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 Low Duration Mortgage Fund; the PIMCO Moderate
Duration Fund; the PIMCO Real Return Bond Fund; the PIMCO Total Return Fund; the
P0IMCO Total Return Fund II; the PIMCO Total Return Fund III; the PIMCO Total
Return Mortgage Fund; the PIMCO Commercial Mortgage Securities Fund; the PIMCO
High Yield Fund; the PIMCO Long-Term U.S. Government Fund; the PIMCO Global Bond
Fund; the PIMCO Global Bond Fund II; the PIMCO Foreign Bond Fund;the PIMCO
International Bond Fund; the PIMCO Emerging Markets Bond Fund; the PIMCO
Emerging Markets Bond Fund II; the PIMCO Municipal Bond Fund; The PIMCO
Strategic Balanced Fund; the PIMCO StocksPLUS Fund; and the PIMCO StocksPLUS
Short Strategy 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 six
classes of shares, offered through four Prospectuses. Class A, Class B, and
Class C shares of certain Funds are offered through the "Class A, B and C
Prospectus" dated April 1, 1998, Class D shares of certain Funds are offered
through the "Class D Prospectus" to be dated April 8, 1998, Institutional Class
and Administrative Class shares of the Funds are offered through the
"Institutional Prospectus" dated April 1, 1998, and Class A shares of the Total
Return Fund also are offered through a prospectus dated March 1, 1998
(collectively, the "Prospectuses"). A copy of the applicable Prospectus may be
obtained free of charge at the address and telephone number listed below.
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<S> <C> <C>
Class A, B and C Prospectus
Institutional Prospectus: and Class D Prospectus:
PIMCO Funds PIMCO Funds Distributors LLC
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>
April 1, 1998
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TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES.........................................1
Borrowing.........................................................1
Corporate Debt Securities.........................................2
Participation on Creditors Committees.............................3
Mortgage-Related and Other Asset-Backed Securities................4
Foreign Securities................................................8
Foreign Currency Transactions.....................................9
Foreign Currency Exchange-Related Securities.....................11
Bank Obligations.................................................12
Loan Participations..............................................13
Delayed Funding Loans and Revolving Credit Facilities............14
Short Sales......................................................14
Derivative Instruments...........................................15
Warrants to Purchase Securities..................................22
Illiquid Securities..............................................22
Municipal Bonds..................................................22
Social Investment Policies.......................................25
INVESTMENT RESTRICTIONS...................................................25
Fundamental Investment Restrictions..............................25
Non-Fundamental Investment Restrictions..........................27
MANAGEMENT OF THE TRUST...................................................30
Trustees and Officers............................................30
Compensation Table...............................................33
Investment Adviser...............................................34
Fund Administrator...............................................36
DISTRIBUTION OF TRUST SHARES..............................................39
Distributor and Multi-Class Plan.................................39
Contingent Deferred Sales Charge and Initial Sales Charge........40
Distribution and Servicing Plans for Class A, Class B and
Class C Shares..................................................41
Distribution and Administrative Services Plans for Administrative
Class Shares....................................................45
Plan for Class D Shares..........................................46
Purchases, Exchanges and Redemptions.............................47
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................49
Investment Decisions.............................................49
Brokerage and Research Services..................................49
Portfolio Turnover...............................................50
NET ASSET VALUE...........................................................51
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TAXATION .................................................................51
Distributions....................................................53
Sales of Shares..................................................54
Backup Withholding...............................................54
Options, Futures and Forward Contracts, and Swap Agreements......54
Short Sales......................................................55
Passive Foreign Investment Companies.............................55
Foreign Currency Transactions....................................56
Foreign Taxation.................................................56
Original Issue Discount and Market Discount......................56
Other Taxation...................................................57
OTHER INFORMATION.........................................................58
Capitalization...................................................58
Performance Information..........................................58
Potential College Cost Table.....................................64
Voting Rights....................................................67
The Reorganization of the PIMCO Money Market and Total
Return II Funds.................................................92
The Reorganization of the PIMCO Global Bond Fund II..............92
Code of Ethics...................................................93
Custodian, Transfer Agent and Dividend Disbursing Agent..........93
Independent Accountants..........................................93
Counsel..........................................................93
Registration Statement...........................................94
Financial Statements.............................................94
<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 typically
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.
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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 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.
<PAGE>
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.
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.
<PAGE>
Mortgage-Related and Other Asset-Backed Securities
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." 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 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.
<PAGE>
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.
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.
<PAGE>
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semi-annually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semi-annual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities include securities that reflect
an interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
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.
<PAGE>
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.
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.
<PAGE>
Other Asset-Backed Securities. Similarly, the Adviser expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile ReceivablesSM
("CARSSM"). CARSSM represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with 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, Total Return II, Long-Term
U.S. Government and Municipal Bond Funds) 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 and Total Return Mortgage 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 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 Municipal Bond 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 (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").
<PAGE>
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the 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.
<PAGE>
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:
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.
<PAGE>
Foreign Currency Exchange-Related Securities
Foreign currency warrants. Foreign currency warrants such as Currency
Exchange WarrantsSM ("CEWsSM") are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal exchange rate linked securities. Principal exchange rate
linked securities ("PERLsSM") 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.
<PAGE>
Performance indexed paper. Performance indexed paper ("PIPsSM") is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Bank Obligations
Bank obligations in which the 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 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.
<PAGE>
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 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.
<PAGE>
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.
Delayed Funding Loans and Revolving Credit Facilities
The Funds (except the PIMCO Money Market and Municipal Bond Funds) may
enter into, or acquire participations in, delayed funding loans and revolving
credit facilities. Delayed funding loans and revolving credit facilities are
borrowing arrangements in which the lender agrees to make loans up to a maximum
amount upon demand by the borrower during a specified term. These commitments
may have the effect of requiring a Fund to increase its investment in a company
at a time when it might not otherwise decide to do so (including at a time when
the company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that a Fund is committed to advance additional funds, it
will at all times segregate assets, determined to be liquid by the Adviser in
accordance with procedures established by the Board of Trustees, in an amount
sufficient to meet such commitments. The Funds may invest in delayed funding
loans and revolving credit facilities with credit quality comparable to that of
issuers of its securities investments. Delayed funding loans and revolving
credit facilities may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, a Fund may be
unable to sell such investments at an opportune time or may have to resell them
at less than fair market value. The Funds currently intend to treat delayed
funding loans and revolving credit facilities for which there is no readily
available market as illiquid for purposes of the Funds' limitation on illiquid
investments. For a further discussion of the risks involved in investing in loan
participations and other forms of direct indebtedness see "Loan Participations."
Participation interests in revolving credit facilities will be subject to the
limitations discussed in "Loan Participations."
<PAGE>
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.
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
(except the PIMCO Money Market and Municipal Bond 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 (except the PIMCO Money Market and Municipal Bond 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.
<PAGE>
An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A 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."
<PAGE>
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, as
specified for that Fund in the Prospectuses. 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.
<PAGE>
A Fund may purchase and write call and put futures options, as
specified for that Fund in the Prospectuses. 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.
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."
<PAGE>
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.
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.
<PAGE>
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
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.
<PAGE>
Swap Agreements. The Funds (except the PIMCO Money Market and Municipal
Bond 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.
