<PAGE>
As filed with the Securities and Exchange Commission on December 30, 1997
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. 38 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 42 [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)
[X] 75 days after filing 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>
<PAGE>
EXPLANATORY NOTE
This post-effective amendment no. 38 to the registration statement of
PIMCO Funds on Form N-1A (File No. 33-12113) is being filed for the purpose of
adding the PIMCO Municipal Bond Fund as a new series to PIMCO Funds, and to
offer Institutional Class, Administrative Class, Class A, Class B and Class C
shares of the PIMCO Municipal Bond Fund. The amendment does not affect the
currently effective prospectus for the Class A shares of the PIMCO Total Return
Fund or the prospectus for the Class A, Class B and Class C shares of any PIMCO
Fund not discussed in the retail prospectus set forth herein. The prospectus
describing the Class A shares of the PIMCO Total Return Fund and the prospectus
describing the Class A, Class B and Class C shares of the StocksPLUS Short
Strategy Fund, Strategic Balanced Fund, Emerging Markets Bond Fund II, Global
Bond Fund, International Bond Fund, Total Return Fund II, Total Return Fund III,
Total Return Mortgage Fund, Commercial Mortgage Securities Fund, Moderate
Duration Fund, Low Duration Fund II, Low Duration Fund III and Low Duration
Mortgage Fund are hereby incorporated by reference from post-effective amendment
no. 36 to the registration statement.
<PAGE>
CROSS-REFERENCE SHEET
REQUIRED BY RULE 495
UNDER THE SECURITIES ACT OF 1933
PART A
Institutional Class and Administrative Class Prospectus
Information Required in Prospectus
----------------------------------
Item Number Heading
- ----------- -------
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 Not Applicable
6 Dividends, Distributions and Taxes;
Other Information
7 Purchase of Shares; Net Asset Value
8 Redemption of Shares
9 Not Applicable
<PAGE>
PART A
Class A, Class B, and Class C Prospectus
Information Required in Prospectus
----------------------------------
Item Number Heading
----------- -------
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 Not Applicable
6 Distributions; Taxes; Description of
the Trust
7 How to Buy Shares; Alternative Purchase
Arrangements; Exchange Privilege; Distributor
and Distribution and Servicing Plans; How Net
Asset Value is Determined
8 How to Redeem
9 Not Applicable
<PAGE>
Part A
PIMCO Total Return Fund
Class A Prospectus
Information Required in Prospectus
----------------------------------
Item Number Heading
- ----------- -------
1 Cover Page
2 Schedule of Fees
3 Financial Highlights
4 Investment Objective and Policies;
Characteristics and Risks of Securities
and Investment Techniques
5 Management of the Trust
5A Not Applicable
6 Distributions; Taxes; Description of
the Trust
7 How to Buy Shares; Exchange Privilege;
Distributor and Distribution and
Servicing Plan; How Net Asset Value is
Determined
8 How to Redeem
9 Not Applicable
<PAGE>
PART B
Information Required in Statement of Additional Information
-----------------------------------------------------------
Item Number Heading
----------- -------
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
<PAGE>
[LOGO OF PIMCO FUNDS]
PACIFIC FIXED INCOME FUNDS
INVESTMENT Money Market Fund
MANAGEMENT Short-Term Fund
SERIES Low Duration Fund
Low Duration Fund II
INSTITUTIONAL Low Duration Fund III
AND Moderate Duration Fund
ADMINISTRATIVE High Yield Fund
SHARE CLASSES Total Return Fund
Total Return Fund II
Total Return Fund III
Commercial Mortgage Securities Fund
Low Duration Mortgage Fund
Total Return Mortgage Fund
Long-Term U.S. Government Fund
Real Return Bond Fund
Foreign Bond Fund
Global Bond Fund
Global Bond Fund II
International Bond Fund
Emerging Markets Bond Fund
Emerging Markets Bond Fund II
TAX EXEMPT FUND
Municipal Bond Fund
EQUITY FUNDS
StocksPLUS Fund
StocksPLUS Short Strategy Fund
BALANCED FUND
Strategic Balanced Fund
PROSPECTUS
- --------------------------------------------------------------------------------
March , 1998
<PAGE>
PIMCO Funds: Pacific Investment Management Series
Prospectus
March , 1998
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") consisting of twenty-five separate investment portfolios (the
"Funds"). Each 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 Funds.
This Prospectus describes two classes of shares offered by each Fund: the
"Institutional Class" and the "Administrative Class." Through a separate
prospectus, certain Funds offer up to three additional classes of shares,
Class A shares, Class B shares and Class C shares. See "Other Information--
Multiple Classes of Shares."
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Funds. It should be read and retained for
ready reference to information about the Funds. Information about the
investment objective of each 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, are set forth in this Prospectus.
There can be no assurance that the investment objective of any Fund will be
achieved. Because the market value of the Funds' investments will change, the
investment returns and net asset value per share of each Fund will vary.
A Statement of Additional Information, dated March , 1998, as amended or
supplemented from time to time, containing additional and more detailed
information about the Funds, 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); (800) 987-4626 (PIMCO Infolink
Audio Response Network)
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.
SHARES OF THE FUNDS 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.
INVESTMENT IN THE PIMCO MONEY MARKET FUND (OR IN ANY OTHER FUND) IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT
THE MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
EACH OF THE FUNDS, EXCEPT THE PIMCO MONEY MARKET FUND, MAY INVEST ALL OF ITS
ASSETS 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 A FUND'S INVESTMENTS IN PARTICULAR
DERIVATIVE INSTRUMENTS.
THE PIMCO HIGH YIELD, EMERGING MARKETS BOND AND EMERGING MARKETS BOND II FUNDS
MAY INVEST ALL OF THEIR ASSETS, AND THE PIMCO COMMERCIAL MORTGAGE SECURITIES
FUND MAY INVEST UP TO 35% OF ITS ASSETS, IN JUNK BONDS, WHICH ARE SUBJECT TO
HIGH RISK, AND SPECULATIVE WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF
PRINCIPAL. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN
THESE FUNDS. SEE "CHARACTERISTICS AND RISKS OF SECURITIES AND INVESTMENT
TECHNIQUES--HIGH YIELD SECURITIES ("JUNK BONDS")."
March , 1998 Prospectus 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Expense Information..................................................... 8
Financial Highlights.................................................... 10
Investment Objectives and Policies...................................... 16
Investment Restrictions................................................. 27
Characteristics and Risks of Securities and Investment Techniques....... 29
Management of the Trust................................................. 45
Purchase of Shares...................................................... 48
Redemption of Shares.................................................... 51
Portfolio Transactions.................................................. 53
Net Asset Value......................................................... 53
Dividends, Distributions and Taxes...................................... 54
Other Information....................................................... 56
Appendix A -- Description of Duration................................... A-1
Appendix B -- Description of Securities Ratings......................... B-1
</TABLE>
2 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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-four separate investment portfolios (the
"Funds"). The following chart provides general information about each of the
PIMCO Funds. It is qualified in its entirety by the more complete descriptions
of the Funds appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIXED INCOME FUNDS PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Money Market Money market instruments is less than Min 95% Aaa or 0%
or equal to Prime 1;
90 days is less than
dollar- or equal to
weighted 5% Aa or Prime 2
average
maturity
- ------------------------------------------------------------------------------------------
Short-Term Money market instruments 0-1 yr B to Aaa; max 0-5%
and short maturity fixed 10% below Baa
income securities
- ------------------------------------------------------------------------------------------
Low Duration Short and intermediate 1-3 yrs B to Aaa; max 0-20%
maturity fixed income 10% below Baa
securities
- ------------------------------------------------------------------------------------------
Low Duration II Same as Low Duration 1-3 yrs A to Aaa 0%
Fund, except quality and
foreign issuer
restrictions
- ------------------------------------------------------------------------------------------
Low Duration III Same as Low Duration 1-3 yrs B to Aaa; max 0-20%
Fund, except 10% below Baa
prohibitions on firms
engaged in socially
sensitive practices
- ------------------------------------------------------------------------------------------
Moderate Duration Short and intermediate 2-5 yrs B to Aaa; max 0-20%
maturity fixed income 10% below Baa
securities
- ------------------------------------------------------------------------------------------
High Yield Higher yielding fixed 2-6 yrs B to Aaa; min 0%
income securities 65% below Baa
- ------------------------------------------------------------------------------------------
Total Return Intermediate maturity 3-6 yrs B to Aaa; max 0-20%
fixed income securities 10% below Baa
- ------------------------------------------------------------------------------------------
Total Return II Same as Total Return 3-6 yrs Baa to Aaa 0%
Fund, except quality and
foreign issuer
restrictions
- ------------------------------------------------------------------------------------------
Total Return III Same as Total Return 3-6 yrs B to Aaa; max 0-20%
Fund, except 10% below Baa
prohibitions on firms
engaged in socially
sensitive practices
- ------------------------------------------------------------------------------------------
Commercial Mortgage Commercial mortgage- 3-8 yrs B to Aaa; max 0%
Securities backed securities 35% below Baa
- ------------------------------------------------------------------------------------------
Low Duration Short and intermediate 1-3 yrs Baa to Aaa; 0%
Mortgage maturity mortgage- max
related securities 10% below Aaa
- ------------------------------------------------------------------------------------------
Total Return Intermediate maturity Lehman Baa to Aaa; 0%
Mortgage mortgage-related Mortgage max 10% below
securities Index plus Aaa
or minus
1.5 yrs.
- ------------------------------------------------------------------------------------------
Long-Term U.S. Long-term maturity fixed is greater A to Aaa 0%
Government income securities than or
equal to
8 yrs.
- ------------------------------------------------------------------------------------------
Real Return Bond Inflation-indexed fixed N/A, but see A to Aaa 0-35%
income securities Fund
description
- ------------------------------------------------------------------------------------------
Foreign Bond Intermediate maturity 3-6 yrs B to Aaa; max is greater
hedged foreign fixed 10% below Baa than or
income securities equal to
85%
- ------------------------------------------------------------------------------------------
Global Bond Intermediate maturity 3-6 yrs B to Aaa; max 25-75%
U.S. and foreign fixed 10% below Baa
income securities
- ------------------------------------------------------------------------------------------
Global Bond II Intermediate maturity 3-6 yrs B to Aaa; max 25-75%
U.S. and hedged foreign 10% below Baa
fixed income securities
- ------------------------------------------------------------------------------------------
International Bond Foreign fixed income 0-8 yrs Baa to Aaa is greater
securities (Fund offered than or
only to PIMCO private equal to
account clients) 65%
- ------------------------------------------------------------------------------------------
Emerging Markets Emerging market fixed 0-8 yrs B to Aaa is greater
Bond income securities than or
equal to
80%
- ------------------------------------------------------------------------------------------
Emerging Markets Emerging market fixed 0-8 yrs B to Aaa is greater
Bond II income securities (Fund than or
offered only to PIMCO equal to
private account clients) 80%
- ------------------------------------------------------------------------------------------
<CAPTION>
TAX EXEMPT FUND PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Municipal Bond High current income 3-10 yrs Ba to Aaa; max 0%
exempt from federal 10% below Baa
income tax, consistent
with preservation of
capital
- ------------------------------------------------------------------------------------------
</TABLE>
March , 1998 Prospectus 3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
EQUITY FUNDS PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
StocksPLUS S&P 500 stock index 0-1 yr B to Aaa; max 0-20%
derivatives backed by a 10% below Baa
portfolio of short-term
fixed income securities
- ------------------------------------------------------------------------------------------
StocksPLUS Short Inversely correlated S&P 0-1 yr B to Aaa; max 0-20%
Strategy 500 derivatives backed 10% below Baa
by a portfolio of short-
term fixed income
securities
- ------------------------------------------------------------------------------------------
<CAPTION>
BALANCED FUND PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Strategic Balanced Same as Total Return and 0-6 yrs B to Aaa; max 0-20%
StocksPLUS Funds 10% below Baa
according to PIMCO's
allocation strategy
- ------------------------------------------------------------------------------------------
</TABLE>
1. As rated by Moody's Investors Service, Inc., or if unrated, determined to be
of comparable quality.
2. Percentage limitations relate to foreign currency-denominated securities for
all Funds except the PIMCO Foreign Bond, Global Bond, Global Bond II,
International Bond, Emerging Markets Bond and Emerging Markets Bond II Funds.
Percentage limitations for these six Funds relate to securities of foreign
issuers, denominated in any currency. Each Fund (except the Low Duration II and
Total Return II Funds) may invest beyond these limits in U.S. dollar-
denominated securities of foreign issuers. Neither the Low Duration Fund II nor
the Total Return Fund II may invest in any securities of foreign issuers.
INVESTMENT OBJECTIVES OF THE PIMCO FUNDS
The investment objective of each of the PIMCO Money Market Fund and PIMCO
Short-Term Fund is to seek to obtain maximum current income consistent with
preservation of capital and daily liquidity. The investment objective of the
PIMCO Municipal Bond Fund is to seek high current income exempt from federal
income tax, consistent with preservation of capital. The investment objective
of the PIMCO Real Return Bond Fund is to seek to realize maximum real return,
consistent with the preservation of real capital and prudent investment
management. The investment objective of the PIMCO Global Bond Fund II is to
seek maximum total return, consistent with the preservation of capital. The
investment objective of each of the remaining Fixed Income Funds and the PIMCO
Strategic Balanced Fund is to seek to realize maximum total return, consistent
with preservation of capital and prudent investment management. The investment
objective of the PIMCO StocksPLUS Fund is to seek to achieve a total return
which exceeds the total return performance of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"). The investment objective of the PIMCO
StocksPLUS Short Strategy Fund is to seek total return through the
implementation of short investment positions on the S&P 500.
INVESTMENT RISKS AND CONSIDERATIONS
The following are some of the primary risks relevant to an investment in the
Funds and to the securities in which the Funds invest. Investors should read
this Prospectus carefully for a more complete discussion of the risks relating
to an investment in the Funds. The value of all securities and other
instruments held by the Funds will vary from time to time in response to a wide
variety of market factors. Consequently, the net asset value per share of each
Fund will vary, except that the PIMCO Money Market Fund shall attempt to
maintain a net asset value of $1.00 per share, although there can be no
assurance that the Fund will be successful in doing so. The net asset value per
share of any Fund may be less at the time of redemption than it was at the time
of investment. Generally, the value of 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, although this may
not be true in the case of inflation-indexed bonds. In addition, certain of the
Funds may invest in securities rated lower than Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Services ("S&P").
Such securities carry a high degree of credit risk and are considered
speculative by the major rating agencies.
Certain Funds 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. Certain of the Funds'
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 a Fund's portfolio and may require liquidation of portfolio
positions when it is not advantageous to do so. Certain Funds may sell
securities short, which exposes the Fund to a risk of loss if the value of the
security sold short should increase.
4 PIMCO Funds: Pacific Investment Management Series
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
All Funds (except the PIMCO Money Market Fund) may use derivative
instruments, consisting of futures, options, options on futures, and swap
agreements, for hedging purposes or as part of their investment strategies. Use
of these instruments may involve certain costs and risks, including the risk
that a 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 a Fund's investments in particular derivative instruments.
Investors should carefully consider the possible tax consequences from
investing in the PIMCO Real Return Bond 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.
Some of the Funds offer their shares to both retail and institutional
investors. Institutional shareholders, some of whom also may be investment
advisory clients of PIMCO, may hold large positions in certain of the Funds.
Such shareholders may on occasion make large redemptions of their holdings in
the Funds to meet their liquidity needs, in connection with strategic
adjustments to their overall portfolio of investments, or for other purposes.
Large redemptions from some Funds could require the Adviser to liquidate
portfolio positions when it is not most desirable to do so. Liquidation of
portfolio holdings also may cause a Fund to realize taxable capital gains.
The PIMCO Commercial Mortgage Securities, Real Return Bond, Foreign Bond,
Global Bond, Global Bond II, International Bond, Emerging Markets Bond and
Emerging Markets Bond II Funds are "non-diversified" for purposes of the
Investment Company Act of 1940 (the "1940 Act"), meaning that they may invest a
greater percentage of their assets in the securities of one issuer than the
other Funds. As "non-diversified" portfolios, these Funds may be more
susceptible to risks associated with a single economic, political or regulatory
occurrence than a diversified portfolio might be. See "Investment Objectives
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 $108.5 billion of assets under management as of September 30,
1997. The Adviser is a subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"),
which had approximately $130 billion of assets under management as of September
30, 1997. See "Management of the Trust."
PURCHASE OF SHARES
This Prospectus describes two classes of shares of each Fund: the
"Institutional Class" and the "Administrative Class." Shares of the
Institutional Class are offered primarily for direct investment by
institutional investors (Institutional Class shares may also be offered through
certain financial intermediaries that charge their customers transaction or
other fees with respect to the customers' investments in the Funds). Shares of
the Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers, and other intermediaries, and each Fund pays service
and distribution fees to such entities for services they provide to such Fund's
shareholders of that class. Administrative Class shares of certain Funds are
not currently available for investment.
March , 1998 Prospectus 5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Shares of the Institutional Class and Administrative Class of the Funds 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 million,
subject to certain exceptions. Shares of either class may also be offered to
clients of the Adviser and its affiliates. Shares of the PIMCO International
Bond Fund and PIMCO Emerging Markets Bond Fund II are offered only to private
account clients of PIMCO. See "Purchase of Shares."
REDEMPTIONS AND EXCHANGES
Institutional Class and Administrative Class shares of each Fund may be
redeemed without cost at the relevant net asset value per share of the class of
that Fund next determined after receipt of the redemption request. The PIMCO
StocksPLUS Short Strategy Fund imposes a redemption fee, payable to the Fund,
of 1% on all shares of the Fund held for less than three months. The redemption
price may be more or less than the purchase price.
Institutional Class and Administrative Class shares of any Fund may be
exchanged on the basis of relative net asset values, for shares of the same
class of any other Fund of the Trust offered generally to the public, except
that only private account clients of PIMCO may purchase shares of the PIMCO
International Bond Fund and PIMCO Emerging Markets Bond Fund II. Shares of a
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, composed
primarily of equity portfolios managed by the subsidiary partnerships of PIMCO
Advisors. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
Each Fund will distribute dividends from net investment income at least
monthly (quarterly in the case of the PIMCO International Bond Fund, PIMCO
Strategic Balanced Fund and Equity Funds), 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
same 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 or distribution fees by that class. See "Dividends, Distributions and
Taxes."
6 PIMCO Funds: Pacific Investment Management Series
<PAGE>
(This page left blank intentionally)
March , 1998 Prospectus 7
<PAGE>
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES (INSTITUTIONAL CLASS AND ADMINISTRATIVE
CLASS):
<TABLE>
<S> <C>
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Redemption Fee:
StocksPLUS Short Strategy Fund......................................... 1%*
All Other Funds........................................................ None
Exchange Fee............................................................. None
</TABLE>
*On shares held less than 3 months.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
ADVISORY ADMINISTRATIVE TOTAL
INSTITUTIONAL CLASS SHARES FEE FEE EXPENSES
-------------------------- -------------- --------------- --------
<S> <C> <C> <C> <C>
Money Market Fund................... 0.15% 0.20% 0.35%
Short-Term Fund..................... 0.25 0.20 0.45
Low Duration Fund................... 0.25 0.18 0.43
Low Duration Fund II................ 0.25 0.25 0.50
Low Duration Fund III............... 0.25 0.25 0.50
Moderate Duration Fund.............. 0.25 0.20 0.45
High Yield Fund..................... 0.25 0.25 0.50
Total Return Fund................... 0.25 0.18 0.43
Total Return Fund II................ 0.25 0.25 0.50
Total Return Fund III............... 0.25 0.25 0.50
Commercial Mortgage Securities Fund. 0.40 0.25 0.65
Low Duration Mortgage Fund.......... 0.25 0.25 0.50
Total Return Mortgage Fund.......... 0.25 0.25 0.50
Long-Term U.S. Government Fund...... 0.25 0.25 0.50
Real Return Bond Fund............... 0.25 0.25 0.50
Foreign Bond Fund................... 0.25 0.25 0.50
Global Bond Fund.................... 0.25 0.30 0.55
Global Bond Fund II................. 0.25 0.30 0.55
Emerging Markets Bond Fund.......... 0.45 0.40 0.85
Emerging Markets Bond Fund II....... 0.45 0.40 0.85
International Bond Fund............. 0.25 0.25 0.50
Municipal Bond Fund................. 0.25 0.25 0.50
StocksPLUS Fund..................... 0.40 0.25 0.65
StocksPLUS Short Strategy Fund...... 0.40 0.25 0.65
Strategic Balanced Fund............. 0.40 0.25 0.65
<CAPTION>
ADVISORY ADMINISTRATIVE 12B-1 (SERVICE) TOTAL
ADMINISTRATIVE CLASS SHARES FEE FEE FEE EXPENSES
--------------------------- -------- -------------- --------------- --------
<S> <C> <C> <C> <C>
Money Market Fund.......... 0.15% 0.20% 0.25% 0.60%
Short-Term Fund............ 0.25 0.20 0.25 0.70
Low Duration Fund.......... 0.25 0.18 0.25 0.68
Low Duration Fund II....... 0.25 0.25 0.25 0.75
Low Duration Fund III...... 0.25 0.25 0.25 0.75
Moderate Duration Fund..... 0.25 0.20 0.25 0.70
High Yield Fund............ 0.25 0.25 0.25 0.75
Total Return Fund.......... 0.25 0.18 0.25 0.68
Total Return Fund II....... 0.25 0.25 0.25 0.75
Total Return Fund III...... 0.25 0.25 0.25 0.75
Commercial Mortgage
Securities Fund........... 0.40 0.25 0.25 0.90
Low Duration Mortgage Fund. 0.25 0.25 0.25 0.75
Total Return Mortgage Fund. 0.25 0.25 0.25 0.75
Long-Term U.S. Government
Fund...................... 0.25 0.25 0.25 0.75
Real Return Bond Fund...... 0.25 0.25 0.25 0.75
Foreign Bond Fund.......... 0.25 0.25 0.25 0.75
Global Bond Fund........... 0.25 0.30 0.25 0.80
Global Bond Fund II........ 0.25 0.30 0.25 0.80
International Bond Fund.... 0.25 0.25 0.25 0.75
Emerging Markets Bond Fund. 0.45 0.40 0.25 1.10
Emerging Markets Bond Fund
II........................ 0.45 0.40 0.25 1.10
Municipal Bond Fund........ 0.25 0.25 0.25 0.75
StocksPLUS Fund............ 0.40 0.25 0.25 0.90
StocksPLUS Short Strategy
Fund...................... 0.40 0.25 0.25 0.90
Strategic Balanced Fund.... 0.40 0.25 0.25 0.90
</TABLE>
8 PIMCO Funds: Pacific Investment Management Series
<PAGE>
For a more detailed discussion of the Funds' fees and expenses, see "Fund
Administrator," "Advisory and Administrative Fees," and "Service and
Distribution 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>
INSTITUTIONAL CLASS SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund............................ $4 $11 $20 $44
Short-Term Fund.............................. 5 14 25 57
Low Duration Fund............................ 4 14 24 54
Low Duration Fund II......................... 5 16 28 63
Low Duration Fund III........................ 5 16 28 63
Moderate Duration Fund....................... 5 14 25 57
High Yield Fund.............................. 5 16 28 63
Total Return Fund............................ 4 14 24 54
Total Return Fund II......................... 5 16 28 63
Total Return Fund III........................ 5 16 28 63
Commercial Mortgage Securities Fund.......... 7 21 36 81
Low Duration Mortgage Fund................... 5 16 28 63
Total Return Mortgage Fund................... 5 16 28 63
Long-Term U.S. Government Fund............... 5 16 28 63
Real Return Bond Fund........................ 5 16 28 63
Foreign Bond Fund............................ 5 16 28 63
Global Bond Fund............................. 6 18 31 69
Global Bond Fund II.......................... 6 18 31 69
International Bond Fund...................... 5 16 28 63
Emerging Markets Bond Fund................... 9 27 47 105
Emerging Markets Bond Fund II................ 9 27 47 105
Municipal Bond Fund.......................... 5 16 N/A N/A
StocksPLUS Fund.............................. 7 21 36 81
StocksPLUS Short Strategy Fund............... 7 21 36 81
Strategic Balanced Fund...................... 7 21 36 81
<CAPTION>
ADMINISTRATIVE CLASS SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund............................ $6 $19 $33 $75
Short-Term Fund.............................. 7 22 39 87
Low Duration Fund............................ 7 22 38 85
Low Duration Fund II......................... 8 24 42 93
Low Duration Fund III........................ 8 24 42 93
Moderate Duration Fund....................... 7 22 39 87
High Yield Fund.............................. 8 24 42 93
Total Return Fund............................ 7 22 38 85
Total Return Fund II......................... 8 24 42 93
Total Return Fund III........................ 8 24 42 93
Commercial Mortgage Securities Fund.......... 9 29 50 111
Low Duration Mortgage Fund................... 8 24 42 93
Total Return Mortgage Fund................... 8 24 42 93
Long-Term U.S. Government Fund............... 8 24 42 93
Real Return Bond Fund........................ 8 24 42 93
Foreign Bond Fund ........................... 8 24 42 93
Global Bond Fund............................. 8 26 44 99
Global Bond Fund II.......................... 8 26 44 99
International Bond Fund...................... 8 24 42 93
Emerging Markets Bond Fund................... 11 35 61 134
Emerging Markets Bond Fund II................ 11 35 61 134
Municipal Bond Fund.......................... 8 24 N/A N/A
StocksPLUS Fund.............................. 9 29 50 111
StocksPLUS Short Strategy Fund............... 9 29 50 111
Strategic Balanced Fund...................... 9 29 50 111
</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 Funds. The information has been restated where appropriate
to reflect the Funds' current fees and expenses. 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.
March , 1998 Prospectus 9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information regarding selected per share data and ratios for
shares of certain of the Funds is part of the Trust's audited financial
statements, which are included in the Trust's Annual Report dated March 31,
1997 and the Trust's unaudited financial statements, which are included in the
Trust's Semiannual Report dated September 30, 1997, both of which are
incorporated by reference in the Statement of Additional Information. The
Trust's audited financial statements and selected per share data and ratios
appearing below have been examined by Price Waterhouse LLP, independent
accountants, whose opinion thereon is also included in the Annual Report,
which may be obtained without charge. The Trust's Semiannual Report also may
be obtained without charge. Information is presented for each Fund of the
Trust which had investment operations during the reporting periods.
Information regarding the PIMCO Money Market Fund and PIMCO Total Return Fund
II reflects the operational history of the Money Market Fund and PIMCO Managed
Bond and Income Fund, respectively, two former series of PIMCO Funds: Multi-
Manager Series which were reorganized as series of the Trust as of November 1,
1995. On that date, the investment advisory responsibilities of Pacific Life
Insurance Company (formerly Pacific Mutual Life Insurance Company) with
respect to the Money Market Fund were assumed by PIMCO. Information for these
Funds for each of the five years in the period ended October 31, 1995, has
been audited by the Funds' former independent accountants.
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Institutional Class
9/30/97(*) $ 1.00 $0.03(+) $ 0.00(+) $0.03 $(0.03) $ 0.00 $ 0.00 $0.00
3/31/97 1.00 0.05 0.00 0.05 (0.05) 0.00 0.00 0.00
11/1/95-3/31/96 1.00 0.02 0.00 0.02 (0.02) 0.00 0.00 0.00
10/31/95 1.00 0.06 0.00 0.06 (0.06) 0.00 0.00 0.00
10/31/94 1.00 0.03 0.00 0.03 (0.03) 0.00 0.00 0.00
10/31/93 1.00 0.03 0.00 0.03 (0.03) 0.00 0.00 0.00
10/31/92 1.00 0.04 0.00 0.04 (0.04) 0.00 0.00 0.00
10/31/91(a) 1.00 0.04 0.00 0.04 (0.04) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 1.00 0.03(+) 0.00(+) 0.03 (0.03) 0.00 0.00 0.00
3/31/97 1.00 0.05 0.00 0.05 (0.05) 0.00 0.00 0.00
3/31/96 1.00 0.02 0.00 0.02 (0.02) 0.00 0.00 0.00
10/31/95(b) 1.00 0.05 0.00 0.05 (0.05) 0.00 0.00 0.00
SHORT-TERM FUND
Institutional Class
9/30/97(*) $10.00 $0.31(+) $ 0.08(+) $0.39 $(0.31) $ 0.00 $ 0.00 $0.00
3/31/97 9.92 0.61 0.08 0.69 (0.59) (0.02) 0.00 0.00
3/31/96 9.79 0.69 0.12 0.81 (0.65) (0.03) 0.00 0.00
3/31/95 9.92 0.56 (0.13) 0.43 (0.55) (0.01) 0.00 0.00
3/31/94 10.03 0.48 (0.12) 0.36 (0.47) 0.00 0.00 0.00
3/31/93 10.01 0.37 0.02 0.39 (0.37) 0.00 0.00 0.00
3/31/92 10.02 0.55 0.00 0.55 (0.55) 0.00 (0.01) 0.00
3/31/91 9.99 0.77 0.04 0.81 (0.78) 0.00 0.00 0.00
3/31/90 10.00 0.86 (0.01) 0.85 (0.86) 0.00 0.00 0.00
3/31/89 10.00 0.81 (0.01) 0.80 (0.80) 0.00 0.00 0.00
3/31/88(c) 10.00 0.33 0.00 0.33 (0.33) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 10.00 0.30(+) 0.07(+) 0.37 (0.29) 0.00 0.00 0.00
3/31/97 9.92 0.58 0.08 0.66 (0.57) (0.01) 0.00 0.00
3/31/96(d) 9.98 0.11 (0.07) 0.04 (0.10) 0.00 0.00 0.00
LOW DURATION FUND
Institutional Class
9/30/97(*) $ 9.98 $0.31(+) $ 0.22(+) $0.53 $(0.31) $ 0.00 $ 0.00 $0.00
3/31/97 9.95 0.64 0.03 0.67 (0.63) (0.01) 0.00 0.00
3/31/96 9.76 0.66 0.21 0.87 (0.68) 0.00 0.00 0.00
3/31/95 10.04 0.65 (0.30) 0.35 (0.54) 0.00 0.00 0.00
3/31/94 10.30 0.62 (0.16) 0.46 (0.64) (0.03) (0.05) 0.00
3/31/93 10.20 0.75 0.22 0.97 (0.74) 0.00 (0.13) 0.00
3/31/92 10.02 0.83 0.25 1.08 (0.82) 0.00 (0.08) 0.00
3/31/91 9.89 0.89 0.12 1.01 (0.88) 0.00 0.00 0.00
3/31/90 9.70 0.88 0.20 1.08 (0.88) 0.00 (0.01) 0.00
3/31/89 9.99 0.89 (0.25) 0.64 (0.90) 0.00 (0.03) 0.00
3/31/88(e) 10.00 0.74 (0.01) 0.73 (0.74) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 9.98 0.30(+) 0.22(+) 0.52 (0.30) 0.00 0.00 0.00
3/31/97 9.95 0.62 0.03 0.65 (0.60) (0.02) 0.00 0.00
3/31/96 9.76 0.63 0.21 0.84 (0.65) 0.00 0.00 0.00
3/31/95(f) 9.67 0.18 0.07 0.25 (0.14) 0.00 0.00 0.00
LOW DURATION FUND II
Institutional Class
9/30/97(*) $ 9.81 $0.30(+) $ 0.17(+) $0.47 $(0.30) $ 0.00 $ 0.00 $0.00
3/31/97 9.82 0.62 (0.03) 0.59 (0.58) (0.02) 0.00 0.00
3/31/96 9.77 0.66 0.04 0.70 (0.60) (0.03) 0.00 0.00
3/31/95 9.94 0.62 (0.16) 0.46 (0.58) (0.03) 0.00 0.00
3/31/94 10.25 0.60 (0.28) 0.32 (0.58) 0.00 (0.05) 0.00
3/31/93 10.04 0.63 0.25 0.88 (0.64) 0.00 (0.03) 0.00
3/31/92(g) 10.00 0.28 0.03 0.31 (0.27) 0.00 0.00 0.00
- --------
(a) From commencement of operations, March 1, 1991. (e) From commencement of operations, May 11, 1987.
(b) From commencement of operations, January 25, 1995. (f) From commencement of operations, January 3, 1995.
(c) From commencement of operations, October 7, 1987. (g) From commencement of operations, November 1, 1991.
(d) From commencement of operations, February 1, 1996. (*) Unaudited
+ Per share amounts based on average number of shares outstanding during the period.
</TABLE>
10 PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
TAX BASIS VALUE END EXPENSES TO INCOME TO PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $(0.03) $ 1.00 2.66% $ 37,641 0.35%+ 5.28%+ N/A
0.00 (0.05) 1.00 5.19 23,497 0.40 5.08 N/A
0.00 (0.02) 1.00 2.58 25,935 0.33+ 5.44+ N/A
0.00 (0.06) 1.00 5.67 7,741 0.40 5.53 N/A
0.00 (0.03) 1.00 3.53 7,454 0.40 3.52 N/A
0.00 (0.03) 1.00 2.83 5,836 0.40 2.78 N/A
0.00 (0.04) 1.00 3.85 7,817 0.40 4.02 N/A
0.00 (0.04) 1.00 3.78 45,406 0.53+ 5.20 N/A
0.00 (0.03) 1.00 2.48 645 0.60+ 5.13+ N/A
0.00 (0.05) 1.00 4.94 12 0.66 4.83 N/A
0.00 (0.02) 1.00 2.47 10 0.61+ 5.95+ N/A
0.00 (0.05) 1.00 4.21 10 0.68+ 5.94+ N/A
$ 0.00 $(0.31) $10.08 3.91% $ 172,603 0.45%+ 6.13%+ 24%
0.00 (0.61) 10.00 7.12 156,515 0.47 6.12 77
0.00 (0.68) 9.92 8.49 101,797 0.58 6.86 215
0.00 (0.56) 9.79 4.46 90,114 0.50 5.67 79
0.00 (0.47) 9.92 3.66 73,176 0.50 4.87 46
0.00 (0.37) 10.03 3.94 46,905 0.50 3.67 55
0.00 (0.56) 10.01 5.66 44,172 0.50 5.52 95
0.00 (0.78) 10.02 8.44 44,820 0.50 7.83 115
0.00 (0.86) 9.99 8.86 13,649 0.50 8.61 140
0.00 (0.80) 10.00 8.29 14,401 0.50 8.57 178
0.00 (0.33) 10.00 7.17+ 5,546 0.50+ 6.99+ 12
0.00 (0.29) 10.08 3.79 4,678 0.70+ 5.92+ 24
0.00 (0.58) 10.00 6.86 4,513 0.72 5.87 77
0.00 (0.10) 9.92 0.41 3,999 0.52+ 4.44+ 215
$ 0.00 $(0.31) $10.20 5.41% $2,797,292 0.43%+ 6.19%+ 132%
0.00 (0.64) 9.98 6.97 2,797,001 0.43 6.46 240
0.00 (0.68) 9.95 9.13 2,677,574 0.42 6.88 209
(0.09) (0.63) 9.76 3.60 2,332,032 0.41 6.46 77
0.00 (0.72) 10.04 4.56 2,298,255 0.43 6.05 43
0.00 (0.87) 10.30 9.91 1,403,594 0.45 7.21 68
0.00 (0.90) 10.20 11.30 906,650 0.50 8.08 37
0.00 (0.88) 10.02 10.60 516,325 0.57 8.97 44
0.00 (0.89) 9.89 11.36 317,425 0.60 8.83 162
0.00 (0.93) 9.70 6.49 172,046 0.60 8.83 56
0.00 (0.74) 9.99 8.64+ 115,865 0.60+ 8.85+ 78
0.00 (0.30) 10.20 5.28 26,266 0.68+ 5.94+ 132
0.00 (0.62) 9.98 6.71 23,564 0.68 6.21 240
0.00 (0.65) 9.95 8.83 2,536 0.69 6.73 209
(0.02) (0.16) 9.76 2.53 771 0.66+ 6.93+ 77
$ 0.00 $(0.30) $ 9.98 4.72% $ 326,740 0.50%+ 6.00%+ 81%
0.00 (0.60) 9.81 6.33 339,375 0.51 6.31 237
(0.02) (0.65) 9.82 7.30 253,299 0.48 6.61 225
(0.02) (0.63) 9.77 4.80 170,866 0.47 6.35 102
0.00 (0.63) 9.94 3.15 141,411 0.50 5.73 54
0.00 (0.67) 10.25 8.95 101,025 0.50 6.16 95
0.00 (0.27) 10.04 7.72+ 31,027 0.51+ 6.80+ 13
</TABLE>
- --------
+ Annualized.
March , 1998 Prospectus 11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOW DURATION FUND III
Institutional Class
9/30/97(*) $ 9.91 $0.30(+) $ 0.15(+) $ 0.45 $(0.30) $ 0.00 $ 0.00 $ 0.00
3/31/97(h) 10.00 0.15 (0.09) 0.06 (0.15) 0.00 0.00 0.00
LOW DURATION MORTGAGE FUND
Institutional Class
9/30/97(i)(*) $10.00 $0.09(+) $ 0.15(+) $ 0.24 $(0.11) $ 0.00 $ 0.00 $ 0.00
MODERATE DURATION FUND
Institutional Class
9/30/97(*) $ 9.83 $0.31(+) $ 0.26(+) $ 0.57 $(0.30) $ 0.00 $ 0.00 $ 0.00
3/31/97(h) 10.00 0.15 (0.17) (0.02) (0.15) 0.00 0.00 0.00
HIGH YIELD FUND
Institutional Class
9/30/97(*) $11.10 $0.51(+) $ 0.52(+) $ 1.03 $(0.51) $ 0.00 $ 0.00 $ 0.00
3/31/97 10.94 0.92 0.34 1.26 (0.97) 0.00 (0.13) 0.00
3/31/96 10.42 1.04 0.54 1.58 (1.01) 0.00 (0.05) 0.00
3/31/95 10.52 0.99 (0.12) 0.87 (0.93) (0.02) 0.00 (0.02)
3/31/94 10.41 0.90 0.18 1.08 (0.90) 0.00 (0.07) 0.00
3/31/93(j) 10.00 0.24 0.41 0.65 (0.24) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 11.10 0.50(+) 0.51(+) 1.01 (0.49) 0.00 0.00 0.00
3/31/97 10.94 0.85(+) 0.38(+) 1.23 (0.94) 0.00 (0.13) 0.00
3/31/96 10.41 1.02(+) 0.54(+) 1.56 (0.98) 0.00 (0.05) 0.00
3/31/95(k) 10.14 0.23 0.25 0.48 (0.21) 0.00 0.00 0.00
TOTAL RETURN FUND
Institutional Class
9/30/97(*) $10.27 $0.33(+) $ 0.46(+) $ 0.79 $(0.33) $ 0.00 $ 0.00 $ 0.00
3/31/97 10.29 0.68 (0.02) 0.66 (0.66) (0.02) 0.00 0.00
3/31/96 10.02 0.81 0.29 1.10 (0.61) (0.10) (0.12) 0.00
3/31/95 10.25 0.64 (0.24) 0.40 (0.56) (0.05) 0.00 0.00
3/31/94 10.91 0.68 (0.16) 0.52 (0.71) (0.15) (0.30) (0.02)
3/31/93 10.46 0.76 0.76 1.52 (0.76) 0.00 (0.31) 0.00
3/31/92 10.15 0.86 0.60 1.46 (0.86) 0.00 (0.29) 0.00
3/31/91 9.77 0.90 0.39 1.29 (0.90) 0.00 (0.01) 0.00
3/31/90 9.62 0.87 0.21 1.08 (0.87) 0.00 (0.06) 0.00
3/31/89 10.04 0.90 (0.23) 0.67 (0.91) 0.00 (0.18) 0.00
3/31/88(e) 10.00 0.67 0.04 0.71 (0.67) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 10.27 0.32(+) 0.46(+) 0.78 (0.32) 0.00 0.00 0.00
3/31/97 10.29 0.66(+) (0.02)(+) 0.64 (0.64) (0.02) 0.00 0.00
3/31/96 10.01 0.80 0.29 1.09 (0.60) (0.09) (0.12) 0.00
3/31/95(l) 10.00 0.31 0.06 0.37 (0.32) (0.03) 0.00 0.00
TOTAL RETURN FUND II
Institutional Class
9/30/97(*) $ 9.85 $0.32(+) $ 0.39(+) $ 0.71 $(0.32) $ 0.00 $ 0.00 $ 0.00
3/31/97 9.89 0.61 (0.02) 0.59 (0.62) (0.01) 0.00 0.00
11/1/95-3/31/96 10.21 0.25 (0.17) 0.08 (0.26) 0.00 (0.09) (0.05)
10/31/95 9.39 0.69 0.76 1.45 (0.62) 0.00 (0.01) 0.00
10/31/94 10.38 0.51 (0.88) (0.37) (0.51) 0.00 (0.05) 0.00
10/31/93 9.99 0.61 0.74 1.35 (0.61) 0.00 (0.35) 0.00
10/31/92(m) 10.00 0.49 0.23 0.72 (0.49) 0.00 (0.24) 0.00
Administrative Class
9/30/97(*) 9.85 0.31(+) 0.39(+) 0.70 (0.31) 0.00 0.00 0.00
3/31/97 9.89 0.59 (0.02) 0.57 (0.60) (0.01) 0.00 0.00
3/31/96 10.22 0.24 (0.17) 0.07 (0.26) 0.00 (0.09) (0.05)
10/31/95(n) 9.34 0.56 0.88 1.44 (0.55) 0.00 (0.01) 0.00
TOTAL RETURN FUND III
Institutional Class
9/30/97(*) $ 9.15 $0.29(+) $ 0.39(+) $ 0.68 $(0.29) $ 0.00 $ 0.00 $ 0.00
3/31/97 9.13 0.55 0.05 0.60 (0.55) (0.02) 0.00 (0.01)
3/31/96 8.99 0.72 0.17 0.89 (0.54) (0.09) (0.12) 0.00
3/31/95 9.18 0.59 (0.16) 0.43 (0.52) (0.02) 0.00 0.00
3/31/94 9.81 0.59 (0.03) 0.56 (0.66) (0.12) (0.20) (0.21)
3/31/93 10.31 0.64 0.75 1.39 (0.64) 0.00 (1.25) 0.00
3/31/92(o) 10.00 0.63 0.58 1.21 (0.63) 0.00 (0.27) 0.00
Administrative Class
9/30/97(p)(*) 9.12 0.26(+) 0.41(+) 0.67 (0.25) 0.00 0.00 0.00
TOTAL RETURN MORTGAGE FUND
Institutional Class
9/30/97(i)(*) $10.00 $0.11(+) $ 0.06(+) $ 0.17 $(0.11) $ 0.00 $ 0.00 $ 0.00
- --------
(h) From commencement of operations, December 31, 1996. (m) From commencement of operations, December 30, 1991.
(i) From commencement of operations, July 31, 1997. (n) From commencement of operations, November 30, 1994.
(j) From commencement of operations, December 16, 1992. (o) From commencement of operations, May 1, 1991.
(k) From commencement of operations, January 16, 1995. (p) From commencement of operations, April 11, 1997.
(l) From commencement of operations, September 8, 1994. (*) Unaudited
</TABLE>
12 PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET ASSETS RATIO OF RATIO OF NET
TAX BASIS VALUE END EXPENSES TO INVESTMENT PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE INCOME TO AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $(0.30) $10.06 4.61% $ 12,321 0.51%+ 6.01%+ 122%
0.00 (0.15) 9.91 0.58 10,056 0.49+ 6.00+ 155
$ 0.00 $(0.11) $10.13 2.23% $ 3,374 0.50%+ 5.70%+ 1,199%
$ 0.00 $(0.30) $10.10 5.91% $ 72,844 0.45%+ 6.21%+ 64%
0.00 (0.15) 9.83 (0.25) 13,458 0.44+ 6.01+ 49
$ 0.00 $(0.51) $11.62 9.40% $ 1,080,857 0.50%+ 8.94%+ 17%
0.00 (1.10) 11.10 12.04 744,498 0.50 8.77 67
0.00 (1.06) 10.94 15.70 536,983 0.47 9.28 66
0.00 (0.97) 10.42 8.81 336,310 0.48 9.37 76
0.00 (0.97) 10.52 10.65 219,976 0.50 8.40 112
0.00 (0.24) 10.41 24.43+ 24,069 0.50+ 8.24+ 30
0.00 (0.49) 11.62 9.27 23,565 0.75+ 8.76+ 17
0.00 (1.07) 11.10 11.76 10,428 0.76 8.48 67
0.00 (1.03) 10.94 15.54 1,007 0.80+ 9.16+ 66
0.00 (0.21) 10.41 4.66 41 0.73+ 10.12+ 78
$ 0.00 $(0.33) $10.73 7.77% $14,126,441 0.43%+ 6.22% 85%
0.00 (0.68) 10.27 6.60 12,528,536 0.43 6.60 173
0.00 (0.83) 10.29 11.14 10,247,605 0.42 6.85 221
(0.02) (0.63) 10.02 4.22 7,239,735 0.41 6.72 98
0.00 (1.18) 10.25 4.55 5,008,160 0.41 6.27 177
0.00 (1.07) 10.91 15.29 3,155,441 0.43 7.07 90
0.00 (1.15) 10.46 14.90 1,813,935 0.46 8.18 110
0.00 (0.91) 10.15 13.74 975,619 0.49 9.10 99
0.00 (0.93) 9.77 11.36 659,663 0.60 8.60 110
0.00 (1.09) 9.62 5.96 192,613 0.60 8.53 195
0.00 (0.67) 10.04 8.31+ 45,172 0.60+ 7.66+ 75
0.00 (0.32) 10.73 7.63 228,074 0.68+ 5.96+ 85
0.00 (0.66) 10.27 6.34 151,194 0.68 6.35 173
0.00 (0.81) 10.29 10.99 104,618 0.68 6.64 221
(0.01) (0.36) 10.01 3.76 9,037 0.66+ 6.54+ 98
$ 0.00 $(0.32) $10.24 7.27% $ 388,962 0.51%+ 6.31%+ 178%
0.00 (0.63) 9.85 6.15 478,451 0.50 6.38 293
0.00 (0.40) 9.89 0.78 455,583 0.51+ 6.36+ 73
0.00 (0.63) 10.21 15.96 442,091 0.50 6.47 41
(0.06) (0.62) 9.39 (3.58) 357,900 0.50 5.22 99
0.00 (0.96) 10.38 13.79 371,260 0.50 5.38 50
0.00 (0.73) 9.99 7.52 287,113 0.50+ 5.83+ 134
0.00 (0.31) 10.24 7.14 9,030 0.76+ 6.03+ 178
0.00 (0.61) 9.85 5.88 5,304 0.75 6.13 293
0.00 (0.40) 9.89 0.57 3,320 0.76+ 6.06+ 73
0.00 (0.56) 10.22 15.92 3,163 0.76+ 6.22+ 41
$ 0.00 $(0.29) $ 9.54 7.49% $ 293,006 0.50%+ 6.10%+ 84%
0.00 (0.58) 9.15 6.76 193,297 0.51 6.21 90
0.00 (0.75) 9.13 10.06 142,223 0.50 6.82 177
(0.08) (0.62) 8.99 4.92 99,497 0.50 6.95 146
0.00 (1.19) 9.18 5.64 97,522 0.50 6.00 95
0.00 (1.89) 9.81 14.47 65,349 0.51 6.06 161
0.00 (0.90) 10.31 13.61+ 47,908 0.60+ 6.75+ 521
0.00 (0.25) 9.54 5.56 127 0.75+ 5.84+ 84
$ 0.00 $(0.11) $10.06 1.69% $ 3,371 0.50%+ 6.71%+ 397%
</TABLE>
- --------
+ Annualized.
March , 1998 Prospectus 13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM U.S. GOV'T FUND
Institutional Class
9/30/97(*) $ 9.39 $0.31(+) $ 0.75 (+) $ 1.06 $(0.31) $ 0.00 $0.00 $0.00
3/31/97 9.96 0.79 (0.35) 0.44 (0.68) 0.00 0.00 (0.33)
3/31/96 9.85 0.83 0.66 1.49 (0.68) (0.04) (0.50) (0.16)
3/31/95 9.96 0.60 (0.09) 0.51 (0.60) (0.02) 0.00 0.00
3/31/94 11.36 0.62 (0.06) 0.56 (1.05) (0.04) (0.70) (0.17)
3/31/93 10.82 0.70 1.66 2.36 (0.70) 0.00 (1.12) 0.00
3/31/92(q) 10.00 0.64 0.85 1.49 (0.64) 0.00 (0.03) 0.00
Administrative Class
9/30/97(r)(*) 10.17 0.01(+) (0.03)(+) (0.02) (0.01) 0.00 0.00 0.00
REAL RETURN BOND FUND
Institutional Class
9/30/97(*) $ 9.93 $0.24(+) $ 0.02 (+) $ 0.26 $(0.24) $ 0.00 $ 0.00 $ 0.00
3/31/97(s) 9.92 0.11 (0.02) 0.09 (0.08) 0.00 0.00 0.00
FOREIGN BOND FUND
Institutional Class
9/30/97(*) $10.41 $0.23(+) $ 0.48 (+) $ 0.71 $(0.23) $ 0.00 $ 0.00 $ 0.00
3/31/97 10.50 0.80 1.00 1.80 (0.40) 0.00 (1.49) 0.00
3/31/96 9.38 0.96 1.03 1.99 (0.34) (0.25) (0.25) (0.03)
3/31/95 10.18 0.38 (0.57) (0.19) 0.00 0.00 0.00 0.00
3/31/94 10.34 0.55 0.27 0.82 (0.55) 0.00 (0.06) (0.37)
3/31/93(t) 10.00 0.16 0.34 0.50 (0.16) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 10.41 0.22 (+) 0.47 (+) 0.69 (0.21) 0.00 0.00 0.00
3/31/97(u) 10.54 0.59 (0.67) (0.08) (0.05) 0.00 0.00 0.00
GLOBAL BOND FUND
Institutional Class
9/30/97(*) $ 9.86 $0.24(+) $ 0.23 (+) $ 0.47 $(0.23) $ 0.00 $ 0.00 $ 0.00
3/31/97 10.05 0.70 (0.01) 0.69 (0.44) 0.00 (0.44) 0.00
3/31/96 9.87 0.45 0.72 1.17 (0.61) 0.00 (0.21) (0.17)
3/31/95 9.85 0.69 (0.14) 0.55 (0.29) (0.24) 0.00 0.00
3/31/94(v) 10.00 0.16 (0.15) 0.01 (0.16) 0.00 0.00 0.00
Administrative Class
9/30/97(*) 9.86 0.22(+) 0.24 (+) 0.46 (0.22) 0.00 0.00 0.00
3/31/97(w) 10.28 0.51 (0.23) 0.28 (0.26) 0.00 (0.44) 0.00
EMERGING MARKETS BOND FUND
Institutional Class
9/30/97(i)(*) $10.00 $0.11(+) $ 0.04 (+) $ 0.15 $(0.11) $ 0.00 $ 0.00 $ 0.00
INTERNATIONAL BOND FUND
Institutional Class
9/30/97(*) $ 7.79 $0.18 $ 0.45 $ 0.63 $(0.10) $ 0.00 $ 0.00 $ 0.00
3/31/97 8.04 0.84 0.42 1.26 (0.50) 0.00 (1.01) 0.00
3/31/96 7.44 0.63 0.49 1.12 (0.39) (0.13) 0.00 0.00
3/31/95 9.93 2.18 (2.41) (0.23) (2.26) 0.00 0.00 0.00
3/31/94 10.53 0.47 0.24 0.71 (0.96) 0.00 (0.35) 0.00
3/31/93 10.02 0.62 0.42 1.04 (0.48) 0.00 (0.05) 0.00
3/31/92 9.94 0.79 0.27 1.06 (0.78) 0.00 (0.20)++ 0.00
3/31/91 9.78 0.79 0.30 1.09 (0.83) 0.00 (0.10) 0.00
3/31/90(x) 10.00 0.15 (0.27) (0.12) (0.10) 0.00 0.00 0.00
STOCKSPLUS FUND
Institutional Class
9/30/97(*) $11.46 $1.16(+) $ 1.89 (+) $ 3.05 $(0.32) $ 0.00 $ 0.00 $ 0.00
3/31/97 11.16 1.27 0.82 2.09 (1.27) 0.00 (0.52) 0.00
3/31/96 10.48 0.91 2.48 3.39 (1.05) 0.00 (1.62) (0.04)
3/31/95 9.52 1.03 0.69 1.72 (0.76) 0.00 0.00 0.00
3/31/94(y) 10.00 0.34 0.10 0.44 (0.34) (0.01) (0.10) (0.47)
Administrative Class
9/30/97(*) 11.46 1.12(+) 1.89 (+) 3.01 (0.30) 0.00 0.00 0.00
3/31/97(z) 11.56 0.14 (0.09) 0.05 (0.15) 0.00 0.00 0.00
STRATEGIC BALANCED FUND
Institutional Class
9/30/97(*) $10.32 $0.83(+) $ 1.14 (+) $ 1.97 $(0.25) $ 0.00 $ 0.00 $ 0.00
3/31/97(aa) 10.00 0.85 0.31 1.16 (0.63) 0.00 (0.21) 0.00
</TABLE>
- --------
<TABLE>
<S> <C>
(q) From commencement of operations, (x) From commencement of operations,
July 1, 1991. December 13, 1989. Formerly the
PIMCO International Fund.
(r) From commencement of operations,
September 23, 1997. (y) From commencement of operations,
May 14, 1993.
(s) From commencement of operations,
January 29, 1997. (z) From commencement of operations,
January 7, 1997.
(t) From commencement of operations,
December 3, 1992. Formerly the (aa) From commencement of
PIMCO Foreign Fund. operations, June 28, 1996.
(u) From commencement of operations, ++ Gain distribution includes $0.14
January 28, 1997. per share characterized for tax
purposes as distributions from
(v) From commencement of operations, ordinary income.
November 23, 1993. Formerly the
PIMCO Global Fund. (*) Unaudited.
(w) From commencement of operations,
July 31, 1996. Formerly the
PIMCO Global Fund.
</TABLE>
14 PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET ASSETS RATIO OF RATIO OF NET
TAX BASIS VALUE END EXPENSES TO INVESTMENT PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE INCOME TO AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 $(0.31) $10.14 11.40% $ 34,856 0.50%+ 6.26%+ 150%
0.00 (1.01) 9.39 4.48 19,995 0.63 7.63 402
0.00 (1.38) 9.96 14.83 32,511 0.56 6.80 238
0.00 (0.62) 9.85 5.50 32,349 0.50 6.62 89
0.00 (1.96) 9.96 4.13 25,978 0.50 5.37 98
0.00 (1.82) 11.36 23.42 22,946 0.50 6.16 320
0.00 (0.67) 10.82 20.57+ 15,900 0.50+ 7.91+ 428
0.00 (0.01) 10.14 (0.18) 3,322 0.75+ 5.69+ 150
0.00 (0.24) 9.95 2.66% 6,073 0.51%+ 4.85%+ 341%
$0.00 $(0.08) $ 9.93 0.09 $ 5,638 0.51+ 6.54+ 160
$0.00 $(0.23) $10.89 6.88% $ 312,524 0.50%+ 4.39%+ 64%
0.00 (1.89) 10.41 17.69 234,880 0.50 7.88 984
0.00 (0.87) 10.50 21.80 258,493 0.52 5.83 1,234
(0.61) (0.61) 9.38 (1.85) 232,700 0.47 6.44 299
0.00 (0.98) 10.18 7.79 498,521 0.54 5.12 260
0.00 (0.16) 10.34 16.23+ 178,895 0.65+ 4.97+ 123
0.00 (0.21) 10.89 6.73 239 0.75+ 4.14+ 64
0.00 (0.05) 10.41 (0.72) 30 0.79+ 7.63+ 984
$0.00 $(0.23) $10.10 4.85% $ 269,620 0.55%+ 4.73%+ 119%
0.00 (0.88) 9.86 6.78 215,631 0.56 7.51 911
0.00 (0.99) 10.05 12.04 133,833 0.58 5.88 1,083
0.00 (0.53) 9.87 10.35 76,476 0.64 5.59 461
0.00 (0.16) 9.85 0.08 40,485 0.50+ 4.55+ 132
0.00 (0.22) 10.10 4.70 576 0.80+ 4.41+ 119
0.00 (0.70) 9.86 2.97 346 0.78+ 5.66+ 911
$0.00 $(0.11) $10.04 1.56% $ 3,453 0.85%+ 7.12%+ 312%
$0.00 $(0.10) $ 8.32 8.11% $ 769,452 0.51%+ 4.49%+ 129%
0.00 (1.51) 7.79 15.86 957,950 0.50 7.17 875
0.00 (0.52) 8.04 15.08 2,271,940 0.50 6.09 1,046
0.00 (2.26) 7.44 (1.27) 45,950 0.43 5.90 674
0.00 (1.31) 9.93 6.54 2,296,978 0.43 5.51 370
0.00 (0.53) 10.53 10.61 2,589,677 0.46 6.67 301
0.00 (0.98) 10.02 10.97 1,314,661 0.51 8.24 201
0.00 (0.93) 9.94 11.55 609,660 0.55 8.23 202
0.00 (0.10) 9.78 (4.18)+ 407,210 0.75+ 7.94+ 49
$0.00 $(0.32) $14.19 26.68% $ 378,234 0.65%+ 17.21%+ 14%
0.00 (1.79) 11.46 19.44 235,829 0.65 11.78 47
0.00 (2.71) 11.16 34.07 151,869 0.70 15.23 102
0.00 (0.76) 10.48 18.64 46,498 0.50 11.89 177
0.00 (0.92) 9.52 1.55 14,330 0.50+ 4.00+ 33
0.00 (0.30) 14.17 26.20 1,135 0.90+ 16.63+ 14
0.00 (0.15) 11.46 0.34 682 0.95+ 4.83+ 47
$0.00 $(0.25) $12.04 19.09% $ 41,566 0.65%+ 14.29%+ 9%
0.00 (0.84) 10.32 11.83 10,360 0.90+ 9.72+ 95
</TABLE>
+ Annualized.
March , 1998 Prospectus 15
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described below. There can be no assurance that the investment objective of
any Fund will be achieved. For temporary, defensive or emergency purposes, a
Fund may invest without limit in U.S. debt securities, including short-term
money market securities, when in the opinion of the Adviser it is appropriate
to do so. It is impossible to predict for how long such alternative strategies
will be utilized. Because the market value of each Fund's investments will
change, the net asset value per share of each Fund (except the PIMCO Money
Market Fund) also will vary. Specific portfolio securities eligible for
purchase by the Funds, investment techniques that may be used by the Funds,
and the risks associated with these securities and techniques are described
more fully under "Characteristics and Risks of Securities and Investment
Techniques" in this Prospectus and "Investment Objectives and Policies" in the
Statement of Additional Information.
FIXED INCOME FUNDS
With the exception of the PIMCO StocksPLUS, StocksPLUS Short Strategy and
Strategic Balanced Funds, each remaining Fund (together, the "Fixed Income
Funds") differs from the others primarily in the length of the Fund's duration
or the proportion of its investments in certain types of fixed income
securities. For a discussion of the concept of duration, see "Appendix A--
Description of Duration."
The investment objective of the PIMCO Money Market Fund and PIMCO Short-Term
Fund is to seek to obtain maximum current income consistent with preservation
of capital and daily liquidity. The PIMCO Money Market Fund also attempts to
maintain a stable net asset value of $1.00 per share, although there can be no
assurance that it will be successful in doing so. The investment objective of
the PIMCO Municipal Bond Fund is to seek high current income exempt from
federal income tax, consistent with preservation of capital. The investment
objective of the PIMCO Real Return Bond 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 "Total Return
and Real Return," below. The investment objective of the PIMCO Global Bond
Fund II is to seek maximum total return, consistent with the preservation of
capital. Each of the remaining Fixed Income Funds seeks to maximize total
return, consistent with preservation of capital and prudent investment
management.
In selecting securities for each Fixed Income 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 each 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.
Each of the Fixed Income Funds will invest at least 65% of its assets in the
following types of securities, which, unless specifically provided otherwise
in the descriptions of the Funds that follows, may be issued by domestic or
foreign entities and denominated in U.S. dollars or foreign currencies:
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"); corporate debt securities,
including convertible securities and corporate commercial paper; mortgage-
backed and other asset-backed securities; inflation-indexed bonds issued by
both governments and corporations; structured notes, including hybrid or
"indexed" securities, and loan participations; bank certificates of deposit,
fixed time deposits and bankers' acceptances; repurchase agreements and
reverse repurchase agreements; debt securities issued by states or local
governments and their agencies, authorities and other instrumentalities;
obligations of 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
16 PIMCO Funds: Pacific Investment Management Series
<PAGE>
that vary according to changes in relative values of currencies. Each of the
Fixed Income Funds may hold different percentages of its assets in these
various types of securities, and each Fund, except the PIMCO Money Market Fund
and PIMCO Municipal Bond Fund, may invest all of its assets in derivative
instruments or in mortgage- or asset-backed securities. Each of the Fixed
Income Funds, except the PIMCO Money Market Fund, may adhere to its investment
policy by entering into a series of purchase and sale contracts or utilizing
other investment techniques by which it may obtain market exposure to the
securities in which it primarily invests.
