<PAGE>
PIMCO ADVISORS L.P.
800 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
(800) 426-0107
April 27, 1998
Dear PIMCO Tax Exempt Fund Shareholder:
I am writing to inform you about a proposal to merge the PIMCO Tax Exempt
Fund into the PIMCO Municipal Bond Fund. You are being asked to vote on an
Agreement and Plan of Reorganization whereby all of the assets of the Tax
Exempt Fund would be transferred in a tax-free reorganization to the Municipal
Bond Fund, a series of PIMCO Funds: Pacific Investment Management Series, in
exchange for shares of the Municipal Bond Fund. We believe this is a positive
development for current PIMCO Tax Exempt Fund shareholders, and the Fund's
Board of Trustees has approved the proposal.
Briefly, the merger would result in a number of advantages for shareholders:
A NEW FUND MANAGER. The Municipal Bond Fund is managed by Pacific
Investment Management Company, a PIMCO Advisors institutional investment
firm. With over $117 billion in assets under management, Pacific Investment
Management is one of the largest bond managers in the U.S. According to
Morningstar, the firm "is one of the great bond shops" (8/97). Pacific
Investment Management currently manages 25 PIMCO bond funds.
REDUCED FUND EXPENSES. The Municipal Bond Fund has a lower expense ratio
than the Tax Exempt Fund.
CONTINUED HIGH QUALITY INVESTMENT SECURITIES. The Municipal Bond Fund
will generally invest 90% of its portfolio in investment grade bonds.
If the Agreement and Plan of Reorganization is approved and consummated, you
would no longer be a shareholder of the Tax Exempt Fund, and would become a
shareholder of the Municipal Bond Fund, which has similar investment
objectives and policies as, but lower fees and expenses than, the Tax Exempt
Fund. As with the Tax Exempt Fund, the Municipal Bond Fund declares dividends
daily and distributes them to shareholders monthly. The Municipal Bond Fund
seeks high current income exempt from federal income tax. The Municipal Bond
Fund has a secondary objective of capital appreciation. Of course, with the
Municipal Bond Fund you will have the same free exchange privileges with the
other 47 PIMCO Funds.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. IN ORDER
TO AVOID THE ADDED COST OF FOLLOW-UP SOLICITATIONS AND POSSIBLE ADJOURNMENTS,
PLEASE TAKE A FEW MINUTES TO READ THE PROXY STATEMENT/PROSPECTUS AND CAST YOUR
VOTE. IT IS IMPORTANT THAT YOUR VOTE BE RECEIVED NO LATER THAN JUNE 17, 1998.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
[LOGO OF SIGNATURE OF STEPHEN TREADWAY]
Stephen Treadway
President and Chief Executive
Officer
<PAGE>
PIMCO TAX EXEMPT FUND
840 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
(800) 426-0107
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
PIMCO TAX EXEMPT FUND
TO BE HELD ON JUNE 19, 1998
----------------
TO THE SHAREHOLDERS:
Notice is hereby given that a Special Meeting of Shareholders of the PIMCO
Tax Exempt Fund, a series of PIMCO Funds: Multi-Manager Series, will be held
on June 19, 1998 at 10:00 a.m., Eastern time, at 2187 Atlantic Street,
Stamford, Connecticut 06902 for the following purpose:
1. To approve or disapprove an Agreement and Plan of Reorganization
providing for (a) the acquisition of all assets, and the assumption of all
liabilities, of the PIMCO Tax Exempt Fund by the PIMCO Municipal Bond Fund,
a series of PIMCO Funds: Pacific Investment Management Series, in exchange
for shares of beneficial interest of the PIMCO Municipal Bond Fund, and (b)
the liquidation of the PIMCO Tax Exempt Fund and the pro rata distribution
of its holdings of PIMCO Municipal Bond Fund shares to its shareholders.
2. To transact such other business as may properly come before the
meeting.
Shareholders of record at the close of business on April 6, 1998 are
entitled to notice of, and to vote at, the meeting. Your attention is called
to the accompanying Proxy Statement/Prospectus. Regardless of whether you plan
to attend the meeting, PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD SO THAT YOU WILL BE REPRESENTED AT THE MEETING. If you
have returned a proxy card and are present at the meeting, you may change the
vote specified in the proxy, if desired, at that time.
By Order of the Board of Trustees
Newton B. Schott, Jr., Secretary
April 27, 1998
<PAGE>
PROXY STATEMENT/PROSPECTUS
April 27, 1998
relating to the acquisition by
PIMCO Municipal Bond Fund ("Municipal Bond Fund"),
a series of PIMCO Funds: Pacific Investment Management Series ("PIMS")
840 Newport Center Drive
Newport Beach, California 92660
(800) 426-0107
of the assets of
PIMCO Tax Exempt Fund ("Tax Exempt Fund"),
a series of PIMCO Funds: Multi-Manager Series ("MMS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about a
proposed reorganization in which all of the assets of the Tax Exempt Fund
would be acquired by the Municipal Bond Fund, in exchange for shares of the
Municipal Bond Fund and the assumption by the Municipal Bond Fund of the Tax
Exempt Fund's liabilities (the "Reorganization"). Shares of the Municipal Bond
Fund received by the Tax Exempt Fund would be distributed to the shareholders
of the Tax Exempt Fund, and the Tax Exempt Fund would be terminated. As a
result of the Reorganization, each shareholder of the Tax Exempt Fund would
receive that number of full and fractional shares of the corresponding class
of the Municipal Bond Fund having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's shares of the Tax Exempt Fund
held as of the close of business on the date of the exchange.
This Proxy Statement/Prospectus, which you should retain for future
reference, sets forth concisely the information about the Municipal Bond Fund
that a prospective investor should know before investing. A Statement of
Additional Information dated April 27, 1998 containing additional information
about the Reorganization and the parties thereto has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Proxy Statement/Prospectus. A copy of the Statement of
Additional Information is available upon request by calling (800) 426-0107.
For more information about PIMS and the Municipal Bond Fund, see the Class A,
B and C prospectus and the Statement of Additional Information for PIMS, each
dated April 1, 1998, which are incorporated herein by reference and copies of
which may be obtained without charge by calling (800) 426-0107. For more
information about MMS and the Tax Exempt Fund, see the Class A, B and C
prospectuses for MMS dated February 5, 1998 and April 1, 1998, and the
Statement of Additional Information for MMS dated April 1, 1998, which are
incorporated herein by reference and copies of which may be obtained without
charge by calling (800) 426-0107. The SEC maintains an Internet World Wide Web
site (at http://www.sec.gov) which contains the Statements of Additional
Information, materials that are incorporated by reference into the
prospectuses and Statements of Additional Information, and other information
about PIMS, MMS and the Funds. In addition, PIMS and MMS provide periodic
reports to shareholders containing relevant information regarding the Funds,
including investment results and reviews of portfolio changes. You may receive
a copy of the most recent annual and semi-annual report for MMS, without
charge, by calling (800) 426-0107. The Municipal Bond Fund has not yet
completed a fiscal year, or portion thereof, that has been reported in a
report to shareholders, so information regarding the Municipal Bond Fund does
not appear in the latest PIMS annual or semi-annual reports.
The Municipal Bond Fund is a series of PIMS, an open-end management
investment company. The Tax Exempt Fund is a series of MMS, an open-end
management investment company. The primary investment objective of each Fund
is to seek high current income exempt from federal income tax, consistent with
preservation of capital. Unlike the Tax Exempt Fund, the Municipal Bond Fund
has the pursuit of capital appreciation as a secondary objective.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE MUNICIPAL BOND FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND ENTAIL RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
OVERVIEW
The following is a summary of certain information contained in this Proxy
Statement/Prospectus. This summary is qualified by reference to the more
complete information contained elsewhere in this Proxy Statement/Prospectus
(including appendices), the Prospectuses for Class A, B and C shares of PIMS
and the Prospectuses for Class A, B and C shares of MMS (each of which is
incorporated herein by reference), and the Agreement and Plan of
Reorganization dated as of April 7, 1998 (the "Reorganization Agreement"),
which is attached to this Proxy Statement/Prospectus as Appendix A.
Shareholders should read this entire Proxy Statement/Prospectus carefully.
The Proposed Reorganization. The Board of Trustees of MMS, including the
Trustees who are not "interested persons" of MMS (as defined in the Investment
Company Act of 1940) (the "Independent Trustees"), approved the Reorganization
Agreement on March 5, 1998. Subject to its approval by the shareholders of the
Tax Exempt Fund, the Reorganization Agreement provides for the acquisition by
the Municipal Bond Fund of all of the assets of the Tax Exempt Fund in
exchange for shares of the Municipal Bond Fund, and the assumption by the
Municipal Bond Fund of the Tax Exempt Fund's liabilities, following which the
shares of the Municipal Bond Fund received by the Tax Exempt Fund would be
distributed to the shareholders of the Tax Exempt Fund and the Tax Exempt Fund
would be terminated. The exchange of all of the Tax Exempt Fund's assets for
shares of the Municipal Bond Fund and the assumption of all of the liabilities
of the Tax Exempt Fund by the Municipal Bond Fund are expected to occur on
June 26, 1998, or such other date as the parties may agree (the "Exchange
Date").
As a result of the Reorganization, each shareholder of the Tax Exempt Fund
would become a shareholder of the Municipal Bond Fund and would hold, after
the Exchange Date, that number of full and fractional Class A, Class B and
Class C Shares of the Municipal Bond Fund having an aggregate net asset value
equal to the aggregate net asset value of each respective class of shares of
the Tax Exempt Fund held by that shareholder as of the close of business on
the Exchange Date.
For the reasons set forth below under "Information About the
Reorganization--Reasons for the Reorganization," the Board of Trustees of MMS,
including the Independent Trustees who were present to consider the matter,
has concluded that the Reorganization is in the best interests of the Tax
Exempt Fund and its shareholders and that the interests of shareholders of the
Tax Exempt Fund will not be diluted as a result of the transactions
contemplated by the Reorganization Agreement. Accordingly, the Board of
Trustees recommends approval of the Reorganization Agreement. If the
Reorganization Agreement is not approved, the Tax Exempt Fund will continue in
existence, unless the Board of Trustees advocates other action.
Approval of the Reorganization Agreement with respect to the Tax Exempt Fund
requires the affirmative vote of a plurality of the shares of beneficial
interest of the Tax Exempt Fund present and voting at the meeting.
Investment Objectives and Policies. The Municipal Bond Fund and the Tax
Exempt Fund have investment objectives and policies which are substantially
similar. The primary investment objective of both Funds is to seek high
current income exempt from federal income tax, consistent with preservation of
capital. The Municipal Bond Fund has capital appreciation as a secondary
investment objective. Accordingly, the Municipal Bond Fund may be expected to
generate a somewhat higher percentage of taxable gain than the Tax Exempt
Fund.
2
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The Funds seek their objectives by investing primarily in debt securities
whose interest is, in the opinion of bond counsel for the issuer at the time
of issuance, exempt from federal income tax ("Municipal Bonds"), although up
to 20% of each Fund's net assets may be invested in other types of securities,
as described below. While the Funds' investment policies are substantially
similar, the Municipal Bond Fund may purchase securities that the Tax Exempt
Fund does not purchase, such as Residual Interest Bonds, which may subject the
portion of the Municipal Bond Fund's portfolio invested therein to a higher
level of volatility than that of the Tax Exempt Fund.
The investment objectives and policies of the Funds are discussed in more
detail in "Investment Practices and Risk Considerations" below. For complete
descriptions of the investment objectives and policies of the Funds, please
read each Fund's prospectus and statement of additional information, which are
incorporated herein by reference.
Investment Advisers. Pacific Investment Management Company ("Pacific
Investment Management"), 840 Newport Center Drive, Newport Beach, California
92660, is the investment adviser to the Municipal Bond Fund pursuant to an
investment advisory contract with PIMS. Pacific Investment Management is an
investment counseling firm founded in 1971, and had over $117 billion in
assets under management as of December 31, 1997. For further information about
Pacific Investment Management, see "Management of the Trust--Investment
Advisor" in Appendix B. The investment adviser for the Tax Exempt Fund is
PIMCO Advisors L.P. ("PIMCO Advisors"), 800 Newport Center Drive, Newport
Beach, California 92660, a Delaware limited partnership. As of December 31,
1997, PIMCO Advisors and its subsidiary partnerships had more than
$199.5 billion in assets under management. PIMCO Advisors employs its
affiliate, Columbus Circle Investors ("Columbus Circle"), One Station Place,
8th Floor, Stamford, Connecticut 06902, as Portfolio Manager of the Tax Exempt
Fund. Accounts managed by Columbus Circle had combined assets as of December
31, 1997 of approximately $9.3 billion. Pacific Investment Management and
Columbus Circle are each subsidiary partnerships of PIMCO Advisors. Except
with respect to the advisory fee rates, the investment advisory contract
between MMS, on behalf of the Tax Exempt Fund, and PIMCO Advisors is
substantially similar in all material respects to the investment advisory
contract currently in place between PIMS, on behalf of the Municipal Bond
Fund, and Pacific Investment Management.
Fees and Expenses. Each of the Funds features fixed advisory and
administrative fee rates. Each Fund pays its respective investment adviser and
administrator monthly fees at the following annual rates:
<TABLE>
<CAPTION>
ADVISORY FEE RATE(1) ADMINISTRATIVE FEE RATE(2)
-------------------- -------------------------
<S> <C> <C>
Municipal Bond Fund..... 0.25% 0.35%
Tax Exempt Fund......... 0.30% 0.40% of first $2.5 billion
0.35% of amounts in excess of $2.5 billion
</TABLE>
- --------
1. Based on the average daily net assets of the Fund.
2. Based on the average daily net assets attributable in the aggregate to the
Fund's Class A, Class B and Class C shares.
For its services as Portfolio Manager of the Tax Exempt Fund, Columbus
Circle is paid a portfolio management fee by PIMCO Advisors (and not by the
Tax Exempt Fund) equal, on an annual basis, to 0.30% of the Tax Exempt Fund's
average daily net assets. For more information about fees and expenses, see
"Fees and Expenses."
Classes of Shares. Each Fund currently offers three classes of shares that
are affected by the proposed Reorganization: (1) Class A shares, which
generally are sold subject to an initial sales charge; (2) Class B shares,
which are sold subject to a contingent deferred sales charge; and (3) Class C
shares, which are sold subject to an asset based sales charge. Sales charges
are in addition to the advisory and administrative fees discussed above.
Shareholders of the Tax Exempt Fund will not be charged a sales charge in
connection with the Reorganization, although Class B and Class C shares of the
Municipal Bond Fund acquired by Tax Exempt Fund shareholders in
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the Reorganization will be subject to a contingent deferred sales charge to
the same extent that the Class B and Class C shares, respectively, of the Tax
Exempt Fund were so subject prior to their exchange for the Municipal Bond
Fund shares. For more information about sales charges, see "Fees and
Expenses."
Purchase, Redemption, and Exchange Information. The purchase, redemption and
exchange procedures and privileges for the Tax Exempt Fund and the Municipal
Bond Fund are substantially the same. For further information on the purchase,
redemption and exchange procedures and privileges for the Municipal Bond Fund,
see Appendix B.
Federal Income Tax Consequences of the Reorganization. It is expected that
the Reorganization will constitute a tax-free reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Reorganization constitutes a tax-free
reorganization, no gain or loss will be recognized by the Tax Exempt Fund or
its shareholders as a result of the Reorganization. See "Information About The
Reorganization--Tax Considerations."
INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The investment objectives, policies and restrictions of the Municipal Bond
Fund and the Tax Exempt Fund are substantially similar, although the Funds
differ to some extent with respect to particular investment techniques and
instruments, as described below. Because the Funds share similar investment
objectives and policies, PIMS and MMS believe that the risks of investing in
the Municipal Bond Fund are substantially similar to the risks of investing in
the Tax Exempt Fund. The investment objectives, policies and restrictions of
the Funds, and certain differences between them, are discussed below. For a
more detailed description, please see the prospectus and statement of
additional information describing each Fund. There can be no assurance that
either Fund will achieve its stated objective(s).
COMPARISON OF OBJECTIVES AND PRIMARY INVESTMENTS
The primary investment objective for each Fund is to seek high current
income exempt from federal income tax, consistent with preservation of
capital. For the Municipal Bond Fund, capital appreciation is a secondary
investment objective. The Funds seek their objectives by investing primarily
in debt securities whose interest is, in the opinion of bond counsel for the
issuer at the time of issuance, exempt from federal income tax ("Municipal
Bonds"). Municipal Bonds generally are issued by states and local governments
and their agencies, authorities and other instrumentalities. It is a policy of
each Fund that, under normal market conditions, at least 80% of its net assets
will be invested in Municipal Bonds.
The Municipal Bond Fund may invest up to 10% of its net assets, under normal
market conditions, in Municipal Bonds or "private activity" bonds which are
rated below Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Services ("S&P") but which are rated at least Ba by
Moody's or BB by S&P (or, if unrated, determined by Pacific Investment
Management to be of comparable quality). The remaining 90% of the Municipal
Bond Fund's portfolio will be invested in "investment grade" securities. For
the Tax Exempt Fund, the 80% component of its portfolio invested in Municipal
Bonds must consist of "investment grade" Municipal Bonds. Securities are
considered to be investment grade if they are rated at least Baa by Moody's or
BBB by S&P or, if they are unrated, determined by the Fund's investment
adviser to be of comparable quality. The Tax Exempt Fund may invest up to 20%
of its net assets in Municipal Bonds or "private activity" bonds which are
rated below Baa by Moody's or BBB by S&P but which are rated at least Ba by
Moody's or BB by S&P (or, if unrated, determined by Columbus Circle to be of
comparable quality). Securities rated lower than Baa by Moody's or lower than
BBB by S&P are sometimes referred to as "high yield" or "junk" bonds. For
information on the risks associated with investments in securities rated below
investment grade, see "Comparison of Securities and Investment Techniques--
High Yield Securities ("Junk Bonds")" below and "Characteristics and Risks of
Securities and Investment Techniques--High Yield Securities ("Junk Bonds")" in
Appendix B.
4
<PAGE>
Under normal circumstances, the average portfolio duration of each Fund will
vary within a three-to ten-year time frame, based on Pacific Investment
Management's or Columbus Circle's forecast for interest rates. For more
information regarding duration, see "Description of Duration" in Appendix B.
The Municipal Bond Fund may invest up to 20% of its net assets in U.S.
Government securities, money market instruments, "private activity" bonds or
other securities that are described below. Similarly, the Tax Exempt Fund may
invest up to 20% of its net assets in any combination of those types of
securities. For temporary defensive purposes, each Fund may invest all or a
portion of its assets in U.S. Government securities. The Tax Exempt Fund may
also invest up to 100% of its assets in non-U.S. Government money market
instruments for temporary defensive purposes.
Because the Municipal Bond Fund has capital appreciation as a secondary
investment objective, a greater percentage of the Municipal Bond Fund's
distributions may be derived from taxable capital gains than is generally the
case with the Tax Exempt Fund. For more information, see "Taxes" in Appendix
B.
Fundamental Policies. The Municipal Bond Fund's investment objective is
fundamental and may be changed only with the approval of a majority of the
shareholders of the Fund. The Tax Exempt Fund's investment objective is
nonfundamental and may be changed by the Trustees of MMS without shareholder
approval. For each Fund, all other policies described above are nonfundamental
and may be changed by its Board of Trustees without shareholder approval.
Investment Restrictions. Each Fund has adopted "fundamental" investment
restrictions that may be changed only with shareholder approval and
"nonfundamental" investment restrictions that may be changed by the Fund's
Trustees without shareholder approval. While the investment restrictions of
the Tax Exempt Fund are similar to the investment restrictions of the
Municipal Bond Fund, there are certain differences, which are discussed below.
As a fundamental restriction, the Municipal Bond Fund may borrow money, or
pledge, mortgage or hypothecate its assets, if there is asset coverage of
300%. However, as an operating policy, the Municipal Bond Fund will not borrow
money, except for temporary administrative purposes. The Tax Exempt Fund may
not borrow money, or pledge, mortgage or hypothecate its assets, in excess of
10% of the value of the Fund's total assets at the time of borrowing. The Tax
Exempt Fund may borrow only from banks as a temporary measure to facilitate
the meeting of redemption requests or for extraordinary or emergency purposes.
As a nonfundamental restriction, the Tax Exempt Fund may not write (sell)
options. In addition, that Fund may not purchase put or call options if the
premiums paid by the Fund on all outstanding options exceeds 5% of its total
assets. The Municipal Bond Fund does not have such restrictions. The Municipal
Bond Fund may not invest more than 5% of its assets (taken at market value at
the time of investment) in any combination of interest only, principal only,
or inverse floating rate securities. The Tax Exempt Fund has no such
restriction. Neither Fund may invest more than 15% of its net assets in any
combination of illiquid securities.
COMPARISON OF SECURITIES AND INVESTMENT TECHNIQUES
The following is a summary of the types of securities in which the Funds may
invest and strategies the Funds may employ in pursuit of their investment
objectives, and certain risks associated with those investments and
techniques. While the securities and investment techniques used by the Funds
are similar, there are some differences. As with any security, an investment
in a Fund's shares involves certain risks, including the potential for loss of
principal. The Funds are subject to varying degrees of financial, market,
interest and credit risks. For a further discussion of the securities and
investment techniques used by the Municipal Bond Fund, and the risks
associated therewith, see "Appendix B--Characteristics and Risks of Securities
and Investment Techniques."
Municipal Bonds. Both Funds invest in Municipal Bonds which are generally
issued by states and local governments and their agencies, authorities and
other instrumentalities. The Municipal Bonds which the Funds
5
<PAGE>
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 that 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.
Municipal Bonds are subject to credit and market risk. Credit risk relates
to the ability of the issuer to make payments of principal and interest. The
ability of an issuer to make such payments could be affected by litigation,
legislation or other political events or the bankruptcy of the issuer. Market
risk relates to changes in a security's value as a result of changes in
interest rates. Lower rated Municipal Bonds generally provide higher yields
but are subject to greater credit and market risk than higher quality
Municipal Bonds. The secondary market for Municipal Bonds typically has been
less liquid than that for taxable debt/fixed income securities, and this may
affect a 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.
The Municipal Bond Fund may invest in municipal lease obligations. A lease
is not a full faith and credit obligation of the issuer and is usually backed
only by the borrowing government's unsecured pledge to make annual
appropriations for lease payments. The Municipal Bond Fund may also invest in
municipal warrants. Like options, warrants may expire worthless and they may
have reduced liquidity. The Municipal Bond Fund will not invest more than 5%
of its net assets in municipal warrants. The Municipal Bond Fund also may seek
to enhance its yield through the purchase of private placements, which may
have resale restrictions.
The Municipal Bond Fund may invest in Municipal Bonds with credit
enhancements such as letters of credit, municipal bond insurance and Standby
Bond Purchase Agreements ("SBPA"). The Municipal Bond Fund may also 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. Rising short-term interest rates result in lower income for the
longer-term portion, and vice versa. The longer-term bonds can be very
volatile and may be less liquid than other Municipal Bonds of comparable
maturity. The Municipal Bond Fund will not invest more than 10% of its total
assets in Residual Interest Bonds.
The Municipal Bond Fund may invest in participation interests. Participation
interests are various types of securities created by converting fixed rate
bonds into short-term, variable rate certificates. There is no guarantee the
interest thereon will be exempt from federal taxes because the Internal
Revenue Service has not issued a definitive ruling on the matter.
Each Fund may, subject to restrictions imposed by the Code, invest up to 20%
of its net assets in some or all of the following types of securities and
investment techniques.
U.S. Government Securities. U.S. Government securities are obligations of
and, in certain cases, guaranteed by, the U.S. Government, its agencies or
instrumentalities. The U.S. Government does not guarantee the net asset value
of the Funds' shares. U.S. Government securities may include zero coupon
securities, which do not distribute interest on a current basis and tend to be
subject to greater market risk than interest-paying securities of similar
maturities.
Variable And Floating Rate Securities. Variable and floating rate securities
provide for a periodic adjustment in the interest rate paid on the
obligations.
Inflation-Indexed Bonds. The Municipal Bond Fund may invest in inflation-
indexed bonds, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than typical bonds, but are expected to
retain their principal value over time. The interest rate on these bonds is
fixed at issuance, but over the life of the bond this interest may be
6
<PAGE>
paid on an increasing principal value, which has been adjusted for inflation.
If a guarantee of principal is not provided, the adjusted principal value of
the bond repaid at maturity may be less than the original principal. While
these securities are expected to be protected from long-term inflationary
trends, short-term increases in inflation may lead to a decline in value.
High Yield Securities ("Junk Bonds"). The Municipal Bond Fund may invest up
to 10% of its assets in securities rated lower than Baa by Moody's or BBB by
S&P, but rated at least Ba by Moody's or BB by S&P (or, if not rated,
determined to be of comparable quality). The Tax Exempt Fund may invest up to
20% of its assets in such securities. Securities rated lower than Baa by
Moody's or lower than BBB by S&P are sometimes referred to as "high yield" or
"junk" bonds.
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. For more information, see "Appendix B--Description of Securities
Ratings." Analysis of the creditworthiness of issuers of high yield securities
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 higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual corporate developments. If the
issuer of high yield securities defaults, a Fund may incur additional expenses
to seek recovery.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities, which may adversely affect
and cause large fluctuations in the daily net asset value of a Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield
securities, especially in a thinly traded market.
Pacific Investment Management and Columbus Circle seek to minimize the risks
of investing in high yield securities through diversification, in-depth credit
analysis and attention to current developments in interest rates and market
conditions.
Corporate Debt Securities. Each Fund may invest in corporate debt
securities. The rate of interest paid on a corporate debt security may be
fixed, floating or variable, and may vary inversely with respect to a
reference rate. See "Variable and Floating Rate Securities" above. 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.