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.
<PAGE>
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 without value for purposes of
this restriction.
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 Adviser 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."
<PAGE>
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 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 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 PIMCO 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 PIMCO 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 PIMCO 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 PIMCO 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 PIMCO 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 PIMCO Municipal Bond Fund would hold
the longer-term security, which could experience substantially more volatility.
The PIMCO 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 PIMCO 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 PIMCO Municipal Bond Fund will not invest more than 5% of
its net assets in municipal warrants.
<PAGE>
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 ("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 PIMCO 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 PIMCO Municipal
Bond Fund will not invest more than 10% of its total assets in Residual Interest
Bonds.
The PIMCO 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.
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 Municipal
Bonds due to changes in the Adviser'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.
<PAGE>
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 PIMCO Municipal Bond Fund in utilities,
gas, electric, water and telephone companies will be considered as being in
separate industries;
<PAGE>
(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 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);
<PAGE>
(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 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:
<PAGE>
(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 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) 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;
<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.
<PAGE>
Unless otherwise indicated, all limitations applicable to Fund
investments (as stated above and elsewhere in this Statement of Additional
Information) apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a security (or,
if unrated, deemed to be of comparable quality), or change in the percentage of
Fund assets invested in certain securities or other instruments, or change in
the average duration of 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>
<S> <C> <C>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
Brent R. Harris* Chairman of the Managing Director, PIMCO; Board of Governors,
Age 38 Board and Trustee Investment Company Institute; Director, Harris
Holdings; Director, Harris Oil Company; Chairman
and Director, PIMCO Commercial Mortgage
Securities Trust, Inc.; Chairman and Trustee,
PIMCO Variable Insurance Trust. Formerly
Principal, Senior Vice President and Vice
President of PIMCO.
R. Wesley Burns* President and Trustee Executive Vice President, PIMCO; President and
Age 38 Director, PIMCO Commercial Mortgage Securities
Trust, Inc.; President and Trustee, PIMCO
Variable Insurance Trust; 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.; Trustee, PIMCO
91108 Variable Insurance Trust; Director, Growth Fund
Age 66 of America and Fundamental Investors Fund of the
Capital Group; Director, Good Hope Medical
Foundation.
<PAGE>
Vern O. Curtis Trustee Private Investor; Director, PIMCO Commercial
14158 N.W. Bronson Creek Drive Mortgage Securities Trust, Inc.; Trustee, PIMCO
Portland, Oregon Variable Insurance Trust; Director, American
97229 Office Park Properties, Inc., a Real Estate
Age 63 Investment Trust; Director, Fresh Choice, Inc.
Formerly charitable work, The Church of Jesus
Christ of Latter Day Saints.
Thomas P. Kemp Trustee Private Investor; Director, PIMCO Commercial
1141 Marine Drive Mortgage Securities Trust, Inc.; Trustee, PIMCO
Laguna Beach, California Variable Insurance Trust. Formerly Co-Chairman,
92651 U.S. Committee to Assist Russian Reform;
Age 67 Director, Union Financial Corp.; Senior
Consultant, World Cup 1994 Organizing Committee;
Chairman and CEO of Coca Cola Bottling Company
of L.A.
William J. Popejoy Trustee Director, California State Lottery; Director,
600 North 10th Street PIMCO Commercial Mortgage Securities Trust,
Sacramento, California Inc.; Trustee, PIMCO Variable Insurance Trust.
95814 Chairman, PacPro (formerly Western Printing);
Age 59 Formerly Chief 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 41
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO. Formerly Vice
Age 45 President, PIMCO.
Michael G. Dow Vice President Account Manager, PIMCO. Formerly Fixed Income
Age 34 Specialist, Salomon Brothers, Inc.; Vice
President Operations, Citibank NA Global
Consumer Banking Group.
U. Teri Frisch Vice President Account Manager, PIMCO.
Age 44
Raymond C. Hayes Vice President Account Manager, PIMCO. Formerly Marketing
Age 53 Director, Pacific Financial Asset Management
Corporation.
<PAGE>
Thomas J. Kelleher, III Vice President Vice President, PIMCO. Previously associated
Age 47 with Delaware, Mellon and Girard Trusts.
Andre Mallegol Vice President Vice President, PIMCO. Formerly associated with
Age 31 Fidelity Investments Institutional Services
Company.
Dean S. Meiling Vice President Managing Director, PIMCO.
Age 49
James F. Muzzy Vice President Managing Director, PIMCO.
Age 58
Douglas J. Ongaro Vice President Account Manager, PIMCO. Formerly Regional
Age 37 Marketing Manager, Charles Schwab & Co., Inc.
David J. Pittman Vice President Vice President, PIMCO. Formerly a senior
Age 50 executive with Bank of America, the Northern
Trust Co. and NationsBank.
Mark A. Romano Vice President Account Manager, PIMCO. Previously associated
Age 39 with Wells Fargo's institutional money
management group and First Interstate's Pacifica
family of mutual funds.
Jeffrey M. Sargent Vice President Vice President and Manager of Fund Shareholder
Age 35 Servicing, PIMCO; Vice President, PIMCO Commerical
Mortgage Securities Trust and PIMCO Variable
Insurance Trust.
William S. Thompson, Jr. Vice President Chief Executive Officer and Managing Director,
Age 52 PIMCO; Vice President, PIMCO Variable Insurance
Trust.. Formerly Managing Director, Salomon
Brothers, Inc.
Kristen M. Wilsey Vice President Senior Vice President, PIMCO. Formerly Vice
Age 38 President, Account 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 Commerical Securities
Trust, Inc. and PIMCO Variable Insurance Trust.
<PAGE>
Garlin G. Flynn Secretary Lead, Pooled Funds Administration, PIMCO;
Age 51 Secretary, PIMCO Variable Insurance Trust.
Formerly Senior Fund Administrator,
PIMCO; Senior Mutual Fund Analyst,
PIMCO Advisors Institutional
Services.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Fund Taxation,
Age 34 PIMCO. Formerly Director of Financial
Reporting, Carl I. Brown & Co.; Tax Manager,
Price Waterhouse LLP.
Michael J. Willemsen Assistant Secretary Manager, PIMCO. Formerly Project Lead, PIMCO.
Age 38
- -------------------
*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.
</TABLE>
Compensation Table
The following table sets forth information regarding compensation
received by the Trustees for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C>
Aggregate Total Compensation from
Compensation Trust and Fund Complex
Name and Position from Trust1 Paid to Trustees2
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>
- --------------------
1Each 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.
2Each Trustee also serves as a Director of PIMCO Commercial Mortgage
Securities Trust, Inc., a registered closed-end management investment company,
and as a Trustee of PIMCO Variable Insurance Trust, a registered open-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. The general partners of
PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings L.P.
("PAH"). PIMCO Partners, G.P. is a general partnership between PIMCO Holding
LLC, a Delaware limited liability company and indirect wholly owned subsidiary
of Pacific Life Insurance Company, and PIMCO Partners LLC, a California limited
liability company controlled by the PIMCO Managing Directors. PIMCO Partners,
G.P. is the sole general partner of PAH.