In addition, each of the Fixed Income Funds may lend its portfolio
securities to brokers, dealers and other financial institutions in order to
earn income. Each of the Fixed Income Funds may purchase and sell options and
futures subject to the limits discussed below, engage in credit spread trades
and enter into forward foreign currency contracts.
The compositions of the Fixed Income Funds differ as follows:
PIMCO MONEY MARKET FUND seeks maximum current income consistent with the
preservation of capital and daily liquidity. It attempts to achieve this
objective by investing at least 95% of its total assets, measured at the time
of investment, in a diversified portfolio of the highest quality money market
securities. The Fund may also invest up to 5% of its total assets, measured at
the time of investment, in money market securities that are in the second-
highest rating category for short-term obligations. The Fund's investments in
securities will be limited to U.S. dollar-denominated securities that mature
in 397 days or less from the date of purchase. The Fund may invest in the
following: obligations of the U.S. Government (including its agencies and
instrumentalities); short-term corporate debt securities of domestic and
foreign corporations; obligations of domestic and foreign commercial banks,
savings banks, and savings and loan associations; and commercial paper. The
Fund may invest more than 25% of its total assets in securities or obligations
issued by U.S. banks. The dollar-weighted average portfolio maturity of the
Fund will not exceed 90 days.
The PIMCO Money Market Fund may invest only in U.S. dollar-denominated money
market instruments that present minimal credit risk and, with respect to at
least 95% of its total assets, measured at the time of investment, that are of
the highest quality. The Adviser will make a determination as to whether a
security presents minimal credit risk under procedures adopted by the Board of
Trustees. A money market instrument will be considered to be of the highest
quality (1) if rated in the highest rating category (i) by any two nationally
recognized statistical rating organizations ("NRSROs") (e.g., Aaa or Prime-1
by Moody's, AAA or A-1 by S&P, or, (ii) if rated by only one NRSRO, by that
NRSRO, and whose acquisition is approved or ratified by the Board of Trustees;
(2) if unrated but issued by an issuer that has short-term debt obligations of
comparable maturity, priority, and security, and that are rated in the highest
rating category by (i) any two NRSROs or, (ii) if rated by only one NRSRO, by
that NRSRO, and whose acquisition is approved or ratified by the Board of
Trustees; or (3) an unrated security that is of comparable quality to a
security rated in the highest rating category as determined by the Adviser and
whose acquisition is approved or ratified by the Board of Trustees. With
respect to no more than 5% of its total assets, measured at the time of
investment, the Fund may also invest in money market instruments that are in
the second-highest rating category for short-term debt obligations (e.g.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered to be of the
highest quality, as applied to instruments in the second-highest rating
category. See "Appendix B--Description of Securities Ratings" for a
description of Moody's and S&P's ratings applicable to fixed income
securities.
The PIMCO Money Market Fund may not invest more than 5% of its total assets,
measured at the time of investment, in securities of any one issuer that are
of the highest quality, except that (1) the Fund may invest more than 5% of
its total assets in the securities of a single issuer if rated in the highest
rating category for a period of up to three business days after purchase,
provided that the Fund may not make more than one investment at a time in
accordance
March , 1998 Prospectus 17
<PAGE>
with this exception, and (2) this limitation shall not apply to U.S.
Government securities and repurchase agreements with respect thereto. The Fund
may not invest more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are
in the second-highest rating category, except that this limitation shall not
apply to U.S. Government securities. In the event that an instrument acquired
by the Fund is downgraded or otherwise ceases to be of the quality that is
required for securities purchased by the Fund, the Adviser, under procedures
approved by the Board of Trustees (or the Board of Trustees itself if the
Adviser becomes aware an unrated security is downgraded below high quality and
the Adviser does not dispose of the security or such security does not mature
within five business days) shall promptly reassess whether such security
presents minimal credit risk and determine whether to retain the instrument.
PIMCO SHORT-TERM FUND invests in a diversified portfolio of fixed income
securities of varying maturities. The average portfolio duration of this Fund
will normally not exceed one year. The Fund may invest up to 10% of its assets
in fixed income securities that are rated below investment grade (rated below
Baa by Moody's or BBB by S&P) but rated B or higher by Moody's or S&P (or, if
unrated, determined by the Adviser to be of comparable quality). Securities
rated below investment grade may be referred to colloquially as "junk bonds."
For information on the risks associated with investments in securities rated
below investment grade, see "Appendix B--Description of Securities Ratings."
The Fund may invest up to 5% of its assets in securities denominated in
foreign currencies, and may invest beyond this limit in U.S. dollar-
denominated securities of foreign issuers.
PIMCO LOW DURATION FUND invests in a diversified portfolio of fixed income
securities of varying maturities. The average portfolio duration of this Fund
will normally vary within a one- to three-year time frame based on the
Adviser's forecast for interest rates. The Fund may invest up to 10% of its
assets in fixed income securities that are rated below investment grade but
rated B or higher by Moody's or S&P (or, if unrated, determined by the Adviser
to be of comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Appendix B--
Description of Securities Ratings." The Fund may invest up to 20% of its
assets in securities denominated in foreign currencies, and may invest beyond
this limit in U.S. dollar-denominated securities of foreign issuers. The total
rate of return for this Fund is expected to exhibit less volatility than that
of the PIMCO Moderate Duration Fund or the PIMCO Total Return Fund because its
duration will be shorter.
PIMCO LOW DURATION FUND II has the same policies as the PIMCO Low Duration
Fund, except that its investments in fixed income securities are limited to
those of domestic (U.S.) issuers that are rated at least A by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality).
PIMCO LOW DURATION FUND III has the same policies as the PIMCO Low Duration
Fund, except that it limits its investments with respect to certain socially
sensitive issues. As a matter of non-fundamental policy, the Fund will not
invest in the securities of any issuer determined by the Adviser to be engaged
principally in the provision of healthcare services, the manufacture of
alcoholic beverages, tobacco products, pharmaceuticals or military equipment,
or the operation of gambling casinos. The Fund will also avoid, to the extent
possible on the basis of information available to the Adviser, the purchase of
securities of issuers engaged in the production or trade of pornographic
materials. An issuer will be deemed to be principally engaged in an activity
if it derives more than 10% of its gross revenues from such activities.
PIMCO MODERATE DURATION FUND invests in a diversified portfolio of fixed
income securities of varying maturities. The average portfolio duration of
this Fund will normally vary within a two- to five-year time frame based on
the Adviser's forecast for interest rates. The Fund may invest up to 10% of
its assets in fixed income securities that are rated below investment grade
but rated B or higher by Moody's or S&P (or, if unrated, determined by the
Adviser to be of
18 PIMCO Funds: Pacific Investment Management Series
<PAGE>
comparable quality). For information on the risks associated with investments
in securities rated below investment grade, see "Appendix B--Description of
Securities Ratings." The Fund may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. The total rate of return for
this Fund is expected to exhibit less volatility than that of the PIMCO Total
Return Fund because its duration will normally be shorter. However, the total
rate of return for this Fund is expected to exhibit more volatility than that
of the PIMCO Low Duration Fund because its duration will normally be longer.
PIMCO HIGH YIELD FUND invests under normal circumstances at least 65% of its
assets in a diversified portfolio of fixed income securities rated lower than
Baa by Moody's or lower than BBB by S&P but rated at least B by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality). Such
securities are colloquially referred to as "junk bonds." The remainder of the
Fund's assets may be invested in investment grade fixed income securities
(i.e., securities rated at least Baa by Moody's or BBB by S&P, or, if unrated,
deemed by the Adviser to be of comparable quality). The average portfolio
duration of this Fund will normally vary within a two- to six-year time frame
depending on the Adviser's view of the potential for total return offered by a
particular duration strategy. The Fund may invest in securities of foreign
issuers, but only those that are U.S. dollar-denominated. The Fund may also
engage in hedging strategies involving equity options.
Investments in high yield securities, while generally providing greater
potential opportunity for capital appreciation and higher yields than
investments in higher rated securities, also entail greater risk, including
the possibility of default or bankruptcy of the issuer of such securities.
Risk of default or bankruptcy may be greater in periods of economic
uncertainty or recession, as the issuers of high yield securities may be less
able to withstand general economic downturns. The Adviser seeks to reduce risk
through diversification, credit analysis and attention to current developments
and trends in both the economy and financial markets. The value of all fixed
income securities, including those held by the Fund, can be expected to change
inversely with interest rates. For a further discussion of the special risks
of investing in lower rated securities, see "Characteristics and Risks of
Securities and Investment Techniques--High Yield Securities ("Junk Bonds")."
PIMCO TOTAL RETURN FUND invests under normal circumstances at least 65% of
its assets in a diversified portfolio of fixed income securities of varying
maturities. The average portfolio duration of this Fund will normally vary
within a three- to six-year time frame based on the Adviser's forecast for
interest rates. The Fund may invest up to 10% of its assets in fixed income
securities that are rated below investment grade but rated B or higher by
Moody's or S&P (or, if unrated, determined by the Adviser to be of comparable
quality). For information on the risks associated with investments in
securities rated below investment grade, see "Appendix B--Description of
Securities Ratings." The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers. Portfolio holdings
will be concentrated in areas of the bond market (based on quality, sector,
coupon or maturity) which the Adviser believes to be relatively undervalued.
The total rate of return for this Fund is expected to exhibit less volatility
than that of the PIMCO Long-Term U.S. Government Fund because its duration
will normally be shorter.
PIMCO TOTAL RETURN FUND II has the same policies as the PIMCO Total Return
Fund, except that its investments in fixed income securities are limited to
those of domestic (U.S.) issuers that are rated at least Baa by Moody's or BBB
by S&P (or, if unrated, determined by the Adviser to be of comparable
quality).
PIMCO TOTAL RETURN FUND III has the same policies as the PIMCO Total Return
Fund, except that it limits its investments with respect to certain socially
sensitive issues in the same manner as the PIMCO Low Duration Fund III.
March , 1998 Prospectus 19
<PAGE>
PIMCO COMMERCIAL MORTGAGE SECURITIES FUND invests at least 65% of its assets
in commercial mortgage-backed securities rated at least Baa by Moody's or BBB
by S&P (or, if unrated, determined by the Adviser to be of comparable
quality). The Fund also may invest up to 35% of its assets in lower-rated
securities (but rated at least B, or, if unrated, determined by the Adviser to
be of comparable quality) if such securities are considered by the Adviser to
have attractive investment characteristics. For information on the risks
associated with investments in securities rated below investment grade, see
"Appendix B--Description of Securities Ratings." The average portfolio
duration of this Fund will normally vary within a three- to eight-year time
frame depending on the Adviser's view of the potential for total return
offered by a particular duration strategy. The Fund may invest in securities
of foreign issuers, but only those that are U.S. dollar-denominated.
PIMCO LOW DURATION MORTGAGE FUND invests under normal circumstances at least
80% of its assets in a diversified portfolio of mortgage-related securities.
The Fund will not acquire a security if, as a result, more than 10% of the
Fund's total assets would be invested in securities rated below Aaa by Moody's
or AAA by S&P, subject to a minimum rating of Baa by Moody's or BBB by S&P
(or, if unrated, determined by the Adviser to be of comparable quality). The
average portfolio duration of this Fund will normally vary within a one- to
three-year time frame based on the Adviser's view of the potential for total
return offered by a particular duration strategy. The Fund may invest without
limit in U.S. dollar-denominated securities of foreign issuers. The total rate
of return and share price for this Fund are expected to exhibit less
volatility than that of the PIMCO Total Return Mortgage Fund because its
duration will be shorter.
PIMCO TOTAL RETURN MORTGAGE FUND has the same policies as the PIMCO Low
Duration Mortgage Fund, except that its average portfolio duration will
normally vary approximately within a range of plus or minus one and one-half
years of the average duration of the Lehman Brothers Mortgage-Backed
Securities Index, which, as of May 31, 1997, had an average duration of
approximately four years.
PIMCO LONG-TERM U.S. GOVERNMENT FUND invests in a diversified portfolio of
primarily U.S. Government securities, which may be represented by futures
contracts (including related options) with respect to such securities, and
options on such securities, when the Adviser deems it appropriate to do so.
The Fund will have a minimum average portfolio duration of eight years. For
point of reference, the dollar-weighted average portfolio maturity of the Fund
is normally expected to be more than ten years. The total rate of return is
expected to exhibit more volatility than that of the other Fixed Income Funds
due to the greater investment risk normally associated with longer duration
investments. The PIMCO Long-Term U.S. Government Fund's investments in fixed
income securities are limited to those of U.S. dollar-denominated securities
of domestic and foreign issuers that are rated at least A by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality). In
addition, the Fund will not acquire a security if, as a result, more than 10%
of the Fund's total assets would be invested in securities rated below Aa by
Moody's or below AA by S&P, or if more than 25% of the Fund's total assets
would be invested in securities rated Aa by Moody's or AA by S&P.
PIMCO MUNICIPAL BOND FUND seeks high current income exempt from federal
income tax, consistent with preservation of capital, by investing in debt
securities whose interest is, in the opinion of bond counsel for the issuer at
the time of issuance, exempt from federal income tax ("Municipal Bonds").
Municipal Bonds generally are issued by states and local governments and their
agencies, authorities and other instrumentalities. It is a policy of the Fund
that, under normal market conditions, at least 80% of its net assets will be
invested in Municipal Bonds. The Fund may invest up to 20% of net assets in
U.S. Government securities, money market instruments and/or "private activity"
bonds. Under normal circumstances, the average portfolio duration of the PIMCO
Municipal Bond Fund will vary within a three to ten-year time frame, based on
the Adviser's forecast for interest rates.
20 PIMCO Funds: Pacific Investment Management Series
<PAGE>
The Fund may invest up to 10% of its net assets, under normal market
conditions, in Municipal Bonds or "private activity" bonds which are rated
below Baa by Moody's or BBB by S&P but which are rated at least Ba by Moody's
or BB by S&P (or, if unrated, determined by the Adviser to be of comparable
quality). For information on the risks associated with investments in
securities rated below investment grade, see "Appendix B--Description of
Securities Ratings."
PIMCO REAL RETURN BOND FUND invests under normal circumstances at least 65%
of its total assets in inflation-indexed bonds issued by U.S. and foreign
governments, their agencies or instrumentalities. 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. The Fund may invest up to 35% of its assets in
other types of fixed income instruments, including securities denominated in
foreign currencies, (and the Fund may also invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers).
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 non-inflation related 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
the Fund and in inflation-indexed bonds.
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. See "Appendix A--
Description of Duration." Because of the unique features of inflation-indexed
bonds, the Adviser utilizes a modified form of duration for the PIMCO Real
Return Bond Fund ("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 PIMCO Real
Return Bond 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.
PIMCO FOREIGN BOND FUND invests in a portfolio of fixed income securities
primarily denominated in major foreign currencies and baskets of foreign
currencies (such as the European Currency Unit, or "ECU"). The Adviser will
invest the assets of the Fund in a number of international bond markets so
that, under normal circumstances, the Fund will invest at least 85% of its
assets in securities of issuers located outside the United States, representing
at least three foreign countries, which may be represented by futures contracts
(including related options) with respect to such securities, and options on
such securities, when the Adviser deems it appropriate to do so. The Fund may
invest up to 10% of its assets in fixed income securities that are rated below
investment grade but rated B or higher by Moody's or S&P (or, if unrated,
determined by the Adviser to be of comparable quality). For information on the
risks associated with investments in securities rated below investment grade,
see "Appendix B--Description of Securities Ratings." The average portfolio
duration of this Fund will normally vary within a three- to six-year time
frame.
PIMCO GLOBAL BOND FUND invests in a portfolio of fixed income securities
denominated in major foreign currencies, baskets of foreign currencies (such as
the ECU), and the U.S. dollar. Under normal circumstances, at least 65% of its
assets will be invested in fixed income securities of issuers located in at
least three countries (one of which may be the United States), which may be
represented by futures contracts (including related options) with respect to
such securities, and options on such securities, when the Adviser deems it
appropriate to do so. Depending on the Adviser's current
March , 1998 Prospectus 21
<PAGE>
opinion as to the proper allocation of assets among domestic and foreign
issuers, investments in the securities of issuers located outside the United
States will normally vary between 25% and 75% of the Fund's assets. The Fund
may invest up to 10% of its assets in fixed income securities that are rated
below investment grade but rated B or higher by Moody's or S&P (or, if
unrated, determined by the Adviser to be of comparable quality). For
information on the risks associated with investments in securities rated below
investment grade, see "Appendix B--Description of Securities Ratings." The
average portfolio duration of this Fund will normally vary within a three- to
six-year time frame.
PIMCO GLOBAL BOND FUND II has the same policies as the PIMCO Global Bond
Fund, except as set forth below. The PIMCO Global Bond Fund II expects to
hedge its foreign currency exposure so that generally no more than 25% of the
Fund's total net assets will be invested in unhedged foreign currency-
denominated securities. The PIMCO Global Bond Fund II may not borrow in excess
of 10% of the value of its total assets and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage), or for extraordinary or emergency purposes. The PIMCO Global Bond
Fund II may only engage in short sales that are "against the box," and may not
loan its portfolio securities if their market value exceeds 25% of the total
assets of the Fund. In addition, the PIMCO Global Bond Fund II is subject to
different fundamental and non-fundamental investment restrictions than the
PIMCO Global Bond Fund. See "Investment Restrictions" in this Prospectus and
in the Statement of Additional Information.
The PIMCO Foreign Bond Fund differs from the PIMCO Global Bond and Global
Bond II Funds primarily in the extent to which assets are invested in the
securities of issuers located outside the United States. The Adviser will
select these Funds' foreign country and currency compositions based on an
evaluation of relative interest rates, exchange rates, monetary and fiscal
policies, trade and current account balances, and any other specific factors
the Adviser believes to be relevant.
PIMCO INTERNATIONAL BOND FUND invests in a portfolio of fixed income
securities denominated in major foreign currencies, baskets of foreign
currencies, and the U.S. dollar. The PIMCO International Bond Fund is
available only to private account clients of PIMCO. The Adviser will invest
the assets of the Fund in a number of international bond markets so that,
under normal conditions, the Fund will invest at least 65% of its assets in
fixed income securities of foreign issuers representing at least three foreign
countries or currencies, which may be represented by futures contracts
(including related options) with respect to such securities, and options on
such securities, when the Adviser deems it appropriate to do so. The PIMCO
International Bond Fund will invest only in investment grade securities, i.e.,
in securities rated at least Baa by Moody's or BBB by S&P (or, if unrated,
deemed by the Adviser to be of comparable quality). The average portfolio
duration of this Fund will vary based on the strategy currently being used by
the Adviser in managing the assets of the Fund within the overall PIMCO
private account management program, but is normally not expected to exceed
eight years. The Adviser will select the Fund's foreign country and currency
composition based on its evaluation of relative interest rates, inflation
rates, exchange rates, monetary and fiscal policies, trade and current account
balances, and any other specific factors the Adviser believes to be relevant.
PIMCO EMERGING MARKETS BOND FUND invests in a portfolio of fixed income
securities denominated in foreign currencies and the U.S. dollar. Under normal
market conditions, the Fund will invest at least 80% of its assets in fixed
income securities of issuers that economically are tied to countries with
emerging securities markets. The Fund may invest up to 20% of its assets in
other types of fixed income instruments, including securities of issuers
located in, or securities denominated in currencies of, countries with
developed foreign securities markets. The Fund also may invest up to 10% of
its assets in shares of investment companies that invest primarily in emerging
market debt securities. The average portfolio duration of the Fund will vary
based on the Adviser's view of the potential for total return offered by a
particular duration strategy and, under normal market conditions, is not
expected to exceed eight years.
22 PIMCO Funds: Pacific Investment Management Series
<PAGE>
The Adviser has broad discretion to identify and invest in countries that it
considers to qualify as emerging securities markets. However, the Adviser
generally considers an emerging securities market to be one located in any
country that is defined as an emerging or developing economy by any of the
following: the International Bank for Reconstruction and Development (i.e.,
the World Bank), including its various offshoots, such as the International
Finance Corporation, or the United Nations or its authorities. The Fund's
investments in emerging market fixed income securities may be represented by
futures contracts (including related options) with respect to such securities,
options on such securities, equity securities (including common stocks) upon
the conversion of convertible securities, or securities the return on which is
derived primarily from emerging securities markets, when the Adviser deems it
appropriate to do so.
The Fund emphasizes countries with relatively low gross national product per
capita and with the potential for rapid economic growth. The Adviser will
select the Fund's country and currency composition based on its evaluation of
relative interest rates, inflation rates, exchange rates, monetary and fiscal
policies, trade and current account balances, and any other specific factors
the Adviser believes to be relevant. The Fund likely will concentrate its
investments in Asia, Africa, the Middle East, Latin America and the developing
countries of Europe. Accordingly, the Fund will be particularly susceptible to
the effects of political and economic developments in these regions. This
effect may be exacerbated by a relative scarcity of issuers in certain of
these markets, which may result in the Fund being highly concentrated in a
small number of issuers. For a further discussion of the special risks of
investing in foreign and emerging market countries, see "Characteristics and
Risks of Securities and Investment Techniques--Foreign Securities."
The Fund may invest substantially all of its assets in securities rated
below investment grade but rated B or higher by Moody's or S&P (or, if
unrated, determined by the Adviser to be of comparable quality). Such
securities are colloquially referred to as "junk bonds." While these
securities generally provide greater potential opportunity for capital
appreciation and higher yields than investments in higher rated securities,
they also entail greater risk, including the possibility of default or
bankruptcy of the issuer of the securities. Risk of default or bankruptcy may
be greater in periods of economic uncertainty or recession, as the issuers may
be less able to withstand general economic downturns affecting the regions in
which the Fund invests. The Adviser seeks to reduce risk through
diversification, credit analysis and attention to current developments and
trends in emerging market economies and markets. The value of most fixed
income securities, including those held by the Fund, can be expected to change
inversely with interest rates. For a further discussion of the special risks
of investing in lower rated securities, see "Characteristics and Risks of
Securities and Investment Techniques--High Yield Securities ("Junk Bonds")."
PIMCO EMERGING MARKETS BOND FUND II has the same policies as the PIMCO
Emerging Markets Bond Fund, except that it is available only to private
account clients of PIMCO.
Each of the PIMCO Real Return Bond, Foreign Bond, Global Bond, Global Bond
II, International Bond, Emerging Markets Bond and Emerging Markets Bond II
Funds will normally invest at least 80% of its total assets in "bonds." For
this purpose, each of these Funds 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 that Fund's name. The use of
this name is not meant to restrict a Fund's investment to the narrow category
of debt securities that are formally called "bonds."
As a non-fundamental, operating policy, the Adviser intends to use foreign
currency-related derivative instruments (currency futures and related options,
currency options, forward contracts and swap agreements) in an effort to hedge
foreign currency risk with respect to at least 75% of the assets of the Fixed
Income Funds (other than the PIMCO Global Bond, Emerging Markets Bond and
Emerging Markets Bond II Funds) denominated in currencies other than the U.S.
dollar. There can be no assurance that the Adviser will be successful in doing
so. The active use of currency derivatives involves transaction costs which
may adversely effect yield and return.
March , 1998 Prospectus 23
<PAGE>
The PIMCO Real Return Bond, Commercial Mortgage Securities, Foreign Bond,
Global Bond, Global Bond II, International Bond, Emerging Markets Bond and
Emerging Markets Bond II Funds are "non-diversified" for purposes of the 1940
Act, meaning that they may invest a greater percentage of their assets in the
securities of one issuer than the other Funds. The Funds are still, however,
subject to diversification requirements imposed by the Internal Revenue Code
of 1986, as amended, which means that as of the end of each calendar quarter,
a Fund may have no more than 25% of its assets invested in the securities of a
single issuer, and may, with respect to 50% of its assets, have no more than
5% of its assets invested in the securities of a single issuer. As "non-
diversified" portfolios, these Funds may be more susceptible to risks
associated with a single economic, political or regulatory occurrence than a
diversified portfolio might be.
EQUITY FUNDS
The Equity Funds are the PIMCO StocksPLUS Fund and the PIMCO StocksPLUS
Short Strategy Fund. The investment objective of PIMCO StocksPLUS Fund is to
seek to achieve a total return which exceeds the total return performance of
the S&P 500. The investment objective of the PIMCO StocksPLUS Short Strategy
Fund is to seek total return through the implementation of short investment
positions on the S&P 500.
Each of the Equity Funds invests in common stocks, options, futures, options
on futures and swaps consistent with its portfolio management strategy as set
forth below. Assets not invested in equity securities may be invested in
securities eligible for purchase by the Fixed Income Funds. Each of the Equity
Funds may invest up to 10% of its assets in fixed income securities that are
below "investment grade," i.e., rated below Baa by Moody's or BBB by S&P, but
at least B (or, if unrated, determined by the Adviser to be of comparable
quality). In addition, each of the Equity Funds may lend its portfolio
securities to brokers, dealers and other financial institutions in order to
earn income. Each of the Equity Funds may invest all of its assets in
derivative instruments, as described below and under "Characteristics of
Securities and Investment Techniques--Derivative Instruments." Each of the
Equity Funds may invest up to 20% of its assets in securities of foreign
issuers, may purchase and sell options and futures on foreign currencies, and
may enter into forward currency contracts.
The Equity Funds differ in composition or strategy as follows:
PIMCO STOCKSPLUS FUND StocksPLUS is the name of a proprietary portfolio
management strategy which utilizes S&P 500 derivatives in addition to or in
place of S&P 500 stocks in an attempt to equal or exceed the performance of
the S&P 500. The Adviser expects that under normal market conditions, the Fund
will invest substantially all of its assets in S&P 500 derivatives, backed by
a portfolio of fixed income securities. The Adviser will actively manage the
fixed income assets serving as cover for derivatives, as well as any other
fixed income assets held by the Fund, with a view toward enhancing the Fund's
total return investment performance, subject to an overall portfolio duration
which is normally not expected to exceed one year. See "Appendix A--
Description of Duration."
The S&P 500 is composed of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. S&P chooses the stocks to be included
in the S&P 500 solely on a statistical basis. The weightings of stocks in the
index are based on each stock's relative total market value, that is, its
market price per share times the number of shares outstanding. Stocks
represented currently in the S&P 500 represent approximately two-thirds of the
total market value of all U.S. common stocks. The Fund is neither sponsored by
nor affiliated with S&P. The Fund will seek to remain invested in S&P 500
derivatives or S&P 500 stocks even when the S&P 500 is declining.
When S&P 500 derivatives appear to be overvalued relative to the S&P 500,
the Fund may invest up to 100% of its assets in a "basket" of S&P 500 stocks.
The composition of this basket will be determined by standard statistical
24 PIMCO Funds: Pacific Investment Management Series
<PAGE>
techniques that analyze the historical correlation between the return of every
stock currently in the S&P 500 and the return on the S&P 500 itself. The
Adviser may employ fundamental stock analysis only to choose among stocks that
have already satisfied the statistical correlation tests. Stocks chosen for
the Fund are not limited to those with any particular weighting in the S&P
500.
Positions in S&P 500 futures and options on futures will be entered into
only to the extent they constitute permissible positions for the Fund
according to applicable rules of the Commodity Futures Trading Commission
("CFTC"). From time to time, the Adviser may be constrained in its ability to
use S&P 500 derivatives either by requirements of the Internal Revenue Code or
by an unanticipated inability to close out positions when it would be most
advantageous to do so. A large number of investors use S&P 500 derivatives for
both hedging and speculative purposes, and although generally this helps
guarantee a liquid market in those instruments, at times liquidity may be
limited. For more information about S&P 500 derivatives, see "Characteristics
and Risks of Securities and Investment Techniques--Derivative Instruments."
PIMCO STOCKSPLUS SHORT STRATEGY FUND invests primarily in S&P 500 short
positions such that the Fund's net asset value is generally expected to vary
inversely to the value of the S&P 500. The Fund is designed for investors
seeking to take advantage of declines in the value of the S&P 500, or
investors wishing to hedge existing long equity positions. The Fund will
generally realize gains only when the price of the S&P 500 is declining. When
the S&P 500 is rising, the Fund will generally incur a loss.
The Fund will maintain short positions through the use of a combination of
S&P 500 derivatives, including options, futures and swap agreements. All S&P
500 derivatives 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, or through the maintenance of
offsetting positions. It is anticipated that the Fund will generally remain
fully invested in S&P 500 short positions at all times, even during periods
when the S&P 500 is rising. However, the Fund may purchase call options on S&P
500 futures contracts from time to time in an effort to limit the total
potential decline in the Fund's net asset value. There can be no assurance
that the use of such call options would be effective in limiting the potential
decline in net asset value of the Fund.
The Adviser will actively manage the fixed income portion of the Fund's
investment portfolio that is used as coverage for S&P 500 derivatives in an
attempt to provide incremental returns. Thus, there will not be a perfect
inverse correlation between the performance of the S&P 500 and the performance
of the Fund. A perfect inverse correlation would exist if the net asset value
of the Fund, including the value of its dividend and capital gains
distributions, increased in exact proportion to decreases in the S&P 500 (or
decreased in exact proportion to increases in the S&P 500). Rather, because of
the Adviser's management of the fixed income securities that are held by the
Fund as cover for the Fund's short positions, it is expected that, if the
value of the S&P 500 were to decrease by 10%, for example, the amount by which
the Fund's net asset value would increase would be an amount slightly in
excess of 10%. Conversely, an increase in the S&P 500 of 10% would result in a
loss to the Fund of slightly less than this amount. There can be no assurance
that the use of such active fixed income management techniques will produce
the intended results.
BALANCED FUND
PIMCO STRATEGIC BALANCED FUND has as its investment objective the
maximization of total return, consistent with preservation of capital and
prudent investment management. In seeking to achieve this objective, the Fund
invests in the securities eligible for purchase by the PIMCO StocksPLUS Fund
and the PIMCO Total Return Fund. The percentage of the Fund's assets allocated
to equity or fixed income exposure will vary in accordance with an asset
allocation
March , 1998 Prospectus 25
<PAGE>
methodology developed by the Adviser. The methodology builds upon the
Adviser's long-standing process of economic forecasting of business cycle
stages by applying to this process a disciplined asset allocation model which
employs certain statistical variance techniques. Depending on the outcome of
this asset allocation methodology, the Fund's equity exposure will vary
between 45% and 75% of its total assets, and its fixed income exposure will
vary between 25% and 55%. There can be no assurance that the Adviser's asset
allocation methodology will be successful.
TOTAL RETURN AND REAL RETURN
The "total return" sought by certain of the Funds will consist of interest
and dividends from underlying securities, 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, the total
return obtained by a portfolio investing primarily in fixed income securities
is not expected to be as great as that obtained by a portfolio that invests
primarily in equity securities. At the same time, the market risk and price
volatility of a fixed income portfolio is expected to be less than that of an
equity portfolio, so that a fixed income portfolio is generally considered to
be a more conservative investment. The change in market value of fixed income
securities (and therefore their capital appreciation or depreciation) is
largely a function of changes in the current level of interest rates.
Generally, when interest rates are falling, a portfolio with a shorter
duration will not generate as high a level of total return as a portfolio with
a longer duration. Conversely, when interest rates are rising, a portfolio
with a shorter duration will generally outperform longer duration portfolios.
When interest rates are flat, shorter duration portfolios generally will not
generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates,
which is commonly the case). With respect to the composition of any fixed
income portfolio, the longer the duration of the portfolio, the greater the
anticipated potential for total return, with, however, greater attendant
market risk and price volatility than for a portfolio with a shorter duration.
The market value of fixed income securities denominated in currencies other
than the U.S. dollar also may be affected by movements in foreign currency
exchange rates.
The change in market value of equity securities (and therefore their capital
appreciation or depreciation) may depend upon a number of factors, including:
conditions in the securities markets, the business success of the security's
issuer, changing interest rates, real or perceived economic and competitive
industry conditions, and foreign currency exchange rates. Historically, the
total return performance of equity-oriented portfolios has generally been
greater over the long term than fixed income portfolios. However, the market
risk and price volatility of an equity portfolio is generally greater than
that of a fixed income portfolio, and is generally considered to be a more
aggressive investment.
"Real Return," or "Inflation Adjusted Return," as referenced in the name and
investment objective of the PIMCO Real Return Bond 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% increase in purchasing power 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.
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
26 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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.
INVESTMENT RESTRICTIONS
Each Fund's investment objective (except the PIMCO Global Fund II) as set
forth under "Investment Objectives and Policies," and the investment
restrictions set forth below are fundamental policies of the Fund and may not
be changed with respect to a Fund without shareholder approval by vote of a
majority of the outstanding shares of that Fund. Under these restrictions, a
Fund may not:
(1) (a) 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, or, in the case of the PIMCO Municipal Bond Fund, an
industrial development revenue bonds based, directly or indirectly, on the
credit of private entities in any one 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) and (b) with respect to the Money Market
Fund, to securities or obligations issued by U.S. banks. Investments of the
PIMCO Municipal Bond Fund, in utilities, gas, electric water and telephone
companies will be considered as being in separate industries;
(b) for the Global Bond Fund II, concentrate more than 25% of the
value of its total assets in any one industry (The SEC staff takes the
position that investments in government securities of a single foreign
country, including agencies and instrumentalities of such government, to
the extent such obligations are backed by the assets and revenues of such
government, represent investments in a separate industry for these
purposes.);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at
market value at the time of such investment) would be invested in the
securities of any one issuer, except that this restriction does not apply
to securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (This investment restriction is not applicable to the
Commercial Mortgage Securities Fund, the Real Return Bond Fund, the Foreign
Bond Fund, the Global Bond Fund, the Global Bond Fund II, the International
Bond Fund, the Emerging Markets Bond Fund or the Emerging Markets Bond Fund
II.). For the purpose of this restriction, each state and each separate
political subdivision, agency, authority or instrumentality of such state,
each multi-state agency or authority, and each guarantor, if any, are
treated as separate issuers of Municipal Bonds;
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time
of such investment) of the outstanding voting securities of any one issuer
(This restriction is not applicable to the Commercial Mortgage Securities
Fund, the Real Return Bond Fund, the Foreign Bond Fund, the Global Bond
Fund, the Global Bond Fund II, the International Bond Fund, the Emerging
Markets Bond Fund or the Emerging Markets Bond Fund II.);
(4) (a) 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;
(b) for the Global Bond Fund II, purchase or sell real estate, although
it may purchase securities of issuers which deal in real estate, including
securities of real estate investment trusts, and may purchase securities
which are secured by interests in real estate;
(5) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit a Fund, subject to
restrictions described in this Prospectus and in the Statement of
Additional
March , 1998 Prospectus 27
<PAGE>
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 (this restriction
is not applicable to the Global Bond Fund II.);
(6) for the High Yield, Total Return III, International Bond and
StocksPLUS Funds: purchase securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales of portfolio
securities, but it may make margin deposits in connection with transactions
in options, futures, and options on futures;
(7)(a) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that a 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 a Fund's
assets);
(b) for the Global Bond Fund II: (i) borrow money in excess of 10% of the
value (taken at the lower of cost or current value) of the Fund's total assets
(not including the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the meeting of
redemption requests (not for leverage) which might otherwise require the
untimely disposition of portfolio investments or for extraordinary or
emergency purposes (Such borrowings will be repaid before any additional
investments are purchased.); or (ii) pledge, hypothecate, mortgage or
otherwise encumber its assets in excess of 10% of the Fund's total assets
(taken at cost) and then only to secure borrowings permitted above; (The
deposit of securities or cash or cash equivalents in escrow in connection with
the writing of covered call or put options, respectively, is not deemed to be
pledges or other encumbrances.) (For the purpose of this restriction,
collateral arrangements with respect to the writing of options, futures
contracts, options on futures contracts, and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge of
assets and neither such arrangements nor the purchase or sale of futures or
related options are deemed to be the issuance of a senior security.)
(8) lend any funds or other assets, except that a 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. (This restriction is not applicable to the
Global Bond Fund II.)
(9)(a) 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
(b) for the Global Bond Fund II, underwrite securities issued by other
persons except to the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter under federal
securities laws; or
28 PIMCO Funds: Pacific Investment Management Series
<PAGE>
(10)(a) for the High Yield, Total Return III, and StocksPLUS Funds:
maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except as set forth in this
Prospectus and in the Statement of Additional Information for transactions
in options, futures, options on futures, and transactions arising under
swap agreements or other derivative instruments;
(b) for the Money Market, Short-Term, Low Duration, Low Duration II, Low
Duration III, Moderate Duration, Total Return, Total Return II, Low
Duration Mortgage, Total Return Mortgage, Commercial Mortgage Securities,
Long-Term U.S. Government, Real Return Bond, Foreign Bond, Global Bond,
International Bond, Emerging Markets Bond, Emerging Markets Bond II,
StocksPLUS Short Strategy, and Strategic Balanced Funds: 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.
To the extent a Fund covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the maintenance of a
segregated account consisting of assets determined to be liquid in accordance
with procedures adopted by the Trustees, equal in value to the amount of the
Fund's commitment to repurchase, such an agreement will not be considered a
"senior security" by the Fund and therefore will not be subject to the 300%
asset coverage requirement otherwise applicable to borrowings by the Fund.
Each 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. As indicated above, certain fundamental
investment restrictions do not apply to certain Funds. However, certain non-
fundamental restrictions, set forth in the Statement of Additional
Information, place comparable limitations on these Funds. 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 a Fund's investment portfolio, resulting
from market fluctuations or other changes in a Fund's total assets will not
require a 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.
CHARACTERISTICS AND RISKS OF SECURITIES AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities and
investment techniques used by the individual Funds, and discusses certain
concepts relevant to the investment policies of the Funds. Additional
information about the Funds' investments and investment practices may be found
in the Statement of Additional Information.
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 Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National
March , 1998 Prospectus 29
<PAGE>
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 rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are rated below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Such securities are sometimes referred to as "junk
bonds," and may be subject to greater market fluctuations, less liquidity and
greater risk of loss of income or principal, including a greater possibility
of default or bankruptcy of the issuer of such securities, than are more
highly rated debt securities. Moody's also describes securities rated Baa as
having speculative characteristics. The Adviser seeks to minimize these risks
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions. See "Appendix B--
Description of Securities Ratings." Investments in high yield securities are
discussed separately below under "High Yield Securities ("Junk Bonds")."
CONVERTIBLE SECURITIES
Each Fund (except the PIMCO Municipal Bond Fund) may invest in convertible
securities, which may offer higher income than the common stocks into which
they are convertible. Typically, convertible securities are callable by the
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Funds may invest consist of bonds,
notes, debentures and preferred stocks which may be converted or exchanged at
a stated or determinable exchange ratio into underlying shares of common
stock. A Fund may be required to permit the issuer of a convertible security
to redeem the security, convert it into the underlying common stock, or sell
it to a third party. Thus, a Fund may not be able to control whether the
issuer of a convertible security chooses to convert that security. If the
issuer chooses to do so, this action could have an adverse effect on a Fund's
ability to achieve its investment objectives.
While the Fixed Income Funds intend to invest primarily in fixed income
securities, each may invest in convertible securities or equity securities.
While some countries or companies may be regarded as favorable investments,
pure fixed
30 PIMCO Funds: Pacific Investment Management Series
<PAGE>
income opportunities may be unattractive or limited due to insufficient
supply, legal or technical restrictions. In such cases, a Fund may consider
equity securities or convertible bonds to gain exposure to such investments.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in fixed- and floating-rate loans arranged through
private negotiations between an issuer of debt instruments and one or more
financial institutions ("lenders"). Generally, the Funds' investments in loans
are expected to take the form of loan participations and assignments of
portions of loans from third parties.
Large loans to corporations or governments may be shared or syndicated among
several lenders, usually banks. The Funds may participate in such syndicates,
or can buy part of a loan, becoming a direct lender. Participations and
assignments involve special types of risk, including limited marketability and
the risks of being a lender. See "Illiquid Securities" for a discussion of the
limits on a Fund's investments in loan participations and assignments with
limited marketability. If a Fund purchases a participation, it may only be
able to enforce its rights through the lender, and may assume the credit risk
of the lender in addition to the borrower. In assignments, the Funds' rights
against the borrower may be more limited than those held by the original
lender.
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 PIMCO
Money Market Fund may invest in a variable rate security having a stated
maturity in excess of 397 calendar days if the interest rate will be adjusted,
and the Fund may demand payment of principal from the issuer, within that
period.
Each of the Fixed Income Funds (except the PIMCO Municipal Bond Fund) may
engage in credit spread trades and invest in floating rate debt instruments
("floaters"). A credit spread trade is an investment position relating to a
difference in the prices or interest rates of two securities or currencies,
where the value of the investment position is determined by movements in the
difference between the prices or interest rates, as the case may be, of the
respective securities or currencies. The interest rate on a floater is a
variable rate which is tied to another interest rate, such as a money-market
index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. While, because of the interest rate
reset feature, floaters provide a Fund with a certain degree of protection
against rises in interest rates, a Fund will participate in any declines in
interest rates as well.
Each of the Fixed Income Funds (except the PIMCO Money Market Fund and the
PIMCO Municipal Bond 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 Funds have adopted a policy under which no Fund will invest more
than 5% (10% in the case of the PIMCO Low Duration Mortgage and Total Return
Mortgage Funds) of its net assets in any combination of inverse floater,
interest only ("IO"), or principal only ("PO") securities. See "Mortgage-
Related and Other Asset-Backed Securities" for a discussion of IOs and POs.
INFLATION-INDEXED BONDS
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than typical bonds, but are expected to
retain
March , 1998 Prospectus 31
<PAGE>
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 five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semi-annual basis, equal to a fixed percentage of the inflation-
adjusted principal amount. For example, if a Fund purchased an inflation-
indexed bond with a par value of $1,000 and a 3% real rate of return coupon
(payable 1.5% semi-annually), and inflation over the first six months were 1%,
the mid-year par value of the bond would be $1,010 and the first semi-annual
interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year reached 3%, the end-of-year par value of the bond
would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently
the interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal
upon maturity (as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation-indexed bonds, even during a period of deflation. However,
the current market value of the bonds is not guaranteed, and will fluctuate.
The Funds may also invest in other inflation related bonds which may or may
not provide a similar guarantee. If a guarantee of principal is not provided,
the adjusted principal value of the bond repaid at maturity may be less than
the original principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline
in value. If interest rates rise due to reasons other than inflation (for
example, due to changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not
reflected in the bond's inflation measure.
The 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 that a 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.
32 PIMCO Funds: Pacific Investment Management Series
<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 the PIMCO Real
Return Bond Fund and in inflation-indexed bonds.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each of the Funds (except the PIMCO Money Market Fund and the PIMCO
Municipal Bond Fund) may invest all of its assets in mortgage- or other asset-
backed securities. The value of some mortgage- or asset-backed securities in
which the Funds invest may be particularly sensitive to changes in prevailing
interest rates, and, like other fixed income investments, the ability of a
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 a 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. Interest and pre-paid principal on a CMO are paid, in most cases,
on a monthly basis. 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
March , 1998 Prospectus 33
<PAGE>
the Funds, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a 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-related or asset-backed
securities.
Mortgage-Related Securities include securities other than those described
above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property, such as mortgage dollar
rolls (see "Reverse Repurchase Agreements, Dollar Rolls, and Borrowings"), 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 interest-only,
or "IO" class), while the other class will receive all of the principal (the
principal-only, or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the 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 Funds have adopted a policy under which no Fund will
invest more than 5% (10% in the case of the PIMCO Low Duration Mortgage and
Total Return Mortgage Funds) of its net assets in any combination of IO, PO,
or inverse floater securities. The Funds 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.
MUNICIPAL BONDS
The PIMCO Municipal Bond Fund invests in Municipal Bonds which are generally
issued by states and local governments and their agencies, authorities and
other instrumentalities. The Municipal Bonds which the PIMCO Municipal Bond
Fund may purchase include general obligation bonds and limited obligation
bonds (or revenue bonds), including industrial development bonds issued
pursuant to former federal tax law. General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from
such issuer's general revenues and not from any particular source. Limited
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Tax-exempt "private activity"
bonds and industrial development bonds generally are also revenue bonds and
thus are not payable from the issuer's general revenues. The PIMCO Municipal
Bond Fund may invest in Municipal Bonds with credit enhancements such as
letters of credit, municipal bond insurance and Standby Bond Purchase
Agreements. The PIMCO Municipal Bond Fund may also invest in municipal lease
obligations, as well as securities derived from Municipal Bonds, such as
residual interest bonds, participation interests and embedded interest rate
swaps and caps.
Municipal Bonds are subject to credit and market risk. Credit risk relates
to the ability of the issuer to make payments of principal and interest. The
ability of an issuer to make such payments could be affected by litigation,
34 PIMCO Funds: Pacific Investment Management Series
<PAGE>
legislation or other political events or the bankruptcy of the issuer. Market
risk relates to changes in a security's value as a result of changes in
interest rates. Lower rated Municipal Bonds generally provide higher yields
but are subject to greater credit and market risk than higher quality
Municipal Bonds.
REPURCHASE AGREEMENTS
For the purpose of achieving income, each of the Funds 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. No Fund
will invest more than 15% of its net assets (10% in the case of the PIMCO
Money Market Fund) (taken at current market value) in repurchase agreements
maturing in more than seven days.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS, AND BORROWINGS
A reverse repurchase agreement involves the sale of a security by a Fund and
its agreement to repurchase the instrument at a specified time and price.
Under a reverse repurchase agreement, the Fund continues to receive any
principal and interest payments on the underlying security during the term of
the agreement. The Fund generally 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
reverse repurchase agreements and, to this extent, a reverse repurchase
agreement (or economically similar transaction) will not be considered a
"senior security" subject to the 300% asset coverage requirements otherwise
applicable to borrowings by a Fund.
A 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.
To the extent that positions in reverse repurchase agreements, dollar rolls
or similar transactions are not covered through the maintenance of a
segregated account consisting of liquid assets at least equal to the amount of
any forward purchase commitment, such transactions would be subject to the
Funds' limitations on borrowings, which would restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% (for each Fund except the
PIMCO Global Bond Fund II) of a Fund's total assets. Apart from such
transactions, a Fund will not borrow money, except for temporary
administrative purposes. The PIMCO Global Bond Fund II may not borrow in
excess of 10% of the value of its total assets and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) or for extraordinary or emergency purposes.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the Funds may lend their portfolio
securities to brokers, dealers, and other financial institutions, provided:
(i) the loan is secured continuously by collateral consisting of U.S.
Government
March , 1998 Prospectus 35
<PAGE>
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% (25% in the case of
the PIMCO Global Bond Fund II) of the total assets of the Fund. Each Fund's
performance will continue to reflect changes in the value of the securities
loaned and will also reflect the receipt of either interest through investment
of cash collateral by the Fund in permissible investments, or a fee, if the
collateral is U.S. Government securities. Securities lending involves the risk
of loss of rights in the collateral or delay in recovery of the collateral
should the borrower fail to return the securities loaned or become insolvent.
The Funds may pay lending fees to the party arranging the loan.
WHEN-ISSUED, DELAYED DELIVERY, AND FORWARD COMMITMENT TRANSACTIONS
Each of the Funds 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 a Fund has committed to purchase
prior to the time delivery of the securities is made, although a 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. A 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 Funds may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.
SHORT SALES
Each of the Funds (except the PIMCO High Yield, Total Return III and
StocksPLUS Funds), and particularly the PIMCO StocksPLUS Short Strategy Fund,
may from time to time effect short sales as part of their overall portfolio
management strategies, 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 a 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 a 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. The PIMCO Global
Bond Fund II may only engage in short sales that are "against the box."
36 PIMCO Funds: Pacific Investment Management Series
<PAGE>
FOREIGN SECURITIES
Each of the Funds (except the PIMCO Low Duration II, Total Return II,
Municipal Bond and Long-Term U.S. Government Funds) may invest directly in
fixed income securities of non-U.S. issuers. The PIMCO Money Market, High
Yield, Commercial Mortgage Securities, Low Duration Mortgage and Total Return
Mortgage Funds may only invest in U.S. dollar-denominated fixed income
securities of non-U.S. issuers. Each of the Equity Funds may invest directly
in foreign equity securities.
Except for the PIMCO Emerging Markets Bond Fund and the PIMCO Emerging
Markets Bond Fund II, each of the Funds will concentrate its foreign
investments in securities of issuers based in developed countries. However,
the PIMCO Short-Term, Low Duration and Low Duration III Funds may each invest
up to 5% of its assets in securities of issuers based in the emerging market
countries in which the PIMCO Emerging Markets Bond Fund and PIMCO Emerging
Markets Bond Fund II may invest, and each of the remaining Fixed Income Funds
that may invest in foreign securities may invest up to 10% of its assets in
such securities.
Individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. The securities markets, values of securities, yields and
risks associated with securities markets in different countries may change
independently of each other. Investing in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. companies. Shareholders should consider
carefully the substantial risks involved in investing in securities issued by
companies and governments of foreign nations. These risks include: differences
in accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of
the ability to transfer currency from a country); and political instability
which could affect U.S. investments in foreign countries. Additionally,
foreign securities and dividends and interest payable on those securities may
be subject to foreign taxes, including taxes withheld from payments on those
securities. Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility.
Additional 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.
Certain of the Funds, and particularly the PIMCO Emerging Markets Bond Fund
and PIMCO Emerging Markets Bond Fund II, may invest in the securities of
issuers based in countries with developing economies. Investing in developing
(or "emerging market") countries involves certain risks not typically
associated with investing in U.S. securities, and imposes risks greater than,
or in addition to, risks of investing in foreign, developed countries. A
number of emerging market countries restrict, to varying degrees, foreign
investment in securities. Repatriation of investment income, capital, and the
proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies
of emerging market countries have experienced significant declines against the
U.S. dollar in recent years, and devaluation may occur subsequent to
investments in these currencies by a Fund. Inflation and rapid fluctuations in
inflation rates have had, and may continue to have, negative effects on the
economies and securities markets of certain emerging market countries. Many of
the emerging securities markets are relatively small, have low trading
volumes, suffer periods of relative illiquidity, and are characterized by
significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls,
forced mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, or creation of government monopolies, any of which may have a
detrimental effect on a Fund's investment.
March , 1998 Prospectus 37
<PAGE>
Additional risks of investing in emerging market countries may include:
currency exchange rate fluctuations; greater social, economic and political
uncertainty and instability (including the risk of war); more substantial
governmental involvement in the economy; less governmental supervision and
regulation of the securities markets and participants in those markets;
unavailability of currency hedging techniques in certain emerging market
countries; the fact that companies in emerging market countries may be newly
organized and may be smaller and less seasoned companies; the difference in,
or lack of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the
United States; and significantly smaller market capitalization of securities
markets. Also, any change in the leadership or policies of Eastern European
countries, or the countries that exercise a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and adversely affect existing investment
opportunities.
In addition, emerging securities markets may have different clearance and
settlement procedures, which may be unable to keep pace with the volume of
securities transactions or otherwise make it difficult to engage in such
transactions. Settlement problems may cause a Fund to miss attractive
investment opportunities, hold a portion of its assets in cash pending
investment, or delay in disposing of a portfolio security. Such a delay could
result in possible liability to a purchaser of the security.
Each of the Fixed Income Funds (except the PIMCO Low Duration II, Total
Return II, Municipal Bond and Long-Term U.S. Government Funds) 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 a 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.
Certain of the Funds also may invest in sovereign debt (other than Brady
Bonds) issued by governments, their agencies or instrumentalities, or other
government-related entities located in emerging market countries. Holders of
sovereign debt may be requested to particpate in the rescheduling of such debt
and to extend further loans to governmental entities. In addition, there is no
bankruptcy proceeding by which defaulted sovereign debt may be collected.
A Fund's investments in foreign currency denominated debt obligations and
hedging activities will likely produce a difference between its book income
and its taxable income. This difference may cause a portion of the Fund's
income distributions to constitute returns of capital for tax purposes or
require the Fund to make distributions exceeding book income to qualify as a
regulated investment company for federal tax purposes.
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
38 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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 Funds' assets are denominated may be devalued against the U.S.
dollar, resulting in a loss to the Funds.
All Funds that may invest in securities denominated in foreign currencies
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 exchange contract, the
Fund "locks in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. As a result, a 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 a Fund is similar to selling
securities denominated in one currency and purchasing securities denominated
in another. Contracts to sell foreign currency would limit any potential gain
which might be realized by a Fund if the value of the hedged currency
increases. A 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. A 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. A 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. Each 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 its obligations under forward
foreign currency exchange contracts entered into for non-hedging purposes.
All Funds that may invest in securities denominated in foreign currencies
may invest in options on foreign currencies and foreign currency futures and
options thereon. The Funds 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. Each Fund that may
invest in securities denominated in foreign currencies, except the PIMCO
Global Bond, Emerging Markets Bond and Emerging Markets Bond II Funds, 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.
HIGH YIELD SECURITIES ("JUNK BONDS")
The PIMCO High Yield Fund invests at least 65% of its assets, each of the
PIMCO Emerging Markets Bond Fund and PIMCO Emerging Markets Bond Fund II may
invest up to 100% of its assets, and the PIMCO Commercial Mortgage Securities
Fund may invest up to 35% of its assets, in fixed income securities rated
lower than Baa by Moody's or lower than BBB by S&P but rated at least B by
Moody's or S&P (or, if not rated, of comparable quality). In addition, each of
the PIMCO Short-Term, Low Duration, Low Duration III, Moderate Duration, Total
Return, Total Return III, Foreign Bond, Global Bond, Global Bond II,
StocksPLUS, StocksPLUS Short Strategy and Strategic Balanced Funds may invest
up to 10% of its assets in such securities. The Municipal Bond Fund may invest
up to 10% of its assets in securities rated lower than Baa by Moody's or BBB
by S&P but rated at least Ba by Moody's or BB by S&P. Securities rated lower
than Baa by Moody's or lower than BBB by S&P are sometimes referred to as
"high yield" or "junk" bonds. Securities rated Baa are considered by Moody's
to have some speculative characteristics. Investors should consider the
following risks associated with high yield securities before investing in
these Funds.
March , 1998 Prospectus 39
<PAGE>
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and
the ability of a Fund to achieve its investment objective may, to the extent
of its investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield security prices because the
advent of a recession could lessen the ability of a highly leveraged company
to make principal and interest payments on its debt securities. If the issuer
of high yield securities defaults, a Fund may incur additional expenses to
seek recovery. In the case of high yield securities structured as zero coupon
or payment-in-kind securities, the market prices of such securities are
affected to a greater extent by interest rate changes, and therefore tend to
be more volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations
in the daily net asset value of a Fund's shares. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield securities, especially in a
thinly traded market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last
rated. The Adviser does not rely solely on credit ratings when selecting
securities for the Funds, and develops its own independent analysis of issuer
credit quality. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the portfolio security if the
Adviser deems it in the best interest of shareholders.
During the year ended March 31, 1997, based upon the dollar-weighted average
ratings of the Funds' portfolio holdings at the end of each month in the
Funds' fiscal year, each operational Fund that may invest greater than 5% of
its assets in securities rated below investment grade had the following
percentages of its net assets invested in securities rated in the categories
indicated as rated by Moody's (or, if unrated, determined by the Adviser to be
of comparable quality). See "Appendix B--Description of Securities Ratings,"
for further information.
<TABLE>
<CAPTION>
RATING
--------------------------------------------
BELOW
FUND PRIME 1 AAA AA A PRIME 1 BAA BA B
- ---- ------- --- --- --- ------- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term 31% 26% 3% 12% 0% 20% 7% 1%
Low Duration 24 55 1 3 0 13 4 0
Low Duration III 40 60 0 0 0 0 0 0
Moderate Duration 2 59 0 7 0 24 5 3
High Yield 6 1 0 0 0 3 48 42
Total Return 13 66 2 4 0 9 5 1
Total Return III 5 76 4 1 0 8 5 1
Foreign Bond 21 58 14 0 0 3 4 0
Global Bond 33 45 14 2 0 4 2 0
Global Bond II 21 58 15 1 0 4 1 0
StocksPLUS 32 29 5 7 0 17 9 1
Strategic Balanced 7 36 0 8 0 38 9 2
</TABLE>
40 PIMCO Funds: Pacific Investment Management Series
<PAGE>
These figures are intended solely to provide disclosure about each Fund's
asset composition during its most recent fiscal year. The asset composition
after this time may or may not be approximately the same as represented by
such figures. In addition, the categories reflect ratings by Moody's, and
ratings assigned by S&P may not be consistent with ratings assigned by
Moody's or other credit ratings services, and the Adviser may not necessarily
agree with a rating assigned by any credit rating agency.
DERIVATIVE INSTRUMENTS
To the extent permitted by the investment objectives and policies of the
Funds, the Funds may (except the PIMCO Money Market Fund) 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 Funds (except the PIMCO Money Market Fund and the
PIMCO Municipal Bond Fund) also may enter into swap agreements with respect to
foreign currencies, interest rates, and securities indexes. The Funds may use
these techniques to hedge against changes in interest rates, foreign currency
exchange rates or securities prices or as part of their overall investment
strategies. The Funds (except the PIMCO Money Market Fund and the PIMCO
Municipal Bond 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.
Each 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 (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations under options, futures,
and swaps to limit leveraging of the Fund.
Derivative instruments are considered for these purposes 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 depends upon cash flows from
underlying assets, such as mortgage-related or asset-backed securities. Each
Fund (except the PIMCO Money Market Fund and the PIMCO Municipal Bond Fund)
may invest all of its assets in derivative instruments, subject only to the
Fund's investment objective and policies. The value of some derivative
instruments in which the Funds invest may be particularly sensitive to changes
in prevailing interest rates, and, like the other investments of the Funds,
the ability of a 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 Funds could be exposed to the risk of loss.
The Funds 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 a 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 otherwise, due
to the possible inability of a Fund to purchase or sell a portfolio security
at a time that otherwise would be favorable or the possible need to sell a
portfolio security at a disadvantageous time because the Fund is required to
maintain asset coverage or offsetting positions in connection with
transactions in derivative instruments, and the possible inability of a Fund
to close out or to liquidate its derivatives positions.
March , 1998 Prospectus 41
<PAGE>
Options on Securities, Securities Indexes, and Currencies A 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. A 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.
A 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. A 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 Funds 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 Funds' immediate obligations.
The Funds 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
Funds 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 security above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation
under the option and must deliver the underlying security at the exercise
price. If a put or call option purchased by the 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 a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.
Funds that invest in foreign currency-denominated securities 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 a Fund to reduce foreign currency risk using such options.
42 PIMCO Funds: Pacific Investment Management Series
<PAGE>
Over-the-counter options in which certain Funds may invest differ from
traded options in that they are two-party contracts, with price and other
terms negotiated between buyer and seller, and generally do not have as much
market liquidity as exchange-traded options. The Funds 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 Funds 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 Funds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a 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"). A 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
limit 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 Funds' investment restriction concerning senior securities. A
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 a 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, a 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 Funds 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 Funds' repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may
limit the Funds' 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.
March , 1998 Prospectus 43
<PAGE>
Futures Contracts and Options on Futures Contracts Each of the Fixed Income
Funds (except the PIMCO Money Market Fund and the PIMCO Municipal Bond Fund)
may invest in interest rate futures contracts and options thereon ("futures
options"), and to the extent it may invest in foreign currency-denominated
securities, may also invest in foreign currency futures contracts and options
thereon. The PIMCO Municipal Bond Fund may purchase and sell futures contracts
on U.S. Government securities and Municipal Bonds, as well as purchase put and
call options on such futures contracts. Each of the Equity Funds and the PIMCO
Strategic Balanced Fund may invest in interest rate, stock index and 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 a 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 a
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 a Fund from
liquidating an unfavorable position, and the Fund would remain obligated to
meet margin requirements until the position is closed.
The Funds 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 Funds' immediate obligations. A
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 Funds
will also segregate liquid assets equivalent to the amount, if any, by which
the put is "in the money."
The Funds 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. Each 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.
HYBRID INSTRUMENTS
A hybrid instrument can combine the characteristics of securities, futures,
and options. For example, the principal amount or interest rate of a hybrid
could be tied (positively or negatively) to the price of some commodity,
currency or securities index or another interest rate (each a "benchmark").
The interest rate or (unlike most fixed income securities) the principal
amount payable at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and
increased total return. Hybrids may not bear interest or pay dividends. The
value of a hybrid or its interest rate may be a multiple of a benchmark and,
as a result, may be leveraged and move (up or down) more steeply and rapidly
than the benchmark. These benchmarks may be sensitive to economic and
political events, such as
44 PIMCO Funds: Pacific Investment Management Series
<PAGE>
commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid
may entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes a Fund to the credit risk of the issuer of
the hybrids. These risks may cause significant fluctuations in the net asset
value of the Fund. Accordingly, no Fund will invest more than 5% of its assets
in hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Funds' investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions
contained in the 1940 Act.