Mortgage-Backed and Other Asset-Backed Securities. Each Fund may invest in
mortgage- or other asset-backed securities. The value of some mortgage- or
asset-backed securities in which the Funds invest may be particularly
sensitive to changes in prevailing interest rates, and, like other fixed
income investments, the ability of a Fund to successfully use these
instruments may depend in part upon the ability of Pacific Investment
Management or Columbus Circle to forecast interest rates and other economic
factors correctly.
MORTGAGE PASS-THROUGH SECURITIES represent interests in "pools" of mortgage
loans secured by residential or commercial real property. Early repayment of
principal on some mortgage-related securities may expose a Fund to a lower
rate of return upon reinvestment of principal. Like other fixed income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value
of mortgage-related securities with prepayment features may not increase as
much as other fixed income securities. The rate of prepayments on underlying
mortgages will affect the price and volatility of a mortgage-related security,
and may have the effect of shortening or extending the effective maturity of
the security.
7
<PAGE>
COMMERCIAL MORTGAGE-BACKED SECURITIES include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
Many of the risks of investing in commercial mortgage-backed securities
reflect the risks of investing in the real estate securing the underlying
mortgage loans. These risks reflect the effects of local and other economic
conditions on real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.
Commercial mortgage-backed securities may be less liquid and exhibit greater
price volatility than other types of mortgage-related or asset-backed
securities.
MORTGAGE-RELATED SECURITIES include securities other than those described
above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property.
OTHER ASSET-BACKED SECURITIES The Funds may invest in other asset-backed
securities that have been or may be offered to investors. For a discussion of
the characteristics of some of these instruments, see Appendix B.
Repurchase Agreements. For the purpose of achieving income, each Fund may
enter into repurchase agreements, which entail the purchase of a portfolio-
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Fund's cost plus interest within a specified time. If the
party agreeing to repurchase should default, the Fund will seek to sell the
securities which it holds, which could involve procedural costs or delays in
addition to a loss on the securities if their value should fall below their
repurchase price.
Reverse Repurchase Agreements, Dollar Rolls, And Borrowings. A reverse
repurchase agreement involves the sale of a security by a Fund and its
agreement to repurchase the instrument at a specified time and price. The
Municipal Bond Fund may enter into dollar rolls, in which the Fund sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date. Apart from such transactions, the Municipal Bond Fund
will not borrow money, except for temporary administrative purposes.
Loans Of Portfolio Securities. For the purpose of achieving income, the
Municipal Bond Fund may lend its portfolio securities to brokers, dealers, and
other financial institutions, subject to certain provisions described under
"Loans of Portfolio Securities" in Appendix B. Securities lending involves the
risk of loss of rights in the collateral or delay in recovery of the
collateral should the borrower fail to return the securities loaned or become
insolvent. The Tax Exempt Fund may lend its portfolio securities with respect
to not more than 25% of its total assets.
When-Issued, Delayed Delivery, And Forward Commitment Transactions. Each of
the Funds may purchase or sell securities on a when-issued, delayed delivery,
or forward commitment basis. When purchasing a security on a when-issued,
delayed delivery, or forward commitment basis, a Fund assumes the rights and
risks of ownership of the security, including the risk of price and yield
fluctuations. These risks are in addition to the risks associated with the
Fund's other investments. When a Fund has sold a security on a when-issued,
delayed delivery, or forward commitment basis, the Fund does not participate
in future gains or losses with respect to the security. If the other party to
a transaction fails to deliver or pay for the securities, the Fund could miss
a favorable price or yield opportunity or could suffer a loss.
Short Sales. Each Fund may from time to time effect short sales as part of
its overall portfolio management strategy, including the use of derivative
instruments, or to offset potential declines in value of long positions in
similar securities as those sold short. To the extent that the Municipal Bond
Fund engages in short sales, it must (except in the case of short sales
"against the box") maintain asset coverage in the form of assets determined to
be liquid by Pacific Investment Management in accordance with procedures
established by the Board of Trustees, in a segregated account, or otherwise
cover its position in a permissible manner. A short sale is "against the box"
to the extent that the Fund contemporaneously owns, or has the right to obtain
at no added cost, securities identical to, or convertible into or exchangeable
for, those sold short. The Tax Exempt Fund may only make short sales "against
the box."
8
<PAGE>
Derivative Instruments. To the extent permitted by the investment objectives
and policies of the Funds, the Funds may purchase and write call and put
options, enter into futures contracts, and use options on futures contracts.
The Funds may use these techniques to hedge against changes in interest rates
or securities prices or as part of their overall investment strategies.
The use of these strategies involves certain special risks, including a
possible imperfect correlation, or even no correlation, between price
movements of derivative instruments and price movements of related
investments. While some strategies involving derivative instruments can reduce
the risk of loss, they can also reduce the opportunity for gain or even result
in losses by offsetting favorable price movements in related investments or
otherwise, due to the possible inability of a Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable or the possible
need to sell a portfolio security at a disadvantageous time because the Fund
is required to maintain asset coverage or offsetting positions, and the
possible inability of a Fund to close out or to liquidate its derivatives
positions.
The value of some derivative instruments in which the Funds invest may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Funds, the ability of a Fund to successfully use
these instruments may depend in part upon the ability of the investment
adviser to forecast interest rates and other economic factors correctly. If
the investment adviser incorrectly forecasts such factors and has taken
positions in derivative instruments contrary to prevailing market trends, a
Fund could be exposed to the risk of loss.
Hybrid Instruments. The Municipal Bond Fund may invest in hybrid
instruments. A hybrid instrument is a debt instrument the return of which is
calculated with reference to a securities index, commodity index or other
financial index, and it can combine the characteristics of securities,
futures, and options. The value of a hybrid or its interest rate may be a
multiple of a benchmark and, as a result, may be leveraged and move (up or
down) more steeply and rapidly than the benchmark. These benchmarks may be
sensitive to economic and political events. The purchase of hybrids also
exposes the Fund to the credit risk of the issuer of the hybrids.
Investment In Other Investment Companies. The Municipal Bond Fund may invest
in securities of other investment companies, such as closed-end management
investment companies, or in pooled accounts or other investment vehicles. As a
shareholder of an investment company, the Municipal Bond Fund will indirectly
bear service and other fees which are in addition to the fees the Fund pays
its service providers.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
illiquid securities. A Fund may be subject to significant delays in disposing
of illiquid securities, and transactions in illiquid securities may entail
registration expenses and other transaction costs that are higher than those
for transactions in liquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which a Fund has
valued the securities.
FEES AND EXPENSES
Both Funds feature a "unified" fee structure. Each Fund has fixed advisory
and administrative fee rates. The administrative fee is all-inclusive (with
the exception of advisory fees) and covers the cost of administrative expenses
such as legal, audit, custody, transfer agency, printing and other services
reasonably necessary for the ordinary operations of the Funds. Certain other
miscellaneous expenses are paid by the Funds.
The Municipal Bond Fund's investment adviser is Pacific Investment
Management, a Delaware general partnership located at 840 Newport Center
Drive, Newport Beach, California 92660. Pacific Investment Management is a
subsidiary partnership of PIMCO Advisors. The Trust, on behalf of the
Municipal Bond Fund, pays Pacific Investment Management an investment advisory
fee at an annual rate of .25% of the average daily net assets of the Fund.
These fees are computed and accrued daily and paid monthly.
9
<PAGE>
The Tax Exempt Fund retains PIMCO Advisors as its investment adviser. PIMCO
Advisors employs Columbus Circle as Portfolio Manager of the Tax Exempt Fund.
Columbus Circle is a subsidiary partnership of PIMCO Advisors. The investment
advisory fee for Tax Exempt Fund is equal to an annual rate of .30% of the
Fund's average daily net assets. These fees are computed and accrued daily and
paid monthly. As of April 6, 1998, Tax Exempt Fund had total net assets of
$48,481,567.02. The total investment advisory fees paid by the Tax Exempt Fund
to PIMCO Advisors for the fiscal year ended June 30, 1997 were approximately
$166,000.
The Shareholder Transaction Expenses for each Fund, and pro forma expenses
giving effect to the proposed Reorganization, are outlined in the table below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM INITIAL SALES CHARGE IMPOSED ON PURCHASES
SHAREHOLDER (as a percentage of offering price at time of purchase)
TRANSACTION Municipal Bond Fund 3.00% None None
EXPENSES Tax Exempt Fund 4.50% None None
Pro Forma 3.00% None None
-------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE IMPOSED ON REINVESTED DIVIDENDS
(as a percentage of net asset value at time of purchase)
Municipal Bond Fund None None None
Tax Exempt Fund None None None
Pro Forma None None None
-------------------------------------------------------------------------------------
MAXIMUM CONTINGENT DEFERRED SALES CHARGE ("CDSC")
(as a percentage of original purchase price)
Municipal Bond Fund 1%(1) 5%(2) 1%(3)
Tax Exempt Fund 1%(1) 5%(2) 1%(3)
Pro Forma 1%(1) 5%(2) 1%(3)
-------------------------------------------------------------------------------------
EXCHANGE FEE
Municipal Bond Fund None None None
Tax Exempt Fund None None None
Pro Forma None None None
-------------------------------------------------------------------------------------
</TABLE>
1. Imposed only in certain circumstances where Class A shares are purchased
without a front-end sales charge at the time of purchase. See "Alternative
Purchase Arrangements" in Appendix B.
2. The maximum CDSC is imposed on shares redeemed in the first year. For
shares held longer than one year, the CDSC declines according to the
schedule set forth under "Alternative Purchase Arrangements--Deferred Sales
Charge Alternative--Class B Shares" in Appendix B.
3. The CDSC on Class C shares is imposed only on shares redeemed in the first
year.
10
<PAGE>
The current expenses of each Fund, and pro forma expenses giving effect to
the proposed Reorganization, are outlined below. The expenses of the Municipal
Bond Fund are based upon the estimated annual operating expenses for the Class
A, Class B and Class C shares of the Municipal Bond Fund for the current
fiscal year. The pro forma expenses also are based upon the estimated annual
operating expenses of the Municipal Bond Fund for the current fiscal year.
<TABLE>
<CAPTION>
EXAMPLE: You
EXAMPLE: You would pay the
would pay the following
following expenses on a
expenses on a $1,000
$1,000 investment investment
assuming (1) 5% assuming (1) 5%
annual return and annual return
Annual Fund Operating Expenses (2) redemption at and
(As a percentage of average net the end of each (2) no
assets): time period: redemption:
TOTAL
ADMINI- FUND
ADVISORY STRATIVE 12B-1 OPERATING YEAR YEAR
FUND FEE FEE FEES(/1/) EXPENSES 1 3 5 10 1 3 5 10
-----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A Municipal Bond
SHARES Fund .25% .35% .25% .85% $38 $56 $ 76 $132 $38 $56 $76 $132
-----------------------------------------------------------------------------------------------
Tax Exempt Fund .30 .40 .25 .95 54 74 95 156 54 74 95 156
-----------------------------------------------------------------------------------------------
Pro Forma .25 .35 .25 .85 38 56 76 132 38 56 76 132
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
CLASS B Municipal Bond
SHARES Fund .25% .35% 1.00% 1.60% $66 $80 $107 $160 $16 $50 $87 $160
-----------------------------------------------------------------------------------------------
Tax Exempt Fund .30 .40 1.00 1.70 67 84 112 171 17 54 92 171
-----------------------------------------------------------------------------------------------
Pro Forma .25 .35 1.00 1.60 66 80 107 160 16 50 87 160
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
CLASS C Municipal Bond
SHARES Fund .25% .35% .75%(/2/) 1.35%(/3/) $24 $43 $ 74 $162 $14 $43 $74 $162
-----------------------------------------------------------------------------------------------
Tax Exempt Fund .30 .40 1.00 1.70 27 54 92 201 17 54 92 201
-----------------------------------------------------------------------------------------------
Pro Forma .25 .35 .75(/2/) 1.35(/3/) 24 43 74 162 14 43 74 162
-----------------------------------------------------------------------------------------------
</TABLE>
1. 12b-1 fees which equal or are less than .25% represent servicing fees which
are paid annually to PIMCO Funds Distributors LLC (the "Distributor") and
repaid to participating brokers, certain banks and other financial
intermediaries. 12b-1 fees which exceed .25% represent aggregate
distribution and servicing fees. See "Distributor and Distribution and
Servicing Plans" in Appendix B.
2. The Distributor has voluntarily undertaken to reduce the 12b-1 fee it may
receive with respect to Class C shares of the Municipal Bond Fund to .75%
of the Fund's average daily net assets attributable to Class C shares until
further notice.
3. Absent the undertaking noted, the "Total Fund Operating Expenses" for Class
C shares of the Municipal Bond Fund would be 1.60% of average daily net
assets attributable to Class C shares.
The purpose of the foregoing tables is to assist investors in understanding
the various costs and expenses that are borne directly or indirectly by Class
A, Class B and Class C shareholders of the Funds. The Examples for Class A
shares assume payment of the current maximum applicable sales load. Due to the
12b-1 distribution fee imposed on Class B and Class C shares, a Class B or
Class C shareholder of the Funds may, depending on the length of time the
shares are held, pay more than the economic equivalent of the maximum front-
end sales charges permitted by relevant rules of the National Association of
Securities Dealers, Inc.
NOTE: THE FIGURES SHOWN IN THE EXAMPLES ARE ENTIRELY HYPOTHETICAL. THEY ARE
NOT REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EXPENSES; ACTUAL
PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN.
11
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
The Reorganization Agreement. As stated above, the Reorganization Agreement
provides for the transfer of all of the assets and all of the liabilities of
the Tax Exempt Fund to the Municipal Bond Fund in exchange for that number of
full and fractional Class A, Class B and Class C shares in the Municipal Bond
Fund having an aggregate net asset value equal to the aggregate net asset
value of the Class A, Class B and Class C shares of the Tax Exempt Fund as of
the close of business on the Exchange Date. In connection with the
Reorganization, the Tax Exempt Fund will distribute the shares of beneficial
interest of the Municipal Bond Fund received in the exchange to the
shareholders of the Tax Exempt Fund in complete liquidation of the Tax Exempt
Fund.
Upon completion of the Reorganization, each shareholder of the Tax Exempt
Fund will own that number of full and fractional Class A, Class B and/or Class
C shares in the Municipal Bond Fund having an aggregate net asset value equal
to the aggregate net asset value of each respective class of shares in the Tax
Exempt Fund held by that shareholder as of the close of business on the
Exchange Date. In the interest of economy and convenience, shares of the
Municipal Bond Fund generally will not be represented by physical
certificates.
Until the Exchange Date, shareholders of the Tax Exempt Fund will continue
to be able to redeem their shares. Redemption requests received after the
Exchange Date will be treated as requests received by PIMS for the redemption
of Municipal Bond Fund shares received by the shareholder in the
Reorganization.
The obligations of MMS and PIMS under the Reorganization Agreement are
subject to various conditions, as stated therein. Among other things, the
Reorganization requires that all filings be made with, and all authority be
received from, the SEC and state securities commissions as may be necessary in
the opinion of counsel to permit the parties to carry out the transactions
contemplated by the Reorganization Agreement. MMS and PIMS are in the process
of making the necessary filings. The Reorganization Agreement may be
terminated at any time by action of the Trustees of MMS and the Trustees of
PIMS. MMS or PIMS, after consultation with counsel and by consent of its
Trustees or an officer authorized by its Trustees, may at any time waive
compliance with any condition contained in the Reorganization Agreement. For a
complete description of the terms and conditions of the Reorganization, see
the Reorganization Agreement at Appendix A. If the transaction is not
completed by December 31, 1998, the Reorganization Agreement will
automatically terminate on that date unless a later date is agreed upon by the
Funds.
Tax Considerations. The Reorganization is intended to qualify for federal
income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of
the Code. Accordingly, pursuant to this treatment, neither the Tax Exempt Fund
nor the Municipal Bond Fund are expected to recognize any gain or loss for
federal income tax purposes from the transfer of the Tax Exempt Fund's assets
to the Municipal Bond Fund. As a condition to the Reorganization, the Funds
will receive an opinion from counsel to MMS to the effect that the
Reorganization will qualify as a tax-free reorganization for federal income
tax purposes. That opinion will be based in part upon certain assumptions and
upon certain representations made by the Funds.
Application for Exemptive Relief. PIMS and MMS have sought an order of
exemption from the SEC in connection with the proposed transfer of assets
contemplated by the Reorganization. Such order has been requested due to
Pacific Investment Management's ownership of shares of the Municipal Bond Fund
and certain affiliations that may exist among the Funds, Pacific Investment
Management and PIMCO Advisors. On the basis of relevant precedent, PIMS and
MMS anticipate that the SEC will issue the requested order, but there is no
certainty that the SEC will issue the order, or that the order will be
necessary for the successful completion of the proposed Reorganization.
Expenses of the Reorganization. The expenses relating to the proposed
Reorganization incurred by the Tax Exempt Fund, including expenses incurred in
connection with this Notice and Proxy Statement/Prospectus and the meeting,
will be borne by the Tax Exempt Fund up to $24,241. This amount was determined
pursuant to the following formula approved by the MMS Trustees: the lesser of
(i) six months of the projected savings to the Tax Exempt Fund shareholders
due to the lower operating expenses of the Municipal Bond Fund (based upon the
value of the Tax Exempt Fund on the Record Date, as described below), or (ii)
$25,000. PIMCO Advisors will bear the expenses of the Reorganization that
exceed the amount paid by the Tax Exempt Fund. The expenses relating to the
Reorganization incurred by the Municipal Bond Fund will be borne by PIMCO
Advisors.
12
<PAGE>
Reasons for the Reorganization. The proposed Reorganization was presented to
the Board of Trustees of MMS for consideration and approval at a meeting of
the Board held on March 5, 1998. For the reasons discussed below, the Board of
Trustees of MMS, including all of the Independent Trustees present at the
meeting, determined that the interests of the shareholders of the Tax Exempt
Fund will not be diluted as a result of the proposed Reorganization, and that
the proposed Reorganization is in the best interests of the Tax Exempt Fund
and its shareholders.
The Trustees were advised at the meeting that PIMCO Advisors is seeking to
centralize its fixed income advisory business in Pacific Investment
Management. Currently, the Tax Exempt Fund is the only remaining fixed income
account that is advised by Columbus Circle, which is winding down its fixed
income business. Pacific Investment Management has long contemplated the
creation of a tax exempt series of PIMS, which recently was accomplished by
the creation of the Municipal Bond Fund. PIMS is a multi-portfolio investment
company that has over $27 billion invested pursuant to a wide range of fixed
income investment strategies. Pacific Investment Management had over $117
billion under management as of December 31, 1997, almost exclusively in fixed
income portfolios.
The Trustees believe that the proposed combination of the Tax Exempt Fund
and the Municipal Bond Fund will allow the Tax Exempt Fund's shareholders to
continue to participate in a professionally managed portfolio consisting
primarily of Municipal Bonds, and that Tax Exempt Fund shareholders will
benefit from Pacific Investment Management's substantial expertise in fixed
income investing and the Municipal Bond Fund's lower total fund operating
expenses and lower investment management fees, as shown in "Fees and Expenses"
above.
ACCORDINGLY, THE TRUSTEES OF MMS, INCLUDING THE INDEPENDENT TRUSTEES PRESENT
AT THE MARCH 5, 1998 MEETING, RECOMMEND THAT THE TAX EXEMPT FUND'S
SHAREHOLDERS APPROVE THE REORGANIZATION WITH THE MUNICIPAL BOND FUND.
The Board of Trustees of MMS, in recommending the proposed transaction,
considered a number of factors, including the following:
1. expense ratios and information regarding fees and expenses of the Tax
Exempt Fund and the Municipal Bond Fund;
2. the terms and conditions of the Reorganization, whether the
Reorganization is in the best interests of the Tax Exempt Fund, and whether
it would result in a dilution of the interests of the Tax Exempt Fund's
shareholders at the time of the Reorganization;
3. the compatibility of the Municipal Bond Fund's investment objectives,
policies and restrictions with those of the Tax Exempt Fund;
4. the expertise of Pacific Investment Management in fixed income
investing;
5. the capabilities and resources of Pacific Investment Management and
its affiliates in the areas of investment management and shareholder
servicing;
6. the growth opportunities afforded by the proposed consolidation with
the Municipal Bond Fund, which is a series of a much larger investment
company complex than MMS that focuses on fixed income investments;
7. the tax consequences to the Tax Exempt Fund and its shareholders; and
8. the direct and indirect costs to be incurred by the Tax Exempt Fund
and its shareholders in connection with the Reorganization.
Certain Payments by Distributor. In connection with the sale of Class B and
Class C shares of the Tax Exempt Fund, PIMCO Funds Distributors LLC (the
"Distributor"), the principal underwriter of MMS and PIMS, pays commissions to
broker-dealers from its own assets that it expects to recover over time
through the receipt of distribution fees in connection with the Fund's Class B
and Class C shares and the receipt of any
13
<PAGE>
contingent deferred sales charges on Class B and Class C shares. The total
amount of such commissions paid by the Distributor with respect to the Tax
Exempt Fund before the consummation of the proposed Reorganization will likely
exceed the amounts recovered by the Distributor by that time. Such unrecovered
amounts do not represent a liability of the Tax Exempt Fund and, consequently,
the Municipal Bond Fund will not assume any such liability in connection with
the consummation of the Reorganization. However, to the extent the Distributor
has not fully recovered such commissions before the consummation of the
proposed Reorganization, it is anticipated that the PIMS Trustees will
consider such unrecovered amounts, among other factors, in determining whether
to continue payments of distribution fees in the future with respect to Class
B and Class C shares of the Municipal Bond Fund.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Form of Organization. The Municipal Bond Fund is a diversified series of
PIMS, an open-end management investment company organized as a Massachusetts
business trust on February 19, 1987 and registered under the Investment
Company Act of 1940 (the "1940 Act"). PIMS offers other series of shares,
which are not involved in the Reorganization. The Tax Exempt Fund is a
diversified series of MMS, an open-end management investment company organized
as a Massachusetts business trust on August 24, 1990 and registered under the
1940 Act. MMS also offers other series of shares, which are not involved in
the Reorganization.
PIMS and MMS are each governed by a separate Agreement and Declaration of
Trust (in the case of MMS) and Declaration of Trust (in the case of PIMS), as
amended or restated from time to time. While the PIMS Declaration of Trust and
the MMS Agreement and Declaration of Trust are different, they are generally
comparable in all material respects. The business and affairs of each Fund are
managed under the direction of a Board of Trustees. The respective Boards of
Trustees of the Funds have no members in common.
Description of Securities To Be Issued. The number of authorized shares of
beneficial interest of each of PIMS and MMS is unlimited. Under the
Declaration of Trust of PIMS and the Agreement and Declaration of Trust of
MMS, the Board of Trustees is authorized to create new series of shares
without a vote of shareholders. Interests in the Municipal Bond Fund and the
Tax Exempt Fund are represented by transferable shares of beneficial interest
having a par value of $0.0001 and $0.00001, respectively. The Trustees of PIMS
and MMS each have the power to create separate classes of shares for each
series and to create additional classes in the future without a vote of
shareholders. Although shareholders of different classes of a series would
have an interest in the same portfolio of assets, shareholders of different
classes may bear different expenses, which may affect performance.
Voting Rights. Shares of PIMS and MMS entitle their holders to one vote per
share; however, separate votes will be taken by each series on matters
affecting an individual series. Shares have noncumulative voting rights and no
preemptive or subscription rights. PIMS and MMS are not required to hold
shareholder meetings annually, although shareholder meetings may be called for
purposes such as electing or removing Trustees, changing fundamental policies
or approving an investment advisory agreement.
Dividends and Other Distributions. For each Fund, dividends are declared
daily from net investment income and paid monthly to shareholders of record.
Due to its secondary investment objective of capital appreciation, a greater
percentage of the Municipal Bond Fund's distributions may be derived from
taxable capital gains than is generally the case with the Tax Exempt Fund.
Dividend and capital gain distributions of the Municipal Bond Fund will be
reinvested in additional shares of the Fund unless the shareholder elects to
have them paid in cash. There are no sales charges on reinvested dividends. If
a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, the shareholder's
distributions will automatically be invested in the PIMCO Money Market Fund
until the shareholder is located. Dividends from net investment income with
respect to Class B and Class C shares are expected to be lower than those paid
with respect to Class A shares as a result of the distribution fees applicable
to Class B and C shares.
14
<PAGE>
Shareholders may elect to invest dividends and/or distributions paid by the
Municipal Bond Fund in shares of the same class of any other series of PIMS at
net asset value. The shareholder must have an account existing in the Fund
selected for investment with the identical registered name and address and
must elect this option on the account application, on a form provided for that
purpose or by a telephone request to PIMS's transfer agent at 800-426-0107.
If the Reorganization Agreement is approved by the Tax Exempt Fund's
shareholders, then as soon as practicable before the Exchange Date, the Tax
Exempt Fund will pay its shareholders a cash distribution of all undistributed
1998 net investment income and undistributed realized net capital gains.
Dividends designated by the Tax Exempt Fund as capital gain dividends
derived from the Tax Exempt Fund's net capital gain (that is, the excess of
net long-term gain over net short-term loss) are taxable to shareholders as
long-term capital gain except as provided by an applicable tax exemption.
Under the Taxpayer Relief Act of 1997, long-term capital gains will generally
be taxed at a 28% or 20% rate, depending upon the holding period of the
portfolio securities. Any distributions that are not from the Tax Exempt
Fund's net investment income, short-term capital gain, or net capital gain may
be characterized as a return of capital to shareholders or, in some cases, as
capital gain. 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 Federal National Mortgage Association and Government
National Mortgage Association Certificates). The Tax Exempt Fund will advise
shareholders of the amount and nature of the dividends paid to them.