PIMCO is responsible for making investment decisions and placing orders
for the purchase and sale of the 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 24, 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 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:
Advisory
Fund Fee Rate
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%
<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>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
Fund 3/31/97 3/31/96 3/31/95
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>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
Fund 3/31/97 3/31/96 3/31/95
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>
<PAGE>
Fund Administrator
PIMCO also serves as Administrator to the Funds pursuant to an
administration agreement (the "Administration Agreement") with the Trust. 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>
<S> <C> <C> <C> <C>
Administrative Fee Rate
Institutional and Class A,
Fund Administrative Class B and C Class D*
- ---- -------------------- ------- -------
Money Market 0.20% 0.35% 0.45%
Short-Term Fund 0.20% 0.35% 0.50%
Total Return and Low Duration
Funds 0.18% 0.40% 0.50%
Moderate Duration Fund 0.20% 0.40% 0.65%
Municipal Bond Fund 0.25% 0.35% 0.60%
Foreign Bond and International
Bond Funds 0.25% 0.45% 0.70%
Global Bond and Global Bond II
Funds 0.30% 0.45% 0.70%
Emerging Markets Bond and Emerging
Markets Bond II Funds 0.40% 0.55% 0.80%
All other Funds 0.25% 0.40% 0.65%
</TABLE>
* As described below, the Administration Agreement includes a plan adopted
under Rule 12b-1 which provides for the payment of up to .25% of the Class
D Administrative Fee rate as reimbursement for expenses in respect of
activities that may be deemed to be primarily intended to result in the
sale of Class D shares.
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").
<PAGE>
Class-specific expenses include distribution and service fees payable
with respect to different classes of shares and administrative fees as described
above, 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.
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 February 24, 1998. 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.
Under the Administration Agreement, the Administrator or an affiliate
may pay financial service firms a portion of the Class D administration fees in
return for the firms' services (normally not to exceed an annual rate of .35% of
a Fund's average daily net assets attributable to Class D shares purchase
through such firms). The Administration Agreement includes a plan specific to
Class D shares that has been adopted in conformity with the requirements set
forth under Rule 12b-1 of the 1940 Act to allow for payment of up to .25% per
annum of the Class D administrative fees as reimbursement for expenses in
respect of activities that may be deemed to be primarily intended to result in
the sale of Class D shares. The principal types of activities for which such
payments may be made are services in connection with the distribution and
marketing of Class D shares and/or the provision of shareholder services. See
"Distribution of Trust Shares - Plan for Class D Shares."
<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 (Class D shares were not offered during the periods listed):
<TABLE>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
Fund 3/31/97 3/31/96 3/31/95
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>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
Fund 3/31/97 3/31/96 3/31/95
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>
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distributors LLC (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, the Administration Agreement 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).
The Trust offers six classes of shares: Class A, Class B, Class C,
Class D, 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").
Class D shares are generally offered to clients of financial service
firms, such as broker-dealers or registered investment advisors, with which the
Distributor has an agreement for the use of PIMCO Funds: Pacific Investment
Management Series in particular investment products, programs or accounts for
which a fee may be charged.
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 class. In addition, each class may have a differing sales
charge structure, and differing exchange and conversion features.
<PAGE>
Contingent Deferred Sales Charge and Initial Sales Charge
As described in the Class A, B and C 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 Class D, 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:
Fund Class A Class B Class 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
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 Class A, B and C 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.
<PAGE>
As described in the Class A, B and C 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:
Amount Retained
Fund Sales Charges by Distributor
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
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 Class A, B and C 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 Class A, B
and C 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
Class A, B and C 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 Class A, B
and C 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 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.
<PAGE>
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 under 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>
<S> <C> <C> <C>
Fund Class A Class B Class 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>
<S> <C> <C> <C>
Fund Class A Class B Class 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:
Fund A B
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
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:
Fund A B
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
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:
Fund A B
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
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 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.
<PAGE>
During the fiscal year ended September 30, 1996, unreimbursed expenses
of PAF's principal 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 and any related amendments.
<PAGE>
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, $1,244, $12,013, $341,418, $11,142, $13, $328 and $348,
respectively. All of these amounts constituted "service fees" under applicable
NASD rules.
Plan for Class D Shares
As described under "Management of the Trust- Fund Administrator," the
Funds' Administration Agreement includes a plan (the "Class D Plan") adopted
pursuant to Rule 12b-1 under the 1940 Act which provides for the payment of up
to .25% of the Class D administrative fees as reimbursement for expenses in
respect of activities that may be deemed to be primarily intended to result in
the sale of Class D shares.
Specifically, the Administration Agreement provides that the
Administrator shall provide in respect of Class D shares (either directly or by
procuring through other entities, including various financial services firms
such as broker-dealers and registered investment advisors ("Service
Organizations")) some or all of the following services and facilities in
connection with direct purchases by shareholders or in connection with products,
programs or accounts offered by such Service Organizations ("Special Class D
Services"): (i) facilities for placing orders directly for the purchase of a
Fund's shares and tendering a Fund's Class D shares for redemption; (ii)
advertising with respect to a Fund's Class D shares; (iii) providing information
about the Funds; (iv) providing facilities to answer questions from prospective
investors about the Funds; (v) receiving and answering correspondence, including
requests for prospectuses and statements of additional information; (vi)
preparing, printing and delivering prospectuses and shareholder reports to
prospective shareholders; (vii) assisting investors in applying to purchase
<PAGE>
Class D shares and selecting dividend and other account options; and (viii)
shareholder services provided by a Service Organization that 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; issuing confirmations for transactions by shareholders;
performing similar account administrative services; providing such shareholder
communications and recordkeeping services as may be required for any program for
which the Service Organization is a sponsor that relies on Rule 3a-4 under the
1940 Act; and providing such other similar services as may reasonably be
requested to the extent the Service Organization is permitted to do so under
applicable statutes, rules, or regulations.
The Administrator has entered into an agreement with the Distributor
under which the distributor is compensated for providing or procuring certain of
the Class D Services at the rate of .25% per annum of all assets attributable to
Class D shares sold through the Distributor.
The Trust and the Administrator understand that some or all of the
Special Class D Services pursuant to the Administration Agreement may be deemed
to represent services primarily intended to result in the sale of Class D
shares. The Administration Agreement includes the Class D Plan to account for
this possibility. The Administration Agreement provides that any portion of the
fees paid thereunder in respect of Class D shares representing reimbursement for
the Administrator's and the Distributor's expenditures and internally allocated
expenses in respect of Class D Services of any Fund shall not exceed the rate of
.25% per annum of the average daily net assets of such Fund attributable to
Class D shares.
In accordance with Rule 12b-1 under the 1940 Act, the Class D Plan may
not be amended to increase materially the costs which Class D shareholders may
bear under the Plan without approval of a majority of the outstanding Class D
shares, and by vote of a majority of both (i) the Trustees of the Trust and (ii)
those Trustees ("disinterested Class D Plan 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, cast in person at a meeting called for the purpose of voting on
the Plan and any related amendments. The Class D Plan may not take effect until
approved by a vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Class D Plan Trustees. In addition, the Class D Plan may not
take effect unless it is approved by the vote of a majority of the outstanding
Class D shares and it shall continue in effect so long as such continuance is
specifically approved at least annually by the Trustees and the disinterested
Class D Plan Trustees.
