareholder or to an
address other than the address of record, a signature guarantee is required. See
"Signature Guarantee" under "General." Shares of each class of the Fund are
deposited in a plan account and all distributions are reinvested in additional
shares of that class of the Fund at net asset value. Shares in a plan account
are then redeemed at net asset value (less any applicable CDSC) to make each
withdrawal payment. Any applicable CDSC may be waived for certain redemptions
under an Automatic Withdrawal Plan. See "Waiver of Contingent Deferred Sales
Charges" under "Alternative Purchase Agreements" above.
Redemptions for the purpose of withdrawals are ordinarily made on the business
day preceding the day of payment at that day's closing net asset value and
checks are mailed on the day of payment selected by the shareholder. The
Transfer Agent may accelerate the redemption and check mailing date by one day
to avoid weekend delays. Payment will be made to any person the investor
designates; however, if the shares are registered in the name of a trustee or
other fiduciary, payment will be made only to the fiduciary, except in the case
of a profit-sharing or pension plan where payment will be made to the designee.
As withdrawal payments may include a return of principal, they cannot be
considered a guaranteed annuity or actual yield of income to the investor. The
redemption of shares in connection with an Automatic Withdrawal Plan may result
in a gain or loss for tax purposes. Continued withdrawals in excess of income
will reduce and possibly exhaust invested principal, especially in the event of
a market decline. The maintenance of an Automatic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be disadvantageous to the
investor because of the CDSC that may become payable on such withdrawals in the
case of Class A, Class B or Class C shares and because of the initial sales
charge in the case of Class A shares. For this reason, the minimum investment
accepted for the Fund while an Automatic Withdrawal Plan is in effect for the
Fund is $1,000, and an investor may not maintain a plan for the accumulation of
shares of the Fund (other than through reinvestment of distributions) and an
Automatic Withdrawal Plan at the same time. The Trust or the Distributor may
terminate or change the terms of the Automatic Withdrawal Plan at any time.
Because the Automatic Withdrawal Plan may involve invasion of capital, investors
should consider carefully with their own financial advisers whether the plan and
the specified amounts to be withdrawn are appropriate in their circumstances.
The Trust and the Distributor make no recommendations or representations in this
regard.
<PAGE>
38 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
DISTRIBUTOR AND DISTRIBUTION AND SERVICING PLANS
PIMCO Funds Distribution Company (the "Distributor"), an indirect, wholly-owned
subsidiary of PIMCO Advisors L.P., is the principal underwriter of the Trust's
shares and in that connection makes distribution and servicing payments to
participating brokers and servicing payments to certain banks and other
financial intermediaries in connection with the sale of Class B or Class C
shares and servicing payments to participating brokers, certain banks and other
financial intermediaries in connection with the sale of Class A shares. In the
case of Class A shares, these parties are compensated based on the amount of the
front-end sales charge reallowed by the Distributor, except in cases where Class
A shares are sold without a front-end sales charge. In the case of Class B
shares, participating brokers and other financial intermediaries are compensated
by an advance of a sales commission by the Distributor. In the case of Class C
shares, part or all of the first year's distribution and servicing fee is
generally paid at the time of sale. Pursuant to a Distribution Contract with the
Trust, the Distributor bears various other promotional and sales related
expenses, including the cost of printing and mailing prospectuses to persons
other than shareholders.
CLASS A SERVICING FEES: As compensation for services rendered and expenses borne
by the Distributor in connection with personal services rendered to Class A
shareholders of the Trust and the maintenance of Class A shareholder accounts,
the Trust pays the Distributor servicing fees up to the annual rates of .25%
(calculated as a percentage of the Fund's average daily net assets attributable
to Class A shares).
CLASS B DISTRIBUTION AND SERVICING FEES: As compensation for services rendered
and expenses borne by the Distributor in connection with the distribution of
Class B shares of the Fund and in connection with personal services rendered to
Class B shareholders of the Trust and the maintenance of Class B shareholder
accounts, the Trust pays the Distributor distribution fees up to the annual rate
of .75%, and servicing fees up to the annual rate of .25% (calculated as a
percentage of the Fund's average daily net assets attributable to Class B
shares).
CLASS C DISTRIBUTION AND SERVICING FEES: As compensation for services rendered
and expenses borne by the Distributor in connection with the distribution of
Class C shares of the Trust and in connection with personal services rendered to
Class C shareholders of the Trust and the maintenance of Class C shareholder
accounts, the Trust pays the Distributor distribution fees up to the annual rate
of .75%, and servicing fees up to the annual rate of .25% (calculated as
a percentage of the Fund's average daily net assets attributable to Class B
shares).
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 39
---------------------------------------------------------------------
The Class A servicing fees and Class B and C distribution and servicing fees
paid to the Distributor are made under Distribution and Servicing Plans adopted
pursuant to Rule 12b-l under the Investment Company Act of 1940 and are of the
type known as "compensation" plans. This means that, although the Trustees of
the Trust are expected to take into account the expenses of the Distributor and
its predecessors in their periodic review of the Distribution and Servicing
Plans, the fees are payable to compensate the Distributor for services rendered
even if the amount paid exceeds the Distributor's expenses.
The distribution fee applicable to Class B and C shares may be spent by the
Distributor on any activities or expenses primarily intended to result in the
sale of Class B or C shares, respectively, including compensation to, and
expenses (including overhead and telephone expenses) of, financial consultants
or other employees of the Distributor or of participating or introducing brokers
who engage in distribution of Class B or C shares, printing of prospectuses and
reports for other than existing Class B or C shareholders, advertising and
preparation, printing and distribution of sales literature. The servicing fee,
applicable to Class A , Class B and Class C shares of the Trust, may be spent by
the Distributor on personal services rendered to shareholders of the Trust and
the maintenance of shareholder accounts, including compensation to, and expenses
(including telephone and overhead expenses) of, financial consultants or other
employees of the Distributor or participating or introducing brokers, certain
banks and other financial intermediaries who aid in the processing of purchase
or redemption requests or the processing of dividend payments, who provide
information periodically to shareholders showing their positions in the Fund's
shares, who forward communications from the Trust to shareholders, who render
ongoing advice concerning the suitability of particular investment opportunities
offered by the Trust in light of the shareholders' needs, who respond to
inquiries from shareholders relating to such services, or who train personnel in
the provision of such services. Distribution and servicing fees may also be
spent on interest relating to unreimbursed distribution or servicing expenses
from prior years.
Many of the Distributor's sales and servicing efforts involve the Trust as a
whole, so that fees paid by any class of shares of any Fund of the Trust may
indirectly support sales and servicing efforts relating to the other Funds'
shares of the same class. In reporting its expenses to the Trustees, the
Distributor itemizes expenses that relate to the distribution and/or servicing
of a single Fund's shares, and allocates other expenses among the Funds based on
their relative net assets. Expenses allocated to the Fund are further allocated
among its classes of shares annually based on the relative sales of each class,
except for any expenses that relate only to the sale or servicing of a single
class. The Distributor may make payments to brokers (and with respect to
servicing fees only, to certain banks and other financial intermediaries) of up
to the following percentages annually of the average daily net assets
attributable to shares in the accounts of their customers or clients: Class A
Shares Servicing Fee: .25%; Class B Shares Servicing Fee (Payable only with
respect to shares outstanding for one year or more): .25%; Class C Shares
Servicing Fee (Payable only with respect to shares outstanding for one year or
more except in the case of shares for which no payment is made to the party at
the time of sale): .25%, Distribution Fee: .65%.
<PAGE>
40 PIMCO FUNDS - Pacific Investment Management Series
---------------------------------------------------------------------
The Distributor may from time to time pay additional cash bonuses or other
incentives to selected participating brokers in connection with the sale or
servicing of Class A, B and C shares of the Fund. On some occasions, such
bonuses or incentives may be conditioned upon the sale of a specified minimum
dollar amount of the shares of the Fund and/or all of the Funds of the Trust
together or a particular class of shares, during a specific period of time. The
Distributor currently expects that such additional bonuses or incentives will
not exceed 0.50% of the amount of any sale.
If in any year the Distributor's expenses incurred in connection with the
distribution of Class B and C shares and, for Class A, B and C Shares, in
connection with the servicing of shareholders and the maintenance of shareholder
accounts exceed the distribution and/or servicing fees paid by the Trust, the
Distributor would recover such excess only if the Distribution and Servicing
Plan with respect to such class of shares continues to be in effect in some
later year when the distribution and/or servicing fees exceed the Distributor's
expenses. The Trust is not obligated to repay any unreimbursed expenses that
may exist at such time, if any, as the relevant Distribution and Servicing Plan
terminates.
From time to time, expenses of principal underwriters incurred in connection
with the sale of Class B and Class C shares of the Fund and in connection with
the servicing of Class B and Class C shareholders of the Fund and the
maintenance of shareholder accounts may exceed the distribution and servicing
fees collected by the Distributor.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 41
---------------------------------------------------------------------
HOW NET ASSET VALUE IS DETERMINED
The net asset value per share of Class A, B and C shares of the Fund is
determined as of the close of trading on the New York Stock Exchange (ordinarily
4:00 p.m., Eastern time) by dividing the total market value of the Fund's
portfolio investments and other assets attributable to that class, less any
liabilities, by the number of total outstanding shares of that class. Net asset
value will not be determined on days on which the New York Stock Exchange is
closed.
Portfolio securities and other assets for which market quotations are
readily available are stated at market value. Market value is determined on the
basis of last reported sales prices, or if no sales are reported, as is the case
for most securities traded over-the-counter, at the mean between representative
bid and asked quotations obtained from a quotation reporting system or from
established market makers. Fixed income securities, including those to be
purchased under firm commitment agreements (other than obligations having a
maturity of 60 days or less), are normally valued on the basis of quotations
obtained from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using foreign exchange quotations received from independent
dealers. Short-term investments having a maturity of 60 days or less are valued
at amortized cost, when the Board of Trustees determines that amortized cost is
their fair value. Certain fixed income securities for which daily market
quotations are not readily available may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to fixed income securities
whose prices are more readily obtainable and whose durations are comparable to
the securities being valued. Subject to the foregoing, other securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
The Fund's liabilities are allocated among its classes. The total of such
liabilities allocated to a class plus that class' distribution and/or servicing
fees and any other expenses specially allocated to that class are then deducted
from the class' proportionate interest in the Fund's assets, and the resulting
amount for each class is divided by the number of shares of that class
outstanding to produce the "net asset value" per share. Under certain
circumstances, the per share net asset value of the Class B and Class C shares
of the Fund may be lower than the per share net asset value of the Class A
shares as a result of the daily expense accruals of the distribution fee
applicable to the Class B and Class C shares. Generally, for Funds that pay
income dividends, those dividends are expected to differ over time by
approximately the amount of the expense accrual differential between the Fund's
classes.
<PAGE>
42 PIMCO FUNDS - Pacific Investment Management Series
-----------------------------------------------------------------------------
DISTRIBUTIONS
The Fund pays out as dividends substantially all of its net investment income
(which comes from dividends and interest it receives or is deemed to receive
from its investments) and net realized short-term capital gains. For these
purposes and for federal income tax purposes, a portion of the premiums from
certain expired call or put options written by the Fund, net gains from closing
purchase and sale transactions with respect to such options, and net gains from
futures transactions are treated as short-term capital gains. The Fund
distributes substantially all of its net realized capital gains, if any, after
giving effect to any available capital loss carry-over.
Shares begin earning dividends on the effective date of purchase, which is the
date that funds are received by the Trust for the purchase of shares. Dividends
are declared daily from net investment income to shareholders of record at the
close of the previous business day, and distributed to shareholders monthly. Any
net realized capital gains from the sale of portfolio securities will be
distributed no less frequently than once yearly. Dividend and capital gain
distributions of the Fund will be reinvested in additional shares of the Fund
unless the shareholder elects to have them paid in cash. Dividends from net
investment income with respect to Class B and Class C shares are expected to be
lower than those paid with respect to Class A shares as a result of the
distribution fees applicable to Class B and C shares.
Dividends and capital gains distributions may be declared more or less
frequently in the discretion of the Trustees. There are no charges on reinvested
dividends.
Shareholders may elect to invest dividends and/or distributions paid by the Fund
in shares of the same class of any other Fund of the Trust at net asset value.
The shareholder must have an account existing in the Fund selected for
investment with the identical registered name and address and must elect this
option on the Account Application, on a form provided for that purpose or by a
telephone request to the Transfer Agent at 800-426-0107. For further information
on this option, contact your broker or call the Distributor at 800-426-0107.
TAXES
The Fund intends to qualify as a regulated investment company annually and to
elect to be treated as a regulated investment company under the Internal Revenue
Code of 1986, as amended. As such, the Fund generally will not pay federal
income tax on the income and gains it pays as dividends to its shareholders. In
order to avoid a 4% federal excise tax, each Fund intends to distribute each
year substantially all of its net income and gains.
Distributions received by tax-exempt shareholders will not be subject to federal
income tax to the extent permitted under applicable tax law. To the extent that
a shareholder is not exempt from tax on Fund distributions, such shareholder
will be subject to tax on dividends received from the Fund, regardless of
whether received in cash or reinvested in additional shares. All shareholders
must treat dividends, other than capital gain dividends or dividends that
represent a return of capital to shareholders, as ordinary income. Dividends
designated by the Fund as capital gain dividends are taxable to shareholders as
long-term capital gain except as provided by an applicable tax exemption. Any
distributions that are not from the Fund's net investment income or net capital
gain may be characterized as a return of capital to shareholders or, in some
cases, as capital gain. Certain dividends declared in October, November or
December of a calendar year are taxable to shareholders (who otherwise are
subject to tax on dividends) as though received on December 31 of that year if
paid to shareholders during January of the following calendar year. For state
income tax purposes, interest on some Federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA and GNMA Certificates). The Fund will advise shareholders annually of the
amount and nature of the dividends paid to them.
Coupon payments received by the Fund from inflation-indexed bonds will be
includable in the Fund's gross income in the period in which they accrue.
Periodic adjustments for inflation in the principal value of these securities
also may give rise to original issue discount, which, likewise, will be
includable in the Fund's gross income on a current basis. See "Taxation--
Original Issue Discount" in the Statement of Additional Information. Amounts
includable in the Fund's gross income become subject to tax-related distribution
requirements. Accordingly, the Fund may be required to make annual distributions
to shareholders in excess of the cash received in a given period from these
investments. As a result, the Fund may be required to liquidate certain
investments at a time when it is not advantageous to do so. If the principal
value of an inflation-indexed bond is adjusted downward in any period as a
result of deflation, the reduction may be treated as a loss to the extent the
reduction exceeds coupon payments received in that period; in that case, the
amount distributable by the Fund may be reduced and amounts distributed
previously in the taxable year may be characterized in some circumstances as a
return of capital.