INVESTMENT IN INVESTMENT COMPANIES
Each of the Funds may invest in securities of other investment companies,
such as closed-end management investment companies, or in pooled accounts or
other investment vehicles. As a shareholder of an investment company, a Fund
may indirectly bear service and other fees which are in addition to the fees
the Fund pays its service providers.
ILLIQUID SECURITIES
Each of the Funds may invest up to 15% of its net assets in illiquid
securities (10% in the case of the PIMCO Money Market Fund). 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 those for transactions in liquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a 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 and other securities which legally or in
the Adviser's opinion may be deemed illiquid (not including securities issued
pursuant to Rule 144A under the Securities Act of 1933 and certain commercial
paper that PIMCO has determined to be liquid under procedures approved by the
Board of Trustees).
Illiquid securities may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities
laws. Although certain of these securities may be readily sold, for example,
under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
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, R. Wesley Burns, Vern
O. Curtis, Brent R. Harris, Thomas P. Kemp, 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."
March , 1998 Prospectus 45
<PAGE>
INVESTMENT ADVISER
Pacific Investment Management Company ("PIMCO") 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 $108.5 billion in assets under management as of September 30,
1997. 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 Life
Insurance Company, 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 each
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."
Information about the individual portfolio managers responsible for
management of the Trust's currently operational Funds, including their
occupations for the past five years, is provided below.
<TABLE>
<CAPTION>
PORTFOLIO MANAGER AND BUSINESS EXPERIENCE (PAST
FUND FIVE YEARS)
---- -----------------------------------------------
<C> <S>
Money Market Fund Leslie Barbi, Senior Vice President, PIMCO. A
Fixed Income Portfolio Manager, Ms. Barbi has
managed the PIMCO Money Market Fund since
November 1, 1995. Prior to joining PIMCO in
1993, Ms. Barbi was associated with Salomon
Brothers as a proprietary Portfolio Manager.
Short-Term Fund David H. Edington, Managing Director, PIMCO. A
StocksPLUS Fund Fixed Income Portfolio Manager, Mr. Edington
Strategic Balanced Fund joined PIMCO in 1987 and has managed the PIMCO
Moderate Duration Fund Short-Term, StocksPLUS, Strategic Balanced and
Moderate Duration Funds since their inception,
October 7, 1987, May 14, 1993, June 28, 1996,
and December 31, 1996, respectively.
Low Duration Fund William H. Gross, Managing Director, PIMCO. A
Low Duration Fund II Fixed Income Portfolio Manager, Mr. Gross is
Low Duration Fund III one of the founders of PIMCO and has managed
Total Return Fund the PIMCO Low Duration, Low Duration II, Low
Total Return Fund II Duration III, Total Return, Total Return II and
Total Return Fund III Total Return III Funds since their inception,
May 11, 1987, November 1, 1991, December 31,
1996, May 11, 1987, December 30, 1991, and May
1, 1991, respectively.
Low Duration Mortgage Fund William C. Powers, Managing Director, PIMCO. A
Fixed Income Portfolio Manager, Mr. Powers
joined PIMCO in 1991.
Total Return Mortgage Fund Pasi Hamalainen, Senior Vice President, PIMCO.
Long-Term U.S. Government Fund A Fixed Income Portfolio Manager, Mr.
Hamalainen joined PIMCO in 1994 and has managed
the PIMCO Long-Term U.S. Government Fund since
July 1, 1997 and the Total Return Mortgage Fund
since its inception, July 31, 1997.
Municipal Bond Fund Benjamin Ehlert, Executive Vice President,
PIMCO. A Fixed Income Portfolio Manager, Mr.
Ehlert has been associated with PIMCO for over
23 years.
High Yield Fund Benjamin Trosky, Managing Director, PIMCO. A
Fixed Income Portfolio Manager, Mr. Trosky
joined PIMCO in 1990 and has managed the PIMCO
High Yield Fund since its inception, December
16, 1992.
Real Return Bond Fund John Brynjolfsson, Vice President, PIMCO. A
Fixed Income Portfolio Manager, Mr.
Brynjolfsson joined PIMCO in 1989, and has
managed the PIMCO Real Return Bond Fund since
its inception, January 29, 1997.
Foreign Bond Fund Lee R. Thomas, III, Managing Director and
Global Bond Fund Senior International Portfolio Manager, PIMCO.
Global Bond Fund II A Fixed Income Portfolio Manager, Mr. Thomas
International Bond Fund has managed the PIMCO Foreign Bond, Global Bond
and International Bond Funds since July 13,
1995, and the PIMCO Global Bond Fund II since
October 1, 1995. Prior to joining PIMCO in
1995, Mr. Thomas was associated with Investcorp
as a member of the management committee
responsible for global securities and foreign
exchange trading. Prior to Investcorp, he was
associated with Goldman Sachs as an Executive
Director in foreign fixed income.
Emerging Markets Bond Fund Michael J. Rosborough, Senior Vice President,
Emerging Markets Bond Fund II PIMCO . A Fixed Income Portfolio Manager, Mr.
Rosborough was associated with RBC Dominion in
Tokyo as a Vice President and Manager in
foreign fixed income prior to joining PIMCO in
1994.
</TABLE>
46 PIMCO Funds: Pacific Investment Management Series
<PAGE>
FUND ADMINISTRATOR
PIMCO also serves as administrator to the Funds pursuant to an
administration agreement with the Trust. PIMCO provides administrative
services to the Funds, which include clerical help and accounting,
bookkeeping, internal audit services, and certain other services required by
the Funds, preparation of reports to the Funds' 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 Funds, 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 Funds (and not PIMCO) are 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.
ADVISORY AND ADMINISTRATIVE FEES
The Funds feature fixed advisory and administrative fee rates. For providing
investment advisory and administrative services to the Funds as described
above, PIMCO receives monthly fees from each Fund at an annual rate based on
the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ADVISORY
FUND FEE RATE
---- --------
<S> <C>
Money Market Fund............................................ 0.15%
Commercial Mortgage Securities, StocksPLUS, StocksPLUS Short
Strategy and Strategic Balanced Funds....................... 0.40%
Emerging Markets Bond and Emerging Markets Bond II Funds..... 0.45%
All other Funds.............................................. 0.25%
<CAPTION>
ADMINISTRATIVE
FUND FEE RATE
---- --------------
<S> <C>
Money Market, Short-Term and Moderate Duration Funds......... 0.20%
Low Duration and Total Return Funds.......................... 0.18%
Global Bond and Global Bond II Funds......................... 0.30%
Emerging Markets Bond and Emerging Markets Bond II Funds..... 0.40%
All other Funds.............................................. 0.25%
</TABLE>
Both the investment advisory contract and administration agreement for the
Funds 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.
March , 1998 Prospectus 47
<PAGE>
SERVICE AND DISTRIBUTION FEES
The Trust has adopted an Administrative Services Plan and a Distribution
Plan (the "Plans") with respect to the Administrative Class shares of each
Fund. Under the terms of the Plans, the Trust is permitted to reimburse, out
of the Administrative Class assets of each 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 and
marketing of shares and/or the provision of certain shareholder services (in
the case of the Distribution Plan) or the administration of plans or programs
that use Fund shares as their funding medium (in the case of the
Administrative Services Plan), and to reimburse certain other 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 Trust may also be offered through certain
brokers and financial intermediaries ("service agents") that have established
a shareholder servicing relationship with the Trust on behalf of their
customers. The Trust pays no compensation to such entities. 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 Trust are distributed through PIMCO Funds Distribution Company
(the "Distributor"), a 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
Each Fund offers its shares in up to 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
Funds. 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 high net worth
individuals (Institutional Class shares may also be offered through certain
financial intermediaries that charge their customers transaction or other fees
with respect to their customers' investments in the Funds). Shares of the
Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers, and other intermediaries, and each Fund pays
service and/or distribution 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
Funds 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
million. Shares of either class may also be offered to clients of the Adviser
and its affiliates. Shares of the PIMCO International
48 PIMCO Funds: Pacific Investment Management Series
<PAGE>
Bond Fund and PIMCO Emerging Markets Bond Fund II are offered only to clients
of PIMCO who maintain separately managed private accounts. In addition, the
minimum initial investment does not apply to shares of the Institutional Class
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 to a financial intermediary for investment advisory
and/or administrative services.
Pension and profit-sharing plans, employee benefit trusts and employee
benefit plan alliances and "wrap account" programs established with broker-
dealers or other 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 each Fund and will not require a
Fund to pay any type of administrative payment per participant account to any
third party.
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"), 801
Pennsylvania, 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
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.
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. In order to facilitate efficient operation of the PIMCO
StocksPLUS, StocksPLUS Short Strategy and Strategic Balanced Funds, the Trust
requests that all purchase or exchange orders for these Funds be received by
the Transfer Agent prior to 3:00 p.m., Eastern time. An order received after
the close of business will generally be effected at the net asset value
determined on the next business day. However, orders received by certain
retirement plans and other financial intermediaries by the close of business
and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the
following business day will be effected at the net asset value determined on
the prior business day. The Trust is "open for business" on each day the New
York Stock Exchange (the "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.
With respect to the Funds whose policy is to declare dividends daily (i.e.,
each of the Fixed Income Funds except the PIMCO International Bond Fund), 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
March , 1998 Prospectus 49
<PAGE>
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.
OTHER PURCHASE INFORMATION
Purchases of a 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 Funds or to reject any
purchase order, in whole or in part, or to redeem shares, in whole or in part,
when, in the judgment of management, such suspension or rejection is in the
best interests of the Trust. The Trust and the Distributor may also waive the
minimum initial investment for certain investors.
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 Trust are not
qualified or registered for sale in all states. Prospective investors should
inquire as to whether shares of a particular Fund are available for offer and
sale in their state of residence. Shares of the Trust 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 a
Fund with liquid securities that are eligible for purchase by the Fund
(consistent with such 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 a 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 Funds 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 a 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
50 PIMCO Funds: Pacific Investment Management Series
<PAGE>
participants in the plan. Therefore, there may be a delay between the time the
investor places an 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. In order to discourage short-term trading, the PIMCO StocksPLUS
Short Strategy Fund imposes a redemption fee, payable to the Fund, of 1% on
all shares of the Fund held for less than three months.
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 million 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
Redemption requests for Fund shares are effected at the net asset value per
share next determined after receipt in good order of the redemption request by
the Trust or its designee. A redemption request received by the Trust or its
March , 1998 Prospectus 51
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designee prior to 4:00 P.M. Eastern time on a day the Trust is open for
business is effective on that day. A redemption request received after that
time becomes effective on the next business day.
Payment of the redemption price will ordinarily be wired to the investor's
bank one business day after the redemption 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 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.
The Trust agrees to redeem shares of each 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 a 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 a Fund may be exchanged for shares of the same class of any other
Fund based on the respective net asset values of the shares involved, except
that shares of the PIMCO International Bond Fund and PIMCO Emerging Markets
Bond Fund II 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 a 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.
Shareholders interested in such an exchange may request a prospectus for these
funds by contacting PIMCO Funds at the same address and telephone number as
the Trust.
Exchanges may be made only with respect to Funds, or series of 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 for tax purposes as a redemption followed by a purchase and
may result in a capital gain or loss, and special rules may apply in computing
tax basis when determining gain or loss. See "Taxation" in the Statement of
Additional Information.
52 PIMCO Funds: Pacific Investment Management Series
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The Trust reserves the right to modify or revoke the exchange privilege of
any shareholder or to limit or reject any exchange. Although each Fund 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 Funds' accounts with
brokers or dealers selected by it in its discretion. In effecting purchases
and sales of portfolio securities for the account of the Funds, the Adviser
will seek the best price and execution of the Funds' orders. In doing so, a
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 manages the Funds 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 certain
derivative instruments with relatively short maturities may tend to exaggerate
the portfolio turnover rate for some of the Funds. Trading in fixed income
securities does not generally involve the payment of brokerage commissions,
but does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. High
portfolio turnover (e.g., over 100%) involves correspondingly greater expenses
to a Fund, including commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestments in other securities. Such
sales may result in realization of taxable gains. See "Dividends,
Distributions and Taxes." The portfolio turnover rate for each Fund for which
financial highlights are provided in this Prospectus is set forth under
"Financial Highlights." The portfolio turnover rate for certain of the
remaining Funds is incorporated by reference in the Statement of Additional
Information.
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the Adviser. If a purchase or sale of
securities consistent with the investment policies of a 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. The Adviser may
aggregate orders for the Funds with simultaneous transactions entered into on
behalf of other clients of the Adviser so long as price and transaction
expenses are averaged either for that transaction or for the day.
NET ASSET VALUE
The net asset value per share of each of the Institutional Class and
Administrative Class of each Fund will be determined once on each day on which
the Exchange is open as of the close of regular trading on the Exchange
(ordinarily 4:00 p.m., Eastern time) by dividing the total market value of a
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 Exchange is closed.
The PIMCO Money Market Fund's securities are normally valued using the
amortized cost method of valuation. This involves valuing a security at cost
on the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity. See the Statement of
Additional Information for a description of certain conditions and procedures
followed by the PIMCO Money Market Fund in connection with amortized cost
valuation. For all other Funds, 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
March , 1998 Prospectus 53
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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.
Each 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 Funds that do not declare regular income dividends on a daily
basis 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, for Funds that pay
income dividends, those dividends are expected to differ over time by
approximately the amount of the expense accrual differential between a
particular 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." For the Fixed Income
Funds (other than the PIMCO International Bond Fund), 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. The PIMCO
International Bond, Strategic Balanced and Equity Funds intend to declare and
pay as a dividend substantially all of their net investment income on a
quarterly basis. 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 a Fund will be reinvested in additional
shares of that 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 and distribution fees by that class.
Each 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, a 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.
Shareholders subject to U.S. federal income tax will be subject to tax on
dividends received from a Fund, regardless of whether received in cash or
reinvested in additional shares. Distributions received by tax-exempt
shareholders will not be subject to federal income tax to the extent permitted
under applicable tax law. All shareholders must treat dividends, other than
capital gain dividends or dividends that represent a return of capital to
shareholders, as ordinary income.
54 PIMCO Funds: Pacific Investment Management Series
<PAGE>
Dividends designated by a Fund as capital gain dividends derived from the
Fund's net capital gain (that is, the excess of net long-term gain over net
short-term loss) are taxable to shareholders as long-term capital gain except
as provided by an applicable tax exemption. Under the Taxpayer Relief Act of
1997, long-term capital gains will generally be taxed at a 28% or 20% rate,
depending upon the holding period of the portfolio securities. Any
distributions that are not from a Fund's net investment income, short-term
capital gain, 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). Each
Fund will advise shareholders annually of the amount and nature of the
dividends paid to them.
Dividends paid to shareholders by the PIMCO Municipal Bond Fund which are
derived from interest on Municipal Bonds are expected to be designated by the
Fund as "exempt-interest dividends," and shareholders may exclude such
dividends from gross income for federal income tax purposes. However, if a
shareholder receives social security or railroad retirement benefits, the
shareholder may be taxed on a portion of those benefits as a result of
receiving tax-exempt income. In addition, certain exempt-interest dividends
could, as discussed below, cause certain shareholders to become subject to the
alternative minimum tax and may increase the alternative minimum tax liability
of shareholders already subject to this tax. Other distributions from the
PIMCO Municipal Bond Fund may constitute taxable income, and any gain realized
on a redemption of shares will be taxable gain, subject to any applicable tax
exemption for which an investor may qualify.
Dividends derived from interest on certain U.S. Government securities may be
exempt from state and local taxes, although interest on mortgage-backed U.S.
Government securities may not be so exempt. The distributions of "exempt-
interest dividends" paid by the PIMCO Municipal Bond Fund may be exempt from
state and local taxation when received by a shareholder to the extent that
they are derived from interest on Municipal Bonds issued by the state or
political subdivision in which such shareholder resides. The federal exemption
for "exempt-interest dividends" attributable to Municipal Bonds does not
necessarily result in exemption of such dividends from income for the purpose
of state and local taxes. The Trust will report annually on a state-by-state
basis the source of income the PIMCO Municipal Bond Fund receives on Municipal
Bonds that was paid out as dividends during the preceding year.
The Code also provides that exempt-interest dividends allocable to interest
received from "private activity bonds" issued after August 7, 1986 are an item
of tax preference for individual and corporate alternative minimum tax at the
applicable rate for individuals and corporations. Therefore, if the PIMCO
Municipal Bond Fund invests in such private activity bonds, certain of its
shareholders may become subject to the alternative minimum tax on that part of
its distributions to them that are derived from interest income on such bonds,
and certain shareholders already subject to such tax may have increased
liability therefor. However, it is the present policy of the PIMCO Municipal
Bond Fund to invest no more than 20% of its assets in such bonds. Other
provisions of the Code affect the tax treatment of distributions from the
PIMCO Municipal Bond Fund for corporations, casualty insurance companies, and
financial institutions. In particular, under the Code, for corporations,
alternative minimum taxable income will be increased by a percentage of the
amount by which the corporation's "adjusted current earnings" (which includes
various items of tax exempt income) exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, an investment in the PIMCO
Municipal Bond Fund may cause shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
Dividends to shareholders of the PIMCO Municipal Bond Fund derived from
money market instruments and U.S. Government securities are generally taxable
as ordinary income. The Fund may seek to reduce fluctuations in its net
March , 1998 Prospectus 55
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asset value by engaging in portfolio strategies involving options on
securities, futures contracts, and options on futures contracts. Any gain
derived by the Fund from the use of such instruments, including by reason of
"marking to market," will be treated as a combination of short-term and long-
term capital gain and, if not offset by realized capital losses incurred by
the Fund, will be distributed to shareholders (possibly requiring the
liquidation of other portfolio securities) and will be taxable to shareholders
as a combination of ordinary income and long-term capital gain.
Coupon payments received by a 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, regardless of
whether the Fund receives any cash payments. See "Taxation--Original Issue
Discount" in the Statement of Additional Information. Amounts includable in a
Fund's gross income become subject to tax-related distribution requirements.
Accordingly, a 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 record date of 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 a 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 also provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which such disclaimer is inoperative or the
Trust itself is unable to meet its obligations, and thus should be considered
remote.
MULTIPLE CLASSES OF SHARES
In addition to Institutional Class and Administrative Class shares, certain
Funds offer Class A shares, Class B shares, and Class C shares. This
Prospectus relates only to the Institutional Class shares and Administrative
Class shares of the Funds. The other classes of the Funds may have different
sales charges and expense levels, which will affect performance accordingly.
Investors may contact the Distributor at (800) 426-0107 for more information
concerning other classes of shares of the Funds.
56 PIMCO Funds: Pacific Investment Management Series
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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 or Fund have separate voting rights with respect to matters that only
affect that class or Fund. 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 of , 1997, the following were
shareholders of record of at least 25% of the outstanding voting securities of
the indicated Funds: [TO BE UPDATED IN POST-EFFECTIVE AMENDMENT NO. 39] Sprint
Corporation (Westwood, Kansas) with respect to the PIMCO Low Duration Fund II;
Sisters of St. Joseph (Nazareth, Michigan) and St. John Hospital and Medical
Center (Detroit, Michigan) with respect to the PIMCO Low Duration Fund III;
St. John Hospital of Detroit (Detroit, Michigan) with respect to the PIMCO
Moderate Duration Fund; Tice & Co. (Buffalo, New York) and Wendel & Co. (New
York, New York) with respect to the PIMCO Long-Term U.S. Government Fund;
Pacific Investment Management Company (Newport Beach, California) with respect
to the PIMCO Real Return Bond Fund; Charles Schwab & Co., Inc. (San Francisco,
California) with respect to the PIMCO Foreign Bond Fund; and Pacific Financial
Asset Management Corporation (Newport Beach, California) with respect to the
PIMCO Strategic Balanced Fund. To the extent such shareholders are also the
beneficial owners of such securities, they may be deemed to control (as that
term is defined in the 1940 Act) the relevant Fund. 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 its Funds in advertisements or reports to shareholders
or prospective investors. Yield quotations for the PIMCO Money Market Fund may
include current yield and effective yield. Current yield will be based on
income received by a hypothetical investment over a given seven-day period
(less expenses accrued during the period) and "annualized" (i.e., assuming
that the seven-day yield would be received for 52 weeks, stated in terms of an
annual percentage return on the investment). Effective yield for the Fund is
calculated in the manner similar to that used to calculate current yield, but
reflects the compounding effect on earnings of reinvested dividends. For the
remaining Funds, quotations of yield for a Fund or class 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. The tax equivalent yield of the PIMCO Municipal
Bond Fund's shares may also be advertised, calculated like yield except that,
for any given tax bracket, net investment income will be calculated as the sum
of (i) any taxable income of the class plus (ii) the tax exempt income of the
class divided by the difference between 1 and the effective federal income tax
rates for taxpayers in that tax bracket.
Quotations of average annual total return for a Fund or class 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
March , 1998 Prospectus 57
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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. Total return for each class is
measured by comparing the value of an investment in the Fund at the beginning
of the relevant period to the redemption value of the investment in the Fund
at the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions at net asset value). The Funds may advertise total
return using alternative methods that reflect all elements of return, but that
may be adjusted to reflect the cumulative impact of alternative fee and
expense structures, such as the currently effective advisory and
administrative fees for the Funds.
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 a 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 Trust may also be compared to various
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Mortgage-
Backed Securities Index, the Merrill Lynch 1 to 3 Year Treasury Index, the
Lehman Intermediate and 20+ Year Treasury Blend Index, the Lehman BB
Intermediate Corporate Index, indexes prepared by Lipper Analytical Services,
the J.P. Morgan Global Index, the J.P. Morgan Emerging Markets Bond Index
Plus, the Salomon Brothers World Government Bond Index-10 Non U.S.-Dollar
Hedged and the J.P. Morgan Government Bond Index Non U.S.-Dollar Hedged, 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 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 Funds or to the Adviser,
should be considered in light of a 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 Funds, see the Statement of
Additional Information.
Investment results of the Funds will fluctuate over time, and any
presentation of the Funds' total return or yield for any prior period should
not be considered as a representation of what an investor's total return or
yield may be in any future period. The Trust's Annual Report contains
additional performance information for the Funds and is available upon
request, without charge, by calling (800) 927-4648 (Current Shareholders), or
(800) 800-0952 (New Accounts).
58 PIMCO Funds: Pacific Investment Management Series
<PAGE>
APPENDIX A
DESCRIPTION OF DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of "term to
maturity." Traditionally, a fixed income security's "term to maturity" has
been used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a fixed
income security provides its final payment, taking no account of the pattern
of the security's payments prior to maturity. In contrast, duration
incorporates a bond's yield, coupon interest payments, final maturity and call
features into one measure. Duration management is one of the fundamental tools
used by the Adviser.
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being equal, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen a Fund's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have
the effect of reducing portfolio duration by approximately the same amount
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. For inflation-indexed bonds, duration is calculated on
the basis of modified real duration, which measures price changes of
inflation-indexed bonds on the basis of changes in real, rather than nominal,
interest rates. Another example where the interest rate exposure is not
properly captured by duration is the case of mortgage pass-through securities.
The stated final maturity of such securities is generally 30 years, but
current prepayment rates are more critical in determining the securities'
interest rate exposure. Finally, the duration of a fixed income security may
vary over time in response to changes in interest rates and other market
factors. In these and other similar situations, the Adviser will use more
sophisticated analytical techniques that incorporate the anticipated economic
life of a security into the determination of its interest rate exposure.
March , 1998 Prospectus A-1
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
Certain of the Funds make use of average portfolio credit quality standards
to assist institutional investors whose own investment guidelines limit their
investments accordingly. In determining a 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. A 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 a Fund does not mean that all securities held by the Fund will be
rated in that category or higher. A 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 a Fund's assets invested in securities in a particular rating
category will vary. Following is a description of Moody's and S&P's ratings
applicable to fixed income securities.
MOODY'S INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
March , 1998 Prospectus B-1
<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
CORPORATE AND MUNICIPAL BOND RATINGS
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
B-2 PIMCO Funds: Pacific Investment Management Series
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The B rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
March , 1998 Prospectus B-3
<PAGE>
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from A for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P by the issuer or obtained from other sources it considers
reliable. S&P does not perform an audit in connection with any rating and may,
on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in or unavailability
of such information.
B-4 PIMCO Funds: Pacific Investment Management Series
<PAGE>
[LOGO OF PIMCO FUND]
PACIFIC INVESTMENT ADVISER AND ADMINISTRATOR
Pacific Investment Management Company
INVESTMENT 840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
MANAGEMENT
SERIES CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INSTITUTIONAL
AND 801 Pennsylvania
ADMINISTRATIVE Kansas City, MO 64105
SHARE CLASSES
INDEPENDENT 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
- --------------------------------------------------------------------------------
March ,1998
<PAGE>
PIMCO Funds Prospectus
Pacific LONG-TERM BOND FUND
Investment
Management Long-Term U.S. Government Fund
Series
March __, 1998 INTERMEDIATE-TERM BOND FUNDS
Emerging Markets Bond Fund
Foreign Bond Fund
Global Bond Fund II
High Yield Fund
Total Return Fund
Real Return Bond Fund
SHORTER-TERM BOND FUNDS
Low Duration Fund
Short-Term Fund
Money Market Fund
TAX EXEMPT FUND
Municipal Bond Fund
STOCK FUND
StocksPLUS Fund
[LOGO OF PIMCO FUNDS APPEARS HERE]
<PAGE>
PIMCO Funds: Pacific Investment Management Series
Prospectus
March , 1998
PIMCO Funds (the "Trust") is an open-end series management invest-
ment company consisting of twenty-five separate investment portfo-
lios, each with different investment objectives and strategies.
Twelve of the twenty-five portfolios (each a "Fund") are described
herein. The Trust is designed to provide access to the profes-
sional investment management services offered by Pacific Invest-
ment Management Company ("Pacific Investment Management"), which
serves as investment adviser (the "Advisor") to the Funds. The ad-
dress of PIMCO Funds is 840 Newport Center Drive, Suite 360, New-
port Beach, CA 92660.
Each 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, certain Funds and other
series of the Trust offer up to two additional classes of shares,
Institutional Class shares and Administrative Class shares. See
"Description of the Trust--Multiple Classes of Shares."
This Prospectus concisely describes the information investors
should know before investing in Class A, Class B or Class C shares
of the Funds. Please read this Prospectus carefully and keep it
for further reference. Information about the investment objective
of each Fund, along with a detailed description of the types of
securities in which each Fund may invest and of investment poli-
cies and restrictions applicable to each Fund, are set forth in
this Prospectus. There can be no assurance that the investment ob-
jective of any Fund will be achieved. Because the market value of
each Fund's investments will change, the investment returns and
net asset value per share of each Fund will vary.
A Statement of Additional Information, dated March , 1998, as
amended or supplemented from time to time, is available free of
charge by writing to PIMCO Funds Distribution Company (the "Dis-
tributor"), 2187 Atlantic Street, Stamford, Connecticut 06902, or
by telephoning 800-426-0107. The Statement of Additional Informa-
tion, which contains more detailed information about the Trust,
has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SE-
CURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION, 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 OF-
FENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORA-
TION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENT IN THE MONEY MARKET FUND (OR IN ANY OTHER FUND) IS NEI-
THER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE
NO ASSURANCE THAT THE MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
EACH OF THE FUNDS, EXCEPT THE MONEY MARKET FUND, MAY INVEST ALL OF
ITS ASSETS IN DERIVATIVE INSTRUMENTS, SOME OF WHICH MAY BE PARTIC-
ULARLY SENSITIVE TO CHANGES IN PREVAILING INTEREST RATES. UNEX-
PECTED CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT THE VALUE OF
A FUND'S INVESTMENTS IN PARTICULAR DERIVATIVE INSTRUMENTS.
THE HIGH YIELD AND EMERGING MARKETS BOND FUNDS MAY INVEST ALL OF
THEIR ASSETS IN JUNK BONDS, WHICH ARE SUBJECT TO HIGH RISK, AND
SPECULATIVE WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF PRIN-
CIPAL. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE IN-
VESTING IN THE HIGH YIELD FUND. SEE "CHARACTERISTICS AND RISKS OF
SECURITIES AND INVESTMENT TECHNIQUES--HIGH YIELD SECURITIES ("JUNK
BONDS")."
TABLE OF CONTENTS
<TABLE>
<S> <C>
PIMCO Funds Overview.......... 3
Schedule of Fees.............. 4
Financial Highlights.......... 8
Investment Objectives and
Policies...................... 12
Investment Risks and
Considerations................ 19
Characteristics and Risks of
Securities
and Investment Techniques.... 20
Performance Information....... 34
How to Buy Shares............. 36
Alternative Purchase
Arrangements.................. 39
Exchange Privilege............ 48
</TABLE>
<TABLE>
<S> <C>
How to Redeem..................... 49
Distributor and Distribution and
Servicing Plans................... 53
How Net Asset Value Is Determined
.................................. 56
Distributions..................... 57
Taxes............................. 57
Management of the Trust........... 59
Description of the Trust.......... 62
Mailings to Shareholders.......... 63
Appendix A--Description of
Duration.......................... 64
Appendix B--Description of
Securities Ratings................ 65
</TABLE>
PIMCO Funds: Pacific Investment Management Series
2
<PAGE>
PIMCO Funds Overview
Pacific Investment Management, a subsidiary partnership of PIMCO
Advisors L.P., is the investment adviser of all of the Funds. Pa-
cific Investment Management is one of the premier fixed income in-
vestment management firms in the U.S. As of September 30, 1997,
Pacific Investment Management had over $108.5 billion in assets
under management. Pacific Investment Management invests in all
sectors of the fixed income market, using its total return philos-
ophy--seeking capital appreciation as well as yield.
<TABLE>
<CAPTION>
PIMCO PRIMARY
FUND NAME OBJECTIVE DURATION CREDIT QUALITY(/1/)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUND LONG-TERM BOND
PROFILES FUNDS Long-Term U.S. Government Maximum total return, consistent 18 years A to Aaa
with preservation of capital
and prudent investment management
---------------------------------------------------------------------------------------------------------
INTERMEDIATE- Emerging Markets Bond Maximum total return, consistent 0-8 years B to Aaa
TERM with preservation of capital
BOND FUNDS and prudent investment management
(non-U.S.)
---------------------------------------------------------------------------------
Foreign Bond Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital 10% below Baa
and prudent investment management
(non-U.S.)
---------------------------------------------------------------------------------
Global Bond II Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital (U.S. 10% below Baa
and non-U.S.)
---------------------------------------------------------------------------------
High Yield Maximum total return, consistent 2-6 years B to Aaa; min
with preservation of capital 65% below Baa
and prudent investment management
---------------------------------------------------------------------------------
Total Return Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital 10% below Baa
and prudent investment management
---------------------------------------------------------------------------------
Real Return Bond Maximum real return, consistent Not applicable, A to Aaa
with preservation of real capital but see Fund
and prudent investment management description
---------------------------------------------------------------------------------------------------------
SHORTER-TERM
BOND FUNDS Low Duration Maximum total return, consistent 1-3 years B to Aaa; max
with preservation of capital 10% below Baa
and prudent investment management
---------------------------------------------------------------------------------
Short-Term Maximum current income, consistent 0-1 year B to Aaa; max
with preservation of capital and 10% below Baa
daily liquidity
---------------------------------------------------------------------------------
Money Market Maximum current income, consistent less than or equal Min 95% Aaa or
with preservation of capital and to 90 days dollar- Prime 1; less than
daily liquidity weighted average or equal to 5% Aa
maturity or Prime 2
---------------------------------------------------------------------------------------------------------
TAX EXEMPT FUND Municipal Bond High current income exempt from 3-10 years Ba to Aaa; max
federal income tax, consistent with 10% below Baa
preservation of capital
---------------------------------------------------------------------------------------------------------
EQUITY FUND StocksPLUS(/2/) Total return which exceeds that of the 0-1 year B to Aaa; max
S&P 500 10% below Baa
</TABLE>
1. As rated by Moody's Investors Service, Inc., or if unrated, de-
termined to be of comparable quality. For specific information
concerning the credit quality of the securities in each Fund's
portfolio, see "Investment Objectives and Policies."
2. The StocksPLUS Fund may invest all of its assets in stock index
futures backed by short-term bonds.
March , 1998 Prospectus
3
<PAGE>
Schedule of Fees
SHAREHOLDER
TRANSACTION
EXPENSES
<TABLE>
<CAPTION>
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)
LONG-TERM U.S.
GOVERNMENT, MUNICIPAL
BOND, EMERGING MARKETS
BOND, FOREIGN BOND,
GLOBAL BOND II, HIGH
YIELD AND TOTAL RETURN
FUNDS 4.50% None None
REAL RETURN BOND, LOW
DURATION AND STOCKSPLUS
FUNDS 3.00% None None
SHORT-TERM FUND 2.00% None None
MONEY MARKET FUND None(/1/) 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%(/2/) 5%(/3/) 1%(/4/)
-------------------------------------------------------
EXCHANGE FEE None(/1/) None None
</TABLE>
1. Regular sales charges apply when Class A shares of the Money
Market Fund (on which no sales charge was paid at time of pur-
chase) are exchanged for shares of any other Fund.
2. Imposed only in certain circumstances where Class A shares are
purchased without a front-end sales charge at the time of pur-
chase. See "Alternative Purchase Arrangements" in this Prospectus.
3. The maximum CDSC is imposed on shares redeemed in the first
year. For shares held longer than one year, the CDSC declines ac-
cording to the schedule set forth under "Alternative Purchase Ar-
rangements--Deferred Sales Charge Alternative--Class B Shares" in
this Prospectus.
4. The CDSC on Class C shares is imposed only on shares redeemed
in the first year.
<TABLE>
<CAPTION>
EXAMPLE: You EXAMPLE: You
would pay the would pay the
following following
expenses on a expenses on a
$1,000 investment $1,000 investment
assuming (1) 5% assuming (1) 5%
annual return and annual return and
(2) redemption at (2) no
ANNUAL FUND OPERATING EXPENSES the end of each redemption:
(As a percentage of average net assets): time period:
TOTAL
ADMINI- FUND
ADVISORY STRATIVE 12B-1 OPERATING YEAR YEAR
FUND FEE FEE FEES(/1/) EXPENSES 1 3 5 10 1 3 5 10
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A LONG-TERM U.S.
SHARES GOVERNMENT .25% .40% .25% .90% $54 $72 $93 $151 $54 $72 $93 $151
-------------------------------------------------------------------------------------------------
EMERGING MARKETS BOND .45 .55 .25 1.25 57 83 111 189 57 83 111 189
-------------------------------------------------------------------------------------------------
FOREIGN BOND .25 .45 .25 .95 54 74 95 156 54 74 95 156
-------------------------------------------------------------------------------------------------
GLOBAL BOND II .25 .45 .25 .95 54 74 95 156 54 74 95 156
-------------------------------------------------------------------------------------------------
HIGH YIELD .25 .40 .25 .90 54 72 93 151 54 72 93 151
-------------------------------------------------------------------------------------------------
TOTAL RETURN .25 .40 .25 .90 54 72 93 151 54 72 93 151
-------------------------------------------------------------------------------------------------
REAL RETURN BOND .25 ,40 .25 .90 39 58 78 137 39 58 78 137
-------------------------------------------------------------------------------------------------
LOW DURATION .25 .40 .25 .90 39 58 78 137 39 58 78 137
-------------------------------------------------------------------------------------------------
SHORT-TERM .25 .35 .25 .85 29 47 66 123 29 47 66 123
-------------------------------------------------------------------------------------------------
MONEY MARKET .15 .35 .10(2) .60(3) 6 19 33 75 6 19 33 75
-------------------------------------------------------------------------------------------------
MUNICIPAL BOND .25 .40 .25 .90 54 72 N/A N/A 54 72 N/A N/A
-------------------------------------------------------------------------------------------------
STOCKSPLUS .40 .40 .25 1.05 40 62 86 154 40 62 86 154
-------------------------------------------------------------------------------------------------
</TABLE>
1. 12b-1 fees represent servicing fees which are paid to the Dis-
tributor and repaid to participating brokers, certain banks and
other financial intermediaries. See "Distributor and Distribution
and Servicing Plans."
2. The Distributor has voluntarily undertaken to reduce the 12b-1
fee it receives with respect to the Money Market Fund to .10% of
the Fund's average daily net assets until further notice. Absent
such undertaking, the 12b-1 fee would be .20% of the Fund's aver-
age daily net assets.
3. Absent the undertaking noted, the "Total Fund Operating Ex-
penses" for the Money Market Fund would be .70% of the Fund's av-
erage daily net assets.
PIMCO Funds: Pacific Investment Management Series
4
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE: You would EXAMPLE: You
pay the following would pay the
expenses on a following
$1,000 investment expenses on a
assuming (1) 5% $1,000 investment
annual return and assuming (1) 5%
(2) redemption at annual return and
ANNUAL FUND OPERATING EXPENSES the end of each (2) no
(As a percentage of average net assets): time period: redemption:
TOTAL
ADMINI- FUND
ADVISORY STRATIVE 12B-1 OPERATING YEAR YEAR
FUND FEE FEE FEES(/1/) EXPENSES 1 3 5 10 1 3 5 10
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B LONG-TERM U.S.
SHARES GOVERNMENT .25% .40% 1.00% 1.65% $67 $82 $110 $166 $17 $52 $90 $166
------------------------------------------------------------------------------------------------------
EMERGING MARKETS BOND .45 .55 1.00 2.00 70 93 128 204 20 63 108 204
------------------------------------------------------------------------------------------------------
FOREIGN BOND .25 .45 1.00 1.70 67 84 112 171 17 54 92 171
------------------------------------------------------------------------------------------------------
GLOBAL BOND II .25 .45 1.00 1.70 67 84 112 171 17 54 92 171
------------------------------------------------------------------------------------------------------
HIGH YIELD .25 .40 1.00 1.65 67 82 110 166 17 52 90 166
------------------------------------------------------------------------------------------------------
TOTAL RETURN .25 .40 1.00 1.65 67 82 110 166 17 52 90 166
------------------------------------------------------------------------------------------------------
REAL RETURN BOND .25 .40 1.00 1.65 67 82 110 166 17 52 90 166
------------------------------------------------------------------------------------------------------
LOW DURATION .25 .40 1.00 1.65 67 82 110 166 17 52 90 166
------------------------------------------------------------------------------------------------------
SHORT-TERM .25 .35 1.00 1.60 66 80 107 160 16 50 87 160
------------------------------------------------------------------------------------------------------
MONEY MARKET .15 .35 1.00 1.50 65 77 102 143 15 47 82 143
------------------------------------------------------------------------------------------------------
MUNICIPAL BOND .25 .40 1.00 1.65 67 82 N/A N/A 17 52 N/A N/A
------------------------------------------------------------------------------------------------------
STOCKSPLUS .40 .40 1.00 1.80 68 87 117 182 18 57 97 182
------------------------------------------------------------------------------------------------------
</TABLE>
1. 12b-1 fees which equal or are less than .25% represent servic-
ing fees which are paid to the Distributor and repaid to partici-
pating 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."
March , 1998 Prospectus
5
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE: You EXAMPLE: You
would pay the would pay the
following following
expenses on a expenses on a
$1,000 investment $1,000 investment
assuming (1) 5% assuming (1) 5%
annual return and annual return and
(2) redemption at (2) no
ANNUAL FUND OPERATING EXPENSES the end of each redemption:
(As a percentage of average net assets): time period:
TOTAL
ADMINI- FUND
ADVISORY STRATIVE 12B-1 OPERATING YEAR YEAR
FUND FEE FEE FEES(/1/) EXPENSES 1 3 5 10 1 3 5 10
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS C LONG-TERM U.S.
SHARES GOVERNMENT .25% .40% 1.00% 1.65% $27 $52 $90 $195 $17 $52 $90 $195
---------------------------------------------------------------------------------------------------------
EMERGING MARKETS BOND .45 .55 1.00 2.00 30 63 108 233 20 63 108 233
---------------------------------------------------------------------------------------------------------
FOREIGN BOND .25 .45 1.00 1.70 27 54 92 201 17 54 92 201
---------------------------------------------------------------------------------------------------------
GLOBAL BOND II .25 .45 1.00 1.70 27 54 92 201 17 54 92 201
---------------------------------------------------------------------------------------------------------
HIGH YIELD .25 .40 1.00 1.65 27 52 90 195 17 52 90 195
---------------------------------------------------------------------------------------------------------
TOTAL RETURN .25 .40 1.00 1.65 27 52 90 195 17 52 90 195
---------------------------------------------------------------------------------------------------------
REAL RETURN BOND .25 .40 .75(/2/) 1.40(/3/) 24 44 77 168 14 44 77 168
---------------------------------------------------------------------------------------------------------
LOW DURATION .25 .40 .75 1.40 24 44 77 168 14 44 77 168
---------------------------------------------------------------------------------------------------------
SHORT-TERM .25 .35 .55(/2/) 1.15(/3/) 22 37 63 140 12 37 63 140
---------------------------------------------------------------------------------------------------------
MONEY MARKET .15 .35 .10(/2/) .60(/3/) 16 19 33 75 6 19 33 75
---------------------------------------------------------------------------------------------------------
MUNICIPAL BOND .25 .40 1.00 1.65 27 52 N/A N/A 17 52 N/A N/A
---------------------------------------------------------------------------------------------------------
STOCKSPLUS .40 .40 .75(/2/) 1.55(/3/) 26 49 84 185 16 49 84 185
---------------------------------------------------------------------------------------------------------
</TABLE>
1. 12b-1 fees which equal or are less than .25% represent servic-
ing fees which are paid to the Distributor and repaid to partici-
pating 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."
2. The Distributor has voluntarily undertaken to reduce the 12b-1
fee it may receive with respect to each of the Real Return Bond,
Short-Term, Money Market and StocksPLUS Funds to the following an-
nual rates based on the Fund's average daily net assets until fur-
ther notice: Real Return Bond--.75%; Short-Term--.55%; Money Mar-
ket--.10%; and StocksPLUS--.75%. Absent such undertakings, the
12b-1 fee for each such Fund would be as follows: Real Return
Bond--1.00%; Short-Term--1.00%; Money Market--.20%; and
StocksPLUS--1.00%.
3. Absent the undertakings noted, the "Total Fund Operating Ex-
penses" for the Real Return Bond, Short-Term, Money Market and
StocksPLUS Funds would be as follows (based on average daily net
assets): Real Return Bond--1.65%; Short-Term--1.60%; Money Mar-
ket--.70%; and StocksPLUS--1.80%.
The purpose of the foregoing tables is to assist investors in un-
derstanding 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 Funds. The information has been restated where
appropriate to reflect the Funds' current fees and expenses. 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 Trust 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 As-
sociation of Securities Dealers, Inc.
NOTE: THE FIGURES SHOWN IN THE EXAMPLES ARE ENTIRELY HYPOTHETICAL.
THEY ARE NOT REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EX-
PENSES; ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS
THAN SHOWN.
PIMCO Funds: Pacific Investment Management Series
6
<PAGE>
(This page left blank intentionally)
March , 1998 Prospectus 7
<PAGE>
Financial Highlights
The following information regarding selected per share data and
ratios for shares of certain of the Funds is part of the Trust's
audited financial statements, which are included in the Trust's
Annual Report dated March 31, 1997, and the Trust's unaudited fi-
nancial statements, which are included in the Trust's Semiannual
Report dated September 30, 1997, both of which are incorporated by
reference in the Statement of Additional Information. The Trust's
audited financial statements and selected per share data and ra-
tios appearing below have been examined by Price Waterhouse LLP,
independent accountants, whose opinion thereon is also included in
the Annual Report, which may be obtained without charge. The
Trust's Semiannual Report also may be obtained without charge. In-
formation is presented for each Fund described herein which had
investment operations during the reporting periods. Information
regarding the Global Bond Fund II reflects the operational history
of the Global Income Fund, a former series of PIMCO Advisors Funds
that was reorganized as a series of the Trust on January 17, 1997.
Information for the Global Bond Fund II for the period ended Sep-
tember 30, 1996, has been audited by that Fund's former indepen-
dent accountants.
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM U.S. GOVERNMENT
FUND
Class A
9/30/97(*) $ 9.39 $0.29(+) $ 0.75 (+) $ 1.04 $(0.29) $ 0.00 $ 0.00 $0.00
3/31/97(a) 9.67 0.32 (0.47) (0.15) (0.13) 0.00 0.00 0.00
Class B
9/30/97(*) 9.39 0.25(+) 0.75 (+) 1.00 (0.25) 0.00 0.00 0.00
3/31/97(a) 9.67 0.29 (0.47) (0.18) (0.10) 0.00 0.00 0.00
Class C
9/30/97(*) 9.39 0.25(+) 0.75 (+) 1.00 (0.25) 0.00 0.00 0.00
3/31/97(a) 9.67 0.29 (0.47) (0.18) (0.10) 0.00 0.00 0.00
FOREIGN BOND FUND
Class A
9/30/97(*) $10.41 $0.22(+) $ 0.47 (+) $ 0.69 $(0.21) $ 0.00 $ 0.00 $0.00
3/31/97(b) 10.59 0.59 (0.72) (0.13) (0.05) 0.00 0.00 0.00
Class B
9/30/97(*) 10.41 0.18(+) 0.47 (+) 0.65 (0.17) 0.00 0.00 0.00
3/31/97(b) 10.59 0.58 (0.72) (0.14) (0.04) 0.00 0.00 0.00
Class C
9/30/97(*) 10.41 0.18(+) 0.46 (+) 0.64 (0.16) 0.00 0.00 0.00
3/31/97(b) 10.59 0.58 (0.72) (0.14) (0.14) 0.00 0.00 0.00
EMERGING MARKETS BOND FUND
Class A
9/30/97(*)(c) $10.00 $0.11(+) $ 0.04 (+) $ 0.15 $(0.11) $ 0.00 $ 0.00 $0.00
Class B
9/30/97(*)(c) 10.00 0.09(+) 0.04 (+) 0.13 (0.09) 0.00 0.00 0.00
Class C
9/30/97(*)(c) 10.00 0.09(+) 0.04 (+) 0.13 (0.09) 0.00 0.00 0.00
HIGH YIELD FUND
Class A
9/30/97(*) $11.10 $0.48(+) $ 0.52 (+) $ 1.00 $(0.48) $ 0.00 $ 0.00 $0.00
3/31/97(d) 11.18 0.17 (0.05) 0.12 (0.20) 0.00 0.00 0.00
Class B
9/30/97(*) 11.10 0.44(+) 0.52 (+) 0.96 (0.44) 0.00 0.00 0.00
3/31/97(d) 11.18 0.15 (0.05) 0.10 (0.18) 0.00 0.00 0.00
Class C
9/30/97(*) 11.10 0.44(+) 0.52 (+) 0.96 (0.44) 0.00 0.00 0.00
3/31/97(d) 11.18 0.15 (0.05) 0.10 (0.18) 0.00 0.00 0.00
</TABLE>
- -------
(+)Per share amounts based on average number of shares outstanding during the
period.
(*)Unaudited.
(a)From commencement of operations, January 20, 1997.
(b)From commencement of operations, January 13, 1997.
(c)From commencement of operations, July 31, 1997.
(d)From commencement of operations, January 29, 1997.
PIMCO Funds: Pacific Investment Management Series
8
<PAGE>
<TABLE>
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
TAX BASIS VALUE END EXPENSES TO INCOME TO PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 $(0.29) $10.14 11.19% $ 2,720 0.90%+ 5.78%+ 150%
0.00 (0.13) 9.39 (1.72) 1,204 1.12+ 6.91+ 402
0.00 (0.25) 10.14 10.76 1,994 1.65+ 4.93+ 150
0.00 (0.10) 9.39 (1.92) 454 1.87+ 4.95+ 402
0.00 (0.25) 10.14 10.77 1,499 1.65+ 4.93+ 150
0.00 (0.10) 9.39 (1.83) 275 1.88+ 5.52+ 402
$0.00 $(0.21) $10.89 6.65% $ 3,309 0.95%+ 4.12%+ 64%
0.00 (0.05) 10.41 (1.21) 704 0.97+ 4.95+ 984
0.00 (0.17) 10.89 6.23 6,205 1.70+ 3.39+ 64
0.00 (0.04) 10.41 (1.34) 1,221 1.75+ 3.73+ 984
0.00 (0.16) 10.89 6.23 9,572 1.70+ 3.33+ 64
0.00 (0.04) 10.41 (1.32) 1,788 1.76+ 4.09+ 984
$0.00 $(0.11) $10.04 1.50% $ 144 1.25%+ 5.81%+ 312%
0.00 (0.09) 10.04 1.34 58 2.00+ 4.70+ 312
0.00 (0.09) 10.04 1.35 80 2.00+ 4.11+ 312
$0.00 $(0.48) $11.62 9.18% $49,258 0.90%+ 8.43%+ 17%
0.00 (0.20) 11.10 1.06 28,873 0.92+ 8.28+ 67
0.00 (0.44) 11.62 8.77 100,636 1.65+ 7.68+ 17
0.00 (0.18) 11.10 0.86 60,269 1.67+ 7.52+ 67
0.00 (0.44) 11.62 8.78 242,856 1.65+ 7.71+ 17
0.00 (0.18) 11.10 0.88 205,297 1.68+ 7.56+ 67
</TABLE>
- -------
+Annualized.
March , 1998 Prospectus
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL BOND FUND II
Class A
09/30/97(*) $10.84 $ 0.26 (+) $ 0.54 (+) $ 0.80 $(0.25) $ 0.00 $ 0.00 $0.00
10/01/96--03/31/97 10.96 0.66 (0.16) 0.50 (0.22) 0.00 (0.40) 0.00
09/30/96 10.00 0.32 (e) 0.95 1.27 (0.31) 0.00 0.00 0.00
Class B
09/30/97(*) 10.84 0.21 (+) 0.55 (+) 0.76 (0.21) 0.00 0.00 0.00
10/01/96--03/31/97 10.96 0.62 (0.16) 0.46 (0.18) 0.00 (0.40) 0.00
09/30/96 10.00 0.30 (e) 0.92 1.22 (0.26) 0.00 0.00 0.00
Class C
09/30/97(*) 10.84 0.20 (+) 0.56 (+) 0.76 (0.21) 0.00 0.00 0.00
10/01/96--03/31/97 10.96 0.62 (0.16) 0.46 (0.18) 0.00 (0.40) 0.00
09/30/96 10.00 0.30 (e) 0.92 1.22 (0.26) 0.00 0.00 0.00
TOTAL RETURN FUND
Class A
09/30/97(*) $10.27 $ 0.30 (+) $ 0.46 (+) $ 0.76 $(0.30) $ 0.00 $ 0.00 $0.00
03/31/97(b) 10.40 0.12 (0.12) 0.00 (0.13) 0.00 0.00 0.00
Class B
09/30/97(*) 10.27 0.26 (+) 0.46 (+) 0.72 (0.26) 0.00 0.00 0.00
03/31/97(b) 10.40 0.11 (0.12) (0.01) (0.12) 0.00 0.00 0.00
Class C
09/30/97(*) 10.27 0.26 (+) 0.46 (+) 0.72 (0.26) 0.00 0.00 0.00
03/31/97(b) 10.40 0.11 (0.12) (0.01) (0.12) 0.00 0.00 0.00
REAL RETURN BOND FUND
Class A
09/30/97(*) $ 9.93 $ 0.21 (+) $ 0.02 (+) $ 0.23 $(0.21) $ 0.00 $ 0.00 $0.00
03/31/97(d) 10.00 0.11 (+) (0.10)(+) 0.01 (0.08) 0.00 0.00 0.00
Class B
09/30/97(*) 9.93 0.18 (+) 0.02 (+) 0.20 (0.18) 0.00 0.00 0.00
03/31/97(d) 10.00 0.09 (0.10) (0.01) (0.06) 0.00 0.00 0.00
Class C
09/30/97(*) 9.93 0.19 (+)(f) 0.02 (+) 0.21 (0.19) 0.00 0.00 0.00
03/31/97(d) 10.00 0.09 (0.10) (0.01) (0.06) 0.00 0.00 0.00
LOW DURATION FUND
Class A
09/30/97(*) $ 9.98 $ 0.29 (+) $ 0.22 (+) $ 0.51 $(0.29) $ 0.00 $ 0.00 $0.00
03/31/97(b) 10.02 0.12 (0.03) 0.09 (0.12) (0.01) 0.00 0.00
Class B
09/30/97(*) 9.98 0.25 (+) 0.22 (+) 0.47 (0.25) 0.00 0.00 0.00
03/31/97(b) 10.02 0.10 (0.03) 0.07 (0.11) 0.00 0.00 0.00
Class C
09/30/97(*) 9.98 0.27 (+) 0.21 (+) 0.48 (0.26) 0.00 0.00 0.00
03/31/97(b) 10.02 0.11 (0.03) 0.08 (0.11) (0.01) 0.00 0.00
SHORT-TERM FUND
Class A
09/30/97(*) $10.00 $ 0.29 (+) $ 0.08 (+) $ 0.37 $(0.29) $ 0.00 $ 0.00 $0.00
03/31/97(a) 10.04 0.10 (0.03) 0.07 (0.10) (0.01) 0.00 0.00
Class B
09/30/97(*) 10.00 0.26 (+) 0.08 (+) 0.34 (0.26) 0.00 0.00 0.00
03/31/97(a) 10.04 0.09 (0.03) 0.06 (0.10) 0.00 0.00 0.00
Class C
09/30/97(*) 10.00 0.27 (+)(g) 0.08 (+) 0.35 (0.27) 0.00 0.00 0.00
03/31/97(a) 10.04 0.09 (0.03) 0.06 (0.10) 0.00 0.00 0.00
MONEY MARKET FUND
Class A
09/30/97(*) $ 1.00 $ 0.03 (+)(h) $ 0.00 (+) $ 0.03 $(0.03) $ 0.00 $ 0.00 $0.00
03/31/97(d) 1.00 0.01 0.00 0.01 (0.01) 0.00 0.00 0.00
Class B
09/30/97(*) 1.00 0.02 (+) 0.00 (+) 0.02 (0.02) 0.00 0.00 0.00
03/31/97(d) 1.00 0.01 0.00 0.01 (0.01) 0.00 0.00 0.00
Class C
09/30/97(*) 1.00 0.03 (+)(i) 0.00 (+) 0.03 (0.03) 0.00 0.00 0.00
03/31/96(d) 1.00 0.01 0.00 0.01 (0.01) 0.00 0.00 0.00
STOCKSPLUS FUND
Class A
09/30/97(*) $11.46 $ 1.12 (+) $ 1.89 (+) $ 3.01 $(0.30) $ 0.00 $ 0.00 $0.00
03/31/97(b) 11.91 (0.10) (0.20) (0.30) (0.15) 0.00 0.00 0.00
Class B
09/30/97(*) 11.44 1.08 (+) 1.89 (+) 2.97 (0.27) 0.00 0.00 0.00
03/31/97(b) 11.91 (0.13) (0.20) (0.33) (0.14) 0.00 0.00 0.00
Class C
09/30/97(*) 11.45 1.09 (+)(j) 1.89 (+) 2.98 (0.28) 0.00 0.00 0.00
03/31/97(b) 11.91 (0.12) (0.20) (0.32) (0.14) 0.00 0.00 0.00
<CAPTION>
YEAR OR
PERIOD
ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL BOND FUND II
Class A
09/30/97(*)
10/01/96--03/31/97
09/30/96
Class B
09/30/97(*)
10/01/96--03/31/97
09/30/96
Class C
09/30/97(*)
10/01/96--03/31/97
09/30/96
TOTAL RETURN FUND
Class A
09/30/97(*)
03/31/97(b)
Class B
09/30/97(*)
03/31/97(b)
Class C
09/30/97(*)
03/31/97(b)
REAL RETURN BOND FUND
Class A
09/30/97(*)
03/31/97(d)
Class B
09/30/97(*)
03/31/97(d)
Class C
09/30/97(*)
03/31/97(d)
LOW DURATION FUND
Class A
09/30/97(*)
03/31/97(b)
Class B
09/30/97(*)
03/31/97(b)
Class C
09/30/97(*)
03/31/97(b)
SHORT-TERM FUND
Class A
09/30/97(*)
03/31/97(a)
Class B
09/30/97(*)
03/31/97(a)
Class C
09/30/97(*)
03/31/97(a)
MONEY MARKET FUND
Class A
09/30/97(*)
03/31/97(d)
Class B
09/30/97(*)
03/31/97(d)
Class C
09/30/97(*)
03/31/96(d)
STOCKSPLUS FUND
Class A
09/30/97(*)
03/31/97(b)
Class B
09/30/97(*)
03/31/97(b)
Class C
09/30/97(*)
03/31/97(b)
</TABLE>
- -------
(e)Reflects voluntary waiver of investment advisory fee of $12,041 (.01 per
share) by the Advisor.
(f)Reflects voluntary waiver of distribution fee of $586 (.01 per share) by the
Distributor.
(g)Reflects voluntary waiver of distribution fee of $5,771 (.02 per share) by
the Distributor.
(h)Reflects voluntary waiver of distribution fee of $14,946 (.00 per share) by
the Distributor.
(i)Reflects voluntary waiver of distribution fee of $30,556 (.00 per share) by
the Distributor.
(j)Reflects voluntary waiver of distribution fee of $40,185 (.02 per share) by
the Distributor.
10
PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED) [/R]
<TABLE>
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
TAX BASIS VALUE END EXPENSES TO INCOME TO PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 $(0.25) $11.39 7.44% $ 8,761 0.95%+ 4.51%+ 133%
0.00 (0.62) 10.84 4.55 7,652 2.05+ 5.60+ 307
0.00 (0.31) 10.96 15.01 7,360 1.27(k) 4.88(l) 1,246
0.00 (0.21) 11.39 7.04 4,474 1.70+ 3.70+ 133
0.00 (0.58) 10.84 4.17 3,925 2.57+ 4.22+ 307
0.00 (0.26) 10.96 14.54 3,240 2.49(k) 4.09(l) 1,246
0.00 (0.21) 11.39 7.05 5,550 1.70+ 3.67+ 133
0.00 (0.58) 10.84 4.17 5,323 2.43+ 4.14+ 307
0.00 (0.26) 10.96 14.54 3,459 2.49(k) 4.09(l) 1,246
$0.00 $(0.30) $10.73 7.52% $241,075 0.90%+ 5.68%+ 85%
0.00 (0.13) 10.27 0.02 115,742 0.91+ 6.08+ 173
0.00 (0.26) 10.73 7.11 107,136 1.65+ 4.95+ 85
0.00 (0.12) 10.27 (0.10) 74,130 1.67+ 5.28+ 173
0.00 (0.26) 10.73 7.12 342,949 1.65+ 5.00+ 85
0.00 (0.12) 10.27 (0.11) 329,104 1.67+ 5.32+ 173
$0.00 $(0.21) $ 9.95 2.33% $ 652 0.91%+ 4.20%+ 341%
0.00 (0.08) 9.93 0.15 1 0.90+ 6.14+ 160
0.00 (0.18) 9.95 2.07 926 1.66+ 3.59+ 341
0.00 (0.06) 9.93 (0.08) 509 1.59+ 3.43+ 160
0.00 (0.19) 9.95 2.17 508 1.41+(m) 3.85+(n) 341
0.00 (0.06) 9.93 (0.07) 148 1.62+ 5.13+ 160
$0.00 $(0.29) $10.20 5.17% $ 72,176 0.90%+ 5.66%+ 132%
0.00 (0.13) 9.98 0.85 59,348 0.91+ 5.84+ 240
0.00 (0.25) 10.20 4.77 8,487 1.65+ 4.95+ 132
0.00 (0.11) 9.98 0.68 6,296 1.67+ 5.03+ 240
0.00 (0.26) 10.20 4.91 59,625 1.40+ 5.32+ 132
0.00 (0.12) 9.98 0.75 63,606 1.42+ 5.36+ 240
$0.00 $(0.29) $10.08 3.71% $ 7,554 0.85%+ 5.57%+ 24%
0.00 (0.11) 10.00 0.66 2,533 0.86+ 5.07+ 77
0.00 (0.26) 10.08 3.44 609 1.60+ 4.95+ 24
0.00 (0.10) 10.00 0.58 114 1.62+ 4.83+ 77
0.00 (0.27) 10.08 3.56 3,721 1.15+(o) 5.31+(p) 24
0.00 (0.10) 10.00 0.63 1,359 1.14+ 4.78+ 77
$0.00 $(0.03) $ 1.00 2.52% $ 44,690 0.60%+(q) 5.05%+(r) N/A
0.00 (0.01) 1.00 1.01 43,589 0.57+ 4.44+ N/A
0.00 (0.02) 1.00 2.09 2,584 1.50+ 4.12+ N/A
0.00 (0.01) 1.00 0.83 3,143 1.41+ 3.62+ N/A
0.00 (0.03) 1.00 2.52 59,700 0.60+(q) 5.04+(s) N/A
0.00 (0.01) 1.00 1.02 85,398 0.58+ 4.47+ N/A
$0.00 $(0.30) $14.17 26.38% $ 34,474 1.05%+ 5.21%+ 14%
0.00 (0.15) 11.46 (2.59) 5,790 1.10+ (10.69)+ 47
0.00 (0.27) 14.14 26.01 44,617 1.80+ 13.95 + 14
0.00 (0.14) 11.44 (2.81) 8,281 1.88+ (15.13)+ 47
0.00 (0.28) 14.15 26.08 51,686 1.55+(t) 14.27+(u) 14
0.00 (0.14) 11.45 (2.71) 11,254 1.65+ (12.79)+ 47
</TABLE>
- -------
+Annualized. (p) The Ratio of Net Investment Income
to Average Net assets without the
(k) The Ratio of Expenses to Average waiver would have been 4.86%.