With respect to the Class D Plan, the Administration Agreement requires
the Administrator to present reports as to out-of-pocket expenditures and
internal expenses allocations of the Administrator and the Distributor at least
quarterly and in a manner that permits the disinterested Class D Plan Trustees
to determine that portion of the Class D administrative fees paid thereunder
which represents reimbursements in respect of Special Class D Services.
Rules of the NASD limit the amount of distribution fees that may be
paid by mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to the Class D Plan will qualify as "service
fees" and therefore will not be limited by NASD rules.
Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of Class A, Class B, Class C and
Class D shares are discussed in the Class A, B and C and Class D Prospectuses
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.
<PAGE>
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.
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 Class A, B and C and Class D Prospectuses 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 Class A, B and C 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.
<PAGE>
The Trust reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions
by any shareholder of record of the 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, the minimums of which are currently set at $250 for
Class A, Class B and Class C shares, $2,000 for Class D 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). The Prospectuses may set higher minimum account balances for one or more
classes from time to time depending upon the Trust's current policy. 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. The Trust may also charge periodic
account fees for accounts that fall below minimum balances, as described in the
Prospectuses.
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.
<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.
<PAGE>
NET ASSET VALUE
As indicated under "Net Asset Value" in the Institutional Prospectus
and "How Net Asset Value is Determined" in the Class A, B and C 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 summarizes certain additional federal income tax
considerations generally affecting the Funds and their shareholders. The
discussion is for general information only and does not purport to consider all
aspects of U.S. federal income taxation that might be relevant to beneficial
owners of shares of the Funds. The discussion is based upon current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, which change could
be retroactive. The discussion applies only to beneficial owners of Fund shares
in whose hands such shares are capital assets within the meaning of Section 1221
of the Code, and may not apply to certain types of beneficial owners of shares
(such as insurance companies, tax exempt organizations, and broker-dealers) who
may be subject to special rules. Persons who may be subject to tax in more than
one country should consult the provisions of any applicable tax treaty to
determine the potential tax consequences to them. Prospective investors should
consult their own tax advisers with regard to the federal tax consequences of
the purchase, ownership and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction. The discussion here and in the Prospectuses is not intended
as a substitute for careful tax planning.
<PAGE>
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under 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) 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 (c) 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, all or 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 generally
exempt from federal income tax when received by an investor. Certain
exempt-interest dividends, as described in the Class A, B and C 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
<PAGE>
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 Municipal Bond
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 Municipal Bond
Fund, all dividends and distributions of a Fund, whether received in shares or
cash, generally 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. Long-term capital gains are
generally taxed as "20% Rate Gain" or "28% Rate Gain." 20% Rate Gains result
from sales of assets held by the Fund for more than 18 months and are subject to
a maximum tax rate of 20%; 28% Rate Gains result from sales of assets held by
the Fund for more than one year but less than 18 months and are subject to a
maximum tax rate of 28%. 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.
<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, mid-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.
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.
<PAGE>
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 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.
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
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.
<PAGE>
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 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 and Market 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.
<PAGE>
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.
Constructive Sales
Recently enacted rules may affect the timing and character of gain if a
Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
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 consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
<PAGE>
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:
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 - .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%.
<PAGE>
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) (Class D shares were not
offered during the period listed):
<TABLE>
<S> <C> <C> <C> <C> <C>
Yield for Period
Ended September 30, 1997
Institutional Administrative
Fund Class Class A B 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%
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>
<S> <C> <C>
A tax-exempt yield of
Filing Status is equivalent to a taxable yield of
Single (Married filing jointly) 3% 4% 5% 6% 7%
Taxable income Marginal tax rate*
$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 28% 4.17% 5.56% 6.94% 8.33% 9.72 %
not over $56,550 not over $94,250
Over $56,550 but Over $94,250 but 31% 4.35% 5.80% 7.25% 8.70% 10.14%
not over $117,950 not over $143,600
Over $117,950 but Over $143,600 but 36% 4.69% 6.25% 7.81% 9.38% 10.94%
not over $256,500 not over $256,500
Over $256,500 Over $256,500 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
- -------------------
* These marginal tax rates do not take into account the effect of the phaseout
of itemized deductions and personal exemptions.
</TABLE>
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 may be 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, Class C and
Class D 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Return for Periods Ended September 30, 1997
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
Since
Inception Inception Inception
of Fund Date of Date of
Fund Class 1 Year 5 Years 10 Years (Annual-ized) Fund Class
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
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
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
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 Institutional N/A N/A N/A 5.22%* 12/31/96 12/31/96
III
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
Moderate Institutional N/A N/A N/A -5.65%* 12/31/96 12/31/96
Duration
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
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 Institutional 10.72% 8.06% N/A 9.60% 05/01/91 05/01/91
III 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
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
<PAGE>
Real Return Institutional N/A N/A N/A 2.76%* 01/29/97 01/29/97
Bond Class A -0.59%* 01/29/97
Class B -2.99%* 01/29/97
Class C 1.11%* 01/29/97
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
Foreign Bond Institutional 13.75% N/A N/A 11.65% 12/02/92 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% 10/01/95 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% 05/13/93 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 Institutional 28.68% N/A N/A 25.72% 06/28/96 06/28/96
Balanced
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
Emerging Institutional N/A N/A N/A 1.56%* 07/31/97 07/31/97
Markets Bond Class A -3.07%* 07/31/97
Class B -3.66%* 07/31/97
Class C 0.35%* 07/31/97
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
Total Return Institutional N/A N/A N/A 1.69%* 07/31/97 07/31/97
Mortgage
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
Low Duration Institutional N/A N/A N/A 2.23%* 07/31/97 07/31/97
Mortgage
- ---------------- ------------------- ------------- ------------- ------------- -------------- --------------- ---------------
* unannualized
</TABLE>
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:
<TABLE>
<S> <C> <C>
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.
</TABLE>
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.
<PAGE>
For the month ended September 30, 1997, the current distribution rates
(annualized) for the Funds were as follows (Class D shares were not offered
during the period listed):
<TABLE>
<S> <C> <C> <C> <C> <C>
Distribution Rate
Institutional Administrative
Fund Class Class A B 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 Fund 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 Fund 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 Fund 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
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.
Top Foreign
Year Performer U.S.
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
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.
<TABLE>
<S> <C> <C> <C> <C> <C>
Potential College Cost Table
Start Public Private Start Public Private
Year College College Year College College
- ---- ------- ------- ---- ------- -------
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.
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>
<S> <C> <C> <C> <C> <C>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------- ----- ------- ---------- ---------
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% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
</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.
<PAGE>
The Trust may use in its advertisement and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<S> <C> <C> <C> <C>
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
30 Years $1,979 $59,370 $200,000
25 Years $2,955 $73,875 $200,000
20 Years $4,559 $91,180 $200,000
15 Years $7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</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:
% of Income for Individuals
Aged 65 Years and Older in 1990*
Social Security
Year and Pension Plans Other
1990 38% 62%
* For individuals with an annual income of at least $51,000. Other
includes personal savings, earnings and other undisclosed sources of income.
Source: Social Security Administration.
<PAGE>
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.