Taxable shareholders should note that the timing of their investment could have
undesirable tax consequences. If shares are purchased on or just before the day
the Fund declares a dividend, taxable shareholders will pay full price for the
shares and may receive a portion of their investment back as a taxable
distribution.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 43
-------------------------------------------------------------------------------
The preceding discussion relates only to federal income tax; the consequences
under other tax laws may differ. For additional information relating to the tax
aspects of investing in the Fund, see the Statement of Additional Information.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are managed under the direction of the Board
of Trustees. The Trustees are Guilford C. Babcock, Thomas P. Kemp, Brent R.
Harris, Vern O. Curtis, and William J. Popejoy. Additional information about the
Trustees and the Trust's executive officers may be found in the Statement of
Additional Information under the heading "Management--Trustees and Officers."
INVESTMENT ADVISER
Pacific Investment Management Company ("Pacific Investment Management") serves
as investment adviser ("Adviser") to the Funds pursuant to an investment
advisory contract. The Adviser is an investment counseling firm founded in 1971,
and had approximately $____ billion in assets under management as of November
30, 1996. Pacific Investment Management is a subsidiary partnership of PIMCO
Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors is
held by PIMCO Partners, G.P., a general partnership between Pacific Investment
Management Company, a California corporation and indirect wholly owned
subsidiary of Pacific Mutual Life Insurance Company ("Pacific Mutual"), and
PIMCO Partners, LLC, a limited liability company controlled by the PIMCO
Managing Directors. Pacific Investment Management's address is 840 Newport
Center Drive, Suite 360, Newport Beach, California 92660. Pacific Investment
Management is registered as an investment adviser with the Securities and
Exchange Commission ("SEC") and as a commodity trading advisor with the CFTC.
The Adviser manages the investment and reinvestment of the assets of the Fund.
The Adviser is responsible for placing orders for the purchase and sale of each
Fund's investments directly with brokers or dealers selected by it in its
discretion. See "Portfolio Transactions."
The Fund's portfolio manager, who is responsible for the day to day management
of the Fund, is John Brynjolfsson, Vice President, Pacific Investment
Management. Mr. Brynjolfsson joined Pacific Investment Management in 1989 and
has managed the Fund since its inception, February ,1997.
--
<PAGE>
44 PIMCO FUNDS - Pacific Investment Management Series
-----------------------------------------------------------------------------
FUND ADMINISTRATOR
Pacific Investment Management also serves as administrator to the Fund pursuant
to an administration agreement. Pacific Investment Management provides
administrative services to the Fund, which include clerical help and
accounting, bookkeeping, internal audit services, and certain other services
required by the Fund, preparation of reports to the Fund's shareholders and
regulatory filings. In addition, Pacific Investment Management, at its own
expense, arranges for the provision of legal, audit, custody, transfer agency
and other services for 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.
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 Pacific Investment Management
or its 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 Pacific Investment
Management or the Trust, and any counsel retained exclusively for their benefit;
(vi) extraordinary expenses, including costs of litigation and indemnification
expenses; (vii) expenses, such as organizational expenses, which are capitalized
in accordance with generally accepted accounting principles; and (viii) any
expenses allocated or allocable to a specific class of shares, which include
distribution and servicing fees payable with respect to Class A, B and C shares
and may include certain other expenses as permitted by the Trust's Multi-Class
Plan adopted pursuant to Rule 18f-3 under the 1940 Act and subject to review and
approval by the Trustees.
ADVISORY AND ADMINISTRATIVE FEES
The PIMCO Funds feature fixed advisory and administrative fee rates. For
providing investment advisory and administrative services to the Fund as
described above, Pacific Investment Management receives monthly advisory fees
from the Fund at an annual rate of 0.25%, and monthly administrative fees at an
annual rate of 0.40%, based on the average daily net assets of the Fund
attributable to its Class A, B and C shares.
<PAGE>
PIMCO FUNDS - Pacific Investment Management Series 45
-----------------------------------------------------------------------------
Both the investment advisory contract and administration agreement with respect
to Class A, Class B and Class C shares of the Fund may be terminated by the
Trustees at any time on 60 days' written notice. The investment advisory
contract may be terminated by Pacific Investment Management on 60 days' written
notice. Following the expiration of the one-year period commencing with the
effectiveness of the administration agreement, it may be terminated by Pacific
Investment Management on 60 days' written notice. Following its initial two-year
term, the investment advisory contract will continue from year to year if
approved by the Trustees. Following its initial one-year term, the
administration agreement with respect to Class A, Class B and Class C shares of
the Fund will continue from year to year if approved by the Trustees.
DESCRIPTION OF THE TRUST
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on February 19, 1987.
The Board of Trustees may establish additional portfolios in the future. The
capitalization of the Trust consists solely of an unlimited number of shares of
beneficial interest with a par value of $0.0001 each. When issued, shares of the
Trust are fully paid, non-assessable and freely transferable.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
and thus should be considered remote.
MULTIPLE CLASSES OF SHARES
In addition to Class A, Class B, and Class C shares, the Fund offers
Institutional Class and Administrative Class shares. These other classes of the
Fund may have different sales charges and expense levels, which will affect
performance. Investors may contact the Distributor at 800-426-0107 for more
information concerning other classes of shares of the Fund. This Prospectus
relates only to the Class A, Class B, and Class C shares of the Fund.
VOTING
Shareholders have the right to vote on the election of Trustees and on any and
all matters on which the law or the Declaration of Trust states they may be
entitled to vote. The Trust is not required to hold regular annual meetings of
Trust shareholders and does not intend to do so. Shareholders of a class of
shares have separate voting rights with respect to matters that only affect that
class. See "Other Information--Voting Rights" in the Statement of Additional
Information.
The Declaration of Trust provides that the holders of not less than two-thirds
of the outstanding shares of the Trust may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required
<PAGE>
46 PIMCO FUNDS - Pacific Investment Management Series
----------------------------------------------------------------------------
to call a meeting for the purpose of considering the removal of a person serving
as Trustee if requested in writing to do so by the holders of not less than 10%
of the outstanding shares of the Trust.
Shares entitle their holders to one vote per share (with proportionate voting
for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of the Fund (or the Trust) means the vote
of the lesser of: (1) 67% of the shares of the Fund (or the Trust) present at a
meeting, if the holders of more than 50% of the outstanding shares are present
in person or by proxy; or (2) more than 50% of the outstanding shares of the
Fund (or the Trust).
MAILINGS TO SHAREHOLDERS
To reduce the volume of mail shareholders receive, it is anticipated that only
one copy of most Trust reports, such as the Trust's annual report, will be
mailed to a shareholder's household (same surname, same address). A shareholder
may call 800-227-7337 if additional shareholder reports are desired.
<PAGE>
-----------------------------------------------------------------------------
52 PIMCO FUNDS - Pacific Investment Management Series
-----------------------------------------------------------------------------
[ART]
PIMCO FUNDS
- -----------
Pacific Investment Management Series
INVESTMENT ADVISER AND Pacific Investment Management Company, 840 Newport
ADMINISTRATOR Center Drive, Suite 360, Newport Beach, CA 92660
- --------------------------------------------------------------------------------
DISTRIBUTOR PIMCO Funds Distribution Company, 2187 Atlantic Street,
Stamford, CT 06902
- --------------------------------------------------------------------------------
CUSTODIAN Investors Fiduciary Trust Company, 127 West 10th
Street, Kansas City, MO 64105
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING Shareholder Services, Inc., P.O. Box 5866, Denver,
AGENT AND TRANSFER AGENT Colorado 80217
- --------------------------------------------------------------------------------
For further information about the Trust, call __________________________.
[PRINTED ON RECYCLED PAPER USING SOY-BASED INKS.]
<PAGE>
PIMCO FUNDS
Pacific Investment Management Series
PIMCO Real Return Bond Fund
PROSPECTUS
- --------------------------------------------------------------------------------
February __, 1997
<PAGE>
PIMCO Funds
Pacific Investment Management Series
Statement of Additional Information
for the PIMCO Real Return Bond Fund
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") currently consisting of twenty separate investment portfolios,
one of which, the Real Return Bond Fund (the "Fund") is described herein.
The Trust's investment adviser is Pacific Investment Management Company
("PIMCO" or the "Adviser"), 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is a subsidiary partnership of PIMCO Advisors L.P.
("PIMCO Advisors").
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with a Prospectus for the Fund. The Fund offers five
classes of shares, offered through two Prospectuses. Class A, Class B, and
Class C shares are offered through the "Retail Prospectus" and Institutional
Class and Administrative Class shares are offered through the "Institutional
Prospectus," each dated February __, 1997 (collectively, the "Prospectuses"). A
copy of the applicable Prospectus may be obtained free of charge at the address
and telephone number listed below.
Institutional Prospectus: Retail Prospectus:
PIMCO Funds PIMCO Advisors Distribution Company
840 Newport Center Drive 2187 Atlantic Street
Suite 360 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: (800) 426-0107
Telephone: (800) 927-4648
February __, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES............................................................................................. 1
Borrowing................................................................................................................ 1
Corporate Debt Securities................................................................................................ 2
Participation on Creditors Committee..................................................................................... 3
Mortgage-Related and Other Asset-Backed Securities....................................................................... 4
Foreign Securities....................................................................................................... 8
Foreign Currency Exchange-Related Securities............................................................................. 10
Bank Obligations......................................................................................................... 11
Loan Participations...................................................................................................... 12
Short Sales.............................................................................................................. 14
Derivative Instruments................................................................................................... 15
Warrants to Purchase Securities.......................................................................................... 22
Illiquid Securities...................................................................................................... 22
INVESTMENT RESTRICTIONS....................................................................................................... 23
Fundamental Investment Restrictions...................................................................................... 23
Non-Fundamental Investment Restrictions.................................................................................. 25
......................................................................................................................... 29
MANAGEMENT OF THE TRUST....................................................................................................... 29
Trustees and Officers.................................................................................................... 29
Compensation Table....................................................................................................... 33
Investment Adviser....................................................................................................... 33
Fund Administrator............................................................................................................ 36
DISTRIBUTION OF TRUST SHARES.................................................................................................. 39
Distributor and Multi-Class Plan......................................................................................... 39
Contingent Deferred Sales Charge and Initial Sales Charge................................................................ 40
Distribution and Servicing Plans for Class A, Class B and Class C Shares................................................. 40
Distribution and Administrative Services Plans for Administrative Class Shares........................................... 41
Purchases, Exchanges and Redemptions..................................................................................... 43
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................................................................... 44
Investment Decisions..................................................................................................... 44
Brokerage and Research Services.......................................................................................... 45
Portfolio Turnover....................................................................................................... 45
NET ASSET VALUE............................................................................................................... 46
TAXATION...................................................................................................................... 47
Distributions............................................................................................................ 48
Sales of Shares.......................................................................................................... 48
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Backup Withholding....................................................................................................... 48
Options, Futures and Forward Contracts, and Swap Agreements.............................................................. 48
Short Sales.............................................................................................................. 49
Passive Foreign Investment Companies..................................................................................... 49
Foreign Currency Transactions............................................................................................ 50
Foreign Taxation......................................................................................................... 50
Original Issue Discount.................................................................................................. 51
Other Taxation........................................................................................................... 52
OTHER INFORMATION............................................................................................................. 52
Capitalization........................................................................................................... 52
Performance Information.................................................................................................. 52
Voting Rights............................................................................................................ 59
Code of Ethics........................................................................................................... 66
Custodian, Transfer Agent and Dividend Disbursing Agent.................................................................. 67
Independent Accountants.................................................................................................. 67
Counsel.................................................................................................................. 67
Registration Statement................................................................................................... 67
Financial Statements..................................................................................................... 68
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Fund are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.
Borrowing
The Fund may borrow for temporary administrative purposes. This borrowing
may be unsecured. Provisions of the Investment Company Act of 1940 ("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 and mortgage dollar rolls. 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. The Fund will maintain a segregated account with its custodian consisting
of assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, equal (on a daily mark-to-market basis) to
its obligations under reverse repurchase agreements with broker-dealers (but not
banks). However, 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,
which will restrict the aggregate of such transactions (plus any other
borrowings) to 33 1/3% of the Fund's total assets.
A "mortgage dollar roll," is similar to reverse repurchase agreements in
certain respects. In a "dollar roll" transaction the Fund sells a mortgage-
related security, such as a security issued by the Government National Mortgage
Association ("GNMA"), to a dealer and simultaneously agrees to repurchase a
similar security (but not the same security) in the future at a pre-determined
price. A "dollar roll" can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which the Fund pledges a mortgage-related security
to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,
the dealer with which the Fund enters into a dollar roll transaction is not
obligated to return the same securities as those originally sold by the Fund,
but only securities which are "substantially identical." To be considered
"substantially identical," the securities returned
1
<PAGE>
to the Fund generally must: (1) be collateralized by the same types of
underlying mortgages; (2) be issued by the same agency and be part of the same
program; (3) have a similar original stated maturity; (4) have identical net
coupon rates; (5) have similar market yields (and therefore price); and (6)
satisfy "good delivery" requirements, meaning that the aggregate principal
amounts of the securities delivered and received back must be within 2.5% of the
initial amount delivered.
The Fund's obligations under a dollar roll agreement must be covered by
liquid assets, such as cash or high quality debt securities equal in value to
the securities subject to repurchase by the Fund, maintained in a segregated
account. Dollar rolls will be subject to the Fund's limitations on borrowings,
which will restrict the aggregate of such transactions (plus any other
borrowings) to 331/3% of the Fund's total assets. Furthermore, because dollar
roll transactions may be for terms ranging between one and six months, dollar
roll transactions may be deemed "illiquid" and subject to the Fund's overall
limitations on investments in illiquid securities.
Corporate Debt Securities
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 in the
Adviser's opinion 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 bonds in which the Fund may invest are convertible
securities. A convertible security is a bond, debenture, note, or other
security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by 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.
2
<PAGE>
Participation on Creditors Committee
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. 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 will
participate on such committees only when the Adviser 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.
3
<PAGE>
Mortgage-Related and Other Asset-Backed Securities
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations, see "Mortgage Pass-Through
Securities." The Fund may also invest in debt securities which are secured with
collateral consisting of mortgage-related securities, see "Collateralized
Mortgage Obligations," and in other types of mortgage-related securities.
Mortgage Pass-Through Securities. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment
on underlying mortages increase in the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs
(the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the twelve Federal Home Loan Banks and
now owned entirely by private stockholders. FHLMC
4
<PAGE>
issues Participation Certificates ("Pcs") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but Pcs are not
backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the 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 Adviser
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 Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the Fund's
net assets will be illiquid.
Mortgage-backed 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, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the 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. CMOs
5
<PAGE>
provide for a modified form of call protection through a de facto breakdown of
the underlying pool of mortgages according to how quickly the loans are repaid.