Net Assets without the waiver
would have been 1.57%. (q) The Ratio of Expenses to Average
Net assets without the waiver
(l) The Ratio of Net Investment Income would have been 0.70%.
to Average Net Assets without the
waiver would have been 4.58%. (r) The Ratio of Net Investment Income
to Average Net assets without the
(m) The Ratio of Expenses to Average waiver would have been 4.95%.
Net assets without the waiver
would have been 1.66%. (s) The Ratio of Net Investment Income
to Average Net assets without the
(n) The Ratio of Net Investment Income waiver would have been 4.94%.
to Average Net Assets without the
waiver would have been 3.60%. (t) The Ratio of Expenses to Average
Net assets without the waiver
(o) The Ratio of Expenses to Average would have been 1.80%.
Net assets without the waiver
would have been 1.60%. (u) The Ratio of Net Investment Income
to Average Net assets without the
waiver would have been 14.02%.
[/R]
March , 1998 Prospectus
11
<PAGE>
Investment Objectives and Policies
The investment objective and general investment policies of each
Fund are described below. There can be no assurance that the in-
vestment objective of any Fund will be achieved. For temporary,
defensive or emergency purposes, a Fund may invest without limit
in U.S. debt securities, including short-term money market securi-
ties, when in the opinion of the Advisor it is appropriate to do
so. It is impossible to predict for how long such alternative
strategies will be utilized. The value of all securities and other
instruments held by the Funds will vary from time to time in re-
sponse to a wide variety of market factors. Consequently, the net
asset value per share of each Fund will vary, except that the
Money Market Fund will attempt to maintain a net asset value of
$1.00 per share, although there can be no assurance that the Fund
will be successful in doing so.
The investment objective of the Global Bond Fund II described
in this Prospectus may be changed by the Board of Trustees without
shareholder approval. The investment objective of each other Fund
is fundamental and may not be changed without shareholder approval
by vote of a majority of the outstanding shares of that Fund. If
there is a change in a Fund's investment objective, including a
change approved by a shareholder vote, shareholders should con-
sider whether the Fund remains an appropriate investment in light
of their then current financial position and needs.
Specific portfolio securities eligible for purchase by the
Funds, investment techniques that may be used by the Funds, and
the risks associated with these securities and techniques are de-
scribed more fully under "Characteristics and Risks of Securities
and Investment Techniques" in this Prospectus and "Investment Ob-
jectives and Policies" in the Statement of Additional Information.
FIXED With the exception of the StocksPLUS Fund, each remaining Fund
INCOME FUND (together, the "Fixed Income Funds") differs from the others pri-
DESCRIPTIONSmarily in the length of the Fund's duration or the proportion of
its investments in certain types of fixed income securities. For a
discussion of the concept of duration, see "Appendix A--Descrip-
tion of Duration."
The investment objective of the Global Bond Fund II is to seek
maximum total return, consistent with the preservation of capital.
The investment objective of the Municipal Bond Fund is to seek
high current income exempt from federal income tax, consistent
with preservation of capital. The investment objective of the Real
Return Bond Fund is to seek to realize maximum real return, con-
sistent with the preservation of real capital and prudent invest-
ment management. For a discussion of "real return," see "Total Re-
turn and Real Return," below. The investment objective of the
Short-Term Fund and the Money Market Fund is to seek to obtain
maximum current income consistent with preservation of capital and
daily liquidity. The Money Market Fund also attempts to maintain a
stable net asset value of $1.00 per share, although there can be
no assurance that it will be successful in doing so. Each of the
remaining Fixed Income Funds seeks to maximize total return, con-
sistent with preservation of capital and prudent investment man-
agement.
In selecting securities for each Fixed Income Fund, the Advisor
utilizes economic forecasting, interest rate anticipation, credit
and call risk analysis, foreign currency exchange rate forecast-
ing, and other security selection techniques. The proportion of
each Fund's assets committed to investment in securities with par-
ticular characteristics (such as maturity, type and coupon rate)
will vary based on the Advisor's outlook for the U.S. and foreign
economies, the financial markets, and other factors.
Each of the Fixed Income Funds will invest at least 65% of its
assets in the following types of securities, which, unless specif-
ically provided otherwise in the descriptions of the Funds that
follow, may be issued by domestic or foreign entities and denomi-
nated in U.S. dollars or foreign currencies: securities issued or
guaranteed by the U.S. Government, its agencies or instrumentali-
ties ("U.S. Government securities"); corporate debt securities,
including convertible securities and corporate commercial paper;
mortgage-backed and other asset-backed securities; inflation-in-
dexed bonds issued by both governments and corporations; struc-
tured notes, including hybrid or "indexed" securities, and loan
participations; bank certificates of deposit, fixed time deposits
and bankers' acceptances; repurchase agreements and reverse repur-
chase agreements; debt securities issued by states or local gov-
ernments and their agencies, authorities and other instrumentali-
ties; 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
12
PIMCO Funds: Pacific Investment Management Series
<PAGE>
rates of interest, including rates of interest that vary inversely
at a multiple of a designated or floating rate, or that vary ac-
cording to changes in relative values of currencies. Each of the
Fixed Income Funds may hold different percentages of its assets in
these various types of securities, and each Fund, except the Money
Market Fund, may invest all of its assets in derivative instru-
ments or in mortgage- or asset-backed securities. Each of the
Fixed Income Funds, except the Money Market Fund, may adhere to
its investment policy by entering into a series of purchase and
sale contracts or utilizing other investment techniques by which
it may obtain market exposure to the securities in which it pri-
marily invests.
In addition, each of the Fixed Income Funds may lend its port-
folio securities to brokers, dealers and other financial institu-
tions in order to earn income. Each of the Fixed Income Funds may
purchase and sell options and futures subject to the limits dis-
cussed below, engage in credit spread trades and enter into for-
ward foreign currency contracts.
Each of the Foreign Bond, Global Bond II, Emerging Markets Bond
and Real Return Bond Funds will normally invest at least 80% of
its total assets in "bonds." For this purpose, each of these Funds
considers the various types of debt or fixed income securities in
which it invests, as specifically described elsewhere in this Pro-
spectus, to be "bonds" as referenced in that Fund's name. The use
of this name is not meant to restrict a Fund's investment to the
narrow category of debt securities that are formally called
"bonds."
As a non-fundamental, operating policy, the Advisor intends to
use foreign currency-related derivative instruments (currency
futures and related options, currency options, forward contracts
and swap agreements) in an effort to hedge foreign currency risk
with respect to at least 75% of the assets of the Fixed Income
Funds (other than the Emerging Markets Bond Fund) denominated in
currencies other than the U.S. dollar. There can be no assurance
that the Advisor will be successful in doing so. The active use of
currency derivatives involves transaction costs which may ad-
versely effect yield and return.
The compositions of the Fixed Income Funds differ as follows:
LONG-TERM U.S. GOVERNMENT FUND invests in a diversified portfolio
of primarily U.S. Government securities, which may be represented
by futures contracts (including related options) with respect to
such securities, and options on such securities, when the Advisor
deems it appropriate to do so. The Fund will have a minimum aver-
age portfolio duration of eight years. For point of reference, the
dollar-weighted average portfolio maturity of the Fund is normally
expected to be more than ten years. The total rate of return is
expected to exhibit more volatility than that of the other Fixed
Income Funds due to the greater investment risk normally associ-
ated with longer duration investments. The Long-Term U.S. Govern-
ment Fund's investments in fixed income securities are limited to
those of U.S. dollar-denominated securities of domestic and for-
eign issuers that are rated at least A by Moody's Investors Serv-
ice, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P")
(or, if unrated, determined by the Advisor to be of comparable
quality). In addition, the Fund will not acquire a security if, as
a result, more than 10% of the Fund's total assets would be in-
vested in securities rated below Aa by Moody's or below AA by S&P,
or if more than 25% of the Fund's total assets would be invested
in securities rated Aa by Moody's or AA by S&P.
MUNICIPAL BOND FUND seeks high current income exempt from federal
income tax, consistent with preservation of capital, by investing
in debt securities whose interest is, in the opinion of bond coun-
sel for the issuer at the time of issuance, exempt from federal
income tax ("Municipal Bonds"). Municipal Bonds generally are is-
sued by states and local governments and their agencies, authori-
ties and other instrumentalities. It is a policy of the Fund that,
under normal market conditions, at least 80% of its net assets
will be invested in Municipal Bonds. The Fund may invest up to 20%
of its net assets in U.S. Government securities, money market in-
struments and/or "private activity" bonds. Under normal circum-
stances, the average portfolio duration of the Municipal Bond Fund
will vary within a three- to ten-year time frame, based on the Ad-
visor's forecast for interest rates.
March , 1998 Prospectus
13
<PAGE>
The Fund may invest up to 10% of its net assets in Municipal
Bonds or "private activity" bonds which are rated below Baa by
Moody's or BBB by S&P but which are rated at least Ba by Moody's
or BB by S&P (or, if unrated, determined by the Advisor to be of
comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Ap-
pendix B--Description of Securities Ratings."
EMERGING MARKETS BOND FUND invests in a portfolio of fixed income
securities denominated in foreign currencies and the U.S. dollar.
Under normal market conditions, the Fund will invest at least 80%
of its assets in fixed income securities of issuers that economi-
cally are tied to countries with emerging securities markets. The
Fund may invest up to 20% of its assets in other types of fixed
income instruments, including securities of issuers located in, or
securities denominated in currencies of, countries with developed
foreign securities markets. The Fund also may invest up to 10% of
its assets in shares of investment companies that invest primarily
in emerging market debt securities. The average portfolio duration
of the Fund will vary based on the Advisor's view of the potential
for total return offered by a particular duration strategy and,
under normal market conditions, is not expected to exceed eight
years.
The Advisor has broad discretion to identify and invest in
countries that it considers to qualify as emerging securities mar-
kets. However, the Advisor generally considers an emerging securi-
ties market to be one located in any country that is defined as an
emerging or developing economy by any of the following: the Inter-
national Bank for Reconstruction and Development (i.e., the World
Bank), including its various offshoots, such as the International
Finance Corporation, or the United Nations or its authorities. The
Fund's investments in emerging market fixed income securities may
be represented by futures contracts (including related options)
with respect to such securities, options on such securities, eq-
uity securities (including common stocks) upon the conversion of
convertible securities, or securities the return on which is de-
rived primarily from emerging securities markets, when the Advisor
deems it appropriate to do so.
The Fund emphasizes countries with relatively low gross na-
tional product per capita and with the potential for rapid eco-
nomic growth. The Advisor will select the Fund's country and cur-
rency composition based on its evaluation of relative interest
rates, inflation rates, exchange rates, monetary and fiscal poli-
cies, trade and current account balances, and any other specific
factors the Advisor believes to be relevant. The Fund likely will
concentrate its investments in Asia, Africa, the Middle East,
Latin America and the developing countries of Europe. Accordingly,
the Fund will be particularly susceptible to the effects of polit-
ical and economic developments in these regions. This effect may
be exacerbated by a relative scarcity of issuers in certain of
these markets, which may result in the Fund being highly concen-
trated in a small number of issuers. For a further discussion of
the special risks of investing in foreign and emerging market
countries, see "Characteristics and Risks of Securities and In-
vestment Techniques--Foreign Securities."
The Fund may invest substantially all of its assets in securi-
ties rated below investment grade but rated B or higher by Moody's
or S&P (or, if unrated, determined by the Advisor to be of compa-
rable quality). Such securities are colloquially referred to as
"junk bonds." While these securities generally provide greater po-
tential opportunity for capital appreciation and higher yields
than investments in higher rated securities, they also entail
greater risk, including the possibility of default or bankruptcy
of the issuer of the securities. Risk of default or bankruptcy may
be greater in periods of economic uncertainty or recession, as the
issuers may be less able to withstand general economic downturns
affecting the regions in which the Fund invests. The Advisor seeks
to reduce risk through diversification, credit analysis and atten-
tion to current developments and trends in emerging market econo-
mies and markets. The value of all fixed income securities, in-
cluding those held by the Fund, can be expected to change in-
versely with interest rates. For a further discussion of the spe-
cial risks of investing in lower rated securities, see "Character-
istics and Risks of Securities and Investment Techniques--High
Yield Securities ("Junk Bonds")."
FOREIGN BOND FUND invests in a portfolio of fixed income securi-
ties primarily denominated in major foreign currencies and baskets
of foreign currencies (such as the European Currency Unit, or
"ECU"). The Advisor will invest the assets of
14
PIMCO Funds: Pacific Investment Management Series
<PAGE>
the Fund in a number of international bond markets so that, under
normal circumstances, the Fund will invest at least 85% of its as-
sets in securities of issuers located outside the United States,
representing at least three foreign countries, which may be repre-
sented by futures contracts (including related options) with re-
spect to such securities, and options on such securities, when the
Advisor deems it appropriate to do so. The Fund may invest up to
10% of its assets in fixed income securities that are rated below
investment grade but rated B or higher by Moody's or S&P (or, if
unrated, determined by the Advisor to be of comparable quality).
Securities rated below investment grade may be referred to collo-
quially as "junk bonds." For information on the risks associated
with investments in securities rated below investment grade, see
"Appendix B--Description of Securities Ratings." The average port-
folio duration of this Fund will normally vary within a three- to
six-year time frame.
GLOBAL BOND FUND II invests in a portfolio of fixed income securi-
ties denominated in major currencies, baskets of foreign curren-
cies (such as the ECU), and the U.S. dollar. Under normal circum-
stances, at least 65% of the Fund's assets will be invested in
fixed income securities of issuers located in at least three coun-
tries (one of which may be the United States), which may be repre-
sented by futures contracts (including related options) with re-
spect to such securities, and options on such securities, when the
Advisor deems it appropriate to do so. Depending on the Advisor's
current opinion as to the proper allocation of assets among domes-
tic and foreign issuers, investments in the securities of issuers
located outside the United States will normally vary between 25%
and 75% of the Fund's assets. The Fund may invest up to 10% of its
assets in fixed income securities that are rated below investment
grade but rated B or higher by Moody's or S&P (or, if unrated, de-
termined by the Advisor to be of comparable quality). For informa-
tion on the risks associated with investments in securities rated
below investment grade, see "Appendix B--Description of Securities
Ratings." The average portfolio duration of this Fund will nor-
mally vary within a three- to six-year time frame.
The Foreign Bond Fund differs from the Global Bond Fund II pri-
marily in the extent to which assets are invested in the securi-
ties of issuers located outside the United States. The Advisor
will select these Funds' foreign country and currency compositions
based on an evaluation of relative interest rates, exchange rates,
monetary and fiscal policies, trade and current account balances,
and any other specific factors the Advisor believes to be rele-
vant.
HIGH YIELD FUND invests under normal circumstances at least 65% of
its assets in a diversified portfolio of fixed income securities
rated lower than Baa by Moody's or lower than BBB by S&P but rated
at least B by Moody's or S&P (or, if unrated, determined by the
Advisor to be of comparable quality). The remainder of the Fund's
assets may be invested in investment grade fixed income securities
(i.e., securities rated at least Baa by Moody's or BBB by S&P, or,
if unrated, deemed by the Advisor to be of comparable quality).
The average portfolio duration of this Fund will normally vary
within a two- to six-year time frame depending on the Advisor's
view of the potential for total return offered by a particular du-
ration strategy. The Fund may invest in securities of foreign is-
suers, but only those that are U.S. dollar-denominated. The Fund
may also engage in hedging strategies involving equity options.
Investments in high yield securities, while generally providing
greater potential opportunity for capital appreciation and higher
yields than investments in higher rated securities, also entail
greater risk, including the possibility of default or bankruptcy
of the issuer of such securities. Risk of default or bankruptcy
may be greater in periods of economic uncertainty or recession, as
the issuers of high yield securities may be less able to withstand
general economic downturns. The Advisor seeks to reduce risk
through diversification, credit analysis and attention to current
developments and trends in both the economy and financial markets.
The value of all fixed income securities, including those held by
the Fund, can be expected to change inversely with interest rates.
For a further discussion of the special risks of investing in
lower rated securities, see "Characteristics and Risks of Securi-
ties and Investment Techniques--High Yield Securities ("Junk
Bonds")."
TOTAL RETURN FUND invests under normal circumstances at least 65%
of its assets in a diversified portfolio of fixed income securi-
ties of varying maturities. The average portfolio duration of this
Fund will normally vary within a three- to six-
March , 1998 Prospectus
15
<PAGE>
year time frame based on the Advisor's forecast for interest
rates. The Fund may invest up to 10% of its assets in fixed income
securities that are rated below investment grade but rated B or
higher by Moody's or S&P (or, if unrated, determined by the Advi-
sor to be of comparable quality). For information on the risks as-
sociated with investments in securities rated below investment
grade, see "Appendix B--Description of Securities Ratings." The
Fund may also invest up to 20% of its assets in securities denomi-
nated in foreign currencies, and may invest beyond this limit in
U.S. dollar-denominated securities of foreign issuers. Portfolio
holdings will be concentrated in areas of the bond market (based
on quality, sector, coupon or maturity) which the Advisor believes
to be relatively undervalued. The total rate of return for this
Fund is expected to exhibit less volatility than that of the Long-
Term U.S. Government Fund because its duration will normally be
shorter.
REAL RETURN BOND FUND invests under normal circumstances at least
65% of its total assets in inflation-indexed bonds issued by U.S.
and foreign governments, their agencies or instrumentalities. All
securities purchased by the Fund must be rated at least A by
Moody's or S&P (or, if unrated, determined by the Advisor to be of
comparable quality), and the Fund will maintain a minimum average
quality of Aa. The Fund may invest up to 35% of its assets in
other types of fixed income instruments, including securities de-
nominated in foreign currencies, (and the Fund may also invest be-
yond this limit in U.S. dollar-denominated securities of foreign
issuers).
Inflation-indexed bonds are fixed income securities whose prin-
cipal value is periodically adjusted according to the rate of in-
flation. Such bonds generally are issued at an interest rate lower
than non-inflation related 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 "Taxes" for information about the possible tax consequences of
investing in the Fund and in inflation-indexed bonds.
In managing fixed income securities, one of the principal tools
generally used by the Advisor 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, fi-
nal maturity and call features. See "Appendix A--Description of
Duration." Because of the unique features of inflation-indexed
bonds, the Advisor utilizes a modified form of duration for the
Real Return Bond Fund ("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 Real Return Bond Fund, it is ex-
pected 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.
LOW DURATION FUND invests in a diversified portfolio of fixed in-
come securities of varying maturities. The average portfolio dura-
tion of this Fund will normally vary within a one- to three-year
time frame based on the Advisor's forecast for interest rates. The
Fund may invest up to 10% of its assets in fixed income securities
that are rated below investment grade but rated B or higher by
Moody's or S&P (or, if unrated, determined by the Advisor to be of
comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Ap-
pendix B--Description of Securities Ratings." The Fund may invest
up to 20% of its assets in securities denominated in foreign cur-
rencies, and may invest beyond this limit in U.S. dollar-denomi-
nated securities of foreign issuers. The total rate of return for
this Fund is expected to exhibit less volatility than that of the
Total Return Fund because its duration will be shorter.
SHORT-TERM FUND invests in a diversified portfolio of fixed income
securities of varying maturities. The average portfolio duration
of this Fund will normally not exceed one year. The Fund may in-
vest up to 10% of its assets in fixed income securities that are
rated below investment grade (rated below Baa by Moody's or BBB by
S&P) but rated B or higher
16
PIMCO Funds: Pacific Investment Management Series
<PAGE>
by Moody's or S&P (or, if unrated, determined by the Advisor to be
of comparable quality). For information on the risks associated
with investments in securities rated below investment grade, see
"Appendix B--Description of Securities Ratings." The Fund may in-
vest up to 5% of its assets in securities denominated in foreign
currencies, and may invest beyond this limit in U.S. dollar-denom-
inated securities of foreign issuers.
MONEY MARKET FUND seeks maximum current income consistent with the
preservation of capital and daily liquidity. It attempts to
achieve this objective by investing at least 95% of its total as-
sets, measured at the time of investment, in a diversified portfo-
lio of the highest quality money market securities. The Fund may
also invest up to 5% of its total assets, measured at the time of
investment, in money market securities that are in the second-
highest rating category for short-term obligations. The Fund's in-
vestments in securities will be limited to U.S. dollar-denominated
securities that mature in 397 days or less from the date of pur-
chase. The Fund may invest in the following: obligations of the
U.S. Government (including its agencies and instrumentalities);
short-term corporate debt securities of domestic and foreign cor-
porations; obligations of domestic and foreign commercial banks,
savings banks, and savings and loan associations; and commercial
paper. The Fund may invest more than 25% of its total assets in
securities or obligations issued by U.S. banks. The dollar-
weighted average portfolio maturity of the Fund will not exceed 90
days.
The Money Market Fund may invest only in U.S. dollar-denomi-
nated money market instruments that present minimal credit risk
and, with respect to at least 95% of its total assets, measured at
the time of investment, that are of the highest quality. The Advi-
sor will make a determination as to whether a security presents
minimal credit risk under procedures adopted by the Board of
Trustees. A money market instrument will be considered to be of
the highest quality (1) if rated in the highest rating category
(i) by any two nationally recognized statistical rating organiza-
tions ("NRSROs") (e.g., Aaa or Prime-1 by Moody's, AAA or A-1 by
S&P), or, (ii) if rated by only one NRSRO, by that NRSRO, and
whose acquisition is approved or ratified by the Board of Trust-
ees; (2) if unrated but issued by an issuer that has short-term
debt obligations of comparable maturity, priority, and security,
and that are rated in the highest rating category by (i) any two
NRSROs or, (ii) if rated by only one NRSRO, by that NRSRO, and
whose acquisition is approved or ratified by the Board of Trust-
ees; or (3) an unrated security that is of comparable quality to a
security rated in the highest rating category as determined by the
Advisor and whose acquisition is approved or ratified by the Board
of Trustees. With respect to no more than 5% of its total assets,
measured at the time of investment, the Fund may also invest in
money market instruments that are in the second-highest rating
category for short-term debt obligations (e.g., rated Aa or Prime-
2 by Moody's or AA or A-2 by S&P). A money market instrument will
be considered to be in the second-highest rating category under
the criteria described above with respect to instruments consid-
ered to be of the highest quality, as applied to instruments in
the second-highest rating category. See "Appendix B--Description
of Securities Ratings" for a description of Moody's and S&P's rat-
ings applicable to fixed income securities.
The Money Market Fund may not invest more than 5% of its total
assets, measured at the time of investment, in securities of any
one issuer that are of the highest quality, except that (1) the
Fund may invest more than 5% of its total assets in the securities
of a single issuer if rated in the highest rating category for a
period of up to three business days after purchase, provided that
the Fund may not make more than one investment at a time in accor-
dance with this exception, and (2) this limitation shall not apply
to U.S. Government securities and repurchase agreements with re-
spect thereto. The Fund may not invest more than the greater of 1%
of its total assets or $1,000,000, measured at the time of invest-
ment, in securities of any one issuer that are in the second-high-
est rating category, except that this limitation shall not apply
to U.S. Government securities. In the event that an instrument ac-
quired by the Fund is downgraded or otherwise ceases to be of the
quality that is required for securities purchased by the Fund, the
Advisor, under procedures approved by the Board of Trustees (or
the Board of Trustees itself if the Advisor becomes aware an
unrated security is downgraded below high quality and the Advisor
does not dispose of the security or such security does not mature
within five business days) shall promptly reassess whether such
security presents minimal credit risk and determine whether to re-
tain the instrument.
March , 1998 Prospectus
17
<PAGE>
EQUITY FUND STOCKSPLUS FUND, as its investment objective, seeks to achieve to-
DESCRIPTION tal return which exceeds the total return performance of the Stan-
dard & Poor's Composite Stock Price Index ("S&P 500"). StocksPLUS
is the name of a proprietary portfolio management strategy which
utilizes S&P 500 derivatives in addition to or in place of S&P 500
stocks to equal or exceed the performance of the S&P 500. The Ad-
visor expects that under normal market conditions, the Fund will
invest substantially all of its assets in S&P 500 derivatives,
backed by a portfolio of fixed income securities. The Advisor will
actively manage the fixed income assets serving as cover for de-
rivatives, as well as any other fixed income assets held by the
Fund, with a view toward enhancing the Fund's total return invest-
ment performance, subject to an overall portfolio duration which
is normally not expected to exceed one year. See "Appendix A--De-
scription of Duration."
The S&P 500 is composed of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. S&P chooses the
stocks to be included in the S&P 500 solely on a statistical ba-
sis. The weightings of stocks in the index are based on each
stock's relative total market value, that is, its market price per
share times the number of shares outstanding. Stocks represented
currently in the S&P 500 represent approximately two-thirds of the
total market value of all U.S. common stocks. The Fund is neither
sponsored by nor affiliated with S&P. The Fund will seek to remain
invested in S&P 500 derivatives or S&P 500 stocks even when the
S&P 500 is declining.
When S&P 500 derivatives appear to be overvalued relative to
the S&P 500, the Fund may invest up to 100% of its assets in a
"basket" of S&P 500 stocks. The composition of this basket will be
determined by standard statistical techniques that analyze the
historical correlation between the return of every stock currently
in the S&P 500 and the return on the S&P 500 itself. The Advisor
may employ fundamental stock analysis only to choose among stocks
that have already satisfied the statistical correlation tests.
Stocks chosen for the Fund are not limited to those with any par-
ticular weighting in the S&P 500.
Positions in S&P 500 futures and options on futures will be en-
tered into only to the extent they constitute permissible posi-
tions for the Fund according to applicable rules of the Commodity
Futures Trading Commission ("CFTC"). From time to time, the Advi-
sor may be constrained in its ability to use S&P 500 derivatives
either by requirements of the Internal Revenue Code or by an unan-
ticipated inability to close out positions when it would be most
advantageous to do so. A large number of investors use S&P 500 de-
rivatives for both hedging and speculative purposes, and although
generally this helps guarantee a liquid market in those instru-
ments, at times liquidity may be
limited. For more information about S&P 500 derivatives, see
"Characteristics and Risks of Securities and Investment Tech-
niques--Derivative Instruments."
Assets of the StocksPLUS Fund not invested in equity securities
may be invested in securities eligible for purchase by the Fixed
Income Funds. The Fund may invest up to 10% of its assets in fixed
income securities that are below "investment grade," i.e., rated
below Baa by Moody's or BBB by S&P, but at least B (or, if
unrated, determined by the Advisor to be of comparable quality).
In addition, the StocksPLUS Fund may lend its portfolio securities
to brokers, dealers and other financial institutions in order to
earn income. The Fund may also invest all of its assets in deriva-
tive instruments, as described under "Characteristics of Securi-
ties and Investment Techniques--Derivative Instruments." In addi-
tion, the Fund may invest up to 20% of its assets in securities of
foreign issuers, may purchase and sell options and futures on for-
eign currencies, and may enter into forward foreign currency con-
tracts.
TOTAL The "total return" sought by certain of the Funds will consist of
RETURN AND interest and dividends from underlying securities, capital appre-
REAL RETURN ciation 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, the total
return obtained by a portfolio investing primarily in fixed income
securities is not expected to be as great as that obtained by a
portfolio that invests primarily in equity securities. At the same
time, the market risk and price volatility of a fixed income port-
folio 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 in-
come securities (and therefore their capital appreciation or de-
preciation) is largely a function of changes in the current level
of interest rates. Generally, when interest rates
18
PIMCO Funds: Pacific Investment Management Series
<PAGE>
are falling, a portfolio with a shorter duration will not generate
as high a level of total return as a portfolio with a longer dura-
tion. Conversely, when interest rates are rising, a portfolio with
a shorter duration will generally outperform longer duration port-
folios. When interest rates are flat, shorter duration portfolios
generally will not generate as high a level of total return as
longer duration portfolios (assuming that long-term interest rates
are higher than short-term rates, which is commonly the case).
With respect to the composition of any fixed income portfolio, the
longer the duration of the portfolio, the greater the anticipated
potential for total return, with, however, greater attendant mar-
ket risk and price volatility than for a portfolio with a shorter
duration. The market value of fixed income securities denominated
in currencies other than the U.S. dollar also may be affected by
movements in foreign currency exchange rates.
The change in market value of equity securities (and therefore
their capital appreciation or depreciation) may depend upon a num-
ber of factors, including: conditions in the securities markets,
the business success of the security's issuer, changing interest
rates, real or perceived economic and competitive industry condi-
tions, and foreign currency exchange rates. Historically, the to-
tal return performance of equity-oriented portfolios has generally
been greater over the long term than fixed income portfolios. How-
ever, the market risk and price volatility of an equity portfolio
is generally greater than that of a fixed income portfolio, and is
generally considered to be a more aggressive investment.
"Real Return," or "Inflation Adjusted Return," as referenced in
the name and investment objective of the Real Return Bond 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 generat-
ing 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 approxi-
mately 3%. On the other hand, an inflation-indexed instrument gen-
erating a 5% real return would generate a 5% increase in purchas-
ing power 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) at-
tained by this Fund may be less than the total return attained by
other of the Funds that do not invest primarily in inflation-in-
dexed securities.
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 de-
crease in value of inflation-indexed bonds.
Investment Risks and Considerations
The following are some of the principal risks of investing in the
Funds. Investors should read this Prospectus carefully for a more
complete discussion of the risks relating to an investment in the
Funds. The net asset value per share of any Fund may be less at
the time of redemption than it was at the time of investment. Gen-
erally, the value of 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, although this may not be true in the case of inflation-
indexed bonds. In addition, certain of the Funds may invest in se-
curities rated lower than Baa by Moody's or S&P. Such securities
carry a high degree of credit risk and are considered speculative
by the major rating agencies.
Certain Funds 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. Certain of the Funds' 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 a
Fund's portfolio and may require liquidation of portfolio posi-
tions when it is not advantageous to do so. Certain Funds may sell
securities short, which exposes the Fund to a risk of loss if the
value of the security sold short should increase.
March , 1998 Prospectus
19
<PAGE>
All Funds (except the Money Market Fund) may use derivative in-
struments, consisting of futures, options, options on futures, and
swap agreements, for hedging purposes or as part of their invest-
ment strategies. Use of these instruments may involve certain
costs and risks, including the risk that a 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 securi-
ties being hedged and the value of the particular derivative in-
strument, and the risk that unexpected changes in interest rates
may adversely affect the value of a Fund's investments in particu-
lar derivative instruments. Unless otherwise indicated, all limi-
tations applicable to Fund investments (as stated in this Prospec-
tus 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 a Fund's invest-
ment portfolio, resulting from market fluctuations or other
changes in a Fund's total assets, will not require a Fund to dis-
pose of an investment until the Advisor determines that is practi-
cable 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 Advisor will
determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the sev-
eral assigned ratings.
Investors should carefully consider the possible tax conse-
quences from investing in the Real Return Bond Fund. The Fund in-
vests primarily in securities that for tax purposes may be consid-
ered to have been issued originally at a discount. Accordingly,
the Fund may be required to make annual distributions to share-
holders in excess of the cash received by the Fund in a given pe-
riod from those investments. See "Characteristics and Risks of Se-
curities and Investment Techniques--Inflation-Indexed Bonds" and
"Taxes" for additional information.
The Emerging Markets Bond, Foreign Bond, Global Bond II and
Real Return Bond Funds are "non-diversified" for purposes of the
Investment Company Act of 1940 ("1940 Act"), meaning that they may
invest a greater percentage of their assets in the securities of
one issuer than the other Funds. The Funds are still, however,
subject to diversification requirements imposed by the Internal
Revenue Code of 1986, as amended, which means that as of the end
of each calendar quarter, a Fund may have no more than 25% of its
assets invested in the securities of a single issuer, and may,
with respect to 50% of its assets, have no more than 5% of its as-
sets invested in the securities of a single issuer. As "non-diver-
sified" portfolios, these Funds may be more susceptible to risks
associated with a single economic, political or regulatory occur-
rence than a diversified portfolio might be.
The Funds offer their shares to both retail and institutional
investors. Institutional shareholders, some of whom also may be
investment advisory clients of Pacific Investment Management, may
hold large positions in certain of the Funds. Such shareholders
may on occasion make large redemptions of their holdings in the
Funds to meet their liquidity needs, in connection with strategic
adjustments to their overall portfolio of investments, or for
other purposes. Large redemptions from some Funds could require
the Advisor to liquidate portfolio positions when it is not most
desirable to do so. Liquidation of portfolio holdings also may
cause a Fund to realize taxable capital gains.
Characteristics and Risks of
Securities and Investment Techniques
The following describes in greater detail different types of secu-
rities and investment techniques used by the individual Funds, and
discusses certain concepts relevant to the investment policies of
the Funds. Additional information about the Funds' investments and
investment practices may be found in the Statement of Additional
Information.
U.S. U.S. Government securities are obligations of, or guaranteed by,
GOVERNMENT the U.S. Government, its agencies or instrumentalities. The U.S.
SECURITIES Government does not guarantee the net asset value of the Funds'
shares. Some U.S. Government securities, such as Treasury bills,
notes and bonds, and securities guaranteed by the Government Na-
tional Mortgage Association
20
PIMCO Funds: Pacific Investment Management Series
<PAGE>
("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. Trea-
sury; others, such as those of the Federal National Mortgage Asso-
ciation ("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 Associa-
tion, are supported only by the credit of the instrumentality.
U.S. Government securities include securities that have no cou-
pons, or have been stripped of their unmatured interest coupons,
individual interest coupons from such securities that trade sepa-
rately, and evidences of receipt of such securities. Such securi-
ties may pay no cash income, and are purchased at a deep discount
from their value at maturity. Because interest on zero coupon se-
curities 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 securi-
ties, 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 Corporate debt securities include corporate bonds, debentures,
DEBT notes and other similar corporate debt instruments, including con-
SECURITIES vertible securities. Debt securities may be acquired with warrants
attached. Corporate income-producing securities may also include
forms of preferred or preference stock. The rate of interest on a
corporate debt security may be fixed, floating or variable, and
may vary inversely with respect to a reference rate. See "Variable
and Floating Rate Securities" below. The rate of return or return
of principal on some debt obligations may be linked or indexed to
the level of exchange rates between the U.S. dollar and a foreign
currency or currencies.
Investments in corporate debt securities that are rated below
investment grade (rated below Baa (Moody's) or BBB (S&P)) are de-
scribed as "speculative" both by Moody's and S&P. Such securities
are sometimes referred to as "junk bonds," and may be subject to
greater market fluctuations, less liquidity and greater risk of
loss of income or principal, including a greater possibility of
default or bankruptcy of the issuer of such securities, than are
more highly rated debt securities. Moody's also describes securi-
ties rated Baa as having speculative characteristics. The Advisor
seeks to minimize these risks through diversification, in-depth
credit analysis and attention to current developments in interest
rates and market conditions. See "Appendix B--Description of Secu-
rities Ratings." Investments in high yield securities are dis-
cussed separately below under "High Yield Securities ("Junk
Bonds")."
CONVERTIBLE Each Fund (except the Municipal Bond Fund) may invest in convert-
SECURITIES ible securities, which may offer higher income than the common
stocks into which they are convertible. Typically, convertible se-
curities are callable by the company, which may, in effect, force
conversion before the holder would otherwise choose.
The convertible securities in which the Funds may invest con-
sist of bonds, notes, debentures and preferred stocks which may be
converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. A Fund may be required to
permit the issuer of a convertible security to redeem the securi-
ty, convert it into the underlying common stock, or sell it to a
third party. Thus, a Fund may not be able to control whether the
issuer of a convertible security chooses to convert that security.
If the issuer chooses to do so, this action could have an adverse
effect on a Fund's ability to achieve its investment objectives.
While the Fixed Income Funds intend to invest primarily in
fixed income securities, each may invest in convertible securities
or equity securities. While some countries or companies may be re-
garded as favorable investments, pure fixed income opportunities
may be unattractive or limited due to insufficient supply, legal
or technical restrictions. In such cases, a Fund may consider eq-
uity securities or convertible bonds to gain exposure to such in-
vestments.
LOAN Certain Funds may invest in fixed- and floating-rate loans ar-
PART- ranged through private negotiations between an issuer of debt in-
ICIPATIONS struments and one or more financial institutions ("lenders"). Gen-
AND erally, the Funds' investments in loans are expected to take the
ASSIGNMENTS form of loan participations and assignments of portions of loans
from third parties.
March , 1998 Prospectus
21
<PAGE>
Large loans to corporations or governments may be shared or
syndicated among several lenders, usually banks. The Funds may
participate in such syndicates, or can buy part of a loan, becom-
ing a direct lender. Participations and assignments involve spe-
cial types of risk, including limited marketability and the risks
of being a lender. See "Illiquid Securities" for a discussion of
the limits on a Fund's investments in loan participations and as-
signments with limited marketability. If a Fund purchases a par-
ticipation, it may only be able to enforce its rights through the
lender, and may assume the credit risk of the lender in addition
to the borrower. In assignments, the Funds' rights against the
borrower may be more limited than those held by the original lend-
er.
VARIABLE Variable and floating rate securities provide for a periodic ad-
AND justment in the interest rate paid on the obligations. The terms
FLOATING of such obligations must provide that interest rates are adjusted
RATE periodically based upon an interest rate adjustment index as pro-
SECURITIES vided in the respective obligations. The adjustment intervals may
be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate. The Money Mar-
ket Fund may invest in a variable rate security having a stated
maturity in excess of 397 calendar days if the interest rate will
be adjusted, and the Fund may demand payment of principal from the
issuer, within the period.
Each of the Fixed Income Funds (except the Municipal Bond Fund)
may engage in credit spread trades and invest in floating rate
debt instruments ("floaters"). A credit spread trade is an invest-
ment position relating to a difference in the prices or interest
rates of two securities or currencies, where the value of the in-
vestment position is determined by movements in the difference be-
tween the prices or interest rates, as the case may be, of the re-
spective securities or currencies. The interest rate on a floater
is a variable rate which is tied to another interest rate, such as
a money-market index or Treasury bill rate. The interest rate on a
floater resets periodically, typically every six months. While,
because of the interest rate reset feature, floaters provide a
Fund with a certain degree of protection against rises in interest
rates, a Fund will participate in any declines in interest rates
as well.
Each of the Fixed Income Funds (except the Money Market Fund
and the Municipal Bond 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 mar-
ket rate of interest to which the inverse floater is indexed. An
inverse floating rate security may exhibit greater price volatil-
ity than a fixed rate obligation of similar credit quality. The
Funds have adopted a policy under which no Fund will invest more
than 5% of its net assets in any combination of inverse floater,
interest only ("IO"), or principal only ("PO") securities. See
"Mortgage-Related and Other Asset-Backed Securities" for a discus-
sion of IOs and POs.
INFLATION- Inflation-indexed bonds are fixed income securities whose princi-
INDEXED pal value is periodically adjusted according to the rate of infla-
BONDS tion. The interest rate on these bonds is generally fixed at issu-
ance at a rate lower than typical bonds. Over the life of an in-
flation-indexed bond, however, interest will be paid based on a
principal value which is adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will
initially have maturities of five or ten years, although it is an-
ticipated that securities with other maturities will be issued in
the future. The securities will pay interest on a semi-annual ba-
sis, equal to a fixed percentage of the inflation-adjusted princi-
pal amount. For example, if an investor purchased an inflation-in-
dexed 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 down-
ward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be
reduced. Repayment of the original bond principal upon maturity
(as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation-indexed bonds, even during a period of defla-
tion. However, the current market value of the bonds is not guar-
anteed, and will fluctuate. The Funds may also invest in other in-
flation
22
PIMCO Funds: Pacific Investment Management Series
<PAGE>
related bonds which may or may not provide a similar guarantee. If
such a guarantee of principal is not provided, the adjusted prin-
cipal value of the bond repaid at maturity may be less than the
original principal.
The value of inflation-indexed bonds is expected to change in
response to changes in real interest rates. Real interest rates in
turn are tied to the relationship between nominal interest rates
and the rate of inflation. Therefore, if inflation were to rise at
a faster rate than nominal interest rates, real interest rates
might decline, leading to an increase in value of inflation-in-
dexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, lead-
ing 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 ex-
change rates), investors in these securities may not be protected
to the extent that the increase is not reflected in the bond's in-
flation measure.
The U.S. Treasury has only recently begun issuing inflation-in-
dexed bonds. As such, there is no trading history of these securi-
ties, and there can be no assurance that a liquid market in these
instruments will develop, although one is expected. Lack of a liq-
uid market may impose the risk of higher transaction costs and the
possibility that a Fund may be forced to liquidate positions when
it would not be advantageous to do so. There also can be no assur-
ance 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 is-
suing inflation-indexed bonds, and there may be a more liquid mar-
ket 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 gener-
ally 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 coun-
try 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 in-
vestors do not receive their principal until maturity. See "Taxes"
for information about the possible tax consequences of investing
in the Real Return Bond Fund and in inflation-indexed bonds.
MORTGAGE- Each of the Funds (except the Money Market Fund and the Municipal
RELATED AND Bond Fund) may invest all of its assets in mortgage- or other as-
OTHER set-backed securities. The value of some mortgage- or asset-backed
ASSET- securities in which the Funds invest may be particularly sensitive
BACKED to changes in prevailing interest rates, and, like the other in-
SECURITIES vestments of the Funds, the ability of a Fund to successfully uti-
lize these instruments may depend in part upon the ability of the
Advisor to forecast interest rates and other economic factors cor-
rectly.
MORTGAGE-PASS-THROUGH SECURITIES are securities representing in-
terests 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 borrow-
ers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early re-
payment of principal on some mortgage-related securities (arising
from prepayments of principal due to sale of the underlying prop-
erty, refinancing, or foreclosure, net of fees and costs which may
be incurred) may expose a Fund to a lower rate of return upon re-
investment 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 securi-
ties, 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 prepay-
ment features may not increase as much as other fixed income secu-
rities. The rate of prepayments on underlying mortgages will af-
fect the price and volatility of a mortgage-related security, and
may have the effect of shortening or extending the effective matu-
rity of the security beyond what was anticipated at the
March , 1998 Prospectus
23
<PAGE>
time of purchase. To the extent that unanticipated rates of pre-
payment 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. Govern-
ment (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 bank-
ers and other secondary market issuers) may be supported by vari-
ous 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 mort-
gage poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs") are hybrid mortgage-
related instruments. Interest and pre-paid principal on a CMO are
paid, in most cases, on a monthly basis. CMOs may be collateral-
ized 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 pay-
ments 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 Funds, while
other CMOs, even if collateralized by U.S. Government securities,
will have the same status as other privately issued securities for
purposes of applying a Fund's diversification tests.
COMMERCIAL MORTGAGE-BACKED SECURITIES include securities that re-
flect an interest in, and are secured by, mortgage loans on com-
mercial real property. The market for commercial mortgage-backed
securities developed more recently and in terms of total outstand-
ing 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 secu-
rities reflect the risks of investing in the real estate securing
the underlying mortgage loans. These risks reflect the effects of
local and other economic conditions on real estate markets, the
ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility
than other types of mortgage-related or asset-backed securities.
MORTGAGE-RELATED SECURITIES include securities other than those
described above that directly or indirectly represent a participa-
tion in, or are secured by and payable from, mortgage loans on
real property, such as mortgage dollar rolls (see "Reverse Repur-
chase Agreements, Dollar Rolls, and Borrowings"), CMO residuals or
stripped mortgage-backed securities ("SMBS"), and may be struc-
tured 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 remain-
der of the principal. In the most extreme case, one class will re-
ceive all of the interest (the interest-only, or "IO" class),
while the other class will receive all of the principal (the prin-
cipal-only, or "PO" class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (includ-
ing prepayments) on the related underlying mortgage assets, and a
rapid rate of principal payments may have a material adverse ef-
fect on a Fund's yield to maturity from these securities. The
Funds have adopted a policy under which no Fund will invest more
than 5% of its net assets in any combination of IO, PO, or inverse
floater securities. The Funds may invest in other asset-backed se-
curities that have been offered to investors. For a discussion of
the characteristics of some of these instruments, see the State-
ment of Additional Information.
24
PIMCO Funds: Pacific Investment Management Series
<PAGE>
MUNICIPAL The Municipal Bond Fund invests in Municipal Bonds which are gen-
BONDS erally issued by states and local governments and their agencies,
authorities and other instrumentalities. The Municipal Bonds which
the Municipal Bond Fund may purchase include general obligation
bonds and limited obligation bonds (or revenue bonds), including
industrial development bonds issued pursuant to former federal tax
law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such is-
suer's general revenues and not from any particular source. Lim-
ited obligation bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific
revenue source. Tax-exempt "private activity" bonds and industrial
development bonds generally are also revenue bonds and thus are
not payable from the issuer's general revenues. The Municipal Bond
Fund may invest in Municipal Bonds with credit enhancements such
as letters of credit, municipal bond insurance and Standby Bond
Purchase Agreements. The Municipal Bond Fund may also invest in
municipal lease obligations, as well as securities derived from
Municipal Bonds, such as residual interest bonds, participation
interests and embedded interest rate swaps and caps. [/R]
Municipal Bonds are subject to credit and market risk. Credit
risk relates to the ability of the issuer to make payments of
principal and interest. The ability of an issuer to make such pay-
ments could be affected by litigation, legislation or other polit-
ical events or the bankruptcy of the issuer. Market risk relates
to changes in a security's value as a result of changes in inter-
est rates. Lower rated Municipal Bonds generally provide higher
yields but are subject to greater credit and market risk than
higher quality Municipal Bonds.
REPURCHASE For the purpose of achieving income, each of the Funds may enter
AGREEMENTS into repurchase agreements, which entail the purchase of a portfo-
lio-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 repur-
chase 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. No Fund will invest more than 15% of its net assets (10% in
the case of the Money Market Fund) (taken at current market value)
in repurchase agreements maturing in more than seven days.
REVERSE A reverse repurchase agreement involves the sale of a security by
REPURCHASE a Fund and its agreement to repurchase the instrument at a speci-
AGREEMENTS, fied time and price. Under a reverse repurchase agreement, the
DOLLAR Fund continues to receive any principal and interest payments on
ROLLS, AND the underlying security during the term of the agreement. The Fund
BORROWINGS generally will maintain a segregated account consisting of assets
determined to be liquid by the Advisor in accordance with proce-
dures established by the Board of Trustees to cover its obliga-
tions under reverse repurchase agreements and, to this extent, a
reverse repurchase agreement (or economically similar transaction)
will not be considered a "senior security" subject to the 300% as-
set coverage requirements otherwise applicable to borrowings by a
Fund.
A 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 simi-
lar 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 pur-
chase as well as by any interest earned on the proceeds of the se-
curities sold. The Fund also could be compensated through the re-
ceipt 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 Advisor in accordance with procedures estab-
lished by the Board of Trustees to cover its obligations under
dollar rolls.
To the extent that positions in reverse repurchase agreements,
dollar rolls or similar transactions are not covered through the
maintenance of a segregated account consisting of liquid assets at
least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Funds' limitations on
borrowings, which would restrict
the aggregate of such transactions (plus any other borrowings) to
33 1/3% (for each Fund except the Global Bond
25
March , 1998 Prospectus
<PAGE>
Fund II) of such Fund's total assets. Apart from such transac-
tions, a Fund will not borrow money, except for temporary adminis-
trative purposes. The Global Bond Fund II may not borrow in excess
of 10% of the value of its total assets and then only from banks
as a temporary measure to facilitate the meeting of redemption re-
quests (not for leverage) or for extraordinary or emergency pur-
poses.
LOANS OF For the purpose of achieving income, each Fund may lend its port-
PORTFOLIO folio securities to brokers, dealers, and other financial institu-
SECURITIES tions, provided: (i) the loan is secured continuously by collat-
eral consisting of U.S. Government securities, cash or cash equiv-
alents (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 se-
curities 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% (25% in the case of the Global Bond
Fund II) of the total assets of the Fund. Each Fund's performance
will continue to reflect changes in the value of the securities
loaned and will also reflect the receipt of either interest,
through investment of cash collateral by the Fund in permissible
investments, or a fee, if the collateral is U.S. Government secu-
rities. Securities lending involves the risk of loss of rights in
the collateral or delay in recovery of the collateral should the
borrower fail to return the security loaned or become insolvent.
The Funds may pay lending fees to the party arranging the loan.
WHEN- Each of the Funds may purchase or sell securities on a when-is-
ISSUED, sued, delayed delivery, or forward commitment basis. These trans-
DELAYED actions involve a commitment by the Fund to purchase or sell secu-
DELIVERY rities for a predetermined price or yield, with payment and deliv-
AND FORWARD ery taking place more than seven days in the future, or after a
COMMITMENT period longer than the customary settlement period for that type
TRANSACTIONSof 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 Advisor in accor-
dance with procedures established by the Board of Trustees, in an
amount sufficient to meet the purchase price. Typically, no income
accrues on securities a Fund has committed to purchase prior to
the time delivery of the securities is made, although a Fund may
earn income on securities it has deposited in a segregated ac-
count. When purchasing a security on a when-issued, delayed deliv-
ery, 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 re-
quired 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 in-
vested 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. A 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 de-
livered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Funds may pur-
chase or sell securities on a when-issued, delayed delivery, or
forward commitment basis.
SHORT SALES Each of the Funds (except the High Yield and StocksPLUS Funds) may
from time to time effect short sales as part of their overall
portfolio management strategies, including the use of derivative
instruments, or to offset potential declines in value of long po-
sitions in similar securities as those sold short. A short sale
(other than a short sale against the box) is a transaction in
which a 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 a Fund engages in short sales, it must
(except in the case of short sales "against the box") maintain as-
set coverage in the form of assets determined to be liquid by the
Advisor 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
26
PIMCO Funds: Pacific Investment Management Series
<PAGE>
the right to obtain at no added cost, securities identical to
those sold short. The Global Bond Fund II may only engage in short
sales that are "against the box."
FOREIGN Each of the Funds (except the Municipal Bond Fund and the Long-
SECURITIES Term U.S. Government Fund) may invest directly in fixed income se-
curities of non-U.S. issuers. The High Yield and Money Market
Funds may only invest in U.S. dollar-denominated fixed income se-
curities of non-U.S. issuers. The StockPLUS Fund may invest di-
rectly in foreign equity securities.
Except for the Emerging Markets Bond Fund, each of the Funds
will concentrate its foreign investments in securities of issuers
based in developed countries. However, the Short-Term and Low Du-
ration Funds may each invest up to 5% of its assets in securities
of issuers based in the emerging market countries in which the
Emerging Markets Bond Fund may invest, and each of the remaining
Fixed Income Funds that may invest in foreign securities may in-
vest up to 10% of its assets in such securities.
Individual foreign economies may differ favorably or unfavor-
ably from the U.S. economy in such respects as growth of gross do-
mestic product, rate of inflation, capital reinvestment, re-
sources, self-sufficiency and balance of payments position. The
securities markets, values of securities, yields, and risks asso-
ciated with securities markets in different countries may change
independently of each other. Investing in the securities of is-
suers in any foreign country involves special risks and considera-
tions not typically associated with investing in U.S. companies.
Shareholders should consider carefully the substantial risks in-
volved in investing in securities issued by companies and govern-
ments of foreign nations. These risks include: differences in ac-
counting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory tax-
ation; adverse changes in investment or exchange control regula-
tions (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, for-
eign securities and dividends and interest payable on those secu-
rities 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 there-
fore may exhibit greater price volatility. Additional costs asso-
ciated 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 for-
eign exchange rates also will affect the value of securities de-
nominated or quoted in currencies other than the U.S. dollar.
Certain of the Funds, and particularly the Emerging Markets
Bond Fund, will invest in the securities of issuers based in coun-
tries with developing economies. Investing in developing (or
"emerging market") countries involves certain risks not typically
associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign,
developed countries. A number of emerging market countries re-
strict, to varying degrees, foreign investment in securities. Re-
patriation of investment income, capital, and the proceeds of
sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the
currencies of emerging market countries have experienced signifi-
cant declines against the U.S. dollar in recent years, and devalu-
ation may occur subsequent to investments in these currencies by a
Fund. Inflation and rapid fluctuations in inflation rates have
had, and may continue to have, negative effects on the economies
and securities markets of certain emerging market countries. Many
of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is a risk in
emerging market countries that a future economic or political cri-
sis could lead to price controls, forced mergers of companies, ex-
propriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies, any of which may have a detri-
mental effect on a Fund's investment.
Additional risks of investing in emerging market countries may
include: currency exchange rate fluctuations; greater social, eco-
nomic and political uncertainty and instability (including the
risk of war); more substantial governmental involvement in the
economy; less governmental supervision and regulation of the secu-
rities markets and participants in those markets; unavailability
of currency hedging techniques in certain emerging market coun-
tries; the fact that
March , 1998 Prospectus
27
<PAGE>
companies in emerging market countries may be newly organized and
may be smaller and less seasoned companies; the difference in, or
lack of, auditing and financial reporting standards, which may re-
sult in unavailability of material information about issuers; the
risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and significantly
smaller market capitalization of securities markets. Also, any
change in the leadership or policies of Eastern European coun-
tries, or the countries that exercise a significant influence over
those countries, may halt the expansion of or reverse the liberal-
ization of foreign investment policies now occurring and adversely
affect existing investment opportunities.
In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep
pace with the volume of securities transactions or otherwise make
it difficult to engage in such transactions. Settlement problems
may cause a Fund to miss attractive investment opportunities, hold
a portion of its assets in cash pending investment, or delay in
disposing of a portfolio security. Such a delay could result in
possible liability to a purchaser of the security.
Each of the Fixed Income Funds (except the Municipal Bond Fund
and the Long-Term U.S. Government Fund) may invest in Brady Bonds.
Brady Bonds are securities created through the exchange of exist-
ing commercial bank loans to sovereign entities for new obliga-
tions in connection with debt restructurings under a debt restruc-
turing 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 assur-
ance that Brady Bonds acquired by a 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.
Certain of the Funds also may invest in sovereign debt (other
than Brady Bonds) issued by governments, their agencies or instru-
mentalities, or other government-related entities located in
emerging market countries. Holders of sovereign debt may be re-
quested to participate in the rescheduling of such debt and to ex-
tend further loans to governmental entities. In addition, there is
no bankruptcy proceeding by which defaulted sovereign debt may be
collected.
A Fund's investments in foreign currency denominated debt obli-
gations and hedging activities will likely produce a difference
between its book income and its taxable income. This difference
may cause a portion of the Fund's income distributions to consti-
tute returns of capital for tax purposes or require the Fund to
make distributions exceeding book income to qualify as a regulated
investment company for federal tax purposes.
FOREIGN Foreign currency exchange rates may fluctuate significantly over
CURRENCY short periods of time. They generally are determined by the forces
TRANSACTIONSof supply and demand in the foreign exchange markets and the rela-
tive merits of investments in different countries, actual or per-
ceived 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 Funds' assets are denominated may be de-
valued against the U.S. dollar, resulting in a loss to the Funds.
All Funds that may invest in securities denominated in foreign
currencies may buy and sell foreign currencies on a spot and for-
ward basis to reduce the risks of adverse changes in foreign ex-
change rates. A forward foreign currency exchange contract in-
volves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the
time of the contract. By entering into a forward foreign currency
exchange contract, the Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for
the duration of the contract. As a result, a Fund reduces its ex-
posure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the
28
PIMCO Funds: Pacific Investment Management Series
<PAGE>
currency it will exchange into. The effect on the value of a 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 re-
alized by a Fund if the value of the hedged currency increases. A
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. A Fund also may enter into these contracts for pur-
poses of increasing exposure to a foreign currency or to shift ex-
posure to foreign currency fluctuations from one country to anoth-
er. A 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 cur-
rencies are positively correlated. Each Fund will segregate assets
determined to be liquid by the Advisor in accordance with proce-
dures established by the Board of Trustees, in a segregated ac-
count to cover its obligations under forward foreign currency ex-
change contracts entered into for non-hedging purposes.
All Funds that may invest in securities denominated in foreign
currencies may invest in options on foreign currencies and foreign
currency futures and options thereon. The Funds also may invest in
foreign currency exchange-related securities, such as foreign cur-
rency warrants and other instruments whose return is linked to
foreign currency exchange rates. Each Fund that may invest in se-
curities denominated in foreign currencies, except the Emerging
Markets Bond 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.
HIGH YIELD
SECURITIES The High Yield Fund invests at least 65% of its assets, and the
("JUNK Emerging Markets Bond Fund may invest up to 100% of its assets, in
BONDS") fixed income securities rated lower than Baa by Moody's or lower
than BBB by S&P but rated at least B by Moody's or S&P (or, if not
rated, of comparable quality). In addition, each of the Foreign
Bond, Global Bond II, Total Return, Low Duration, Short-Term and
StocksPLUS Funds may invest up to 10% of its assets in such secu-
rities. The Municipal Bond Fund may invest up to 10% of its assets
in securities rated lower than Baa by Moody's or BBB by S&P but
rated at least Ba by Moody's or BB by S&P. Securities rated lower
than Baa by Moody's or lower than BBB by S&P are sometimes re-
ferred to as "high yield" or "junk" bonds. Securities rated Baa
are considered by Moody's to have some speculative characteris-
tics. Investors should consider the following risks associated
with high yield securities before investing in these Funds.
Investing in high yield securities involves special risks in
addition to the risks associated with investments in higher rated
fixed income securities. High yield securities may be regarded as
predominately speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Analysis of the
creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and
the ability of a Fund to achieve its investment objective may, to
the extent of its investments in high yield securities, be more
dependent upon such creditworthiness analysis than would be the
case if the Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or per-
ceived adverse economic and competitive industry conditions than
higher grade securities. The prices of high yield securities have
been found to be less sensitive to interest rate changes than more
highly rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for ex-
ample, could cause a decline in high yield security prices because
the advent of a recession could lessen the ability of a highly
leveraged company to make principal and interest payments on its
debt securities. If the issuer of high yield securities defaults,
a Fund may incur additional expenses to seek recovery. In the case
of high yield securities structured as zero coupon or payment-in-
kind securities, the market prices of such securities are affected
to a greater extent by interest rate changes, and therefore tend
to be more volatile than securities which pay interest periodi-
cally and in cash.
The secondary markets on which high yield securities are traded
may be less liquid than the market for higher grade securities.
Less liquidity in the secondary trading markets could adversely
affect and cause large fluctuations in the daily net asset value
of a Fund's shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a
thinly traded market.
March , 1998 Prospectus
29
<PAGE>
The use of credit ratings as the sole method of evaluating high
yield securities can involve certain risks. For example, credit
ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield securities. Also, credit
rating agencies may fail to change credit ratings in a timely
fashion to reflect events since the security was last rated. The
Advisor does not rely solely on credit ratings when selecting se-
curities for the Funds, and develops its own independent analysis
of issuer credit quality. If a credit rating agency changes the
rating of a portfolio security held by a Fund, the Fund may retain
the portfolio security if the Advisor deems it in the best inter-
est of shareholders.
During the year ended March 31, 1997, based upon the dollar-
weighted average ratings of the Funds' portfolio holdings at the
end of each month in the Funds' fiscal year, each operational Fund
that may invest greater than 5% of its assets in securities rated
below investment grade had the following percentages of its net
assets invested in securities rated in the categories indicated as
rated by Moody's (or, if unrated, determined by the Advisor to be
of comparable quality). See "Appendix B--Description of Securities
Ratings," for further information.
FIXED INCOME SECURITIES RATINGS
<TABLE>
<CAPTION>
BELOW
FUND PRIME 1 AAA AA A PRIME 1 BAA BA B
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN BOND 21% 58% 14% 0% 0% 3% 4% 0%
----------------------------------------------------------
GLOBAL BOND II 21 58 15 1 0 4 1 0
----------------------------------------------------------
HIGH YIELD 6 1 0 0 0 3 48 42
----------------------------------------------------------
TOTAL RETURN 13 66 2 4 0 9 5 1
----------------------------------------------------------
LOW DURATION 24 55 1 3 0 13 4 0
----------------------------------------------------------
SHORT-TERM 31 26 3 12 0 20 7 1
----------------------------------------------------------
STOCKSPLUS 32 29 5 7 0 17 9 1
</TABLE>
These figures are intended solely to provide disclosure about
each Fund's asset composition during its most recent fiscal year.
The asset composition after this time may or may not be approxi-
mately the same as represented by such figures. In addition, the
categories reflect ratings by Moody's, and ratings assigned by S&P
may not be consistent with ratings assigned by Moody's or other
credit ratings services, and the Advisor may not necessarily agree
with a rating assigned by any credit rating agency.