<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 would not be able to
elect any Trustees. As of February 28, 1998, the following persons owned of
record or beneficially 5% or more of the shares of the indicated classes of the
following Funds:
<PAGE>
<TABLE>
<S> <C> <C>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Money Market Fund
Institutional
Pacific Life Insurance Co. for 8,614,299.320 21.32%
California Hardware Company
700 Newport Center Drive
Newport Beach, California 92660
California Community Foundation 11,879,176.490 33.41%*
606 South Olive Street, Suite 2400
Los Angeles, California 90014
Marin Community Foundation 7,791,335.300 21.91%
17 East Sir Francis Drake Blvd., Suite 200
Larkspur, California 94939
Poverello Foundation 3,171,486.350 8.92%
Mayo Foundation200 First Street S.W.
Rochester, Minnesota 55905
Stussy Inc. 3,054,951.820 8.59%
1852 Langley Avenue
Irvine, California 92714
Charles Schwab & Co., Inc.** 2,332,954.810 6.56%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Columbus Circle Trust Company - SV** 1,779,294.680 5.00%
1 Station Place Metro Center
Stamford, Connecticut 06902
Administrative
Cody Kondo 48,039.310 7.95%
354 Sturbridge Road
Wyckoff, New Jersey 07481
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Money Market Fund
Administrative
Joan H. Dickson 34,563.700 5.72%
2510 46th Avenue NW
Olympia, Washington 98502
Class A
Carn & Co. 7,622,957.860 10.98%
PIMCO Advisors 401K Savings & Retirement Plan
P. O. Box 96211
Washington, D.C. 20090-6211
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
Robert W. Baird & Co. Inc. (A/C #4574-6139) 326,051.410 10.92%
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5391
Mucio R. Valenca & Helen Valenca 168,,093.840 5.63%
87 Highland Avenue
Binghamton, New York 13905-4041
Class C
W.D. Jennett, C. Cooper & T.J. Viola 12,748,219.020 21.44%
Gilbert Kelly Crowley Jennett Retirement Trust
1200 Wilshire Boulevard, Suite 5
Los Angeles, California 90017-1908
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Short-Term Fund
Institutional
Charles Schwab & Co., Inc.** 2,196,438.721 12.35%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Trustees of Columbia University 1,089,238.242 11.75%
in the City of New York
Office of Investments
475 Riverside Drive, Suite 401
New York, New York 10115
Dillon Co., Inc. 1,609,193.029 9.05%
P. O. Box 1266
Hutchinson, Kansas 67504-1266
DLJ Securities Corporation, Inc.** 1,136,706.581 6.39%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
Denison University 1,022,448.391 5.75%
P.O. Box F
Granville, Ohio 43023
Hawaii Carpenters Health & Welfare 936,277.866 5.26%
615 Pilkoi Street
Honolulu, Hawaii 96814
Administrative
Northwestern Trust 412,130.918 81.58%*
1201 Third Avenue
Seattle, Washington 98101
First National Bank as Trustee for** 69,862.169 13.83%
Lau & Co.
100 West Houston
San Antonio, Texas 78296
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Short-Term Fund
Class A
Smith Barney, Inc. 00165244008** 300,699.612 15.64%
388 Greenwich Street
New York, New York 10013
MLPF&S for the sole benefit of its Customers 224,626.401 11.68%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
PaineWebber FBO 184,812.654 9.61%
Adventist Healthcare, Inc.
Dan Bowen
1801 Research Boulevard, Suite 300
Rockville, Maryland 20850-3152
PaineWebber FBO 123,714.054 6.43%
Louise Obici Memorial Hospital
Attn: William A. Carpenter
1900 North Main Street
P.O. Box 1100
Suffolk, Virginia 23434-4345
Lehman Brothers Inc. 842-17450-12** 99,601.594 5.18%
P. O. Box 29198
Brooklyn, New York 11202-9198
Class B
MLPF&S for the sole benefit of its Customers** 78,326.834 71.42%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Smith Barney, Inc. 00154621411** 15,659.002 5.16%
388 Greenwich Street
New York, New York 10013
Class C
MLPF&S for the sole benefit of its Customers** 213,53.132 33.21%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Short-Term Fund
Class C
Prudential Securities, Inc. FBO 42,496.668 6.61%
Oakwood Orthopaedic Clinic PA
Drs. Manning & Evins Trustees
13 Edgewood Drive
Greenville, South Carolina 29605-4235
RPSS TR Rollover IRA ` 34,174.574 5.31%
FBO William B. Becker
8053 Garfield Street NE
Spring Lake Park, Minnesota 55432-2164
Low Duration Fund
Institutional
Charles Schwab & Co., Inc.** 28,484,376.001 10.23%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Brunswick, Inc. 14,165,394.357 5.09%
P. O. Box 1066
Wall Street Station
New York, New York 10286
Administrative
FIIOC as Agent for 1,864,763.401 54.49%*
Certain Employee Benefits Plan**
100 Magetian KW1C
Covington, Kentucky 41015
News & Observer Cash or Deferred Plan 468,253.672 13.68%
550 Kearny Street #600
San Francisco, California 94108
Frirst National Bank as Trustee for** 437,320.523 12.78%
Lau & Co.
100 West Houston
San Antonio, Texas 78296
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Low Duration Fund
Administrative
New York Life Trust Company 227,770.479 6.66%
51 Madison Avenue, Room 117A
New York, New York 10010
First Interstate Bank as Trustee for 182,797.824 5.34%
Choicemaster**
P.O. Box 9800
Calabasas, California 91302
Class A
Richard J. Steinhelper TR 3,469,208.845 35.05%*
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 1,740,422.427 17.58%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class B
MLPF&S for the sole benefit of its Customers** 255,657.257 16.56%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
MLPF&S for the sole benefit of its Customers** 1,744,637.274 26.09%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Low Duration Fund II
Institutional
Sprint Corporation 14,242,859.255 36.63%*
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Low Duration Fund II
Institutional
American Bible Society 6,471,800.708 16.64%
1865 Broadway
New York, New York 10023
Salt River Project 3,309,935.460 8.51%
P.O. Box 52025
Phoenix, Arizona 85072
University of Illinois Foundation 2,161,360.181 5.56%
1305 West Green Street
Urbana, Illinois 61801
Administrative
First National Bank as Trustee for** 7,176.510 100.00%*
Lau & Co.
100 West Houston
San Antonio, Texas 78296
Low Duration Fund III
Institutional
Loyola Academy Endowment Fund 855,721.393 36.27%*
135 S. LaSalle Street
P. O. Box 1443
Chicago, Illinois 60690
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Low Duration Fund III
Institutional
Sisters of St. Joseph/Michigan 718,201.997 30.44%*
3427 Gull Road
P. O. Box 13
Nazareth, Michigan 49074
St. John Health system 535,117.519 22.68%
22101 Moross Road
Detroit, Michigan 48236
Charles Schwab & Co., Inc. ** 250,146.687 10.60%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Moderate Duration Fund
Institutional
Mercantile Stores Company, Inc. 7,501,984.464 32.13%*
Attn: Mr. Robert Bienkowski
111 Wall Street
New York, New York 10005
Sparrow Health System 4,639,923.614 19.87%
Mutual Fund Operations
P. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Baystate Health System, Inc. P&O/Endow 2,736,965.967 11.72%
759 Chestnut Street
Springfield, Massachusetts 01199
Columbus Circle Trust Company - SV** 2,491,101.322 10.67%
1 Station Place Metro Center
Stamford, Connecticut 06902
St. John Hospital of Detroit, Michigan 1,636,013.653 7.01%
P. O. Box 771072
Detroit, Michigan 48277-1072
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
High Yield Fund
Institutional
Charles Schwab & Co., Inc. ** 16,016,841.059 11.97%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Administrative
National Financial Services Corporation** 1,534,814.863 35.12%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
Certain Employee (Fidelity)** 1,191,202.886 27.26%*
100 Magellan KWlC
Covington, Kentucky 41015
StocktonTrust Nominee Partnership** 405,892.432 9.29%
c/o Stockton Trust, Inc.