Monthly payment of principal received from the pool of underlying mortgages,
including prepayments, is first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired. An investor is partially guarded
against a sooner than desired return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC Pcs, payments of principal and interest on the CMOs are made
semi-annually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC Pcs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
6
<PAGE>
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 ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities--Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped mortgage-
backed securities, in certain circumstances the Fund may fail to recoup fully
its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a 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 principal-only or "PO"
class). The yield to maturity on an IO class is extremely
7
<PAGE>
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 fully recoup 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 Adviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile ReceivablesSM
("CARSSM"). CARSSM represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARSSM may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with the Fund's investment objectives and policies, the Adviser
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 (including preferred or preference
stock), certain foreign bank obligations (see "Bank Obligations") and U.S.
dollar-or foreign currency-denominated obligations of foreign governments or
their subdivisions, agencies and instrumentalities, international agencies and
supranational entities. The Fund will limit its investment in securities
denominated in foreign currencies to no more than 20% of the Fund's total
assets. The Fund will limit its foreign investments to securities of issuers
based in developed countries (which include Newly Industrialized Countries
("NICs") such as Mexico, Taiwan and South Korea). The Fund limits its
investments in securities of issuers based in NICs to 10% of its assets.
8
<PAGE>
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 Fund also may purchase and sell foreign currency options and foreign
currency futures contracts and related options, see "Derivative Instruments,"
and enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates in the
purchase and sale of securities. The Fund may also use foreign currency options
and foreign currency forward contracts to increase exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another.
A forward foreign currency 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. These contracts may be bought or sold to protect a Fund
against a possible loss resulting from an adverse change in the relationship
between foreign currencies and the U.S. dollar or to increase exposure to a
particular foreign currency. Open positions in forward contracts used for non-
hedging purposes will be covered by the segregation with the Trust's custodian
of assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, and are marked to market daily. Although
forward contracts are intended to minimize the risk of loss due to a decline in
the value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies
increase.
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 (the "Brady Plan"). Brady Plan debt restructurings have been
implemented in a number of countries, including: Argentina, Bolivia, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, the
Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil has concluded a
Brady-like plan. It is expected that other countries will undertake a Brady Plan
in the future, including Panama and Peru.
Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of
9
<PAGE>
floating rate bonds, initially is equal to at least one year' s interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Fund may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Fund to suffer
a loss of interest or principal on any of its holdings.
Foreign Currency Exchange-Related Securities
Foreign currency warrants. Foreign currency warrants such as Currency
Exchange WarrantsSM ("CEWs(SM)") are warrants which entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the
10
<PAGE>
warrants may be accelerated if the warrants should be delisted from an exchange
or if their trading should be suspended permanently, which would result in the
loss of any remaining "time value" of the warrants (i.e., the difference between
the current market value and the exercise value of the warrants), and, in the
case the warrants were "out-of-the-money," in a total loss of the purchase price
of the warrants. Warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal exchange rate linked securities. Principal exchange rate linked
securities ("PERLs(SM)") are debt obligations the principal on which is payable
at maturity in an amount that may vary based on the exchange rate between the
U.S. dollar and a particular foreign currency at or about that time. The return
on "standard" principal exchange rate linked securities is enhanced if the
foreign currency to which the security is linked appreciates against the U.S.
dollar, and is adversely affected by increases in the foreign exchange value of
the U.S. dollar; "reverse" principal exchange rate linked securities are like
the "standard" securities, except that their return is enhanced by increases in
the value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance indexed paper. Performance indexed paper ("PIPs(SM)") is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Bank Obligations
Bank obligations in which the Fund invests include certificates of deposit,
bankers' acceptances, and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal
11
<PAGE>
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 limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. 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 United
States dollar-or foreign currency-denominated obligations of foreign banks
(including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Adviser, are of an investment quality comparable to
obligations of United States banks in which the Fund may invest. Subject to the
Fund's limitation on concentration of no more than 25% of its assets in the
securities of issuers in a particular industry, there is no limitation on the
amount of 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 somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any U.S.
Government agency or instrumentality.
Loan Participations
The Fund may purchase participations in commercial loans. Such indebtedness
may be secured or unsecured. Loan participations typically represent direct
participation in a loan to a corporate borrower, and generally are offered by
banks or other financial institutions or lending syndicates. When purchasing
loan participations, the Fund assumes the credit risk associated with the
corporate borrower and may assume the credit risk associated with an interposed
bank or other financial intermediary. The participation interests in which the
Fund intends to invest may not be rated by any nationally recognized rating
service.
12
<PAGE>
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated in
the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Fund were determined to be
subject to the claims of the agent bank's general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the corporate borrower for payment of principal and
interest. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower's obligation, or that the collateral
can be liquidated.
The Fund may invest in loan participations with credit quality comparable
to that of issuers of its securities investments. Indebtedness of companies
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Some companies may never pay off their indebtedness, or may
pay only a small fraction of the amount owed. Consequently, when investing in
indebtedness of companies with poor credit, the Fund bears a substantial risk of
losing the entire amount invested.
The Fund limits the amount of its total assets that it will invest in any
one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, the Fund generally will treat the
corporate borrower as the "issuer" of indebtedness held by the Fund. In the case
of loan participations where a bank or other lending institution serves as a
financial intermediary between the Fund and the corporate borrower, if the
participation does not shift to the Fund the direct debtor-creditor relationship
with the corporate borrower, Securities and Exchange Commission ("SEC")
interpretations require the Fund to treat both the lending bank or other lending
institution and the corporate borrower as "issuers" for the purposes of
determining whether the Fund has invested more than 5% of its total assets in a
single issuer. Treating a financial intermediary as an issuer of indebtedness
may restrict the Fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
Loans and other types of direct indebtedness may not be readily marketable
and may be subject to restrictions on resale. In some cases, negotiations
involved in disposing of indebtedness may require weeks to complete.
Consequently, some indebtedness may be difficult or impossible to dispose of
readily at what the Adviser believes to be a fair price. In addition, valuation
of illiquid indebtedness involves a greater degree of judgment in determining a
Fund's net asset value than if that value were based on available market
quotations, and could result in significant variations in the
13
<PAGE>
Fund's daily share price. At the same time, some loan interests are traded among
certain financial institutions and accordingly may be deemed liquid. As the
market for different types of indebtedness develops, the liquidity of these
instruments is expected to improve. In addition, the Fund currently intends to
treat indebtedness for which there is no readily available market as illiquid
for purposes of the Fund's limitation on illiquid investments.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund.
Short Sales
The Fund, may make short sales of securities as part of its overall
portfolio management strategies involving the use of derivative instruments and
to offset potential declines in long positions in similar securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of the
short sale and the time and the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer and (except in the case of short sales "against
the box") will maintain additional asset coverage in the form of assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in a segregated account. The Fund does not intend to
enter into short sales (other than those "against the box") if immediately after
such sale the aggregate of the value of all collateral plus the amount in such
segregated account exceeds one-third of the value of the Fund's net assets. This
percentage may be varied by action of the Trustees. A short sale is "against the
box" to the extent that the Fund contemporaneously owns, or has the right to
obtain at no added cost, securities identical to those sold short. The Fund will
engage in short selling to the extent permitted by the 1940 Act and rules and
interpretations thereunder.
14
<PAGE>
Derivative Instruments
In pursuing its individual objective the Fund may, as described in the
Prospectuses, purchase and sell (write) both put options and call options on
securities, securities indexes, and foreign currencies, and enter into interest
rate, foreign currency and index futures contracts and purchase and sell options
on such futures contracts ("futures options") for hedging purposes. The Fund
also may purchase and sell foreign currency options for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another. The Fund also may enter into swap
agreements with respect to foreign currencies, interest rates and indexes of
securities. The Fund may invest in structured notes. If other types of financial
instruments, including other types of options, futures contracts, or futures
options are traded in the future, the Fund may also use those instruments,
provided that the Trustees determine that their use is consistent with the
Fund's investment objective, and provided that their use is consistent with
restrictions applicable to options and futures contracts currently eligible for
use by the Fund (i.e., that written call or put options will be "covered" or
"secured," and that futures and futures options will be used only for hedging
purposes).
Options on Securities and Indexes. The Fund may purchase and sell both put
and call options on fixed income or other securities or indexes in standardized
contracts traded on foreign or domestic securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign over-the-
counter market, and agreements, sometimes called cash puts, which may accompany
the purchase of a new issue of bonds from a dealer.
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 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 assets
determined to be liquid by the Adviser in accordance with procedures established
by the Board of Trustees, in such amount are placed in a segregated account by
its custodian) upon conversion or exchange of other securities held by the Fund.
For a call option on an index, the option is covered if the Fund maintains with
its custodian assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, in an amount equal to the
contract value of the index. A call option is also covered if the 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 difference is maintained by the Fund in assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees,
in a segregated account with its custodian. A put option on a security or an
index is "covered" if the Fund maintains assets determined to be liquid by the
Adviser in accordance with
15
<PAGE>
procedures established by the Board of Trustees, equal to the exercise price in
a segregated account with its custodian. A put option is also covered if the
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 assets determined
to be liquid by the Adviser in accordance with procedures established by the
Board of Trustees, in a segregated account with its custodian.
If an option written by the Fund expires, 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
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.
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."
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 unless the option
expired without exercise. As the writer of a covered call option, a 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.
16
<PAGE>
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. An interest rate,
foreign currency or index futures contract provides for the future sale by one
party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.
A public market exists in futures contracts covering a number of indexes as well
as financial instruments and foreign currencies, including: the S&P 500; the S&P
Midcap 400; the Nikkei 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.
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.
To comply with applicable rules of the Commodity Futures Trading Commission
("CFTC") under which the Trust and the Fund avoids being deemed a "commodity
pool" or a "commodity pool operator," the Fund intends generally to limit its
use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. The Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although
17
<PAGE>
other techniques could be used to reduce that Fund's exposure to interest rate
fluctuations, the Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost by using futures contracts and futures options.
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 quoted on an automated quotation system.
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 determined to be liquid by the Adviser in accordance
with procedures established by the Board of Trustees ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. Margin
requirements on foreign exchanges may be different than U.S. exchanges. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the 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.
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 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."
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.
18
<PAGE>
When purchasing a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, that, when added to the amounts deposited with a futures commission
merchant as margin, are equal to the market value of the futures contract.
Alternatively, the 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) assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, that
are equal to the market value of the instruments underlying the contract.
Alternatively, the 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).
When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that, when added to the amounts deposited with a futures commission
merchant as margin, equal the total market value of the futures contract
underlying the call option. Alternatively, the 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 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) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the 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.
As an operating policy, the Adviser will generally use cash and cash
equivalents in establishing and maintaining segregated accounts to cover each
Fund's obligations under futures contracts and related options. The Adviser
defines cash equivalents to include high grade liquid debt securities with
maturities of one year or less. To the extent that securities with maturities
greater than one year are used, such use will not eliminate the risk of a form
of leverage, which may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio, and may
require liquidation of portfolio positions when it is not advantageous to do so.
However, any potential risk of leverage resulting from the use of securities
with maturities greater than one year may be mitigated by the overall duration
limit on the Fund's portfolio securities. Thus, the use of a longer-term
security may require the Fund to hold offsetting short-term securities to
balance the Fund's portfolio such that the Fund's duration does not exceed the
maximum permitted for the Fund in the Prospectuses.
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."
19
<PAGE>
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when
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 interest rate, index and currency
exchange rate swap agreements. These transactions are entered into in a attempt
to obtain a particular return when it is considered desirable to do so, possibly
at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return. Swap agreements are two party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the
20
<PAGE>
parties are generally calculated with respect to a "notional amount," i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Forms of swap agreements include
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
fall below a specified rate, or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
Most swap agreements entered into by the 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 will be
accrued daily (offset against any amounts owing 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 assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, to avoid any potential leveraging of the 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 of total return will depend on the Adviser's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, 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 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 a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which includes the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or
21
<PAGE>
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Fund invests in these
securities, however, the Adviser analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
Warrants to Purchase Securities
The Fund may invest in or acquire warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit 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.
The Fund will not invest more than 5% of its net assets, valued at the
lower of cost or market, in warrants to purchase securities. Included within
that amount, but not to exceed 2% of the Fund's net assets, may be warrants that
are not listed on the New York or American Stock Exchanges. Warrants acquired in
units or attached to securities will be deemed to be without value for purposes
of this restriction.
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 seven 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 seven days, certain
loan participation interests, fixed time deposits which are not subject to
prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), and other securities whose disposition is restricted under
the federal securities laws (other than securities issued pursuant to Rule 144A
under the 1933 Act and certain commercial paper that the Adviser has determined
to be liquid under procedures approved by the Board of Trustees).
22
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The Fund's investment objective as set forth in the Prospectuses under
"Investment Objectives and Policies," together with the investment restrictions
set forth below, are fundamental policies of the Fund and may not be changed
without shareholder approval by vote of a majority of the outstanding shares of
the Fund. Under these restrictions the Fund may not:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply (a) to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase agreements
with respect thereto);
23
<PAGE>
(2) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein;
(3) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit the Fund, subject to
restrictions described in the Prospectuses and elsewhere in this Statement of
Additional Information, from purchasing, selling or entering into futures
contracts, options on futures contracts, foreign currency forward contracts,
foreign currency options, or any interest rate, securities-related or foreign
currency-related hedging instrument, including swap agreements and other
derivative instruments, subject to compliance with any applicable provisions of
the federal securities or commodities laws;
(4) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that the Fund may (i) borrow from banks or enter
into reverse repurchase agreements, or employ similar investment techniques, and
pledge its assets in connection therewith, but only if immediately after each
borrowing there is asset coverage of 300% and (ii) enter into transactions in
options, futures, options on futures, and other derivative instruments as
described in the Prospectuses and in this Statement of Additional Information
(the deposit of assets in escrow in connection with the writing of covered put
and call options and the purchase of securities on a when-issued or delayed
delivery basis, collateral arrangements with respect to initial or variation
margin deposits for futures contracts and commitments entered into under swap
agreements or other derivative instruments, will not be deemed to be pledges of
the Fund's assets);
(5) lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans, (b) enter into repurchase agreements, and (c) lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets, provided such
24
<PAGE>
loans are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the Trustees of the Trust.
(6) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws;
(7) maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except on such conditions as may be
set forth in the Prospectuses and in this Statement of Additional Information.