DERIVATIVE To the extent permitted by the investment objectives and policies
INSTRUMENTS of the Funds, the Funds may (except the Money Market Fund) pur-
chase and write call and put options on securities, securities in-
dexes and foreign currencies, and enter into futures contracts and
use options on futures contracts as further described below. The
Funds (except the Money Market Fund and the Municipal Bond Fund)
also may enter into swap agreements with respect to foreign cur-
rencies, interest rates, and securities indexes. The Funds may use
these techniques to hedge against changes in interest rates, for-
eign currency exchange rates or securities prices or as part of
their overall investment strategies. The Funds (except the Money
Market Fund and the Municipal Bond Fund) may also purchase and
sell options relating to foreign currencies for purposes of in-
creasing exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one country to another. Each
Fund will maintain a segregated account consisting of assets de-
termined to be liquid by the Advisor in accordance with procedures
established by the Board of Trustees (or, as permitted by applica-
ble regulation, enter into certain offsetting positions) to cover
its obligations under options, futures, and swaps to limit
leveraging of the Fund.
Derivative instruments are considered for these purposes 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 depends upon cash flows from underlying assets,
such as mortgage-related or asset-backed securities. Each Fund
(except the Money Market Fund and the Municipal Bond Fund) may in-
vest all of its
30
PIMCO Funds: Pacific Investment Management Series
<PAGE>
assets in derivative instruments, subject only to the Fund's in-
vestment objective and policies. The value of some derivative in-
struments in which the Funds invest may be particularly sensitive
to changes in prevailing interest rates, and, like the other in-
vestments of the Funds, the ability of a Fund to successfully uti-
lize these instruments may depend in part upon the ability of the
Advisor to forecast interest rates and other economic factors cor-
rectly. If the Advisor incorrectly forecasts such factors and has
taken positions in derivative instruments contrary to prevailing
market trends, the Funds could be exposed to the risk of loss.
The Funds might not employ any of the strategies described be-
low, and no assurance can be given that any strategy used will
succeed. If the Advisor incorrectly forecasts interest rates, mar-
ket values or other economic factors in utilizing a derivatives
strategy for a 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 pos-
sible imperfect correlation, or
even no correlation, between price movements of derivative instru-
ments 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 in-
vestments or otherwise, due to the possible inability of a Fund to
purchase or sell a portfolio security at a time that otherwise
would be favorable or the possible need to sell a portfolio secu-
rity 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 a Fund to close out or to liquidate its derivatives positions.
OPTIONS ON SECURITIES, SECURITIES INDEXES, AND CURRENCIES A 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. A
Fund may also purchase call options on securities and indexes. One
purpose of purchasing call options is to protect against substan-
tial increases in prices of securities the Fund intends to pur-
chase pending its ability to invest in such securities in an or-
derly 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 op-
tion (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 op-
tion to deliver the underlying security upon payment of the exer-
cise price or to pay the exercise price upon delivery of the un-
derlying 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 mul-
tiplier 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.
A Fund may sell put or call options it has previously pur-
chased, 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. A Fund may write a call or put option only if the
option is "covered" by the Fund holding a position in the under-
lying 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 Funds may write covered straddles consisting of a combina-
tion 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 Funds' immediate obligations. The Funds may use the same
liquid assets to cover both the call and put options where the ex-
ercise 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 Funds 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 security above the exer-
cise 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
31
March , 1998 Prospectus
<PAGE>
its obligation as a writer of the option. Once an option writer
has received an exercise notice, it cannot effect a closing pur-
chase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise
price. If a put or call option purchased by the Fund is not sold
when it has remaining value, and if the market price of the under-
lying security remains equal to or greater than the exercise price
(in the case of a put), or remains less than or equal to the exer-
cise 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 a Fund
seeks to close out an option position. Furthermore, if trading re-
strictions or suspensions are imposed on the options markets, a
Fund may be unable to close out a position.
Funds that invest in foreign currency-denominated securities
may buy or sell put and call options on foreign currencies. Cur-
rency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce
foreign currency risk using such options.
Over-the-counter options in which certain Funds may invest dif-
fer 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 Funds may be required to treat as illiquid over-the-
counter options purchased and securities being used to cover cer-
tain written over-the-counter options.
SWAP AGREEMENTS The Funds may enter into interest rate, index, eq-
uity and currency exchange rate swap agreements. These transac-
tions 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 in-
vestors for periods ranging from a few weeks to more than one
year. In a standard swap transaction, two parties agree to ex-
change 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 calcu-
lated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a par-
ticular 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 in-
terest rates fall below a specified level, or "floor"; and inter-
est rate collars, under which a party sells a cap and purchases a
floor or vice versa in an attempt to protect itself against inter-
est rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Funds calculate the
obligations of the parties to the agreement on a "net basis." Con-
sequently, a 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"). A 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 con-
sisting of assets determined to be liquid by the Advisor in accor-
dance with procedures established by the Board of Trustees, to
limit any potential leveraging of the Fund's portfolio. Obliga-
tions under swap agreements so covered will not be construed to be
"senior securities" for purposes of the Funds' investment restric-
tion concerning senior securities. A 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 a Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Advisor's
ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Be-
cause 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, a Fund bears the risk of loss
of the amount
32
PIMCO Funds: Pacific Investment Management Series
<PAGE>
expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Funds
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 Funds' repurchase agreement guidelines). Certain re-
strictions imposed on the Funds by the Internal Revenue Code may
limit the Funds' ability to use swap agreements. The swaps market
is a relatively new market and is largely unregulated. It is pos-
sible 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 re-
ceived under such agreements.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS Each of the
Fixed Income Funds (except the Money Market Fund and the Municipal
Bond Fund) may invest in interest rate futures contracts and op-
tions thereon ("futures options"), and to the extent it may invest
in foreign currency-denominated securities, may also invest in
foreign currency futures contracts and options thereon. The Munic-
ipal Bond Fund may purchase and sell futures contracts on U.S.
Government securities and Municipal Bonds, as well as purchase put
and call options on such futures contracts. The StocksPLUS Fund
may invest in interest rate, stock index and 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 a Fund and the hedging vehicle, so that the portfo-
lio 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 a 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 con-
tract 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 in-
struments are relatively new and without a significant trading
history. As a result, there is no assurance that an active second-
ary market will develop or continue to exist. Lack of a liquid
market for any reason may prevent a Fund from liquidating an unfa-
vorable position, and the Fund would remain obligated to meet mar-
gin requirements until the position is closed.
The Funds 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
Funds' immediate obligations. A Fund may use the same liquid as-
sets 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 Funds
will also segregate liquid assets equivalent to the amount, if
any, by which the put is "in the money."
The Funds will only enter into futures contracts or futures op-
tions which are standardized and traded on a U.S. or foreign ex-
change or board of trade, or similar entity, or quoted on an auto-
mated quotation system. Each Fund will use financial futures con-
tracts and related options only for "bona fide hedging" purposes,
as such term is defined in applicable regulations of the 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 posi-
tions, less the amount by which any such positions are "in-the-
money," would not exceed 5% of the Fund's net assets.
HYBRID A hybrid instrument can combine the characteristics of securities,
INSTRUMENTS futures, and options. For example, the principal amount or inter-
est rate of a hybrid could be tied (positively or negatively) to
the price of some commodity, currency or securities index or an-
other interest rate (each a "benchmark"). The interest rate or
(unlike most fixed income securities) the principal amount payable
at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration manage-
ment, and increased total return. Hybrids may not bear interest or
pay dividends. The value of a hybrid or its interest rate may be a
multiple of a benchmark and, as a result, may be leveraged and
move (up or down) more
March , 1998 Prospectus
33
<PAGE>
steeply and rapidly than the benchmark. These benchmarks may be
sensitive to economic and political events, such as commodity
shortages and currency devaluations, which cannot be readily fore-
seen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in
a hybrid may entail significant market risks that are not associ-
ated with a similar investment in a traditional, U.S. dollar-de-
nominated bond that has a fixed principal amount and pays a fixed
rate or floating rate of interest. The purchase of hybrids also
exposes a Fund to the credit risk of the issuer of the hybrids.
These risks may cause significant fluctuations in the net asset
value of the Fund. Accordingly, no Fund will invest more than 5%
of its assets in hybrid instruments.
Certain issuers of structured products such as hybrid instru-
ments may be deemed to be investment companies as defined in the
1940 Act. As a result, the Funds' investments in these products
will be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940
Act.
INVESTMENT Each of the Funds may invest in securities of other investment
IN companies, such as closed-end management investment companies, or
INVESTMENT in pooled accounts or other investment vehicles. As a shareholder
COMPANIES of an investment company, a Fund may indirectly bear service and
other fees which are in addition to the fees the Fund pays its
service providers.
PORTFOLIO The length of time a Fund has held a particular security is not
TURNOVER generally a consideration in investment decisions. The investment
policies of a Fund may lead to frequent changes in the Fund's in-
vestments, particularly in periods of volatile market movements.
High portfolio turnover (e.g., over 100%) involves correspondingly
greater expenses to a Fund, including commissions or dealer mark-
ups and other transaction costs on the sale of securities and
reinvestments in other securities. See "Management of the Trust--
Portfolio Transactions." Such sales may result in realization of
taxable capital gains. See "Taxes." The portfolio turnover rate
for certain of the Funds is set forth under "Financial High-
lights." The portfolio turnover rate for certain of the Funds,
which offer Institutional or Administrative Class shares, is in-
corporated by reference in the Statement of Additional Informa-
tion.
ILLIQUID Each of the Funds may invest up to 15% of its net assets in illiq-
SECURITIES uid securities (10% in the case of the Money Market Fund). Certain
illiquid securities may require pricing at fair value as deter-
mined in good faith under the supervision of the Board of Trust-
ees. The Advisor may be subject to significant delays in disposing
of illiquid securities, and transactions in illiquid securities
may entail registration expenses and other transaction costs that
are higher than those for transactions in liquid securities. The
term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which a 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, re-
purchase agreements with maturities in excess of seven days, cer-
tain 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 and other
securities which legally or in the Advisor's opinion may be deemed
illiquid (not including securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper that
Pacific Investment Management has determined to be liquid under
procedures approved by the Board of Trustees).
Illiquid securities may include privately placed securities,
which are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not
registered under the federal securities laws. Although certain of
these securities may be readily sold, for example, under Rule
144A, others may be illiquid, and their sale may involve substan-
tial delays and additional costs.
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 some or all of the Funds. Performance information is computed
separately for each Fund's Class A,
Class B and Class C shares in accordance with the formulas de-
scribed below. Because Class B and Class C shares bear
34
PIMCO Funds: Pacific Investment Management Series
<PAGE>
the expense of the distribution fee attending the deferred sales
charge (Class B) and asset based sales charge (Class C) alterna-
tives and certain other expenses, it is expected that, under nor-
mal circumstances, the yield and the level of performance of a
Fund's Class B and Class C shares will be lower than that of the
Fund's Class A shares although an investment in Class B or Class C
shares is not reduced by the front-end sales charge generally ap-
plicable to an investment in Class A shares.
From time to time, the yield and total return for each class of
shares of the Funds may be included in advertisements or reports
to shareholders or prospective investors. Yield quotations for the
Money Market Fund may include current yield and effective yield.
Current yield will be based on income received by a hypothetical
investment over a given seven-day period (less expenses accrued
during the period) and "annualized" (i.e., assuming that the sev-
en-day yield would be received for 52 weeks, stated in terms of an
annual percentage return on the investment). Effective yield for
the Fund is calculated in the manner similar to that used to cal-
culate current yield, but reflects the compounding effect on earn-
ings of reinvested dividends. For the remaining Funds, quotations
of yield for a Fund or class will be based on the investment in-
come per share (as defined by the Securities and Exchange Commis-
sion) 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. The tax equivalent yield of the Mu-
nicipal Bond Fund's Class A, Class B and Class C shares may also
be advertised, calculated like yield except that, for any given
tax bracket, net investment income will be calculated as the sum
of (i) any taxable income of the class plus (ii) the tax exempt
income of the class divided by the difference between 1 and the
effective federal income tax rates for taxpayers in that tax
bracket.
The total return of Class A, Class B and/or Class C shares of
all Funds may be included in advertisements or other written mate-
rial. When a Fund's total return is advertised with respect to its
Class A, Class B and Class C shares, it will be calculated for the
past year, the past five years, and the past ten years (or if the
Fund has been offered for a period shorter than one, five or ten
years, that period will be substituted) since the establishment of
the Fund (or its predecessor series of PIMCO Advisors Funds for
the Global Bond Fund II), as more fully described in the Statement
of Additional Information. Consistent with Securities and Exchange
Commission rules and informal guidance, for periods prior to the
initial offering date of a particular class, total return presen-
tations for the class will be based on the historical performance
of an older class of the Fund (the older class to be used in each
case is set forth in the Statement of Additional Information) re-
stated to reflect current sales charges (if any) of the newer
class, but not reflecting any higher operating expenses (such as
12b-1 distribution and servicing fees and administrative fee
charges) associated with the newer class. All other things being
equal, such higher expenses would have adversely affected (i.e.,
reduced) total return for a newer class (i.e., if the newer class
had been issued since the inception of the Fund) by the amount of
such higher expenses, compounded over the relevant period. Total
return for each class is measured by comparing the value of an in-
vestment in the Fund at the beginning of the relevant period (in
the case of Class A shares, giving effect to the maximum initial
sales charge) to the redemption value of the investment in the
Fund at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions at net asset value
and giving effect to the deduction of the maximum CDSC which would
be payable). Total return may be advertised using alternative
methods that reflect all elements of return, but that may be ad-
justed to reflect the cumulative impact of alternative fee and ex-
pense structures, such as the currently effective advisory and ad-
ministrative fees for the Funds.
The Trust may also provide current distribution information to
its shareholders in shareholder reports or other shareholder com-
munications, or in certain types of sales literature provided to
prospective investors. Current distribution information for a par-
ticular class of a Fund will be based on distributions for a spec-
ified 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 distri-
butions 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 in-
vestment income for that period.
March , 1998 Prospectus
35
<PAGE>
Performance information for the Trust may also be compared to
various unmanaged indexes, such as the Standard & Poor's 500 Com-
posite Stock Price Index, the Lehman Brothers Aggregate Bond In-
dex, the Lehman Brothers Mortgage-Backed Securities Index, the
Merrill Lynch 1 to 3 Year Treasury Index, the Lehman Intermediate
and 20+ Year Treasury Blend Index, the Lehman BB Intermediate Cor-
porate Index, indexes prepared by Lipper Analytical Services, the
J.P. Morgan Global Index, the J.P. Morgan Emerging Markets Bond
Index Plus, the Salomon Brothers World Government Bond Index-10
Non U.S.-Dollar Hedged and the J.P. Morgan Government Bond Index
Non U.S.-Dollar Hedged, and other entities or organizations which
track the performance of investment companies or investment advis-
ers. Unmanaged indexes (i.e., other than Lipper) generally do not
reflect deductions for administrative and management costs and ex-
penses. The Advisor may also report to shareholders or to the pub-
lic in advertisements concerning the performance of the Advisor as
adviser to clients other than the Trust, and on the comparative
performance or standing of the Advisor in relation to other money
managers. Such comparative information may be compiled or provided
by independent ratings services or by news organizations. Any per-
formance information, whether related to the Funds or to the Advi-
sor, should be considered in light of a Fund's investment objec-
tives 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 Funds, see the Statement
of Additional Information.
Investment results of the Funds will fluctuate over time, and
any presentation of the Funds' total return or yield for any prior
period should not be considered as a representation of what an in-
vestor's total return or yield may be in any future period.
How to Buy Shares
Class A, Class B and Class C shares of each Fund of the Trust 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 introduc-
ing brokers for the Distributor ("introducing brokers").
There are two ways to purchase Class A, Class B or Class C
shares: either 1) through your dealer or broker which has a dealer
agreement with the Distributor; or 2) directly by mailing a PIMCO
Funds Account Application (the "Account Application") with pay-
ment, as described below under the heading Direct Investment, to
the Distributor (if no dealer is named in the Account Application,
the Distributor may act as dealer).
Each 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 certain of the
Funds 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 alterna-
tive"), 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 CDSC. See "Alternative Purchase Ar-
rangements." Purchase payments for Class B and Class C shares are
fully invested at the net asset value next determined after ac-
ceptance 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 (normally 4:00 p.m. Eastern time) on the
New York Stock Exchange (the "Exchange"), 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 of-
fering 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
36
PIMCO Funds: Pacific Investment Management Series
<PAGE>
determination and were transmitted to and received by the Distrib-
utor prior to its close of business that day (normally 5:00 p.m.
Eastern time) or, in the case of certain retirement plans, re-
ceived by the Distributor prior to 9:30 a.m. Eastern time on the
next business day. Purchase orders received on other than a regu-
lar 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 Exchange
is closed for other than weekends or holidays, or if permitted by
the rules of the Securities and Exchange Commission, when trading
on the Exchange is restricted or during an emergency which makes
it impracticable for the Funds to dispose of their securities or
to determine fairly the value of their net assets, or during any
other period as permitted by the Securities and Exchange Commis-
sion for the protection of investors.
Except for purchases through the PIMCO Auto Invest plan, the
PIMCO Auto Exchange plan and tax-qualified and wrap programs re-
ferred to below under "Tax-Qualified Retirement Plans" and "Sales
at Net Asset Value", the minimum initial investment in Class A,
Class B or Class C shares of any Fund of the Trust or any series
of PIMCO Funds: Multi-Manager Series is $1,000, 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, Fund shares
purchased through participating brokers are held in the investor's
account with that broker. No share certificates will be issued un-
less specifically requested in writing by an investor or broker-
dealer.
DIRECT Investors who wish to invest in Class A, Class B or Class C shares
INVESTMENT 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. All
shareholders who open direct accounts with the Distributor will
receive from the Distributor individual confirmations of each pur-
chase, 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 fea-
tures or plans offered by the Trust may be obtained by calling the
Distributor at 800-426-0107 or by calling your broker.
PURCHASE BY Investors who wish to invest directly may send a check payable to
MAIL PIMCO Funds Distribution Company, along with a completed applica-
tion 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 con-
verted 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 Subsequent purchases of Class A, Class B or Class C shares can be
PURCHASES made as indicated above by mailing a check with a letter describ-
OF SHARES ing 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 ex-
cept during periods when an Automatic Withdrawal plan is in ef-
fect, the minimum subsequent purchase is $100 in any Fund. All
payments should be made payable to PIMCO Funds Distribution Com-
pany and should clearly indicate the shareholder's account number.
Checks should be mailed to the address above under "Purchase by
Mail."
March , 1998 Prospectus
37
<PAGE>
TAX- The Distributor makes available retirement plan services and docu-
QUALIFIED ments for Individual Retirement Accounts (IRAs) for which First
RETIREMENT National Bank of Boston serves as trustee and for IRA accounts es-
PLANS tablished with Form 5305-SIMPLE under the Internal Revenue Code.
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 re-
tirement plan. Investors who maintain their accounts with partici-
pating brokers should consult their broker about similar types of
accounts that may be offered through the broker. The minimum ini-
tial investment for all tax qualified plans (except for 401(k)
plans, SIMPLE IRAs, SEPs and SAR/SEPs) is $250 per Fund and the
minimum initial investment for 401(k) plans, SIMPLE IRAs, SEPs and
SAR/SEPs and the minimum subsequent investment per Fund for all
tax-qualified plans is $25.
PIMCO AUTO The PIMCO Auto Invest plan provides for periodic investments into
INVEST the shareholder's account with the Trust by means of automatic
transfers of a designated amount from the shareholder's bank ac-
count. 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 com-
pleting the appropriate section on the Account Application, or you
may obtain an Auto Invest Application by calling the Distributor
or your broker.
PIMCO AUTO The PIMCO Auto Exchange plan establishes regular, periodic ex-
EXCHANGE changes from one Fund to another Fund or a series of PIMCO Funds:
Multi-Manager Series which offers Class A, Class B or Class C
shares. The plan provides for regular investments into a share-
holder's account in a specific Fund by means of automatic ex-
changes 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 tele-
phone request at 800-426-0107. For more information on exchanges,
see "Exchange Privilege."
PIMCO FUND PIMCO Fund Link ("Fund Link") connects your Fund account with a
LINK bank account. Fund Link may be used for subsequent purchases and
for redemptions and other transactions described under "How to Re-
deem." 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 pur-
chases, call 800-426-0107. All such calls will be recorded. Fund
Link is normally established within 45 days of receipt of a Fund
Link Application by Shareholder Services, Inc. (the "Transfer
Agent"). The minimum investment by Fund Link is $50 per Fund.
Shares will be purchased on the regular business day the Distribu-
tor receives the funds through the ACH system, provided the funds
are received before the close of regular trading on the 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 Account Applica-
tion. 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" below. Such
privileges apply to each shareholder of record for the account un-
less 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
38
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Fund Link Application signed by all owners of record of the ac-
count, with all signatures guaranteed. The Distributor, the Trans-
fer Agent and the Fund may rely on any telephone instructions be-
lieved 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. Fund Link does
not apply to shares held in broker "street name" accounts.
SIGNATURE When a signature guarantee is called for, the shareholder should
GUARANTEE have "Signature Guaranteed" stamped under his signature and guar-
anteed by any of the following entities: U.S. banks, foreign banks
having a U.S. correspondent bank, credit unions, savings associa-
tions, 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 guaran-
tee pursuant to its written signature guarantee standards or pro-
cedures, 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 require-
ments from time to time upon notice to shareholders, which may be
given by means of a new or supplemented Prospectus.
ACCOUNT Changes in registration or account privileges may be made in writ-
REGISTRATIONing to the Transfer Agent. Signature guarantees may be required.
CHANGES See "Signature Guarantee" above. All correspondence must include
the account number and must be sent to:
PIMCO Funds Distribution Company
P.O. Box 5866
Denver, CO 80217-5866
Alternative Purchase Arrangements
The Trust offers investors three classes of shares in this Pro-
spectus (Class A, Class B and Class C) which bear sales charges in
different forms and amounts and which bear different levels of ex-
penses. Through a separate prospectus, certain of the Funds offer
up to two additional classes of shares, Institutional Class shares
and Administrative Class shares, to pension and profit sharing
plans, employee benefit plans, endowments, foundations, corpora-
tions and other high net worth individuals. 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, Ad-
ministrative 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 Institu-
tional Class or Administrative Class shares, please call the Dis-
tributor at 800-426-0107.
The alternative purchase arrangements offered in this Prospec-
tus 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, in-
vestors should consider the anticipated life of an intended in-
vestment in the Funds, the accumulated distribution and servicing
fees plus CDSCs on Class B or Class C shares, the initial sales
charge plus accumulated servicing fees on Class A shares (plus a
CDSC in certain circumstances), the possibility that the antici-
pated 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 CDSCs applicable to Class A, Class B and
Class C shares.
39
March , 1998 Prospectus
<PAGE>
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 appli-
cable to such shares. Similar reductions are not available on the
contingent deferred sales charge alternative (Class B) or the as-
set 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 correspond-
ingly higher dividends on a per share basis. However, because ini-
tial 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 CDSC. 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 CDSC
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 Funds 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 ini-
tial 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 CDSC, and will be subject to the servicing
fees charged for Class A shares which are lower than the distribu-
tion and servicing fees charged on either Class B or Class C
shares. See "Deferred Sales Charge Alternative--Class B Shares"
below. Class B shares are not available for purchase by employer
sponsored retirement plans.
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 CDSC after they have been held for one year and are
subject to only a 1% CDSC 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 main-
tain their investment in the Funds 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 CDSC is available. See generally "Initial Sales Charge
Alternative--Class A Shares" and "Waiver of Contingent Deferred
Sales Charges" below.
The maximum single purchase of Class B shares of the Trust and
series of PIMCO Funds: Multi-Manager Series accepted is $249,999.
The maximum single purchase of Class C shares of the Trust and se-
ries of PIMCO Funds: Multi-Manager Series accepted is $999,999.
The Funds 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 Distri-
bution and Servicing Plans" below.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES The CDSC 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 separa-
tion from service and attaining age 55; (ii) any partial or com-
plete 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 qual-
ified employer retirement plan in connection with termination of
employment or termination of the employer's plan and the transfer
to another employer's plan
40
PIMCO Funds: Pacific Investment Management Series
<PAGE>
or to an IRA; (iv) any partial or complete redemption following
death or disability (as defined in the Code) of a shareholder (in-
cluding 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 determina-tion of disability; (v) any redemption
resulting from a return of an excess contribution to a qualified
employer retirement plan or an IRA; (vi) up to 10% per year of the
value of an account which (a) has the value of at least $10,000 at
the start of such year and (b) is subject to an Automatic With-
drawal Plan; (vii) redemptions by Trustees, officers and employees
of the Trust, and by directors, officers and employees of the Dis-
tributor and the Advisor; (viii) redemptions effected pursuant to
a Fund's right to involuntarily redeem a shareholder's account if
the aggregate net asset value of shares held in such shareholder's
account is less than a minimum account size specified in such
Fund's 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 hold-
ing 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; (xii) redemptions effected by
trustees or other fiduciaries who have purchased shares for em-
ployer sponsored plans, the trustee, administrator, fiduciary,
broker, trust company or registered investment adviser for which
has an agreement with the Distributor with respect to such pur-
chases; or (xiii) redemptions in connection with IRA accounts es-
tablished with Form 5305-SIMPLE under the Code for which the Trust
is the designated financial institution.
The CDSC applicable to Class B shares is currently waived for
any partial or complete redemption in each of the following cases:
(a) in connection with a distribution without penalty under Sec-
tion 72(t) of the Code from a 403(b)(7) plan or an IRA upon at-
taining age 59 1/2; (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 re-
quested within one year of the death or initial determination of
disability; and (c) up to 10% per year of the value of an account
which (i) has a value of at least $100,000 at the start of such
year and (ii) is subject to an Automatic Withdrawal Plan. See "How
to Redeem--Automatic Withdrawal Plan."
The Distributor may require documentation prior to waiver of
the CDSC for any class, including distribution letters, certifica-
tion by plan administrators, applicable tax forms, death certifi-
cates, physicians' certificates, etc.
March , 1998 Prospectus
41
<PAGE>
INITIAL Class A shares are sold at a public offering price equal to their
SALES net asset value per share plus a sales charge, as set forth below.
CHARGE As indicated below under "Class A Deferred Sales Charge," certain
ALTERNATIVE investors that purchase $1,000,000 ($250,000 in the case of the
- -- Short-Term Fund) or more of any Fund's Class A shares (and thus
CLASS A pay no initial sales charge) may be subject to a 1% CDSC if they
SHARES redeem such shares during the first 18 months after their pur-
chase.
LONG-TERM U.S. GOVERNMENT, MUNICIPAL BOND, FOREIGN BOND, GLOBAL
BOND II, EMERGING MARKETS BOND, HIGH YIELD AND TOTAL RETURN
FUNDS
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT OR
AS % OF NET SALES CHARGE COMMISSION TO
AMOUNT OF AMOUNT AS % OF THE PUBLIC DEALERS AS % OF
PURCHASE INVESTED OFFERING PRICE PUBLIC OFFERING PRICE
-----------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 4.71% 4.50% 4.00%
-----------------------------------------------------------------------
$50,000 - $99,999 4.17% 4.00% 3.50%
-----------------------------------------------------------------------
$100,000 - $249,999 3.63% 3.50% 3.00%
-----------------------------------------------------------------------
$250,000 - $499,999 2.56% 2.50% 2.00%
-----------------------------------------------------------------------
$500,000 - $999,999 2.04% 2.00% 1.75%
-----------------------------------------------------------------------
$1,000,000+ 0.00%(/1/) 0.00%(/1/) 0.50%(/2/)
</TABLE>
REAL RETURN BOND, LOW DURATION AND STOCKSPLUS FUNDS
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT OR
AS % OF NET SALES CHARGE COMMISSION TO
AMOUNT OF AMOUNT AS % OF THE PUBLIC DEALERS AS % OF
PURCHASE INVESTED OFFERING PRICE PUBLIC OFFERING PRICE
-----------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 3.09% 3.00% 2.50%
-----------------------------------------------------------------------
$50,000 - $99,999 2.56% 2.50% 2.00%
-----------------------------------------------------------------------
$100,000 - $249,999 2.04% 2.00% 1.75%
-----------------------------------------------------------------------
$250,000 - $499,999 1.52% 1.50% 1.25%
-----------------------------------------------------------------------
$500,000 - $999,999 1.27% 1.25% 1.00%
-----------------------------------------------------------------------
$1,000,000+ 0.00%(/1/) 0.00%(/1/) 0.50%(/2/)
</TABLE>
SHORT-TERM FUND
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT OR
AS % OF NET SALES CHARGE COMMISSION TO
AMOUNT OF AMOUNT AS % OF THE PUBLIC DEALERS AS % OF
PURCHASE INVESTED OFFERING PRICE PUBLIC OFFERING PRICE
-----------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 2.04% 2.00% 1.75%
-----------------------------------------------------------------------
$50,000 - $99,999 1.78% 1.75% 1.50%
-----------------------------------------------------------------------
$100,000 - $249,999 1.52% 1.50% 1.25%
-----------------------------------------------------------------------
$250,000+ 0.00%(/1/) 0.00%(/1/) 0.25%(/2/)
</TABLE>
1. As shown, investors that purchase more than $1,000,000 of any
Fund's Class A shares ($250,000 in the case of the Short-Term
Fund) will not pay any initial sales charge on such purchase. How-
ever, except with regard to purchases of Class A shares of the
Money Market Fund, purchasers of $1,000,000 ($250,000 in the case
of the Short-Term Fund) or more of Class A shares (other than
those purchasers described below under "Sales at Net Asset Value"
where no commission is paid) will be subject to a CDSC 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 CDSC as described under "Waiver of Contingent De-
ferred Sales Charges" above. See "Class A Deferred Sales Charge"
below.
2. The Distributor will pay a commission to dealers who sell
amounts of $1,000,000 ($250,000 in the case of the Short-Term
Fund) 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") of each of the Funds except for the
Money Market Fund (for which no payment is made) and the Short-
Term Fund, according to the following schedule: 0.50% of the first
$2,000,000 and 0.25% of amounts over $2,000,000; and 0.25% of
sales of Class A shares of the Short-Term Fund in excess of
$250,000.
42
PIMCO Funds: Pacific Investment Management Series
<PAGE>
No initial sales charge applies to purchases of Class A shares
of the Money Market Fund. However, if a shareholder exchanges
Class A shares of the Money Market Fund, for which no sales load
was paid at the time of purchase, for Class A shares of any other
Fund, the sales charge shown above for the other Fund applies at
the time of the exchange.
Each 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
any particular Fund during a particular period. During such peri-
ods as may from time to time be designated by the Distributor, the
Distributor will pay an additional amount of up to .50% of the
purchase price on sales of Class A shares of all or selected Funds
purchased to each participating broker which obtains purchase or-
ders in amounts exceeding thresholds established from time to time
by the Distributor. From time to time, the Distributor, its parent
and/or its affiliates may make additional payments to one or more
participating brokers based upon factors such as the level of
sales or the length of time clients' assets have remained in the
Trust.
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 enti-
tled 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 or series of PIMCO Funds: Multi-Manager Series which
offer Class A shares (together, "eligible PIMCO Funds") 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 or her spouse and their children under the age of 21 years
purchasing Class A shares of the eligible PIMCO 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 fidu-
ciary 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, call the Distributor at 800-
426-0107 or your broker.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION) A purchase of
additional Class A shares of any eligible PIMCO Fund 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 eligible PIMCO
Fund (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 Total Return
Fund worth $25,000 at the current maximum offering price and
wished to purchase Class A shares of the Global Bond Fund II worth
an additional $30,000, the sales charge for the $30,000 purchase
would be at the 4.00% rate applicable to a single $55,000 purchase
of shares of the Global Bond Fund II, rather than the 4.50% rate.
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 eligible PIMCO Fund(s) (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 appli-
cable 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
March , 1998 Prospectus
43
<PAGE>
eligible PIMCO Fund (other than the Money Market Fund) 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 in-
cluded and the sales charge on any purchases prior to the Letter
will not be adjusted.
Investors qualifying for the Combined Purchase Privilege de-
scribed above may purchase shares of the eligible PIMCO Funds un-
der 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 Fund), you and
your spouse each purchase Class A shares of the Global Bond Fund
II worth $30,000 (for a total of $60,000), it will only be neces-
sary 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
Fund) to qualify for the 3.50% 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 the Real Return Bond, Low
Duration, Short-Term, Money Market and StocksPLUS Funds).
A Letter of Intent is not a binding obligation to purchase the
full amount indicated. The minimum initial investment under a Let-
ter 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 in-
dicated 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 eligible PIMCO Fund shares, are not subject to es-
crow. When the full amount indicated has been purchased, the es-
crow will be released.
If you wish to enter into a Letter of Intent in conjunction
with your initial investment in Class A shares of a Fund, you
should complete the appropriate portion of the Account Applica-
tion. If you are a current Class A shareholder desiring to do so
you can obtain a form of Letter of Intent by contacting the Dis-
tributor at 800-426-0107 or any broker participating in this pro-
gram.
REINSTATEMENT PRIVILEGE A Class A shareholder who has caused any
or all of his shares (other than Money Market Fund shares that
were not acquired by exchanging Class A shares of another Fund) to
be redeemed may reinvest all or any portion of the redemption pro-
ceeds in Class A shares of any eligible PIMCO Fund 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 as-
set value next determined. See "How Net Asset Value is Deter-
mined." 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 rein-
vested in shares of the same Fund within 30 days. The reinstate-
ment privilege may be utilized by a shareholder only once, irre-
spective of the number of shares redeemed, except that the privi-
lege may be utilized without limit in connection with transactions
whose sole purpose is to transfer a shareholder's interest in a
Fund to his Individual Retirement Account or other qualified re-
tirement plan account. An investor may exercise the reinstatement
privilege by written request sent to the Distributor or to the in-
vestor's broker.
SALES AT NET ASSET VALUE Each 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 Advi-
sor or the Distributor, a parent, brother or sister of any such
officer, trustee, director or employee or a spouse or child of any
of the foregoing persons, or any trust, profit sharing or pension
plan for the benefit of any such person and to any other person if
the Distributor anticipates that there will be minimal sales ex-
penses associated with the sale, (b) current or retired trustees
of PIMCO Funds: Multi-Manager Series or Cash Accumulation Trust,
registered investment companies for which PIMCO Advisors L.P., an
affiliate of the Advisor, acts as investment adviser, (c) current
registered representatives and other full-time employees of par-
ticipating brokers or such persons' spouses or for trust or custo-
dial accounts for their minor children, (d) trustees or other fi-
duciaries purchasing shares for certain employer sponsored plans
that have at least 100 eligible participants or at
44
PIMCO Funds: Pacific Investment Management Series
<PAGE>
least $1 million in total plan assets, (e) trustees or other fidu-
ciaries purchasing shares for certain plans sponsored by employ-
ers, professional organizations or associations, or charitable or-
ganizations, the trustee, administrator, fiduciary, broker, trust
company or registered investment adviser for which has an agree-
ment with the Distributor with respect to such purchases, and to
participants in such plans and their spouses purchasing for their
accounts(s) or IRAs, (f) participants investing through accounts
known as "wrap accounts" established with brokers or dealers ap-
proved by the Distributor where such brokers or dealers are paid a
single, inclusive fee for brokerage and investment management
services, (g) client accounts of broker-dealers or registered in-
vestment advisers affiliated with such broker-dealers with which
the Distributor has an agreement for the use of PIMCO Funds in
particular investment products or programs, and (h) accounts for
which a trust company affiliated with the Trust or the Advisor
serves as trustee or custodian. As described above, the Distribu-
tor 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.
NOTIFICATION OF DISTRIBUTOR An investor or participating broker
must notify the Distributor whenever a quantity discount or re-
duced sales charge is applicable to a purchase and must provide
the Distributor with sufficient information at the time of pur-
chase 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.
CLASS A DEFERRED SALES CHARGE For all Funds except the Money Mar-
ket Fund, investors who purchase $1,000,000 ($250,000 in the case
of the Short-Term Fund) or more of Class A shares (and, thus, pur-
chase such shares without any initial sales charge) may be subject
to a 1% CDSC (the "Class A CDSC") if such shares are redeemed
within 18 months of their purchase. The Class A CDSC does not ap-
ply to investors purchasing $1,000,000 or more of any Fund's Class
A shares ($250,000 in the case of the Short-Term Fund) if such in-
vestors 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 de-
rived 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 re-
deemed 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 does not apply to Class A shares of the Money
Market Fund but, if Money Market Fund Class A shares are purchased
in a transaction that, for any other Fund, would be subject to the
CDSC (i.e., a purchase of $1,000,000 ($250,000 in the case of the
Short-Term Fund) or more) and are subsequently exchanged for Class
A shares of any other Fund, a Class A CDSC will apply to the
shares of the Fund acquired by exchange for a period of 18 months
from the date of the exchange.
The Class A CDSC is currently waived in connection with certain
redemptions as described above under "Alternative Purchase Ar-
rangements--Waiver of Contingent Deferred Sales Charges." For more
information about the Class A CDSC, call the Distributor at 800-
426-0107.
PARTICIPATING BROKERS Investment dealers and other financial in-
termediaries 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 transaction fees and/or
other 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
45
March , 1998 Prospectus
<PAGE>
shares or the reinvestment of dividends may not be available
through such firms. Some firms may participate in a program al-
lowing them access to their clients' accounts for servicing in-
cluding, without limitation, transfers of registration and divi-
dend 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' ma-
terial regarding their fees and services.
DEFERRED Class B shares are sold at their current net asset value without
SALES any initial sales charge. The full amount of an investor's pur-
CHARGE chase payment will be invested in shares of the Fund(s) selected.
ALTERNATIVE A CDSC will be imposed on Class B shares of all Funds if an in-
- -- vestor redeems an amount which causes the current value of the in-
CLASS B vestor's account for a Fund to fall below the total dollar amount
SHARES of purchase payments subject to the CDSC, except that no CDSC is
imposed if the shares redeemed have been acquired through the re-
investment of dividends or capital gains distributions or if the
amount redeemed is derived from increases in the value of the ac-
count above the amount of purchase payments subject to the CDSC.
Class B shares of the Short-Term Fund and the Money Market Fund
are not offered for initial purchase but may be obtained through
exchanges of Class B shares of other Funds. See "Exchange Privi-
lege" below. Class B shares are not available for purchase by em-
ployer sponsored retirement plans.
Whether a CDSC is imposed and the amount of the CDSC will de-
pend on the number of years since the investor made a purchase
payment from which an amount is being redeemed. Purchases are sub-
ject to the CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
----------------------------------------
<S> <C>
First 5%
----------------------------------------
Second 4
----------------------------------------
Third 3
----------------------------------------
Fourth 3
----------------------------------------
Fifth 2
----------------------------------------
Sixth 1
----------------------------------------
Seventh 0*
</TABLE>
*After the seventh year,
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 earli-
est purchase payment from which a redemption or exchange has not
already been fully effected.
The following example will illustrate the operation of the
Class B CDSC:
Assume that an individual opens an account and makes a purchase
payment of $10,000 for Class B shares of a Fund (except the Money
Market and Short-Term Funds) and that six months later the value
of the investor's account for that Fund has grown through invest-
ment performance and reinvestment of distributions to $11,000. The
investor then may redeem up to $1,000 from that Fund ($11,000 mi-
nus $10,000) without incurring a CDSC. If the investor should re-
deem $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 re-
duced below the amount of the purchase payment). At the rate of
5%, the Class B CDSC would be $100.
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 aggregat-
ed. 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
each Fund automatically convert into Class A shares after they
have been held for seven years.
46
PIMCO Funds: Pacific Investment Management Series
<PAGE>
For sales of Class B shares made and services rendered to Class
B shareholders, the Distributor intends to make payments to par-
ticipating brokers, at the time a shareholder purchases Class B
shares, of 4% of the purchase amount for each of the Funds. During
such periods as may from time to time be designated by the Dis-
tributor, the Distributor will pay selected participating brokers
an additional amount of up to .50% of the purchase price on sales
of Class B shares of all or selected Funds purchased to each par-
ticipating broker which obtains purchase orders in amounts exceed-
ing 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 Ar-
rangements--Waiver of Contingent Deferred Sales Charges." For more
information about the Class B CDSC, call the Distributor at 800-
426-0107.
ASSET BASED Class C shares are sold at their current net asset value without
SALES any initial sales charge. A CDSC is imposed on Class C shares of
CHARGE all Funds if an investor redeems an amount which causes the cur-
ALTERNATIVE rent value of the investor's account for a Fund to fall below the
- -- total dollar amount of purchase payments subject to the CDSC, ex-
CLASS C cept that no CDSC is imposed if the shares redeemed have been ac-
SHARES quired through the reinvestment of dividends or capital gains dis-
tributions 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(s) selected.
Whether a CDSC is imposed and the amount of the CDSC will de-
pend on the number of years since the investor made a purchase
payment from which an amount is being redeemed. Purchases are sub-
ject to the CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
----------------------------------------
<S> <C>
First 1
----------------------------------------
Thereafter 0
</TABLE>
In determining whether a CDSC is payable, it is assumed that
the purchase payment from which the redemption is made is the ear-
liest purchase payment (from which a redemption or exchange has
not already been effected).
The following example will illustrate the operation of the
Class C CDSC:
Assume that an individual opens an account and makes a purchase
payment of $10,000 for Class C shares of a Fund and that six
months later the value of the investor's account for that Fund has
grown through investment performance and reinvestment of distribu-
tions to $11,000. The investor then may redeem up to $1,000 from
that 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 Class C 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 particular Fund are
aggregated, and the current value of all such shares is aggregat-
ed. Any CDSC imposed on a redemption of Class C shares is paid to
the Distributor. Unlike Class B shares, Class C shares do not au-
tomatically convert to any other class of shares of the Funds.
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 share-
holder purchases Class C shares, of 1.00% (representing .75% dis-
tribution fees and .25% servicing fees) of the purchase amount for
all Funds except the Real Return Bond, Low Duration, Low Duration
Mortgage, Short-Term, Money Market and StocksPLUS Funds. For the
Real Return Bond, Low Duration and StocksPLUS Funds, the Distribu-
tor expects to make payments of .75% (representing .50% distribu-
tion fees and .25% service fees); for the Short-Term Fund, the
Distributor expects to make payments of .55% (representing .30%
distribution fees and .25% service fees); and for the Money Market
Fund, the Distributor expects to make no payment. For sales of
Class C shares made to participants making periodic purchases of
March , 1998 Prospectus
47
<PAGE>
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 .50% of the purchase price on sales
of Class C shares of all or selected Funds purchased to each par-
ticipating broker which obtains purchase orders in amounts exceed-
ing 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 Ar-
rangements--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
any Fund for the same Class of shares of any other Fund in an ac-
count with identical registration on the basis of their respective
net asset values (except that a sales charge will apply on ex-
changes of Class A shares of the Money Market Fund on which no
sales charge was paid at the time of purchase). Class A, Class B
and Class C shares of each Fund may also be exchanged for shares
of the same class of a series which offers such classes (except
for the Opportunity Fund if a restriction applies) of PIMCO Funds:
Multi-Manager Series, an affiliated mutual fund family comprised
primarily of equity portfolios managed by the subsidiary partner-
ships of PIMCO Advisors L.P. Class A shares of the Money Market
Fund may be exchanged for Class A shares of any other Fund, but
the usual sales charges applicable to investments in such other
Fund apply on shares for which no sales load was paid at the time
of purchase. There are currently no exchange fees or charges. Ex-
cept with respect to tax- qualified programs and exchanges ef-
fected through the PIMCO Auto Exchange plan, exchanges are subject
to the $1000 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, un-
less 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 Trans-
fer Agent at 800-426-0107. The Trust will employ reasonable proce-
dures 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 act-
ing on a caller's telephone instructions, will provide written
confirmations of such transactions and will record telephone in-
structions. 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 regis-
tration information or account 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 avail-
able from the Distributor. A signature guarantee is required. See
"How to Buy Shares--Signature Guarantee." Telephone exchanges may
be made between 9:00 a.m. Eastern time and the close of regular
trading (normally 4:00 p.m. Eastern time) on the Exchange on any
day the Exchange is open (generally weekdays other than normal
holidays). The Trust reserves the right to refuse exchange pur-
chases if, in the judgment of the Advisor, the purchase would ad-
versely affect the Fund and its shareholders. In particular, a
pattern of exchanges characteristic of "market-timing" strategies
may be deemed by the Advisor to be detrimental to the Trust or a
particular 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 Secu-
rities and Exchange Commission regulations, the Trust will give 60
days' advance notice to shareholders of any termination or mate-
rial modification of the exchange privilege. For further informa-
tion 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 a Fund, any portion of the investment attributable to capi-
tal appreciation and/or reinvested divi-
48
PIMCO Funds: Pacific Investment Management Series
<PAGE>
dends or capital gains distributions will be exchanged first, and
thereafter any portions exchanged will be from the earliest in-
vestment made in the Fund from which the exchange was made. Share-
holders should take into account the effect of any exchange on the
applicability of any CDSC that may be imposed upon any subsequent
redemption. Although the Class A CDSC does not apply to Class A
shares of the Money Market Fund, Class A shares purchased in a
transaction that would otherwise be subject to the Class A CDSC
(i.e., most purchases of $1,000,000 or more) are subsequently ex-
changed for Class A shares of any other Fund, a Class A CDSC will
apply to the shares of the Fund acquired by exchange for a period
of 18 months from the date of the exchange. See "Initial Sales
Charge Alternative--Class A Shares--Class A Deferred Sales Charge"
above.
Investors may also select the PIMCO Auto Exchange plan which
establishes automatic periodic exchanges. For further information
on automatic exchanges see "How to Buy Shares--PIMCO Auto Ex-
change" above.
How to Redeem
Class A, Class B or Class C shares may be redeemed through a par-
ticipating broker, by telephone, by submitting a written redemp-
tion request directly to the Transfer Agent (for non-broker ac-
counts), 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 bro-
ker who processes a redemption for an investor may charge custom-
ary 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 (normally 4:00 p.m. Eastern time) on the
Exchange on a regular business day and received by the Distributor
prior to the close of the Distributor's business day will be con-
firmed at the net asset value effective as of the closing of the
Exchange on that day, less any applicable CDSC.
DIRECT A shareholder's original Account Application permits the share-
REDEMPTION holder to redeem by written request and by telephone (unless the
shareholder specifically elects not to utilize telephone redemp-
tions) and to elect one or more of the additional redemption pro-
cedures described below. A shareholder may change the instructions
indicated on his original Account Application, or may request ad-
ditional redemption options, only by transmitting a written direc-
tion 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 pro-
ceeds 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 To redeem shares in writing (whether or not represented by certif-
REQUESTS icates), a shareholder must send the following items to the Trans-
fer Agent, Shareholder Services, Inc., P.O. Box 5866, Denver, Col-
orado 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 be-
low, a guarantee of all signatures on the written request or on
the share certificate or accompanying stock power, if required, as
described under "How to Buy Shares--Signature Guarantee"; (3) any
share certificates issued for any of the shares to be redeemed
(see "Certificated Shares" below); and (4) any
49
March , 1998 Prospectus
<PAGE>
additional documents which may be required by the Transfer Agent
for redemption by corporations, partnerships or other organiza-
tions, executors, administrators, trustees, custodians or guardi-
ans, 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 re-
demptions 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 trans-
fer, 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 or transfer re-
quests will not be honored until all required documents in the
proper form have been received by the Transfer Agent. This redemp-
tion option does not apply to shares held in broker "street name"
accounts.
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 redemp-
tion 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 adminis-
trator for which has an agreement with the Distributor.
TELEPHONE The Trust accepts telephone requests for redemption of shares for
REDEMPTIONS 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 redemp-
tion will be sent to the record shareholder at his record address.
Changes in account information must be made in a written authori-
zation with a signature guarantee. See "How to Buy Shares--Signa-
ture Guarantee". Telephone redemptions will not be accepted during
the 30-day period following any change in an account's record ad-
dress. This redemption option does not apply to shares held in
broker "street name" accounts.
By completing an Account Application, an investor agrees that
the Trust, the Distributor and the Transfer Agent shall not be li-
able for any loss incurred by the investor by reason of the Trust
accepting unauthorized telephone redemption requests for his ac-
count if the Trust reasonably believes the instructions to be gen-
uine. 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 him-
self 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 instruc-
tions 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 transac-
tions and will record telephone instructions.
A shareholder making a telephone redemption should call the
Transfer Agent at 800-426-0107 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 with-
drawn 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 re-
demption request is received prior to the close of regular trading
(normally 4:00 p.m. Eastern time) on the Exchange that day. If the
redemption request is received after the close 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 in-
vestor on the second following Trust business day. The Trust re-
serves the right to terminate or modify the telephone redemption
service at any time. During times of severe disruptions in the se-
curities markets, the volume of calls may make it difficult to re-
deem by telephone, in which case a shareholder may wish to send a
written request for redemption as described under "Written Re-
quests" above. Telephone communications may be recorded by the
Distributor or the Transfer Agent.
50
PIMCO Funds: Pacific Investment Management Series
<PAGE>
FUND LINK If a shareholder has established Fund Link, the shareholder may
REDEMPTIONS 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 a Fund Link Ap-
plication by the Transfer Agent. To use Fund Link for redemptions,
call the Transfer Agent at 800-426-0107. Subject to the limita-
tions set forth above under "Telephone Redemptions," the Distribu-
tor, the Trust and the Transfer Agent may rely on instructions by
any registered owner believed to be genuine and will not be re-
sponsible to any shareholder for any loss, damage or expense aris-
ing out of such instructions. Requests received by the Transfer
Agent prior to the close of regular trading (normally 4:00 p.m.
Eastern time) on the Exchange 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
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. Fund Link may not be
used to redeem shares held in certificated form. Changes in bank
account information must be made by completing a new Fund Link Ap-
plication, signed by all owners of record of the account, with all
signatures guaranteed. See "How to Buy Shares--Signature Guaran-
tee." See "How to Buy Shares-- PIMCO Fund Link" for information on
establishing the Fund Link privilege. The Trust may terminate the
Fund Link program at any time without notice to shareholders. This
redemption option does not apply to shares held in broker "street
name" accounts.
PIMCO FUNDS PIMCO Funds Automated Telephone System ("ATS") is an automated
AUTOMATED telephone system that enables shareholders to perform a number of
TELEPHONE account transactions automatically using a touch-tone telephone.
SYSTEM ATS may be used on already-established Fund accounts after you ob-
tain a Personal Identification Number (PIN) by calling the special
ATS number: 1-800-223-2413.
Purchasing Shares. You may purchase shares in amounts up to
$100,000 by telephone by calling 1-800-223-2413. You must have es-
tablished ATS privileges to link your bank account with the Fund
to pay for these purchases.
Exchanging Shares. With the PIMCO Funds Exchange Privilege, you
can exchange shares automatically by telephone from your Fund Link
Account to another PIMCO Funds account you have already estab-
lished by calling 1-800-223-2413. Please refer to "Exchange Privi-
lege" below for details.
Redemptions. You may redeem shares by telephone automatically by
calling 1-800-223-2413 and the Fund will send the proceeds di-
rectly to your Fund bank account. Please refer to "How to Redeem"
below for details.
EXPEDITED If a shareholder has given authorization for expedited wire re-
WIRE demption, shares can be redeemed and the proceeds sent by federal
TRANSFER wire transfer to a single previously designated bank account. Re-
REDEMPTIONS quests received by the Trust prior to the close of the Exchange
will result in shares being redeemed that day at the next deter-
mined 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 de-
layed by the Trust for up to 7 days if the Distributor deems it
appropriate under then current market conditions. Once authoriza-
tion is on file, the Trust will honor requests by any person iden-
tifying himself as the owner of an account or the owner's broker
by telephone at 800-426-0107 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 cur-
rently 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 privi-
lege. Shares purchased by check may not be redeemed by wire trans-
fer until such shares have been owned (i.e., paid for) for at
least 15 days. Expedited wire transfer redemptions may be autho-
rized 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 re-
ceive 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 "How to Buy
Shares -- Signature Guarantee." This redemption option does not
apply to shares held in broker "street name" accounts.
March , 1998 Prospectus
51
<PAGE>
CERTIFICATEDTo redeem shares for which certificates have been issued, the cer-
SHARES tificates must be mailed to or deposited with the Trust, duly en-
dorsed or accompanied by a duly endorsed stock power or by a writ-
ten request for redemption. Signatures must be guaranteed as de-
scribed under "How to Buy Shares--Signature Guarantee." Further
documentation may be requested from institutions or fiduciary ac-
counts, such as corporations, custodians (e.g., under the Uniform
Gifts to Minors Act), executors, administrators, trustees or
guardians ("institutional account owners"). The redemption request
and stock power must be signed exactly as the account is regis-
tered, including indication of any special capacity of the regis-
tered owner.
AUTOMATIC An investor who owns or buys shares of a Fund having a net asset
WITHDRAWAL value of $10,000 or more may open an Automatic Withdrawal Plan and
PLAN have a designated sum of money (not less than $100 per Fund) paid
monthly (or quarterly) to the investor or another person. Such a
plan may be established by completing the appropriate section of
the Account Application or you may obtain an Automatic Withdrawal
Plan Application from the Distributor or your broker. If an Auto-
matic Withdrawal Plan is set up after the account is established
providing for payment to a person other than the record share-
holder or to an address other than the address of record, a signa-
ture guarantee is required. See "How to Buy Shares--Signature
Guarantee." Class A, Class B and Class C shares of any 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 Au-
tomatic Withdrawal Plan. See "Alternative Purchase Arrangements--
Waiver of Contingent Deferred Sales Charges."
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 pay-
ment selected by the shareholder. The Transfer Agent may acceler-
ate 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 fidu-
ciary, 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 disadvanta-
geous 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 a Fund while an Automatic Withdrawal Plan is in effect for
that Fund is $1,000, and an investor may not maintain a plan for
the accumulation of shares of the Fund (other than through rein-
vestment 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 finan-
cial 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.
Distributor and Distribution and Servicing Plans
The Distributor, a 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 partici-
pating brokers and servicing payments to certain banks and other
financial intermediaries in connection with the sale of Class B
and Class C shares and servicing payments to participating bro-
kers, certain banks and other financial intermediaries in connec-
tion with the sale of
52
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Class A shares. In the case of Class A shares, these parties are
also 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 Dis-
tributor. 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,
with respect to each Fund's Class A, Class B and Class C shares,
the Distributor bears various other promotional and sales related
expenses, including the cost of printing and mailing prospectuses
to persons other than current 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 set forth below
(calculated as a percentage of each Fund's average daily net as-
sets attributable to Class A shares):
<TABLE>
<CAPTION>
SERVICING
FUND FEE
-----------------------------
<S> <C>
All Funds except the
Money Market Fund .25%
-----------------------------
Money Market Fund* .10%
</TABLE>
*Subject to increase by action of the Trust's Trustees to a rate
not exceeding .25% per annum. Also, subject to increase to a rate
not exceeding .20% if the Distributor ceases to voluntarily waive
any portion of the fee.
CLASS B DISTRIBUTION AND SERVICING FEES As compensation for serv-
ices rendered and expenses borne by the Distributor in connection
with the distribution of Class B shares of the Trust and, in con-
nection with personal services rendered to Class B shareholders of
the Trust and the maintenance of Class B shareholder accounts, the
Trust pays the Distributor servicing fees and distribution fees up
to the annual rates set forth below (calculated as a percentage of
each Fund's average daily net assets attributable to Class B
shares):
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FUND FEE FEE
------------------------------
<S> <C> <C>
All Funds .25% .75%
</TABLE>
March , 1998 Prospectus
53
<PAGE>
CLASS C DISTRIBUTION AND SERVICING FEES As compensation for serv-
ices rendered and expenses borne by the Distributor in connection
with the distribution of Class C shares of the Trust and, in con-
nection with personal services rendered to Class C shareholders of
the Trust and the maintenance of Class C shareholder accounts, the
Trust pays the Distributor servicing fees and distribution fees up
to the annual rates set forth below (calculated as a percentage of
each Fund's average daily net assets attributable to Class C
shares):
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------
<S> <C> <C>
Long-Term U.S.
Government,
Municipal Bond,
Foreign Bond,
Global Bond II,
Emerging
Markets Bond,
High Yield and
Total Return
Funds .25% .75%
-------------------------------------
Real Return
Bond, Low
Duration and
StocksPLUS
Funds* .25% .50%
-------------------------------------
Short-Term Fund* .25% .30%
-------------------------------------
Money Market
Fund* .10% .00%
</TABLE>
*Subject to increase by action of the Trust's Trustees to a rate
not exceeding .75% per annum with respect to the distribution fee
on shares of the Low Duration and Money Market Funds, and .25% per
annum with respect to the servicing fee on shares of the Money
Market Fund. With respect to the servicing fee on shares of the
Money Market Fund, such fee is subject to increase to a rate of
.20% if the Distributor ceases to voluntarily waive any portion of
the fee. With respect to the distribution fee on shares of each of
the Real Return Bond, Short-Term and StocksPLUS Funds, such fee is
subject to an increase to a rate of .75% if the Distributor ceases
to voluntarily waive any portion of the fee.
The Class A servicing fees and Class B and Class C distribution
and servicing fees paid to the Distributor are made under Distri-
bution and Servicing Plans adopted pursuant to Rule 12b-l under
the 1940 Act 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 pred-
ecessors in their periodic review of the Distribution and Servic-
ing Plans, the fees are payable to compensate the Distributor for
services rendered even if the amount paid exceeds the Distribu-
tor's expenses.
The distribution fee applicable to Class B and Class C shares
may be spent by the Distributor on any activities or expenses pri-
marily intended to result in the sale of Class B or Class C
shares, respectively, including compensation to, and expenses (in-
cluding overhead and telephone expenses) of, financial consultants
or other employees of the Distributor or of participating or in-
troducing brokers who engage in distribution of Class B or Class C
shares, printing of prospectuses and reports for other than exist-
ing Class B or Class 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 ac-
counts, including compensation to, and expenses (including tele-
phone and overhead expenses) of, financial consultants or other
employees of 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 pay-
ments, who provide information periodically to shareholders show-
ing their positions in a Fund's shares, who forward communications
from the Trust to shareholders, who render ongoing advice concern-
ing 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.
54
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Many of the Distributor's sales and servicing efforts involve
the Trust as a whole, so that fees paid by Class A, Class B or
Class C shares of any Fund may indirectly support sales and ser-
vicing 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
each Fund are further allocated among its classes of shares annu-
ally based on the relative sales of each class, except for any ex-
penses that relate only to the sale or servicing of a single
class. The Distributor may make payments to brokers (and with re-
spect 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
<TABLE>
<CAPTION>
SERVICING
FEE(/1/)
-----------------------------
<S> <C>
All Funds except the
Money Market Fund .25%
-----------------------------
Money Market Fund .10%
</TABLE>
CLASS B SHARES(/2/)
<TABLE>
<CAPTION>
SERVICING
FEE
-----------------
<S> <C>
All Funds .25%
</TABLE>
CLASS C SHARES--
PURCHASED ON OR AFTER
7/1/91(/3/)
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FEE(/1/) FEE(/1/)
------------------------------------
<S> <C> <C>
Long-Term U.S.
Government,
Municipal Bond,
Foreign Bond,
Global Bond II,
Emerging
Markets Bond,
High Yield and
Total Return
Funds .25% .65%
------------------------------------
Real Return
Bond, Low
Duration and
StocksPLUS
Funds .25% .45%
------------------------------------
Short-Term Fund .25% .25%
------------------------------------
Money Market
Fund .10% .00%
</TABLE>
CLASS C SHARES--
PURCHASED BEFORE 7/1/91
<TABLE>
<CAPTION>
SERVICING
FEE(/1/)
-----------------------------
<S> <C>
All Funds except the
Money Market Fund .25%
-----------------------------
Money Market Fund .10%
</TABLE>
1. Applies, in part, to Class A, Class B and Class C shares of the
Trust issued to former shareholders of PIMCO Advisors Funds in
connection with the reorganizations/mergers of series of PIMCO Ad-
visors Funds as/with Funds of the Trust in a transaction which
took place on January 17, 1997.
2. Payable only with respect to shares outstanding for one year or
more.
3. 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.
The Distributor may from time to time pay additional cash bo-
nuses or other incentives to selected participating brokers in
connection with the sale or servicing of Class A, Class B and
Class C shares of the Funds. On some occasions, such bonuses or
incentives may be conditioned upon the sale of a specified minimum
dollar amount of the shares of a
March , 1998 Prospectus
55
<PAGE>
Fund and/or all of the Funds together or a particular class of
shares, during a specific period of time. The Distributor cur-
rently expects that such additional bonuses or incentives will not
exceed .50% of the amount of any sale. Pacific Investment Manage-
ment (in its capacity as administrator) may also pay participating
brokers and other intermediaries for transfer agency and other
services.
If in any year the Distributor's expenses incurred in connec-
tion with the distribution of Class B and Class C shares and, for
Class A, Class B and Class C Shares, in connection with the ser-
vicing of shareholders and the maintenance of shareholder ac-
counts, exceed the distribution and/or servicing fees paid by the
Trust, the Distributor would recover such excess only if the Dis-
tribution 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 shares of the Funds and in connec-
tion with the servicing of shareholders of the Funds and the main-
tenance of shareholder accounts may exceed the distribution and
servicing fees collected by the Distributor. As of March 31, 1997,
such expenses were approximately $430,000 in excess of payments
under the Funds' Class A Distribution and Servicing Plan and
$1,192,000 in excess of payments under the Funds' Class B Distri-
bution and Servicing Plan. Expenses did not exceed payments under
the Funds' Class C Distribution and Servicing Plan.