Dividends paid to shareholders by the Tax Exempt Fund which are derived from
interest on Municipal Bonds are expected to be designated by the Tax Exempt
Fund as "exempt-interest dividends," and shareholders may generally exclude
such dividends from gross income for federal income tax purposes. However, if
a shareholder receives social security or railroad retirement benefits, the
shareholder may be taxed on a portion of those benefits as a result of
receiving tax-exempt income. In addition, certain exempt-interest dividends
could, as discussed below, cause certain shareholders to become subject to the
alternative minimum tax and may increase the alternative minimum tax liability
of shareholders already subject to this tax.
To the extent that dividends paid to shareholders by the Tax Exempt Fund are
derived from taxable interest or from capital gains, such dividends will be
subject to federal income tax. Any gain realized on a redemption of shares
will be taxable gain, subject to any applicable tax exemption for which an
investor may qualify.
Capitalization. The following table shows, on an unaudited basis, the actual
capitalization of the Tax Exempt Fund and the Municipal Bond Fund as of March
31, 1998, and the capitalization on a pro forma basis as of that date giving
effect to the Reorganization:
<TABLE>
<CAPTION>
NET ASSET VALUE
NET ASSETS PER SHARE SHARES OUTSTANDING
----------- --------------- ------------------
<S> <C> <C> <C>
Municipal Bond Fund
Institutional.................. $ 3,011,757 $ 9.97 302,110
Class A........................ -- -- --
Class B........................ -- -- --
Class C........................ -- -- --
Tax Exempt Fund
Institutional.................. $ -- $ -- --
Class A........................ 6,640,419 12.26 541,601
Class B........................ 3,855,750 12.26 314,478
Class C........................ 38,304,105 12.26 3,124,127
Pro Forma
Institutional.................. $ 3,011,757 $ 9.97 302,110
Class A........................ 6,640,419 12.26 541,601
Class B........................ 3,855,750 12.26 314,478
Class C........................ 38,304,105 12.26 3,124,127
</TABLE>
15
<PAGE>
GENERAL INFORMATION
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this
Notice and Proxy Statement/Prospectus on or about April 27, 1998. Shareholders
of the Tax Exempt Fund whose shares are held by nominees, such as brokers, can
vote their proxies by contacting their respective nominee. In addition to the
solicitation of proxies by mail, proxies also may be solicited by officers or
agents of MMS and employees of PIMCO Advisors and its affiliates, or by
professional proxy solicitation firms retained by PIMCO Advisors or Pacific
Investment Management. As the meeting date approaches, certain shareholders of
the Tax Exempt Fund may receive a telephone call asking the shareholder to
vote. The costs associated with any professional proxy solicitation firm will
be paid by PIMCO Advisors or the Tax Exempt Fund, as described above under
"Information About the Reorganization--Expenses of the Reorganization."
A shareholder may revoke the accompanying proxy at any time prior to its use
by filing with MMS a written revocation or a duly executed proxy bearing a
later date. In addition, any shareholder who attends the meeting in person may
vote by ballot at the meeting, thereby canceling any proxy previously given.
However, attendance at the meeting, by itself, will not serve to revoke a
previously tendered proxy.
The persons named in the accompanying proxy will vote as directed by the
proxy, but in the absence of voting directions in any proxy that is signed and
returned, they intend to vote FOR the proposal and may vote in their
discretion with respect to other matters not now known to the Board of
Trustees of MMS that may be presented at the meeting.
VOTING RIGHTS
The proposals in this proxy statement affect only the Tax Exempt Fund, which
is one of 22 operating series of MMS. As a result, the Board of Trustees of
MMS is soliciting votes only from shareholders of the Tax Exempt Fund.
Each share of the Tax Exempt Fund is entitled to one vote. Shareholders of
the Tax Exempt Fund at the close of business on April 6, 1998 (the "Record
Date") will be entitled to be present and give voting instructions for the Tax
Exempt Fund at the meeting with respect to their shares owned as of the Record
Date. There were 3,964,151.682 shares of beneficial interest outstanding and
entitled to vote as of the Record Date, representing total net assets of
$48,481,567.02. Approval of the Reorganization requires a vote of a plurality
of the shares of the Tax Exempt Fund present and voting at the meeting.
Thirty percent of the shares of the Tax Exempt Fund entitled to vote at the
meeting, represented in person or by proxy, must be present to constitute a
quorum for the transaction of the Tax Exempt Fund's business at the meeting.
If a quorum is not present at the meeting, or if a quorum is present but
sufficient votes to approve the proposal are not received, the persons named
as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies. Any adjournment will require the affirmative
vote of a plurality of those shares represented at the meeting in person or by
proxy. Unless otherwise instructed, the persons named as proxies will vote
proxies in favor of the adjournment. If the meeting is adjourned with respect
to a proposal, any other proposal(s) may still be acted upon.
If a shareholder abstains from voting, or if a broker returns a "non-vote"
proxy, indicating a lack of authority to vote, the shares represented by the
abstention or non-vote will be deemed present at the meeting for purposes of
determining a quorum. However, abstentions and broker non-votes will not be
deemed represented at the meeting for purposes of calculating the vote on the
proposal. As a result, so long as a quorum is present, abstentions and broker
non-votes will have no effect on the outcome of the proposal.
16
<PAGE>
As of the Record Date, to the best of the knowledge of PIMS and MMS, the
following persons owned of record or beneficially 5% or more of the
outstanding shares of the indicated classes of the Tax Exempt Fund and the
Municipal Bond Fund:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
OWNER OWNED SHARES
----- ----------- -------------
<C> <S> <C> <C>
TAX EXEMPT FUND
Class A BT Alex Brown Incorporated 160,755.487 29.51%
FBO 405-10433-15
P.O. Box 1346
Baltimore, MD 21203
Merrill Lynch, Pierce, Fenner &
Smith, Inc. 137,384.601 25.22%
for the sole benefit of its
customers
4800 Deer Lake Drive
Jacksonville, FL 32246-6468
NationsBanc Montgomery Securities 55,979.884 10.27%
600 Montgomery Street
San Francisco, CA 94111
Joseph R. White 33,262.218 6.10%
P.O. Box 572
Waltham, MA 02254-0572
Class B Dain Rauscher Incorporated FBO 56,252.028 17.86%
K.K. Kinsey Trustee
K.K. Kinsey Rev Intervivos Trust
2801 NE 14th Street
Fort Lauderdale, FL 33304
Merrill Lynch, Pierce, Fenner &
Smith, Inc. 50,384.840 16.00%
for the sole benefit of its
customers
4800 Deer Lake Drive
Jacksonville, FL 32246-6468
Prudential Securities Inc. FBO 40,619.524 12.90%
Ruth G. Battel
6 Willowbank Ct.
Mahwah, NJ 07430-2909
PaineWebber for the benefit of 17,885.431 5.68%
William H. Hoehn
1906 SW 130th Terrace
Archer, FL 32618-2124
Robert A. Fish & 17,755.346 5.63%
Susan Beville Fish COTRS
The Fish Family Trust
300 Tolak Road
Aptos, CA 95003-2737
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
OWNER OWNED SHARES
----- ----------- -------------
<S> <C> <C> <C>
Class C Merrill Lynch, Pierce, Fenner & Smith, Inc. 352,401.507 11.35%
for the sole benefit of its customers
4800 Deer Lake Drive
Jacksonville, FL 32246-6468
MUNICIPAL BOND FUND
Institutional Class Pacific Investment Management Company* -- 100%
840 Newport Center Drive
Newport Beach, CA 92660
</TABLE>
- --------
* Entity owned 25% or more of the outstanding shares of beneficial interest
of the Municipal Bond Fund, and therefore may be presumed to "control" the
Municipal Bond Fund, as that term is defined in the 1940 Act.
On the basis of the holdings and commitments as of the Record Date, the
percentages on the foregoing table are not expected to change as a result of
the Reorganization, because the Municipal Bond Fund had outstanding as of the
Record Date only Institutional Class shares and the Tax Exempt Fund had
outstanding only Class A, Class B and Class C shares. However, the Municipal
Bond Fund now offers Class A, Class B and Class C shares, and the percentages
appearing in the foregoing table may change prior to the Reorganization.
To the knowledge of each Fund, as of April 6, 1998, no current Trustee of
the Fund owns 1% or more of its outstanding shares, and the officers and
Trustees of each Fund own, as a group, less than 1% of the shares of the Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
MMS's management does not know of any matters to be presented at the meeting
other than those described in this Proxy Statement/Prospectus. If other
business should properly come before the meeting, the proxyholders will vote
thereon in accordance with their best judgment.
PRINCIPAL UNDERWRITER
PIMCO Funds Distributors LLC, whose address is 2187 Atlantic Street,
Stamford, Connecticut 06902, is the principal underwriter for both the
Municipal Bond Fund and the Tax Exempt Fund.
SHAREHOLDER PROPOSALS
Proposals of shareholders must be received by MMS a reasonable time prior to
the mailing of proxy materials for a meeting of shareholders. The submission
by a shareholder of a proposal for inclusion in a proxy statement does not
guarantee that it will be included. Shareholder proposals are subject to
certain regulations under the federal securities laws.
INFORMATION ABOUT THE FUNDS
Proxy materials, reports, proxy and information statements and other
information filed by PIMS with respect to the Municipal Bond Fund and MMS with
respect to the Tax Exempt Fund can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copes of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed
rates. The SEC maintains an Internet World Wide Web site (at
http://www.sec.gov) which contains the Statements of Additional Information
for PIMS and MMS, materials that
18
<PAGE>
are incorporated by reference into the prospectuses and Statements of
Additional Information, and other information about PIMS, MMS and the Funds.
REPORTS TO SHAREHOLDERS
MMS will furnish, without charge, a copy of the most recent Annual Report
regarding MMS and the most recent Semi-Annual Report succeeding the Annual
Report, if any, on request. Requests for such reports should be directed to
PIMCO Funds Distributors LLC, 2187 Atlantic Street, Stamford, Connecticut
06902 at (800) 426-0107.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED, PROMPT
EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
Newton B. Schott, Jr., Secretary
April 27, 1998
840 Newport Center Drive
Newport Beach, CA 92660
19
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
April 7, 1998 by and between PIMCO Funds: Multi-Manager Series, a
Massachusetts business trust (the "MMS Trust"), on behalf of its Tax Exempt
Fund (the "Acquired Fund"), and PIMCO Funds, a Massachusetts business trust
(the "PIMS Trust"), on behalf of its Municipal Bond Fund (the "Acquiring
Fund").
PLAN OF REORGANIZATION
(a) The Acquired Fund will sell, assign, convey, transfer and deliver to the
Acquiring Fund on the Exchange Date (as defined in Section 6) all of its
properties and assets. In consideration therefor, the Acquiring Fund shall, on
the Exchange Date, assume all of the liabilities of the Acquired Fund existing
at the Valuation Time and deliver to the Acquired Fund (i) a number of full
and fractional Class A shares of beneficial interest of the Acquiring Fund
(the "Class A Merger Shares") having an aggregate net asset value equal to the
value of the assets of the Acquired Fund attributable to Class A shares of the
Acquired Fund transferred to the Acquiring Fund on such date less the value of
the liabilities of the Acquired Fund attributable to Class A shares of the
Acquired Fund assumed by the Acquiring Fund on that date, (ii) a number of
full and fractional Class B shares of beneficial interest of the Acquiring
Fund (the "Class B Merger Shares") having an aggregate net asset value equal
to the value of the assets of the Acquired Fund attributable to Class B shares
of the Acquired Fund transferred to the Acquiring Fund on such date less the
value of the liabilities of the Acquired Fund attributable to Class B shares
of the Acquired Fund assumed by the Acquiring Fund on that date, and (iii) a
number of full and fractional Class C shares of beneficial interest of the
Acquiring Fund (the "Class C Merger Shares") having an aggregate net asset
value equal to the value of the assets of the Acquired Fund attributable to
Class C shares of the Acquired Fund transferred to the Acquiring Fund on such
date less the value of the liabilities of the Acquired Fund attributable to
Class C shares of the Acquired Fund assumed by the Acquiring Fund on that
date. (The Class A Merger Shares, the Class B Merger Shares and the Class C
Merger Shares shall be referred to collectively as the "Merger Shares.") It is
intended that the reorganization described in this Plan shall be a
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of this
Plan of Reorganization, the Acquired Fund shall distribute in complete
liquidation to its Class A, Class B and Class C shareholders of record as of
the Exchange Date Class A, Class B and Class C Merger Shares, each shareholder
being entitled to receive that proportion of such Class A, Class B and Class C
Merger Shares which the number of Class A, Class B or Class C shares of
beneficial interest of the Acquired Fund held by such shareholder bears to the
number of Class A, Class B and Class C shares of the Acquired Fund outstanding
on such date. Certificates representing the Merger Shares will not be issued.
All issued and outstanding shares of the Acquired Fund will simultaneously be
canceled on the books of the Acquired Fund.
(c) As promptly as practicable after the liquidation of the Acquired Fund as
aforesaid, the Acquired Fund shall be dissolved pursuant to the provisions of
the Agreement and Declaration of Trust of the MMS Trust, as amended, and
applicable law, and its legal existence terminated. Any reporting
responsibility of the Acquired Fund is and shall remain the responsibility of
the Acquired Fund up to and including the Exchange Date and, if applicable,
such later date on which the Acquired Fund is liquidated.
AGREEMENT
The Acquiring Fund and the Acquired Fund agree as follows:
1. Representations, Warranties and Agreements of the Acquiring Fund. The
Acquiring Fund represents and warrants to and agrees with the Acquired Fund
that:
a. The Acquiring Fund is a series of shares of the PIMS Trust, a
Massachusetts business trust duly established and validly existing under
the laws of The Commonwealth of Massachusetts, and has power to
A-1
<PAGE>
own all of its properties and assets and to carry out its obligations under
this Agreement. The PIMS Trust is qualified as a foreign association in
every jurisdiction where required, except to the extent that failure to so
qualify would not have a material adverse effect on the PIMS Trust. Each of
the PIMS Trust and the Acquiring Fund has all necessary federal, state and
local authorizations to carry on its business as now being conducted and to
carry out this Agreement.
b. The PIMS Trust is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company,
and such registration has not been revoked or rescinded and is in full
force and effect.
c. A statement of assets and liabilities, statements of operations,
statements of changes in net assets and a schedule of investments
(indicating their market values) of the Acquiring Fund as of and for the
period ended March 31, 1998 will be furnished to the Acquired Fund prior to
the Exchange Date. Such statement of assets and liabilities and schedule
will fairly present the financial position of the Acquiring Fund as of
their date and said statements of operations and changes in net assets will
fairly reflect the results of its operations and changes in net assets for
the periods covered thereby in conformity with generally accepted
accounting principles.
d. The prospectuses and statement of additional information of the PIMS
Trust, each dated April 1, 1998 (collectively, the "PIMS Prospectus"),
previously furnished to the Acquired Fund, did not as of such date and do
not contain, with respect to the PIMS Trust or the Acquiring Fund, any
untrue statements of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
e. There are no material legal, administrative or other proceedings
pending or, to the knowledge of the PIMS Trust or the Acquiring Fund,
threatened against the PIMS Trust or the Acquiring Fund, which assert
liability on the part of the PIMS Trust or the Acquiring Fund. The
Acquiring Fund knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
f. The Acquiring Fund has no known liabilities of a material nature,
contingent or otherwise, other than those that will be shown as belonging
to it on its statement of assets and liabilities as of March 31, 1998 and
those incurred in the ordinary course of business as an investment company
since such date. Prior to the Exchange Date, the Acquiring Fund will
endeavor to quantify and to reflect on its balance sheet all of its
material known liabilities and will advise the Acquired Fund of all
material liabilities, contingent or otherwise, incurred by it subsequent to
March 31, 1998, whether or not incurred in the ordinary course of business.
g. As of the Exchange Date, the Acquiring Fund will have filed all
federal and other tax returns and reports which, to the knowledge of the
PIMS Trust's officers, are required to be filed by the Acquiring Fund and
has paid or will pay all federal and other taxes shown to be due on said
returns or on any assessments received by the Acquiring Fund. All tax
liabilities of the Acquiring Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquiring Fund has been
asserted, and no question with respect thereto has been raised or is under
audit, by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid.
h. No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by this Agreement, except such as may
be required under the Securities Act of 1933, as amended (the "1933 Act"),
the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940
Act and state securities or blue sky laws (which term as used herein shall
include the laws of the District of Columbia and of Puerto Rico).
i. The registration statement (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") by the PIMS Trust
on Form N-14 on behalf of the Acquiring Fund and relating to the Merger
Shares issuable hereunder, and the proxy statement of the Acquired Fund
relating to
A-2
<PAGE>
the meeting of the Acquired Fund's shareholders referred to in Section 7(a)
herein (together with the documents incorporated therein by reference, the
"Acquired Fund Proxy Statement"), on the effective date of the Registration
Statement (i) complies in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) does not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and at the time of
the shareholders meeting referred to in Section 7(a) and on the Exchange
Date, the prospectus which is contained in the Registration Statement, as
amended or supplemented by any amendments or supplements filed with the
Commission by the PIMS Trust, and the Acquired Fund Proxy Statement will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that none of the
representations and warranties in this subsection shall apply to statements
in or omissions from the Registration Statement or the Acquired Fund Proxy
Statement made in reliance upon and in conformity with information
furnished by the Acquired Fund for use in the Registration Statement or the
Acquired Fund Proxy Statement.
j. There are no material contracts outstanding to which the Acquiring
Fund is a party, other than as will be disclosed in the Registration
Statement, the PIMS Prospectus or the Acquired Fund Proxy Statement.
k. To the best of its knowledge, all of the issued and outstanding shares
of beneficial interest of the Acquiring Fund have been offered for sale and
sold in conformity with all applicable federal and state securities laws
(including any applicable exemptions therefrom), or the Acquiring Fund has
taken any action necessary to remedy any prior failure to have offered for
sale and sold such shares in conformity with such laws.
l. The Acquiring Fund qualifies and will at all times through the
Exchange Date qualify for taxation as a "regulated investment company"
under Sections 851 and 852 of the Code.
m. The issuance of the Merger Shares pursuant to this Agreement will be
in compliance with all applicable federal and state securities laws.
n. The Merger Shares to be issued to the Acquired Fund have been duly
authorized and, when issued and delivered pursuant to this Agreement, will
be legally and validly issued and will be fully paid and nonassessable by
the Acquiring Fund, and no shareholder of the Acquiring Fund will have any
preemptive right of subscription or purchase in respect thereof.
o. All issued and outstanding shares of the Acquiring Fund are, and at
the Exchange Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Acquiring Fund. The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for or
purchase any of the Acquiring Fund shares, nor is there outstanding any
security convertible into any of the Acquiring Fund shares.
2. Representations, Warranties and Agreements of the Acquired Fund. The
Acquired Fund represents and warrants to and agrees with the Acquiring Fund
that:
a. The Acquired Fund is a series of shares of the MMS Trust, a
Massachusetts business trust duly established and validly existing under
the laws of The Commonwealth of Massachusetts, and has power to own all of
its properties and assets and to carry out this Agreement. The MMS Trust is
qualified as a foreign association in every jurisdiction where required,
except to the extent that failure to so qualify would not have a material
adverse effect on the MMS Trust. Each of the MMS Trust and the Acquired
Fund has all necessary federal, state and local authorizations to own all
of its properties and assets and to carry on its business as now being
conducted and to carry out this Agreement.
b. The MMS Trust is registered under the 1940 Act as an open-end
management investment company, and such registration has not been revoked
or rescinded and is in full force and effect.
c. A statement of assets and liabilities, statements of operations,
statements of changes in net assets and a schedule of investments
(indicating their market values) of the Acquired Fund as of and for the
period
A-3
<PAGE>
ended March 31, 1998 will be furnished to the Acquiring Fund prior to the
Exchange Date. Such statement of assets and liabilities and schedule will
fairly present the financial position of the Acquired Fund as of their date
and said statements of operations and changes in net assets will fairly
reflect the results of its operations and changes in net assets for the
periods covered thereby in conformity with generally accepted accounting
principles.
d. The prospectuses and statement of additional information of the MMS
Trust, each dated February 5, 1998 (collectively, the "MMS Prospectus"),
previously furnished to the Acquiring Fund, did not contain as of such date
and do not contain, with respect to the MMS Trust and the Acquired Fund,
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
e. There are no material legal, administrative or other proceedings
pending or, to the knowledge of the MMS Trust or the Acquired Fund,
threatened against the MMS Trust or the Acquired Fund, which assert
liability on the part of the MMS Trust or the Acquired Fund. The Acquired
Fund knows of no facts which might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated.
f. There are no material contracts outstanding to which the Acquired Fund
is a party, other than as will be disclosed in the Registration Statement,
the MMS Prospectus or the Acquired Fund Proxy Statement.
g. The Acquired Fund has no known liabilities of a material nature,
contingent or otherwise, other than those that will be shown on the
Acquired Fund's statement of assets and liabilities as of March 31, 1998
referred to above and those incurred in the ordinary course of its business
as an investment company since such date. Prior to the Exchange Date, the
Acquired Fund will endeavor to quantify and to reflect on its balance sheet
all of its material known liabilities and will advise the Acquiring Fund of
all material liabilities, contingent or otherwise, incurred by it
subsequent to March 31, 1998, whether or not incurred in the ordinary
course of business.
h. As of the Exchange Date, the Acquired Fund will have filed all federal
and other tax returns and reports which, to the knowledge of the MMS
Trust's officers, are required to be filed by the Acquired Fund and has
paid or will pay all federal and other taxes shown to be due on said
returns or on any assessments received by the Acquired Fund. All tax
liabilities of the Acquired Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquired Fund has been
asserted, and no question with respect thereto has been raised or is under
audit, by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid.
i. At the Exchange Date, the MMS Trust, on behalf of the Acquired Fund,
will have full right, power and authority to sell, assign, transfer and
deliver the Investments (as defined below) and any other assets and
liabilities of the Acquired Fund to be transferred to the Acquiring Fund
pursuant to this Agreement. At the Exchange Date, subject only to the
delivery of the Investments and any such other assets and liabilities as
contemplated by this Agreement, the Acquiring Fund will acquire the
Investments and any such other assets and liabilities subject to no
encumbrances, liens or security interests whatsoever and without any
restrictions upon the transfer thereof. As used in this Agreement, the term
"Investments" shall mean the Acquired Fund's investments shown on the
schedule of its investments as of March 31, 1998 referred to in Section
2(c) hereof, as supplemented with such changes in the portfolio as the
Acquired Fund shall make, and changes resulting from stock dividends, stock
split-ups, mergers and similar corporate actions through the Exchange Date.
j. No registration under the 1933 Act of any of the Investments would be
required if they were, as of the time of such transfer, the subject of a
public distribution by either of the Acquiring Fund or the Acquired Fund,
except as previously disclosed to the Acquiring Fund by the Acquired Fund.
k. No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement, except such as may
be required under the 1933 Act, 1934 Act, the 1940 Act or state securities
or blue sky laws.
A-4
<PAGE>
l. The Registration Statement and the Acquired Fund Proxy Statement, on
the effective date of the Registration Statement, (i) complies in all
material respects with the provisions of the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder and (ii) does not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and at the time of the shareholders meeting referred to in
Section 7(a) and on the Exchange Date, the Acquired Fund Proxy Statement
and the Registration Statement will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that none of the representations and warranties in this
subsection shall apply to statements in or omissions from the Registration
Statement or the Acquired Fund Proxy Statement made in reliance upon and in
conformity with information furnished by the Acquiring Fund for use in the
Registration Statement or the Acquired Fund Proxy Statement.
m. The Acquired Fund qualifies and will at all times through the Exchange
Date qualify for taxation as a "regulated investment company" under
Sections 851 and 852 of the Code.
n. At the Exchange Date, the Acquired Fund will have sold such of its
assets, if any, as are necessary to assure that, after giving effect to the
acquisition of the assets of the Acquired Fund pursuant to this Agreement,
the Acquiring Fund will remain a "diversified company" within the meaning
of Section 5(b)(1) of the 1940 Act and in compliance with such other
mandatory investment restrictions as are set forth in the PIMS Prospectus,
as amended through the Exchange Date.
o. To the best of its knowledge, all of the issued and outstanding shares
of beneficial interest of the Acquired Fund shall have been offered for
sale and sold in conformity with all applicable federal and state
securities laws (including any applicable exemptions therefrom), or the
Acquired Fund has taken any action necessary to remedy any prior failure to
have offered for sale and sold such shares in conformity with such laws.
p. All issued and outstanding shares of the Acquired Fund are, and at the
Exchange Date will be, duly and validly issued and outstanding, fully paid
and non-assessable by the Acquired Fund. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of the Acquired Fund shares, nor is there outstanding any
security convertible into any of the Acquired Fund shares, except that
Class B shares of the Acquired Fund are convertible into Class A shares of
the Acquired Fund in the manner and on the terms described in the MMS
Prospectus.