3001 E. Camelback Road, Suite 100
Phoenix, Arizona 85016
American Bankers Insurance Co. 434,782.609 9.95%
P. O. Box 979004
Miami, Florida 33197-9004
American Bankers Life Assurance of Fl. 430,663.221 9.85%
P. O. Box 979004
Miami, Florida 33197-9004
Class A
MLPF&S for the sole benefit of its Customers** 1,295,434.443 22.52%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class B
MLPF&S for the sole benefit of its Customers** 3,778,199.266 29.74%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
High Yield Fund
Class C
MLPF&S for the sole benefit of its Customers** 3,869,906.869 16.07%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Total Return Fund
Institutional
Charles Schwab & Co., Inc.** 84,172,461.271 5.71%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Class A
MLPF&S for the sole benefit of its Customers** 11,262,314.065 24.23%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Merrill Lynch Trust Company TTEE** 10,193,537.067 21.93%
FBO Qualified Retirement Plans
Attn: Phil Kolb
265 Davidson Avenue
Somerset, New Jersey 08873-4120
The Chase Manhattan Bank TR 3,349,665.977 7.20%
McLane Co. Investment Savings Plan
770 Broadway, 10th Floor
New York, New York 10003-9522
Class B
MLPF&S for the sole benefit of its Customers** 5,736,048.027 34.78%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
MLPF&S for the sole benefit of its Customers** 9,038,612.913 24.40%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Total Return Fund II
Institutional
Arco 4,557,949.169 8.85%
c/o State Street Bank
One Enterprise Drive
North Quincy, Massachusetts 02171
Macmillan Bloedel Pension Plan 4,301,163.541 8.35%
c/o State Street Bank and Trust Co.
200 Newport Avenue #JQ7
North Quincy, Massachusetts 02171
Charles Schwab & Co., Inc.** 4,129,406.035 8.02%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Morley Capital Management 3,188,916.980 6.19%
5665 SW Meadows Road, Suite 400
Lake Oswego, Oregon 97035
IUE AFL-CIO Pension Plan 6,366,576.862 12.37%
1460 Broad Street
Blommfield, New Jersey 07003
CMTA-GMPP & Allied Workers Pension Trust 3,117,473.496 6.05%
700 Newport Center Drive
Newport Beach, California 92660
The Trustee of GMP Employee Pension 2,881,800.409 5.60%
1100 Fifth & Race Tower
Cincinnati, Ohio 45202
Administrative
Eastern Illinois University Foundation (PaineWebber) 110,643.287 7.80%
600 Lincoln Avenue
Charleston, Illinois 61920
American Express Trust Company** 169,806.719 11.96%
1200 Northstar West
P.O. Box 534
Minneapolis, Minnesota 55440-0534
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Total Return Fund II
Administrative
Datalynx #083 (Hunt, Dupree, Rhine)** 399,414.956 28.14%*
P. O. Box 173736
Denver, Colorado 80217-3736
Eastern Illinois University (Painewebber) 362,843.566 25.57%*
600 Lincoln Avenue
Charleston, Illinois 61920-3011
Total Return Fund III
Institutional
Archdiocese of LA/Corp/Diocese Tucson 8,747,333.398 23.14%
3424 Wilshire Boulevard, 10th Floor
Los Angeles, California 90010-2241
Archdiocese LA Lay Plan/Diocese Tucson 2,111,859.477 5.59%
3424 Wilshire Boulevard
Los Angeles, California 90010-2241
The Papal Foundation 2,004,245.364 5.30%
222 North 17th Street
Philadelphia, Pennsylvania 19103
Holy Cross 4,590,114.170 12.14%
St. Mary's Lourdes Hall
Notre Dame, Indiana 46556
Diocese of Orange 2,936,448.802 7.77%
2811 East Villa Road
Orange, California 92667
Baptist Health System, Inc. 2,463,124.089 6.52%
P. O. Box 830605
Birmingham, Alabama 35283-0605
Society of Mount Carmel 2,178,293.199 5.76%
1317 Frontage Road
Darien, Illinois 60561
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Total Return Fund III
Administrative
Dubuque Bank and Trust Company** 14,393.933 77.39%*
P.O. Box 747
Dubuque, Iowa 52004-0747
National Financial Services Corporation** 4,195.194 22.56%
1 World Financial Center
200 Liberty Street
New York, New York 10281
Long-Term U.S. Government Fund
Institutional
Allianz Defined Contribution Plan 1,291,571.575 28.85%*
P. O. Box 92956
Chicago, Illinois 60675
Charles Schwab & Co. Inc. ** 915,867.618 20.46%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Pacific Life Insurance Co. for 596,018.725 13.31%
California Hardware Company
700 Newport Center Drive
Newport Beach, California 92660
Source One 444,891.400 9.94%
P. O. Box 92956
Chicago, Illinois 60675
DLJ Securities Corporation, Inc.** 361,057.879 8.07%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
The J. Paul Getty Trust 265,130.136 5.92%
401 Wilshire Blvd., Suite 900
Santa Monica, California 90401
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Long-Term U.S. Government Fund
Administration
Sealed Air P/S Plan (Met Life) 260,403.474 54.74%*
100 Plaza One MS 3064
Jersey City, New Jersey 07302
Smith Barney Inc.** 148,282.514 31.17%*
388 Greenwich Street
New York, New York 10013
New York Life Trust Company** 66,998.937 14.08%
51 Madison Avenue, Room 117A
New York, New York 10010
Class A
PaineWebber FBO 64,782.943 10.79%
Lokahi Pacific Investment Account
840 Alua Street #203
Wailuku, Hawaii 96793-1482
MLPF&S for the sole benefit of its Customers** 57,071.821 9.50%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Carn & Co. 02174701 31,986.699 5.32%
Finkbeiner Pettis & Strout 401K
Attn: Mutual Funds - Star
P. O. Box 96211
Washington D.C. 20090-6211
Class B
MLPF&S for the sole benefit of its Customers** 162,537.569 25.08%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
MLPF&S for the sole benefit of its Customers** 152,419.404 24.26%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Real Return Bond Fund
Institutional
National Financial Services Corporation** 368,750.526 65.66%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
Chris P. Dialynas 53,294.630 9.61%
840 Newport Center Drive, Suite 360
Newport Beach, California 92660
Hofstra University 50,968.400 9.08%
128 Hofstra University
Hempstead, New York 11549
Charles Schwab & Co. Inc. ** 45,511.157 8.10%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Class A
Prudential Securities, Inc. FBO 20,935.826 57.46%*
Dima Ventures Inc.