Non-Fundamental Investment Restrictions
The Fund is also subject to the following non-fundamental restrictions and
policies (which may be changed without shareholder approval) relating to the
investment of its assets and activities. Unless otherwise indicated, the Fund
may not:
25
<PAGE>
(A) invest more than 15% of the net assets of the Fund (taken at market value
at the time of the investment) in "illiquid securities," illiquid securities
being defined to include securities subject to legal or contractual restrictions
on resale (which may include private placements), repurchase agreements maturing
in more than seven days, certain loan participation interests, fixed time
deposits which are not subject to prepayment or provide for withdrawal penalties
upon prepayment (other than overnight deposits), certain options traded over the
counter that the Fund has purchased, securities or other liquid assets being
used to cover such options the Fund has written, securities for which market
quotations are not readily available, or other securities which legally or in
the Adviser's opinion may be deemed illiquid (other than securities issued
pursuant to Rule 144A under the Securities Act of 1933 and certain commercial
paper that PIMCO has determined to be liquid under procedures approved by the
Board of Trustees);
26
<PAGE>
(B) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with covered transactions in options,
futures, options on futures and short positions;
(C) invest more than 5% of the assets of the Fund (taken at market value at
the time of investment) in any combination of interest only, principal only, or
inverse floating rate securities;
(D) borrow money (excluding dollar rolls and reverse repurchase agreements,
which are subject to the Fund's fundamental borrowing restriction), except for
temporary administrative purposes;
(E) invest greater than 10% of its assets in the securities of issuers
based in Newly Industrialized Countries.
27
<PAGE>
In addition, the Trust has adopted a non-fundamental policy pursuant to
which the Fund will hedge at least 75% of its exposure to foreign currency using
the techniques described in the Prospectuses. There can be no assurance that
currency hedging techniques will be successful.
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed. Notwithstanding
the provisions of fundamental investment restriction (4) above, the Fund may
borrow money for temporary administrative purposes. To the extent that
borrowings for temporary administrative purposes exceed 5% of the total assets
of the Fund such excess shall be subject to the 300% asset coverage requirement
of that restriction.
The staff of the SEC has taken the position that purchased over-the-counter
("OTC") options and the assets used as cover for written OTC options are
illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which the Fund will not purchase or sell OTC options if, as a result
of such transactions, the sum of the market value of OTC options currently
outstanding which are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding which were sold by
the Fund and margin deposits on the Fund's existing OTC options on futures
contracts exceeds 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are otherwise
not readily marketable. However, if an OTC option is sold by the Fund to a
primary U.S. Government securities dealer recognized by the Federal Reserve Bank
of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities equal to
the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
is not a fundamental policy of the Fund and may be amended by the Trustees
without the approval of shareholders. However, the Fund will not change or
modify this policy prior to the change or modification by the SEC staff of its
position.
28
<PAGE>
Unless otherwise indicated, all limitations applicable to Fund investments
(as stated above and elsewhere in this Statement of Additional Information)
apply only at the time a transaction is entered into. Any subsequent change in a
rating assigned by any rating service to a security (or, if unrated, deemed to
be of comparable quality), or change in the percentage of Fund assets invested
in certain securities or other instruments, or change in the average duration of
the Fund's investment portfolio, resulting from market fluctuations or other
changes in the Fund's total assets will not require the Fund to dispose of an
investment until the Adviser determines that it is practicable to sell or close
out the investment without undue market or tax consequences to the Fund. In the
event that ratings services assign different ratings to the same security, the
Adviser will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the several assigned
ratings.
MANAGEMENT OF THE TRUST
Trustees and Officers
The Trustees and Executive Officers of the Trust, their business address
and principal occupations during the past five years are as follows (unless
otherwise indicated, the address of all persons below is 840 Newport Center
Drive, Suite 360, Newport Beach, California 92660):
29
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- ----------------------------------------------------------------------------
<S> <C> <C>
Brent R. Harris* Chairman of the Managing Director, PIMCO; Director,
Age 37 Board and Trustee Harris Holdings; Director, Harris Oil
Company; Chairman and Director, PIMCO
Commercial Mortgage Securities Trust,
Inc. Formerly Principal, Senior Vice
President and Vice President of PIMCO.
Guilford C. Babcock Trustee Associate Professor of Finance,
School of Business University of Southern California;
Administration, Director, PIMCO Commercial Mortgage
University of Securities Trust, Inc.; Director, AMCAP
Southern California, Fund and Fundamental Investors Fund of
Los Angeles, California the Capital Group; Director, Good Hope
90089-1421 Medical Foundation.
Age 65
Vern O. Curtis Trustee Private Investor; Director of 16 Real
15213 N.W. Francesca Drive Estate Investment Trusts affiliated with
Portland, Oregon Public Storage, Inc.; Director, PIMCO
97229 Commercial Mortgage Securities Trust, Inc.
Age 62 Formerly Charitable Work, The Church of
Jesus Christ of Latter Day Saints.
Thomas P. Kemp Trustee Co-Chairman, U.S. Committee to Assist
359 San Miguel Russian Reform; Director, Union
Suite 110 Financial Corp.; Director, PIMCO
Newport Beach, California Commercial Mortgage Securities Trust, Inc.
92660 - 7807 Formerly Senior Consultant, World Cup 1994
Age 66 Organizing Committee; Chairman and CEO of
Coca Cola Bottling Company of L.A.
William J. Popejoy Trustee Chairman, Western Vinyl Manufacturing;
10036 Freeman Avenue Partner, Butler Popejoy Group; Director,
Santa Fe Springs, California PIMCO Commercial Mortgage Securities Trust,
90670 Inc. Formerly Chief Executive Officer,
Age 58 Orange County, California; Principal,
Castine Partners.
R. Wesley Burns President Executive Vice President, PIMCO. Formerly
Age 37 Vice President, PIMCO.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- ----------------------------------------------------------------------------
<S> <C> <C>
William H. Gross Senior Vice President Managing Director, PIMCO.
Age 52
Margaret Isberg Senior Vice President Executive Vice President, PIMCO.
Age 39
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO.
Age 44 Formerly Vice President, PIMCO.
Andrew C. Ward Senior Vice President Vice President, PIMCO.
Age 36
Michael G. Dow Vice President Account Manager, PIMCO. Formerly
Age 32 Fixed Income Specialist, Salomon
Brothers, Inc.; Vice President
Operations, Citibank NA Global
Consumer Banking Group.
U. Teri Frisch Vice President Account Manager, PIMCO.
Age 43
Raymond C. Hayes Vice President Account Manager, PIMCO. Formerly
Age 51 Marketing Director, Pacific Financial
Asset Management Corporation.
Dean S. Meiling Vice President Managing Director, PIMCO.
Age 48
James F. Muzzy Vice President Managing Director, PIMCO.
Age 57
Douglas J. Ongaro Vice President Account Manager, PIMCO. Formerly
Age 35 Regional Marketing Manager, Charles
Schwab & Co., Inc.
Jeffrey M. Sargent Vice President Vice President and Manager of Fund
Age 33 Shareholder Servicing, PIMCO. Formerly
Project Specialist, PIMCO.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- ----------------------------------------------------------------------------
<S> <C> <C>
William S. Thompson, Jr. Vice President Chief Executive Officer and Managing
Age 51 Director, PIMCO. Formerly Managing
Director, Salomon Brothers, Inc.
Teresa A. Wagner
Age 34 Vice President Vice President and Manager of Fund
Administration, PIMCO. Formerly Vice
President, PIMCO Advisors Institutional
Services; Finance Director, Pacific
Financial Asset Management Corporation.
Kristen M. Wilsey Vice President Vice President, PIMCO. Formerly Account
Age 36 Manager, PIMCO; Vice President, Pacific
Financial Asset Management Corporation.
John P. Hardaway Treasurer Vice President and Manager of Fund
Age 39 Operations, PIMCO.
Garlin G. Flynn Secretary Senior Fund Administrator, PIMCO. Formerly
Age 50 Senior Mutual Fund Analyst, PIMCO Advisors
Institutional Services; Senior Mutual Fund
Analyst, Pacific Financial Asset Management
Corporation.
Joseph D. Hattesohl Assistant Treasurer Manager of Fund Taxation, PIMCO. Formerly
Age 32 Director of Financial Reporting, Carl I. Brown
& Co.; Tax Manager, Price Waterhouse LLP.
Michael J. Willemsen Assistant Secretary Project Lead, PIMCO. Formerly Shareholder
Age 36 Services Specialist, PIMCO.
____________________
*Mr. Harris is an "interested person" of the Trust (as that term is defined in
the 1940 Act) because of his affiliations with PIMCO.
</TABLE>
32
<PAGE>
Compensation Table
The following table sets forth information regarding compensation received
by the Trustees for the year ended March 31, 1996.
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Compensation Trust and Fund Complex
Name and Position from Trust/1/ Paid to Trustees/2/
----------------- ---------- ----------------
<S> <C> <C>
Guilford C. Babcock $22,500 $32,500
Trustee
Vern O. Curtis $22,500 $32,500
Trustee
Thomas P. Kemp $22,500 $32,500
Trustee
William J. Popejoy $18,167/3/ $25,167/3/
Trustee
</TABLE>
____________________
/1/Effective October 1, 1995, Trustees, other than those affiliated with
the Adviser or its affiliates, receive an annual retainer of $20,000 plus $2,500
for each Board of Trustees meeting attended, plus reimbursement of related
expenses. For the fiscal year ended March 31, 1996, the unaffiliated Trustees as
a group received reimbursement of such fees and expenses aggregating $85,667.
/2/Each Trustee also serves as a Director of PIMCO Commercial Mortgage
Securities Trust, Inc., a registered closed-end management investment company.
For their services, the Directors who are unaffiliated with the Adviser or its
affiliates receive an annual retainer of $6,000 plus $1,000 for each Board of
Directors meeting attended, plus reimbursement of related expenses. For the
fiscal year ended December 31, 1995, the unaffiliated Trustees as a group
received reimbursement of such fees and expenses aggregating $32,000.
/3/Mr. Popejoy resigned as a Trustee in February 1995, and rejoined the
Boards of both the Trust and PIMCO Commercial Mortgage Securities Trust, Inc. in
August, 1995, and thus received a pro rata portion of his annual retainers.
Investment Adviser
PIMCO serves as investment adviser to the Fund and all other Funds of the
Trust pursuant to an investment advisory contract ("Advisory Contract") between
PIMCO and the Trust. PIMCO is a subsidiary partnership of PIMCO Advisors. A
majority interest of PIMCO Advisors is held by PIMCO Partners, G.P., a general
partnership between Pacific Investment Management Company, a California
corporation and indirect wholly owned subsidiary of Pacific Mutual Life
Insurance Company ("Pacific Mutual"), and PIMCO Partners, LLC ("PIMCO
Partners"), a limited liability company controlled by the PIMCO Managing
Directors.
33
<PAGE>
PIMCO is responsible for making investment decisions and placing orders for
the purchase and sale of the Trust's investments directly with the issuers or
with brokers or dealers selected by it in its discretion. See "Portfolio
Transactions." PIMCO also furnishes to the Board of Trustees, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Fund.
Under the terms of the Advisory Contract, PIMCO is obligated to manage the
Fund in accordance with applicable laws and regulations. The investment
advisory services of PIMCO to the Trust are not exclusive under the terms of the
Advisory Contract. PIMCO is free to, and does, render investment advisory
services to others. The current Advisory Contract was approved by the Board of
Trustees, including a majority of the Trustees who are not parties to the
Advisory Contract or interested persons of such parties ("Independent
Trustees"), at a meeting held on May 31, 1994, as supplemented at a meeting held
on May 23, 1995, and was last approved by the Trustees on August 27, 1996 and by
shareholders of all then-operational Funds on October 17, 1994.
The Advisory Contract will continue in effect on a yearly basis provided
such continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Trust or by the Board of Trustees and (ii)
by a majority of the Independent Trustees. The Advisory Contract may be
terminated without penalty by vote of the Trustees or the shareholders of the
Trust, or by the Adviser, on 60 days' written notice by either party to the
contract and will terminate automatically if assigned.
The current Advisory Contract was executed in connection with the
consolidation of PIMCO, Pacific Investment Administrative Services Company
("PIASCo"), Thomson Advisory Group L.P. and certain other affiliated entities
(the "Consolidation"). Prior to the Consolidation, and since the inception of
each of the Funds, PIMCO had served as investment adviser to the Funds, pursuant
to an advisory contract, last approved by the Trustees April 14, 1993, and by
shareholders of the then-operational Funds on August 21, 1992 (the "Prior
Advisory Contract"). The terms and conditions of the Advisory Contract are
identical in all material respects to the Prior Advisory Contract, with the
exception of the identity of the service provider, its effective date and
termination date, and the amendment recently effected in connection with the
adoption of a new service and fee arrangement for the Funds.
The Adviser currently receives a monthly investment advisory fee from each
Fund at an annual rate of 0.25% of the average daily net assets of the Fund.
34
<PAGE>
Fund Administrator
PIMCO also serves as Administrator to the Fund pursuant to an
administration agreement dated November 15, 1994, as amended (the
"Administration Agreement"). PIMCO provides the Fund with certain
administrative and shareholder services necessary for Fund operations and is
responsible for the supervision of other Fund service providers. PIMCO may in
turn use the facilities or assistance of its affiliates to provide certain
services under the Administration Agreement, on terms agreed between PIMCO and
such affiliates. The administrative services provided by PIMCO include but are
not limited to: (1) shareholder servicing functions, including preparation of
shareholder reports and communications, (2) regulatory compliance, such as
reports and filings with the SEC and state securities commissions, and (3)
general supervision of the operations of the Fund, including coordination of
the services performed by the Fund's transfer agent, custodian, legal counsel,
independent accountants, and others. PIMCO (or an affiliate of PIMCO) also
furnishes the Fund with office space facilities required for conducting the
business of the Fund, and pays the compensation of those officers, employees
and Trustees of the Trust affiliated with PIMCO. In addition, PIMCO, at its own
expense, arranges for the provision of legal, audit, custody, transfer agency
and other services for the 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. PIMCO has contractually agreed to
provide these services, and to bear these expenses, at the rate of 0.25% for
Institutional and Administrative Class shares, and 0.40% for Class A, B and C
shares (each expressed as a percentage of the Fund's average daily net assets
attributable to its classes of shares on an annual basis).
Except for the expenses paid by PIMCO, the Trust bears all costs of its
operations. The Fund is responsible for: (i) salaries and other compensation
of any of the Trust's executive officers and employees who are not officers,
directors, stockholders, or employees of PIMCO or its subsidiaries or
affiliates; (ii) taxes and governmental fees; (iii) brokerage fees and
commissions and other portfolio transaction expenses; (iv) costs of borrowing
money, including interest expenses; (v) fees and expenses of the Trustees who
are not "interested persons" of PIMCO or the Trust, and any counsel retained
exclusively for their benefit; (vi) extraordinary expenses, including costs of
litigation and indemnification expenses; (vii) expenses, such as organizational
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").