How Net Asset Value Is Determined
The net asset value per share of Class A, Class B and Class C
shares of each Fund will be determined once on each day on which
the Exchange is open as of the close of regular trading (normally
4:00 p.m., Eastern time) on the Exchange by dividing the total
market value of a 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 Exchange is closed.
The Money Market Fund's securities are normally valued using
the amortized cost method of valuation. This involves valuing a
security at cost on the date of acquisition and thereafter assum-
ing a constant accretion of a discount or amortization of a pre-
mium to maturity. See the Statement of Additional Information for
a description of certain conditions and procedures followed by the
Money Market Fund in connection with amortized cost valuation. For
all other Funds, portfolio securities and other assets for which
market quotations are readily available are stated at market val-
ue. Market value is determined on the basis of last reported sales
prices, or if no sales are reported, as is the case for most secu-
rities traded over-the-counter, at the mean between representative
bid and asked quotations obtained from a quotation reporting sys-
tem 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 appropri-
ate factors such as institutional-sized trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of is-
sue, trading characteristics, and other market data.
Quotations of foreign securities in foreign currency are con-
verted to U.S. dollar equivalents using foreign exchange quota-
tions 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 quota-
tions are not readily available are valued at fair value as deter-
mined in good faith by the Board of Trustees.
Each Fund's liabilities are allocated among its classes. The
total of such liabilities allocated to a class plus that class's
distribution and/or servicing fees and any other expenses spe-
cially allocated to that class are then deducted from
56
PIMCO Funds: Pacific Investment Management Series
<PAGE>
the class's 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 class's "net asset value"
per share. Under certain circumstances, the per share net asset
value of the Class B and Class C shares of the Funds that do not
declare regular income dividends on a daily basis may be lower
than the per share net asset value of the Class A shares as a re-
sult of the daily expense accruals of the distribution fee appli-
cable 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 differen-
tial between a particular Fund's classes.
Distributions
Each Fund pays out as dividends substantially all of its net in-
vestment income (which comes from dividends and interest it re-
ceives or is deemed to receive from its investments) and net real-
ized short-term capital gains. For these purposes and for federal
income tax purposes, a portion of the premiums from certain ex-
pired call or put options written by the Fund, net gains from
closing purchase and sale transactions with respect to such op-
tions, and net gains from futures transactions are treated as
short-term capital gains. Each 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 day after the date that
funds are received by the Trust for the purchase of shares. For
the Fixed Income Funds, dividends are declared daily from net in-
vestment income to shareholders of record at the close of the pre-
vious business day, and distributed to shareholders monthly. The
StocksPLUS Fund intends to declare and pay as a dividend substan-
tially all of its net investment income on a quarterly basis. 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 a Fund will be reinvested in ad-
ditional shares of that Fund unless the shareholder elects to have
them paid in cash. There are no sales charges on reinvested divi-
dends. If a shareholder has elected to receive dividends and/or
capital gain distributions in cash and the postal or other deliv-
ery service is unable to deliver checks to the shareholder's ad-
dress of record, such shareholder's distributions will automati-
cally be invested in the Money Market Fund until such shareholder
is located. 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 distribu-
tion fees applicable to Class B and C shares.
Shareholders may elect to invest dividends and/or distributions
paid by any 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 Ac-
count Application, on a form provided for that purpose or by a
telephone request to the Transfer Agent at 800-426-0107. For fur-
ther information on this option, contact your broker or call the
Distributor at 800-426-0107.
Taxes
Each Fund intends to qualify as a regulated investment company an-
nually and to elect to be treated as a regulated investment com-
pany under the Code. As such, a Fund generally will not pay fed-
eral 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.
Shareholders subject to U.S. federal income tax will be subject
to tax on dividends received from a Fund, regardless of whether
received in cash or reinvested in additional shares. Distributions
received by tax-exempt shareholders will not be subject to federal
income tax to the extent permitted under applicable tax law. All
shareholders must treat dividends, other than capital gain divi-
dends or dividends that represent a return of capital to share-
holders, as ordinary income.
March , 1998 Prospectus
57
<PAGE>
Dividends designated by a Fund as capital gain dividends de-
rived from the Fund's net capital gain (that is, the excess of net
long-term gain over net short-term loss) are taxable to sharehold-
ers as long-term capital gain except as
provided by an applicable tax exemption. Under the Taxpayer Relief
Act of 1997, long-term capital gains will generally be taxed at a
28% or 20% rate, depending upon the holding period of the portfo-
lio securities Any distributions that are not from a Fund's net
investment income, short-term capital gain, 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 Octo-
ber, November or December of a calendar year are taxable to share-
holders (who otherwise are subject to tax on dividends) as though
received on December 31 of that year if paid to shareholders dur-
ing 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). Each Fund will
advise shareholders annually of the amount and nature of the divi-
dends paid to them.
Dividends paid to shareholders by the Municipal Bond Fund which
are derived from interest on Municipal Bonds are expected to be
designated by the Fund as "exempt-interest dividends," and share-
holders may exclude such dividends from gross income for federal
income tax purposes. However, if a shareholder receives social se-
curity or railroad retirement benefits, the shareholder may be
taxed on a portion of those benefits as a result of receiving tax-
exempt income. In addition, certain exempt-interest dividends
could, as discussed below, cause certain shareholders to become
subject to the alternative minimum tax and may increase the alter-
native minimum tax liability of shareholders already subject to
this tax. Other distributions from the Municipal Bond Fund may
constitute taxable income, and any gain realized on a redemption
of shares will be taxable gain, subject to any applicable tax ex-
emption for which an investor may qualify.
Dividends derived from interest on certain U.S. Government se-
curities may be exempt from state and local taxes, although inter-
est on mortgage-backed U.S. Government securities may not be so
exempt. The distributions of "exempt-interest dividends" paid by
the Municipal Bond Fund may be exempt from state and local taxa-
tion when received by a shareholder to the extent that they are
derived from interest on Municipal Bonds issued by the state or
political subdivision in which such shareholder resides. The fed-
eral exemption for "exempt-interest dividends" attributable to Mu-
nicipal Bonds does not necessarily result in exemption of such
dividends from income for the purpose of state and local taxes.
The Trust will report annually on a state-by-state basis the
source of income the Municipal Bond Fund receives on Municipal
Bonds that was paid out as dividends during the preceding year.
The Code also provides that exempt-interest dividends allocable
to interest received from "private activity bonds" issued after
August 7, 1986 are an item of tax preference for individual and
corporate alternative minimum tax at the applicable rate for indi-
viduals and corporations. Therefore, if the Municipal Bond Fund
invests in such private activity bonds, certain of its sharehold-
ers may become subject to the alternative minimum tax on that part
of its distributions to them that are derived from interest income
on such bonds, and certain shareholders already subject to such
tax may have increased liability therefor. However, it is the
present policy of the Municipal Bond Fund to invest no more than
20% of its assets in such bonds. Other provisions of the Code af-
fect the tax treatment of distributions from the Municipal Bond
Fund for corporations, casualty insurance companies, and financial
institutions. In particular, under the Code, for corporations, al-
ternative minimum taxable income will be increased by a percentage
of the amount by which the corporation's "adjusted current earn-
ings" (which includes various items of tax exempt income) exceeds
the amount otherwise determined to be alternative minimum taxable
income. Accordingly, an investment in the Municipal Bond Fund may
cause shareholders to be subject to (or result in an increased li-
ability under) the alternative minimum tax.
Dividends to shareholders of the Municipal Bond Fund derived
from money market instruments and U.S. Government securities are
generally taxable as ordinary income. The Fund may seek to reduce
fluctuations in its net asset value by engaging in portfolio
strategies involving options on securities, futures contracts, and
options on futures
58
PIMCO Funds: Pacific Investment Management Series
<PAGE>
contracts. Any gain derived by the Fund from the use of such in-
struments, including by reason of "marking to market," will be
treated as a combination of short-term and long-term capital gain
and, if not offset by realized capital losses incurred by the
Fund, will be distributed to shareholders (possibly requiring the
liquidation of other portfolio securities) and will be taxable to
shareholders as a combination of ordinary income and long-term
capital gain.
Coupon payments received by a 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 prin-
cipal value of these securities also may give rise to original is-
sue discount, which, likewise, will be includable in the Fund's
gross income on a current basis, regardless of whether the Fund
receives any cash payments. See "Taxation--Original Issue Dis-
count" in the Statement of Additional Information. Amounts
includable in a Fund's gross income become subject to tax-related
distribution requirements. Accordingly, a 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 in-
vestment could have undesirable tax consequences. If shares are
purchased on or just before the record date of 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 a 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, R.
Wesley Burns, Vern O. Curtis, Brent R. Harris, Thomas P. Kemp, 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 Pacific Investment Management serves as investment adviser ("Advi-
ADVISOR sor") to the Funds pursuant to an investment advisory contract.
The Advisor is an investment counseling firm founded in 1971, and
had approximately $108.5 billion in assets under management as of
September 30, 1997. 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 gen-
eral partnership between Pacific Investment Management Company, a
California corporation and indirect wholly owned subsidiary of Pa-
cific Life Insurance Company, and PIMCO Partners, LLC, a limited
liability company controlled by the PIMCO Managing Directors. Pa-
cific 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 Securi-
ties and Exchange Commission and as a commodity trading advisor
with the CFTC.
The Advisor manages the investment and reinvestment of the as-
sets of each Fund. The Advisor 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 "Portfo-
lio Transactions" in the Statement of Additional Information.
59
March , 1998 Prospectus
<PAGE>
Information about the individual portfolio managers responsible
for management of the Trust's currently operational Funds offered
in this Prospectus, including their occupations for the past five
years, is provided below.
<TABLE>
<CAPTION>
PORTFOLIO MANAGER AND BUSINESS
FUND EXPERIENCE (PAST FIVE YEARS)
-----------------------------------------------------------------
<C> <S>
TOTAL RETURN FUND William H. Gross, Managing Director,
LOW DURATION FUND Pacific Investment Management. A
Fixed Income Portfolio Manager, Mr.
Gross is one of the founders of Pa-
cific Investment Management and has
managed the Total Return and Low Du-
ration Funds since their inception,
May 11, 1987.
-----------------------------------------------------------------
LONG-TERM U.S. GOVERNMENT FUND Pasi Hamalainen, Senior Vice Presi-
dent, Pacific Investment Management.
A Fixed Income Portfolio Manager, Mr.
Hamalainen joined Pacific Investment
Management in 1994 and has managed
the Long-Term U.S. Government Fund
since July 1, 1997.
-----------------------------------------------------------------
MUNICIPAL BOND FUND Benjamin Ehlert, Executive Vice Pres-
ident, PIMCO. A Fixed Income Portfo-
lio Manager, Mr. Ehlert has been as-
sociated with PIMCO for over 23
years.
-----------------------------------------------------------------
EMERGING MARKETS BOND FUND Michael J. Rosborough, Senior Vice
President, Pacific Investment Manage-
ment. A Fixed Income Portfolio Manag-
er, Mr. Rosborough was associated
with RBC Dominion in Tokyo as a Vice
President and Manager in foreign
fixed income prior to joining Pacific
Investment Management in 1994.
-----------------------------------------------------------------
FOREIGN BOND FUND Lee R. Thomas, III, Managing Director
GLOBAL BOND FUND II and Senior International Portfolio
Manager, Pacific Investment Manage-
ment. A Fixed Income Portfolio
Manager, Mr. Thomas has managed the
Foreign Bond Fund since July 13,
1995, and the Global Bond Fund II
since October 1, 1995. Prior to join-
ing Pacific Investment Management in
1995, Mr. Thomas was associated with
Investcorp as a member of the manage-
ment committee responsible for global
securities and foreign exchange trad-
ing. Prior to Investcorp, he was as-
sociated with Goldman Sachs as an Ex-
ecutive Director in foreign fixed in-
come.
-----------------------------------------------------------------
HIGH YIELD FUND Benjamin Trosky, Managing Director,
Pacific Investment Management. A
Fixed Income Portfolio Manager, Mr.
Trosky joined Pacific Investment
Management in 1990 and has managed
the High Yield Fund since its incep-
tion, December 16, 1992.
-----------------------------------------------------------------
REAL RETURN BOND FUND John Brynjolfsson, Vice President,
Pacific Investment Management. A
Fixed Income Portfolio Manager, Mr.
Brynjolfsson joined Pacific Invest-
ment Management in 1989, and has man-
aged the Real Return Bond Fund since
its inception, January 29, 1997.
-----------------------------------------------------------------
SHORT-TERM FUND David H. Edington, Managing Director,
STOCKSPLUS FUND Pacific Investment Management. A
Fixed Income Portfolio Manager, Mr.
Edington joined Pacific Investment
Management in 1987 and has managed
the Short-Term and StocksPLUS Funds
since their inception, October 7,
1987 and May 14, 1993, respectively.
-----------------------------------------------------------------
MONEY MARKET FUND Leslie Barbi, Senior Vice President,
Pacific Investment Management. A
Fixed Income Portfolio Manager, Ms.
Barbi has managed the Money Market
Fund since November 1, 1995. Prior to
joining Pacific Investment Management
in 1993, Ms. Barbi was associated
with Salomon Brothers as a proprie-
tary Portfolio Manager.
</TABLE>
FUND Pacific Investment Management also serves as administrator to
ADMINISTRATOR the Funds pursuant to an administration agreement with the
Trust. Pacific Investment Management provides administrative
services to the Funds, which include clerical help and
accounting, bookkeeping, internal audit services, and certain
other services required by the Funds, preparation of reports to
the Funds' shareholders and regulatory filings. Pacific
Investment Management may also retain certain of its affiliates
to provide certain of these services. In addition, Pacific
Investment Management, at its own expense, arranges for the
provision of legal, audit, custody, transfer agency (including
sub-transfer agency and other administrative
60
PIMCO Funds: Pacific Investment Management Series
<PAGE>
services) and other services for the Funds, 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 Funds (and not Pacific Investment Management) are responsi-
ble for the following expenses: (i) salaries and other compensa-
tion 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 bor-
rowing money, including interest expenses; (v) fees and expenses
of the Trustees who are not "interested persons" of Pacific In-
vestment Management or the Trust, and any counsel retained exclu-
sively for their benefit; (vi) extraordinary expenses, including
costs of litigation and indemnification expenses; (vii) expenses,
such as organizational expenses, which are capitalized in accor-
dance 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, Class B and Class 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, subject to re-
view and approval by the Trustees.
ADVISORY The Funds feature fixed advisory and administrative fee rates. For
AND providing investment advisory and administrative services to the
ADMIN- Funds as described above, Pacific Investment Management receives
ISTRATIVE monthly fees from each Fund at an annual rate (i) based on the av-
FEES erage daily net assets of the Fund for advisory fees and, (ii) at-
tributable in the aggregate to the Fund's Class A, Class B and
Class C shares for administrative fees, as follows:
<TABLE>
<CAPTION>
ADVISORY
FUND FEE RATE
--------------------------------------------------
<S> <C>
Money Market Fund .15%
--------------------------------------------------
StocksPLUS Fund .40%
--------------------------------------------------
Emerging Markets Bond Fund .45%
--------------------------------------------------
All other Funds .25%
<CAPTION>
ADMINISTRATIVE
FUND FEE RATE
--------------------------------------------------
<S> <C>
Short-Term and Money Market Funds .35%
--------------------------------------------------
Foreign Bond and Global Bond II Funds .45%
--------------------------------------------------
Emerging Markets Bond Fund .55%
--------------------------------------------------
All other Funds .40%
</TABLE>
Both the investment advisory contract and administration agree-
ment with respect to Class A, Class B and Class C shares of the
Funds 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. Fol-
lowing 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 advi-
sory 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 Funds will continue from year-to-year if approved by the
Trustees.
PORTFOLIO Pursuant to the advisory contract, the Advisor places orders for
TRANSACTIONSthe purchase and sale of portfolio investments for the Funds' ac-
counts with brokers or dealers selected by it in its discretion.
In effecting purchases and sales of portfolio securities for the
account of the Funds, the Advisor will seek the best price and ex-
ecution of the Funds' orders. In doing so, a Fund may pay higher
commission rates than the lowest available when the Advisor be-
lieves it is reasonable to do so in light of the value of the bro-
kerage and research services provided by the broker effecting the
transaction.
March , 1998 Prospectus
61
<PAGE>
The Advisor manages the Funds without regard generally to re-
strictions 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 certain derivative instruments
with relatively short maturities may tend to exaggerate the
portfolio turnover rate for some of the Funds. 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 a Fund, the higher all these
transaction costs borne by the Fund generally will be. The
portfolio turnover rate for each Fund for which financial
highlights are provided in this Prospectus is set forth under
"Financial Highlights."
Some securities considered for investments by the Funds may
also be appropriate for other clients served by the Advisor. If
a purchase or sale of securities consistent with the investment
policies of a Fund and one or more of these clients served by
the Advisor 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
Advisor. The Advisor may aggregate orders for the Funds with
simultaneous transactions entered into on behalf of other
clients of the Advisor so long as price and transaction
expenses are averaged either for that transaction or for the
day.
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 also provides for
indemnification out of Trust property for all loss and expense
of any shareholder held personally liable for the obligations
of the Trust. The risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circum-
stances in which such disclaimer is inoperative or the Trust
itself is unable to meet its obligations, and thus should be
considered remote.
MULTIPLE In addition to Class A, Class B and Class C shares, each Fund
CLASSES OF offers Institutional Class and Administrative Class shares.
SHARES These other classes of the Funds may have different sales
charges and expense levels, which will affect performance
accordingly. Investors may contact the Distributor at 800-426-
0107 for more information concerning other classes of shares
of the Funds. This Prospectus relates only to the Class A,
Class B and Class C shares of the Funds.
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
re-quired to hold regular annual meetings of Trust shareholders
and does not intend to do so. Shareholders of a class of shares
or Fund have separate voting rights with respect to matters
that only affect that class or Fund. 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 pro-
portionate voting for fractional shares). As of June 16, 1997,
the following were shareholders of record of at least 25% of
the outstanding voting securities of the indicated Fund: [TO
BE UPDATED IN POST-EFFECTIVE AMENDMENT NO. 39] Tice & Co.
(Buffalo, New York) and Wendel & Co.
62
PIMCO Funds: Pacific Investment Management Series
<PAGE>
(New York, New York) with respect to the Long-Term U.S. Government
Fund; Pacific Investment Management Company (Newport Beach, Cali-
fornia) with respect to the Real Return Bond Fund; and Charles
Schwab & Co., Inc. (San Francisco, California) with respect to the
Foreign Bond Fund. To the extent such shareholders are also the
beneficial owners of those shares, they may be deemed to control
(as that term is defined in the 1940 Act) the relevant Fund. 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) pres-
ent at a meeting, if the holders of more than 50% of the outstand-
ing 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 antici-
pated 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.
March , 1998 Prospectus
63
<PAGE>
Appendix A
Description of Duration
Duration is a measure of the expected life of a fixed income secu-
rity that was developed as a more precise alternative to the con-
cept of "term to maturity." Traditionally, a fixed income
security's "term to maturity" has been used as a proxy for the
sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the securi-
ty). However, "term to maturity" measures only the time until a
fixed income security provides its final payment, taking no ac-
count of the pattern of the security's payments prior to maturity.
In contrast, duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Dura-
tion management is one of the fundamental tools used by the Advi-
sor.
Duration is a measure of the expected life of a fixed income
security on a present value basis. Duration takes the length of
the time intervals between the present time and the time that the
interest and principal payments are scheduled or, in the case of a
callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in
time. For any fixed income security with interest payments occur-
ring prior to the payment of principal, duration is always less
than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security,
the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security,
the shorter the duration of the security.
Futures, options and options on futures have durations which,
in general, are closely related to the duration of the securities
which underlie them. Holding long futures or call option positions
(backed by a segregated account of cash and cash equivalents) will
lengthen a Fund's duration by approximately the same amount that
holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly
equal to the negative duration of the securities that underlie
these positions, and have the effect of reducing portfolio dura-
tion by approximately the same amount that selling an equivalent
amount of the underlying securities would.
There are some situations where even the standard duration cal-
culation does not properly reflect the interest rate exposure of a
security. For example, floating and variable rate securities often
have final maturities of ten or more years; however, their inter-
est rate exposure corresponds to the frequency of the coupon re-
set. For inflation-indexed bonds, duration is calculated on the
basis of modified real duration, which measures price changes of
inflation-indexed bonds on the basis of changes in real, rather
than nominal, interest rates. Another example where the interest
rate exposure is not properly captured by duration is the case of
mortgage pass-through securities. The stated final maturity of
such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest
rate exposure. Finally, the duration of a fixed income security
may vary over time in response to changes in interest rates and
other market factors. In these and other similar situations, the
Advisor will use more sophisticated analytical techniques that in-
corporate the anticipated economic life of a security into the de-
termination of its interest rate exposure.
64
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Appendix B
Description of Securities Ratings
Certain of the Funds make use of average portfolio credit quality
standards to assist institutional investors whose own investment
guidelines limit their investments accordingly. In determining a
Fund's overall dollar-weighted average quality, unrated securities
are treated as if rated, based on the Advisor's view of their com-
parability to rated securities. A Fund's use of average quality
criteria is intended to be a guide for those institutional invest-
ors whose investment guidelines require that assets be invested
according to comparable criteria. Reference to an overall average
quality rating for a Fund does not mean that all securities held
by the Fund will be rated in that category or higher. A Fund's in-
vestments 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 Advisor to be of comparable quality).
The percentage of a Fund's assets invested in securities in a par-
ticular rating category will vary. Following is a description of
Moody's and S&P's ratings applicable to fixed income securities.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
INVESTORS Aaa: Bonds which are rated Aaa are judged to be of the best
SERVICE, quality. They carry the smallest degree of investment risk and are
INC. generally referred to as "gilt edge." Interest payments are pro-
tected by a large or by an exceptionally stable margin and princi-
pal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to im-
pair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than with Aaa se-
curities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obliga-
tions. Factors giving security to principal and interest are con-
sidered adequate but elements may be present that suggest a sus-
ceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative el-
ements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very mod-
erate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B: Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long pe-
riod of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such is-
sues may be in default or there may be present elements of danger
with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor pros-
pects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each ge-
neric rating classified from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 in-
dicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
65
March , 1998 Prospectus
<PAGE>
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of is-
suers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters of credit and bonds of indem-
nity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment ability of
rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds em-
ployed; conservative capitalization structure with moderate reli-
ance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash genera-
tion; and well-established access to a range of financial markets
and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term debt ob-
ligations. This will normally be evidenced by many of the charac-
teristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior short-term ob-
ligations. The effect of industry characteristics and market com-
positions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protec-
tion measurements and may require relatively high financial lever-
age. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of
the Prime rating categories.
CORPORATE AND MUNICIPAL BOND RATINGS
STANDARD &
POOR'S
RATINGS
SERVICES
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Ca-
pacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only
in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions, or
changing circumstances are more likely to lead to a weakened ca-
pacity to pay interest and repay principal for debt in this cate-
gory than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predomi-
nantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing un-
certainties or exposure to adverse business, financial, or eco-
nomic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
66
PIMCO Funds: Pacific Investment Management Series
<PAGE>
B: Debt rated B has a greater vulnerability to default but cur-
rently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and re-
pay principal. The B rating category is also used for debt subor-
dinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability
to default and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and re-
payment of principal. In the event of adverse business, financial
or economic conditions, it is not likely to have the capacity to
pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an ac-
tual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC- debt rat-
ing. The C rating may be used to cover a situation where a bank-
ruptcy petition has been filed, but debt service payments are con-
tinued.
CI: The rating CI is reserved for income bonds on which no in-
terest is being paid.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The D rating will also be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modi-
fied by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful com-
pletion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such com-
pletion. The investor should exercise his own judgment with re-
spect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities,
or currencies; certain swaps and options; and interest only and
principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indica-
tion that an obligation will exhibit no volatility or variability
in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity
of no more than 365 days. Ratings are graded into several catego-
ries, ranging from A for the highest quality obligations to D for
the lowest. These categories are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designa-
tion is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
67
March , 1998 Prospectus
<PAGE>
A-3: Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the ad-
verse effects of changes in circumstances than obligations carry-
ing the higher designations.
B: Issues rated B are regarded as having only speculative ca-
pacity for timely payment.
C: This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase,
sell or hold a security inasmuch as it does not comment as to mar-
ket price or suitability for a particular investor. The ratings
are based on current information furnished to S&P by the issuer or
obtained from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occa-
sion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in or un-
availability of such information.
68
PIMCO Funds: Pacific Investment Management Series
<PAGE>
PIMCO Funds:
Pacific Investment
Management Series
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
DISTRIBUTOR
PIMCO Funds Distribution Company, 2187 Atlantic Street, Stamford,
Connecticut 06902
- --------------------------------------------------------------------------------
CUSTODIAN
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO 64105
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT
Shareholder Services, Inc., P.O. Box 5866, Denver, Colorado 80217
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1055 Broadway, Kansas City, MO 64105
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Dechert Price & Rhoads, 1500 K Street N.W., Washington, D.C. 20005
- --------------------------------------------------------------------------------
For further information about the PIMCO Funds, call 1-800-426-0107.
<PAGE>
PIMCO FUNDS:
Pacific Investment Management Series
STATEMENT OF ADDITIONAL INFORMATION
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") currently consisting of twenty-five separate investment
portfolios (the "Funds"): the PIMCO MONEY MARKET FUND; the PIMCO SHORT-TERM
FUND; the PIMCO LOW DURATION FUND; the PIMCO LOW DURATION FUND II; the PIMCO LOW
DURATION FUND III; the PIMCO MODERATE DURATION FUND; the PIMCO HIGH YIELD FUND;
the PIMCO TOTAL RETURN FUND; the PIMCO TOTAL RETURN FUND II; the PIMCO TOTAL
RETURN FUND III; the PIMCO COMMERCIAL MORTGAGE SECURITIES FUND; the PIMCO LOW
DURATION MORTGAGE FUND; the PIMCO TOTAL RETURN MORTGAGE FUND; the PIMCO
LONG-TERM U.S. GOVERNMENT FUND; the PIMCO MUNICIPAL BOND FUND; the PIMCO REAL
RETURN BOND FUND; the PIMCO FOREIGN BOND FUND; the PIMCO GLOBAL BOND FUND; the
PIMCO GLOBAL BOND FUND II; the PIMCO INTERNATIONAL BOND FUND; the PIMCO EMERGING
MARKETS BOND FUND; the PIMCO EMERGING MARKETS BOND FUND II; the PIMCO STOCKSPLUS
FUND; the PIMCO STOCKSPLUS SHORT STRATEGY FUND; and the PIMCO STRATEGIC BALANCED
FUND. Shares of the PIMCO International Bond Fund and PIMCO Emerging Markets
Bond Fund II are offered only to clients of PIMCO who maintain separately
managed private accounts.
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 Trust. Each Fund offers
up to 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 March __, 1998 and Class A shares of the
PIMCO Total Return Fund also are offered through a prospectus dated July 15,
1997 (collectively, the "Prospectuses"). A copy of the applicable Prospectus may
be obtained free of charge at the address and telephone number listed below.
<TABLE>
<S> <C>
Institutional Prospectus: Retail Prospectus:
PIMCO Funds PIMCO Funds 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 (Current Shareholders)
(800) 800-0952 (New Accounts)
</TABLE>
March , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES............................................................................. 1
Borrowing............................................................................................. 1
Corporate Debt Securities............................................................................. 2
Participation on Creditors Committee.................................................................. 4
Mortgage-Related and Other Asset-Backed Securities.................................................... 4
Foreign Securities.................................................................................... 8
Foreign Currency Transactions......................................................................... 10
Foreign Currency Exchange-Related Securities.......................................................... 11
Bank Obligations...................................................................................... 13
Loan Participations................................................................................... 14
Short Sales........................................................................................... 15
Derivative Instruments................................................................................ 16
Warrants to Purchase Securities....................................................................... 23
Illiquid Securities................................................................................... 24
Municipal Bonds...................................................................................... 24
Social Investment Policies............................................................................ 24
INVESTMENT RESTRICTIONS........................................................................................ 24
Fundamental Investment Restrictions................................................................... 24
Non-Fundamental Investment Restrictions............................................................... 26
MANAGEMENT OF THE TRUST........................................................................................ 29
Trustees and Officers................................................................................. 29
Compensation Table.................................................................................... 32
Investment Adviser.................................................................................... 32
Fund Administrator.................................................................................... 35
DISTRIBUTION OF TRUST SHARES................................................................................... 38
Distributor and Multi-Class Plan...................................................................... 38
Contingent Deferred Sales Charge and Initial Sales Charge............................................. 39
Distribution and Servicing Plans for Class A, Class B and Class C Shares.............................. 40
Distribution and Administrative Services Plans for Administrative Class Shares........................ 44
Purchases, Exchanges and Redemptions.................................................................. 45
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................................................... 47
Investment Decisions.................................................................................. 47
Brokerage and Research Services....................................................................... 47
Portfolio Turnover.................................................................................... 48
NET ASSET VALUE................................................................................................ 49
TAXATION....................................................................................................... 49
Distributions......................................................................................... 50
Sales of Shares....................................................................................... 51
Backup Withholding.................................................................................... 51
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Options, Futures and Forward Contracts, and Swap Agreements........................................... 51
Short Sales........................................................................................... 52
Passive Foreign Investment Companies.................................................................. 52
Foreign Currency Transactions......................................................................... 53
Foreign Taxation...................................................................................... 53
Original Issue Discount............................................................................... 54
Other Taxation........................................................................................ 54
OTHER INFORMATION.............................................................................................. 55
Capitalization........................................................................................ 55
Performance Information............................................................................... 55
Potential College Cost Table.......................................................................... 61
Voting Rights......................................................................................... 64
The Reorganization of the PIMCO Money Market and Total Return II Funds................................ 75
The Reorganization of the PIMCO Global Bond Fund II................................................... 76
Code of Ethics........................................................................................ 76
Custodian, Transfer Agent and Dividend Disbursing Agent............................................... 76
Independent Accountants............................................................................... 76
Counsel............................................................................................... 77
Registration Statement................................................................................ 77
Financial Statements.................................................................................. 77
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund
are described in the Prospectuses. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
BORROWING
A Fund may borrow for temporary administrative purposes. This borrowing
may be unsecured. Provisions of the Investment Company Act of 1940 ("1940 Act")
require a 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, a 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. As noted below, a
Fund also may enter into certain transactions, including reverse repurchase
agreements, mortgage dollar rolls, and sale-buybacks, that can be viewed as
constituting a form of borrowing or financing transaction by the Fund. To the
extent a Fund covers its commitment under a reverse repurchase agreement (or
economically similar transaction) by the maintenance of a segregated account
consisting of assets determined in accordance with procedures adopted by the
Trustees, equal in value to the amount of the Fund's commitment to repurchase,
such an agreement will not be considered a "senior security" by the Fund and
therefore will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by the Funds. Borrowing will tend to exaggerate the
effect on net asset value of any increase or decrease in the market value of a
Fund's portfolio. Money borrowed will be subject to interest costs which may or
may not be recovered by appreciation of the securities purchased. A 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. The PIMCO Global Bond Fund II may not borrow in excess of
10% of the value of its total assets and then only from banks as a temporary
measure to facilitate the meeting of redemption requests (not for leverage) or
for extraordinary or emergency purposes.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements, mortgage dollar rolls, and economically similar
transactions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. Under a reverse repurchase agreement,
the Fund continues to receive any principal and interest payments on the
underlying security during the term of the agreement. 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, equal (on a
daily mark-to-market basis) to its obligations under reverse repurchase
agreements. However, reverse repurchase agreements involve the risk that the
market value of securities retained by the Fund may decline below the repurchase
price of the securities sold by the Fund which it is obligated to repurchase. To
the extent that positions in reverse repurchase agreements are not covered
through the maintenance of a segregated account consisting of liquid assets at
least equal to the amount of any forward purchase commitment, such transactions
would be subject to the Funds' limitations on borrowings, which would restrict
the aggregate of such transactions (plus any other borrowings) to 33 1/3% (for
each Fund except the PIMCO Global Bond Fund II) of a Fund's total assets.
A "mortgage dollar roll" is similar to a reverse repurchase agreement
in certain respects. In a "dollar roll" transaction a Fund sells a mortgage-
related security, such as a security issued
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by the Government National Mortgage Association ("GNMA"), to a dealer and
simultaneously agrees to repurchase a similar security (but not the same
security) in the future at a pre-determined price. A "dollar roll" can be
viewed, like a reverse repurchase agreement, as a collateralized borrowing in
which a Fund pledges a mortgage-related security to a dealer to obtain cash.
Unlike in the case of reverse repurchase agreements, the dealer with which a
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 to a 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.
A Fund's obligations under a dollar roll agreement must be covered by
liquid assets equal in value to the securities subject to repurchase by the
Fund, maintained in a segregated account. As with reverse repurchase
agreements, to the extent that positions in dollar roll agreements are not
covered through the maintenance of a segregated account consisting of liquid
assets at least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Funds' limitations on borrowings.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to a Fund's overall limitations on investments in illiquid securities. A
Fund also may effect simultaneous purchase and sale transactions that are known
as "sale-buybacks". A sale-buyback is similar to a reverse repurchase agreement,
except that in a sale-buyback, the counterparty who purchases the security is
entitled to receive any principal or interest payments make on the underlying
security pending settlement of the Fund's repurchase of the underlying security.
A Fund's obligations under a sale-buyback typically would be offset by liquid
assets equal in value to the amount of the Fund's forward commitment to
repurchase the subject security.
CORPORATE DEBT SECURITIES
A 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 debt securities in which the Funds may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
non-convertible debt securities. Convertible 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 a 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. A 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.
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Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's Investor Service, Inc. ("Moody's")
describes securities rated Baa as "medium-grade" obligations; they are "neither
highly protected nor poorly secured . . . [i]nterest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." Standard & Poor's Ratings Services ("S&P")
describes securities rated BBB as "regarded as having an adequate capacity to
pay interest and repay principal . . . [w]hereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
. . . than in higher rated categories."
Investments in securities rated below investment grade that are
eligible for purchase by certain of the Funds (i.e., rated B or better by
Moody's or S&P), and in particular, by the PIMCO High Yield Fund, are described
as "speculative" by both Moody's and S&P. Investment in lower rated corporate
debt securities ("high yield securities" or "junk bonds") generally provides
greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Analysis of the
creditworthiness of issuers of debt securities that are high yield may be more
complex than for issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of high yield securities have been found to be less
sensitive to interest-rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Funds investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Funds
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly-traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
The Adviser seeks to minimize the risks of investing in all securities through
diversification, in-depth credit analysis and attention to current developments
in interest rates and market conditions.
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PARTICIPATION ON CREDITORS COMMITTEES
A Fund (in particular, the PIMCO High Yield 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 a Fund to expenses such as legal fees and may make a
Fund an "insider" of the issuer for purposes of the federal securities laws, and
therefore may restrict such Fund's ability to trade in or acquire additional
positions in a particular security when it might otherwise desire to do so.
Participation by a 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. A 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.
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." Certain of the Funds 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 mortgages 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
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Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional (i.e.,
not insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally chartered
savings and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA but are not
backed by the full faith and credit of the United States Government. FHLMC was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. It is a government-sponsored
corporation formerly owned by the twelve Federal Home Loan Banks and now owned
entirely by private stockholders. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but PCs are not backed by the full faith and credit of
the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Funds 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 Trust's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. No Fund will 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 (10% in the case of
the PIMCO Money Market Fund.)
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
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 Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
VA. In the case of private issue mortgage-related securities whose underlying
assets are neither U.S. Government securities nor U.S. Government-insured
mortgages, to the extent that real properties securing such assets may be
located in the same geographical region, the security may be subject to a
greater risk of default than other comparable securities in the event of adverse
economic, political or business developments that may affect such region and,
ultimately, the ability of residential homeowners to make payments of principal
and interest on the underlying mortgages.
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COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond 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
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of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including mortgage dollar rolls, CMO residuals or stripped
mortgage-backed securities ("SMBS"). Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies
or instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "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 a 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. 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.
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SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a 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
Receivables/(SM)/ ("CARS/(SM)/"). CARS/(SM)/ represent undivided fractional
interests in a trust whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/(SM)/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor's return
on CARS/(SM)/ may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
Consistent with a Fund's investment objectives and policies, the
Adviser also may invest in other types of asset-backed securities.
FOREIGN SECURITIES
All Funds (except the PIMCO Low Duration II, PIMCO Total Return II,
PIMCO Long-Term U.S. Government and PIMCO Municipal Bond Fund) may invest in
corporate debt securities of foreign issuers (including preferred or preference
stock), certain foreign bank obligations (see "Bank Obligations") and U.S.
dollar-or foreign currency-denominated obligations of foreign governments or
their subdivisions, agencies and instrumentalities, international agencies and
supranational entities. The PIMCO Money Market, High Yield, Commercial Mortgage
Securities, Low Duration Mortgage, Total Return Mortgage, and Long-Term U.S.
Government Funds may invest in securities of foreign issuers only if they are
U.S. dollar-denominated.
Securities traded in certain emerging market countries, including the
emerging market countries in Eastern Europe, may be subject to risks in addition
to risks typically posed by international investing due to the inexperience of
financial intermediaries, the lack of modern technology, and the lack of a
sufficient capital base to expand business operations. Additionally, former
Communist regimes of a number of Eastern European countries previously
expropriated a large amount of property, the claims on which have
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not been entirely settled. There can be no assurance that a Fund's investments
in Eastern Europe will not also be expropriated, nationalized or otherwise
confiscated.
Each of the Fixed Income Funds (except the PIMCO Low Duration II, Total
Return II, Long-Term U.S. Government and PIMCO Municipal Bond 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 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
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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 Funds may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Funds to suffer a loss of interest or principal on any of its holdings.
Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Funds) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
Each of the PIMCO Emerging Markets Bond Fund and PIMCO Emerging
Markets Bond Fund II will consider an issuer to be economically tied to a
country with an emerging securities market if (1) the issuer is organized under
the laws of, or maintains its principal place of business in, the country, (2)
its securities are principally traded in the country's securities markets, or
(3) the issuer derived at least half of its revenues or profits from goods
produced or sold, investments made, or services performed in the country, or has
at least half of its assets in that country.
FOREIGN CURRENCY TRANSACTIONS
All Funds that may invest in foreign currency-denominated securities
also may purchase and sell foreign currency options and foreign currency futures
contracts and related options (see "Derivative Instruments") and may engage in
foreign currency transactions either on a spot (cash) basis at the rate
prevailing in the currency exchange market at the time or through forward
currency contracts ("forwards") with terms generally of less than one year.
Funds may engage in these transactions in order to protect against uncertainty
in the level of future foreign exchange rates in the purchase and sale of
securities. The Funds 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 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 forwards 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 forwards are intended to
minimize the risk of loss due to a decline in the value of the hedged
currencies, at the same time, they tend to limit any potential gain which might
result should the value of such currencies increase. Forwards will be used
primarily to adjust the foreign exchange exposure of each Fund with a view to
protecting the outlook, and the Funds might be expected to enter into such
contracts under the following circumstances:
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LOCK IN. When the Adviser desires to lock in the U.S. dollar price on
the purchase or sale of a security denominated in a foreign currency.
CROSS HEDGE. If a particular currency is expected to decrease against
another currency, a Fund may sell the currency expected to decrease and purchase
a currency which is expected to increase against the currency sold in an amount
approximately equal to some or all of the Fund's portfolio holdings denominated
in the currency sold.
DIRECT HEDGE. If the Adviser wants to a eliminate substantially all of
the risk of owning a particular currency, and/or if the Adviser thinks that a
Fund can benefit from price appreciation in a given country's bonds but does not
want to hold the currency, it may employ a direct hedge back into the U.S.
dollar. In either case, a Fund would enter into a forward contract to sell the
currency in which a portfolio security is denominated and purchase U.S. dollars
at an exchange rate established at the time it initiated the contract. The cost
of the direct hedge transaction may offset most, if not all, of the yield
advantage offered by the foreign security, but a Fund would hope to benefit from
an increase (if any) in value of the bond.
PROXY HEDGE. The Adviser might choose to use a proxy hedge, which * may
be less costly than a direct hedge. In this case, a Fund, having purchased a
security, will sell a currency whose value is believed to be closely linked to
the currency in which the security is denominated. Interest rates prevailing in
the country whose currency was sold would be expected to be closer to those in
the U.S. and lower than those of securities denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge
because it is dependent on a stable relationship between the two currencies
paired as proxies and the relationships can be very unstable at times.
COSTS OF HEDGING. When a Fund purchases a foreign bond with a higher
interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially reduced or lost if
the Fund were to enter into a direct hedge by selling the foreign currency and
purchasing the U.S. dollar. This is what is known as the "cost" of hedging.
Proxy hedging attempts to reduce this cost through an indirect hedge back to the
U.S. dollar.
It is important to note that hedging costs are treated as capital
transactions and are not, therefore, deducted from a Fund's dividend
distribution and are not reflected in its yield. Instead such costs will, over
time, be reflected in a Fund's net asset value per share.
TAX CONSEQUENCES OF HEDGING. Under applicable tax law, the Funds may be
required to limit their gains from hedging in foreign currency forwards,
futures, and options. Although the Funds are expected to comply with such
limits, the extent to which these limits apply is subject to tax regulations as
yet unissued. Hedging may also result in the application of the marked-to-market
and straddle provisions of the Internal Revenue Code. Those provisions could
result in an increase (or decrease) in the amount of taxable dividends paid by
the Funds and could affect whether dividends paid by the Funds are classified as
capital gains or ordinary income.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS. Foreign currency warrants such as Currency
Exchange Warrants/(SM)/ ("CEWs/(SM)/") are warrants which entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S.
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dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk which, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may attempt to reduce the
foreign exchange risk assumed by purchasers of a security by, for example,
providing for a supplemental payment in the event that the U.S. dollar
depreciates against the value of a major foreign currency such as the Japanese
Yen or German Deutschmark. The formula used to determine the amount payable upon
exercise of a foreign currency warrant may make the warrant worthless unless the
applicable foreign currency exchange rate moves in a particular direction (e.g.,
unless the U.S. dollar appreciates or depreciates against the particular foreign
currency to which the warrant is linked or indexed). Foreign currency warrants
are severable from the debt obligations with which they may be offered, and may
be listed on exchanges. Foreign currency warrants may be exercisable only in
certain minimum amounts, and an investor wishing to exercise warrants who
possesses less than the minimum number required for exercise may be required
either to sell the warrants or to purchase additional warrants, thereby
incurring additional transaction costs. In the case of any exercise of warrants,
there may be a time delay between the time a holder of warrants gives
instructions to exercise and the time the exchange rate relating to exercise is
determined, during which time the exchange rate could change significantly,
thereby affecting both the market and cash settlement values of the warrants
being exercised. The expiration date of the warrants may be accelerated if the
warrants should be delisted from an exchange or if their trading should be
suspended permanently, which would result in the loss of any remaining "time
value" of the warrants (i.e., the difference between the current market value
and the exercise value of the warrants), and, in the case the warrants were
"out-of-the-money," in a total loss of the purchase price of the warrants.
Warrants are generally unsecured obligations of their issuers and are not
standardized foreign currency options issued by the Options Clearing Corporation
("OCC"). Unlike foreign currency options issued by OCC, the terms of foreign
exchange warrants generally will not be amended in the event of governmental or
regulatory actions affecting exchange rates or in the event of the imposition of
other regulatory controls affecting the international currency markets. The
initial public offering price of foreign currency warrants is generally
considerably in excess of the price that a commercial user of foreign currencies
might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate
linked securities ("PERLs/(SM)/") are debt obligations the principal on which is
payable at maturity in an amount that may vary based on the exchange rate
between the U.S. dollar and a particular foreign currency at or about that time.
The return on "standard" principal exchange rate linked securities is enhanced
if the foreign currency to which the security is linked appreciates against the
U.S. dollar, and is adversely affected by increases in the foreign exchange
value of the U.S. dollar; "reverse" principal exchange rate linked securities
are like the "standard" securities, except that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases in
the value of foreign currency. Interest payments on the securities are generally
made in U.S. dollars at rates that reflect the degree of foreign currency risk
assumed or given up by the purchaser of the notes (i.e., at relatively higher
interest rates if the purchaser has assumed some of 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
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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 Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A 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 (10% in the case of the PIMCO Money
Market Fund) would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
Each 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. A 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.
Each Fund (except the PIMCO Money Market, High Yield, Commercial
Mortgage Securities, Low Duration Mortgage, Total Return Mortgage and Long-Term
U.S. Government Funds) 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 Funds may invest. The PIMCO
Money Market, High Yield, Commercial Mortgage Securities, Low Duration Mortgage,
Total Return Mortgage and Long-Term U.S. Government Funds may invest in the same
types of bank obligations as the other Funds, but they must be U.S.
dollar-denominated. Subject to the Trust's limitation on concentration of no
more than 25% of its assets in the securities of issuers in a particular
industry, there is no limitation on the amount of a 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
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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
Each Fund (except the PIMCO Municipal Bond 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, a 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 a Fund
intends to invest may not be rated by any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, a 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 a 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 a 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 a 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 Funds may invest in loan participations with credit quality
comparable to that of issuers of its securities investments. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, a Fund bears a
substantial risk of losing the entire amount invested.
Each 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, a Fund generally
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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 a 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 a Funds' 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 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 Funds currently intend to
treat indebtedness for which there is no readily available market as illiquid
for purposes of the Funds' 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 Funds. For example, if a loan is foreclosed, a 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, a 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 Funds rely on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Funds.
SHORT SALES
Certain of the Funds, particularly the PIMCO StocksPLUS Short Strategy
Fund, may make short sales of securities as part of their overall portfolio
management strategies involving the use of derivative instruments and to offset
potential declines in long positions in similar securities. A short sale is a
transaction in which a Fund sells a security it does not own in anticipation
that the market price of that security will decline.
When a 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.
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To the extent that a 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. Each Fund, except the PIMCO
StocksPLUS Short Strategy 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 Funds will engage in short selling
to the extent permitted by the 1940 Act and rules and interpretations
thereunder. The PIMCO Global Bond Fund II may only engage in short sales that
are "against the box."
DERIVATIVE INSTRUMENTS
In pursuing their individual objectives the Funds 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, except that
those Funds that may not invest in foreign currency-denominated securities may
not enter into transactions involving currency futures or options. The Funds
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 Funds also may enter into swap
agreements with respect to foreign currencies, interest rates and indexes of
securities. The Funds may invest in structured notes. If other types of
financial instruments, including other types of options, futures contracts, or
futures options are traded in the future, a Fund may also use those instruments,
provided that the Trustees determine that their use is consistent with the
Fund's investment objective.
OPTIONS ON SECURITIES AND INDEXES. A Fund may, to the extent specified
for the Fund in the Prospectuses, purchase and sell both put and call options on
fixed income or other securities or indexes in standardized contracts traded on
foreign or domestic securities exchanges, boards of trade, or similar entities,
or quoted on NASDAQ or on a regulated foreign over-the-counter market, and
agreements, sometimes called cash puts, which may accompany the purchase of a
new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
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A 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 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 a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
A 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 a Fund is an
asset of the Fund. The premium received for an option written by a 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 Funds 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 Funds' immediate
obligations. The Funds 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
Funds will also segregate liquid assets equivalent to the amount, if any, by
which the put is "in the money."
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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 a Fund
seeks to close out an option position. If a 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 a 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.
If trading were suspended in an option purchased by a 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. A 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 a 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. A Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectuses. An interest rate, foreign currency or index
futures contract provides for the future sale by one 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.
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A 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 Funds avoid being deemed a
"commodity pool" or a "commodity pool operator," each 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, a 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. A 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 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.
A 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 a 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. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a 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 a 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, each Fund
will mark to market its open futures positions.
A 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.
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The Funds 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 Funds' immediate obligations. A 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 Funds 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
Funds intend to enter into positions in futures contracts and related options
only for "bona fide hedging" purposes. With respect to positions in futures and
related options that do not constitute bona fide hedging positions, a Fund will
not enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of the Fund's net
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
When purchasing a futures contract, a 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, a 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, a 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, a 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.
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To the extent that securities with maturities greater than one year are
used to establish and maintain segregated accounts to cover a Fund's obligations
under futures contracts and related options, such use will not eliminate the
risk of a form of leverage, which may tend to exaggerate the effect on net asset
value of any increase or decrease in the market value of a 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 a Fund's portfolio securities. Thus, the use of a longer-term security
may require a 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 a Fund may enter into futures, futures
options or forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several
risks associated with the use of futures contracts and futures options as
hedging techniques. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. 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 contracts on U.S. Government securities historically have
reacted to an increase or decrease in interest rates in a manner similar to that
in which the underlying U.S. Government securities reacted. To the extent,
however, that the PIMCO Municipal Bond Fund enters into such futures contracts,
the value of such futures will not vary in direct proportion to the value of the
Fund's holdings of Municipal Bonds (as defined below). Thus, the anticipated
spread between the price of the futures contract and the hedged security may be
distorted due to differences in the nature of the markets. The spread also may
be distorted by differences in initial and variation margin requirements, the
liquidity of such markets and the participation of speculators in such
markets.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures or a futures option position, and that
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
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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 Funds 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 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 Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
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"). A 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.
A 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 a 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, a 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 Funds 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 Funds' repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' 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.
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Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the CFTC effective February 22, 1993. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants," which includes the
following, provided the participants' total assets exceed established levels: a
bank or trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
STRUCTURED NOTES. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a 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 Funds may invest in or acquire warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a 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.
A Fund will not invest more than 5% of its net assets, valued at the
lower of cost or market, in warrants to purchase securities. Warrants acquired
in units or attached to securities will be deemed to be without value for
purposes of this restriction.
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ILLIQUID SECURITIES
The Funds may invest up to 15% of their net assets in illiquid
securities (10% in the case of the PIMCO Money Market Fund). The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a 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).
MUNICIPAL BONDS
It is a policy of the PIMCO Municipal Bond Fund to have 80% of its
net assets invested in debt obligations the interest on which, in the opinion of
bond counsel to the issuer at the time of issuance, is exempt from federal
income tax ("Municipal Bonds"). The Fund may invest up to 10% of its net assets
in Municipal Bonds rated in the fifth highest rating category by Moody's or S&P
or unrated obligations determined by the Portfolio Manager to be of quality
comparable to obligations so rated. A description of these ratings is set forth
in Appendix B to the Prospectuses. The ability of the Fund to invest in
securities other than Municipal Bonds is limited by a requirement of the
Internal Revenue Code that at least 50% of the Fund's total assets be invested
in Municipal Bonds at the end of each calendar quarter. See "Taxes."
Municipal Bonds share the attributes of debt/fixed income securities
in general, but are generally issued by states, municipalities and other
political subdivisions, agencies, authorities and instrumentalities of states
and multi-state agencies or authorities. The Municipal Bonds which the
Municipal Bond Fund may purchase include general obligation bonds and limited
obligation bonds (or revenue bonds), including industrial development bonds
issued pursuant to former federal tax law. General obligation bonds are
obligations involving the credit of an issuer possessing taxing power and are
payable from such issuer's general revenues and not from any particular source.
Limited obligation bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Tax-exempt private
activity bonds and industrial development bonds generally are also revenue bonds
and thus are not payable from the issuer's general revenues. The credit and
quality of private activity bonds and industrial development bonds are usually
related to the credit of the corporate user of the facilities. Payment of
interest on and repayment of principal of such bonds is the responsibility of
the corporate user (and/or any guarantor).
Under the Internal Revenue Code, certain limited obligation bonds are
considered "private activity bonds" and interest paid on such bonds is treated
as an item of tax preference for purposes of calculating federal alternative
minimum tax liability.
The Municipal Bond Fund may invest in municipal lease obligations. A
lease is not a full faith and credit obligation of the issuer and is usually
backed only by the borrowing government's unsecured pledge to make annual
appropriations for lease payments. There have been challenges to the legality of
lease financing in numerous states, and, from time to time, certain
municipalities have considered not appropriating money for lease payments. In
deciding whether to purchase a lease obligation, the Municipal Bond Fund would
assess the financial condition of the borrower, the merits of the project, the
level of public support for the project, and the legislative history of lease
financing in the state. These securities may be less readily marketable than
other municipals. The Municipal Bond Fund may also purchase unrated lease
obligations if determined by the Adviser to be of comparable quality to rated
securities in which the Fund is permitted to invest.
The Municipal Bond Fund may seek to enhance its yield through the
purchase of private placements. These securities are sold through private
negotiations, usually to institutions or mutual funds, and may have resale
restrictions. Their yields are usually higher than comparable public securities
to compensate the investor for their limited marketability. The Municipal Bond
Fund may not invest more than 15% of its net assets in illiquid securities,
including unmarketable private placements.
Some longer-term Municipal Bonds give the investor the right to "put"
or sell the security at par (face value) within a specified number of days
following the investor's request-usually one to seven days. This demand feature
enhances a security's liquidity by shortening its effective maturity and enables
it to trade at a price equal to or very close to par. If a demand feature
terminates prior to being exercised, the Municipal Bond Fund would hold the
longer-term security, which could experience substantially more volatility.
The Municipal Bond Fund may invest in municipal warrants, which are
essentially call options on Municipal Bonds. In exchange for a premium, they
give the purchaser the right, but not the obligation, to purchase a Municipal
Bond in the future. The Municipal Bond Fund might purchase a warrant to lock in
forward supply in an environment where the current issuance of bonds is sharply
reduced. Like options, warrants may expire worthless and they may have reduced
liquidity. The Municipal Bond Fund will not invest more than 5% of its net
assets in municipal warrants
The Municipal Bond Fund may invest in Municipal Bonds with credit
enhancements such as letters of credit, municipal bond insurance and Standby
Bond Purchase Agreements ("SBPAs"). Letters of credit that are issued by a third
party, usually a bank, to enhance liquidity and ensure repayment of principal
and any accrued interest if the underlying Municipal Bond should default.
Municipal bond insurance, which is usually purchased by the bond issuer from a
private, nongovernmental insurance company, provides an unconditional and
irrevocable guarantee that the insured bond's principal and interest will be
paid when due. Insurance does not guarantee the price of the bond or the share
price of any fund. The credit rating of an insured bond reflects the credit
rating of the insurer, based on its claims-paying ability. The obligation of a
municipal bond insurance company to pay a claim extends over the life of each
insured bond. Although defaults on insured Municipal Bonds have been low to date
and municipal bond insurers have met their claims, there is no assurance this
will continue. A higher-than-expected default rate could strain the insurer's
loss reserves and adversely affect its ability to pay claims to bondholders. The
number of municipal bond insurers is relatively small, and not all of them have
the highest rating. An SBPA is a liquidity facility provided to pay the purchase
price of bonds that cannot be re-marketed. The obligation of the liquidity
provider (usually a bank) is only to advance funds to purchase tendered bonds
that cannot be remarketed and does not cover principal or interest under any
other circumstances. The liquidity provider's obligations under the SBPA are
usually subject to numerous conditions, including the continued creditworthiness
of the underlying borrower.
The Municipal Bond Fund may invest in Residual Interest Bonds, which
are created by dividing the income stream provided by an underlying bond to
create two securities, one short term and one long term. The interest rate on
the short-term component is reset by an index or auction process normally every
seven to 35 days. After income is paid on the short-term securities at current
rates, the residual income goes to the long-term securities. Therefore, rising
short-term interest rates result in lower income for the longer-term portion,
and vice versa. The longer-term bonds can be very volatile and may be less
liquid than other Municipal Bonds of comparable maturity. The Municipal Bond
Fund will not invest more than 10% of its total assets in residual interest
bonds.
The Municipal Bond Fund also may invest in participation interests.
Participation interests are various types of securities created by converting
fixed rate bonds into short-term, variable rate certificates. These securities
have been developed in the secondary market to meet the demand for short-term,
tax-exempt securities. The Fund will invest only in securities deemed tax-exempt
by a nationally recognized bond counsel, but there is no guarantee the interest
will be exempt because the IRS has not issued a definitive ruling on the
matter
The Municipal Bond Fund also may invest in embedded interest rate
swaps and caps. In a fixed rate, long-term Municipal Bond with an interest rate
swap attached to it, the bondholder usually receives the bond's fixed coupon
payment as well as a variable rate payment that represents the difference
between a fixed rate for the term of the swap (which is typically shorter than
the bond it is attached to) and a variable rate short-term municipal index. The
bondholder receives excess income when short-term rates remain below the fixed
interest rate swap rate. If short-term rates rise above the fixed income swap
rate, the bondholder's income is reduced. At the end of the interest rate swap
term, the bond reverts to a single fixed coupon payment.
An embedded interest rate cap allows the bondholder to receive
payments whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates. Both instruments may be volatile and of limited liquidity, and their use
may adversely affect a fund's total return. The Municipal Bond Fund will not
invest more than 10% of its total assets in embedded interest rate swaps and
caps.
Municipal Bonds are subject to credit and market risk. Generally,
prices of higher quality issues tend to fluctuate less with changes in market
interest rates than prices of lower quality issues and prices of longer maturity
issues tend to fluctuate more than prices of shorter maturity issues.
The PIMCO Municipal Bond Fund may purchase and sell portfolio
investments to take advantage of changes or anticipated changes in yield
relationships, markets or economic conditions. The Fund may also sell Tax Exempt
Bonds due to changes in the Portfolio Manager's evaluation of the issuer or cash
needs resulting from redemption requests for Fund shares. The secondary market
for Municipal Bonds typically has been less liquid than that for taxable
debt/fixed income securities, and this may affect the Fund's ability to sell
particular Municipal Bonds at then-current market prices, especially in periods
when other investors are attempting to sell the same securities.
Prices and yields on Municipal Bonds are dependent on a variety of
factors, including general money-market conditions, the financial condition of
the issuer, general conditions of the Municipal Bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of Municipal Bonds may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
Obligations of issuers of Municipal Bonds are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations for the payment of interest and principal on their Municipal Bonds
may be materially affected or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for Municipal Bonds or
certain segments thereof, or of materially affecting the credit risk with
respect to particular bonds. Adverse economic, business, legal or political
developments might affect all or a substantial portion of the Fund's Municipal
Bonds in the same manner.