3. Reorganization.
a. Subject to the requisite approval of the shareholders of the Acquired
Fund and to the other terms and conditions contained herein (including the
Acquired Fund's obligation to distribute to its shareholders all of its
investment company taxable income and net capital gain as described in
Section 8(m) hereof), the Acquired Fund agrees to sell, assign, convey,
transfer and deliver to the Acquiring Fund, and the Acquiring Fund agrees
to acquire from the Acquired Fund, on the Exchange Date all of the
Investments and all of the cash and other properties and assets of the
Acquired Fund, whether accrued or contingent (including cash received by
the Acquired Fund upon the liquidation of the Acquired Fund of any
investments purchased by the Acquired Fund after March 31, 1998 and
designated by the Acquiring Fund as being unsuitable for it to acquire), in
exchange for that number of shares of beneficial interest of the Acquiring
Fund provided for in Section 4 and the assumption by the Acquiring Fund of
all of the liabilities of the Acquired Fund, whether accrued or contingent,
existing at the Valuation Time except for the Acquired Fund's liabilities,
if any, arising in connection with this Agreement. The Acquired Fund will,
as soon as practicable after the Exchange Date, distribute all of the
Merger Shares received by it to the shareholders of the Acquired Fund in
exchange for their Class A, Class B and Class C shares of the Acquired
Fund.
b. The Acquired Fund will pay or cause to be paid to the Acquiring Fund
any interest, cash or such dividends, rights and other payments received by
it on or after the Exchange Date with respect to the Investments and other
properties and assets of the Acquired Fund, whether accrued or contingent,
received
A-5
<PAGE>
by it on or after the Exchange Date. Any such distribution shall be deemed
included in the assets transferred to the Acquiring Fund at the Exchange
Date and shall not be separately valued unless the securities in respect of
which such distribution is made shall have gone "ex" such distribution
prior to the Valuation Time, in which case any such distribution which
remains unpaid at the Exchange Date shall be included in the determination
of the value of the assets of the Acquired Fund acquired by the Acquiring
Fund.
c. The Valuation Time shall be 4:00 p.m. Eastern time on the Exchange
Date or such earlier or later day as may be mutually agreed upon in writing
by the parties hereto (the "Valuation Time").
4. Exchange Date; Valuation Time. On the Exchange Date, the Acquiring Fund
will deliver to the Acquired Fund (i) a number of full and fractional Class A
Merger Shares having an aggregate net asset value equal to the value of the
assets of the Acquired Fund attributable to Class A shares of the Acquired
Fund transferred to the Acquiring Fund on such date less the value of the
liabilities of the Acquired Fund attributable to Class A shares of the
Acquired Fund assumed by the Acquiring Fund on that date, (ii) a number of
full and fractional Class B Merger Shares having an aggregate net asset value
equal to the value of the assets of the Acquired Fund attributable to Class B
shares of the Acquired Fund transferred to the Acquiring Fund on such date
less the value of the liabilities of the Acquired Fund attributable to Class B
shares of the Acquired Fund assumed by the Acquiring Fund on that date, and
(iii) a number of full and fractional Class C Merger Shares having an
aggregate net asset value equal to the value of the assets of the Acquired
Fund attributable to Class C shares of the Acquired Fund transferred to the
Acquiring Fund on such date less the value of the liabilities of the Acquired
Fund attributable to Class C shares of the Acquired Fund assumed by the
Acquiring Fund on that date, determined as hereinafter provided in this
Section 4.
a. The net asset value of the Merger Shares to be delivered to the
Acquired Fund, the value of the assets attributable to the Class A, Class B
and Class C shares of the Acquired Fund, and the value of the liabilities
attributable to the Class A, Class B and Class C shares of the Acquired
Fund to be assumed by the Acquiring Fund, shall in each case be determined
as of the Valuation Time.
b. The net asset value of the Class A, Class B and Class C Merger Shares
shall be computed in the manner set forth in the PIMS Prospectus. The value
of the assets and liabilities of the Class A, Class B and Class C shares of
the Acquired Fund shall be determined by the Acquiring Fund, in cooperation
with the Acquired Fund, pursuant to procedures which the Acquiring Fund
would use in determining the fair market value of the Acquiring Fund's
assets and liabilities.
c. No adjustment shall be made in the net asset value of either the
Acquired Fund or the Acquiring Fund to take into account differences in
realized and unrealized gains and losses.
d. The Acquiring Fund shall issue the Merger Shares to the Acquired Fund
in three certificates registered in the name of the Acquired Fund, one
representing Class A Merger Shares, one representing Class B Merger Shares
and one representing Class C Merger Shares. The Acquired Fund shall
distribute the Class A Merger Shares to the Class A shareholders of the
Acquired Fund by redelivering such certificate to the Acquiring Fund's
transfer agent, which will as soon as practicable set up open accounts for
each Class A Acquired Fund shareholder in accordance with written
instructions furnished by the Acquired Fund. The Acquired Fund shall
distribute the Class B Merger Shares to the Class B shareholders of the
Acquired Fund by redelivering such certificate to the Acquiring Fund's
transfer agent, which will as soon as practicable set up open accounts for
each Class B Acquired Fund shareholder in accordance with written
instructions furnished by the Acquired Fund. The Acquired Fund shall
distribute the Class C Merger Shares to the Class C shareholders of the
Acquired Fund by redelivering such certificate to the Acquiring Fund's
transfer agent, which will as soon as practicable set up open accounts for
each Class C Acquired Fund shareholder in accordance with written
instructions furnished by the Acquired Fund. With respect to any Acquired
Fund shareholder holding share certificates as of the Exchange Date, such
certificates will from and after the Exchange Date be deemed to be
certificates for the Merger Shares issued to each shareholder in respect of
the Acquired Fund shares represented by such certificates; certificates
representing the Merger Shares will not be issued to Acquired Fund
shareholders.
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<PAGE>
e. The Acquiring Fund shall assume all liabilities of the Acquired Fund,
whether accrued or contingent, in connection with the acquisition of assets
and subsequent dissolution of the Acquired Fund or otherwise, except for
the Acquired Fund's liabilities, if any, pursuant to this Agreement.
5. Expenses, Fees, etc.
a. Except as otherwise provided in this Section 5, PIMCO Advisors L.P.,
by countersigning this Agreement, agrees that it will bear any and all
costs and expenses of the transaction incurred by the Acquiring Fund. The
Acquired Fund agrees to pay any and all costs and expenses of the
transaction incurred by the Acquired Fund but not, however, in an amount
exceeding $24,241. PIMCO Advisors L.P., by countersigning this Agreement,
agrees that it will bear any and all costs and expenses of the transaction
incurred by the Acquired Fund to the extent that they exceed $24,241.
Notwithstanding any of the foregoing, costs and expenses will in any event
be paid by the party directly incurring them if and to the extent that the
payment by another party of such costs and expenses would result in the
disqualification of such party as a "regulated investment company" within
the meaning of Section 851 of the Code.
b. In the event the transaction contemplated by this Agreement is not
consummated solely by reason of the Acquiring Fund's failure to satisfy or
fulfill any of its obligations or duties under this Agreement or its being
either unwilling or unable to go forward other than by reason of the
nonfulfillment or failure of any condition to the Acquiring Fund's
obligations referred to in Section 7 or Section 8, the Acquiring Fund shall
pay directly all of its costs and expenses and all reasonable costs and
expenses incurred by or on behalf of the Acquired Fund in connection with
such transaction, including, without limitation, legal, accounting and
filing fees.
c. In the event the transaction contemplated by this Agreement is not
consummated solely by reason of the Acquired Fund's failure to satisfy or
fulfill any of its obligations or duties under this Agreement or its being
either unwilling or unable to go forward other than by reason of the
nonfulfillment or failure of any condition to the Acquired Fund's
obligations referred to in Section 7 or Section 9, the Acquired Fund shall
pay directly all of its costs and expenses and all reasonable costs and
expenses incurred by or on behalf of the Acquiring Fund in connection with
such transaction, including, without limitation, legal, accounting and
filing fees.
d. In the event the transaction contemplated by this Agreement is not
consummated for reasons specified in both paragraphs (b) and (c) of this
Section 5, then each of the Acquiring Fund and the Acquired Fund shall bear
all of its own costs and expenses incurred in connection with such
transaction.
e. In the event the transaction contemplated by this Agreement is not
consummated for reasons other than those specified in paragraphs (b) or (c)
of this Section 5, then PIMCO Advisors L.P. shall bear all costs and
expenses incurred by the Acquiring Fund in connection with such transaction
and the Acquired Fund shall bear all of its own costs and expenses incurred
in connection with such transaction.
f. Notwithstanding any other provisions of this Agreement, if for any
reason the transaction contemplated by this Agreement is not consummated,
no party shall be liable to the other party for any damages resulting
therefrom, including, without limitation, consequential damages, except as
specifically set forth above.
6. Exchange Date. Delivery of the assets of the Acquired Fund to be
transferred, assumption of the liabilities of the Acquired Fund to be assumed,
and the delivery of the Merger Shares to be issued shall be made at the
offices of Dechert, Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C.
20006, as of the close of business on June 26, 1998, or at such other time and
date agreed to by the Acquiring Fund and the Acquired Fund, the date and time
upon which such delivery is to take place being referred to herein as the
"Exchange Date."
A-7
<PAGE>
7. Meetings of Shareholders; Dissolution.
a. The MMS Trust, on behalf of the Acquired Fund, agrees to call a
meeting of the Acquired Fund's shareholders as soon as is practicable after
the effective date of the Registration Statement for the purpose of
considering the sale of all of its assets to and the assumption of all of
its liabilities by the Acquiring Fund as herein provided, adopting this
Agreement, and authorizing the liquidation and dissolution of the Acquired
Fund.
b. The Acquired Fund agrees that the liquidation and dissolution of the
Acquired Fund will be effected in the manner provided in the MMS Trust's
Agreement and Declaration of Trust in accordance with applicable law and
that on and after the Exchange Date, the Acquired Fund shall not conduct
any business except in connection with its liquidation and dissolution.
c. The Acquiring Fund has, after the preparation and delivery to the
Acquired Fund by the Acquiring Fund of a preliminary version of the
Registration Statement and the Acquired Fund Proxy Statement which were
satisfactory to the Acquired Fund and to Ropes & Gray, filed the
Registration Statement with the Commission. Each of the Acquired Fund and
the Acquiring Fund will cooperate with the other, and each will furnish to
the other the information relating to itself required by the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder to be
set forth in the Registration Statement and the Acquired Fund Proxy
Statement.
8. Conditions to the Acquiring Fund's Obligations. The obligations of the
Acquiring Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the requisite votes of the
holders of the outstanding shares of beneficial interest of the Acquired
Fund entitled to vote.
b. That the Acquired Fund shall have furnished to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, with values
determined as provided in Section 4 of this Agreement, together with a list
of Investments with their respective tax costs, all as of the Valuation
Time, certified on the Acquired Fund's behalf by the MMS Trust's President
(or any Vice President) and Treasurer, and a certificate of both such
officers, dated the Exchange Date, that there has been no material adverse
change in the financial position of the Acquired Fund since March 31, 1998
other than changes in the Investments and other assets and properties since
that date or changes in the market value of the Investments and other
assets of the Acquired Fund, or changes due to dividends paid or losses
from operations.
c. That the Acquired Fund shall have furnished to the Acquiring Fund a
statement, dated the Exchange Date, signed by the MMS Trust's President (or
any Vice President) and Treasurer certifying that as of the Exchange Date
all representations and warranties of the Acquired Fund made in this
Agreement are true and correct in all material respects as if made at and
as of such date and the Acquired Fund has complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied
at or prior to such date.
d. That the Acquired Fund shall have delivered to the Acquiring Fund a
letter from Price Waterhouse LLP dated the Exchange Date stating that such
firm has employed certain procedures whereby it has obtained schedules of
the tax provisions and qualifying tests for regulated investment companies
as prepared for the period ended March 31, 1998 and the period April 1,
1998 to the Exchange Date (the latter period being based on unaudited data)
and that, in the course of such procedures, nothing came to their attention
which caused them to believe that the Acquired Fund (i) would not qualify
as a regulated investment company for federal, state, or local income tax
purposes or (ii) would owe any federal, state or local income tax or excise
tax, for the tax year ended June 30, 1997, and for the period from July 1,
1997 to the Exchange Date.
e. That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
A-8
<PAGE>
f. That the Acquiring Fund shall have received an opinion of Ropes &
Gray, in form satisfactory to Dechert Price & Rhoads, counsel to the
Acquiring Fund, and dated the Exchange Date, to the effect that (i) the MMS
Trust is a Massachusetts business trust duly formed and is validly existing
under the laws of The Commonwealth of Massachusetts and has the power to
own all its properties and to carry on its business as presently conducted;
(ii) this Agreement has been duly authorized, executed and delivered by the
MMS Trust on behalf of the Acquired Fund and, assuming that the
Registration Statement, the PIMS Prospectus and the Acquired Fund Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and
assuming due authorization, execution and delivery of this Agreement by the
PIMS Trust on behalf of the Acquiring Fund, is a valid and binding
obligation of the MMS Trust and the Acquired Fund; (iii) the MMS Trust, on
behalf of the Acquired Fund, has power to sell, assign, convey, transfer
and deliver the assets contemplated hereby and, upon consummation of the
transactions contemplated hereby in accordance with the terms of this
Agreement, the Acquired Fund will have duly sold, assigned, conveyed,
transferred and delivered such assets to the Acquiring Fund; (iv) the
execution and delivery of this Agreement did not, and the consummation of
the transactions contemplated hereby will not, violate the MMS Trust's
Agreement and Declaration of Trust or By-Laws or any provision of any
agreement known to such counsel to which the MMS Trust or the Acquired Fund
is a party or by which it is bound, it being understood that with respect
to investment restrictions contained in the MMS Trust's Agreement and
Declaration of Trust, By-Laws or then-current prospectuses or statement of
additional information, such counsel may rely upon a certificate of an
officer of the MMS Trust whose responsibility it is to advise the MMS Trust
and the Acquired Fund with respect to such matters; and (v) no consent,
approval, authorization or order of any court or governmental authority is
required for the consummation by the MMS Trust on behalf of the Acquired
Fund of the transactions contemplated hereby, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required under state securities or blue sky laws.
g. That the Acquiring Fund shall have received an opinion of Ropes & Gray
(which opinion would be based upon certain factual representations and
subject to certain qualifications), in form satisfactory to Dechert Price &
Rhoads, with respect to the matters specified in Section 9(g) of this
Agreement.
h. That the Acquiring Fund shall have received an opinion of Ropes &
Gray, dated the Exchange Date, satisfactory to Dechert Price & Rhoads
(which opinion would be based upon certain factual representations and
subject to certain qualifications), to the effect that, on the basis of the
existing provisions of the Code, current administrative rules, and court
decisions, for federal income tax purposes (i) no gain or loss will be
recognized by the Acquiring Fund upon receipt of the Investments
transferred to the Acquiring Fund pursuant to this Agreement in exchange
for the Merger Shares; (ii) the basis to the Acquiring Fund of the
Investments will be the same as the basis of the Investments in the hands
of the Acquired Fund immediately prior to such exchange; and (iii) the
Acquiring Fund's holding periods with respect to the Investments will
include the respective periods for which the Investments were held by the
Acquired Fund.
i. That the assets of the Acquired Fund to be acquired by the Acquiring
Fund will include no assets which the Acquiring Fund, by reason of charter
limitations or of investment restrictions disclosed in the Registration
Statement in effect on the Exchange Date, may not properly acquire.
j. That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the PIMS Trust or the Acquiring Fund,
threatened by the Commission.
k. That the MMS Trust and the PIMS Trust shall have received from the
Commission and any relevant state securities administrator such order or
orders as are reasonably necessary or desirable under the 1933 Act, the
1934 Act, the 1940 Act, and any applicable state securities or blue sky
laws in connection with the transactions contemplated hereby, and that all
such orders shall be in full force and effect.
l. That all actions taken by the MMS Trust on behalf of the Acquired Fund
in connection with the transactions contemplated by this Agreement and all
documents incidental thereto shall be satisfactory in form and substance to
the Acquiring Fund and Dechert Price & Rhoads.
A-9
<PAGE>
m. That, prior to the Exchange Date, the Acquired Fund shall have
declared a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to the shareholders of the
Acquired Fund (i) all of the excess of (x) the Acquired Fund's investment
income excludable from gross income under Section 103 of the Code over (y)
the Acquired Fund's deductions disallowed under Sections 265 and 171 of the
Code, (ii) all of the Acquired Fund's investment company taxable income (as
defined in Section 852 of the Code) for its taxable years ending on or
after June 30, 1997 and on or prior to the Exchange Date (computed in each
case without regard to any deduction for dividends paid), and (iii) all of
the Acquired Fund's net capital gain realized (after reduction for any
capital loss carryover), in each case for both the taxable year ended on
June 30, 1997 and the short taxable period beginning on July 1, 1997 and
ending on the Exchange Date.
n. That the Acquired Fund shall have furnished to the Acquiring Fund a
certificate, signed by the President (or any Vice President) and the
Treasurer of the MMS Trust, as to the tax cost to the Acquired Fund of the
securities delivered to the Acquiring Fund pursuant to this Agreement,
together with any such other evidence as to such tax cost as the Acquiring
Fund may reasonably request.
o. That the Acquired Fund's custodian shall have delivered to the
Acquiring Fund a certificate identifying all of the assets of the Acquired
Fund held or maintained by such custodian as of the Valuation Time.
p. That the Acquired Fund's transfer agent shall have provided to the
Acquiring Fund (i) the originals or true copies of all of the records of
the Acquired Fund in the possession of such transfer agent as of the
Exchange Date, (ii) a certificate setting forth the number of shares of the
Acquired Fund outstanding as of the Valuation Time, and (iii) the name and
address of each holder of record of any shares and the number of shares
held of record by each such shareholder.
q. That all of the issued and outstanding shares of beneficial interest
of the Acquired Fund shall have been offered for sale and sold in
conformity with all applicable state securities or blue sky laws (including
any applicable exemptions therefrom) and, to the extent that any audit of
the records of the Acquired Fund or its transfer agent by the Acquiring
Fund or its agents shall have revealed otherwise, either (i) the Acquired
Fund shall have taken all actions that in the opinion of the Acquiring Fund
or Dechert Price & Rhoads are necessary to remedy any prior failure on the
part of the Acquired Fund to have offered for sale and sold such shares in
conformity with such laws or (ii) the Acquired Fund shall have furnished
(or caused to be furnished) surety, or deposited (or caused to be
deposited) assets in escrow, for the benefit of the Acquiring Fund in
amounts sufficient and upon terms satisfactory, in the opinion of the
Acquiring Fund or Dechert Price & Rhoads, to indemnify the Acquiring Fund
against any expense, loss, claim, damage or liability whatsoever that may
be asserted or threatened by reason of such failure on the part of the
Acquired Fund to have offered and sold such shares in conformity with such
laws.
r. That the Acquiring Fund shall have received from Price Waterhouse LLP
a letter addressed to the Acquiring Fund dated as of the Exchange Date
satisfactory in form and substance to the Acquiring Fund to the effect
that, on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), as of the Valuation Time the value
of the assets and liabilities of the Acquired Fund to be exchanged for the
Merger Shares has been determined in accordance with the provisions of the
PIMS Trust's Declaration of Trust, pursuant to the procedures customarily
utilized by the Acquiring Fund in valuing its assets and issuing its
shares.
9. Conditions to the Acquired Fund's Obligations. The obligations of the
Acquired Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the requisite votes of the
holders of the outstanding shares of beneficial interest of the Acquired
Fund entitled to vote.
A-10
<PAGE>
b. That the Acquiring Fund shall have furnished to the Acquired Fund a
statement of the Acquiring Fund's net assets, together with a list of
portfolio holdings with values determined as provided in Section 4, all as
of the Valuation Time, certified on the Acquiring Fund's behalf by the PIMS
Trust's President (or any Vice President) and Treasurer (or any Assistant
Treasurer), and a certificate of both such officers, dated the Exchange
Date, to the effect that as of the Valuation Time and as of the Exchange
Date there has been no material adverse change in the financial position of
the Acquiring Fund since March 31, 1998, other than changes in its
portfolio securities since that date, changes in the market value of the
portfolio securities, changes due to net redemptions, dividends paid or
losses from operations.
c. That the PIMS Trust, on behalf of the Acquiring Fund, shall have
executed and delivered to the Acquired Fund an Assumption of Liabilities
dated as of the Exchange Date pursuant to which the Acquiring Fund will
assume all of the liabilities of the Acquired Fund existing at the
Valuation Time in connection with the transactions contemplated by this
Agreement, other than liabilities arising pursuant to this Agreement.
d. That the Acquiring Fund shall have furnished to the Acquired Fund a
statement, dated the Exchange Date, signed by the PIMS Trust's President
(or any Vice President) and Treasurer (or any Assistant Treasurer)
certifying that as of the Exchange Date all representations and warranties
of the Acquiring Fund made in this Agreement are true and correct in all
material respects as if made at and as of such date, and that the Acquiring
Fund has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied at or prior to such
date.
e. That there shall not be any material litigation pending or threatened
with respect to the matters contemplated by this Agreement.
f. That the Acquired Fund shall have received an opinion of Dechert Price
& Rhoads, in form satisfactory to Ropes & Gray, counsel to the Acquired
Fund, and dated the Exchange Date, to the effect that (i) the PIMS Trust is
a Massachusetts business trust duly formed and is validly existing under
the laws of The Commonwealth of Massachusetts and has the power to own all
its properties and to carry on its business as presently conducted; (ii)
the Merger Shares to be delivered to the Acquired Fund as provided for by
this Agreement are duly authorized and upon such delivery will be validly
issued and will be fully paid and nonassessable by the PIMS Trust and the
Acquiring Fund and no shareholder of the Acquiring Fund has any preemptive
right to subscription or purchase in respect thereof; (iii) this Agreement
has been duly authorized, executed and delivered by the PIMS Trust on
behalf of the Acquiring Fund and, assuming that the MMS Prospectus, the
Registration Statement and the Acquired Fund Proxy Statement comply with
the 1933 Act, the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this Agreement by the MMS Trust on behalf of the
Acquired Fund, is a valid and binding obligation of the PIMS Trust and the
Acquiring Fund; (iv) the execution and delivery of this Agreement did not,
and the consummation of the transactions contemplated hereby will not,
violate the PIMS Trust's Declaration of Trust or By-Laws, or any provision
of any agreement known to such counsel to which the PIMS Trust or the
Acquiring Fund is a party or by which it is bound, it being understood that
with respect to investment restrictions as contained in the PIMS Trust's
Declaration of Trust, By-Laws or then-current prospectuses or statement of
additional information, such counsel may rely upon a certificate of an
officer of the PIMS Trust whose responsibility it is to advise the PIMS
Trust and the Acquiring Fund with respect to such matters; (v) no consent,
approval, authorization or order of any court or governmental authority is
required for the consummation by the PIMS Trust on behalf of the Acquiring
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required under state securities or blue sky laws; and (vi) the
Registration Statement has become effective under the 1933 Act, and to best
of the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act.
g. That the Acquired Fund shall have received an opinion of Ropes & Gray,
dated the Exchange Date (which opinion would be based upon certain factual
representations and subject to certain qualifications), in
A-11
<PAGE>
form satisfactory to the Acquired Fund to the effect that, on the basis of
the existing provisions of the Code, current administrative rules, and
court decisions, for federal income tax purposes: (i) no gain or loss will
be recognized by the Acquired Fund as a result of the reorganization; (ii)
no gain or loss will be recognized by shareholders of the Acquired Fund on
the distribution of Merger Shares to them in exchange for their shares of
the Acquired Fund; (iii) the tax basis of the Merger Shares that the
Acquired Fund's shareholders receive in place of their Acquired Fund shares
will be the same as the basis of the Acquired Fund shares; and (iv) a
shareholder's holding period for the Merger Shares received pursuant to the
Agreement will be determined by including the holding period for the
Acquired Fund shares exchanged for the Merger Shares, provided that the
shareholder held the Acquired Fund shares as a capital asset.
h. That all actions taken by the PIMS Trust on behalf of the Acquiring
Fund in connection with the transactions contemplated by this Agreement and
all documents incidental thereto shall be satisfactory in form and
substance to the Acquired Fund and Ropes & Gray.
i. That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the PIMS Trust or the Acquiring Fund,
threatened by the Commission.
j. That the MMS Trust and PIMS Trust shall have received from the
Commission and any relevant state securities administrator such order or
orders as are reasonably necessary or desirable under the 1933 Act, the
1934 Act, the 1940 Act, and any applicable state securities or blue sky
laws in connection with the transactions contemplated hereby, and that all
such orders shall be in full force and effect.
10. Indemnification.
a. The Acquired Fund shall indemnify and hold harmless, out of the assets
of the Acquired Fund (which shall be deemed to include the assets of the
Acquiring Fund represented by the Merger Shares following the Exchange
Date) but no other assets, the trustees and officers of the PIMS Trust (for
purposes of this subparagraph, the "Indemnified Parties") against any and
all expenses, losses, claims, damages and liabilities at any time imposed
upon or reasonably incurred by any one or more of the Indemnified Parties
in connection with, arising out of, or resulting from any claim, action,
suit or proceeding in which any one or more of the Indemnified Parties may
be involved or with which any one or more of the Indemnified Parties may be
threatened by reason of any untrue statement or alleged untrue statement of
a material fact relating to the MMS Trust or the Acquired Fund contained in
the Registration Statement, the MMS Prospectus or the Acquired Fund Proxy
Statement or any amendment or supplement to any of the foregoing, or
arising out of or based upon the omission or alleged omission to state in
any of the foregoing a material fact relating to the MMS Trust or the
Acquired Fund required to be stated therein or necessary to make the
statements relating to the MMS Trust or the Acquired Fund therein not
misleading, including, without limitation, any amounts paid by any one or
more of the Indemnified Parties in a reasonable compromise or settlement of
any such claim, action, suit or proceeding, or threatened claim, action,
suit or proceeding made with the consent of the MMS Trust or the Acquired
Fund. The Indemnified Parties will notify the MMS Trust and the Acquired
Fund in writing within ten days after the receipt by any one or more of the
Indemnified Parties of any notice of legal process or any suit brought
against or claim made against such Indemnified Party as to any matters
covered by this Section 10(a). The Acquired Fund shall be entitled to
participate at its own expense in the defense of any claim, action, suit or
proceeding covered by this Section 10(a), or, if it so elects, to assume at
its expense by counsel satisfactory to the Indemnified Parties the defense
of any such claim, action, suit or proceeding, and if the Acquired Fund
elects to assume such defense, the Indemnified Parties shall be entitled to
participate in the defense of any such claim, action, suit or proceeding at
their expense. The Acquired Fund's obligation under Section 10(a) to
indemnify and hold harmless the Indemnified Parties shall constitute a
guarantee of payment so that the Acquired Fund will pay in the first
instance any expenses, losses, claims, damages and liabilities required to
be paid by it under this Section 10(a) without the necessity of the
Indemnified Parties' first paying the same.