Class-specific expenses include distribution and service fees payable with
respect to different classes of shares and may include certain other expenses
as permitted by the Trust's Amended and Restated Multi-Class Plan adopted
pursuant to Rule 18f-3 under the 1940 Act and subject to review and approval by
the Trustees.
35
<PAGE>
With respect to the Institutional and Administrative Class shares of the
Fund, the Administration Agreement may be terminated by the Trustees, or by a
vote of the outstanding voting securities of the Trust, or Class as applicable,
at any time on 60 days' written notice. Following the expiration of the two-year
period commencing with the effectiveness of the agreement, it may be terminated
by PIMCO, also on 60 days' written notice. Following its initial two-year term,
the agreement will continue from year to year if approved by the Trustees.
With respect to the Class A, Class B and Class C shares of the Fund the
Administration Agreement may be terminated by the Trustees, or by a vote of the
outstanding securities of the Trust, or Class as applicable, at any time on 60
days' written notice, or by PIMCO on 60 days' written notice.
The Administration Agreement is subject to annual approval by the Board,
including a majority of the Trust's Independent Trustees (as that term is
defined in the 1940 Act). The current Administration Agreement was approved by
the Board of Trustees, including all of the Independent Trustees at a meeting
held on August 22, 1995. In approving the Administration Agreement, the
Trustees determined that: (1) the Administration Agreement is in the best
interests of the Fund and their shareholders; (2) the services to be performed
under the Agreement are services required for the operation of the Fund; (3)
PIMCO 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 Agreement are fair and reasonable
in light of the usual and customary charges made by others for services of the
same nature and quality. The preceding Administrative Services Contract between
the Trust and PIMCO was approved by the Trustees at their meeting held on May
31, 1994, and was approved by shareholders of all then-operational Funds on
October 17, 1994.
A previous Administrative Services Contract ("Prior Contact") between the
Trust and PIASCo was initially approved by the Trustees at a meeting held on
April 29, 1987 (and by the then-sole shareholder of the Trust at a meeting held
on April 30, 1987). The Prior Contract was last approved by the Board of
Trustees on February 23, 1993. PIASCo was a wholly owned subsidiary of the
predecessor of PIMCO. In connection with the Consolidation, PIMCO assumed the
duties of PIASCo as Administrator to the Funds. The terms and conditions of the
Administrative Services Contract are substantially identical in all material
respects to those of the Prior Contract, with the primary exception of the
identity of the service provider, its effective date and termination date, and
the amendment recently effected in connection with the adoption of a new service
and fee arrangement for the Funds.
36
<PAGE>
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distribution Company (the "Distributor") serves as the Trust's
Distributor pursuant to a distribution contract ("Distribution Contract") dated
December __, 1996, which is subject to annual approval by the Board. The
Distributor is a wholly owned subsidiary of PIMCO Advisors. The Distribution
Contract is terminable with respect to the Fund or a class thereof without
penalty, at any time, by the Fund or class by not more than 60 days' nor less
than 30 days written notice to the Distributor, or by the Distributor upon not
more than 60 days' nor less than 30 days written notice to the Trust. The
Distributor is not obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect with respect to the Fund
and each class of shares thereof for successive one-year periods, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Independent Trustees and (ii) by the vote of a majority of the entire Board
of Trustees cast in person at a meeting called for that purpose. If the
Distribution Contract is terminated (or not renewed) with respect to the Fund,
it may continue in effect with respect to any class of any other Fund as to
which it has not been terminated (or has been renewed).
Prior to the Consolidation, Pacific Equities Network ("PEN"), an indirect
subsidiary of Pacific Mutual, served as the Trust's Distributor, pursuant to a
contract approved by the Board of Trustees, including a majority of the
Independent Trustees, at its meeting held on April 29, 1987 (and by the then-
sole shareholder of the Trust at a meeting held on April 30, 1987) (the "Prior
Distribution Contract"). The Prior Distribution Contract was last approved by
the Board of Trustees on February 23, 1993 and by shareholders of the Trust on
November 1, 1988.
The Trust offers five classes of shares: Class A, Class B, Class C, the
Institutional Class and the Administrative Class. Class A, Class B and Class C
shares of the Trust are offered through firms ("participating brokers") which
are members of the National Association of Securities Dealers, Inc. ("NASD"),
and which have dealer agreements with the Distributor, or which have agreed to
act as
37
<PAGE>
introducing brokers for the Distributor ("introducing brokers"). Shares of the
Institutional Class are offered primarily for direct investment by investors
such as pension and profit sharing plans, employee benefit trusts, endowments,
foundations, corporations and other institutions. They also are offered through
certain financial intermediaries that charge their customers transaction or
other fees with respect to the customer's investment in the Fund. Shares of the
Administrative Class are offered primarily through employee benefit plans
alliances.
The Trust has adopted an Amended and Restated Multi-Class Plan ("Multi-
Class Plan") pursuant to Rule 18f-3 under the 1940 Act. Under the Multi-Class
Plan, shares of each class of the Fund represent an equal pro rata interest in
the Fund and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, restrictions, limitations, qualifications and terms
and conditions, except that: (a) each class has a different designation; (b)
each class of shares bears any class-specific expenses allocated to it; and (c)
each class has exclusive voting rights on any matter submitted to shareholders
that relates solely to its distribution or service arrangements, and each class
has separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. In
addition, each class may have a differing sales charge structure, and differing
exchange and conversion features.
Contingent Deferred Sales Charge and Initial Sales Charge
As described in the Retail Prospectus under the caption "How to Redeem," a
contingent deferred sales charge is imposed upon certain redemptions of the
Class A, Class B and Class C shares. No contingent deferred sales charge is
imposed upon Institutional Class or Administrative Class shares. Because
contingent deferred sales charges are calculated on a Fund-by-Fund basis,
shareholders should consider whether to exchange shares of one Fund for shares
of another Fund prior to redeeming an investment if such an exchange would
reduce the contingent deferred sales charge applicable to such redemptions.
In certain cases described in the Retail Prospectus, the contingent
deferred sales charge is waived on redemptions of Class A, Class B or Class C
shares for certain classes of individuals or entities on account of (i) the fact
that the Trust's sales-related expenses are lower for certain of such classes
than for classes for which the contingent deferred sales charge is not waived,
(ii) waiver of the contingent deferred sales charge with respect to certain of
such classes is consistent with certain Internal Revenue Code policies
concerning the favored tax treatment of accumulations, and (iii) with respect to
certain of such classes, considerations of fairness, and competitive and
administrative factors.
As described in the Retail Prospectus under the caption "Alternative
Purchase Arrangements--Initial Sales Charge Alternative - Class A Shares,"
Class A shares of the Trust are sold pursuant to an initial sales charge, which
declines as the amount of purchase reaches certain defined levels.
Distribution and Servicing Plans for Class A, Class B and Class C Shares
Pursuant to the Distribution and Servicing Plans described in the Retail
Prospectus, in connection with the distribution of Class B and Class C shares of
the Trust, the Distributor receives certain distribution fees from the Trust,
and in connection with personal services rendered to Class A, Class B and Class
C shareholders of the Trust and the maintenance of shareholder accounts, the
Distributor receives certain servicing fees from the Trust. Subject to the
percentage limitations on these distribution and servicing fees set forth in the
Retail Prospectus, the distribution and servicing fees may be paid with respect
to services rendered and expenses borne in the past with respect to each such
class as to which no distribution and servicing fees were paid on account of
such
38
<PAGE>
limitations. As described in the Retail Prospectus, the Distributor pays (i) all
or a portion of the distribution fees it receives from the Trust to
participating and introducing brokers, and (ii) all or a portion of the
servicing fees it receives from the Trust to participating and introducing
brokers, certain banks and other financial intermediaries.
Each Distribution and Servicing Plan may be terminated with respect to the
class of shares of the Fund to which the Plan relates by vote of a majority of
the Trustees who are not interested persons of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Plan or the Distribution Contract ("Independent Trustees"), or by vote of a
majority of the outstanding voting securities of that class. Any change in any
Plan that would materially increase the cost to the class of shares of the Fund
to which the Plan relates requires approval by the affected class of
shareholders of the Fund. The Trustees review quarterly a written report of
such costs and the purposes for which such costs have been incurred. Each Plan
may be amended by vote of the Trustees, including a majority of the Independent
Trustees, cast in person at a meeting called for the purpose. For so long as the
Plans are in effect, selection and nomination of those Trustees who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested persons.
The Distribution and Servicing Plans will continue in effect with respect
to the Fund and each class of shares thereof for successive one-year periods,
provided that each such continuance is specifically approved (i) by the vote of
a majority of the Independent Trustees and (ii) by the vote of a majority of the
entire Board of Trustees cast in person at a meeting called for that
purpose.
If the Distribution and Servicing Plans are terminated (or not renewed)
with respect to the Fund, they may continue in effect with respect to any class
of any other Fund as to which they have not been terminated (or have been
renewed).
The Trustees believe that the Distribution and Servicing Plans will provide
benefits to the Trust. The Trustees believe that the Class A, Class B and
Class C Plans will result in greater sales and/or fewer redemptions of Trust
shares, although it is impossible to know for certain the level of sales and
redemptions of Trust shares that would occur in the absence of the Plans or
under alternative distribution schemes. The Trustees believe that the effect on
sales and/or redemptions will benefit the Trust by reducing Fund expense ratios
and/or by affording greater flexibility to Fund managers.
Distribution and Administrative Services Plans for Administrative Class
Shares
The Trust has adopted an Administrative Services Plan and a Distribution
Plan with respect to the Administrative Class shares of the Fund. Under the
terms of each Plan, the Trust is permitted to reimburse, out of the
Administrative Class assets of the Fund, in an amount up to 0.25% on an annual
basis of the average daily net assets of that class, financial intermediaries
that provide services in connection with the distribution of shares or
administration of plans or programs that use Fund shares as their funding
medium, and to reimburse certain other distribution related expenses. Under the
terms of the Distribution Plan, these services may include, but are not limited
to, the following functions: providing facilities to answer questions from
prospective investors about the Fund; receiving and answering correspondence,
including requests for prospectuses and statements of additional information;
preparing, printing and delivering prospectuses and shareholder reports to
prospective shareholders; complying with federal and state securities laws
pertaining to the sale of Administrative Class shares; and assisting investors
in completing application forms and selecting dividend and other account
options.
39
<PAGE>
Under the terms of the Administrative Services Plan, the services may
include, but are not limited to, the following functions: receiving, aggregating
and processing shareholder orders; furnishing shareholder sub-accounting;
providing and maintaining elective shareholder services such as check writing
and wire transfer services; providing and maintaining pre-authorized investment
plans; communicating periodically with shareholders; acting as the sole
shareholder of record and nominee for shareholders; maintaining accounting
records for shareholders; answering questions and handling correspondence from
shareholders about their accounts; and performing similar account administrative
services.
The same entity may be the recipient of fees under both the Distribution
Plan and the Administrative Services Plan, but may not receive fees under both
plans with respect to the same assets.
Each Plan provides that it may not be amended to materially increase the
costs which Administrative Class shareholders may bear under the Plan without
the approval of a majority of the outstanding voting securities of the class,
and by vote of a majority of both (i) the Trustees of the Trust and (ii) those
Trustees who are not "interested persons" of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Plan or any agreements related to it (the "Plan Trustees"), cast in person
at a meeting called for the purpose of voting on the Plan and any related
amendments.
Each Plan provides that it may not take effect until approved by vote of a
majority of both (i) the Trustees of the Trust and (ii) the Plan Trustees. The
Distribution Plan further provides that it may not take effect unless approved
by the vote of a majority of the outstanding voting securities of the class. The
Plans were approved by the Trustees, including the Plan Trustees, at a meeting
held on May 31, 1994.
Each Plan provides that it shall continue in effect so long as such
continuance is specifically approved at least annually by the Trustees and the
Plan Trustees. Each Plan provides that any person authorized to direct the
disposition of monies paid or payable by a class pursuant to the Plan or any
related agreement shall provide to the Trustees, and the Board shall review at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made.
Each Plan provides that expenses payable under the Plan may be carried
forward for reimbursement for up to twelve months beyond the date in which the
expense is incurred, subject to the limit that not more that 0.25% of the
average daily net assets of each class may be used in any month to pay expenses
under the Plan. Each Plan requires that Administrative Class shares will incur
no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to the Plan will qualify as "service fees" and
therefore will not be limited by NASD rules.
40
<PAGE>
Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of Class A, Class B and Class C shares
are discussed in the Retail Prospectus under the headings "How to Buy Shares,"
"Exchange Privilege," and "How to Redeem," and that information is incorporated
herein by reference. Purchases, exchanges and redemptions of Institutional and
Administrative Class shares are discussed in the Institutional Prospectus under
the headings "Purchase of Shares," "Redemption of Shares," and "Net Asset
Value," and that information is incorporated herein by reference.
Certain managed account clients of the Adviser may purchase shares of the
Trust. To avoid the imposition of duplicative fees, the Adviser may be required
to make adjustments in the management fees charged separately by the Adviser to
these clients to offset the generally higher level of management fees and
expenses resulting from a client's investment in the Trust.
Certain clients of the Adviser whose assets would be eligible for purchase
by the Fund may purchase shares of the Trust with such assets. Assets so
purchased by the Fund will be valued in accordance with procedures adopted by
the Board of Trustees.
Shares of the Fund are not qualified or registered for sale in all states.
Prospective investors should inquire as to whether shares of the Fund
or a class thereof are available for offer and sale in their state of domicile
or residence. Shares of the Fund may not be offered or sold in any state unless
registered or qualified in that jurisdiction, unless an exemption from
registration or qualification is available.
Independent financial intermediaries unaffiliated with PIMCO may perform
shareholder servicing functions with respect to certain of their clients whose
assets may be invested in the Fund. These services, normally provided by PIMCO
directly to Trust shareholders, may include the provision of ongoing information
concerning the Fund and their investment performance, responding to shareholder
inquiries, assisting with purchases, redemptions and exchanges of Trust shares,
and other services. PIMCO may pay fees to such entities for the provision of
these services which PIMCO normally would perform, out of PIMCO's own resources.
As described in the Retail Prospectus under the caption "Exchange
Privilege," and in the Institutional Prospectus under the caption "Redemption of
Shares," a shareholder may exchange shares of the Fund for shares of any other
Fund of the Trust or any series (except the Opportunity Fund) of PIMCO Funds:
Multi-Manager Series, within the same class on the basis of their respective net
asset values. The original purchase date(s) of shares exchanged for purposes of
calculating any contingent deferred sales charge will carry over to the
investment in the new Fund. For example, if a shareholder invests in the Class C
shares of one Fund and 6 months later (when the contingent deferred sales charge
upon redemption would be 1%) exchanges his shares for Class C shares of another
Fund, no sales charge would be imposed upon the exchange but the investment in
the other Fund would be subject to the 1% contingent deferred sales charge until
one year after the date of the shareholder's investment in the first Fund as
described in the Retail Prospectus under "Alternative Purchase Arrangements."