SOCIAL INVESTMENT POLICIES
The PIMCO Low Duration Fund III and PIMCO Total Return Fund III will
not, as a matter of non-fundamental operating policy, invest in the securities
of any issuer determined by the Adviser to be engaged principally in the
provision of healthcare services, the manufacture of alcoholic beverages,
tobacco products, pharmaceuticals, military equipment, or the operation of
gambling casinos. The Funds will also avoid, to the extent possible on the basis
of information available to the Adviser, the purchase of securities of issuers
engaged in the production or trade of pornographic materials. An issuer will be
deemed to be principally engaged in an activity if it derives more than 10% of
its gross revenues from such activities. Evaluation of any particular issuer
with respect to these criteria may involve the exercise of subjective judgment
by the Adviser. The Adviser's determination of issuers engaged in such
activities at any given time will, however, be based upon its good faith
interpretation of available information and its continuing and reasonable best
efforts to obtain and evaluate the most current information available, and to
utilize such information, as it becomes available, promptly and expeditiously in
portfolio management for the Funds. In making its analysis, the Adviser may
rely, among other things, upon information contained in such publications as
those produced by the Investor Responsibility Research Center, Inc.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund's investment objective, except for the PIMCO Global Bond Fund
II, 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 with respect to a Fund without
shareholder approval by vote of a majority of the outstanding shares of that
Fund. Under these restrictions a Fund may not:
(1)(a) 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, or, in the case of the PIMCO Municipal Bond Fund, in industrial
development revenue bonds based, directly or indirectly, on the credit of
private entities in any one 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)
and (b) with respect to the Money Market Fund, to securities or obligations
issued by U.S. banks. Investments of the Municipal Bond Fund in utilities, gas,
electric, water and telephone companies will be considered as being in separate
industries;
(b) for the Global Bond Fund II, concentrate more than 25% of the
value of its total assets in any one industry (The SEC staff takes the position
that investments in government securities of a single foreign country (including
agencies and instrumentalities of such government, to the extent such
obligations are backed by the assets and revenues of such government) represent
investments in a separate industry for
24
<PAGE>
these purposes.);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (This
investment restriction is not applicable to the Real Return Bond Fund, the
Commercial Mortgage Securities Fund, the Foreign Bond Fund, the Global Bond
Fund, Global Bond Fund II, the International Bond Fund, the Emerging Markets
Bond Fund or the Emerging Markets Bond Fund II.). For the purpose of this
restriction, each state and each separate political subdivision, agency,
authority or instrumentality of such state, each multi-state agency or
authority, and each guarantor, if any, are treated as separate issuers of
Municipal Bonds;
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one issuer (This
restriction is not applicable to the Real Return Bond Fund, the Commercial
Mortgage Securities Fund, the Foreign Bond Fund, the Global Bond Fund, Global
Bond Fund II, the International Bond Fund, the Emerging Markets Bond Fund or the
Emerging Markets Bond Fund II.);
(4)(a) 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;
(b) for the Global Bond Fund II, purchase or sell real estate,
although it may purchase securities of issuers which deal in real estate,
including securities of real estate investment trusts, and may purchase
securities which are secured by interests in real estate;
(5) purchase or sell commodities or commodities contracts or oil, gas
or mineral programs. This restriction shall not prohibit a 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 (This restriction is not applicable
to the Global Bond Fund II, but see non-fundamental restriction "F".);
(6) for the High Yield, Total Return III, International and StocksPLUS
Funds: purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures;
(7)(a) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that a 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
a Fund's assets);
(b) for the Global Bond Fund II, borrow money in excess of 10% of
the value (taken at the lower of cost or current value) of the Fund's total
assets (not including the amount borrowed) at the time
25
<PAGE>
the borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes (Such borrowings will be repaid before any
additional investments are purchased.); or pledge, hypothecate, mortgage or
otherwise encumber its assets in excess of 10% of the Fund's total assets (taken
at cost) and then only to secure borrowings permitted above (The deposit of
securities or cash or cash equivalents in escrow in connection with the writing
of covered call or put options, respectively, is not deemed to be pledges or
other encumbrances. For the purpose of this restriction, collateral arrangements
with respect to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge of assets and neither such arrangements nor
the purchase or sale of futures or related options are deemed to be the issuance
of a senior security.);
(8) lend any funds or other assets, except that a 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 (This restriction is not applicable to the Global Bond
Fund II, but see non-fundamental restriction "G".);
(9)(a) 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;
(b) for the Global Bond Fund II, underwrite securities issued by
other persons except to the extent that, in connection with the disposition of
its portfolio investments, it may be deemed to be an underwriter under federal
securities laws; or
(10)(a) for the High Yield, Total Return III, and StocksPLUS Funds:
maintain a short position, or purchase, write or sell puts, calls, straddles,
spreads or combinations thereof, except as set forth in the Prospectuses and in
this Statement of Additional Information for transactions in options, futures,
options on futures, and transactions arising under swap agreements or other
derivative instruments;
(b) for the Money Market, Short-Term, Low Duration, Low Duration
II, Low Duration III, Moderate Duration, Total Return, Total Return II,
Commercial Mortgage Securities, Low Duration Mortgage, Total Return Mortgage,
Long-Term U.S. Government, Foreign Bond, Global Bond, International, Emerging
Markets Bond, Emerging Markets Bond II, StocksPLUS Short Strategy and Strategic
Balanced Funds: 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
Each 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, a Fund may
not:
(A)(a) invest more than 15% of the net assets of a Fund (10% in the
case of the PIMCO Money Market 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
26
<PAGE>
private placements), repurchase agreements maturing in more than seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), certain options traded over the counter that a Fund has
purchased, securities or other liquid assets being used to cover such options a
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);
(b) for the Global Bond Fund II, invest in (a) securities which at
the time of such investment are not readily marketable, (b) securities the
disposition of which is restricted under federal securities laws, (c) repurchase
agreements maturing in more than seven days (d) OTC options (to the extent
described below), and (e) IO/PO stripped mortgage-backed securities (as defined
in the Prospectuses) if, as a result, more than 15% of the Fund's net assets,
taken at current value, would then be invested in securities described in (a),
(b), (c), (d) and (e) above (For the purpose of this restriction securities
subject to a 7-day put option or convertible into readily saleable securities or
commodities are not included with subsections (a) or (b).); or purchase
securities the disposition of which is restricted under the federal securities
laws (excluding for purposes of this restriction securities offered and sold
pursuant to Rule 144A of the Securities Act of 1933 and Section 4(2) commercial
paper) if, as a result, such investments would exceed 10% of the value of the
net assets of the Fund; provided, however, that so long as a similar restriction
applies under the Ohio Administrative Code, the Fund will invest no more than
15% of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years continuous operation or
securities of issuers which are restricted as to disposition (including Rule
144A securities and Section 4(2) commercial paper);
(B)(a) for the PIMCO Money Market, Short-Term, Low Duration, Low
Duration II, Low Duration III, Moderate Duration, Total Return, Total Return II,
Commercial Mortgage Securities, Municipal Bond, Long-Term U.S. Government,
Foreign Bond, Global Bond, StocksPLUS Short Strategy and Strategic Balanced
Funds: 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;
(b) for the Global Bond Fund II, purchase securities on margin,
except such short-term credits as may be necessary for the clearance of
purchases and sales of securities (For this purpose, the deposit or payment by
the Fund of initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a security on
margin.);
(C) invest more than 5% (10% in the case of the PIMCO Low Duration
Mortgage and Total Return Mortgage Funds*) of the assets of a Fund (taken at
market value at the time of investment) in any combination of interest only,
principal only, or inverse floating rate securities (This restriction is not
applicable to the Global Bond Fund II, but see fundamental investment
restriction 7(b).);
(D) borrow money (excluding uncovered dollar rolls, reverse repurchase
agreements, sale-buybacks, and economically similar transactions, which are
subject to the Fund's fundamental borrowing restriction), except for temporary
administrative purposes (This restriction is not applicable to the Global Bond
Fund II, but see fundamental investment restriction 7(b).);
(E) for the Global Bond Fund II, make short sales of securities or
maintain a short position for the account of the Fund unless at all times when a
short position is open the Fund owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
27
<PAGE>
(F) for the Global Bond Fund II, purchase or sell commodities or
commodity contracts except that the Fund may purchase and sell financial futures
contracts and related options;
(G) for the Global Bond Fund II, make loans, except by purchase of
debt obligations or by entering into repurchase agreements or through the
lending of the Fund's portfolio securities with respect to not more than 25% of
its total assets;
(H) for the Global Bond Fund II, write (sell) or purchase options
except that the Fund may (a) write covered call options or covered put options
on securities that it is eligible to purchase (and on stock indices) and enter
into closing purchase transactions with respect to such options, and (b) in
combination therewith, or separately, purchase put and call options on
securities it is eligible to purchase, provided that the premiums paid by the
Fund on all outstanding options it has purchased do not exceed 5% of its total
assets (The Fund may enter into closing sale transactions with respect to
options it has purchased.);
In addition, the Trust has adopted a non-fundamental policy pursuant to
which each Fund that may invest in securities denominated in foreign currencies,
except the PIMCO Global Bond, Emerging Markets Bond and Emerging Markets Bond II
Funds, 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 (7)(a) above, a Fund may
borrow money for temporary administrative purposes. To the extent that
borrowings for temporary administrative purposes exceed 5% of the total assets
of a Fund (except the PIMCO Global Bond Fund II), such excess shall be subject
to the 300% asset coverage requirement of that restriction.
To the extent a Fund covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the maintenance of a
segregated account consisting of assets determined to be liquid in accordance
with procedures adopted by the Trustees, equal in value to the amount of the
Fund's commitment to repurchase, such an agreement will not be considered a
"senior security" by the Fund and therefore will not be subject to the 300%
asset coverage requirement otherwise applicable to borrowings by the Fund.
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 Funds have adopted an investment
policy pursuant to which a 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 Funds and may be amended by the Trustees
without the approval of shareholders. However, the Funds will not change or
modify this policy prior to the change or modification by the SEC staff of its
position.
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.
28
<PAGE>
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 a Fund's investment portfolio, resulting
from market fluctuations or other changes in a Fund's total assets will not
require a 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):
<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 Board and Managing Director, PIMCO; Director, Harris
Age 37 Trustee Holdings; Director, Harris Oil Company; Chairman
and Director, PIMCO Commercial Mortgage Securities
Trust, Inc.; Trustee, PIMCO Variable Insurance
Trust. Formerly Principal, Senior Vice President
and Vice President of PIMCO.
R. Wesley Burns* Trustee and President Executive Vice President, PIMCO; Trustee and
Age 37 President, PIMCO Variable Insurance Trust; Director
and President, PIMCO Commercial Mortgage Securities
Trust, Inc. Formerly Vice President, PIMCO.
Guilford C. Babcock Trustee Associate Professor of Finance, University of
1575 Circle Drive Southern California; Director, PIMCO Commercial
San Marino, California Mortgage Securities Trust, Inc.; Director, AMCAP
91108 Fund and Fundamental Investors Fund of the
Age 66 Capital Group; Trustee, PIMCO Variable Insurance
Trust; Director, Good Hope Medical Foundation.
Vern O. Curtis Trustee Private Investor; Director of 16 Real Estate
14158 N.W. Bronson Creek Drive Investment Trusts affiliated with Public
Portland, Oregon Storage, Inc.; Director, PIMCO Commercial
97229 Mortgage Securities Trust, Inc.; Trustee,
Age 63 PIMCO Variable Insurance Trust. Formerly
Charitable Work, The Church of Jesus Christ of
Latter Day Saints.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE THE TRUST DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas P. Kemp Trustee Co-Chairman, U.S. Committee to Assist Russian
1141 Marine Drive Reform; Director, Union Financial Corp.;
Laguna Beach, California Director, PIMCO Commercial Mortgage Securities
92651 Trust, Inc.; Trustee, PIMCO Variable Insurance
Age 66 Trust. Formerly Senior Consultant, World Cup 1994
Organizing Committee; Chairman and CEO of Coca Cola
Bottling Company of L.A.
William J. Popejoy Trustee Chairman, Western Vinyl Manufacturing; Partner,
600 North 10th Street Butler Popejoy Group; Director, PIMCO Commercial
Sacramento, California Mortgage Securities Trust, Inc.; Trustee, PIMCO
95814 Variable Insurance Trust. Formerly Chief
Age 59 Executive Officer, Orange County, California;
Principal, Castine Partners.
William H. Gross Senior Vice President Managing Director, PIMCO; Senior Vice President,
Age 53 PIMCO Variable Insurance Trust.
Margaret Isberg Senior Vice President Executive Vice President, PIMCO.
Age 40
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO. Formerly Vice
Age 44 President, PIMCO.
Michael G. Dow Vice President Account Manager, PIMCO. Formerly Fixed Income
Age 33 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 Marketing
Age 52 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 58
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE THE TRUST DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Douglas J. Ongaro Vice President Account Manager, PIMCO. Formerly Regional
Age 36 Marketing Manager, Charles Schwab & Co., Inc.
Jeffrey M. Sargent Vice President Vice President and Manager of Fund Shareholder
Age 34 Servicing, PIMCO; Vice President, PIMCO Variable
Insurance Trust.
William S. Thompson, Jr. Vice President Chief Executive Officer and Managing Director,
Age 51 PIMCO; Vice President, PIMCO Variable Insurance
Trust. Formerly Managing Director, Salomon
Brothers, Inc.
Kristen M. Wilsey Vice President Vice President, PIMCO. Formerly Account
Age 37 Manager, PIMCO; Vice President, Pacific
Financial Asset Management Corporation.
John P. Hardaway Treasurer Vice President and Manager of Fund Operations,
Age 40 PIMCO; Treasurer, PIMCO Variable Insurance Trust.
Garlin G. Flynn Secretary Senior Fund Administrator, PIMCO; Secretary, PIMCO
Age 51 Variable Insurance Trust. Formerly Senior Mutual Fund
Analyst, PIMCO Advisors Institutional Services.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Fund Taxation, PIMCO.
Age 34 Formerly Director of Financial Reporting, Carl I.
Brown & Co.; Tax Manager, Price Waterhouse LLP.
Michael J. Willemsen Assistant Secretary Manager, PIMCO. Formerly Project Lead,
Age 37 PIMCO.
</TABLE>
- -------------------
*Each of Mr. Harris and Mr. Burns is an "interested person" of the
Trust (as that term is defined in the 1940 Act) because of his affiliations with
PIMCO.
31
<PAGE>
COMPENSATION TABLE
The following table sets forth information regarding compensation
received by the Trustees for the year ended March 31, 1997.
<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 $30,000 $40,000
Trustee
Vern O. Curtis $30,000 $40,000
Trustee
Thomas P. Kemp $30,000 $40,000
Trustee
William J. Popejoy $30,000 $40,000
Trustee
</TABLE>
- --------------------
/1/Each Trustee, other than those affiliated with the Adviser or its
affiliates, received an annual retainer of $20,000 plus $2,500 for each Board of
Trustees meeting attended. For the fiscal year ended March 31, 1997, the
unaffiliated Trustees as a group received compensation in the amount of
$120,000. Effective May 1, 1997, each Trustee, other than those affiliated with
the Adviser or its affiliates, receives an annual retainer of $45,000 plus
$3,000 for each Board of Trustees meeting attended in person and $500 for each
meeting attended telephonically, plus reimbursement of related expenses. In
addition, a Trustee serving as a Committee Chair, other than those affiliated
with the Adviser or its affiliates, receives an additional annual retainer of
$1,500.
/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 received an annual retainer of $6,000 plus $1,000 for each Board of
Directors meeting attended. For the fiscal year ended December 31, 1996, the
unaffiliated Directors as a group received compensation in the amount of
$40,000. Effective May 1, 1997, each Director, other than those affiliated with
the Adviser or its affiliates, receives $500 for each Board of Directors meeting
attended telephonically, and a Director serving as a Committee Chair receives an
annual retainer of $500.
INVESTMENT ADVISER
PIMCO serves as investment adviser to the Funds 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.
32
<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 each Fund.
Under the terms of the Advisory Contract, PIMCO is obligated to manage
the Funds 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 November 22, 1994, as supplemented at meetings
held on October 1, 1995, November 21, 1995, February 27, 1996, November 19,
1996, January 14, 1997, May 27, 1997, and February __, 1998, 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 on 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 based on average daily net assets of the Funds as
follows:
<TABLE>
<CAPTION>
ADVISORY
FUND FEE RATE
- ---- --------
<S> <C>
Money Market Fund............................................................................... 0.15%
Commercial Mortgage Securities, StocksPLUS, StocksPLUS Short Strategy,
and Strategic Balanced Funds................................................................ 0.40%
Emerging Markets Bond Fund and Emerging Markets Bond Fund II.................................... 0.45%
All other Funds................................................................................. 0.25%
</TABLE>
33
<PAGE>
For the fiscal years ended March 31, 1997, 1996, and 1995, the
aggregate amount of the advisory fees paid by each operational Fund was as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/97 3/31/96 3/31/95
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund* $ 67,626 $ 10,118 $ N/A
Short-Term Fund 311,485 249,319 383,063
Low Duration Fund 6,877,132 6,267,607 5,756,981
Low Duration Fund II 685,047 575,730 461,261
Low Duration Fund III 6,114 N/A N/A
Moderate Duration Fund 6,525 N/A N/A
High Yield Fund 1,983,580 1,186,819 830,832
Total Return Fund 29,232,090 22,775,075 15,223,950
Total Return Fund II* 1,171,011 486,935 N/A
Total Return Fund III 423,216 327,029 258,080
Long-Term U.S. Government Fund 64,058 101,042 91,533
Real Return Bond Fund 2,453 N/A N/A
Foreign Bond Fund 541,283 640,157 921,902
Global Bond Fund 423,547 264,783 177,065
Global Bond Fund II** 41,683 N/A N/A
International Bond Fund 2,810,494 4,937,820 1,142,716
StocksPLUS Fund 779,413 324,388 109,177
Strategic Balanced Fund 31,660 N/A N/A
</TABLE>
- --------------------
*The PIMCO Money Market Fund, for the fiscal year ended October 31,
1995, paid aggregate advisory fees in the amount of $14,500. The PIMCO Total
Return Fund II, for the fiscal year ended October 31, 1995, paid aggregate
advisory fees in the amount of $1,009,081. See "The Reorganization of the PIMCO
Money Market and Total Return II Funds" for additional information.
**The PIMCO Global Bond Fund II, for the fiscal year ended September
30, 1996, paid aggregate management fees in the amount of $54,325, pursuant to a
management contract between PIMCO Advisors Funds and PIMCO Advisors, under which
PIMCO Advisors provided or procured investment advisory services for the Fund.
See "The Reorganization of the PIMCO Global Bond Fund II" for additional
information.
In connection with the former expense limitation provision, which was
terminated October 1, 1995, the Adviser reimbursed advisory fees for the fiscal
years ended March 31, 1997, 1996, and 1995, in the following amounts:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/97 3/31/96 3/31/95
- ---- ------- ------- -------
<S> <C> <C> <C>
Short-Term Fund $0 $ 10,244 $ 8,045
High Yield Fund 0 0 (42,986)
Low Duration Fund II 0 0 (16,480)
Total Return Fund III 0 1,775 (633)
Long-Term U.S. Government Fund 0 13,554 23,964
Global Bond Fund 0 (17,114) (34,409)
StocksPLUS Fund 0 26,176 53,148
</TABLE>
34
<PAGE>
FUND ADMINISTRATOR
PIMCO also serves as Administrator to the Funds pursuant to an
administration agreement dated January 14, 1997(the "Administration Agreement").
PIMCO provides the Funds 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
Funds, including coordination of the services performed by the Funds' transfer
agent, custodian, legal counsel, independent accountants, and others. PIMCO (or
an affiliate of PIMCO) also furnishes the Funds with office space facilities
required for conducting the business of the Funds, 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 Funds, 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 following rates for each Fund (each expressed as a percentage of the Fund's
average daily net assets attributable to its classes of shares on an annual
basis):
<TABLE>
<CAPTION>
ADMINISTRATIVE FEE RATE
-----------------------
INSTITUTIONAL AND CLASS A,
FUND ADMINISTRATIVE CLASS B AND C
- ---- -------------------- -------
<S> <C> <C>
Money Market Fund and Short-Term Fund 0.20% 0.35%
Moderate Duration Fund 0.20% 0.40%
Low Duration Fund and Total Return Fund 0.18% 0.40%
Global Bond Fund and Global Bond Fund II 0.30% 0.45%
Foreign Bond Fund and International Bond Fund 0.25% 0.45%
Emerging Markets Bond Fund and Emerging Markets
Bond Fund II 0.40% 0.55%
All other Funds 0.25% 0.40%
</TABLE>
Except for the expenses paid by PIMCO, the Trust bears all costs of its
operations. The Funds are responsible for: (i) salaries and other compensation
of any of the Trust's executive officers and employees who are not officers,
directors, stockholders, or employees of PIMCO or its subsidiaries or
affiliates; (ii) taxes and governmental fees; (iii) brokerage fees and
commissions and other portfolio transaction expenses; (iv) costs of borrowing
money, including interest expenses; (v) fees and expenses of the Trustees who
are not "interested persons" of PIMCO or the Trust, and any counsel retained
exclusively for their benefit; (vi) extraordinary expenses, including costs of
litigation and indemnification expenses; (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
each Fund, except the PIMCO Global Bond Fund II, 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 PIMCO
High Yield, Total Return, Low Duration and Money Market Funds, or with respect
to any class of shares of the PIMCO Global Bond Fund II, the Administration
Agreement may be terminated by the Trustees, or by a vote of the outstanding
voting securities of the Trust, Fund, or Class as applicable, at any time on 60
days' written notice. Following the expiration of the one year period commencing
with the effectiveness of the amendment making the Administration Agreement
effective with respect to such Funds or Classes, the Agreement may be terminated
by PIMCO on 60 days' written notice. With respect to the Class A, Class B and
Class C shares of each Fund other than those listed above, 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 27, 1996. In approving the Administration Agreement, the Trustees
determined that: (1) the Administration Agreement is in the best interests of
the Funds and their shareholders; (2) the services to be performed under the
Agreement are services required for the operation of the Funds; (3) PIMCO is
able to provide, or to procure, services for the Funds 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. Prior to August 27, 1996, administrative services were provided
pursuant to predecessor administrative services contracts.
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>
For the fiscal years ended March 31, 1997, 1996, and 1995, the
aggregate amount of the administration fees paid by each operational Fund was as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/97 3/31/96 3/31/95
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund* $ 117,570 $ 13,462 $ N/A
Short-Term Fund 249,655 137,477 129,554
Low Duration Fund 5,005,045 3,520,078 2,272,874
Low Duration Fund II 685,047 391,248 154,668
Low Duration Fund III 6,114 N/A N/A
Moderate Duration Fund 5,220 N/A N/A
High Yield Fund 2,071,177 842,032 302,332
Total Return Fund 21,266,359 13,084,413 6,059,785
Total Return Fund II* 1,171,011 486,935 N/A
Total Return Fund III 423,216 217,584 86,027
Long-Term U.S. Government Fund 64,374 65,155 30,511
Real Return Bond Fund 2,503 N/A N/A
Foreign Bond Fund 540,519 428,175 324,043
Global Bond Fund 508,256 208,234 57,732
Global Bond Fund II** 14,646 N/A N/A
International Bond Fund 2,810,494 3,800,674 440,899
StocksPLUS Fund 491,519 149,888 24,261
Strategic Balanced Fund 19,788 N/A N/A
</TABLE>
- --------------------
*The PIMCO Money Market Fund, for the fiscal year ended October 31,
1995, paid aggregate administration fees in the amount of $24,166. The PIMCO
Total Return Fund II, for the fiscal year ended October 31, 1995, paid aggregate
administration fees in the amount of $1,009,081. See "The Reorganization of the
PIMCO Money Market and Total Return II Funds" for additional information.
**The PIMCO Global Bond Fund II, for the fiscal year ended September
30, 1996, paid aggregate management fees in the amount of $54,325, pursuant to a
management contract between PIMCO Advisors Funds and PIMCO Advisors, under which
PIMCO Advisors provided or procured administrative services for the Fund. See
"The Reorganization of the PIMCO Global Bond Fund II" for additional
information.
In connection with the former expense limitation provision which was
terminated October 1, 1995, the Administrator reimbursed administration fees for
the fiscal years ended March 31, 1997, 1996, and 1995, in the following amounts:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/97 3/31/96 3/31/95
- ---- ------- ------- -------
<S> <C> <C> <C>
Short-Term Fund $0 $ 2,923 $ 2,295
Low Duration Fund II 0 0 (4,703)
High Yield Fund 0 0 (12,266)
Total Return Fund III 0 507 (181)
Long-Term U.S. Government Fund 0 3,867 6,838
Global Bond Fund 0 (4,884) (9,818)
StocksPLUS Fund 0 7,469 15,165
</TABLE>
37
<PAGE>
DISTRIBUTION OF TRUST SHARES
DISTRIBUTOR AND MULTI-CLASS PLAN
PIMCO Funds Distribution Company (the "Distributor") serves as the
distributor of each class of the Trust's shares pursuant to a distribution
contract ("Distribution Contract") with the Trust which is subject to annual
approval by the Board. The Distributor is a wholly owned subsidiary of PIMCO
Advisors. The Distribution Contract is terminable with respect to a Fund or
class 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 each
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 Trustees who are not interested persons of the Trust (as defined
in the 1940 Act) and who have no direct or indirect financial interest in the
Distribution Contract or the Distribution and/or Servicing Plans described
below; and (ii) by the vote of a majority of the entire Board of Trustees cast
in person at a meeting called for that purpose. If the Distribution Contract is
terminated (or not renewed) with respect to one or more Funds or classes
thereof, it may continue in effect with respect to any class of any 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 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 high net individuals. (Institutional
Class shares may also be offered through certain financial intermediaries that
charge their customers transaction or other fees with respect to the customer's
investment in the Funds. Shares of the Administrative Class are offered
primarily through employee benefit plans alliances, broker-dealers, and other
intermediaries, and each Fund pays service or distribution fees to such entities
for services they provide to shareholders of that class.)
The Trust has adopted an Amended and Restated Multi-Class Plan
("Multi-Class Plan") pursuant to Rule 18f-3 under the 1940 Act. Under the
Multi-Class Plan, shares of each class of each Fund represent an equal pro rata
interest in such 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
38
<PAGE>
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 currently imposed upon redemptions of 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.
For the fiscal year ended March 31, 1997, the Distributor received an
aggregate of $670, $85,380 and $44,409 in contingent deferred sales charges on
redemptions of Class A, Class B and Class C shares, respectively, of which the
indicated amounts were attributable to the following Funds:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund $ 0 $ 3,242 $ 8,900
Low Duration Fund 0 14,025 5,158
High Yield Fund 0 14,746 5,318
Total Return Fund 670 36,901 24,796
Global Bond Fund II 0 429 160
StocksPLUS Fund 0 16,037 77
</TABLE>
For the fiscal year ended September 30, 1996, the Distributor received
$0, $1,946 and $2,704 in contingent deferred sales charges on Class A, Class B
and Class C shares, respectively, of the Global Bond Fund II while the Fund was
a series of PIMCO Advisors Funds ("PAF"). See "The Reorganization of the PIMCO
Global Bond Fund II."
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.
39
<PAGE>
As described in the Retail Prospectus under the caption "Alternative
Purchase Arrangements -- Class A," Class A shares of the Trust (except with
respect to the Money Market Fund) are sold pursuant to an initial sales charge,
which declines as the amount of purchase reaches certain defined levels. For the
fiscal year ended March 31, 1997, the Distributor received an aggregate of
$389,133, and retained $45,871, in initial sales charges on Class A shares, of
which the indicated amounts were attributable to the following Funds:
<TABLE>
<CAPTION>
Amount Retained
Fund Sales Charges by Distributor
- ---- ------------- --------------
<S> <C> <C>
Short-Term Fund $ 12,016 $ 2,622
Low Duration Fund 24,796 3,653
High Yield Fund 66,992 9,075
Total Return Fund 174,602 13,299
Long-Term U.S. Government Fund 9,494 1,284
Foreign Bond Fund 16,091 1,913
Global Bond Fund II 11,774 1,520
StocksPLUS Fund 73,368 12,505
</TABLE>
For the fiscal year ended September 30, 1996, the Distributor received $48,106,
and retained $9,896, in initial sales charges paid by shareholders of the Class
A shares of the Global Bond Fund II while the Fund was a series of PAF.
DISTRIBUTION AND SERVICING PLANS FOR CLASS A, CLASS B AND CLASS C SHARES
As stated in the text of the Retail Prospectus under the caption
"Distributor and Distribution and Servicing Plans," Class A, Class B and Class C
shares of the Trust are continuously offered through participating brokers which
are members of the NASD and which have dealer agreements with the Distributor,
or which have agreed to act as introducing brokers.
Pursuant to separate Distribution and Servicing Plans for Class A,
Class B and Class C shares (the "Retail Plans"), as 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 Class A,
Class B and Class C shares as to which no distribution and servicing fees were
paid on account of such 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 Retail Plan may be terminated with respect to any 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 (disinterested Trustees) or by vote of a majority of the outstanding
voting securities of the relevant class of that Fund. Any change in any Retail
Plan that would materially increase the cost to the class of shares of any Fund
to which the Plan relates requires approval by the affected class of
shareholders of that Fund. The Trustees review quarterly written reports of such
costs and the purposes for which such costs have
40
<PAGE>
been incurred. Each Retail Plan may be amended by vote of the disinterested
Trustees defined above cast in person at a meeting called for the purpose. As
long as the Retail 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 Retail Plans will continue in effect with respect to each 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
disinterested Trustees defined above 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 a Retail Plan is terminated (or not renewed) with respect to one or
more Funds, it may continue in effect with respect to any class of any Fund as
to which it has not been terminated (or has been renewed).
From time to time, expenses of principal underwriters incurred in
connection with the sale of shares of the Funds and in connection with the
servicing of shareholders of the Funds and the maintenance of shareholder
accounts may exceed the distribution and servicing fees collected by the
Distributor. As of March 31, 1997, such expenses were approximately $430,000 in
excess of payments under the Funds' Class A Distribution and Servicing Plan and
$1,192,000 in excess of payments under the Funds' Class B Distribution and
Servicing Plan. Expenses did not exceed payments uder the Funds' Class C
Distribution and Servicing Plan. The surplus or deficit of payments relative to
expenses under the Retail Plans for this period was as follows for the indicated
Funds:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund $ (48,000) $ 7,000 $ (11,000)
Short-Term Fund (1,000) (1,000) (6,000)
Low Duration Fund (66,000) (60,000) (1,000)
High Yield Fund (25,000) (416,000) 53,000
Total Return Fund (297,000) (352,000) 231,000
Long-Term U.S. Government Fund 1,000 (19,000) (2,000)
Real Return Fund 0 (17,000) (1,000)
Foreign Bond Fund 2,000 (45,000) (13,000)
Global Bond Fund II 1,000 (9,000) (2,000)
StocksPLUS Fund 3,000 (280,000) (38,000)
</TABLE>
For the fiscal year ended March 31, 1997, the Trust paid the
Distributor an aggregate of $108,294, $293,036 and $1,219,775 pursuant to the
Distribution and Servicing Plans for Class A, Class B and Class C shares,
respectively, of which the indicated amounts were attributable to the following
Funds:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund $ 5,447 $ 4,084 $ 12,352
Short-Term Fund 530 156 462
Low Duration Fund 27,514 9,853 92,491
High Yield Fund 15,347 110,003 412,589
Total Return Fund 47,488 140,575 666,085
Long-Term U.S. Government Fund 396 361 163
Real Return Bond Fund 0 256 79
Foreign Bond Fund 127 1,129 1,520
Global Bond Fund II 9,836 18,506 23,021
StocksPLUS Fund 1,609 8,113 11,013
</TABLE>
During the fiscal year ended March 31, 1997, the amounts collected
pursuant to the Distribution and Servicing Plan for Class A shares and the
front-end sales charge imposed on Class A shares were used as follows: (A)
sales commissions and other compensation to sales personnel, $166,800; (B)
preparing, printing and distributing sales material and advertising (including
preparing, printing and distributing prospectuses to non-shareholders), and
other expenses (including data processing, legal and operations), $325,560.
These amounts are attributable to the following Funds, as indicated:
<TABLE>
<CAPTION>
A B
--- ---
<S> <C> <C>
Money Market Fund $ 5,040 $ 42,840
Short-Term Fund 1,000 1,000
Low Duration Fund 28,560 47,880
High Yield Fund 15,960 30,240
Total Return Fund 112,560 198,240
Long-Term U.S. Government Fund 0 0
Real Return Bond Fund 0 0
Foreign Bond Fund 0 0
Global Bond Fund II 1,680 3,360
StocksPLUS Fund 2,000 2,000
</TABLE>
41
<PAGE>
During the fiscal year ended March 31, 1997, the amounts collected
pursuant to the Distribution and Servicing Plan for Class B shares and the
contingent deferred sales charge imposed on Class B shares were used as follows:
(A) sales commissions and other compensation to sales personnel, $1,264,960; (B)
preparing, printing and distributing sales material and advertising (including
preparing, printing and distributing prospectuses to non-shareholders), and
other expenses (including data processing, legal and operations), $154,520.
These amounts are attributable to the following Funds, as indicated:
<TABLE>
<CAPTION>
A B
--- ---
<S> <C> <C>
Money Market Fund $ 840 $ 0
Short-Term Fund 1,000 0
Low Duration Fund 60,480 13,440
High Yield Fund 403,200 74,760
Total Return Fund 420,000 60,480
Long-Term U.S. Government Fund 19,000 0
Real Return Bond Fund 17,000 0
Foreign Bond Fund 46,000 1,000
Global Bond Fund II 13,440 840
StocksPLUS Fund 284,000 4,000
</TABLE>
During the fiscal year ended March 31, 1997, the amounts collected
pursuant to the Distribution and Servicing Plan for Class C shares and the
contingent deferred sales charge imposed on Class C shares were used as follows:
(A) sales commissions and other compensation to sales personnel, $944,120; (B)
preparing, printing and distributing sales material and advertising (including
preparing, printing and distributing prospectuses to non-shareholders), and
other expenses (including data processing, legal and operations), $200,720.
These amounts are attributable to the following Funds, as indicated:
<TABLE>
<CAPTION>
A B
--- ---
<S> <C> <C>
Money Market Fund $ 10,080 $ 21,000
Short-Term Fund 6,000 0
Low Duration Fund 84,840 19,320
High Yield Fund 308,280 83,160
Total Return Fund 464,520 68,040
Long-Term U.S. Government Fund 2,000 0
Real Return Bond Fund 1,000 0
Foreign Bond Fund 14,000 1,000
Global Bond Fund II 8,400 4,200
StocksPLUS Fund 45,000 4,000
</TABLE>
For the fiscal year ended September 30, 1996, PAF paid the Distributor
an aggregate of $1,567,984, pursuant to a Distribution and Servicing Plan
applicable to the Class A shares of PAF (the "PAF Class A Plan"), which is
similar to the Class A Retail Plan of the Trust. The payments allocated to the
Global Bond Fund II were $11,772.
The remainder of the total payments made under the PAF Class A Plan for
that fiscal year was allocated among other series of PAF which either merged
with Funds of the Trust or merged
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with/reorganized as series of PIMCO Funds: Multi-Manager Series, an affiliated
mutual fund family, in transactions which took place on January 17, 1997.
During the fiscal year ended September 30, 1996, the amounts collected
pursuant to the PAF Class A Plan and the front-end sales charge imposed on Class
A shares were used as follows: commissions and other compensation to dealers,
$1,786,000; preparing, printing and distributing materials to shareholders, and
other expenses (including data processing, legal and operations), $2,483,000.
The total, if allocated to the Global Bond Fund II based on the net assets
attributable to its Class A shares at September 30, 1996, would have been as
follows: compensation -- $17,000; sales material and other expenses -- $24,000;
total -- $41,000.
For the fiscal year ended September 30, 1996, PAF paid the Distributor
an aggregate of $2,107,430, pursuant to a Distribution and Servicing Plan
applicable to the Class B shares of PAF (the "PAF Class B Plan") which is
similar to the Class B Retail Plan of the Trust. The payments allocated to the
Global Bond Fund II were $16,642.
The remainder of the total payments made under the PAF Class B Plan for
that fiscal year was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMCO Funds:
Multi-Manager Series, an affiliated mutual fund family, in transactions which
took place on January 17, 1997.
During the fiscal year ended September 30, 1996, the amounts collected
pursuant to the PAF Class B Plan and the contingent deferred sales charge
imposed on Class B shares of the former PAF Funds were used as follows by the
Distributor: sales commissions and other compensation to sales personnel,
$8,961,000; preparing, printing and distributing sales material and advertising
(including preparing, printing and distributing prospectuses to
non-shareholders), and other expenses (including data processing, legal and
operations), $2,003,000. The total, if allocated to the Global Bond Fund II
based on the net assets attributable to its Class B shares at September 30,
1996, would have been as follows: compensation -- $101,000; sales material and
other expenses -- $23,000; total -- $124,000.
For the fiscal year ended September 30, 1996, PAF paid the Distributor
$42,194,641, pursuant to a similar Distribution and Servicing Plan (the "PAF
Class C Plan") applicable to the Class C shares of PAF, of which $18,448 was
allocated to the Global Bond Fund II (which was formerly a PAF Fund which
reorganized as a series of the Trust on January 17, 1997).
The remainder of the total payments made under the PAF Class C Plan for
that fiscal year was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMCO Funds:
Multi-Manager Series, an affiliated mutual fund family, in transactions which
took place on January 17, 1997.
During the fiscal year ended September 30, 1996, the amounts collected
pursuant to the PAF Class C Plan and the contingent deferred sales charge
imposed on Class C shares of the former PAF Funds were used as follows by the
Distributor: sales commissions and other compensation to sales personnel,
$32,453,000; preparing, printing and distributing sales material and advertising
(including preparing, printing and distributing prospectuses to
non-shareholders), and other expenses (including data processing, legal and
operations), $8,605,000. The total, if allocated to the Global Bond Fund II
based on the net assets attributable to its Class C shares at September 30,
1996, would have been as follows: compensation -- $24,000; sales material and
other expenses -- $6,000; total -- $30,000.
During the fiscal year ended September 30, 1996, unreimbursed expenses
of PAF's principal
43
<PAGE>
underwriter under the PAF Class C Plan were reduced from $4,191,000 to
$2,822,000.
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. Although the Funds' expenses are
essentially fixed, the Trustees believe that the effect of the Retail Plans on
sales and/or redemptions may benefit the Trust by reducing Fund expense ratios
and/or by affording greater flexibility to Portfolio Managers. From time to
time, expenses of the Distributor incurred in connection with the sale of Class
B and Class C shares of the Funds, and in connection with the servicing of Class
B and Class C shareholders of the Funds and the maintenance of shareholder
accounts, may exceed the distribution and servicing fees collected by the
Distributor. The Trustees consider such unreimbursed amounts, among other
factors, in determining whether to cause the Funds to continue payments of
distribution and servicing fees in the future with respect to Class B and Class
C shares.
DISTRIBUTION AND ADMINISTRATIVE SERVICES PLANS FOR ADMINISTRATIVE CLASS SHARES
The Trust has adopted an Administrative Services Plan and a
Distribution Plan (together, the "Administrative Plans") with respect to the
Administrative Class shares of each Fund. Under the terms of each Administrative
Plan, the Trust is permitted to reimburse, out of the assets attributable to the
Administrative Class shares of each 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 Administrative
Class shares or administration of plans or programs that use Administrative
Class of the Funds shares as their funding medium, and to reimburse certain
other distribution related expenses. Under the terms of the Administrative Class
Distribution Plan, these services may include, but are not limited to, the
following functions: providing facilities to answer questions from prospective
investors about a 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.
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
Administrative Class Distribution Plan and the Administrative Services Plan, but
may not receive fees under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to
materially increase the costs which Administrative Class shareholders may bear
under the Plan without the approval of a majority of the outstanding voting
securities of the Administrative Class, and by vote of a majority of both (i)
the Trustees of the Trust and (ii) those Trustees who are not "interested
persons" of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any agreements
related to it (the "Plan Trustees"), cast in person at a meeting called for the
purpose of voting on the Plan
44
<PAGE>
and any related amendments.
Each Administrative 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 disinterested Trustees defined above. The Administrative Class 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 Administrative Class. The
Administrative Plans were approved by the Trustees, including the disinterested
Trustees, at a meeting held on August 27, 1996.
Each Administrative Plan provides that it shall continue in effect so
long as such continuance is specifically approved at least annually by the
Trustees and the disinterested Trustees defined above. Each Administrative Plan
provides that any person authorized to direct the disposition of monies paid or
payable by a class pursuant to the Plan or any related agreement shall provide
to the Trustees, and the Board shall review at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made.
Each Administrative 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 Administrative Class shares may be used in
any month to pay expenses under the Plan. Each Plan requires that Administrative
Class shares 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 both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
For the fiscal year ended March 31, 1997, the Administrative Class
shares of the PIMCO Money Market, Short-Term, Low Duration, High Yield, Total
Return, *Total Return II, Foreign Bond, Global Bond and StocksPLUS Funds paid
aggregate fees under the Distribution Plan to qualified service providers in the
amount of $27, $9,666, $21,244, $12,013, $341,418, $11,142, $13, $328 and
$348, respectively. All of these amounts constituted "service fees" under
applicable NASD rules.
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 one or more of the Funds may purchase shares of the Trust with such
assets. Assets so purchased by a Fund will be valued in accordance with
procedures adopted by the Board of Trustees.
45
<PAGE>
Certain shares of the Funds are not qualified or registered for sale in
all states. Prospective investors should inquire as to whether shares of a
particular Fund or class are available for offer and sale in their state of
domicile or residence. Shares of a 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 Funds. These services, normally provided by
PIMCO directly to Trust shareholders, may include the provision of ongoing
information concerning the Funds 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 any Fund for shares of any other
Fund of the Trust (except the PIMCO International Fund and the PIMCO Emerging
Markets Bond Fund II, each of which is only available to private account clients
of PIMCO) or any * series 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 normally 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,
if less than all of an investment is exchanged out of a 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 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
46
<PAGE>
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 Funds, 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 Funds' 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.
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.
47
<PAGE>
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the relevant Fund 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 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 Funds without regard generally to restrictions
on portfolio turnover, except those imposed on their ability to engage in
short-term trading by provisions of the federal tax laws, see "Taxation." The
use of *certain derivative instruments with relatively short maturities may tend
to exaggerate the portfolio turnover rate for some of the Funds. 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 a Fund, the higher these
transaction costs borne by the Fund generally will be.
The portfolio turnover rate of a 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.
48
<PAGE>
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 will be determined once on each day on which the New York Stock Exchange
is open for trading as of the close of regular trading (ordinarily 4:00 p.m.
Eastern Time). Net asset value will not be determined on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The PIMCO Money Market Fund's securities are valued using the amortized
cost method of valuation. This involves valuing a security at cost on the date
of acquisition and thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument. During such periods the yield to investors in
the Fund may differ somewhat from that obtained in a similar investment company
which uses available market quotations to value all of its portfolio securities.
The SEC's regulations require the PIMCO Money Market Fund to adhere to
certain conditions. The Trustees, as part of their responsibility within the
overall duty of care owed to the shareholders, are required to establish
procedures reasonably designed, taking into account current market conditions
and the Fund's investment objective, to stabilize the net asset value per share
as computed for the purpose of distribution and redemption at $1.00 per share.
The Trustees' procedures include a requirement to periodically monitor, as
appropriate and at such intervals as are reasonable in light of current market
conditions, the relationship between the amortized cost value per share and the
net asset value per share based upon available indications of market value. The
Trustees will consider what steps should be taken, if any, in the event of a
difference of more than 1/2 of 1% between the two. The Trustees will take such
steps as they consider appropriate, (e.g., selling securities to shorten the
average portfolio maturity) to minimize any material dilution or other unfair
results which might arise from differences between the two. The Fund also is
required to maintain a dollar-weighted average portfolio maturity of 90 days or
less, to limit its investments to instruments having remaining maturities of 397
days or less (except securities held subject to repurchase agreements having 397
days or less maturity) and to invest only in securities determined by the
Adviser under procedures established by the Board of Trustees to be of high
quality with minimal credit risks.
TAXATION
The following discussion is general in nature and should not be
regarded as an exhaustive presentation of all possible tax ramifications. All
shareholders should consult a qualified tax adviser regarding their investment
in a Fund.
Each 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, each 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) with respect to tax years beginning on or prior to August 5, 1997, 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
49
<PAGE>
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 each
taxable year the sum of (i) 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) and (ii) 90% of its tax exempt
interest, net of expenses allocable thereto. The Treasury Department is
authorized to promulgate regulations under which gains from foreign currencies
(and options, futures, and forward contracts on foreign currency) would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly relating to investing in securities. To date, such
regulations have not been issued.
As a regulated investment company, a 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. Each 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 a 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, a
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 calendar
year in which the distributions are received. To avoid application of the excise
tax, each Fund intends to make its distributions in accordance with the calendar
year distribution requirement.
The PIMCO Municipal Bond Fund must have at least 50% of its total
assets invested in Municipal Bonds at the end of each calendar quarter so that
dividends derived from its net interest income on Municipal Bonds and so
designated by the Fund will be "exempt-interest dividends," which are exempt
from federal income tax when received by an investor. Certain exempt-interest
dividends, as described in the Retail Prospectus, may increase alternative
minimum taxable income for purposes of determining a shareholder's liability for
the alternative minimum tax. In addition, exempt-interest dividends allocable to
interest from certain "private activity bonds" will not be tax exempt for
purposes of the regular income tax to shareholders who are "substantial users"
of the facilities financed by such obligations or "related persons" of such
"substantial users." The tax-exempt portion of dividends paid for a calendar
year constituting "exempt-interest dividends" will be designated after the end
of that year and will be based upon the ratio of net tax-exempt income to total
net income earned by the Fund during the entire year. That ratio may be
substantially different than the ratio of net tax-exempt income to total net
income earned during a portion of the year. Thus, an investor who holds shares
for only a part of the year may be allocated more or less tax-exempt interest
dividends than would be the case if the allocation were based on the ratio of
net tax-exempt income to total net income actually earned by the Fund while the
investor was a shareholder. All or a portion of interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the PIMCO
Municipal Bond Fund will not be deductible by the shareholder. The portion of
interest that is not deductible is equal to the total interest paid or accrued
on the indebtedness multiplied by the percentage of the Fund's total
distributions (not including distributions of the excess of net long-term
capital gains over net short-term capital losses) paid to the shareholder that
are exempt-interest dividends. Under rules used by the Internal Revenue Service
for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
Shareholders of the PIMCO Municipal Bond Fund receiving social security
or railroad retirement benefits may be taxed on a portion of those benefits as a
result of receiving tax exempt income (including exempt-interest dividends
distributed by the Fund). The tax may be imposed on up to 50% of a recipient's
benefits in cases where the sum of the recipient's adjusted gross income (with
certain adjustments, including tax-exempt interest) and 50% of the recipient's
benefits, exceeds a base amount. In addition, up to 85% of a recipient's
benefits may be subject to tax if the sum of the recipient's adjusted gross
income (with certain adjustments, including tax-exempt interest) and 50% of the
recipient's benefits exceeds a higher base amount. Shareholders receiving social
security or railroad retirement benefits should consult with their tax
advisors.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares. Since certain of the PIMCO Tax Exempt
Income Fund's expenses attributable to earning tax-exempt income do not reduce
such Fund's current earnings and profits, it is possible that distributions, if
any, in excess of such Fund's net tax-exempt and taxable income will be treated
as taxable dividends to the extent of such Fund's remaining earnings and profits
(i.e., the amount of such expenses).
DISTRIBUTIONS
Except for exempt-interest dividends paid by the PIMCO Tax Exempt
Income Fund, all dividends and distributions of a Fund, whether received in
shares or cash, are taxable and must be reported on each shareholder's federal
income tax return. Dividends paid out of a 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.
A portion of the dividends paid by the PIMCO StocksPLUS Fund may
qualify for the deduction for dividends received by corporations. Dividends paid
by the other Funds generally are not expected to qualify for the deduction for
dividends received by corporations, although certain distributions from the
PIMCO High Yield Fund may qualify. Distributions of net capital gains, if any,
designated as capital gain dividends, are taxable as long-term capital gains,
regardless of how long the shareholder has held a Fund's shares and are not
eligible for the dividends received deduction. Any distributions that are not
from a 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.
50
<PAGE>
SALES OF SHARES
Upon the disposition of shares of a 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
A 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 Funds may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by a 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.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a 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 a Fund. In addition,
losses realized by a 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 a Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a 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.
51
<PAGE>
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
Funds intend to account for such transactions in a manner they deem to be
appropriate, the Internal Revenue Service might not accept such treatment. If it
did not, the status of a Fund as a regulated investment company might be
affected. The Trust intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
regulated investment company may limit the extent to which a 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 a 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
Certain Funds may make short sales of securities. Short sales may
increase the amount of short-term capital gain realized by a 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 a Fund will be able to engage in short sales.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain Funds may invest in the stock of foreign corporations which may
be classified under the Code as passive foreign investment companies ("PFICs").
In general, a foreign corporation is classified as a PFIC for a taxable year if
at least one-half of its assets constitute investment-type assets or 75% or more
of its gross income is investment-type income. If a 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 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.
A Fund may be eligible to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently is available in some
circumstances, a 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 a 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
52
<PAGE>
be eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. A 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 and the amount of gain or loss and the timing of
the recognition of income with respect to PFIC shares, and may subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders and will be taxed to shareholders as ordinary income
or long-term capital gain may be increased or decreased substantially as
compared to a 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 a 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 a
Fund's investment company taxable income to be distributed to its shareholders
as ordinary income.
FOREIGN TAXATION
Income received by the Funds 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 Funds with the intention
of minimizing foreign taxation in cases where it is deemed prudent to do so. If
more than 50% of the value of the PIMCO Foreign Bond, Global Bond, Global Bond
II, International Bond, Emerging Markets Bond or Emerging Markets Bond II Funds'
total assets at the close of their taxable year consists of securities of
foreign corporations, such Fund will be eligible to elect to "pass-through" to
the Fund's shareholders the amount of foreign income and similar taxes paid by
the Fund. If this election is made, a shareholder generally subject to tax will
be required to include in gross income (in addition to taxable dividends
actually received) his pro rata share of the foreign taxes paid by the Fund, and
may be entitled either to deduct (as an itemized deduction) his or her pro rata
share of foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his or her U.S. federal income tax
liability. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Each shareholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by the
Fund will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election is
made, the source of the PIMCO Foreign Bond, Global Bond, Global Bond II,
International Bond, Emerging Markets Bond or Emerging Markets Bond II Funds'
income will flow through to shareholders of the Trust. With respect to such
Funds, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency-denominated debt securities, receivables and payables will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income, and
to certain other types of income. Shareholders may be unable to claim a credit
for the full amount of their proportionate share of the foreign taxes paid by
the Fund. The foreign tax
53
<PAGE>
credit can be used to offset only 90% of the revised alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
ORIGINAL ISSUE DISCOUNT
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by a 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 a 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. A 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 a 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.
A 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.
OTHER TAXATION
Distributions also may be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation. Under the
laws of various states, distributions of investment company taxable income
generally are taxable to shareholders even though all or a substantial portion
of such distributions may be derived from interest on certain federal
obligations which, if the interest were received directly by a resident of such
state, would be exempt from such state's income tax ("qualifying federal
obligations"). However, some states may exempt all or a portion of such
distributions from income tax to the extent the shareholder is able to establish
that the distribution is derived from qualifying federal obligations. Moreover,
for state income tax purposes, interest on some federal obligations generally is
not exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund will provide information
annually to shareholders indicating the amount and percentage of a 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
54
<PAGE>
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a 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 a Fund, each
shareholder is entitled to receive his pro rata share of the net assets of that
Fund.
Expenses incurred by the Trust in connection with its organization and
the public offering of its shares were 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 effective yield
of the PIMCO Money Market Fund, and the yield and total return for each class of
shares of all of the Funds, computed in accordance with SEC-prescribed formulas,
in advertisements or reports to shareholders or prospective investors. As noted
below, in accordance with methods approved by the Securities and Exchange
Commission in various pronouncements, total return presentations for periods
prior to the inception date of a particular class of a Fund are based on the
historical performance of an older class of the Fund (specified below) restated
to reflect the current sales charges (if any) of the newer class, but not
reflecting any higher operating expenses such as 12b-1 distribution and
servicing fees and administration fees associated with the newer class. All
other things being equal, such higher expenses would have adversely affected
(i.e., reduced) total return for the newer classes by the amount of such higher
expenses compounded over the relevant periods. The Funds also may compute
current distribution rates and use this information in their prospectuses and
statement of additional information, in reports to current shareholders, or in
certain types of sales literature provided to prospective investors.
Current yield for the PIMCO Money Market Fund will be based on the
change in the value of hypothetical investment (exclusive of capital changes)
over a particular 7-day period less a pro-rata share of Fund expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
"Effective yield" for the PIMCO Money Market Fund assumes that all dividends
received during an annual period have been reinvested. Calculation of "effective
yield" begins with the same "base period return" used in the calculation of
yield, which is then annualized to reflect weekly compounding pursuant to the
following formula:
55
<PAGE>
Effective Yield = [(Base Period Return +1)/365///7/] - 1
The yield of the PIMCO Money Market Fund for the seven day period ended
September 30, 1997 was as follows: Institutional Class - 5.31%, Administrative
Class- 5.07%, Class A - 5.02%, Class B - 4.16% and Class C - 5.05%. The
effective yield of the PIMCO Money Market Fund for the seven day period ended
September 30, 1997 was as follows: Institutional Class - 5.47%, Administrative
Class - 5.18%, Class A - 5.20%, Class B - 4.21% and Class C - 5.18%.
Quotations of yield for the remaining Funds 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.
For the one month period ended September 30, 1997, the yield of the
Funds was as follows (all numbers are annualized):
<TABLE>
<CAPTION>
YIELD FOR PERIOD
ENDED
SEPTEMBER 30, 1997
---------------------
INSTITUTIONAL ADMINISTRATIVE
------------- --------------
FUND CLASS CLASS A B C
- ---- ----- ----- - - -
<S> <C> <C> <C> <C> <C>
Money Market Fund 5.44% 5.19% 5.07% 4.23% 5.16%
Short-Term Fund 6.05% 5.79% 5.63% 4.92% 5.35%
Low Duration Fund 5.89% 5.62% 5.40% 4.65% 4.90%
Low Duration Fund II 5.85% N/A N/A N/A N/A
Low Duration Fund III 5.92% N/A N/A N/A N/A
Low Duration Mortgage 5.17% N/A N/A N/A N/A
Moderate Duration Fund 5.83% N/A N/A N/A N/A
High Yield 7.93% 7.89% 7.51% 6.75% 6.76%
Total Return Fund 5.65% 5.40% 5.18% 4.42% 4.43%
Total Return Fund II 5.85% 5.62% N/A N/A N/A
Total Return Fund III 5.78% 5.53% N/A N/A N/A
Total Return Mortgage 7.98 N/A N/A N/A N/A
Long-Term U.S. Govt. 6.20% N/A 5.78% 4.99% 5.05%
Real Return Bond Fund 4.77% N/A 4.37% 3.61% 4.60%
Foreign Bond Fund 8.33% 8.08% 7.87% 7.09% 7.08%
Global Bond Fund 6.89% 6.63% N/A N/A N/A
Global Bond Fund II N/A N/A 6.39% 5.63% 5.64%
Emerging Markets Bond 6.24% N/A 5.77% 5.03% 4.80%
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
International Bond Fund 5.93% N/A N/A N/A N/A
StocksPLUS Fund 5.50% 5.25 5.24% 4.41% 4.64%
Strategic Balanced Fund 5.48% N/A N/A N/A N/A
</TABLE>
The yield of each such Fund will vary from time to time depending
upon market conditions, the composition of the Fund's portfolio and operating
expenses of the Trust allocated to the Fund or its classes of shares. These
factors, possible differences in the methods used in calculating yield (and the
tax exempt status of distributions for the PIMCO Municipal Bond Fund) should be
considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's various classes of
shares. These yields do not take into account any applicable contingent deferred
sales charges.
The PIMCO Municipal Bond Fund may advertise a tax equivalent yield of
each class of its shares, calculated as described above except that, for any
given tax bracket, net investment income of each class will be calculated using
as gross investment income an amount equal to the sum of (i) any taxable income
of each class of the Fund plus (ii) the tax exempt income of each class of the
Fund divided by the difference between 1 and the effective federal income tax
rates for taxpayers in that tax bracket. For example, taxpayers with the
marginal federal income tax rates indicated in the following table would have to
earn the tax equivalent yields shown in order to realize an after-tax return
equal to the corresponding tax-exempt yield shown.
<TABLE>
<CAPTION>
Filing Status A tax-exempt yield of
Single (Married filing jointly) is equivalent to a taxable yield of
Taxable Income Marginal tax rate 3% 4% 5% 6% 7%
<S> <C> <C> <C> <C> <C> <C> <C>
$23,350 or less $39,000 or less 15% 3.53% 4.71% 5.88% 7.06% 8.24%
Over $23,350 but Over $39,000 but not 28%
not over $56,500 over $94,250 4.17% 5.56% 6.94% 8.33% 9.72%
Over $56,550 but Over $94,250 but not 31%
not over $117,950 over $143,600 4.35% 5.80% 7.25% 8.70% 10.14%
Over $117,950 but Over $143,600 but 36%
not over $256,500 not over $256,500 4.69% 6.25% 7.81% 9.38% 10.14%
Over $256,500 Over $256,500 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
</TABLE>
- ----------------------
* These marginal tax rates do not take into account the effect of the phaseout
of itemized deductions and personal exemptions.
As is shown in the above table, the advantage of tax-exempt investing
becomes more advantageous to an investor as his or her marginal tax rate
increases.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time in
the future, yields and total return may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
Quotations of average annual total return for a Fund or class 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). Except as noted below all total return figures reflect the
deduction of a proportional share of Fund or class expenses on an annual basis,
and assume that (i) the maximum sales load (or other charges deducted from
payments) is deducted from the initial $1,000 payment and that the maximum
contingent deferred sales charge, if any, is deducted at the times, in the
amounts, and under the terms disclosed in the Prospectuses and (ii) all
dividends and distributions are reinvested when paid. The Funds also may, with
respect to certain periods of less than one year, provide total return
information for that period that is unannualized. Quotations of total return may
also be shown for other periods. Any such information would be accompanied by
standardized total return information.
The table below sets forth the average annual total return of each
class of shares of the following Funds for the periods ended September 30, 1997.
As noted below, total return presentations for periods prior to the inception
date of a particular class are based on the historical performance of
Institutional Class shares restated to reflect the current sales charges (if
any) of the newer class, but not reflecting any higher operating expenses such
as 12b-1 distribution and servicing fees, which are paid by all classes except
the Institutional Class (at a maximum rate of 1.00% per annum), and the higher
administration fee charges associated with Class A, Class B, and Class C shares.
All other things being equal, such higher expenses would have adversely affected
(i.e., reduced) total return for the newer classes by the amount of the higher
expenses, compounded over the relevant period.
Total Return for Periods Ended September 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Since
Inception Inception Inception
of Fund Date of Date of
Fund Class 1 Year 5 Years 10 Years (Annualized) Fund Class
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market Institutional 5.24% 4.55% N/A 4.58% 03/01/91 03/01/91
Administrative 4.93% 4.41% 4.47% 01/25/95
Class A 5.03% 4.51% 4.55% 01/13/97
Class B -0.60% 4.04% 4.46% 01/13/97
Class C 4.06% 4.51% 4.55% 01/13/97
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Since
Inception Inception Inception
of Fund Date of Date of
Fund Class 1 Year 5 Years 10 Years (Annualized) Fund Class
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-Term Institutional 7.42% 5.87% N/A 6.63% 10/07/87 10/07/87
Administrative 7.16% 5.77% 6.57% 02/01/96
Class A 4.97% 5.39% 6.39% 01/20/97
Class B 1.74% 5.42% 6.56% 01/20/97
Class C 5.91% 5.77% 6.58% 01/20/97
- ----------------------------------------------------------------------------------------------------------------------------
Low Duration Institutional 9.00% 6.73% 8.58% 8.35% 05/11/87 05/11/87
Administrative 8.72% 6.58% 8.51% 8.28% 01/03/95
Class A 5.39% 6.02% 8.22% 8.01% 01/13/97
Class B 3.06% 6.24% 8.49% 8.27% 01/13/97
Class C 7.27% 6.59% 8.51% 8.29% 01/13/97
- ----------------------------------------------------------------------------------------------------------------------------
Low Duration II Institutional 8.01% 5.99% N/A 6.50% 11/01/91 11/01/91
- ----------------------------------------------------------------------------------------------------------------------------
Low Duration III Institutional N/A N/A N/A 5.22%* 12/31/96 12/31/96
- ----------------------------------------------------------------------------------------------------------------------------
Moderate Duration Institutional N/A N/A N/A 5.65%* 12/31/96 12/31/96
- ----------------------------------------------------------------------------------------------------------------------------
High Yield Institutional 15.44% N/A N/A 13.29% 12/16/92 12/16/92
Administrative 15.16% 13.17% 01/16/95
Class A 9.95% 12.16% 01/13/97
Class B 9.48% 12.84% 01/13/97
Class C 13.51% 13.11% 01/13/97
- ----------------------------------------------------------------------------------------------------------------------------
Total Return Institutional 11.10% 8.02% 10.47% 9.85% 05/11/87 05/11/87
Administrative 10.82% 7.89% 10.40% 9.78% 09/08/94
Class A 5.74% 6.96% 9.93% 9.34% 01/13/97
Class B 5.16% 7.55% 10.39% 9.77% 01/13/97
Class C 9.17% 7.84% 10.39% 9.77% 01/13/97
- ----------------------------------------------------------------------------------------------------------------------------
Total Return II Institutional 10.70% 7.59% N/A 8.15% 12/30/91 12/30/91
Administrative 10.42% 7.43% 8.01% 11/30/94
- ----------------------------------------------------------------------------------------------------------------------------
Total Return III Institutional 10.72% 8.06% N/A 9.60% 05/01/91 05/01/91
Administrative 10.63% 8.04% 9.58% 04/11/97
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Institutional 14.55% 9.78% N/A 12.47% 07/01/91 07/01/91
Government Administrative 14.55% 9.78% 12.47% 09/23/97
Class A 9.12% 8.73% 11.63% 01/20/97
Class B 8.59% 9.33% 12.35% 01/20/97
Class C 12.70% 9.63% 12.36% 01/20/97
- ----------------------------------------------------------------------------------------------------------------------------
Real Return Bond Institutional N/A N/A N/A 2.76%* 01/29/97 01/29/97
Class A -0.59%* 01/29/97
Class B -2.99%* 01/29/97
Class C 1.11%* 01/29/97
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Since
Inception Inception Inception
of Fund Date of Date of
Fund Class 1 Year 5 Years 10 Years (Annualized) Fund Class
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign Bond Institutional 13.75% N/A N/A 11.65% 12/03/92 12/03/92
Administrative 13.54% 11.60% 01/28/97
Class A 8.27% 10.52% 01/20/97
Class B 7.79% 11.18% 01/20/97
Class C 11.81% 11.46% 01/20/97
- ------------------------------------------------------------------------------------------------------------------------------------
Global Bond Institutional 4.72% N/A N/A 8.82% 11/23/93 11/23/93
Administrative 4.45% 8.75% 07/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
Global Bond II Class A 7.28% N/A N/A 11.11% 10/02/95 10/02/95
Class B 6.51% 11.26% 10/02/95
Class C 10.51% 13.06% 10/02/95
- ------------------------------------------------------------------------------------------------------------------------------------
International Institutional 14.38% 10.17% N/A 9.64% 12/13/89 12/13/89
Bond
- ------------------------------------------------------------------------------------------------------------------------------------
StocksPLUS Institutional 40.40% N/A N/A 23.32% 05/14/93 05/14/93
Administrative 40.00% 23.24% 01/07/97
Class A 35.83% 22.43% 01/20/97
Class B 34.31% 22.91% 01/20/97
Class C 38.52% 23.18% 01/20/97
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Balanced Institutional 28.68% N/A N/A 25.72% 06/28/96 06/28/96
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Bond Institutional N/A N/A N/A 1.56%*a 07/31/97 07/31/97
Class A -3.07%* 07/31/97
Class B -3.66%* 07/31/97
Class C 0.35%* 07/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Mortgage Institutional N/A N/A N/A 1.69%* 07/31/97 07/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
Low Duration Mortgage Institutional N/A N/A N/A 2.23%* 07/31/97 07/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* unannualized
Current distribution information for a 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)*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.