A-12
<PAGE>
b. The Acquiring Fund shall indemnify and hold harmless, out of the
assets of the Acquiring Fund but no other assets, the trustees and officers
of the MMS Trust (for purposes of this subparagraph, the "Indemnified
Parties") against any and all expenses, losses, claims, damages and
liabilities at any time imposed upon or reasonably incurred by any one or
more of the Indemnified Parties in connection with, arising out of, or
resulting from any claim, action, suit or proceeding in which any one or
more of the Indemnified Parties may be involved or with which any one or
more of the Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact relating to the
Acquiring Fund contained in the Registration Statement, the PIMS Prospectus
or the Acquired Fund Proxy Statement, or any amendment or supplement to any
thereof, or arising out of, or based upon, the omission or alleged omission
to state in any of the foregoing a material fact relating to the PIMS Trust
or the Acquiring Fund required to be stated therein or necessary to make
the statements relating to the PIMS Trust or the Acquiring Fund therein not
misleading, including, without limitation, any amounts paid by any one or
more of the Indemnified Parties in a reasonable compromise or settlement of
any such claim, action, suit or proceeding, or threatened claim, action,
suit or proceeding made with the consent of the PIMS Trust or the Acquiring
Fund. The Indemnified Parties will notify the MMS Trust and the Acquiring
Fund in writing within ten days after the receipt by any one or more of the
Indemnified parties of any notice of legal process or any suit brought
against or claim made against such Indemnified Party as to any matters
covered by this Section 10(b). The Acquiring Fund shall be entitled to
participate at its own expense in the defense of any claim, action, suit or
proceeding covered by this Section 10(b), or, if it so elects, to assume at
its expense by counsel satisfactory to the Indemnified Parties the defense
of any such claim, action, suit or proceeding, and, if the Acquiring Fund
elects to assume such defense, the Indemnified Parties shall be entitled to
participate in the defense of any such claim, action, suit or proceeding at
their own expense. The Acquiring Fund's obligation under this Section 10(b)
to indemnify and hold harmless the Indemnified Parties shall constitute a
guarantee of payment so that the Acquiring Fund will pay in the first
instance any expenses, losses, claims, damages and liabilities required to
be paid by it under this Section 10(b) without the necessity of the
Indemnified Parties' first paying the same.
11. No Broker, etc. Each of the Acquired Fund and the Acquiring Fund
represents that there is no person who has dealt with it, the MMS Trust or the
PIMS Trust, who by reason of such dealings, is entitled to any broker's or
finder's or other similar fee or commission arising out of the transactions
contemplated by this Agreement.
12. Termination. The Acquired Fund and the Acquiring Fund may, by mutual
consent of the trustees on behalf of each Fund, terminate this Agreement, and
the Acquired Fund or the Acquiring Fund, after consultation with counsel and
by consent of their trustees or an officer authorized by such trustees, may
waive any condition to their respective obligations hereunder. If the
transactions contemplated by this Agreement have not been substantially
completed by December 31, 1998, this Agreement shall automatically terminate
on that date unless a later date is agreed to by the Acquired Fund and the
Acquiring Fund.
13. Rule 145. Pursuant to Rule 145 under the 1933 Act, the Acquiring Fund
will, in connection with the issuance of any Merger Shares to any person who
at the time of the transaction contemplated hereby is deemed to be an
affiliate of a party to the transaction pursuant to Rule 145(c), cause to be
affixed upon the certificates issued to such person (if any) a legend as
follows:
"THESE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO PIMCO
MUNICIPAL BOND FUND OR ITS PRINCIPAL UNDERWRITER UNLESS (i) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (ii) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE FUND SUCH REGISTRATION IS NOT REQUIRED."
and, further, the Acquiring Fund will issue stop transfer instructions to the
Acquiring Fund's transfer agent with respect to such shares. The Acquired Fund
will provide the Acquiring Fund on the Exchange Date with the name of any
Acquired Fund shareholder who is to the knowledge of the Acquired Fund an
affiliate of the Acquired Fund on such date.
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14. Covenants, etc. Deemed Material. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any investigation made by
them or on their behalf.
15. Sole Agreement; Amendments; Governing Law. This Agreement supersedes all
previous correspondence and oral communications between the parties regarding
the subject matter hereof, constitutes the only understanding with respect to
such subject matter, may not be changed except by a letter of agreement signed
by each party hereto, and shall be construed in accordance with and governed
by the laws of The Commonwealth of Massachusetts.
16. Declaration of Trust.
a. A copy of the Agreement and Declaration of Trust of the MMS Trust is
on file with the Secretary of State of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed on behalf of
the trustees of the MMS Trust on behalf of the Acquired Fund as trustees
and not individually and that the obligations of this instrument are not
binding upon any of the trustees, officers or shareholders of the MMS Trust
individually but are binding only upon the assets and property of the
Acquired Fund.
b. A copy of the Declaration of Trust of the PIMS Trust is on file with
the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the trustees of
the PIMS Trust on behalf of the Acquiring Fund as trustees and not
individually and that the obligations of this instrument are not binding
upon any of the trustees, officers or shareholders of the PIMS Trust
individually but are binding only upon the assets and property of the
Acquiring Fund.
PIMCO FUNDS: MULTI-MANAGER SERIES,
on behalf of its Tax Exempt Fund
By:
-------------------------------
PIMCO FUNDS, on behalf of its
Municipal Bond Fund
By:
-------------------------------
Agreed and accepted as to Section 5(a) only by PIMCO ADVISORS L.P.
By:
-----------------------------
Title:
--------------------------
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APPENDIX B
ADDITIONAL INFORMATION ABOUT THE MUNICIPAL BOND FUND
PIMCO Funds: Pacific Investment Management Series ("PIMS" or the "Trust") is
an open-end management investment company consisting of twenty-five separate
investment portfolios (the "Funds"), one of which is the PIMCO Municipal Bond
Fund ("Municipal Bond Fund"). Each Fund offers its shares in up to six
classes: Class A, Class B, Class C, Class D, the Institutional Class and the
Administrative Class.
This Proxy Statement/Prospectus describes only those classes of shares to be
received by shareholders of the Tax Exempt Fund in the Reorganization, i.e.
Class A, Class B and Class C. Information regarding the remaining classes are
contained in separate prospectuses and in the Trust's Statement of Additional
Information, which are available upon request to the Trust without charge.
INVESTMENT RISKS AND CONSIDERATIONS
The following are some of the principal risks of investing in the Municipal
Bond Fund. Investors should read this Proxy Statement/Prospectus carefully for
a more complete discussion of the risks relating to an investment in the
Municipal Bond Fund. The net asset value per share of the Municipal Bond Fund
may be less at the time of redemption than it was at the time of investment.
Generally, the value of fixed income securities can be expected to vary
inversely with changes in prevailing interest rates, i.e., as interest rates
rise, market value tends to decrease, and vice versa, although this may not be
true in the case of inflation-indexed bonds. In addition, the Municipal Bond
Fund may invest in securities rated lower than Baa by Moody's or S&P (or, if
not rated, determined by Pacific Investment Management to be of comparable
quality). Such securities carry a high degree of credit risk and are
considered speculative by the major rating agencies.
The Municipal Bond Fund's investment techniques may involve a form of
borrowing, which may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Municipal Bond Fund's
portfolio and may require liquidation of portfolio positions when it is not
advantageous to do so. The Municipal Bond Fund may sell securities short,
which exposes the Municipal Bond Fund to a risk of loss if the value of the
security sold short should increase.
The Municipal Bond Fund may use derivative instruments, consisting of
futures, options, and options on futures, for hedging purposes or as part of
their investment strategies. Use of these instruments may involve certain
costs and risks, including the risk that the Municipal Bond Fund could not
close out a position when it would be most advantageous to do so, the risk of
an imperfect correlation between the value of the securities being hedged and
the value of the particular derivative instrument, and the risk that
unexpected changes in interest rates may adversely affect the value of the
Municipal Bond Fund's investments in particular derivative instruments. Unless
otherwise indicated, all limitations applicable to the Municipal Bond Fund
investments (as stated in this Proxy Statement/Prospectus, the Trust's Class
A, B and C Prospectus and in the Trust's 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 Municipal Bond
Fund assets invested in certain securities or other instruments, or change in
the average duration of the Municipal Bond Fund's investment portfolio,
resulting from market fluctuations or other changes in the Municipal Bond
Fund's total assets, will not require the Municipal Bond Fund to dispose of an
investment until Pacific Investment Management determines that is practicable
to sell or close out the investment without undue market or tax consequences
to the Municipal Bond Fund. In the event that ratings services assign
different ratings to the same security, Pacific Investment Management will
determine which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned ratings.
The Municipal Bond Fund offers its shares to both retail and institutional
investors. Institutional shareholders, some of whom also may be investment
advisory clients of Pacific Investment Management, may hold large positions in
the Municipal Bond Fund. Such shareholders may on occasion make large
redemptions of
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their holdings in the Municipal Bond Fund to meet their liquidity needs, in
connection with strategic adjustments to their overall portfolio of
investments, or for other purposes. Large redemptions of the Municipal Bond
Fund could require Pacific Investment Management to liquidate portfolio
positions when it is not most desirable to do so. Liquidation of portfolio
holdings also may cause the Municipal Bond Fund to realize taxable capital
gains.
CHARACTERISTICS AND RISKS OF
SECURITIES AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities and
investment techniques used by the Municipal Bond Fund, and discusses certain
concepts relevant to the investment policies of the Fund. Additional
information about the Fund's investments and investment practices may be found
in PIMS's Statement of Additional Information.
MUNICIPAL BONDS. The Municipal Bond Fund invests in Municipal Bonds which
are generally issued by states and local governments and their agencies,
authorities and other instrumentalities. The Municipal Bonds which the 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 that 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.
Municipal Bonds are subject to credit and market risk. Credit risk relates
to the ability of the issuer to make payments of principal and interest. The
ability of an issuer to make such payments could be affected by litigation,
legislation or other political events or the bankruptcy of the issuer. Market
risk relates to changes in a security's value as a result of changes in
interest rates. Lower rated Municipal Bonds generally provide higher yields
but are subject to greater credit and market risk than higher quality
Municipal Bonds.
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.
The Municipal Bond Fund may invest in municipal lease obligations. A lease
is not a full faith and credit obligation of the issuer and is usually backed
only by the borrowing government's unsecured pledge to make annual
appropriations for lease payments. There have been challenges to the legality
of lease financing in numerous states, and, from time to time, certain
municipalities have considered not appropriating money for lease payments.
These securities may be less readily marketable than other municipals. The
Municipal Bond Fund may also purchase unrated lease obligations if determined
by Pacific Investment Management to be of comparable quality to rated
securities in which the Fund is permitted to invest.
The Municipal Bond Fund may seek to enhance its yield through the purchase
of private placements, which may have resale restrictions. The Municipal Bond
Fund may not invest more than 15% of its net assets in illiquid securities,
including unmarketable private placements. The Municipal Bond Fund may invest
in municipal warrants. Like options, warrants may expire worthless and they
may have reduced liquidity. The Municipal Bond Fund will not invest more than
5% of its net assets in municipal warrants.
The Municipal Bond Fund may invest in Municipal Bonds with credit
enhancements such as letters of credit, municipal bond insurance and Standby
Bond Purchase Agreements ("SBPA"). 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. An SBPA is a liquidity facility
provided to pay the purchase price of bonds that cannot be re-marketed, and
does not cover principal or interest under any other circumstances.
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The Municipal Bond Fund may invest in Residual Interest Bonds, which are
created by dividing the income stream provided by an underlying bond to create
two securities, one short term and one long term. Rising short-term interest
rates result in lower income for the longer-term portion, and vice versa. The
longer-term bonds can be very volatile and may be less liquid than other
Municipal Bonds of comparable maturity. The Municipal Bond Fund will not
invest more than 10% of its total assets in Residual Interest Bonds.
The Municipal Bond Fund also may invest in participation interests.
Participation interests are various types of securities created by converting
fixed rate bonds into short-term, variable rate certificates. There is no
guarantee the interest will be exempt because the IRS has not issued a
definitive ruling on the matter.
Although the Municipal Bond Fund invests principally in Municipal Bonds, it
also may invest up to 20% of its net assets in other securities, whose
characteristics and risks are discussed below.
U.S. GOVERNMENT SECURITIES U.S. Government securities are obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities. The
U.S. Government does not guarantee the net asset value of the Municipal Bond
Fund's shares. Some U.S. Government securities, such as Treasury bills, notes
and bonds, and securities guaranteed by the Government National Mortgage
Association ("GNMA"), are supported by the full faith and credit of the United
States; others, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the U.S. Treasury; others, such as
those of the Federal National Mortgage Association ("FNMA"), are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. U.S.
Government securities include securities that have no coupons, or have been
stripped of their unmatured interest coupons, individual interest coupons from
such securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are purchased at a
deep discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts
issued in connection with so-called trademark zero coupon securities, such as
CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not
U.S. Government securities, although the underlying bond represented by such
receipt is a debt obligation of the U.S. Treasury. Other zero coupon Treasury
securities (STRIPs and CUBEs) are direct obligations of the U.S. Government.
VARIABLE AND FLOATING RATE SECURITIES Variable and floating rate securities
provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates
are adjusted periodically based upon an interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be
regular, and range from daily up to annually, or may be event based, such as
based on a change in the prime rate.
The Municipal Bond Fund may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied
to another interest rate, such as a money-market index or Treasury bill rate.
The interest rate on a floater resets periodically, typically every six
months. While, because of the interest rate reset feature, floaters provide
the Municipal Bond Fund with a certain degree of protection against rises in
interest rates, the Municipal Bond Fund will participate in any declines in
interest rates as well.
INFLATION-INDEXED BONDS Inflation-indexed bonds are fixed income securities
whose principal value is periodically adjusted according to the rate of
inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted
for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially have
maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semi-annual basis, equal to a fixed percentage of the inflation-
adjusted principal amount. For example, if an investor purchased an inflation-
indexed bond with a par value of $1,000 and a 3% real rate of
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return coupon (payable 1.5% semi-annually), and inflation over the first six
months were 1%, the mid-year par value of the bond would be $1,010 and the
first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If
inflation during the second half of the year reached 3%, the end-of-year par
value of the bond would be $1,030 and the second semi-annual interest payment
would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently
the interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal
upon maturity (as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation-indexed bonds, even during a period of deflation. However,
the current market value of the bonds is not guaranteed, and will fluctuate.
The Municipal Bond Fund may also invest in other inflation related bonds which
may or may not provide a similar guarantee. If such a guarantee of principal
is not provided, the adjusted principal value of the bond repaid at maturity
may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline
in value. If interest rates rise due to reasons other than inflation (for
example, due to changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not
reflected in the bond's inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that the Municipal Bond Fund may be forced to
liquidate positions when it would not be advantageous to do so. There also can
be no assurance that the U.S. Treasury will issue any particular amount of
inflation-indexed bonds. Certain foreign governments, such as the United
Kingdom, Canada and Australia, have a longer history of issuing inflation-
indexed bonds, and there may be a more liquid market in certain of these
countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food,
transportation and energy. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation index,
calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in
the prices of goods and services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Taxes" for information about the possible tax
consequences of investing in inflation-indexed bonds.
HIGH YIELD SECURITIES ("JUNK BONDS") The Municipal Bond Fund may invest up
to 10% of its assets in securities rated lower than Baa by Moody's or BBB by
S&P but rated at least Ba by Moody's or BB by S&P (or, if not rated,
determined by Pacific Investment Management to be of comparable quality).
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. Securities rated Baa
are considered by Moody's to have some speculative characteristics. Investors
should consider the following risks associated with high yield securities
before investing in the Municipal Bond Fund.
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Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and
the ability of the Municipal Bond Fund to achieve its investment objective
may, to the extent of its investments in high yield securities, be more
dependent upon such creditworthiness analysis than would be the case if the
Municipal Bond Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield security prices because the
advent of a recession could lessen the ability of a highly leveraged company
to make principal and interest payments on its debt securities. If the issuer
of high yield securities defaults, the Municipal Bond Fund may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero coupon or payment-in-kind securities, the market prices of
such securities are affected to a greater extent by interest rate changes, and
therefore tend to be more volatile than securities which pay interest
periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations
in the daily net asset value of the Municipal Bond Fund's shares. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last
rated. Pacific Investment Management does not rely solely on credit ratings
when selecting securities for the Municipal Bond Fund, and develops its own
independent analysis of issuer credit quality. If a credit rating agency
changes the rating of a portfolio security held by the Municipal Bond Fund,
the Fund may retain the portfolio security if Pacific Investment Management
deems it in the best interest of shareholders.
CORPORATE DEBT SECURITIES Corporate debt securities include corporate bonds,
debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants
attached. Corporate income-producing securities may also include forms of
preferred or preference stock. The rate of interest on a corporate debt
security may be fixed, floating or variable, and may vary inversely with
respect to a reference rate. See "Variable and Floating Rate Securities"
above. The rate of return or return of principal on some debt obligations may
be linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.
Investments in corporate debt securities that are rated below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Such securities are sometimes referred to as "junk
bonds," and may be subject to greater market fluctuations, less liquidity and
greater risk of loss of income or principal, including a greater possibility
of default or bankruptcy of the issuer of such securities, than are more
highly rated debt securities. Moody's also describes securities rated Baa as
having speculative characteristics. Pacific Investment Management seeks to
minimize these risks through diversification, in-depth credit analysis and
attention to current developments in interest rates and market conditions. See
"Description of Securities Ratings." Investments in high yield securities are
discussed separately above under "High Yield Securities ("Junk Bonds")."
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES The Municipal Bond Fund
may invest in mortgage- or other asset-backed securities. The value of some
mortgage- or asset-backed securities in which the
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Municipal Bond Fund invests may be particularly sensitive to changes in
prevailing interest rates, and, like the other investments of the Municipal
Bond Fund, the ability of the Municipal Bond Fund to successfully utilize
these instruments may depend in part upon the ability of Pacific Investment
Management to forecast interest rates and other economic factors correctly.
Mortgage-Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are
generally made monthly, in effect "passing through" monthly payments made by
the individual borrowers on the mortgage loans which underlie the securities
(net of fees paid to the issuer or guarantor of the securities). Early
repayment of principal on some mortgage-related securities (arising from
prepayments of principal due to sale of the underlying property, refinancing,
or foreclosure, net of fees and costs which may be incurred) may expose the
Municipal Bond Fund to a lower rate of return upon reinvestment of principal.
Also, if a security subject to prepayment has been purchased at a premium, the
value of the premium would be lost in the event of prepayment. Like other
fixed income securities, when interest rates rise, the value of a mortgage-
related security generally will decline; however, when interest rates are
declining, the value of mortgage-related securities with prepayment features
may not increase as much as other fixed income securities. The rate of
prepayments on underlying mortgages will affect the price and volatility of a
mortgage-related security, and may have the effect of shortening or extending
the effective maturity of the security beyond what was anticipated at the time
of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the
U.S. Government (in the case of securities guaranteed by FNMA or the Federal
Home Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers) may
be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. Interest and pre-paid principal on a CMO are paid, in most cases,
on a monthly basis. CMOs may be collateralized by whole mortgage loans but are
more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, are first returned to investors
holding the shortest maturity class; investors holding the longer maturity
classes receive principal only after the first class has been retired. CMOs
that are issued or guaranteed by the U.S. Government or by any of its agencies
or instrumentalities will be considered U.S. Government securities by the
Fund, while other CMOs, even if collateralized by U.S. Government securities,
will have the same status as other privately issued securities for purposes of
applying the Fund's diversification tests.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently
and in terms of total outstanding principal amount of issues is relatively
small compared to the market for residential single-family mortgage-backed
securities. Many of the risks of investing in commercial mortgage-backed
securities reflect the risks of investing in the real estate securing the
underlying mortgage loans. These risks reflect the effects of local and other
economic conditions on real estate markets, the ability of tenants to make
loan payments, and the ability of a property to attract and retain tenants.
Commercial mortgage-backed securities may be less liquid and exhibit greater
price volatility than other types of mortgage-related or asset-backed
securities.
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Mortgage-Related Securities include securities other than those described
above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property, such as mortgage dollar
rolls (see "Reverse Repurchase Agreements, Dollar Rolls, and Borrowings"), CMO
residuals or stripped mortgage-backed securities ("SMBS"), and may be
structured in classes with rights to receive varying proportions of principal
and interest.
A common type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only,
or "IO" class), while the other class will receive all of the principal (the
principal-only, or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on the Municipal Bond Fund's yield
to maturity from these securities. The Municipal Bond Fund has adopted a
policy under which the Fund will invest more than 5% of its net assets in any
combination of IO or PO securities. The Municipal Bond Fund may invest in
other asset-backed securities that have been offered to investors. For a
discussion of the characteristics of some of these instruments, see the
Trust's Statement of Additional Information.
REPURCHASE AGREEMENTS For the purpose of achieving income, the Municipal
Bond Fund may enter into repurchase agreements, which entail the purchase of a
portfolio-eligible security from a bank or broker-dealer that agrees to
repurchase the security at the Municipal Bond Fund's cost plus interest within
a specified time (normally one day). If the party agreeing to repurchase
should default, as a result of bankruptcy or otherwise, the Municipal Bond
Fund will seek to sell the securities which it holds, which action could
involve procedural costs or delays in addition to a loss on the securities if
their value should fall below their repurchase price. The Municipal Bond Fund
will invest no more than 15% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS, AND BORROWINGS A reverse
repurchase agreement involves the sale of a security by the Municipal Bond
Fund and its agreement to repurchase the instrument at a specified time and
price. Under a reverse repurchase agreement, the Municipal Bond Fund continues
to receive any principal and interest payments on the underlying security
during the term of the agreement. The Municipal Bond Fund generally will
maintain a segregated account consisting of assets determined to be liquid by
Pacific Investment Management in accordance with procedures established by the
Board of Trustees to cover its obligations under reverse repurchase agreements
and, to this extent, a reverse repurchase agreement (or economically similar
transaction) will not be considered a "senior security" subject to the 300%
asset coverage requirements otherwise applicable to borrowings by the
Municipal Bond Fund.
The Municipal Bond Fund may enter into dollar rolls, in which the Municipal
Bond Fund sells mortgage-backed or other securities for delivery in the
current month and simultaneously contracts to purchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-backed securities, the mortgage-backed securities that are purchased
will be of the same type and will have the same interest rate as those sold,
but will be supported by different pools of mortgages. The Municipal Bond Fund
forgoes principal and interest paid during the roll period on the securities
sold in a dollar roll, but the Municipal Bond Fund is compensated by the
difference between the current sales price and the lower price for the future
purchase as well as by any interest earned on the proceeds of the securities
sold. The Municipal Bond Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. The Municipal Bond Fund will
maintain a segregated account consisting of assets determined to be liquid by
Pacific Investment Management in accordance with procedures established by the
Board of Trustees to cover its obligations under dollar rolls.
To the extent that positions in reverse repurchase agreements, dollar rolls
or similar transactions are not covered through the maintenance of a
segregated account consisting of liquid assets at least equal to the amount of
any forward purchase commitment, such transactions would be subject to the
Municipal Bond Fund's limitations on borrowings, which would restrict the
aggregate of such transactions (plus any other borrowings)
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to 33 1/3% of the Municipal Bond Fund's total assets. Apart from such
transactions, the Municipal Bond Fund will not borrow money, except for
temporary administrative purposes.
LOANS OF PORTFOLIO SECURITIES For the purpose of achieving income, the
Municipal Bond Fund may lend its portfolio securities to brokers, dealers, and
other financial institutions, provided:
(i) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash or cash equivalents (negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market
value of the securities loaned;
(ii) the Municipal Bond Fund may at any time call the loan and obtain the
return of the securities loaned;
(iii) the Municipal Bond Fund will receive any interest or dividends paid
on the loaned securities; and
(iv) the aggregate market value of securities loaned will not at any time
exceed 33 1/3% of the total assets of the Municipal Bond Fund.
The Municipal Bond Fund's performance will continue to reflect changes in
the value of the securities loaned and will also reflect the receipt of either
interest, through investment of cash collateral by the Municipal Bond Fund in
permissible investments, or a fee, if the collateral is U.S. Government
securities. Securities lending involves the risk of loss of rights in the
collateral or delay in recovery of the collateral should the borrower fail to
return the security loaned or become insolvent. The Municipal Bond Fund may
pay lending fees to the party arranging the loan.
WHEN-ISSUED, DELAYED DELIVERY, AND FORWARD COMMITMENT TRANSACTIONS The
Municipal Bond Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. These transactions involve a commitment
by the Municipal Bond Fund to purchase or sell securities for a predetermined
price or yield, with payment and delivery taking place more than seven days in
the future, or after a period longer than the customary settlement period for
that type of security. When such purchases are outstanding, the Municipal Bond
Fund will set aside and maintain until the settlement date in a segregated
account, assets determined to be liquid by Pacific Investment Management in
accordance with procedures established by the Board of Trustees, in an amount
sufficient to meet the purchase price. Typically, no income accrues on
securities the Municipal Bond Fund has committed to purchase prior to the time
delivery of the securities is made, although the Municipal Bond Fund may earn
income on securities it has deposited in a segregated account. When purchasing
a security on a when-issued, delayed delivery, or forward commitment basis,
the Municipal Bond Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the
Municipal Bond Fund is not required to pay for the security until the delivery
date, these risks are in addition to the risks associated with the Municipal
Bond Fund's other investments. If the Municipal Bond Fund remains
substantially fully invested at a time when when-issued, delayed delivery, or
forward commitment purchases are outstanding, the purchases may result in a
form of leverage. When the Municipal Bond Fund has sold a security on a when-
issued, delayed delivery, or forward commitment basis, the Municipal Bond Fund
does not participate in future gains or losses with respect to the security.