With respect to Class B or Class C shares, or Class A shares subject to a
contingent deferred sales charge only, if less than all of an investment is
exchanged out of the Fund, any portion of the investment attributable to capital
appreciation and/or reinvested dividends or capital gains distributions will be
exchanged first, and thereafter any portions exchanged will be from the earliest
investment made in the Fund from which the exchange was made.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of
41
<PAGE>
regular trading on the Exchange on any business day will be executed at the
respective net asset values determined at the close of the next business
day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12-month
period or in any calendar quarter; provided, that if such a limitation on
exchanges is adopted, exchanges into the PIMCO Money Market Fund from any other
Fund would not be counted. The Trust reserves the right to modify or
discontinue the exchange privilege at any time.
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Fund, limited in amount with respect to each
shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1%
of the net asset value of the Trust at the beginning of such period. Although
the Trust will normally redeem all shares for cash, it may, in unusual
circumstances, redeem amounts in excess of the lesser of (i) or (ii) above by
payment in kind of securities held in the Fund's portfolios.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, currently set at $250 for Class A, Class B and Class C shares,
and $100,000 for Institutional Class and Administrative Class shares ($10,000
with respect to Institutional Class and Administrative Class accounts opened
before January 1, 1995). An investor will be notified that the value of his
account is less than the minimum and allowed at least 30 days to bring the value
of the account up to at least the specified amount before the redemption is
processed. The Declaration of Trust also authorizes the Trust to redeem shares
under certain other circumstances as may be specified by the Board of
Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved (including the
Trust). Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that two
or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in the
Adviser's opinion is equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
42
<PAGE>
Brokerage and Research Services
There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions in
foreign securities generally involve the payment of fixed brokerage commissions,
which are generally higher than those in the United States.
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the Trust and buys and sells such
securities, options and futures for the Trust through a substantial number of
brokers and dealers. In so doing, the Adviser uses its best efforts to obtain
for the Trust the most favorable price and execution available, except to the
extent it may be permitted to pay higher brokerage commissions as described
below. In seeking the most favorable price and execution, the Adviser, having in
mind the Trust's best interests, considers all factors it deems relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealer involved and the quality
of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser receives research services from many broker-dealers with which the
Adviser places the Trust's portfolio transactions. These services, which in some
cases may also be purchased for cash, include such matters as general economic
and security market reviews, industry and company reviews, evaluations of
securities and recommendations as to the purchase and sale of securities. Some
of these services are of value to the Adviser in advising various of its clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fee paid by the Trust is not
reduced because the Adviser and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser may cause the Trust to pay a broker-dealer which provides "brokerage and
research services" (as defined in the Act) to the Adviser an amount of disclosed
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking the most favorable price and execution available and such other policies
as the Trustees may determine, the Adviser may also consider sales of shares of
the Trust as a factor in the selection of broker-dealers to execute portfolio
transactions for the Trust.
Portfolio Turnover
The Adviser manages the Fund without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-term
trading by provisions of the federal tax laws, see "Taxation." The use of
futures contracts and other derivative instruments with relatively
43
<PAGE>
short maturities may tend to exaggerate the portfolio turnover rate for
the Fund. Trading in fixed income securities does not generally involve the
payment of brokerage commissions, but does involve indirect transaction costs.
The use of futures contracts may involve the payment of commissions to futures
commission merchants. The higher the rate of portfolio turnover of the Fund, the
higher these transaction costs borne by the Fund generally will be.
The portfolio turnover rate of the Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less. Proceeds from short sales and assets used to
cover short positions undertaken are included in the amounts of securities sold
and purchased, respectively, during the year.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Institutional Prospectus and
"How Net Asset Value is Determined" in the Retail Prospectus, the Trust's net
asset value per share for the purpose of pricing purchase and redemption orders
is determined at 4:00 p.m. (Eastern time) on each day the New York Stock
Exchange is open for trading. Net asset value will not be determined on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
44
<PAGE>
TAXATION
While the Adviser anticipates that many Institutional Class shareholders of
the Trust will be tax-exempt institutions, the following discussion may be of
general interest to these shareholders, as well as for those shareholders of the
Trust who do not have tax-exempt status. The following discussion is general in
nature and should not be regarded as an exhaustive presentation of all possible
tax ramifications. All shareholders should consult a qualified tax adviser
regarding their investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, the Fund generally
must, among other things, (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities or currencies ("Qualifying Income Test");
(b) derive in each taxable year less than 30% of its gross income from the sale
or other disposition of certain assets held less than three months, namely (1)
stocks or securities, (2) options, futures, or forward contracts (other than
those on foreign currencies), and (3) foreign currencies (or options, futures,
and forward contracts on foreign currencies) not directly related to the Fund's
principal business of investing in stock or securities; (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of the Fund's assets is represented by cash, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies); and (d) distribute at
least 90% of its investment company taxable income (which includes dividends,
interest and net short-term capital gains in excess of any net long-term capital
losses) each taxable year. The Treasury Department is authorized to promulgate
regulations under which gains from foreign currencies (and options, futures, and
forward contracts on foreign currency) would constitute qualifying income for
purposes of the Qualifying Income Test only if such gains are directly relating
to investing in securities. To date, such regulations have not been issued.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (any net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years)
designated by the Fund as capital gain dividends, if any, that it distributes to
shareholders on a timely basis. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by the Fund on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To avoid the tax, the
Fund must distribute during each calendar year an amount equal to the sum of (1)
at least 98% of its ordinary income (not taking into account any capital gains
or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (and adjusted for certain ordinary losses) for the
twelve month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by a Fund in October, November, or December of
that year to shareholders of record on a date in such a month and paid by the
Fund during January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the
45
<PAGE>
calendar year in which the distributions are received. To avoid application of
the excise tax, the Fund intends to make its distributions in accordance with
the calendar year distribution requirement.
Distributions
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions received by tax-
exempt shareholders will not be subject to federal income tax to the extent
permitted under the applicable tax exemption.
Dividends paid by the Fund generally are not expected to qualify for the
deduction for dividends received by corporations. Distributions of net capital
gains, if any, designated as capital gain dividends, are taxable as long-term
capital gains, regardless of how long the shareholder has held the Fund's shares
and are not eligible for the dividends received deduction. Any distributions
that are not from the Fund's investment company taxable income or net realized
capital gains may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. The tax treatment of dividends and distributions
will be the same whether a shareholder reinvests them in additional shares or
elects to receive them in cash.
Sales of Shares
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Any loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of shares held by the shareholder for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect to such shares.
Backup Withholding
The Fund may be required to withhold 31% of all taxable distributions
payable to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
Options, Futures and Forward Contracts, and Swap Agreements
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Fund may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by the Fund at the end of each taxable year
(and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as ordinary or 60/40 gain or loss.
46
<PAGE>
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the Fund, may result in
"straddles" for U.S. federal income tax purposes. In some cases, the straddle
rules also could apply in connection with swap agreements. The straddle rules
may affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to the Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by the
Fund which is taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner they deem to be
appropriate, the Internal Revenue Service might not accept such treatment. If it
did not, the status of the Fund as a regulated investment company might be
affected. The Fund intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for the Fund to qualify as
a regulated investment company may limit the extent to which the Fund will be
able to engage in swap agreements.
The 30% limit on gains from the disposition of certain options, futures,
forward contracts, and swap agreements held less than three months and the
qualifying income and diversification requirements applicable to the Fund's
assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, forward contracts, and swap
agreements.
Short Sales
The Fund may make short sales of securities. Short sales may increase
the amount of short-term capital gain realized by the Fund, which is taxed as
ordinary income when distributed to shareholders. Moreover, the 30% limit on
gains from the disposition of securities held less than three months may limit
the extent to which the Fund will be able to engage in short sales.
Passive Foreign Investment Companies
The Fund may invest in the stock of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If the Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to stockholders. In general, under the PFIC
rules, an excess distribution is treated as having been
47
<PAGE>
realized ratably over the period during which the Fund held the PFIC stock. A
Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior taxable years and an interest factor
will be added to the tax, as if the tax had been payable in such prior taxable
years. Certain distributions from a PFIC as well as gain from the sale of PFIC
stock are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently is available in some circumstances,
the Fund generally would be required to include in its gross income its share of
the earnings of a PFIC on a current basis, regardless of whether distributions
are received from the PFIC in a given year. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election may be available
that would involve marking to market the Fund's PFIC shares at the end of each
taxable year (and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were realized. If this
election were made, tax at the Fund level under the PFIC rules would generally
be eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Foreign Currency Transactions
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of certain
other instruments, gains or losses attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Foreign Taxation
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser intends to manage the Fund with the intention
of minimizing foreign taxation in cases where it is deemed prudent to do so.
48
<PAGE>
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund may be treated
as debt securities that are issued originally at a discount. Generally, the
amount of the original issue discount ("OID") is treated as interest income and
is included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain high-
yield corporate debt securities may be treated as a dividend for Federal income
tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
securities having market discount, which could affect the character and timing
of recognition of income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by the Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
The Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
49
<PAGE>
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations"). However,
some states may exempt all or a portion of such distributions from income tax to
the extent the shareholder is able to establish that the distribution is derived
from qualifying federal obligations. Moreover, for state income tax purposes,
interest on some federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on FNMA Certificates
and GNMA Certificates). The Fund will provide information annually to
shareholders indicating the amount and percentage of the Fund's dividend
distribution which is attributable to interest on federal obligations, and will
indicate to the extent possible from what types of federal obligations such
dividends are derived. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under a Declaration
of Trust dated February 19, 1987. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.0001 each. The Board of Trustees may establish additional series (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of the Fund, each shareholder is
entitled to receive his pro rata share of the net assets of the Fund.
Expenses incurred by the Trust in connection with its organization and the
public offering of its shares aggregated approximately $75,971. These costs
have been deferred and amortized on a straight line basis over a period not less
than five years. Expenses incurred in the organization of subsequently offered
Funds are charged to those Funds and are being amortized on a straight line
basis over a period not less than five years.
Performance Information
The Trust may, from time to time, include the yield and total return for
each class of shares of the Fund, computed in accordance with SEC-prescribed
formulas, in advertisements or reports to shareholders or prospective investors.
The Fund also may compute current distribution rates and use this information in
its prospectuses and statement of additional information, in reports to current
shareholders, or in certain types of sales literature provided to prospective
investors.
50
<PAGE>
Quotations of yield for the Fund will be based on all investment income per
share (as defined by the SEC) during a particular 30-day (or one month) period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and are computed by dividing net investment income by
the maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[(a-b + 1)/6/-1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
Shares of the Fund have not previously been offered.
51
<PAGE>
Quotations of average annual total return for the Fund or a class thereof
will be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, five and ten
years (up to the life of the Fund), calculated pursuant to the following
formula: P(1 + T)/n/ = ERV (where P = a hypothetical initial payment of $1,000,
T = the average annual total return, n = the number of years, and ERV = the
ending redeemable value of a hypothetical $1,000 payment made at the beginning
of the period). All total return figures reflect the deduction of a proportional
share of Fund or class expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid. The Fund also may, with
respect to certain periods of less than one year, provide total return
information for that period that is unannualized. Any such information would be
accomplished by standardized total return information.
Current distribution information for the Fund will be based on
distributions for a specified period (i.e., total dividends from net investment
income), divided by Fund net asset value per share on the last day of the period
and annualized according to the following formula:
DIVIDEND YIELD = (((a/b) x 365)/c)
where a = actual dividends distributed for the calendar month in question,
b = number of days of dividend declaration in the month in question,
and
c = net asset value (NAV) calculated on the last business day of
the month in question.
52
<PAGE>
The rate of current distributions does not reflect deductions for
unrealized losses from transactions in derivative instruments such as options
and futures, which may reduce total return. Current distribution rates differ
from standardized yield rates in that they represent what the Fund has declared
and paid to shareholders as of the end of a specified period rather than the
Fund's actual net investment income for that same period. Distribution rates
will exclude net realized short-term capital gains. The rate of current
distributions for the Fund should be evaluated in light of these differences and
in light of the Fund's total return figures, which will always accompany any
calculation of the rate of current distributions.
Performance information for the Fund may also be compared to various
unmanaged indexes, such as the Lehman Brothers Aggregate Bond Index, the Merrill
Lynch 1 to 3 Year Treasury Index, the Lehman Intermediate and 20+ Year Treasury
Blend Index, the Lehman BB Intermediate Corporate Index, indexes prepared by
Lipper Analytical Services, the J.P. Morgan Global Index, the Salomon Brothers
World Government Bond Index-10 Non U.S.-Dollar Hedged, the J.P. Morgan
Government Bond Index Non U.S.-Dollar Hedged and the Consumer Price Index.
Unmanaged indexes (i.e., other than Lipper) generally do not reflect deductions
for administrative and management costs and expenses. PIMCO may report to
shareholders or to the public in advertisements concerning the performance of
PIMCO as adviser to clients other than the Trust, or on the comparative
performance or standing of PIMCO in relation to other money managers. PIMCO also
may provide current or prospective private account clients, in connection with
standardized performance information for the Fund, performance information for
the Fund gross of fees and expenses for the purpose of assisting such clients in
evaluating similar performance information provided by other investment managers
or institutions. Comparative information may be compiled or provided by
independent ratings services or by news organizations. Any performance
information, whether related to the Fund or to the Adviser, should be considered
in light of the Fund's investment objectives and policies, characteristics and
quality of the Fund, and the market conditions during the time period indicated,
and should not be considered to be representative of what may be achieved in the
future.
53
<PAGE>
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1993/1994 costs of college and an assumed rate of increase for such costs. For
example, the table below sets forth the projected cost of four years of college
at a public college and a private college assuming a steady increase in both
cases of 7% per year. In presenting this information, the Trust is making no
prediction regarding what will be the actual growth rate in the cost of a
college education, which may be greater or less than 7% per year and may vary
significantly from year to year. The Trust makes no representation that an
investment in the Fund will grow at or above the rate of growth of the cost of a
college education. (Information based on 1994/1995 costs was not available on
the date of this Statement of Additional Information) [to be updated].
<TABLE>
<CAPTION>
Potential College Cost Table
Start Public Private Start Public Private
Year College College Year College College
- ----- ------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C>
1996 $33,761 $ 86,035 2004 $58,007 $147,817
1997 $36,124 $ 92,057 2005 $62,067 $158,165
1998 $38,653 $ 98,501 2006 $66,412 $169,237
1999 $41,358 $105,396 2007 $71,061 $181,084
2000 $44,253 $112,774 2008 $76,035 $193,761
2001 $47,351 $120,668 2009 $81,357 $207,325
2002 $50,665 $129,115 2010 $87,051 $221,838
2003 $54,212 $138,146 2011 $93,143 $237,367
</TABLE>
Costs assume a steady increase in the annual cost of college of 7% per year from
a 1993-94 base year amount. Actual rates of increase may be more or less than 7%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the 25 years from 1971 to 1995 was:
54
<PAGE>
*Stocks: 12.2%
Bonds: 9.6%
T-Bills: 7.2%
Inflation: 5.6%
*Returns of unmanaged indices do not reflect past or future performance of
the Fund. Stocks are represented by Ibbotson's Common Stock Total Return Index.