Fund Account
4199 Campus Drive, Suite 830
Irvine, California 92612-2698
Dain Rauscher Inc. BBO 13,473.054 36.97%*
Mr. Daniel Stanley
U/A DTD 6/7/91
16186 Boswell Road
Rockford, Illinois 61072-9705
Dain Rauscher Custodian Eugene Ehrhardt 5,561.480 15.26%
Profit Sharing Plan
8789 route 64
Sycamore, Illinois 60178
NFSC FEBO #A7D-059501 5,253.072 14.41%
Robert & Genevieve Calcote
4431 Mobile Avenue
El Paso, Texas 79903-1219
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Real Return Bond Fund
Class A
NFSC/FMTC IRA Rollerover 4,965.243 13.62%
FBO Jeannette Mazzer
303 E. 57th Street
New York, New York 10022
Dain Rauscher Inc. BBO 4,887.987 13.41%
Olympia C. Kollias
5239 Indianhead Avenue
Rockford, Illinois 61108
Dain Rauscher Custodian 3,456.152 9.48%
Jerry D, Kitchen
5703 Newburg Road
Rockford, Illinois 61108
Wexford Clearing Services Corp. 3,388.230 9.29%
Robert & Genevieue Calcote
4431 Mobile Avenue
El Paso, Texas 79903-1219
Dain Rauscher Inc. BBO 2,518.053 6.91%
Warren C. Friest
Ardene R. Friest JT TEN/WROS
1912 Nebraska road
Rockford, Illinois 61108-6007
Dain Rauscher Custodian William Strasser 2,024.519 5.55%
1217 N. Village Drive
Arlington Heights, Illinois 60004-4670
Dain Rauscher Custodian 2,221.811 6.09%
Shirley H. Troeger SEP/IRA
2510 Harris Road
Rockford, Illinois 61107
Dain Rauscher Custodian 1,976.285 5.42%
Gloria Weber
A/C #8373-2849 IRA
3307 Rural Street
Rockford, Illinois 61107
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Real Return Bond Fund
Class A
Prudential Securities, Inc. FBO 1,951.999 5.35%
Ms. Ethel M. Strasser Trust
1217 N. Village Drive
Arlington Heights, Illinois 60004-4670
Dain Rauscher Inc. FBO 1,919.844 5.26%
Warren C. Friest
Ardene R. Friest JT TEN/WROS
1912 Nebraska road
Rockford, Illinois 61108-6007
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
Class C
RPSS TR Rollover IRA 3,951.309 8.34%
FBO Emery Jahnke
2402 Lilac Land
Fargo, North Dakota 58102-2124
RPSS TR IRA 2,619.918 5.53%
FBO Stan C. James
2825 Hickory Street
Fargo, North Dakota 58102-1714
Raymond James & Assoc. Inc. CSDN 2,610.607 5.51%
3370 S. Locust Street
Denver, Colorado 80222-7665
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Real Return Bond Fund
Class C
Harold N. Fugile Trust 2,538.442 5.35%
FBO Harold N. Fugile
1546 Grand Boulevard
Sarasota, Florida 34232-3216
MLPF&S for the sole benefit of its Customers** 5,076.246 10.71%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
DLJ Securities Corporation, Inc.** 6,307.562 13.31%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
DLJ Securities Corporation, Inc.** 5,976.372 12.61%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
Irene M. Leatart 5,243.786 11.07%
24501 Via Mar Monte Apt. 79
Carmel, California 93923-9429
Foreign Bond Fund
Administrative
National Financial Services Corporation** 29,017.906 100.00%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
Class A
Lewco Securities Corp 97,411.789 11.76%
FBO A/C#H30-627865-6-01
34 Exchange Place 4th Floor
Jersey City, New Jersey 07311
Verb & Co.** 947,445.249 11.41%
4380 SW MacAdam Avenue, Suite 450
Portland, Oregon 97201-6407
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Foreign Bond Fund
Class B
MLPF&S for the sole benefit of its Customers** 127,012.855 13.71%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
MLPF&S for the sole benefit of its Customers** 169,817.149 11.97%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Global Bond 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
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
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Global Bond Fund
Administrative
Stocktontrust Nominee Partnership 517,068.333 87.04%*
c/o Stockton Trust, Inc
3001 East Camelback Road, Suite 100
Phoenix, Arizona 85016
FIIOC as Agent for Certain Employee Benefits Plan 76,997.633 12.96%
100 Magellan KW1C
Covington, Kentucky 41015
Global Bond Fund II
Institutional
Canterbury/Uniform Code Council 1,681,284.439 100.00%*
Mutual Funds Operations
Pittsburgh, Pennsylvania 15230-3198
Class A
Central Fidelity National Bank FBO 224,158.693 35.14%*
OBICI Foundation
P.O. Box 27602
Richmond, Virginia 23261-7602
MLPF&S for the sole benefit of its Customers 43,986.240 6.89%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Wilmington Trust TR
Bank of California TR 42,429.613 6.65%
Wholesale Beer Multi Employee Trust
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
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
International Bond Fund
Institutional
State Universities Retirement System 6,209,922.529 5.73%
P.O. Box 2710, Station A
Champaign, Illinois 61825-2710
Emerging Markets Bond Fund
Institutional
Pacific Investment Management Company 358,138.618 94.08%*
840 Newport Center Drive
Newport Beach, California 92660
Class A
RPSS TR Rollover IRA 5,530.548 17.18%
FBO Glenda D. Stubbs
1503 Drop Tine Drive
Cedar Park, Texas 78613-4901
MLPF&S for the sole benefit of its Customers** 4,869.000 15.13%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
NFSC FEBO #0C8-743720 3,522.520 10.94%
FBO Wayne E. Smith Jr.