If the other party to a transaction fails to deliver or pay for the
securities, the Municipal Bond Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Municipal Bond Fund may dispose of or
renegotiate a transaction after it is entered into, and may sell when-issued
or forward commitment securities before they are delivered, which may result
in a capital gain or loss. There is no percentage limitation on the extent to
which the Municipal Bond Fund may purchase or sell securities on a
when-issued, delayed delivery, or forward commitment basis.
SHORT SALES The Municipal Bond Fund may from time to time effect short sales
as part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than
a short sale against the box) is a transaction in which the Municipal Bond
Fund sells a security it does not own at the time of the sale in
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anticipation that the market price of that security will decline. To the
extent that the Municipal Bond Fund engages in short sales, it must (except in
the case of short sales "against the box") maintain asset coverage in the form
of assets determined to be liquid by Pacific Investment Management in
accordance with procedures established by the Board of Trustees, in a
segregated account, or otherwise cover its position in a permissible manner. A
short sale is "against the box" to the extent that the Municipal Bond Fund
contemporaneously owns, or has the right to obtain at no added cost,
securities identical to those sold short.
DERIVATIVE INSTRUMENTS To the extent permitted by the investment objectives
and policies of the Municipal Bond Fund, the Fund may purchase and write call
and put options, enter into futures contracts, and use options on futures
contracts as further described below. The Municipal Bond Fund may use these
techniques to hedge against changes in interest rates or securities prices or
as part of their overall investment strategies. The Municipal Bond Fund will
maintain a segregated account consisting of assets determined to be liquid by
Pacific Investment Management in accordance with procedures established by the
Board of Trustees (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations under options and
futures to limit leveraging of the Fund.
Derivative instruments are considered for these purposes to consist of
securities or other instruments whose value is derived from or related to the
value of some other instrument or asset, and not to include those securities
whose payment of principal and/or interest depends upon cash flows from
underlying assets, such as mortgage-related or asset-backed securities. The
value of some derivative instruments in which the Municipal Bond Fund invests
may be particularly sensitive to changes in prevailing interest rates, and,
like the other investments of the Municipal Bond Fund, the ability of the Fund
to successfully utilize these instruments may depend in part upon the ability
of Pacific Investment Management to forecast interest rates and other economic
factors correctly. If Pacific Investment Management incorrectly forecasts such
factors and has taken positions in derivative instruments contrary to
prevailing market trends, the Municipal Bond Fund could be exposed to the risk
of loss.
The Municipal Bond Fund might not employ any of the strategies described
below, and no assurance can be given that any strategy used will succeed. The
use of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments. While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by
offsetting favorable price movements in related investments or otherwise, due
to the possible inability of the Municipal Bond Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable or the possible
need to sell a portfolio security at a disadvantageous time because the
Municipal Bond Fund is required to maintain asset coverage or offsetting
positions, and the possible inability of the Municipal Bond Fund to close out
or to liquidate its derivatives positions.
OPTIONS ON SECURITIES AND SECURITIES INDEXES. The Municipal Bond Fund may
purchase put and call options on U.S. Government securities, Municipal Bonds
and Municipal Bond indexes. One purpose of purchasing put options is to
protect holdings in an underlying or related security against a substantial
decline in market value. One purpose of purchasing call options is to protect
against substantial increases in prices of securities the Fund intends to
purchase pending its ability to invest in such securities in an orderly
manner. An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of
a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a specified
exercise price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of the underlying security. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. An index is designed to reflect specified
facets of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.
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The Municipal Bond Fund may sell put or call options it has previously
purchased, which could result in a net gain or loss. The Municipal Bond Fund
may write a call or put option only if the option is "covered" by the Fund
holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund's obligation as writer of the
option. Prior to exercise or expiration, an option may be closed out by an
offsetting purchase or sale of an option of the same series.
The Municipal Bond Fund may write covered straddles consisting of a
combination of a call and a put written on the same underlying security. A
straddle will be covered when sufficient assets are deposited to meet the
Fund's immediate obligations. The Municipal Bond 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 Municipal Bond Fund will also segregate
liquid assets equivalent to the amount, if any, by which the put is "in the
money."
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation
under the option and must deliver the underlying security at the exercise
price. If a put or call option purchased by the Fund is not sold when it has
remaining value, and if the market price of the underlying security remains
equal to or greater than the exercise price (in the case of a put), or remains
less than or equal to the exercise price (in the case of a call), the Fund
will lose its entire investment in the option. Also, where a put or call
option on a particular security is purchased to hedge against price movements
in a related security, the price of the put or call option may move more or
less than the price of the related security. There can be no assurance that a
liquid market will exist when the Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, the Fund may be unable to close out a position.
Over-the-counter options in which the Municipal Bond Fund may invest differ
from traded options in that they are two-party contracts, with price and other
terms negotiated between buyer and seller, and generally do not have as much
market liquidity as exchange-traded options. The Municipal Bond Fund may be
required to treat as illiquid over-the-counter options purchased and
securities being used to cover certain written over-the-counter options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Municipal Bond Fund
may purchase and sell futures contracts on U.S. Government securities and
Municipal Bonds, as well as purchase put and call options on such futures
contracts.
There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in the Municipal Bond Fund and the hedging
vehicle so that the portfolio return might have been greater had hedging not
been attempted. There can be no assurance that a liquid market will exist at a
time when the Municipal Bond Fund seeks to close out a futures contract or a
futures option position. Most futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
day; once the daily limit has been reached on a particular contract, no trades
may be made that day at a price beyond that limit. In addition, certain of
these instruments are relatively new and without a significant trading
history. As a result, there is no assurance that an active secondary market
will develop or continue to exist. Lack of a liquid market for any reason may
prevent the Municipal Bond Fund from liquidating an unfavorable position, and
the Municipal Bond Fund would remain obligated to meet margin requirements
until the position is closed.
The Municipal Bond Fund may write covered straddles consisting of a
combination of a call and a put written on the same underlying futures
contract. A straddle will be covered when sufficient assets are deposited
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to meet the Municipal Bond Fund's immediate obligations. The Municipal Bond
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 Municipal
Bond Fund will also segregate liquid assets equivalent to the amount, if any,
by which the put is "in the money."
The Municipal Bond Fund will only enter into futures contracts or futures
options which are standardized and traded on a U.S. or foreign exchange or
board of trade, or similar entity, or quoted on an automated quotation system.
The Municipal Bond Fund will use financial futures contracts and related
options only for "bona fide hedging" purposes, as such term is defined in
applicable regulations of the Commodities Futures Trading Commission ("CFTC")
or, with respect to positions in financial futures and related options that do
not qualify as "bona fide hedging" positions, will enter such positions only
to the extent that aggregate initial margin deposits plus premiums paid by it
for open futures option positions, less the amount by which any such positions
are "in-the-money," would not exceed 5% of the Municipal Bond Fund's net
assets.
HYBRID INSTRUMENTS A hybrid instrument can combine the characteristics of
securities, futures, and options. For example, the principal amount or
interest rate of a hybrid could be tied (positively or negatively) to the
price of some commodity, currency or securities index or another interest rate
(each a "benchmark"). The interest rate or (unlike most fixed income
securities) the principal amount payable at maturity of a hybrid security may
be increased or decreased, depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and
increased total return. Hybrids may not bear interest or pay dividends. The
value of a hybrid or its interest rate may be a multiple of a benchmark and,
as a result, may be leveraged and move (up or down) more steeply and rapidly
than the benchmark. These benchmarks may be sensitive to economic and
political events, such as commodity shortages and currency devaluations, which
cannot be readily foreseen by the purchaser of a hybrid. Under certain
conditions, the redemption value of a hybrid could be zero. Thus, an
investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated
bond that has a fixed principal amount and pays a fixed rate or floating rate
of interest. The purchase of hybrids also exposes a Fund to the credit risk of
the issuer of the hybrids. These risks may cause significant fluctuations in
the net asset value of the Municipal Bond Fund. Accordingly, the Municipal
Bond Fund will invest no more than 5% of its assets in hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Municipal Bond Fund's investments in these products will be subject to limits
applicable to investments in investment companies and may be subject to
restrictions contained in the 1940 Act.
INVESTMENT IN INVESTMENT COMPANIES The Municipal Bond Fund may invest in
securities of other investment companies, such as closed-end management
investment companies, or in pooled accounts or other investment vehicles. As a
shareholder of an investment company, the Fund may indirectly bear service and
other fees which are in addition to the fees the Fund pays its service
providers.
PORTFOLIO TURNOVER The length of time the Municipal Bond Fund has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Municipal Bond Fund may lead to frequent
changes in the Fund's investments, particularly in periods of volatile market
movements. High portfolio turnover (e.g., over 100%) involves correspondingly
greater expenses to the Municipal Bond Fund, including commissions or dealer
mark-ups and other transaction costs on the sale of securities and
reinvestments in other securities. See "Management of the Trust--Portfolio
Transactions." Such sales may result in realization of taxable capital gains.
See "Taxes."
ILLIQUID SECURITIES The Municipal Bond Fund may invest up to 15% of its net
assets in illiquid securities. Certain illiquid securities may require pricing
at fair value as determined in good faith under the supervision of the Board
of Trustees. Pacific Investment Management may be subject to significant
delays in disposing of
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illiquid securities, and transactions in illiquid securities may entail
registration expenses and other transaction costs that are higher than those
for transactions in liquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Municipal
Bond Fund has valued the securities. Illiquid securities are considered to
include, among other things, written over-the-counter options, securities or
other liquid assets being used as cover for such options, repurchase
agreements with maturities in excess of seven days, certain loan participation
interests, fixed time deposits which are not subject to prepayment or provide
for withdrawal penalties upon prepayment (other than overnight deposits),
securities that are subject to legal or contractual restrictions on resale and
other securities which legally or in Pacific Investment Management's opinion
may be deemed illiquid (not including securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper that Pacific
Investment Management has determined to be liquid under procedures approved by
the Board of Trustees).
Illiquid securities may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities
laws. Although certain of these securities may be readily sold, for example,
under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
SERVICE SYSTEMS--YEAR 2000 PROBLEM. Many of the services provided to the
Municipal Bond Fund depend on the smooth functioning of computer systems. Many
systems in use today cannot distinguish between the year 1900 and the year
2000. Should any of the service systems fail to process information properly,
that could have an adverse impact on the Fund's operation and services
provided to shareholders. Pacific Investment Management, the Distributor,
Shareholder Servicing and Transfer Agent, Custodian, and certain other service
providers to the Fund have reported that each is working toward mitigating the
risks associated with the so-called "year 2000 problem." However, there can be
no assurance that the problem will be corrected in all respects and that the
Fund's operations and services provided to shareholders will not be adversely
affected.
HOW TO BUY SHARES
Class A, Class B and Class C shares of the Municipal Bond Fund are
continuously offered through the Trust's principal underwriter, PIMCO Funds
Distributors LLC (the "Distributor"), and through other firms which have
dealer agreements with the Distributor ("participating brokers") or which have
agreed to act as introducing brokers for the Distributor ("introducing
brokers").
There are two ways to purchase Class A, Class B or Class C shares: either 1)
through your dealer or broker which has a dealer agreement with the
Distributor; or 2) directly by mailing a PIMCO Funds account application (the
"account application") with payment, as described below under the heading
"Direct Investment," to the Distributor (if no dealer is named in the account
application, the Distributor may act as dealer).
Class A, Class B and Class C shares may be purchased at a price equal to
their net asset value per share next determined after receipt of an order,
plus a sales charge which, at the election of the purchaser, may be imposed
either (i) at the time of the purchase in the case of Class A shares (the
"initial sales charge alternative"), (ii) on a contingent deferred basis in
the case of Class B shares (the "deferred sales charge alternative"), or
(iii) by the deduction of an ongoing asset based sales charge in the case of
Class C shares (the "asset based sales charge alternative"). In certain
circumstances, Class A and Class C shares are also subject to a contingent
deferred sales charge ("CDSC"). See "Alternative Purchase Arrangements."
Purchase payments for Class B and Class C shares are fully invested at the net
asset value next determined after acceptance of the trade. Purchase payments
for Class A shares, less the applicable sales charge, are invested at the net
asset value next determined after acceptance of the trade.
All purchase orders received by the Distributor prior to the close of
regular trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange (the "Exchange"), on a regular business day, are processed at that
day's offering price. However, orders received by the Distributor from dealers
or brokers after the offering
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price is determined that day will receive such offering price if the orders
were received by the dealer or broker from its customer prior to such
determination and were transmitted to and received by the Distributor prior to
its close of business that day (normally 5:00 p.m., Eastern time) or, in the
case of certain retirement plans, received by the Distributor prior to 9:30
a.m., Eastern time on the next business day. Purchase orders received on other
than a regular business day will be executed on the next succeeding regular
business day. The Distributor, in its sole discretion, may accept or reject
any order for purchase of Municipal Bond Fund shares. The sale of shares will
be suspended during any period in which the Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission, when trading on the Exchange is restricted or during an
emergency which makes it impracticable for the Municipal Bond Fund to dispose
of its securities or to determine fairly the value of its net assets, or
during any other period as permitted by the Securities and Exchange Commission
for the protection of investors.
Except for purchases through the PIMCO Funds Auto-Invest plan, the PIMCO
Funds Auto-Exchange plan, investments pursuant to the Uniform Gifts to Minors
Act, and tax-qualified and wrap programs referred to below under
"Tax-Qualified Retirement Plans" and "Sales at Net Asset Value", the minimum
initial investment in Class A, Class B or Class C shares of any Fund of the
Trust or any series of PIMCO Funds: Multi-Manager Series is $2,500, and the
minimum additional investment is $100 per Fund. For information about dealer
commissions, see "Alternative Purchase Arrangements" below. Persons selling
Municipal Bond Fund shares may receive different compensation for selling
Class A, Class B or Class C shares. Normally, Municipal Bond Fund shares
purchased through participating brokers are held in the investor's account
with that broker. No share certificates will be issued unless specifically
requested in writing by an investor or broker-dealer.
DIRECT INVESTMENT
Investors who wish to invest in Class A, Class B or Class C shares of the
Municipal Bond Fund directly, rather than through a participating broker, may
do so by opening an account with the Distributor. To open an account, an
investor should complete the account application. All shareholders who open
direct accounts with the Distributor will receive from the Distributor
individual confirmations of each purchase, redemption, dividend reinvestment,
exchange or transfer of Trust shares, including the total number of Trust
shares owned as of the confirmation date, except that purchases which result
from the reinvestment of daily-accrued dividends and/or distributions will be
confirmed once each calendar quarter. See "Distributions" below. Information
regarding direct investment or any other features or plans offered by the
Trust may be obtained by calling the Distributor at 800-426-0107 or by calling
your broker.
PURCHASE BY MAIL
Investors who wish to invest directly may send a check payable to PIMCO
Funds Distributors LLC, along with a completed application form to:
PIMCO Funds Distributors LLC
P.O. Box 5866
Denver, CO 80217-5866
Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any member of the
Federal Reserve System can normally be converted into federal funds within two
business days after receipt of the check. Checks drawn on a non-member bank
may take up to 15 days to convert into federal funds. In all cases, the
purchase price is based on the net asset value next determined after the
purchase order and check are accepted, even though the check may not yet have
been converted into federal funds.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases of Class A, Class B or Class C shares can be made as
indicated above by mailing a check with a letter describing the investment or
with the additional investment portion of a confirmation
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statement. Except for subsequent purchases through the PIMCO Funds Auto-Invest
plan, the PIMCO Funds Auto-Exchange plan, tax-qualified programs and PIMCO
Funds Fund Link referred to below, and except during periods when an Automatic
Withdrawal plan is in effect, the minimum subsequent purchase is $100 in any
Fund. All payments should be made payable to PIMCO Funds Distributors LLC and
should clearly indicate the shareholder's account number. Checks should be
mailed to the address above under "Purchase by Mail."
TAX-QUALIFIED RETIREMENT PLANS
The Distributor makes available retirement plan services and documents for
Individual Retirement Accounts (IRAs), including Roth IRAs, for which First
National Bank of Boston serves as trustee and for IRA accounts established
with Form 5305-SIMPLE under the Internal Revenue Code. These accounts include
Simplified Employee Pension Plan (SEP) and Salary Reduction Simplified
Employee Pension Plan (SAR/SEP) IRA accounts and prototype documents. In
addition, prototype documents are available for establishing 403(b)(7)
Custodial Accounts with First National Bank of Boston as custodian. This type
of plan is available to employees of certain non-profit organizations.
The Distributor also makes available prototype documents for establishing
Money Purchase and/or Profit Sharing Plans and 401(k) Retirement Savings
Plans. Investors should call the Distributor at 800-426-0107 for further
information about these plans and should consult with their own tax advisers
before establishing any retirement plan. Investors who maintain their accounts
with participating brokers should consult their broker about similar types of
accounts that may be offered through the broker. The minimum initial
investment for all tax qualified plans (except for employer-sponsored plans,
SIMPLE IRAs, SEPs and SAR/SEPs) is $1,000 per Fund and the minimum subsequent
investment is $100 and the minimum initial investment for employer-sponsored
plans, SIMPLE IRAs, SEPs and SAR/SEPs and the minimum subsequent investment
per Fund for all such plans is $50.
PIMCO FUNDS AUTO-INVEST
The PIMCO Funds Auto-Invest plan provides for periodic investments into the
shareholder's account with the Trust by means of automatic transfers of a
designated amount from the shareholder's bank account. The minimum investment
for eligibility in the PIMCO Funds Auto-Invest Plan is $1,000 per Fund.
Subsequent investments may be made monthly or quarterly, and may be in any
amount subject to a minimum of $50 per month for each Fund in which shares are
purchased through the plan. Further information regarding the PIMCO Funds
Auto-Invest plan is available from the Distributor or participating brokers.
You may enroll by completing the appropriate section on the account
application, or you may obtain an Auto-Invest application by calling the
Distributor or your broker.
PIMCO FUNDS AUTO-EXCHANGE
The PIMCO Funds Auto-Exchange plan establishes regular, periodic exchanges
from one Fund to another Fund or a series of MMS which offers Class A, Class B
or Class C shares. The plan provides for regular investments into a
shareholder's account in a specific Fund by means of automatic exchanges of a
designated amount from another Fund account of the same class of shares and
with identical account registration.
Exchanges may be made monthly or quarterly, and may be in any amount subject
to a minimum of $50 for each Fund whose shares are purchased through the plan.
Further information regarding the PIMCO Funds Auto-Exchange plan is available
from the Distributor at 800-426-0107 or participating brokers. You may enroll
by completing an application which may be obtained from the Distributor or by
telephone request at 800-426-0107. For more information on exchanges, see
"Exchange Privilege."
PIMCO FUNDS FUND LINK
PIMCO Funds Fund Link ("Fund Link") connects your Fund account with a bank
account. Fund Link may be used for subsequent purchases and for redemptions
and other transactions described under "How to
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Redeem." Purchase transactions are effected by electronic funds transfers from
the shareholder's account at a U.S. bank or other financial institution that
is an Automated Clearing House ("ACH") member. Investors may use Fund Link to
make subsequent purchases of shares in amounts from $50 to $10,000. To
initiate such purchases, call 800-426-0107. All such calls will be recorded.
Fund Link is normally established within 45 days of receipt of a Fund Link
application by Shareholder Services, Inc. (the "Transfer Agent"). The minimum
investment by Fund Link is $50 per Fund. Shares will be purchased on the
regular business day the Distributor receives the funds through the ACH
system, provided the funds are received before the close of regular trading on
the Exchange. If the funds are received after the close of regular trading,
the shares will be purchased on the next regular business day.
Fund Link privileges must be requested on the account application. To
establish Fund Link on an existing account, complete a Fund Link application,
which is available from the Distributor or your broker, with signatures
guaranteed from all shareholders of record for the account. See "Signature
Guarantee" below. Such privileges apply to each shareholder of record for the
account unless and until the Distributor receives written instructions from a
shareholder of record canceling such privileges. Changes of bank account
information must be made by completing a new Fund Link application signed by
all owners of record of the account, with all signatures guaranteed. The
Distributor, the Transfer Agent and the Municipal Bond Fund may rely on any
telephone instructions believed to be genuine and will not be responsible to
shareholders for any damage, loss or expenses arising out of such
instructions. The Municipal Bond Fund reserves the right to amend, suspend or
discontinue Fund Link privileges at any time without prior notice. Fund Link
does not apply to shares held in broker "street name" accounts.
SIGNATURE GUARANTEE
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature and guaranteed by any of
the following entities: U.S. banks, foreign banks having a U.S. correspondent
bank, credit unions, savings associations, U.S. registered dealers and
brokers, municipal securities dealers and brokers, government securities
dealers and brokers, national securities exchanges, registered securities
associations and clearing agencies (each an "Eligible Guarantor Institution").
The Distributor reserves the right to reject any signature guarantee pursuant
to its written signature guarantee standards or procedures, which may be
revised in the future to permit it to reject signature guarantees from
Eligible Guarantor Institutions that do not, based on credit guidelines,
satisfy such written standards or procedures. The Trust may change the
signature guarantee requirements from time to time upon notice to
shareholders, which may be given by means of a new or supplemented Prospectus.
ACCOUNT REGISTRATION CHANGES
Changes in registration or account privileges may be made in writing to the
Transfer Agent. Signature guarantees may be required. See "Signature
Guarantee" above. All correspondence must include the account number and must
be sent to:
PIMCO Funds Distributors LLC
P.O. Box 5866
Denver, CO 80217-5866
SMALL ACCOUNT FEE
Because of the disproportionately high costs of servicing accounts with low
balances, a fee at an annual rate of $16, paid to Pacific Investment
Management, the Municipal Bond Fund's administrator, will automatically be
deducted from direct accounts with balances falling below a minimum level. The
valuation of accounts and the deduction are expected to take place during the
last five days of each calendar quarter. The fee will be deducted in quarterly
installments from accounts with balances below $2,500 except for Uniform Gift
to Minors, IRA, Roth IRA and Auto-Invest accounts, for which the limit is
$1,000. The fee will not apply to employer-sponsored retirement accounts or
403(b)(7) custodial accounts. (A separate custodial fee may also
B-15
<PAGE>
apply to IRAs, Roth IRAs and other retirement accounts.) No small account fee
will be charged on any account of a shareholder if the aggregate value of all
of the shareholder's accounts is at least $50,000. No fee will be charged to
employee and employee-related accounts of PIMCO Advisors and/or its
affiliates.
MINIMUM ACCOUNT SIZE
Due to the relatively high cost to the Municipal Bond Fund of maintaining
small accounts, you are asked to maintain an account balance of at least the
amount necessary to open the type of account involved. If your balance is
below such minimum for three months or longer, the Municipal Bond Fund's
administrator shall have the right (except in the case of employer-sponsored
retirement accounts) to close your account after giving you 60 days in which
to increase your balance. Your account will not be liquidated if the reduction
in size is due solely to market decline in the value of your Fund shares or if
the aggregate value of all your accounts in PIMCO Funds exceeds $50,000.
ALTERNATIVE PURCHASE ARRANGEMENTS
Class A, Class B and Class C shares bear sales charges in different forms
and amounts and which bear different levels of expenses. Through separate
prospectuses, the Municipal Bond Fund offers three additional classes of
shares: Class D, Institutional Class shares and Administrative Class shares.
Class D shares are offered primarily through financial intermediaries.
Institutional Class shares and Administrative Class share are sold to pension
and profit sharing plans, employee benefit plans, endowments, foundations,
corporations and other high net worth individuals. Institutional Class,
Administrative Class and Class D shares are sold without sales charges and
have different expenses than Class A, Class B and Class C shares. As a result
of lower sales charges and/or operating expenses, Institutional Class,
Administrative Class and Class D shares are generally expected to achieve
higher investment returns than Class A, Class B or Class C shares. To obtain
more information about the other classes, please call the Distributor at 800-
927-4648 (for Institutional and Administrative Classes) or 888-87-PIMCO (for
Class D).
The alternative purchase arrangements are designed to enable a retail
investor to choose the method of purchasing Municipal Bond Fund shares that is
most beneficial to the investor based on all factors to be considered, which
include: the amount and intended length of the investment; the particular
Fund; and whether the investor intends to exchange shares for shares of other
Funds. Generally, when making an investment decision, investors should
consider the anticipated life of an intended investment in the Municipal Bond
Fund, the accumulated distribution and servicing fees plus CDSCs on Class B or
Class C shares, the initial sales charge plus accumulated servicing fees on
Class A shares (plus a CDSC in certain circumstances), the possibility that
the anticipated higher return on Class A shares due to the lower ongoing
charges will offset the initial sales charge paid on such shares, the
automatic conversion of Class B shares to Class A shares and the difference in
the CDSCs applicable to Class A, Class B and Class C shares.
CLASS A The initial sales charge alternative (Class A) might be preferred by
investors purchasing shares of sufficient aggregate value to qualify for
reductions in the initial sales charge applicable to such shares. Similar
reductions are not available on the contingent deferred sales charge
alternative (Class B) or the asset based sales charge alternative (Class C).