Bonds are represented by Ibbotson's Long-term Corporate Bond Index. T-bills are
represented by Ibbotson's Treasury Bill Index and Inflation is represented by
the Cost of Living Index. These are all unmanaged indices, which can not be
invested in directly. While Treasury bills are insured and offer a fixed rate of
return, both the principal and yield of investment securities will fluctuate
with changes in market conditions. Source: Ibbotson, Roger G., and Rex A.
Sinquefiled, Stocks, Bonds, Bill and Inflation (SBBI), 1989, updated in Stocks,
Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates, Chicago. All
rights reserved [to be updated].
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1971-1995, the average annual return of stocks comprising the Ibbotson's
Common Stock Total Return Index ranged from -26.5% to 37.4% while the annual
return of a hypothetical portfolio comprised 40% of such common stocks, 40% of
bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1971
through 1995 is set forth in the following table.
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------ ----- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
1971 14.31% 11.01% 4.39% 3.36% 11.01%
1972 18.98% 7.26% 3.84% 3.41% 11.26%
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% .387% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
</TABLE>
55
<PAGE>
The Trust may use in its advertisement and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
<S> <C> <C> <C>
30 Years $1,979 $59,370 $200,000
25 Years $2,955 $73,875 $200,000
20 Years $4,559 $91,180 $200,000
15 Years $7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</TABLE>
This hypothetical example assumes a fixed 7% return compounded annually and
a guaranteed return of principal. The example is intended to show the
benefits of a long-term, regular investment program, and is in no way
representative of any past or future performance of the Fund. There can
be no guarantee that you will be able to find an investment that would
provide such a return at the times you invest and an investor in the
Fund should be aware that the Fund may experience periods of negative
growth.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1990:
% of Income for Individuals
Aged 65 Years and Older in 1990*
--------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
1990 38% 62%
*For individuals with an annual income of at least $51,000. Other includes
personal savings, earnings and other undisclosed sources of income. Source:
Social Security Administration [to be updated].
56
<PAGE>
Articles or reports which include information relating to performance,
rankings and other characteristics of the Fund may appear in various national
publications and services including, but not limited to: The Wall Street
Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual Fund
Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies and The
Donoghue Organization. Some or all of these publications or reports may publish
their own rankings or performance reviews of mutual funds, including the Fund,
and may provide information relating to the Adviser, including descriptions of
assets under management and client base, and opinions of the author(s) regarding
the skills of personnel and employees of the Adviser who have portfolio
management responsibility. From time to time, the Trust may include references
to or reprints of such publications or reports in its advertisements and other
information relating to the Fund.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Fund over a specified period of time and may use charts and
graphs to display that growth.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. In addition, the Declaration of Trust provides that
the holders of not less than two-thirds of the outstanding shares of the Trust
may remove a person serving as Trustee either by declaration in writing or at a
meeting called for such purpose. The Trustees are required to call a meeting
for the purpose of considering the removal of a person serving as Trustee if
requested in writing to do so by the holders of not less than ten percent of the
outstanding shares of the Trust. In the event that such a request was made, the
Trust has represented that it would assist with any necessary shareholder
communications. Shareholders of a class of shares have different voting rights
with respect to matters that affect only that class.
The Trust's shares do not have cumulative voting rights, so that the holder
of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
57
<PAGE>
Code of Ethics
The Trust and PIMCO have each adopted a Code of Ethics governing personal
trading activities of all Trustees and officers of the Trust, and Directors,
officers and employees of PIMCO who, in connection with their regular functions,
play a role in the recommendation of any purchase or sale of a security by the
Trust or obtain information pertaining to such purchase or sale or who have the
power to influence the management or policies of the Trust or PIMCO. Such
persons are required to preclear certain security transactions with PIMCO's
Compliance Officer or his designee
58
<PAGE>
and to report certain transactions on a regular basis. PIMCO has developed
procedures for administration of the Codes.
Custodian, Transfer Agent and Dividend Disbursing Agent
Investors Fiduciary Trust Company ("IFTC") serves as custodian, transfer
agent and dividend disbursing agent for assets of the Fund.
Pursuant to rules adopted under the 1940 Act, the Trust may maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Trust; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Trust assets. The Board of Trustees reviews annually the
continuance of foreign custodial arrangements for the Trust. No assurance can be
given that the Trustees' appraisal of the risks in connection with foreign
custodial arrangements will always be correct or that expropriation,
nationalization, freezes, or confiscation of assets that would impact assets of
the Funds will not occur, and shareholders bear the risk of losses arising from
these or other events.
IFTC also serves as transfer agent and dividend disbursing agent for the
Institutional Class and Administrative Class shares of the Fund. Shareholder
Services Inc. serves as transfer agent and dividend disbursing agent for the
Class A, Class B and Class C shares of the Fund.
Independent Accountants
Price Waterhouse LLP, 1055 Broadway, Kansas City, MO 64105, serves as
independent public accountants for the Fund. Price Waterhouse LLP provides
audit services, tax return preparation and assistance and consultation in
connection with review of SEC filings.
Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005, passes
upon certain legal matters in connection with the shares offered by the Trust,
and also act as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all of the information included in the Trust's registration statement filed with
the SEC under the 1933 Act with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
59
<PAGE>
Financial Statements
Shares of the Fund have not been previously issued as of the date of this
Statement of Additional Information. As such, the Fund currently has no
financial statements. Financial statements for the Trust, as of March 31, 1996
for its fiscal year then ended, including notes thereto, and the reports of
Price Waterhouse LLP thereon dated May 10, 1996, are incorporated by reference
from the Trust's 1996 Annual Report. Financial statements for the Trust as of
September 30, 1996, including notes thereto, are incorporated by reference from
the Trust's 1996 Semi-Annual Report, which is unaudited. A copy of the Annual
Reports and Semi-Annual Report delivered with this Statement of Additional
Information should be retained for future reference.
60
<PAGE>
Part C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial statements for the Trust as of March 31, 1996, and for
its fiscal year then ended, including notes thereto, and the
reports of Price Waterhouse LLP thereon, dated May 10, 1996
are incorporated by reference from the Annual Report. Financial
Statements for the Trust as of September 30, 1996, including
notes thereto, are incorporated by reference from the Semi-Annual
Report.
(b) Exhibits
(1) (i) Declaration of Trust of Registrant/1/
-
(ii) Establishment and Designation of Global, Foreign, Low
Duration South Africa Free and Total Return South Africa
Free Portfolios as Series of Registrant/5/
-
(iii) Establishment and Designation of High Yield, Low Duration II
and Total Return II Portfolios as Series of Registrant/6/
-
(iv) Establishment and Designation of Income and Capital
Preservation Portfolio I and Income and Capital
Preservation Portfolio II as Series of Registrant/7/
-
(v) Amended and Restated Establishment and Designation of
Series of Shares of Registrant/8/
-
(vi) Amended Designation of Two Series of Registrant/8/
-
(vii) Second Amended and Restated Establishment and Designation of
Series of Shares of Registrant/9/
-
(viii) Establishment and Designation of Moderate Duration and
VersaSTYLE Equity Funds as Series of Registrant/10/
--
(ix) Amended Designation of Two Series of Registrant/14/
--
(x) Establishment and Designation of StocksPLUS Short Strategy
Fund as Series of Registrant/15/
--
(xi) Redesignation of One Existing Series and Establishment and
Designation of Two New Series of Registrant/16/
(xii) Form of Redesignation of One Series of Registrant/17/
(xiii) Establishment and Designation of One Additional Series of
Shares and Amended and Restated Establishment and
Designation of Series of Shares of Registrant/19/
(xiv) Amended Designation of Five Existing Series of Registrant
/19/
(xv) Establishment and Designation of One Additional Series of
Shares of Registrant/19/
(2) By-laws of Registrant/1/
-
(3) Not applicable
(4) Not applicable
(5) (i) Investment Advisory Contract/2/
-
(ii) Supplements to Investment Advisory Contract Relating to
Global, Foreign, Low Duration South Africa Free and Total
Return South Africa Free Portfolios/5/
-
(iii) Supplements to Investment Advisory Contract Relating to
High Yield, Low Duration II and Total Return II
Portfolios/6/
-
-1-
<PAGE>
(iv) Supplements to Investment Advisory Contract Relating to
Income and Capital Preservation Portfolio I and Income and
Capital Preservation Portfolio II/7/
-
(v) Form of Supplements to Investment Advisory Contract Relating
to Moderate Duration Fund and VersaSTYLE Equity Fund/10/
--
(vi) Form of Amended Investment Advisory Contract/11/
--
(vii) Form of Supplement to Investment Advisory Contract/12/
--
(viii) Form of Supplement to Investment Advisory Contract Relating
to StocksPLUS Short Strategy Fund/15/
--
(ix) Supplements to Investment Advisory Contract/16/
(x) Form of Supplement to Investment Advisory Contract Relating
to Global Income Fund/19/
(xi) Form of Supplement to Investment Advisory Contract Relating
to Real Return Bond Fund/19/
(6) (i) Distribution Contract/2/
-
(ii) Supplement to Distribution Contract Relating to Global,
Foreign, Low Duration South Africa Free and Total Return
South Africa Free Portfolios/5/
-
(iii) Supplement to Distribution Contract Relating to High Yield,
Low Duration II and Total Return II Portfolios/6/
-
(iv) Supplements to Distribution Contract Relating to Income and
Capital Preservation Portfolio I and Income and Capital
Preservation Portfolio II/7/
-
(v) Form of Distribution Contract as Amended May 31, 1994/9/
-
(vi) Form of Supplements to Distribution Contract Relating to
Moderate Duration Fund and VersaSTYLE Equity Fund/10/
--
(vii) Form of Amended Distribution Contract/11/
--
(viii) Form of Supplement to Distribution Contract Relating to
StocksPLUS Short Strategy Fund/15/
--
(ix) Supplements to Distribution Contract/16/
(x) Form of Distribution Contract/18/
(xi) Form of Supplement to Distribution Contract Relating to
Real Return Bond Fund/19/
(7) Not applicable
(8) Custodian Agreement/4/
-
(9) Transfer Agency Agreement/4/
-
(10) (i) Opinion of Counsel/13/
--
(ii) Consent of Counsel/3/
-
(11) Consent of Independent Accountants
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) (i) Form of Distribution Plan for Administrative Class Shares/9/
-
(ii) Administrative Services Contract/2/
-
(iii) Supplements to Administrative Services Contract relating to
Global, Foreign, Low Duration South Africa Free and Total
Return South Africa Free Portfolios/5/
-
(iv) Supplement to Administrative Services Contract Relating to
High Yield, Low Duration II and Total Return II
Portfolios/6/
-
(v) Supplements to Administrative Services Contract Relating to
Income and Capital Preservation Portfolio I and Income and
Capital Preservation Portfolio II/7/
-
(vi) Form of Administrative Services Plan for Administrative
Class Shares/9/
-
-2-
<PAGE>
(vii) Form of Supplements to Administrative Services Contract
Relating to Moderate Duration Fund and VersaSTYLE Equity
Fund/10/
--
(viii) Form of Amended Administrative Services Contract/11/
--
(ix) Form of Amended Administrative Services Contract/12/
--
(x) Form of Supplement to Administration Agreement Relating to
StocksPLUS Short Strategy Fund/15/
--
(xi) Supplements to Administration Agreement/16/
(xii) Form of Amendment to Administration Agreement/18/
(xiii) Form of Distribution and Servicing Plan for Class A shares
/18/
(xiv) Form of Distribution and Servicing Plan for Class B shares
/18/
(xv) Form of Distribution and Servicing Plan for Class C shares
/18/
(xvi) Form of Supplement to Administration Agreement Relating
to Real Return Bond Fund/19/
(16) Calculation of Performance/12/
--
(17) Not Applicable
(18) (i) Dual-Class Plan/12/
--
(ii) Amended Dual-Class Plan/16/
(iii) Amended and Restated Multi-Class Plan adopted
Pursuant to Rule 18f-3/18/
____________________
/1/ Filed with initial Registration Statement on February 19, 1987
-
(File No. 33-12113).
/2/ Filed with Pre-Effective Amendment No. 2 on April 21, 1987.
-
/3/ Filed with Pre-Effective Amendment No. 4 on May 5, 1987.
-
/4/ Filed with Post-Effective Amendment No. 3 on August 1, 1988.
-
/5/ Filed with Post-Effective Amendment No. 8 on August 3, 1990.
-
/6/ Filed with Post-Effective Amendment No. 10 on May 31, 1991.
-
/7/ Filed with Post-Effective Amendment No. 12 on August 29, 1991.
-
/8/ Filed with Post-Effective Amendment No. 15 on June 1, 1992.
-
/9/ Filed with Post-Effective Amendment No. 20 on June 1, 1994.
-
/10/ Filed with Post-Effective Amendment No. 21 on August 1, 1994.
--
/11/ Filed with Post-Effective Amendment No. 22 on November 30, 1994.
--
/12/ Filed with Post-Effective Amendment No. 23 on June 1, 1995.
--
/13/ Filed with Registrant's Rule 24f-2 Notice.
--
/14/ Filed with Post-Effective Amendment No. 24 on July 31, 1995.
--
/15/ Filed with Post-Effective Amendment No. 27 on January 16, 1996.
--
/16/ Filed with Post-Effective Amendment No. 28 on April 1, 1996.
--
/17/ Filed with Post-Effective Amendment No. 29 on June 14, 1996.
/18/ Filed with Registration Statement on Form N-14 (File No. 333-12871)
on September 27, 1996
/19/ To be filed by post-effective amendment prior to effectiveness of this
amendment.
Item 25. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
No person is controlled by or under common control with the
Registrant.