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 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 a 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.
59
<PAGE>
For the month ended September 30, 1997, the current distribution rates
(annualized) for the Funds were as follows:
<TABLE>
<CAPTION>
DISTRIBUTION RATE
-----------------
INSTITUTIONAL ADMINISTRATIVE
------------- --------------
FUND CLASS CLASS A B C
- ---- ----- ----- - - -
<S> <C> <C> <C> <C> <C>
Money Market Fund 5.27% 5.03% 4.96% 4.16% 5.01%
Short-Term Fund 6.24% 5.99% 5.85% 5.12% 5.55%
Low Duration Fund 6.12% 5.87% 5.65% 4.90% 5.15%
Low Duration Fund II 5.96% N/A N/A N/A N/A
Low Duration Fund III 6.07% N/A N/A N/A N/A
Low Duration Mortgage 5.70% N/A N/A N/A N/A
Moderate Duration Fund 6.23% N/A N/A N/A N/A
High Yield Fund 10.19% 9.95% 9.79% 9.03% 9.04%
Total Return Fund 6.13% 5.88% 5.66% 4.91% 4.92%
Total Return Fund II 6.22% 5.97% N/A N/A N/A
Total Return Fund III 5.99% 5.74% N/A N/A N/A
Total Return Mortgage 7.26% N/A N/A N/A N/A
Long-Term U.S. Government Fund 6.10% N/A 5.70% 4.93% 4.96%
Real Return Bond Fund 5.00% N/A 4.60% 3.85% 4.84%
Foreign Bond Fund 5.94% 5.69% 5.57% 4.74% 4.72%
Global Bond Fund 5.81% 5.57% N/A N/A N/A
Global Bond Fund II N/A N/A 5.35% 4.59% 4.62%
Emerging Markets Bond 6.50% N/A 6.09% 5.34% 5.13%
International Bond Fund N/A N/A N/A N/A N/A
StocksPLUS Fund N/A N/A N/A N/A N/A
Strategic Balanced Fund N/A N/A N/A N/A N/A
</TABLE>
Performance information for a Fund may also be compared to various
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Lehman Brothers Aggregate Bond
Index, the Lehman Brothers Mortgage-Backed Securities Index, the Merrill Lynch 1
to 3 Year Treasury Index, the Lehman Intermediate and 20+ Year Treasury Blend
Index, the Lehman BB Intermediate Corporate Index, indexes prepared by Lipper
Analytical Services, the J.P. Morgan Global Index, the J.P. Morgan Emerging
Markets Bond Index Plus, the Salomon Brothers World Government Bond Index-10 Non
U.S.-Dollar Hedged and the J.P. Morgan Government Bond Index Non U.S.-Dollar
Hedged. Unmanaged indexes (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses. PIMCO may
report to shareholders or to the public in advertisements concerning the
performance of PIMCO as adviser to clients other than the Trust, or on the
comparative performance or standing of PIMCO in relation to other money
managers. PIMCO also may provide current or prospective private account clients,
in connection with standardized performance information for the Funds,
performance information for the Funds 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 Funds or to the Adviser,
should be considered in light of the Funds' investment objectives and policies,
characteristics and quality of the Funds, 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.
Advertisements and information relating to the PIMCO Global Bond Fund
II may use data comparing the total returns of the top foreign bond market as
compared to the total return of the U.S. bond market for a particular year. For
instance, the following table sets forth the total return of the top foreign
60
<PAGE>
bond market compared to the total return for the U.S. bond market for the years
1986 through 1996. Performance is shown in U.S. dollar terms, hedged for
currency rate changes and is no way indicative of the performance of the PIMCO
Global Bond Fund II.
<TABLE>
<CAPTION>
Top Foreign
Year Performer U.S.
---- --------- ----
<S> <C> <C> <C>
1986 +13.1% Japan +15.7%
1987 +12.8 UK +1.9
1988 +15.0 France +7.0
1989 +10.0 Canada +14.4
1990 +11.0 Australia +8.6
1991 +20.0 Australia +15.3
1992 +10.5 UK +7.2
1993 +20.0 Italy +11.0
1994 -0.9 Japan -3.4
1995 +21.0 Netherlands +18.3
1996 +18.8 Spain +2.7
</TABLE>
Source: Salomon Brothers World Government Bond Index 1985-1996.
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1996/1997 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 any of the Funds will grow at or above the rate of growth of the
cost of a college education.
POTENTIAL COLLEGE COST TABLE
<TABLE>
<CAPTION>
Start Public Private Start Public Private
Year College College Year College College
- ---- ------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C>
1997 $42,840 $90,401 2005 $73,609 $153,038
1998 $45,839 $96,729 2006 $78,761 $166,200
1999 $49,048 $103,500 2007 $84,275 $177,834
2000 $52,482 $110,745 2008 $90,174 $190,283
2001 $56,156 $118,497 2009 $96,486 $203,603
2002 $60,087 $126,792 2010 $103,240 $217,855
2003 $64,293 $135,668 2011 $110,466 $233,105
2004 $68,793 $145,165 2012 $118,199 $249,422
</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.
61
<PAGE>
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 1972 to 1996 was:
*Stocks: 12.5%
Bonds: 9.2%
T-Bills: 7.0%
Inflation: 5.6%
*Returns of unmanaged indices do not reflect past or future performance
of any of the Funds of PIMCO Funds: Pacific Investment Management Series. 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 1997 Yearbook, Ibbotson Associates, Chicago. All
rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1972-1996, 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 1972
through 1996 is set forth in the following table.
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------ ----- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------ ----- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
</TABLE>
*Returns of unmanaged indices do not reflect past or future performance of any
of the Funds of PIMCO Funds: Pacific Investment Management Series. 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 1997 Yearbook, Ibbotson Associates, Chicago. All
rights reserved.
The Trust may use in its advertisement and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
<S> <C> <C> <C>
30 Years $ 1,979 $ 59,370 $200,000
25 Years $ 2,955 $ 73,875 $200,000
20 Years $ 4,559 $ 91,180 $200,000
15 Years $ 7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</TABLE>
This hypothetical example assumes a fixed 7% return compounded annually and a
guaranteed return of principal. The example is intended to show the benefits of
a long-term, regular investment program, and is in no way representative of any
past or future performance of a PIMCO 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 any of the PIMCO Funds should be aware that
certain of the PIMCO Funds have experienced periods of negative growth in the
past and may again in the future.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1990:
<TABLE>
<CAPTION>
% of Income for Individuals
Aged 65 Years and Older in 1990*
--------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
<S> <C> <C>
1990 38% 62%
</TABLE>
63
<PAGE>
* For individuals with an annual income of at least $51,000. Other
includes personal savings, earnings and other undisclosed sources of income.
Source: Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds 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 Funds,
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 Funds.
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 Funds over a specified period of time and may use charts
and graphs to display that growth.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of
the Funds and relevant benchmark market indexes in a variety of market
conditions. Based on its independent research and analysis, Ibbotson has
developed model portfolios of the Funds and series of PIMCO Funds: Multi-Manager
Series ("MMS") which indicate how, in Ibbotson's opinion, a hypothetical
investor with a 5+ year investment horizon might allocate his or her assets
among the Funds and series of MMS. Ibbotson bases its model portfolios on five
levels of investor risk tolerance which it developed and defines as ranging from
"Very Conservative" (low volatility; emphasis on capital preservation, with some
growth potential) to "Very Aggressive" (high volatility; emphasis on long-term
growth potential). However, neither Ibbotson nor the Trust offers Ibbotson's
model portfolios as investments. Moreover, neither the Trust, the Adviser nor
Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
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.
64
<PAGE>
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 As of _______, 1998,
the following persons owned of record or beneficially 5% or more of the shares
of the indicated classes of the following Funds: [To be updated in
Post-Effective Amendment No. 39]
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
MONEY MARKET FUND
INSTITUTIONAL
- -------------
Pacific Mutual as Trustee for 8,614,299.320 21.32%
California Hardware Company
700 Newport Center Drive
Newport Beach, California 92660
Marin Community Foundation 7,639,689.350 18.91%
17 East Sir Francis Drake Blvd., Suite 200
Larkspur, California 94939
California Community Foundation 5,370,522.830 13.29%
606 South Olive Street, Suite 2400
Los Angeles, California 90014
Trap Rock Industries 5,281,881.310 13.07%
P.O. Box 419
Kingston, New Jersey 08528
Charles Schwab & Co., Inc.** 3,495,249.000 8.65%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Columbus Circle Trust Company - SV 2,117,336.940 5.24%
1 Station Place Metro Center
Stamford, Connecticut 06902
ADMINISTRATIVE
- --------------
IFTC as Trustee for 11,902.380 55.72%*
Godwins 401(k)
127 West 10th Street, 11th Floor
Kansas City, Missouri 64105-1716
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
Lincoln Trust Company as Trustee for 9,457.890 44.28%*
Vickers Hansen PSP
P.O. Box 5831
Denver, Colorado 80217
CLASS A
- -------
JC Bradford & Co. Cust. FBO 8,530,080.970 28.82%*
RCIP Limited Partners I
330 Commerce Street
Nashville, Tennessee 37201-1899
JC Bradford & Co. Cust. FBO 3,303,260.280 11.16%
DCIP Limited Partners I
330 Commerce Street
Nashville, Tennessee 37201-1899
RPSS TR Rollover IRA FBO 1,875,690.150 6.33%
James J. Maguire
42 Western Drive
Short Hills, New Jersey 07078-1910
CLASS B
- -------
Raymond James & Associates, Inc. 192,746.400 6.80%
Claire L. Tinsley Grantor
Rev TR U/A Dated 5/6/91
325 Kieffer Avenue
Mount Carmel, Illinois 62863-2832
Rauscher Pierce REFSNES FBO 152,686.220 5.39%
Garth E. Carrier
2548 Elk Grove Road
Solvang, California 93463
Everen Clearing Corporation 151,274.290 5.34%
William L. Spangler &
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
CLASS C
- -------
W.D. Jennett, C. Cooper & T.J. Viola 9,777,407.370 16.41%
Gilbert Kelly Crowley Jennett Retirement Trust
1200 Wilshire Boulevard, Suite 5
Los Angeles, California 90017-1908
SHORT-TERM FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc.** 2,850,686.526 16.68%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Hawaii Carpenters Health & Welfare 1,112,993.858 6.51%
615 Pilkoi Street
Honolulu, Hawaii 96814
Dennison University 1,080,735.250 6.32%
P.O. Box F
Granville, Ohio 43023
Trustees of Columbia University 1,010,854.130 5.91%
in the City of New York
Office of Investments
475 Riverside Drive, Suite 401
New York, New York 10115
ADMINISTRATIVE
- --------------
Northwestern Trust 64,936.279 56.86%*
1201 Third Avenue
Seattle, Washington 98101
Frost National Bank as Trustee for 49,265.956 43.14%*
Lau & Co.
100 West Houston
San Antonio, Texas 78296
CLASS A
- -------
PaineWebber FBO 217,022.835 36.62%*
Louise Obici Memorial Hospital
Attn: William A. Carpenter
1900 North Main Street
P.O. Box 1100
Suffolk, Virginia 23434-4345
PaineWebber FBO 178,446.403 30.11%*
Adventist Healthcare, Inc.
Dan Bowen
1801 Research Boulevard, Suite 300
Rockville, Maryland 20850-3152
PaineWebber FBO 94,380.843 15.92%
PaineWebber CDN FBO
H. Carrol Mackin
P.O. Box 3321
Weehawken, New Jersey 07087-8154
CLASS B
- -------
Smith Barney, Inc. 10,629.181 26.67%*
388 Greenwich Street
New York, New York 10013
Smith Barney, Inc. 6,260.257 15.71%
388 Greenwich Street
New York, New York 10013
Prudential Securities, Inc. FBO 4,996.017 12.53%
Michael J. Byrne
Angela J. Byrne Co-Trustees
18 Tanglewood Lane
Basking Ridge, New Jersey 07920-1219
MLPF&S for the sole benefit of its Customers 2,964.000 7.43%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
PaineWebber FBO 2,683.394 6.73%
PaineWebber CDN FBO
Ann R. Klimchak
P.O. Box 3321
Weehawken, New Jersey 07087-8154
RPSS Cust 403-B Plan 2,275.918 5.71%
Prior 403B Plan Participant FBO
Joan H. Jones
115 Lone Lane
Allentown, Pennsylvania 18104-9538
RPSS Cust 403-B Plan 2,109.280 5.29%
Prior 403B Plan Participant FBO
Lois De Bellis
2305 5th Street
Bethlehem, Pennsylvania 18017-4445
CLASS C
- -------
MLPF&S For the sole benefit of its Customers 59,311.870 22.64%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Prudential Securities, Inc. FBO 25,111.055 9.58%
Oakwood Orthopaedic Clinic PA
Drs. Manning & Evins Trustees
13 Edgewood Drive
Greenville, South Carolina 29605-4235
American Council on Education 23,789.949 9.08%
1 One Dupont Circle NW, Suite 8
Washington, D.C. 20036-1110
Prudential Securities, Inc. FBO 16,568.067 6.32%
Ted N. Grady
P.O. Box 967
Clemson, South Carolina 29633-0967
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
LOW DURATION FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc.** 26,369,707.461 9.51%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
FIIOC as Agent for 1,727,670.296 67.00%*
Certain Employee Benefits Plan
100 Magetian KW1C
Covington, Kentucky 41015
New York Life Trust Company 269,310.235 10.44%
51 Madison Avenue, Room 117A
New York, New York 10010
Frost National Bank as Trustee for 271,231.039 10.52%
Lau & Co.
100 West Houston
San Antonio, Texas 78296
First Interstate Bank as Trustee for 161,601.492 6.27%
Choicemaster
P.O. Box 9800
Calabasas, California 91302
Class A
- -------
Richard J. Steinhelper TR 3,652,288.769 58.87%*
Michigan Tooling Association
Benefit Plans Investment Trust
28237 Orchard Lake Road
P.O. Box 9151
Farmington Hills, Michigan 48333-9151
MLPF&S for the sole benefit of its Customers 629,617.622 10.14%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
PaineWebber FBO 446,183.685 7.19%
Adventist Healthcare, Inc.
Dan Bowen
1801 Research Boulevard, Suite 300
Rockville, Maryland 20850-3152
Class B
- -------
MLPF&S for the sole benefit of its Customers 104,122.572 16.02%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
- -------
MLPF&S for the sole benefit of its Customers 1,436,695.297 25.36%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
LOW DURATION FUND II
INSTITUTIONAL
- -------------
Sprint Corporation 15,746,853.990 43.67%*
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Salt River Project 2,605,798.930 7.23%
P.O. Box 52025
Phoenix, Arizona 85072
Health Cleveland 2,330,198.274 6.46%
18101 Lorain Avenue
Cleveland, Ohio 44111
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
University of Illinois Foundation 2,072,676.862 5.75%
1305 West Green Street
Urbana, Illinois 61801
LOW DURATION FUND III
INSTITUTIONAL
- -------------
Sisters of St. Joseph 688,248.544 57.31%*
P.O. Box 34
3427 Gull Road
Nazareth, Michigan 49074
St. John Hospital and Medical Center 512,713.334 42.69%*
22101 Moross Road
Detroit, Michigan 48236
MODURATE DURATION FUND
INSTITUTIONAL
- -------------
NBD Bank as Trustee for 1,367,078.732 33.89%*
St. John Hospital of Detroit
P.O. Box 771072
Detroit, Michigan 48277-1072
Columbus Circle Trust Company - SV 845,789.862 20.97%
1 Station Place Metro Center
Stamford, Connecticut 06902
The Florida Bar 649,559.145 16.10%
650 Apalache Parkway
Tallahassee, Florida 32399-2300
Fabco Co. 537,333.683 13.32%
P.O. Box 105870
Attn: CTR #3144
Atlanta, Georgia 30348-5870
Rhode Island Interlocal Risk Management 511,286.243 12.68%
Trust, Inc.
501 Wampanoag Trial
East Providence, Rhode Island 02915
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
HIGH YIELD FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. ** 11,183,877.236 16.32%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
FIIOC as Agent for 695,501.301 64.70%*
Certain Employee Benefits Plan
100 Magetian KW1C
Covington, Kentucky 41015
Northwestern Trust and Investors Advisory Co. 163,963.201 15.25%
1201 Third Avenue, Suite 2010
Seattle, Washington 98101
Siefker Charitable Remainder Unitrust 158,496.697 14.74%
1106 Richman Knoll
Fullerton, California 92635
Class A
- -------
MLPF&S for the sole benefit of its Customers 550,288.743 16.87%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Fifth Third Bank Trust FBO 193,521.330 5.93%
Cleveland Glass & Glazing
P.O. Box 630074
Cincinnati, Ohio 45263
Central Fidelity National Bank Cust. FBO 186,064.519 5.70%
OBICI Foundation
P.O. Box 27602
Class B
- -------
MLPF&S for the sole benefit of its Customers 2,471,258.985 37.27%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
- -------
MLPF&S for the sole benefit of its Customers 2,858,788.461 14.71%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
TOTAL RETURN FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc.** 68,903,029.931 5.36%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
FIIOC as Agent for 3,850,714.355 23.00%
Certain Employee Benefits Plan
100 Magetian KW1C
Covington, Kentucky 41015
American Express Institutional Services 2,403,764.523 14.36%
P.O. Box 489
Minneapolis, Minnesota 55440-0489
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
The Bank of New York as Trustee for 1,419,607.353 8.48%
Melville Corporation
1 Wall Street, 7th Floor MT/MC
New York, New York 10286
University of South Dakota Foundation 1,391,753.132 8.31%
414 East Clark
Alumni Foundation Center
Vermillion, South Dakota 57069
Class A
- -------
MLPF&S for the sole benefit of its Customers 6,311,274.000 35.13%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Central Fidelity National Bank Cust. FBO 1,927,800.592 10.69%
OBICI Foundation, Inc.
P.O. Box 27602
Richmond, Virginia 23261-7602
Class B
- -------
MLPF&S for the sole benefit of its Customers 3,209,461.000 39.27%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
- -------
MLPF&S for the sole benefit of its Customers 7,214,123.145 23.13%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
TOTAL RETURN FUND II
INSTITUTIONAL
- -------------
Pacific Mutual as Trustee for 11,499,647.862 23.30%
City of Fort Worth
700 Newport Center Drive
Newport Beach, California 92660
Pacific Mutual as Trustee for 7,832,530.309 15.87%
Carpenters Trust of Western Washington
700 Newport Center Drive
Newport Beach, California 92660
Arco 4,106,044.082 8.32%
c/o State Street Bank
One Enterprise Drive
North Quincy, Massachusetts 02171
Pacific Mutual as Trustee for 2,834,104.691 5.74%
CMTA-GMPP & Allied Workers Pension
700 Newport Center Drive
Newport Beach, California 92660
GMP & Employers 2,721,835.468 5.52%
c/o Smith Barney
312 Walnut Street, Suite 1700
Cincinnati, Ohio 45202
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
Pacific Mutual as Trustee for 2,566,026.498 5.20%
Carpenters District Council of Houston
700 Newport Center Drive
Newport Beach, California 92660
ADMINISTRATIVE
- --------------
Eastern Illinois University Foundation 484,013.291 69.14%*
600 Lincoln Avenue
Charleston, Illinois 61920
American Express Trust Company 153,569.428 21.94%
1200 Northstar West
P.O. Box 534
Minneapolis, Minnesota 55440-0534
Godwins 401(k) 51,420.400 7.34%
c/o IFTC
127 West 10th Street
Kansas City, Missouri 64105-1708
TOTAL RETURN FUND III
INSTITUTIONAL
- -------------
The Roman Catholic Archbishop of Los Angeles 7,974,158.754 36.46%*
3424 Wilshire Boulevard
Los Angeles, California 90010-2241
Holy Cross 3,294,588.322 15.06%
St. Mary's Lourdes Hall
Notre Dame, Indiana 46556
Diocese of Orange 2,775,559.186 12.69%
2811 East Villa Road
Orange, California 92667
Catholic Diocese of Wilmington 1,728,634.579 7.90%
P.O. Box 2030
Wilmington, Delaware 19899
Society of Mount Carmel 1,413,366.855 6.46%
1317 Frontage Road
Darien, Illinois 60561
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
Mount St. Mary's College 1,222,935.744 5.59%
12001 Chalon Road
Los Angeles, California 90049-1599
ADMINISTRATIVE
- --------------
Dubuque Bank and Trust Company 12,607.404 100.00%*
P.O. Box 747
Dubuque, Iowa 52004-0747
LONG-TERM U.S. GOVERNMENT FUND
INSTITUTIONAL
- -------------
Tice & Co. 1,003,659.750 30.59%*
c/o Manufacturers and Traders Trust Company
P.O. Box 1377
Buffalo, New York 14240
Wendel & Co. 949,764.378 28.95%*
P.O. Box 1066
New York, New York 10268
Charles Schwab & Co. Inc. ** 330,831.507 10.08%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
The J. Paul Getty Trust 281,794.457 8.59%
401 Wilshire Blvd., Suite 900
Santa Monica, California 90401
Class A
- -------
PaineWebber FBO 58,922.943 30.79%*
Lokahi Pacific Investment Account
840 Alua Street #203
Wailuku, Hawaii 96793-1482
MLPF&S for the sole benefit of its Customers 26,013.000 13.59%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
PaineWebber FBO 19,895.342 10.39%
Lokahi Pacific RDLF
840 Alua Street #203
Wailuku, Hawaii 96793-1482
PIIAI Reserve Account 15,410.820 8.05%
2205 West Wabash #206
Springfield, Illinois 62704
Joseph R. White 10,576.330 5.52%
P.O. Box 572
Waltham, Massachusetts 02254-0572
Piper Jaffray as Cust. FBO 10,547.077 5.51%
Mark E. Gilbert
222 South 9th Street
Minneapolis, Minnesota 55402
PaineWebber FBO 10,101.010 5.27%
Beti Suetsugu
201b Paiko Drive
Honolulu, Hawaii 96821-23590
Class B
- -------
MLPF&S for the sole benefit of its Customers 33,908.000 30.64%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
RPSS TR IRA FBO 13,071.989 11.81%
Arris M. Johnson
2714 Hillcrest Drive
Hays, Kansas 67601-1714
Prudential Securities, Inc. FBO 10,297.734 9.30%
Mr. Michael Walters Trustee FBO
Angela M. Ktzinger Trustee
11665 Avena Place, Suite 203
San Diego, California 92128-2428
PaineWebber FBO 5,687.118 5.13%
PaineWebber CDN FBO
Jacalyn J. Ziehm
P.O. Box 3321
Weehawken, New Jersey 07087-8154
Class C
- -------
MLPF&S for the sole benefit of its Customers 31,213.000 37.75%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
RPSS TR Rollover IRA FBO 6,375,581 7.71%
Sydney E. Dyer
619 East Olive Avenue, Apt. H
Burbank, California 91501-2193
REAL RETURN BOND FUND
INSTITUTIONAL
- -------------
Pacific Investment Management Company 508,606.716 88.65%*
840 Newport Center Drive, Suite 360
Newport Beach, California 92660
Chris P. Dialynas 50,860.672 8.86%
840 Newport Center Drive, Suite 360
Newport Beach, California 92660
Class A
- -------
PaineWebber FBO 18,350.360 45.49%*
PaineWebber CDN FBO
Raymond L. Penniman
P.O. Box 3321
Weehawken, New Jersey 07087-8154
PaineWebber FBO 12,964.924 32.14%*
PaineWebber CDN FBO
Raymond L. Penniman
P.O. Box 3321
Weehawken, New Jersey 07087-8154
NFSC/FMTC IRA Rollover FBO 5,044.896 12.50%
Jeanette Mazzer
303 East 57th Street
New York, New York 10022
Class B
- -------
MLPF&S for the sole benefit of its Customers 52,893.000 53.01%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Mitchell H. Katz MD TR 8,121.568 8.13%
Mitchell H. Katz MD TR MPP
10 Purple Sage
Irvine, California 92612-3706
Peter J. Lafolley & Ivy Lafolley 7,174.274 7.19%
JT TEN WROS NOT TC
2276 Allegheny Way
San Mateo, California 94402-4003
Prudential Securities, Inc. FBO 5,039.375 5.05%
National Middle School Association
Short Term Reserve
2600 Corporate Exchange Drive, Suite 370
Columbus, Ohio 43231-1663
Class C
- -------
Thomas J. Derbes MD Trustee 26,472.118 41.77%*
Neurology Associates PSP FBO
Thomas J. Derbes MD
2302 North Harbour Drive
Lynn Haven, Florida 32444
PaineWebber FBO 9,139.382 14.42%
Larry L. Kelly Trustee
Larry L. Kelly Rev. Trust
3439 East Roma
Phoenix, Arizona 85018-3921
DLJ Securities Corporation, Inc. 6,071.489 9.58%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
DLJ Securities Corporation, Inc. 5,752.695 9.07%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
Irene M. Leatart 5,047.527 7.96%
24501 Via Mar Monte Apt. 79
Carmel, California 93923-9429
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
FOREIGN FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc.** 10,893,349.068 45.93%*
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & Jennrette** 5,878,228.415 24.78%*
1 Pershing Plaza
Post Office Box 2052
Jersey City, New Jersey 07399
Mac & Co. 1,961,003.629 8.27%
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
ADMINISTRATIVE
- --------------
National Financial Services Corporation 15,758.901 100.00%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
CLASS A
- -------
PaineWebber FBO 13,399.381 7.74%
Society of St. Charles Villa Rosa Home
Attn: Rev. Carmelo Negro
3800 Lottsford-Vista Road
Mitchellville, Maryland 20721-4018
MLPF&S for the sole benefit of its Customers 10,008.000 5.78%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
The Area Fund of Dutchess Company 9,523.810 5.50%
9 Vassar Street
Poughkeepsie, New York 12601-3022
PaineWebber FBO 9,436.812 5.45%
Society of St. Charles Provincial Account (Ret)
Attn: Rev. Dominic Rodighiero
27 Carmine Street
New York, New York 10014-4423
CLASS B
- -------
MLPF&S for the sole benefit of its Customers 50,001.000 16.31%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S for the sole benefit of its Customers 86,802.438 16.50%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
GLOBAL FUND
INSTITUTIONAL
- -------------
Walker Art Center 2,744,094.776 11.91%
Vineland Place
Minneapolis, Minnesota 55403
Georgetown University 2,697,248.543 11.71%
3600 M Street, N.W.
Washington, DC 20007
University of Denver (Colorado Seminary) 1,917,198.557 8.32%
2199 South University Boulevard
Denver, Colorado 80208
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
Charles Schwab & Co., Inc. ** 1,480,572.327 6.43%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Sunkist Master Trust 1,384,472.364 6.01%
14130 Riverside Drive
Sherman Oaks, California 91423
Chase Manhattan Bank as Trustee for 1,290,791.607 5.60%
Redland North America Retirement Plan
770 Broadway, 10th Floor
New York, New York 10003-9598
ADMINISTRATIVE
- --------------
Stocktontrust Nominee Partnership 961,872.435 98.34%*
c/o Stockton Trust, Inc
3001 East Camelback Road, Suite 100
Phoenix, Arizona 85016
GLOBAL BOND FUND II
CLASS A
- -------
Pacific Financial Asset Management Corporation 314,035.118 29.42%*
700 Newport Center Drive
Newport Beach, California 92660-6307
Central Fidelity National Bank FBO 187,837.655 17.60%
OBICI Foundation
P.O. Box 27602
Richmond, Virginia 23261-7602
Wilmington Trust TR
Chesapeake General Hospital Retirement Plan 168,042.113 15.74%
1100 North Market Street
Wilmington, Delaware 19801-1246
CLASS B
- -------
MLPF&S for the sole benefit of its Customers 148,406.000 39.56%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S for the sole benefit of its Customers 95,587.000 19.15%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
INTERNATIONAL FUND
INSTITUTIONAL
- -------------
State Universities Retirement System 5,169,925.638 5.22%
P.O. Box 2710, Station A
Champaign, Illinois 61825-2710
STOCKSPLUS FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc.** 3,390,937.102 13.72%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
First Trust National Association as Trustee for 2,204,736.456 8.92%
St. Benedict Retirement Plan Trust
P.O. Box 64010
St. Paul, Minnesota 55164-0010
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
FUND OWNED SHARES OWNED
- ---- ----- ------------
<S> <C> <C>
Iowa Methodist 1,913,661.645 7.74%
1200 Pleasant Street
Des Moines, Iowa 50309
Boatmen's Trust Company 1,629,064.710 6.59%
P.O. Box 14737
St. Louis, Missouri 63178-4737
ADMINISTRATIVE
- --------------
New York Life Trust Company 50,019.245 72.95%*
51 Madison Avenue, Room 117A
New York, New York 10010
National Financial Services Corporation 18,547.949 27.05%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
CLASS A
- -------
FTC & Co. 281,043.137 19.92%
P.O. Box 173736
Denver, Colorado 80217-3736
MLPF&S for the sole benefit of its Customers 142,599.052 10.10%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Dain Bosworth, Inc. FBO 76,233.925 5.40%
Washington Law School Foundation
1100 NE Campus Parkway
Seattle, Washington 98105
CLASS B
- -------
MLPF&S for the sole benefit of its Customers 295,623.000 16.17%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S for the sole benefit of its Customers 208,069.663 8.47%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
PaineWebber FBO
William H. Rubenstein Cons. 124,647.604 5.07%
for Isabel Rubenstein & Rubenstein - Promise Acct
427 Portland Avenue
Saint Paul, Minnesota 55102-2214
STRATEGIC BALANCED FUND
INSTITUTIONAL
- -------------
Pacific Financial Asset 1,000,000.000 95.44%*
Management Corporation
700 Newport Center Drive
Newport Beach, California 92660
</TABLE>
- --------------------
*Entity owned 25% or more of the outstanding shares of beneficial
interest of the class of shares, and therefore may be presumed to "control" the
class of shares, as that term is defined in the 1940 Act.
**Shares are held only as nominee.
THE REORGANIZATION OF THE PIMCO MONEY MARKET AND TOTAL RETURN II FUNDS
On November 1, 1995, the Money Market Fund and the PIMCO Managed Bond
and Income Fund, two former series of PIMCO Funds: Equity Advisors Series, were
reorganized as series of the Trust, and were renamed PIMCO Money Market Fund and
PIMCO Total Return Fund II, respectively. All information presented for these
Funds prior to this date represents their operational history as series of PIMCO
Funds: Equity Advisors Series. In connection with the Reorganization, the Funds
changed their
75
<PAGE>
fiscal year end from October 31 to March 31.
THE REORGANIZATION OF THE PIMCO GLOBAL BOND FUND II
On January 17, 1997, the Global Income Fund, a former series of PIMCO
Advisors Funds, was reorganized as a series of the Trust, and was renamed the
PIMCO Global Bond Fund II. All information presented for this Fund prior to that
date represents its operational history as a series of PIMCO Advisors Funds. In
connection with the Reorganization, the Fund changed its fiscal year end from
September 30 to March 31.
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 prohibited from effecting certain transactions, allowed
to effect certain exempt transactions, required to preclear certain security
transactions with PIMCO's Compliance Officer or his designee 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") 801 Pennsylvania, Kansas
City, Missouri 64105 serves as custodian for assets of all Funds, and also
serves as transfer agent and dividend disbursing agent for the Institutional
Class and Administrative Class shares of the Funds. Shareholder Services, Inc.,
P.O. Box 5866, Denver, Colorado 80217 serves as transfer agent and dividend
disbursing agent for the Class A, Class B and Class C shares of the Funds.
Pursuant to a sub-custody agreement between IFTC and State Street Bank and Trust
Company ("State Street"), State Street serves as subcustodian of the Trust for
the custody of the foreign securities acquired by those Funds that invest in
foreign securities. Under the agreement, State Street may hold the foreign
securities at its principal office at 225 Franklin Street, Boston,
Massachussetts 02110 and at State Street's branches, and subject to approval by
the Board of Trustees, at a foreign branch of a qualified U.S. bank, with an
eligible foreign subcustodian, or with an eligible foreign securities
depository.
Pursuant to rules adopted under the 1940 Act, the Trust may maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Trust; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Trust assets. The Board of Trustees reviews annually the
continuance of foreign custodial arrangements for the Trust. No assurance can be
given that the Trustees' appraisal of the risks in connection with foreign
custodial arrangements will always be correct or that expropriation,
nationalization, freezes, or confiscation of assets that would impact assets of
the Funds will not occur, and shareholders bear the risk of losses arising from
these or other events.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1055 Broadway, Kansas City, MO 64105, serves as
independent public accountants for all Funds. Price Waterhouse LLP provides
audit services, tax return preparation and
76
<PAGE>
assistance and consultation in connection with review of SEC filings. Prior to
November 1, 1995, Deloitte & Touche LLP served as independent accountants for
the PIMCO Money Market and Total Return II Funds. See "The Reorganization of the
PIMCO Money Market and Total Return II Funds" for additional information. Prior
to October 1, 1996, Coopers & Lybrand LLP served as independent accountants for
the PIMCO Global Bond Fund II. See "The Reorganization of the PIMCO Global Bond
Fund II" for additional information.
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 Prospectuses 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 Prospectuses as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
Financial statements for the Trust as of March 31, 1997 for its fiscal
year then ended, including notes thereto, and the reports of Price Waterhouse
LLP thereon dated May 22, 1997 (May 27, 1997 for the PIMCO International Bond
Fund), are incorporated by reference from the Trust's 1997 Annual Report, and
unaudited financial statements as of September 30, 1997 for the period then
ending are incorporated from the Trust's September 30, 1997 Semiannual Reports.
A copy of the Reports delivered with this Statement of Additional Information
should be retained for future reference.
77
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial statements for the Trust as of March 31, 1997, and for its
fiscal year then ended, including notes thereto, and the reports of
Price Waterhouse LLP thereon, dated May 22, 1997 and May 27, 1997 are
incorporated by reference from the Annual Report. Financial statements
for the Trust as of September 30, 1997, and for its period then ended,
including notes thereto, are incorporated by reference from the
Trust's Semiannual Reports.
(b) Exhibits
(1) (i) Declaration of Trust of Registrant/18/
(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/18/
(iv) Establishment and Designation of Income and Capital Preservation
Portfolio I and Income and Capital Preservation Portfolio II as
Series of Registrant/18/
(v) Amended and Restated Establishment and Designation of Series of
Shares of Registrant/18/
(vi) Amended Designation of Two Series of Registrant/18/
(vii) Second Amended and Restated Establishment and Designation of
Series of Shares of Registrant/18/
(viii) Establishment and Designation of Moderate Duration and
VersaSTYLE Equity Funds as Series of Registrant/18/
(ix) Amended Designation of Two Series of Registrant/18/
(x) Establishment and Designation of StocksPLUS Short Strategy
Fund as Series of Registrant/10/
(xi) Redesignation of One Existing Series and Establishment and
Designation of Two New Series of Registrant/11/
(xii) Form of Redesignation of One Series of Registrant/12/
<PAGE>
(xiii) Establishment and Designation of One Additional Series of
Shares and Amended and Restated Establishment and Designation of
Series of Shares of Registrant/16/
(xiv) Amended Designation of Five Existing Series of Registrant/16/
(xv) Establishment and Designation of One Additional Series of Shares
of Registrant/16/
(xvi) Form of Establishment and Designation of Four Additional Series
of Shares of Registrant/17/
(xvii) Form of Establishment and Designation of one additional Series of
Shares of Registrant
(2) By-laws of Registrant/18/
(3) Not applicable
(4) Not applicable
(5) (i) Investment Advisory Contract/18/
(ii) Supplements to Investment Advisory Contract Relating to Global,
Foreign, Low Duration South Africa Free and Total Return South
Africa Free Portfolios/18/
(iii) Supplements to Investment Advisory Contract Relating to
High Yield, Low Duration II and Total Return II Portfolios/18/
(iv) Supplements to Investment Advisory Contract Relating to Income
and Capital Preservation Portfolio I and Income and Capital
Preservation Portfolio II/18/
(v) Form of Supplements to Investment Advisory Contract Relating
to Moderate Duration Fund and VersaSTYLE Equity Fund/18/
(vi) Form of Amended Investment Advisory Contract/18/
(vii) Form of Supplement to Investment Advisory Contract/18/
(viii) Form of Supplement to Investment Advisory Contract Relating to
StocksPLUS Short Strategy Fund/10/
(ix) Supplements to Investment Advisory Contract/11/
(x) Form of Supplement to Investment Advisory Contract Relating to
Global Bond Fund II/16/
(xi) Form of Supplement to Investment Advisory Contract Relating to
Real Return Bond Fund/16/
(xii) Form of Supplement to Investment Advisory Contract Relating to
Low Duration Mortgage Fund, Total Return Mortgage Fund, Emerging
Markets Bond Fund, and Emerging Markets Bond Fund II/17/
(xiii) Form of Supplement to Investment Advisory Contract Relating to
Municipal Bond Fund*
(6) (i) Distribution Contract/1/
(ii) Supplement to Distribution Contract Relating to Global, Foreign,
Low Duration South Africa Free and Total Return South Africa
Free Portfolios/2/
- 2 -
<PAGE>
(iii) Supplement to Distribution Contract Relating to High Yield, Low
Duration II and Total Return II Portfolios/3/
(iv) Supplements to Distribution Contract Relating to Income and
Capital Preservation Portfolio I and Income and Capital
Preservation Portfolio II/4/
(v) Form of Distribution Contract as Amended May 31, 1994/5/
(vi) Form of Supplements to Distribution Contract Relating to
Moderate Duration Fund and VersaSTYLE Equity Fund/6/
(vii) Form of Amended Distribution Contract/7/
(viii) Form of Supplement to Distribution Contract Relating to
StocksPLUS Short Strategy Fund/10/
(ix) Supplements to Distribution Contract/11/
(x) Form of Distribution Contract/13/
(xi) Form of Supplement to Distribution Contract Relating to Real
Return Bond Fund/16/
(xii) Form of Supplement to Distribution Contract Relating to Low
Duration Mortgage Fund, Total Return Mortgage Fund, Emerging
Markets Bond Fund, and Emerging Markets Bond Fund II/17/
(xiii) Form of Supplement to Distribution Contract Relating to Tax
Exempt Income Fund*
(7) Not applicable
(8) Custodian Agreement/18/
(9) (i) Transfer Agency Agreement/18/
(ii) Form of Transfer Agency Agreement with Shareholder Services,
Inc./14/
(10) (i) Opinion of Counsel/9/
(ii) Consent of Counsel/18/
(11) Consents of Price Waterhouse LLP
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) (i) Form of Distribution Plan for Administrative Class Shares/18/
(ii) Administrative Services Contract/1/
(iii) Supplements to Administrative Services Contract relating to
Global, Foreign, Low Duration South Africa Free and Total Return
South Africa Free Portfolios/2/
- 3 -
<PAGE>
(iv) Supplement to Administrative Services Contract Relating to High
Yield, Low Duration II and Total Return II Portfolios/3/
(v) Supplements to Administrative Services Contract Relating to
Income and Capital Preservation Portfolio I and Income and
Capital Preservation Portfolio II/4/
(vi) Form of Administrative Services Plan for Administrative Class
Shares/18/
(vii) Form of Supplements to Administrative Services Contract Relating
to Moderate Duration Fund and VersaSTYLE Equity Fund/6/
(viii) Form of Amended Administrative Services Contract/7/
(ix) Form of Amended Administrative Services Contract/8/
(x) Form of Supplement to Administration Agreement Relating to
StocksPLUS Short Strategy Fund/11/
(xi) Supplements to Administration Agreement/11/
(xii) Form of Amendment to Administration Agreement/13/
(xiii) Form of Amendment to Administration Agreement/16/
(xiv) Form of Administration Agreement between PIMCO Advisors L.P. and
Pacific Investment Management Company/15/
(xv) Form of Supplement to Administration Agreement Relating to Low
Duration Mortgage Fund, Total Return Mortgage Fund, Emerging
Markets Bond Fund, and Emerging Markets Bond Fund II/17/
(xvi) Form of Supplement to Administration Agreement Relating to Tax
Exempt Income Fund*
(xvii) Form of Distribution and Servicing Plan for Class A
shares/13/
(xviii) Form of Distribution and Servicing Plan for Class B
shares/13/
(xix) Form of Distribution and Servicing Plan for Class C
shares/13/
(16) Calculation of Performance/8/
(17) Financial Data Schedule*
(18) (i) Dual-Class Plan/8/
(ii) Amended Dual-Class Plan/11/
(iii) Amended and Restated Multi-Class Plan adopted pursuant to
Rule 18f-3/17/
(19) Powers of Attorney and Secretary's Certificate/17/
- 4 -
<PAGE>
/1/ Filed with Pre-Effective Amendment No. 2 on April 21, 1987.
/2/ Filed with Post-Effective Amendment No. 8 on August 3, 1990.
/3/ Filed with Post-Effective Amendment No. 10 on May 31, 1991.
/4/ Filed with Post-Effective Amendment No. 12 on August 29, 1991.
/5/ Filed with Post-Effective Amendment No. 20 on June 1, 1994.
/6/ Filed with Post-Effective Amendment No. 21 on August 1, 1994.
/7/ Filed with Post-Effective Amendment No. 22 on November 30, 1994.
/8/ Filed with Post-Effective Amendment No. 23 on June 1, 1995.
/9/ Filed with Registrant's Rule 24f-2 Notice on May 30, 1997.
/10/ Filed with Post-Effective Amendment No. 27 on January 16, 1996.
/11/ Filed with Post-Effective Amendment No. 28 on April 1, 1996.
/12/ Filed with Post-Effective Amendment No. 29 on June 14, 1996.
/13/ Filed with Registration Statement on Form N-14 (File No. 333-12871) on
September 27, 1996.
/14/ Filed with Post Effective Amendment No. 33 to the Registration Statement
of PIMCO Advisors Funds (File No. 2-87203) on November 30, 1995.
/15/ Filed with Post Effective Amendment No. 25 to the Registration Statement
of PIMCO Funds: Equity Advisors Series (File No. 33-36528) on January 13,
1997.
/16/ Filed with Post Effective Amendment No. 33 on January 13, 1997.
/17/ Filed with Post-Effective Amendment No. 36 on July 11, 1997.
/18/ Filed with Post-Effective Amendment No. 37 on November 17, 1997.
* To be filed by Amendment.
- 5 -
<PAGE>
Item 25. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
No person is controlled by or under common control with the
Registrant.
Item 26. Number of Holders of Securities
-------------------------------
As of November 30, 1997, the number of record holders of each Fund and
Class thereof of the Registrant were as follows:
<TABLE>
<CAPTION>
Class
-----
Institutional Administrative A B C
------------- -------------- - - -
Fund
----
<S> <C> <C> <C> <C> <C>
Money Market 95 124 740 154 4,471
Short-Term 106 7 84 15 165
Low Duration 647 11 457 586 2,658
Low Duration II 47 0 0 0 0
Low Duration III 3 0 0 0 0
Moderate Duration 14 0 0 0 0
High Yield 192 10 1,438 3,557 14,381
Total Return 1,375 169 2,898 3,597 17,311
Total Return II 79 23 0 O O
Total Return III 38 3 0 O 0
Commercial Mortgage
Securities 0 0 0 O O
Long-Term U.S. Government 38 2 74 97 143
Real Return Bond 6 0 13 32 38
Foreign Bond 60 2 230 460 546
Global Bond 55 4 0 0 0
Global Bond II 0 0 238 220 328
International Bond 129 0 0 0 0
StocksPLUS 77 5 1,677 3,790 4,028
StocksPLUS Short Strategy 0 0 0 0 0
Strategic Balanced 5 0 0 0 0
Low Duration Mortgage 1 0 0 0 0
Total Return Mortgage 1 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,
- 6 -
<PAGE>
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 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 Life Insurance Company
("Pacific Life"), 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:
Name Business and Other Connections
- ---- ------------------------------
Allan, George C. Vice President, PIMCO and PIMCO Management, Inc.
Arnold, Tamara J. Vice President, PIMCO and PIMCO Management, Inc.
Barbi, Leslie A. Senior Vice President, PIMCO and PIMCO Management,
Inc.
Benz, William R. II Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc., Member of PIMCO
Partners LLC.
Bishop, Gregory A. Vice President, PIMCO.
Brynjolfsson, John B. Vice President, PIMCO and PIMCO Management, Inc.
- 7 -
<PAGE>
Name Business and Other Connections
- ---- ------------------------------
Burns, R. Wesley Executive Vice President, PIMCO and PIMCO
Management, Inc.; President and Trustee of
the Trust and PIMCO Variable Insurance Trust.
President and Director of PIMCO Commercial
Mortgage Securities Trust, Inc.; Executive
Vice President, PIMCO Funds: Multi-Manager Series.
Cupps, Wendy W. Vice President, PIMCO and PIMCO Management, Inc.
Daniels, Charles M. III Executive Vice President, PIMCO and PIMCO
Management, Inc.
Dow, Michael Vice President, PIMCO, PIMCO Management, Inc.
and the Trust.
Dunn, Anita Vice President, PIMCO and PIMCO Management, Inc.
Edington, David H. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Director: Stocks
Plus Management, Inc.; Member of PIMCO Partners
LLC.
Ehlert, A. Benjamin Executive Vice President, PIMCO and PIMCO
Management, Inc.
Ettl, Robert A. Vice President, PIMCO and PIMCO Management, Inc.
Faillace, Anthony L. Vice President, PIMCO and PIMCO Management, Inc.
Fitzgerald, Robert M. Chief Financial Officer and Treasurer, PIMCO, PIMCO
Management, Inc., Cadence Capital Management, Inc.,
NFJ Investment Group, NFJ Management, Inc.,
Parametric Portfolio Associates, Parametric
Management Inc., StocksPLUS Management Inc. and
PIMCO Funds Distribution Company; Chief Financial
Officer and Assistant Treasurer, Cadence Capital
Management; Chief Financial Officer and Treasurer,
Columbus Circle Investors and Columbus Circle
Investors Management Inc.; Chief Financial Officer
and Senior Vice President, PIMCO Advisors.
Frisch, Ursula T. Vice President, PIMCO, PIMCO Management and the
Trust.
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 and PIMCO Variable Insurance
Trust; Member of Equity and Operating Boards, PIMCO
Advisors; Member of PIMCO Partners LLC. Chief
Financial Officer, Senior Vice President and
Controller, Thompson Advisory Group, Inc., Chief
Financial Officer, Columbus Circle Trust Co.
Hague, John L. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Member of Operating
Board, PIMCO Advisors; Member of PIMCO Partners LLC.
Hally, Gordon C. Executive Vice President, PIMCO and PIMCO
Management, Inc.
Hamalainen, Pasi M. Senior Vice President, PIMCO and PIMCO Management,
Inc.
- 8 -
<PAGE>
Name Business and Other Connections
- ---- ------------------------------
Hardaway, John P. Vice President, PIMCO and PIMCO Management, Inc.;
Treasurer of the Trust, PIMCO Variable Insurance
Trust, PIMCO Funds: Multi-Manager Series and
PIMCO Commercial Mortgage Securities Trust,
Inc.
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.
Hattesohl, Joseph D. Vice President, PIMCO and PIMCO Management, Inc.
Assistant Treasurer, the Trust, PIMCO Variable
Insurance Trust, PIMCO Funds: Multi-Manager Series
and PIMCO Commercial Mortgage Securities Trust,
Inc.
Hayes, Raymond C. Vice President, PIMCO and PIMCO Management, Inc.
Hinman, David C. Vice President, PIMCO and PIMCO Management, Inc.
Hocson, Liza Vice President, PIMCO and PIMCO Management, Inc.
Hodge, Douglas M. Executive 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.
Hudoff, Mark Vice President, PIMCO and PIMCO Management, Inc.
Isberg, Margaret E. Executive Vice President, PIMCO and PIMCO
Management, Inc.; Senior Vice President of the Trust.
Keller, James M. Vice President, PIMCO and PIMCO Management, Inc.
Kennedy, Raymond G. Vice President, PIMCO and PIMCO Management, Inc.
Kociuba, James Vice President, PIMCO and PIMCO Management, Inc.
Loftus, John S. Executive Vice President, PIMCO and PIMCO
Management, Inc.; Vice President and Assistant
Secretary, StocksPLUS Management, Inc.
Lown, David Vice President, PIMCO and PIMCO Management, Inc.
Meiling, Dean S. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Vice President of
the Trust and PIMCO Commercial Mortgage Securities
Trust, Inc.; 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.; Senior
Vice President, PIMCO Variable Insurance Trust;
Vice President of the Trust; Member of Operating
Board, PIMCO Advisors; Member of PIMCO Partners,
LLC.
Ongaro, Douglas J. Vice President, PIMCO and PIMCO Management, Inc.
Otterbein, Thomas J. Vice President, PIMCO and PIMCO Management, Inc.
- 9 -
<PAGE>
Name Business and Other Connections
- ---- ------------------------------
Pittman, David J. Vice President, 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 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. Senior Vice President, PIMCO and PIMCO Management,
Inc.
Sargent, Jeffrey M. Vice President, PIMCO, PIMCO Management, Inc., the
Trust, PIMCO Variable Insurance Trust, PIMCO
Commercial Mortgage Securities Trust, Inc. and
PIMCO Funds: Multi-Manager Series.
Schmider, Ernest L. Executive Vice President, Secretary, Chief
Administrative and Legal Officer, PIMCO and PIMCO
Management, Inc.; Secretary, PIMCO Partners LLC,
Director, Assistant Secretary and Assistant
Treasurer, StocksPLUS Management, Inc.
Scholey, Leland T. Senior Vice President, PIMCO, PIMCO Management, Inc.
and the Trust.
Selby, Richard W. Senior Vice President, Chief Technology Officer,
PIMCO.
Seliga, Denise C. Vice President, PIMCO and PIMCO Management, Inc.
Seymour, Rita J. Vice President, PIMCO and PIMCO Management, Inc.
Thomas, Lee R. Managing Director, PIMCO; Director and Managing
Director, PIMCO Management, Inc.; Member PIMCO
Partners LLC.
- 10 -
<PAGE>
Name Business and Other Connections
- ---- ------------------------------
Thompson, William S. Chief Executive Officer and Managing Director, PIMCO;
Jr Director, Managing Director and Chief Executive
Officer, PIMCO Management, Inc.; Director and
President, StocksPLUS Management, Inc.; Director,
Thomson Advisory Group; Senior Vice President of
PIMCO Variable Insurance Trust; Vice President of the
Trust and PIMCO Commercial Mortgage Securities Trust,
Inc.; Member of Equity Board and Operating Committee,
and Member of Operating Board, PIMCO Advisors;
Member, President and Chief Executive Officer 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 Operating Board, PIMCO
Advisors; Member of PIMCO Partners LLC.
Weil, Richard M. Assistant Secretary, PIMCO, Columbus Circle
Investors, Columbus Circle Investors Management,
Inc., Cadence Capital Management, and PIMCO Funds
Distribution Company; Senior Vice President and
Assistant Secretary, PIMCO Management, Inc.; Senior
Vice President Legal and Secretary, PIMCO Advisors;
Senior Vice President and Secretary, Thomson Advisory
Group; Secretary, Cadence Capital Management, Inc.
NFJ Management, Inc., Parametric Management, Inc.,
NFJ Investment Group, Parametric Portfolio
Associates, and StocksPLUS Management, Inc.; Vice
President, PIMCO Funds: Multi-Manager Series.
Wegener, Marilyn Vice President, PIMCO and PIMCO Management, Inc.
Willner, Ram Vice President, PIMCO and PIMCO Management, Inc.
Wilsey, Kristen M. Vice President, of the Trust, PIMCO and PIMCO
Management, Inc.
Wood, George H. Senior Vice President, PIMCO and PIMCO Management,
Inc.
Yetter, Michael A. Vice President, PIMCO and PIMCO Management, Inc.
Young, David Vice President, PIMCO
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 Funds Distribution Company is 2187 Atlantic Street,
Stamford, CT 06902.
- 11 -
<PAGE>
Item 29. Principal Underwriters
----------------------
(a) PIMCO Funds Distributors LLC (the "Distributor") serves as
Distributor of Shares of the Trust. The Distributor also acts as
the principal underwriter for PIMCO Funds: Multi-Manager
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>
Booth, Jeffrey L. Vice President None
Bosch, James D. Regional Vice President None
Brennan, Deborah P. Vice President None
Clark, Timothy R. Senior Vice President None
Fessel, Jonathan P. Vice President None
Fitzgerald, Robert M. Chief Financial Officer
and Treasurer None
Gallagher, Michael J. Vice President None
Goldsmith, David S. Vice President None
Gray, Ronald H. Vice President None
Hussey, John B. Vice President None
Janeczek, Edward W. Senior Vice President None
Jobe, Stephen R. Vice President None
Jones, Jonathan C. Vice President None
Lynch, William E. Senior Vice President None
McCarthy, Jacqueline A. Vice President None
Meyers, Andrew J. Executive Vice President None
Moyer, Fiora H. Regional Vice President None
Neugebauer, Phil J. Vice President None
Nguyen, Vinh T. Vice President, Controller None
Pearlman, Joffrey H. Regional Vice President None
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Pisapia, Glynne P. Regional Vice President None
Russell, Matthew M. Vice President None
Schott, Newton B., Jr. Executive Vice None
President/Secretary, Chief
Administrative/Legal Officer
and Secretary
Smith, Robert H. Vice President None
Spear, Ellen Z. Vice President None
Stone, David P. Regional Vice President None
Sullivan, Daniel W. Vice President None
Thomas, William H., Jr. Regional Vice President None
Treadway, Stephen J. Chairman, None
President and Chief
Executive Officer
Troyer, Paul H. Senior Vice President None
Trumbore, Brian F. Executive Vice President None
Weil, Richard M. Assistant Secretary None
Zimmerman, Glen A. Vice President None
</TABLE>
- -------------
* The business address of all 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, Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, and Shareholder Services, Inc., P.O. Box 5866
Denver, Colorado 80217.
Item 31. Management Services
-------------------
Not applicable
Item 32. Undertakings
------------
(a) Not applicable.
- 13 -
<PAGE>
(b) Registrant undertakes to file a post-effective amendment,
using financial statements which need not be certified,
within four to six months from the latter of the effective
date of a post-effective amendment to Registrant's 1933 Act
registration statement, which provides for the addition of a
new series of Registrant or the date on which shares of such
series are first sold (other than shares sold for seed
money).
(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.
- 14 -
<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. 38 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 29th day of December, 1997.
PIMCO FUNDS
(Registrant)
By:
-------------------------------------
R. Wesley Burns*
President
By: /s/ Keith T. Robinson
-------------------------------------
Keith T. Robinson, 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 December 29, 1997
Guilford C. Babcock*
- -------------------------- Trustee December 29, 1997
Thomas P. Kemp*
- -------------------------- Trustee December 29, 1997
Brent R. Harris*
- -------------------------- Trustee December 29, 1997
William J. Popejoy*
- -------------------------- Trustee December 29, 1997
Vern O. Curtis*
- -------------------------- Trustee and December 29, 1997
R. Wesley Burns* President
(Principal
Executive
Officer)
- -------------------------- Treasurer December 29, 1997
John P. Hardaway* (Principal
Financial
and Accounting
Officer)
</TABLE>
*By: /s/ Keith T. Robinson
----------------------
Keith T. Robinson,
as attorney-in-fact
- -------------------
* Pursuant to power of attorney filed with Post-Effective Amendment No. 36 to
Registration Statement No. 33-12113 on July 11, 1997.
<PAGE>
PIMCO Funds
INDEX TO EXHIBITS
FILED WITH
POST-EFFECTIVE AMENDMENT NO. 38
EXHIBIT 1(xvii) Form of Establishment and Designation of One Additional
Series of Shares of Registrant (EDGAR EXHIBIT 99.B1(xvii).
EXHIBIT 11 Consents of Price Waterhouse LLP. (EDGAR EXHIBIT
99.B11).
<PAGE>
EXHIBIT 99.B1(xvii)
Establishment and Designation of One Additional Series of Shares
of Beneficial Interest, Par Value $0.0001 Per Share, of
PIMCO Funds
(formerly Pacific Investment Management Institutional Trust)
RESOLVED, that pursuant to Section 5.12(a) of the Declaration of Trust of
PIMCO Funds (formerly Pacific Investment Management Institutional Trust) (the
"Trust") dated February 19, 1987, as amended (the "Declaration"), the shares of
beneficial interest of the Trust shall be divided into one additional separate
Series, designated the "Municipal Bond Fund" (the "Fund"); and
FURTHER RESOLVED, that the Fund shall have the following special and
relative rights:
1. The Fund shall issue its shares of beneficial interest with respect to
five separate classes: Class A, Class B, Class C, Institutional Class and
Administrative Class.
2. The Fund shall be authorized to invest in cash, securities, instruments
and other property as from time to time described in the Trust's then currently
effective prospectuses and registration statement under the Securities Act of
1933. Each share of beneficial interest of the Fund ("Share") shall be
redeemable, shall be entitled to one vote (or fraction thereof in respect of a
fractional Share) on matters on which Shares of the Fund shall be entitled to
vote, shall represent a pro rata beneficial interest in the assets allocated to
the Fund, and shall be entitled to receive its pro rata share of net assets of
the Fund upon liquidation of the Fund, all as provided in the Declaration.
3. Shareholders of the Fund shall vote separately as a class on any
matter, except, consistent with the Investment Company Act of 1940, as amended
(the "Act"), and the rules and the Trust's registration statement thereunder,
with respect to (i) the election of Trustees, (ii) any amendment of the
Declaration, unless the amendment affects fewer than all classes of Shares, in
which case only shareholders of the affected classes shall vote, and (iii)
ratification of the selection of auditors, and except when the Trustees have
determined that the matter affects only the interests of shareholders of a
particular class of Shares, in which case only the shareholders of such class
shall be entitled to vote thereon. In each case of separate voting, the Trustees
shall determine whether, for the matter to be effectively acted upon within the
meaning of Rule 18f-2 under the Act (or any successor rule) as to the Fund or
class, the applicable percentage (as specified in the Declaration, or the Act
and the rules thereunder) of the shares of the Fund or class alone must be voted
in favor of the matter, or whether the favorable vote of such applicable
percentage of the shares of the Fund or class entitled to vote on the matter is
required.
4. (a) The assets and liabilities of the Trust shall be allocated among
the Funds as set forth in Section 5.11 of the Declaration, except that only
preexisting Funds shall bear their allocable portion of the remaining
unamortized costs incurred and payable in connection with their organization and
registration; costs of establishing the Fund and of the registration and public
<PAGE>
offering of its Shares shall be amortized for the Fund over the period beginning
on the date such costs become payable and ending sixty months thereafter.
(b) Liabilities, expenses, costs, charges or reserves relating to the
distribution of, and other identified expenses that should properly be allocated
to, the Shares of a particular class may be charged to and borne solely by such
class and the bearing of expenses solely by a class of Shares may be
appropriately reflected and cause differences in the net asset value
attributable to and the dividend, redemption and liquidation rights of, the
Shares of different classes.
(c) Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the Shareholders
of all classes for all purposes.
5. Shares of each class of the Fund may vary between themselves as to
rights of redemption and conversion rights, as may be approved by the Trustees
and set out in the Fund's then-current prospectus.
6. The Trustees shall have the right at any time and from time to time to
reallocate assets and expenses or to change the designation of the Fund or
classes hereby created, or to otherwise change the special and relative rights
of the Fund or classes, provided that such change shall not adversely affect the
rights of the Shareholders of the Fund or classes.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned, being at least a majority of the
Trustees of the Trust, have executed this instrument the ____ day of December,
1997.
___________________________
Brent R. Harris
___________________________
Guilford C. Babcock
___________________________
Vern O. Curtis
___________________________
Thomas P. Kemp
___________________________
William J. Popejoy
___________________________
R. Wesley Burns
-3-
<PAGE>
EXHIBIT 99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 38 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated May 22, 1997, relating to the financial
statements and financial highlights appearing in the March 31, 1997 Annual
Reports to Shareholders of the PIMCO Funds: Pacific Investments Management
Series, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in 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
December 29, 1997