Class A shares are subject to a servicing fee but are not subject to a
distribution fee and, accordingly, such shares are expected to pay
correspondingly higher dividends on a per share basis. However, because
initial sales charges are deducted at the time of purchase, not all of the
purchase payment for Class A shares is invested initially. Class B and Class C
shares might be preferable to investors who wish to have all purchase payments
invested initially, although remaining subject to higher distribution and
servicing fees and, for certain periods, being subject to a CDSC. An investor
who qualifies for an elimination of the Class A initial sales charge should
also consider whether he or she anticipates redeeming shares in a time period
which will subject such shares to a CDSC as described below. See "Initial
Sales Charge Alternative--Class A Shares--Class A Deferred Sales Charge"
below.
B-16
<PAGE>
CLASS B Class B shares might be preferred by investors who intend to invest
in the Municipal Bond Fund for longer periods and who do not intend to
purchase shares of sufficient aggregate value to qualify for sales charge
reductions applicable to Class A shares. Both Class B and Class C shares can
be purchased at net asset value without an initial sales charge. However,
unlike Class C shares, Class B shares convert into Class A shares after the
shares have been held for seven years. After the conversion takes place, the
shares will no longer be subject to a CDSC, and will be subject to the
servicing fees charged for Class A shares which are lower than the
distribution and servicing fees charged on either Class B or Class C shares.
See "Deferred Sales Charge Alternative--Class B Shares" below. Class B shares
are not available for purchase by employer sponsored retirement plans.
CLASS C Class C shares might be preferred by investors who intend to
purchase shares which are not of sufficient aggregate value to qualify for
Class A sales charges of 1% or less and who wish to have all purchase payments
invested initially. Class C shares are preferable to Class B shares for
investors who intend to maintain their investment for intermediate periods and
therefore may also be preferable for investors who are unsure of the intended
length of their investment. Unlike Class B shares, Class C shares are not
subject to a CDSC after they have been held for one year and are subject to
only a 1% CDSC during the first year. However, because Class C shares do not
convert into Class A shares, Class B shares are preferable to Class C shares
for investors who intend to maintain their investment in the Municipal Bond
Fund for long periods. See "Asset Based Sales Charge Alternative--Class C
Shares" below.
In determining which class of shares to purchase, an investor should always
consider whether any waiver or reduction of a sales charge or a CDSC is
available. See generally "Initial Sales Charge Alternative--Class A Shares"
and "Waiver of Contingent Deferred Sales Charges" below.
The maximum single purchase of Class B shares of the Trust and series of
PIMCO Funds: Multi-Manager Series accepted is $249,999. The maximum single
purchase of Class C shares of the Trust and series of PIMCO Funds: Multi-
Manager Series accepted is $999,999. The Municipal Bond Fund may refuse any
order to purchase shares.
For a description of the Distribution and Servicing Plans and distribution
and servicing fees payable thereunder with respect to Class A, Class B and
Class C shares, see "Distributor and Distribution and Servicing Plans" below.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES The CDSC applicable to Class A
and Class C shares is currently waived for (i) any partial or complete
redemption in connection with any of the following distributions from a
retirement plan, including a 403(b)(7) custodial account or an IRA (with the
exception of a Roth IRA), that qualify for exemption from the additional tax
on early distributions under Section 72(t) of the Code: (a) upon attaining age
59 1/2, (b) on account of death or disability, (c) as part of a series of
substantially equal periodic payments, (d) in the case of an IRA (with the
exception of a Roth IRA), attributable to qualified higher education expenses
or to qualified first-time home-buyer expenses, or (e) in the case of a
retirement plan other than an IRA, upon separation from service after
attaining age 55; (ii) any partial or complete redemption in connection with a
qualifying loan or hardship withdrawal from an employer sponsored retirement
plan; (iii) any complete redemption in connection with a distribution from a
qualified employer retirement plan in connection with termination of
employment or termination of the employer's plan and the transfer to another
employer's plan or to an IRA (with the exception of a Roth IRA); (iv) any
partial or complete redemption following death or disability (as defined in
the Code) of a shareholder (including one who owns the shares as joint tenant
with his or her spouse) from an account in which the deceased or disabled is
named, provided the redemption is requested within one year of the death or
initial determination of disability; (v) any redemption resulting from a
return of an excess contribution to a qualified employer retirement plan or an
IRA (with the exception of a Roth IRA); (vi) up to 10% per year of the value
of an account which (a) has the value of at least $10,000 at the start of such
year and (b) is subject to an Automatic Withdrawal Plan; (vii) redemptions by
Trustees, officers and employees of the Trust, and by directors, officers and
employees of the Distributor and Pacific Investment Management; (viii)
redemptions effected pursuant to any PIMS Fund's (including the Municipal Bond
Fund's) right to
B-17
<PAGE>
involuntarily redeem a shareholder's account if the aggregate net asset value
of shares held in such shareholder's account is less than a minimum account
size specified in the relevant prospectus; (ix) involuntary redemptions caused
by operation of law; (x) redemption of shares of any PIMS Fund (including the
Municipal Bond Fund) if it is combined with another Fund, investment company,
or personal holding company by virtue of a merger, acquisition or other
similar reorganization transaction; (xi) redemptions by a shareholder who is a
participant making periodic purchases of not less than $50 through certain
employer sponsored savings plans that are clients of a broker-dealer with
which the Distributor has an agreement with respect to such purchases; (xii)
redemptions effected by trustees or other fiduciaries who have purchased
shares for employer sponsored plans, the trustee, administrator, fiduciary,
broker, trust company or registered investment adviser for which has an
agreement with the Distributor with respect to such purchases; or (xiii)
redemptions in connection with IRA accounts established with Form 5305-SIMPLE
under the Code for which the Trust is the designated financial institution.
The CDSC applicable to Class B shares is currently waived for any partial or
complete redemption in each of the following cases: (a) in connection with a
distribution without penalty under Section 72(t) of the Code from a 403(b)(7)
plan or an IRA (with the exception of a Roth IRA) upon attaining age 59 1/2;
(b) following death or disability (as defined in the Code) of a shareholder
(including one who owns the shares as joint tenant with his or her spouse)
from an account in which the deceased or disabled is named, provided the
redemption is requested within one year of the death or initial determination
of disability; and (c) up to 10% per year of the value of an account which (i)
has a value of at least $100,000 at the start of such year and (ii) is subject
to an Automatic Withdrawal Plan. See "How to Redeem--Automatic Withdrawal
Plan."
The Distributor may require documentation prior to waiver of the CDSC for
any class, including distribution letters, certification by plan
administrators, applicable tax forms, death certificates, physicians'
certificates, etc.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares of the Municipal Bond Fund are sold at a public offering
price equal to their net asset value per share plus a sales charge, as set
forth below. As indicated below under "Class A Deferred Sales Charge," certain
investors that purchase $1,000,000 or more of the Municipal Bond Fund's Class
A shares (and thus pay no initial sales charge) may be subject to a 1% CDSC if
they redeem such shares during the first 18 months after their purchase.
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT OR
AS % OF NET SALES CHARGE COMMISSION TO
AMOUNT OF AMOUNT AS % OF THE PUBLIC DEALERS AS % OF
PURCHASE INVESTED OFFERING PRICE PUBLIC OFFERING PRICE
------------------------------------------------------------------------
<S> <C> <C> <C>
$0 $49,999 3.09% 3.00% 2.50%
------------------------------------------------------------------------
$50,000 $99,999 2.56% 2.50% 2.00%
------------------------------------------------------------------------
$100,000 $249,999 2.04% 2.00% 1.75%
------------------------------------------------------------------------
$250,000 $499,999 1.52% 1.50% 1.25%
------------------------------------------------------------------------
$500,000 $999,999 1.27% 1.25% 1.00%
------------------------------------------------------------------------
$1,000,000+ 0.00%(/1/) 0.00%(/1/) 0.50%(/2/)
</TABLE>
- --------
1. As shown, investors that purchase more than $1,000,000 of the Municipal
Bond Fund's Class A shares will not pay any initial sales charge on such
purchase. However, purchasers of $1,000,000 or more of Class A shares
(other than those purchasers described below under "Sales at Net Asset
Value" where no commission is paid) will be subject to a CDSC of 1% if such
shares are redeemed during the first 18 months after such shares are
purchased unless such purchaser is eligible for a waiver of the CDSC as
described under "Waiver of Contingent Deferred Sales Charges" above. See
"Class A Deferred Sales Charge" below.
2. The Distributor will pay a commission to dealers who sell amounts of
$1,000,000 or more of Class A shares (or who sell Class A shares at net
asset value to certain employer-sponsored plans as outlined in "Sales at
Net Asset Value") of the Municipal Bond Fund, according to the following
schedule: 0.50% of the first $2,000,000 and 0.25% of amounts over
$2,000,000.
B-18
<PAGE>
The Municipal Bond Fund receives the entire net asset value of its Class A
shares purchased by investors. The Distributor receives the sales charge shown
above less any applicable discount or commission "reallowed" to participating
brokers in the amounts indicated in the table above. The Distributor may,
however, elect to reallow the entire sales charge to participating brokers for
all sales with respect to which orders are placed with the Distributor for the
Municipal Bond Fund during a particular period. During such periods as may
from time to time be designated by the Distributor, the Distributor will pay
an additional amount of up to .50% of the purchase price on sales of Class A
shares of all or selected Funds purchased to each participating broker which
obtains purchase orders in amounts exceeding thresholds established from time
to time by the Distributor. From time to time, the Distributor, its parent
and/or its affiliates may make additional payments to one or more
participating brokers based upon factors such as the level of sales or the
length of time clients' assets have remained in the Trust.
Shares issued pursuant to the automatic reinvestment of income dividends or
capital gains distributions are issued at net asset value and are not subject
to any sales charges.
Under the circumstances described below, investors may be entitled to pay
reduced sales charges for Class A shares.
COMBINED PURCHASE PRIVILEGE Investors may qualify for a reduced sales charge
by combining purchases of the Class A shares of one or more Funds or series of
MMS which offer Class A shares (together, "eligible PIMCO Funds") into a
"single purchase," if the resulting purchase totals at least $50,000. The term
single purchase refers to:
(i) a single purchase by an individual, or concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of 21
years purchasing Class A shares of the eligible PIMCO Funds for his,
her or their own account;
(ii) a single purchase by a trustee or other fiduciary purchasing shares
for a single trust, estate or fiduciary account although more than
one beneficiary is involved; or
(iii) a single purchase for the employee benefit plans of a single
employer.
For further information, call the Distributor at 800-426-0107 or your
broker.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION) A purchase of
additional Class A shares of any eligible PIMCO Fund may qualify for a
Cumulative Quantity Discount at the rate applicable to the discount bracket
obtained by adding:
(i) the investor's current purchase;
(ii) the value (at the close of business on the day of the current
purchase) of all Class A shares of any eligible PIMCO Fund (other
than the Money Market Fund) held by the investor computed at the
maximum offering price; and
(iii) the value of all shares described in paragraph (ii) owned by another
shareholder eligible to be combined with the investor's purchase
into a "single purchase" as defined above under "Combined Purchase
Privilege."
LETTER OF INTENT An investor may also obtain a reduced sales charge by means
of a written Letter of Intent, which expresses an intention to invest not less
than $50,000 within a period of 13 months in Class A shares of any eligible
PIMCO Fund(s) (other than the Money Market Fund of the Trust). Each purchase
of shares under a
B-19
<PAGE>
Letter of Intent will be made at the public offering price or prices
applicable at the time of such purchase to a single transaction of the dollar
amount indicated in the Letter. At the investor's option, a Letter of Intent
may include purchases of Class A shares of any eligible PIMCO Fund (other than
the Money Market Fund of the Trust) made not more than 90 days prior to the
date the Letter of Intent is signed; however, the 13-month period during which
the Letter is in effect will begin on the date of the earliest purchase to be
included and the sales charge on any purchases prior to the Letter will not be
adjusted.
Investors qualifying for the Combined Purchase Privilege described above may
purchase shares of the eligible PIMCO Funds under a single Letter of Intent.
For example, if at the time you sign a Letter of Intent to invest at least
$100,000 in Class A shares of any Fund (other than the Money Market Fund), you
and your spouse each purchase Class A shares of the Global Bond Fund II worth
$30,000 (for a total of $60,000), it will only be necessary to invest a total
of $40,000 during the following 13 months in Class A shares of any of the
Funds (other than the Money Market Fund of the Trust) to qualify for the 3.50%
sales charge on the total amount being invested (the sales charge applicable
to an investment of $100,000 in any of the Funds other than the Real Return
Bond, Low Duration, Municipal Bond, Short-Term, Money Market and StocksPLUS
Funds of the Trust).
A Letter of Intent is not a binding obligation to purchase the full amount
indicated. The minimum initial investment under a Letter of Intent is 5% of
such amount. Shares purchased with the first 5% of such amount will be held in
escrow (while remaining registered in your name) to secure payment of the
higher sales charge applicable to the shares actually purchased in the event
the full intended amount is not purchased. If the full amount indicated is not
purchased, a sufficient amount of such escrowed shares will be involuntarily
redeemed to pay the additional sales charge applicable to the amount actually
purchased, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional eligible PIMCO Fund shares, are not subject to
escrow. When the full amount indicated has been purchased, the escrow will be
released.
If you wish to enter into a Letter of Intent in conjunction with your
initial investment in Class A shares of the Municipal Bond Fund, you should
complete the appropriate portion of the account application. If you are a
current Class A shareholder desiring to enter into a Letter of Intent, you can
obtain a form of Letter of Intent by contacting the Distributor at 800-426-
0107 or any broker participating in this program.
REINSTATEMENT PRIVILEGE A Class A shareholder of the Municipal Bond Fund who
has caused any or all of his shares to be redeemed may reinvest all or any
portion of the redemption proceeds in Class A shares of any eligible PIMCO
Fund at net asset value without any sales charge, provided that such
reinvestment is made within 120 calendar days after the redemption or
repurchase date. Shares are sold to a reinvesting shareholder at the net asset
value next determined. See "How Net Asset Value is Determined." A
reinstatement pursuant to this privilege will not cancel the redemption
transaction and, consequently, any gain or loss so realized may be recognized
for federal tax purposes except that no loss may be recognized to the extent
that the proceeds are reinvested in shares of the Municipal Bond Fund within
30 days. The reinstatement privilege may be utilized by a shareholder only
once, irrespective of the number of shares redeemed, except that the privilege
may be utilized without limit in connection with transactions whose sole
purpose is to transfer a shareholder's interest in the Municipal Bond Fund to
his Individual Retirement Account or other qualified retirement plan account.
An investor may exercise the reinstatement privilege by written request sent
to the Distributor or to the investor's broker.
SALES AT NET ASSET VALUE The Municipal Bond Fund may sell its Class A shares
at net asset value without a sales charge to (a) current or retired officers,
trustees, directors or employees of the Trust, Pacific Investment Management
or the Distributor, a parent, brother or sister of any such officer, trustee,
director or employee or a spouse or child of any of the foregoing persons, or
any trust, profit sharing or pension plan for the benefit of any such person
and to any other person if the Distributor anticipates that there will be
minimal sales expenses associated with the sale, (b) current or retired
trustees of MMS, (c) current registered representatives and other full-time
employees of participating brokers or such persons' spouses or for trust or
custodial accounts for their minor children, (d) trustees or other fiduciaries
purchasing shares for certain employer sponsored plans that have at least 100
eligible participants or at least $1 million in total plan assets, (e)
trustees or other fiduciaries
B-20
<PAGE>
purchasing shares for certain plans sponsored by employers, professional
organizations or associations, or charitable organizations, the trustee,
administrator, fiduciary, broker, trust company or registered investment
adviser for which has an agreement with the Distributor with respect to such
purchases, and to participants in such plans and their spouses purchasing for
their accounts(s) or IRAs (with the exception of Roth IRAs), (f) participants
investing through accounts known as "wrap accounts" established with brokers
or dealers approved by the Distributor where such brokers or dealers are paid
a single, inclusive fee for brokerage and investment management services, (g)
client accounts of broker-dealers or registered investment advisers affiliated
with such broker-dealers with which the Distributor has an agreement for the
use of PIMCO Funds in particular investment products or programs, and (h)
accounts for which a trust company affiliated with the Trust or Pacific
Investment Management serves as trustee or custodian. As described above, the
Distributor will not pay any initial commission to dealers upon the sale of
Class A shares to the purchasers described in this paragraph except for sales
to purchasers described under (d) or (e) in this paragraph.
NOTIFICATION OF DISTRIBUTOR An investor or participating broker must notify
the Distributor whenever a quantity discount or reduced sales charge is
applicable to a purchase and must provide the Distributor with sufficient
information at the time of purchase to verify that each purchase qualifies for
the privilege or discount. Upon such notification, the investor will receive
the lowest applicable sales charge. The quantity discounts described above may
be modified or terminated at any time.
CLASS A DEFERRED SALES CHARGE For the Municipal Bond Fund, investors who
purchase $1,000,000 or more of Class A shares (and, thus, purchase such shares
without any initial sales charge) may be subject to a 1% CDSC (the "Class A
CDSC") if such shares are redeemed within 18 months of their purchase. The
Class A CDSC does not apply to investors purchasing $1,000,000 or more of the
Municipal Bond Fund's Class A shares if such investors are otherwise eligible
to purchase Class A shares without any sales charge because they are described
under "Sales at Net Asset Value" above.
For purchases subject to the Class A CDSC, a 1% CDSC will apply for any
redemption of such Class A shares that occurs within 18 months of their
purchase. No CDSC will be imposed if the shares redeemed have been acquired
through the reinvestment of dividends or capital gains distributions or if the
amount redeemed is derived from increases in the value of the account above
the amount of purchase payments subject to the CDSC. In determining whether a
CDSC is payable, it is assumed that Class A shares acquired through the
reinvestment of dividends and distributions are redeemed first, and thereafter
that Class A shares that have been held by an investor for the longest period
of time are redeemed first.
The Class A CDSC is currently waived in connection with certain redemptions
as described above under "Alternative Purchase Arrangements--Waiver of
Contingent Deferred Sales Charges." For more information about the Class A
CDSC, call the Distributor at 800-426-0107.
PARTICIPATING BROKERS Investment dealers and other financial intermediaries
provide varying arrangements for their clients to purchase and redeem
Municipal Bond Fund shares. Some may establish higher minimum investment
requirements than set forth above. Firms may arrange with their clients for
other investment or administrative services and may independently establish
and charge transaction fees and/or other additional amounts to their clients
for such services, which charges would reduce clients' return. Firms also may
hold Municipal Bond Fund shares in nominee or street name as agent for and on
behalf of their customers. In such instances, the Trust's transfer agent will
have no information with respect to or control over accounts of specific
shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their broker. In addition, certain
privileges with respect to the purchase and redemption of shares or the
reinvestment of dividends may not be available through such firms. Some firms
may participate in a program allowing them access to their clients' accounts
for servicing including, without limitation, transfers of registration and
dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. This Prospectus
should be read in connection with such firms' material regarding their fees
and services.
B-21
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold at their current net asset value without any initial
sales charge. The full amount of an investor's purchase payment will be
invested in shares of the Municipal Bond Fund. A CDSC will be imposed on Class
B shares of the Municipal Bond Fund if an investor redeems an amount which
causes the current value of the investor's account for the Municipal Bond Fund
to fall below the total dollar amount of purchase payments subject to the
CDSC, except that no CDSC is imposed if the shares redeemed have been acquired
through the reinvestment of dividends or capital gains distributions or if the
amount redeemed is derived from increases in the value of the account above
the amount of purchase payments subject to the CDSC.
Whether a CDSC is imposed and the amount of the CDSC will depend on the
number of years since the investor made a purchase payment from which an
amount is being redeemed. Purchases are subject to the CDSC according to the
following schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
------------------- ---------------------
<S> <C>
First............................................... 5%
Second.............................................. 4
Third............................................... 3
Fourth.............................................. 3
Fifth............................................... 2
Sixth............................................... 1
Seventh............................................. 0*
</TABLE>
--------
*After the seventh year, Class B shares convert into Class A
shares as described below.
In determining whether a CDSC is payable, it is assumed that the purchase
payment from which a redemption is made is the earliest purchase payment from
which a redemption or exchange has not already been fully effected.
The following example will illustrate the operation of the Class B CDSC:
Assume that an individual opens an account and makes a purchase payment of
$10,000 for Class B shares of the Municipal Bond Fund and that six months
later the value of the investor's account for the Municipal Bond Fund has
grown through investment performance and reinvestment of distributions to
$11,000. The investor then may redeem up to $1,000 from that Fund ($11,000
minus $10,000) without incurring a CDSC. If the investor should redeem $3,000,
a CDSC would be imposed on $2,000 of the redemption (the amount by which the
investor's account for the Fund was reduced below the amount of the purchase
payment). At the rate of 5%, the Class B CDSC would be $100.
In determining whether an amount is available for redemption without
incurring a CDSC, the purchase payments made for all Class B shares in the
shareholder's account with the Municipal Bond Fund are aggregated, and the
current value of all such shares is aggregated. Any CDSC imposed on a
redemption of Class B shares is paid to the Distributor.
Class B shares are subject to higher distribution fees than Class A shares
for a fixed period after their purchase, after which they automatically
convert to Class A shares and are no longer subject to such higher
distribution fees. Class B shares of the Municipal Bond Fund automatically
convert into Class A shares after they have been held for seven years.
For sales of Class B shares made and services rendered to Class B
shareholders, the Distributor intends to make payments to participating
brokers, at the time a shareholder purchases Class B shares, of 4% of the
purchase amount for the Municipal Bond Fund. During such periods as may from
time to time be designated by the Distributor, the Distributor will pay
selected participating brokers an additional amount of up to .50% of the
purchase price on sales of Class B shares of all or selected Funds purchased
to each participating broker which obtains purchase orders in amounts
exceeding thresholds established from time to time by the Distributor.
B-22
<PAGE>
The Class B CDSC is currently waived in connection with certain redemptions
as described above under "Alternative Purchase Arrangements--Waiver of
Contingent Deferred Sales Charges." For more information about the Class B
CDSC, call the Distributor at 800-426-0107.
ASSET BASED SALES CHARGE ALTERNATIVE--CLASS C SHARES
Class C shares are sold at their current net asset value without any initial
sales charge. A CDSC is imposed on Class C shares of the Municipal Bond Fund
if an investor redeems an amount which causes the current value of the
investor's account for the Municipal Bond Fund to fall below the total dollar
amount of purchase payments subject to the CDSC, except that no CDSC is
imposed if the shares redeemed have been acquired through the reinvestment of
dividends or capital gains distributions or if the amount redeemed is derived
from increases in the value of the account above the amount of purchase
payments subject to the CDSC. All of an investor's purchase payments are
invested in shares of the Fund(s) selected.
Whether a CDSC is imposed and the amount of the CDSC will depend on the
number of years since the investor made a purchase payment from which an
amount is being redeemed. Purchases are subject to the CDSC according to the
following schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
------------------- ---------------------
<S> <C>
First............................................... 1
Thereafter.......................................... 0
</TABLE>
In determining whether a CDSC is payable, it is assumed that the purchase
payment from which the redemption is made is the earliest purchase payment
(from which a redemption or exchange has not already been effected).
The following example will illustrate the operation of the Class C CDSC:
Assume that an individual opens an account and makes a purchase payment of
$10,000 for Class C shares of the Municipal Bond Fund and that six months
later the value of the investor's account for the Municipal Bond Fund has
grown through investment performance and reinvestment of distributions to
$11,000. The investor then may redeem up to $1,000 from the Municipal Bond
Fund ($11,000 minus $10,000) without incurring a CDSC. If the investor should
redeem $3,000, a CDSC would be imposed on $2,000 of the redemption (the amount
by which the investor's account for the Fund was reduced below the amount of
the purchase payment). At the rate of 1%, the Class C CDSC would be $20.
In determining whether an amount is available for redemption without
incurring a CDSC, the purchase payments made for all Class C shares in the
shareholder's account with the Municipal Bond Fund are aggregated, and the
current value of all such shares is aggregated. Any CDSC imposed on a
redemption of Class C shares is paid to the Distributor. Unlike Class B
shares, Class C shares do not automatically convert to any other class of
shares of the Municipal Bond Fund.
Except as described below, for sales of Class C shares made and services
rendered to Class C shareholders, the Distributor expects to make payments to
participating brokers, at the time the shareholder purchases Class C shares,
of 1.00% (representing .75% distribution fees and .25% servicing fees) of the
purchase amount for the Municipal Bond Fund. For sales of Class C shares made
to participants making periodic purchases of not less than $50 through certain
employer sponsored savings plans which are clients of a broker-dealer with
which the Distributor has an agreement with respect to such purchases, no
payments are made at the time of purchase. During such periods as may from
time to time be designated by the Distributor, the Distributor will pay an
additional amount of up to .50% of the purchase price on sales of Class C
shares of all or selected Funds purchased to each participating broker which
obtains purchase orders in amounts exceeding thresholds established from time
to time by the Distributor.
B-23
<PAGE>
The Class C CDSC is currently waived in connection with certain redemptions
as described above under "Alternative Purchase Arrangements--Waiver of
Contingent Deferred Sales Charges." For more information about the Class C
CDSC, contact the Distributor at 800-426-0107.
EXCHANGE PRIVILEGE
A shareholder may exchange Class A, Class B and Class C shares of the
Municipal Bond Fund for the same Class of shares of any other Fund in an
account with identical registration on the basis of their respective net asset
values. Class A, Class B and Class C shares of the Municipal Bond Fund may
also be exchanged for shares of the same class of a series which offers such
classes (except for the Opportunity Fund if a restriction applies) of MMS, an
affiliated mutual fund family comprised primarily of equity portfolios managed
by the subsidiary partnerships of PIMCO Advisors. There are currently no
exchange fees or charges. Except with respect to tax-qualified programs and
exchanges effected through the PIMCO Funds Auto-Exchange plan, exchanges are
subject to the $2,500 minimum initial purchase requirement for the Municipal
Bond Fund. An exchange will constitute a taxable sale for federal income tax
purposes.