Box 104A
Green Drive Rd3
Greensburg, Pennsylvania 15601
Rebecca A. Waldo 2,469.141 7.67%
15726 Birchview Drive
Tomball, Texas 77375-8677
Steve M. Foulke & Mary M. Foulke. 2,160.611 6.71%
Community Property
27972 Via Mirada
Laguna Niguel, California 92677-7378
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Emerging Markets Bond Fund
Class A
Patricia D. Rodilosso Cust. 2,018.202 6.27%
FBO Christopher Adam Rodilosso
9 River Edge Drive
Rumson, New Jersey 07760-1025
Class B
Cynthia S. Brannon 9,052.201 35.08%*
8408 Quebe Road
Brenham, Texas 77833-6664
MLPF&S for the sole benefit of its Customers** 6,567.000 25.45%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Resources Trust CO TR IRA 2,880.780 11.16%
FBO Mike Miller
P. O. Box 5900
Denver, Colorado 80217-5900
Class C
NFSC FEBO #OC8-078107 4,906.588 34.36%*
Bernard/Denise P. McGinley
445 Fort Pitt Boulevard
Pittsburgh, Pennsylvania 15219
NFSC FEBO #120-077852 4,671.875 32.72%*
FBO John J. Jordan
P. O. Box 466
Rye Beach, New Hampshire 03871
Wheat First Securities Cust. IRA 1,041.586 7.29%
FBO William Dean Conduit
3706 Takoya Drive
Ellicott City, Maryland 21042-4822
Robert W. Baird & Co., Inc. A/C 5407-4903 723.724 5.06%
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5391
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
StocksPLUS Fund
Institutional
Charles Schwab & Co., Inc.** 3,913,104.821 13.23%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
First Trust National Association as Trustee for 2,368,394.650 8.01%
St. Benedict Retirement Plan Trust
P.O. Box 64010
St. Paul, Minnesota 55164-0010
Iowa Methodist 2,280,020.560 7.71%
1200 Pleasant Street
Des Moines, Iowa 50309
Administrative
New York Life Trust Company** 69,378.441 48.61%*
51 Madison Avenue, Room 117A
New York, New York 10010
National Financial Services Corporation** 50,047.470 35.07%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
Public Service of New Mexico #90701 13,337.651 9.35%
The Vanguard Group
P. O. Box 2600 VM 421
Valley Forge, Pennsylvania 19482
DLJ Securities Corporation, Inc.** 8,809.978 6.17%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
StocksPLUS Fund
Class A
FTC & Co. ** 540,334.932 12.58%
P.O. Box 173736
Denver, Colorado 80217-3736
MLPF&S for the sole benefit of its Customers** 358,982.203 8.35%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Dain Bosworth, Inc. FBO 262,084.725 6.10%
Washington Law School Foundation
1100 NE Campus Parkway
Seattle, Washington 98105
Class B
MLPF&S for the sole benefit of its Customers** 806,406.819 13.05%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
MLPF&S for the sole benefit of its Customers** 552,812.353 8.72%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Strategic Balanced Fund
Institutional
California Community Foundation 2,452,383.165 79.77%*
606 South Olive Street, Suite 2400
Los Angeles, California 90014
Pacific Financial Asset 569,336.779 18.52%
Management Corporation
700 Newport Center Drive
Newport Beach, California 92660
<PAGE>
Shares Percentage of
Beneficially Outstanding
Fund Owned Shares Owned
Municipal Bond Fund
Institutional
Pacific Investment Management Company 301,117.35 100.00%*
840 Newport Center Drive
Newport Beach, California 92660
Low Duration Mortgage
Institutional
Pacific Investment Management Company 341,045.677 100.00%*
840 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc.** 24,959.548 6.82%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
</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 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.
<PAGE>
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, Class C and Class D 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.
Massachusetts 02110, and at State Street's branches, and subject to approval by
the Board of Trustees, at a foreign branch of a qualified U.S. bank, with an
eligible foreign subcustodian, or with an eligible foreign securities
depository.
Pursuant to rules adopted under the 1940 Act, the Trust may maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Trust; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Trust assets. The Board of Trustees reviews annually the
continuance of foreign custodial arrangements for the Trust. No assurance can be
given that the Trustees' appraisal of the risks in connection with foreign
custodial arrangements will always be correct or that expropriation,
nationalization, freezes, or confiscation of assets that would impact assets of
the 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 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, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also act as counsel to the Trust.
<PAGE>
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. Financial statements for the PIMCO
Municipal Bond Fund as of January 2, 1998, including notes thereto, and the
report of Price Waterhouse thereon dated March 11, 1998, are included herein.
<PAGE>
Report of Independent Accountants
To the Shareholder and Board
of Trustees of PIMCO Investment Management Series:
Municipal Bond Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Municipal Bond Fund
(one of the funds constituting the PIMCO Investment Management Series, hereafter
referred to as the "Trust") at January 2, 1998, in conformity with generally
accepted accounting principles. This financial statement is the responsibility
of the Trust's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included confirmation
of securities at January 2, 1998 by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provides a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Kansas City, Missouri
March 11, 1998
<PAGE>
PIMCO FUNDS: PACIFIC INVESTMENT MANAGEMENT SERIES
MUNICIPAL BOND FUND
STATEMENT OF ASSETS & LIABILITIES
January 2, 1998
<TABLE>
<S> <C>
ASSETS:
Investments at value (cost $4,631,858) $ 4,630,997
Repurchase agreement at value (cost $649,000) 649,000
Cash 650,986
Interest receivable
13,756
---------------------
Total Assets 5,944,739
---------------------
LIABILITIES:
Payable for investments purchased 2,944,357
Distribution payable
1,243
---------------------
Total Liabilities 2,945,600
---------------------
---------------------
---------------------
=====================
NET ASSETS: $ 2,999,139
=====================
Net assets consist of:
Paid-in capital $ 3,000,000
Unrealized depreciation (861)
=====================
Net assets $ 2,999,139
=====================
Net asset value per share, 300,000 shares outstanding $ 9.997
=====================
</TABLE>
See Notes to Statement of Assets and Liabilities
<PAGE>
PIMCO Funds
Notes to Statement of Assets and Liabilities
January 2, 1998
- --------------------------------------------------------------------------------
PIMCO Funds
Notes to Statement of Assets and Liabilities
January 2, 1998
- --------------------------------------------------------------------------------
1. Organization
PIMCO Funds (the "Trust") was established as a Massachusetts business trust
on February 19, 1987. The Trust is registered under the Investment Company
Act of 1940 (the "Act"), as amended, as an open-end investment management
company. The Trust currently consists of twenty-five separate investment
funds. Information presented in this Statement of Assets and Liabilities
pertains only to the Municipal Bond Fund (the "Fund"). The Fund seeks high
current income exempt from federal income tax, consistent with the
preservation of capital. The Fund is authorized to offer six classes of
shares. As of January 2, 1998 the Fund has only one class of share
outstanding; the Institutional Class.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
Security Valuation. Portfolio securities and other financial instruments
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, the mean between representative bid and asked
quotations obtained from a quotation reporting system or from established
market makers. Fixed income securities, including those to be purchased
under firm commitment agreements, are normally valued on the basis of
quotes obtained from brokers and dealers or pricing services. Short-term
investments which mature in 60 days or less are valued at amortized cost,
which approximates market 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.
Securities Transactions and Investment Income. Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
sold are recorded on the identified cost basis. Interest income is recorded
on the accrual basis commencing on the settlement date of the transaction,
and includes the accretion of discounts and amortization of premiums.
Dividends and Distributions to Shareholders. Dividends from net investment
income of the Fund, are declared on each day the Trust is open for business
and are distributed to shareholders monthly.
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for such items as wash sales, net operating losses and
capital loss carryforwards.
Federal Income Taxes. The Fund intends to qualify as a regulated investment
company and distribute all of its taxable income and net realized gains, if
applicable, to shareholders. Accordingly, no provision for federal income
taxes has been made.
Repurchase Agreements. Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of the
repurchase agreements. Provisions of the agreements ensure that the market
value of the collateral is sufficient in the event of default; however, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
3. Fees, Expenses, and Related Party Transactions
Investment Advisory Fee. Pacific Investment Management Company ("PIMCO")
serves as investment adviser (the "Adviser") to the Fund, pursuant to an
investment advisory contract. The Adviser receives a monthly fee from the
Fund at an annual rate based on average daily net assets of the Fund at a
rate of 0.25%.
Administration Fee. PIMCO also serves as administrator (the
"Administrator"), and provides administrative services to the Fund for
which it receives a monthly fee from the Fund at an annual rate based on
average daily net assets of the Fund at a rate of 0.25%.
Other Expenses. The Fund is responsible for certain other 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 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.
4. Shares of Beneficial Interest
As of January 2, 1998, the Fund has 300,000 Institutional Class shares
outstanding, all of which are owned by PIMCO.