-3-
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
As of November 13, 1996, the number of record holders of each Fund and
Class thereof of the Registrant were as follows:
<TABLE>
<CAPTION>
Institutional Administrative
Fund Class Class A B C
---- ------------- -------------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Money Market 177 1 0 0 0
Short-Term 112 2 0 0 0
Low Duration 555 7 0 0 0
Low Duration II 49 0 0 0 0
Low Duration III 0 0 0 0 0
Moderate Duration 0 0 0 0 0
High Yield 126 5 0 0 0
Total Return 1236 42 0 0 0
Total Return II 182 7 0 0 0
Total Return III 23 0 0 0 0
Commercial Mortgage Securities 0 0 0 0 0
Long-Term U.S. Government 20 0 0 0 0
Foreign Bond 49 0 0 0 0
Global Bond 42 2 0 0 0
Global Bond II 0 0 0 0 0
International Bond 113 0 0 0 0
StocksPLUS 49 0 0 0 0
StocksPLUS Short Strategy 0 0 0 0 0
Strategic Balanced 2 0 0 0 0
</TABLE>
Item 27. Indemnification
---------------
Reference is made to Article IV of the Registrant's Declaration of
Trust, which was filed with the Registrant's initial Registration
Statement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to
the Declaration of Trust or otherwise, the Registrant is aware that in
the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the
successful defense of any act, suit or proceeding) is asserted by such
trustees, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of
its counsel
-4-
<PAGE>
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issues.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
PIMCO, the investment adviser to the Trust, is a subsidiary
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). The general
partner of PIMCO Advisors is PIMCO Partners, G.P., a general
partnership between Pacific Investment Management Company, an indirect
wholly-owned subsidiary of Pacific Mutual Life Insurance Company
("Pacific Mutual"), and PIMCO Partners LLC, a limited liability
company controlled by the PIMCO Managing Directors.
The directors and officers of PIMCO and their business and other
connections are as follow:
<TABLE>
<CAPTION>
Name Business and Other Connections
- ---- ------------------------------
<S> <C>
Allan, George C. Vice President, PIMCO and PIMCO Management, Inc.
Arnold, Tamara J. Vice President, PIMCO and PIMCO Management, Inc.
Barbi, Leslie A. Vice President, PIMCO and PIMCO Management, Inc.
Benz, William R. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Brynjolfsson, John B. Vice President, PIMCO and PIMCO Management, Inc.
Burns, R. Wesley Executive Vice President, PIMCO and
PIMCO Management, Inc.; President of the Trust and
PIMCO Commerical Mortgage Securities Trust, Inc.;
Vice President, PIMCO Funds: Equity Advisors Series,
PIMCO Advisors Funds and Cash Accumulation Trust.
Cupps, Wendy W. Vice President, PIMCO and PIMCO Management, Inc.
Daniels, Charles M. III Executive Vice President, PIMCO and
PIMCO Management, Inc.
Dunn, Anita Vice President, PIMCO and PIMCO Management, Inc.
Edington, David H. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.;
Member of PIMCO Partners, L.L.C.
Ehlert, A. Benjamin Executive Vice President, PIMCO and
PIMCO Management, Inc.
Ettl, Robert A. Vice President, PIMCO and PIMCO Management, Inc.
Fitzgerald, Robert M. Treasurer, PIMCO, Cadence Capital Management, Inc., NFJ
Management, Inc., Parametric Management, Inc., and
StocksPLUS Management Inc.; Assistant Treasurer,
Cadence Capital Management; Senior Vice President,
Finance and Controller, Columbus Circle Investors and
Columbus Circle Investors Management, Inc.; Chief
Financial Officer, Senior Vice President-Finance and
Controller, PIMCO Advisors and PIMCO Advisors
Distribution Company.
Gross, William H. Managing Director, PIMCO;
Director and Managing Director, PIMCO Management, Inc.;
Director and Vice President, StocksPLUS Management,
Inc.; Senior Vice President of the Trust; Member of
Equity and Operating Boards, PIMCO Advisors; Member of
PIMCO Partners, LLC.
Hague, John L. Managing Director, PIMCO;
Director and Managing Director, PIMCO Management, Inc.;
Member of PIMCO Partners LLC.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Name Business and Other Connections
- ---- ------------------------------
<S> <C>
Hally, Gordon C. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Hamalainen, Pasi M. Vice President, PIMCO and PIMCO Management, Inc.
Hardaway, John P. Vice President, PIMCO and PIMCO Management, Inc.;
Treasurer of the Trust, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Advisors Funds and
Cash Accumulation Trust; Vice President and Treasurer,
PIMCO Funds: Equity Advisors Series.
Harris, Brent R. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management, Inc.; Director
and Vice President, StocksPLUS Management, Inc.;
Trustee and Chairman of the Trust and PIMCO Commercial
Mortgage Securities Trust, Inc.; Member of Operating
Board, PIMCO Advisors; Member of PIMCO Partners LLC.
Hodge, Douglas M. Senior Vice President, PIMCO and PIMCO Management, Inc.
Holden, Brent L. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Holloway, Dwight F., Jr. Vice President, PIMCO and PIMCO Management, Inc.
Howe, Jane T. Vice President, PIMCO and PIMCO Management, Inc.
Isberg, Margaret E. Executive Vice President, PIMCO and
PIMCO Management, Inc.; Senior Vice President of
the Trust.
Loftus, John S. Executive Vice President, PIMCO and
PIMCO Management, Inc.; Vice President and Assistant
Secretary, StocksPLUS Management, Inc.
Meiling, Dean S. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Director, StocksPLUS
Management, Inc.; Vice President of the Trust
and PIMCO Commercial Mortgage Securities Trust,
Inc.; Member of Operating Board, PIMCO Advisors;
Member of PIMCO Partners, LLC.
Muzzy, James F. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Director and
Vice President, StocksPLUS Management, Inc.;
Vice President of the Trust; Member of Operating
Board, PIMCO Advisors; Member of PIMCO Partners, LLC.
Otterbein, Thomas J. Vice President, PIMCO and PIMCO Management, Inc.
Podlich, William F. III Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Vice President,
PIMCO Commercial Mortgage Securities Trust, Inc.,
Member of Equity and Operating Boards,
PIMCO Advisors; Member of PIMCO Partners, LLC.
Powers, William C. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Senior Vice
President, PIMCO Commercial Mortgage Securities
Trust, Inc.; Member of Operating Board,
PIMCO Advisors; Member of PIMCO Partners, LLC.
Rabinovitch, Frank B. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Member of PIMCO
Partners, LLC.
Rennie, Edward P. Senior Vice President, PIMCO and PIMCO Management, Inc.
Roney, Scott L. Vice President, PIMCO and PIMCO Management, Inc.
Rosborough, Michael J. Vice President, PIMCO and PIMCO Management, Inc.
Sargent, Jeffrey M. Vice President, PIMCO, PIMCO Management, Inc.,
the Trust, PIMCO Commercial Mortgage Securities
Trust, Inc. and PIMCO Funds: Equity Advisors Series.
Schmider, Ernest L. Senior Vice President, Secretary, Chief Admistrative
and Legal Officer, PIMCO and PIMCO Management, Inc.;
Vice President-Legal and Assistant Secretary,
PIMCO Advisors; Director, Assistant Secretary and
Assistant Treasurer, StocksPLUS Management, Inc.
Scholey, Leland T. Senior Vice President, PIMCO, PIMCO Management, Inc.
and the Trust.
Seliga, Denise C. Vice President, PIMCO and PIMCO Management, Inc.
Seymour, Rita J. Vice President, PIMCO and PIMCO Management, Inc.
Thomas, Lee R. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Thompson, William S. Chief Executive Officer and Managing
Jr. Director, PIMCO; Director, Managing Director and
Chief Executive Officer, PIMCO Management, Inc.;
Director and President, StocksPLUS Management, Inc.;
Vice President of the Trust and PIMCO Commercial
Mortgage Securities Trust, Inc.; Member of Equity Board
and Operating Committee, and Chairman and Member of
Operating Board, PIMCO Advisors; Member of PIMCO
Partners LLC.
Trosky, Benjamin L. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Senior Vice
President, PIMCO Commercial Mortgage Securities
Trust, Inc.; Member of PIMCO Partners LLC.
Venable, Robert S. Vice President, PIMCO and PIMCO Management, Inc.
Wagner, Teresa A. Vice President, PIMCO, PIMCO Management, Inc., the
Trust, PIMCO Commercial Mortgage Securities Trust, Inc.
and PIMCO Funds: Equity Advisors Series; Vice President
and Assistant Clerk, PIMCO Advisors Funds and Cash
Accumulation Trust.
Ward, Andrew C. Vice President, PIMCO and PIMCO Management, Inc.;
Senior Vice President of the Trust.
Weil, Richard M. Assistant Secretary, PIMCO, PIMCO Management, Inc.,
Columbus Circle Investors, Columbus Circle Investors
Management, Inc., Cadence Capital Management, Cadence
Management, Inc., NFJ Management, Inc., Parametric
Management, Inc., and PIMCO Advisors Distribution
Company; Secretary, NFJ Investment Group, Parametric
Portfolio Associates, and StocksPLUS Management, Inc.;
Senior Vice President and Lead Counsel, PIMCO.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Name Business and Other Connections
- ---- ------------------------------
<S> <C>
Willner, Ram Vice President, PIMCO and PIMCO Management, Inc.
Wilsey, Kristen M. Vice President, PIMCO, PIMCO Management, Inc.
and of the Trust.
Wood, George H. Vice President, PIMCO and PIMCO Management, Inc.
Yetter, Michael A. Vice President, PIMCO and PIMCO Management, Inc.
</TABLE>
The address of PIMCO is 840 Newport Center Drive, Newport Beach, CA 92260.
The address of PIMCO Advisors L.P. is 800 Newport Center Drive, Newport Beach,
CA 92660.
The address of PIMCO Advisors Distribution Company is 2187 Atlantic Street,
Stamford, CT 06902.
Item 29. Principal Underwriters
----------------------
(a) PIMCO Advisors Distribution Company (the "Distributor") serves as
Distributor of Shares of the Trust. The Distributor also acts as
the principal underwriter for PIMCO Advisors Funds and PIMCO
Funds: Equity Advisors Series. The Distributor is a wholly-owned
subsidiary of PIMCO Advisors.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------------- -------------------------- ----------------------
<S> <C> <C>
Badgley, William D. Vice President None
Booth, Jeffrey L. Vice President None
Bosch, James D. Vice President None
Cvengros, William D. Director None
Fitzgerald, Robert M. Chief Financial Officer, None
Senior Vice President -
Finance and Controller
Gallagher, Michael J. Vice President None
Gray, Ronald H. Vice President None
Janeczek, Edward W., Jr. Vice President None
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------------- -------------------------- ----------------------
<S> <C> <C>
Kemraj, Jaishree B. Assistant Vice President None
and Assistant Controller
Leasure, John O. President, Chief Executive None
Officer and Director
Lynch, William E. Regional Vice President None
McCarthy, Jacqueline A. Vice President None
McLaughlin, Richard J. Vice President None
Meyers, Andrew J. Executive Vice President None
Moody, Paul R. Regional Vice President None
Moyer, Fioja Vice President None
Pearlman, Goffrey H. Vice President None
Pisapia, Glynne Vice President None
Russell, Matthew M. Vice President None
Schott, Newton B., Jr. Senior Vice President, None
Secretary and Director
Stone, David P. Vice President None
Thomas, William H., Jr. Regional Vice President None
Treadway, Stephen J. Chairman and Director None
Troyer, Paul H. Regional Vice President None
Trumbore, Brian F. Senior Vice President None
Weil, Richard M. Assistant Secretary None
</TABLE>
- -------------
*/ The business address of all directors and officers of the Distributor is
- -
either 2187 Atlantic Street, Stamford, CT 06902 or 800 Newport Center Drive,
Newport Beach, CA 92660.
Item 30. Location of Accounts and Records
--------------------------------
The account books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940 and the Rules thereunder will be maintained at the offices of
Pacific Investment Management Company, 840 Newport Center Drive,
Newport Beach, California 92660 and at the offices of the Trust's
Custodian, Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105.
-8-
<PAGE>
Item 31. Management Services
-------------------
Not applicable
Item 32. Undertakings
------------
(a) Not applicable.
(b) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to
six months from the effective date of Registrant's 1933 Act
registration statement, or post-effective amendment thereto which
provides for the addition of a new series of Registrant.
(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.
(d) Registrant undertakes to call a meeting of shareholders for the
purpose of considering the removal of a person serving as Trustee
if requested in writing to do so by the holders of not less than
10% of the outstanding shares of Registrant.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 31 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Washington
in the District of Columbia on the 22nd day of November, 1996.
PIMCO FUNDS
(Registrant)
By:
-------------------------------------
R. Wesley Burns*++++
President
*By: /s/ Robert W. Helm
-------------------------------------
Robert W. Helm, as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
___________________________ Trustee November 22, 1996
Guilford C. Babcock*+
___________________________ Trustee November 22, 1996
Thomas P. Kemp*+
___________________________ Trustee November 22, 1996
Brent R. Harris*+++
___________________________ Trustee November 22, 1996
William J. Popejoy* +++++
___________________________ Trustee November 22, 1996
Vern O. Curtis*++++++
___________________________ President November 22, 1996
R. Wesley Burns*++++ (Principal
Executive
Officer)
___________________________ Treasurer November 22, 1996
John P. Hardaway++* (Principal
Financial
and Accounting
Officer)
*By: /s/ Robert W. Helm
-----------------------
Robert W. Helm
as attorney-in-fact
</TABLE>
<PAGE>
___________________
+ Pursuant to power of attorney filed with Post-Effective Amendment
No. 1 to Registration Statement No. 33-12113 on November 6, 1987.
++ Pursuant to power of attorney filed with Post-Effective Amendment
No. 10 to Registration Statement No. 33-12113 on May 31, 1991.
+++ Pursuant to power of attorney filed with Post-Effective Amendment
No. 14 to Registration Statement No. 33-12113 on April 28, 1992.
++++ Pursuant to power of attorney filed with Post-Effective Amendment
No. 20 to Registration Statement No. 33-12113 on June 1, 1995.
+++++ Pursuant to power of attorney filed with Post-Effective Amendment
No. 22 to Registration Statement No. 33-12113 on November 30, 1994.
++++++ Pursuant to power of attorney filed with Post-Effective Amendment
No. 23 to Registration Statement No. 33-12113 on June 1, 1995.
<PAGE>
PIMCO FUNDS
INDEX TO EXHIBITS
FILED WITH
POST-EFFECTIVE AMENDMENT NO. 31
<TABLE>
<C> <S>
EXHIBIT 11 Consent of Independent Accountants (EDGAR EXHIBIT 99.B11).
</TABLE>
<PAGE>
EXHIBIT 11- EDGAR EXHIBIT 99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Real Return Bond
Fund Institutional Prospectus, the Real Return Bond Fund Retail Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 31 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated May 10, 1996, relating to the financial
statements and financial highlights appearing in the March 31, 1996 Annual
Report to Shareholders of the PIMCO Funds: Pacific Investment Management Series,
which are also incorporated by reference into the Registration Statement. We
also consent to the references to us as "Accountants" on the back page of each
Prospectus and under the headings "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information.
/s/ PRICE WATERHOUSE LLP
------------------------
Price Waterhouse LLP
Kansas City, Missouri
November 21, 1996