Investors who maintain their account with the Distributor may exchange
shares by a written exchange request sent to PIMCO Funds Distributors LLC,
P.O. Box 5866, Denver, CO 80217-5866 or, unless the investor has specifically
declined telephone exchange privileges on the account application or elected
in writing not to utilize telephone exchanges, by a telephone request to the
Transfer Agent at 800-426-0107. The Trust will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine, and may be
liable for any losses due to unauthorized or fraudulent instructions if it
fails to employ such procedures. The Trust will require a form of personal
identification prior to acting on a caller's telephone instructions, will
provide written confirmations of such transactions and will record telephone
instructions. Exchange forms are available from the Distributor at 800-426-
0107 and may be used if there will be no change in the registered name or
address of the shareholder. Changes in registration information or account
privileges may be made in writing to the Transfer Agent, Shareholder Services,
Inc., P.O. Box 5866, Denver, Colorado 80217-5866, or by use of forms which are
available from the Distributor. A signature guarantee is required. See "How to
Buy Shares--Signature Guarantee." Telephone exchanges may be made between 9:00
a.m., Eastern time and the close of regular trading (normally 4:00 p.m.,
Eastern time) on the Exchange on any day the Exchange is open (generally
weekdays other than normal holidays). The Trust reserves the right to refuse
exchange purchases if, in the judgment of Pacific Investment Management, the
purchase would adversely affect the Municipal Bond Fund and its shareholders.
In particular, a pattern of exchanges characteristic of "market-timing"
strategies may be deemed by Pacific Investment Management to be detrimental to
the Trust or a particular Fund. Although the Trust has no current intention of
terminating or modifying the exchange privilege, it reserves the right to do
so at any time. Except as otherwise permitted by SEC regulations, the Trust
will give 60 days' advance notice to shareholders of any termination or
material modification of the exchange privilege. For further information about
exchange privileges, contact your participating broker or call the Transfer
Agent at 800-426-0107.
With respect to Class B and Class C shares, or Class A shares subject to a
CDSC, if less than all of an investment is exchanged out of the Municipal Bond
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 Municipal Bond Fund. Shareholders should take into
account the effect of any exchange on the applicability of any CDSC that may
be imposed upon any subsequent redemption.
Investors may also select the PIMCO Funds Auto-Exchange plan which
establishes automatic periodic exchanges. For further information on automatic
exchanges, see "How to Buy Shares--PIMCO Funds Auto-Exchange" above.
HOW TO REDEEM
Class A, Class B or Class C shares may be redeemed through a participating
broker, by telephone, by submitting a written redemption request directly to
the Transfer Agent (for non-broker accounts), or through an Automatic
Withdrawal Plan or Fund Link.
B-24
<PAGE>
A CDSC may apply to a redemption of Class A, Class B or Class C shares. See
"Alternative Purchase Arrangements" above. Shares are redeemed at their net
asset value next determined after a proper redemption request has been
received, less any applicable CDSC. There is no charge by the Distributor
(other than an applicable CDSC) with respect to a redemption; however, a
participating broker who processes a redemption for an investor may charge
customary commissions for its services. Dealers and other financial services
firms are obligated to transmit orders promptly. Requests for redemption
received by dealers or other firms prior to the close of regular trading
(normally 4:00 p.m., Eastern time) on the Exchange on a regular business day
and received by the Distributor prior to the close of the Distributor's
business day will be confirmed at the net asset value effective as of the
closing of the Exchange on that day, less any applicable CDSC.
DIRECT REDEMPTION
A shareholder's original account application permits the shareholder to
redeem by written request and by telephone (unless the shareholder
specifically elects not to utilize telephone redemptions) and to elect one or
more of the additional redemption procedures described below. A shareholder
may change the instructions indicated on his original account application, or
may request additional redemption options, only by transmitting a written
direction to the Transfer Agent. Requests to institute or change any of the
additional redemption procedures will require a signature guarantee.
Redemption proceeds will normally be mailed to the redeeming shareholder
within seven days or, in the case of wire transfer or Fund Link redemptions,
sent to the designated bank account within one business day. Fund Link
redemptions may be received by the bank on the second or third business day.
In cases where shares have recently been purchased by personal check,
redemption proceeds may be withheld until the check has been collected, which
may take up to 15 days. To avoid such withholding, investors should purchase
shares by certified or bank check or by wire transfer.
WRITTEN REQUESTS
To redeem shares in writing (whether or not represented by certificates), a
shareholder must send the following items to the Transfer Agent, Shareholder
Services, Inc., P.O. Box 5866, Denver, Colorado 80217-5866: (1) a written
request for redemption signed by all registered owners exactly as the account
is registered on the Transfer Agent's records, including fiduciary titles, if
any, and specifying the account number and the dollar amount or number of
shares to be redeemed; (2) for certain redemptions described below, a
guarantee of all signatures on the written request or on the share certificate
or accompanying stock power, if required, as described under "How to Buy
Shares--Signature Guarantee"; (3) any share certificates issued for any of the
shares to be redeemed (see "Certificated Shares" below); and (4) any
additional documents which may be required by the Transfer Agent for
redemption by corporations, partnerships or other organizations, executors,
administrators, trustees, custodians or guardians, or if the redemption is
requested by anyone other than the shareholder(s) of record. Transfers of
shares are subject to the same requirements. A signature guarantee is not
required for redemptions of $50,000 or less, requested by and payable to all
shareholders of record for the account, to be sent to the address of record
for that account. To avoid delay in redemption or transfer, shareholders
having any questions about these requirements should contact the Transfer
Agent in writing or by calling 1-800-426-0107 before submitting a request.
Redemption or transfer requests will not be honored until all required
documents in the proper form have been received by the Transfer Agent. This
redemption option does not apply to shares held in broker "street name"
accounts.
If the proceeds of the redemption (i) exceed $50,000, (ii) are to be paid to
a person other than the record owner, (iii) are to be sent to an address other
than the address of the account on the Transfer Agent's records, or (iv) are
to be paid to a corporation, partnership, trust or fiduciary, the signature(s)
on the redemption request and on the certificates, if any, or stock power must
be guaranteed as described above, except that the Distributor may waive the
signature guarantee requirement for redemptions up to $2,500 by a trustee of a
qualified retirement plan, the administrator for which has an agreement with
the Distributor.
B-25
<PAGE>
TELEPHONE REDEMPTIONS
The Trust accepts telephone requests for redemption of shares for amounts up
to $50,000 within any 7 calendar day period, except for investors who have
specifically declined telephone redemption privileges on the account
application or elected in writing not to utilize telephone redemptions. The
proceeds of a telephone redemption will be sent to the record shareholder at
his record address. Changes in account information must be made in a written
authorization with a signature guarantee. See "How to Buy Shares--Signature
Guarantee." Telephone redemptions will not be accepted during the 30-day
period following any change in an account's record address. This redemption
option does not apply to shares held in broker "street name" accounts.
By completing an account application, an investor agrees that the Trust, the
Distributor and the Transfer Agent shall not be liable for any loss incurred
by the investor by reason of the Trust accepting unauthorized telephone
redemption requests for his account if the Trust reasonably believes the
instructions to be genuine. Thus, shareholders risk possible losses in the
event of a telephone redemption not authorized by them. The Trust may accept
telephone redemption instructions from any person identifying himself as the
owner of an account or the owner's broker where the owner has not declined in
writing to utilize this service. The Trust will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine, and may be
liable for any losses due to unauthorized or fraudulent instructions if it
fails to employ such procedures. The Trust will require a form of personal
identification prior to acting on a caller's telephone instructions, will
provide written confirmations of such transactions and will record telephone
instructions.
A shareholder making a telephone redemption should call the Transfer Agent
at 800-426-0107 and state (i) the name of the shareholder as it appears on the
Transfer Agent's records, (ii) his account number with the Trust, (iii) the
amount to be withdrawn and (iv) the name of the person requesting the
redemption. Usually the proceeds are sent to the investor on the next Trust
business day after the redemption is effected, provided the redemption request
is received prior to the close of regular trading (normally 4:00 p.m., Eastern
time) on the Exchange that day. If the redemption request is received after
the close of the Exchange, the redemption is effected on the following Trust
business day at that day's net asset value and the proceeds are usually sent
to the investor on the second following Trust business day. The Trust reserves
the right to terminate or modify the telephone redemption service at any time.
During times of severe disruptions in the securities markets, the volume of
calls may make it difficult to redeem by telephone, in which case a
shareholder may wish to send a written request for redemption as described
under "Written Requests" above. Telephone communications may be recorded by
the Distributor or the Transfer Agent.
FUND LINK REDEMPTIONS
If a shareholder has established Fund Link, the shareholder may redeem
shares by telephone and have the redemption proceeds sent to a designated
account at a financial institution. Fund Link is normally established within
45 days of receipt of a Fund Link Application by the Transfer Agent. To use
Fund Link for redemptions, call the Transfer Agent at 800-426-0107. Subject to
the limitations set forth above under "Telephone Redemptions," the
Distributor, the Trust and the Transfer Agent may rely on instructions by any
registered owner believed to be genuine and will not be responsible to any
shareholder for any loss, damage or expense arising out of such instructions.
Requests received by the Transfer Agent prior to the close of regular trading
(normally 4:00 p.m., Eastern time) on the Exchange on a business day will be
processed at the net asset value on that day and the proceeds (less any CDSC)
will normally be sent to the designated bank account on the following business
day and received by the bank on the second or third business day. If the
redemption request is received after the close of regular trading on the
Exchange, the redemption is effected on the following business day. Shares
purchased by check may not be redeemed through Fund Link until such shares
have been owned (i.e., paid for) for at least 15 days. Fund Link may not be
used to redeem shares held in certificated form. Changes in bank account
information must be made by completing a new Fund Link Application, signed by
all owners of record of the account, with all signatures guaranteed. See "How
to Buy Shares--Signature Guarantee." See "How to Buy Shares--PIMCO Funds Fund
Link" for information on establishing the Fund Link privilege. The Trust may
terminate the Fund Link program at any time without notice to shareholders.
This redemption option does not apply to shares held in broker "street name"
accounts.
B-26
<PAGE>
PIMCO FUNDS AUTOMATED TELEPHONE SYSTEM
PIMCO Funds Automated Telephone System ("ATS") is an automated telephone
system that enables shareholders to perform a number of account transactions
automatically using a touch-tone telephone. ATS may be used on already-
established Fund accounts after you obtain a Personal Identification Number
(PIN) by calling the special ATS number: 1-800-223-2413.
Purchasing Shares. You may purchase shares in amounts up to $100,000 by
telephone by calling 1-800-223-2413. You must have established ATS privileges
to link your bank account with the Fund to pay for these purchases.
Exchanging Shares. With the PIMCO Funds Exchange Privilege, you can exchange
shares automatically by telephone from your Fund Link Account to another PIMCO
Funds account you have already established by calling 1-800-223-2413. Please
refer to "Exchange Privilege" below for details.
Redemptions. You may redeem shares by telephone automatically by calling 1-
800-223-2413 and the Fund will send the proceeds directly to your Fund bank
account. Please refer to "How to Redeem" below for details.
EXPEDITED WIRE TRANSFER REDEMPTIONS
If a shareholder has given authorization for expedited wire redemption,
shares can be redeemed and the proceeds sent by federal wire transfer to a
single previously designated bank account. Requests received by the Trust
prior to the close of the Exchange will result in shares being redeemed that
day at the next determined net asset value (less any CDSC) and normally the
proceeds being sent to the designated bank account the following business day.
The bank must be a member of the Federal Reserve wire system. Delivery of the
proceeds of a wire redemption request may be delayed by the Trust for up to 7
days if the Distributor deems it appropriate under then current market
conditions. Once authorization is on file, the Trust will honor requests by
any person identifying himself as the owner of an account or the owner's
broker by telephone at 800-426-0107 or by written instructions. The Trust
cannot be responsible for the efficiency of the Federal Reserve wire system or
the shareholder's bank. The Trust does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the
shareholder's bank. The minimum amount that may be wired is $2,500. The Trust
reserves the right to change this minimum or to terminate the wire redemption
privilege. Shares purchased by check may not be redeemed by wire transfer
until such shares have been owned (i.e., paid for) for at least 15 days.
Expedited wire transfer redemptions may be authorized by completing a form
available from the Distributor. Wire redemptions may not be used to redeem
shares in certificated form. To change the name of the single bank account
designated to receive wire redemption proceeds, it is necessary to send a
written request with signatures guaranteed to PIMCO Funds Distributors LLC,
P.O. Box 5866, Denver, CO 80217-5866. See "How to Buy Shares--Signature
Guarantee." This redemption option does not apply to shares held in broker
"street name" accounts.
CERTIFICATED SHARES
To redeem shares for which certificates have been issued, the certificates
must be mailed to or deposited with the Trust, duly endorsed or accompanied by
a duly endorsed stock power or by a written request for redemption. Signatures
must be guaranteed as described under "How to Buy Shares--Signature
Guarantee." Further documentation may be requested from institutions or
fiduciary accounts, such as corporations, custodians (e.g., under the Uniform
Gifts to Minors Act), executors, administrators, trustees or guardians
("institutional account owners"). The redemption request and stock power must
be signed exactly as the account is registered, including indication of any
special capacity of the registered owner.
AUTOMATIC WITHDRAWAL PLAN
An investor who owns or buys shares of the Municipal Bond Fund having a net
asset value of $10,000 or more may open an Automatic Withdrawal Plan and have
a designated sum of money (not less than $100 per
B-27
<PAGE>
Fund) paid monthly (or quarterly) to the investor or another person. Such a
plan may be established by completing the appropriate section of the account
application or you may obtain an Automatic Withdrawal Plan Application from
the Distributor or your broker. If an Automatic Withdrawal Plan is set up
after the account is established providing for payment to a person other than
the record shareholder or to an address other than the address of record, a
signature guarantee is required. See "How to Buy Shares--Signature Guarantee."
Class A, Class B and Class C shares of the Municipal Bond Fund are deposited
in a plan account and all distributions are reinvested in additional shares of
that class of the Municipal Bond Fund at net asset value. Shares in a plan
account are then redeemed at net asset value (less any applicable CDSC) to
make each withdrawal payment. Any applicable CDSC may be waived for certain
redemptions under an Automatic Withdrawal Plan. See "Alternative Purchase
Arrangements--Waiver of Contingent Deferred Sales Charges."
Redemptions for the purpose of withdrawals are ordinarily made on the
business day preceding the day of payment at that day's closing net asset
value and checks are mailed on the day of payment selected by the shareholder.
The Transfer Agent may accelerate the redemption and check mailing date by one
day to avoid weekend delays. Payment will be made to any person the investor
designates; however, if the shares are registered in the name of a trustee or
other fiduciary, payment will be made only to the fiduciary, except in the
case of a profit-sharing or pension plan where payment will be made to the
designee. As withdrawal payments may include a return of principal, they
cannot be considered a guaranteed annuity or actual yield of income to the
investor. The redemption of shares in connection with an Automatic Withdrawal
Plan may result in a gain or loss for tax purposes. Continued withdrawals in
excess of income will reduce and possibly exhaust invested principal,
especially in the event of a market decline. The maintenance of an Automatic
Withdrawal Plan concurrently with purchases of additional shares of the
Municipal Bond Fund would be disadvantageous to the investor because of the
CDSC that may become payable on such withdrawals in the case of Class A, Class
B or Class C shares and because of the initial sales charge in the case of
Class A shares. For this reason, the minimum investment accepted for the
Municipal Bond Fund while an Automatic Withdrawal Plan is in effect for the
Municipal Bond Fund is $1,000, and an investor may not maintain a plan for the
accumulation of shares of the Municipal Bond Fund (other than through
reinvestment of distributions) and an Automatic Withdrawal Plan at the same
time. The Trust or the Distributor may terminate or change the terms of the
Automatic Withdrawal Plan at any time.
Because the Automatic Withdrawal Plan may involve invasion of capital,
investors should consider carefully with their own financial advisers whether
the plan and the specified amounts to be withdrawn are appropriate in their
circumstances. The Trust and the Distributor make no recommendations or
representations in this regard.
DISTRIBUTOR AND DISTRIBUTION AND SERVICING PLANS
The Distributor, a wholly owned subsidiary of PIMCO Advisors, is the
principal underwriter of the Trust's shares and in that connection makes
distribution and servicing payments to participating brokers and servicing
payments to certain banks and other financial intermediaries in connection
with the sale of Class B and Class C shares and servicing payments to
participating brokers, certain banks and other financial intermediaries in
connection with the sale of Class A shares. In the case of Class A shares,
these parties are also compensated based on the amount of the front-end sales
charge reallowed by the Distributor, except in cases where Class A shares are
sold without a front-end sales charge. In the case of Class B shares,
participating brokers and other financial intermediaries are compensated by an
advance of a sales commission by the Distributor. In the case of Class C
shares, part or all of the first year's distribution and servicing fee is
generally paid at the time of sale. Pursuant to a Distribution Contract with
the Trust, with respect to the Municipal Bond Fund's Class A, Class B and
Class C shares, the Distributor bears various other promotional and sales
related expenses, including the cost of printing and mailing prospectuses to
persons other than current shareholders. The Distributor, located at 2187
Atlantic Street, Stamford, Connecticut 06902, is a broker-dealer registered
with the SEC.
B-28
<PAGE>
CLASS A SERVICING FEES As compensation for services rendered and expenses
borne by the Distributor in connection with personal services rendered to
Class A shareholders of the Trust and the maintenance of Class A shareholder
accounts, the Trust pays the Distributor servicing fees up to the annual rates
of 0.25% (calculated as a percentage of each Fund's average daily net assets
attributable to Class A shares).
<TABLE>
<CAPTION>
SERVICING
FUND FEE
------------------------------
<S> <C>
Municipal Bond Fund .25%
</TABLE>
CLASS B DISTRIBUTION AND SERVICING FEES As compensation for services
rendered and expenses borne by the Distributor in connection with the
distribution of Class B shares of the Trust and, in connection with personal
services rendered to Class B shareholders of the Trust and the maintenance of
Class B shareholder accounts, the Trust pays the Distributor servicing fees
and distribution fees up to the annual rates set forth below (calculated as a
percentage of each Fund's average daily net assets attributable to Class B
shares):
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------------
<S> <C> <C>
Municipal Bond Fund .25% .75%
</TABLE>
CLASS C DISTRIBUTION AND SERVICING FEES As compensation for services
rendered and expenses borne by the Distributor in connection with the
distribution of Class C shares of the Trust and, in connection with personal
services rendered to Class C shareholders of the Trust and the maintenance of
Class C shareholder accounts, the Trust pays the Distributor servicing fees
and distribution fees up to the annual rates set forth below (calculated as a
percentage of the Municipal Bond Fund's average daily net assets attributable
to Class C shares):
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FUND FEE FEE
-------------------------------------------
<S> <C> <C>
Municipal Bond Fund .25% .50%*
</TABLE>
- --------
* Subject to an increase to a rate of .75% if the Distributor ceases to
voluntarily waive any portion of the fee.
The Class A servicing fees and Class B and Class C distribution and
servicing fees paid to the Distributor are made under Distribution and
Servicing Plans adopted pursuant to Rule 12b-l under the 1940 Act and are of
the type known as "compensation" plans. This means that, although the Trustees
of the Trust are expected to take into account the expenses of the Distributor
and its predecessors in their periodic review of the Distribution and
Servicing Plans, the fees are payable to compensate the Distributor for
services rendered even if the amount paid exceeds the Distributor's expenses.
The distribution fee applicable to Class B and Class C shares may be spent
by the Distributor on any activities or expenses primarily intended to result
in the sale of Class B or Class C shares, respectively, including compensation
to, and expenses (including overhead and telephone expenses) of, financial
consultants or other employees of the Distributor or of participating or
introducing brokers who engage in distribution of Class B or Class C shares,
printing of prospectuses and reports for other than existing Class B or Class
C shareholders, advertising, and preparation, printing and distribution of
sales literature. The servicing fee, applicable to Class A, Class B and Class
C shares of the Trust, may be spent by the Distributor on personal services
rendered to shareholders of the Trust and the maintenance of shareholder
accounts, including compensation to, and expenses (including telephone and
overhead expenses) of, financial consultants or other employees of
participating or introducing brokers, certain banks and other financial
intermediaries who aid in the processing of purchase or redemption requests or
the processing of dividend payments, who provide information periodically to
shareholders showing their positions in a Fund's shares, who forward
communications from the Trust to shareholders, who render ongoing advice
concerning the suitability of particular investment opportunities offered by
the Trust in light of the shareholders' needs, who respond to inquiries from
shareholders relating to such services, or who train personnel in the
provision of such services. Distribution and servicing fees may also be spent
on interest relating to unreimbursed distribution or servicing expenses from
prior years.
B-29
<PAGE>
Many of the Distributor's sales and servicing efforts involve the Trust as a
whole, so that fees paid by Class A, Class B or Class C shares of the
Municipal Bond Fund may indirectly support sales and servicing efforts
relating to the other Funds' shares of the same class. In reporting its
expenses to the Trustees, the Distributor itemizes expenses that relate to the
distribution and/or servicing of a single Fund's shares, and allocates other
expenses among the Funds based on their relative net assets. Expenses
allocated to each Fund are further allocated among its classes of shares
annually based on the relative sales of each class, except for any expenses
that relate only to the sale or servicing of a single class. The Distributor
may make payments to brokers (and with respect to servicing fees only, to
certain banks and other financial intermediaries) of up to the following
percentages annually of the average daily net assets attributable to shares in
the accounts of their customers or clients:
CLASS A SHARES
<TABLE>
<CAPTION>
SERVICING
FEE
------------------------------
<S> <C>
Municipal Bond Fund .25%
</TABLE>
CLASS B SHARES(/1/)
<TABLE>
<CAPTION>
SERVICING
FEE
------------------------------
<S> <C>
Municipal Bond Fund .25%
</TABLE>
CLASS C SHARES(/2/)
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FEE FEE
-------------------------------------------
<S> <C> <C>
Municipal Bond Fund .25% .65%
</TABLE>
- --------
1. Payable only with respect to shares outstanding for one year or more.
2. Payable only with respect to shares outstanding for one year or more except
in the case of shares for which no payment is made to the party at the time
of sale.
The Distributor may from time to time pay additional cash bonuses or other
incentives to selected participating brokers in connection with the sale or
servicing of Class A, Class B and Class C shares of the Municipal Bond Fund.
On some occasions, such bonuses or incentives may be conditioned upon the sale
of a specified minimum dollar amount of the shares of the Municipal Bond Fund
and/or all of the Funds together or a particular class of shares, during a
specific period of time. The Distributor currently expects that such
additional bonuses or incentives will not exceed .50% of the amount of any
sale. Pacific Investment Management (in its capacity as administrator) may
also pay participating brokers and other intermediaries for transfer agency
and other services.
If in any year the Distributor's expenses incurred in connection with the
distribution of Class B and Class C shares and, for Class A, Class B and Class
C Shares, in connection with the servicing of shareholders and the maintenance
of shareholder accounts, exceed the distribution and/or servicing fees paid by
the Trust, the Distributor would recover such excess only if the Distribution
and Servicing Plan with respect to such class of shares continues to be in
effect in some later year when the distribution and/or servicing fees exceed
the Distributor's expenses. The Trust is not obligated to repay any
unreimbursed expenses that may exist at such time, if any, as the relevant
Distribution and Servicing Plan terminates.
From time to time, expenses of principal underwriters incurred in connection
with the sale of 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.
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HOW NET ASSET VALUE IS DETERMINED
The net asset value per share of Class A, Class B and Class C shares of the
Municipal Bond Fund will be determined once on each day on which the Exchange
is open as of the close of regular trading (normally 4:00 p.m., Eastern time)
on the Exchange by dividing the total market value of the Municipal Bond
Fund's portfolio investments and other assets attributable to that class, less
any liabilities, by the number of total outstanding shares of that class. Net
asset value will not be determined on days on which the Exchange is closed.
Portfolio securities and other assets for which market quotations are
readily available are stated at market value. Market value is determined on
the basis of last reported sales prices, or if no sales are reported, as is
the case for most securities traded over-the-counter, at the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. Fixed income securities, including
those to be purchased under firm commitment agreements (other than obligations
having a maturity of 60 days or less), are normally valued on the basis of
quotations obtained from brokers and dealers or pricing services, which take
into account appropriate factors such as institutional-sized trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
Short-term investments having a maturity of 60 days or less are valued at
amortized cost, when the Board of Trustees determines that amortized cost is
their fair value. Certain fixed income securities for which daily market
quotations are not readily available may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to fixed income
securities whose prices are more readily obtainable and whose durations are
comparable to the securities being valued. Subject to the foregoing, other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Trustees.
The Municipal Bond Fund's liabilities are allocated among its classes. The
total of such liabilities allocated to a class plus that class's distribution
and/or servicing fees and any other expenses specially allocated to that class
are then deducted from the class's proportionate interest in the Municipal
Bond Fund's assets, and the resulting amount for each class is divided by the
number of shares of that class outstanding to produce the class's "net asset
value" per share. Generally, for the Municipal Bond Fund, income dividends are
expected to differ over time by approximately the amount of the expense
accrual differential between the Municipal Bond Fund's classes.
DISTRIBUTIONS
The Municipal Bond Fund pays out as dividends substantially all of its net
investment income (which comes from dividends and interest it receives or is
deemed to receive from its investments) and net realized short-term capital
gains. For these purposes and for federal income tax purposes, a portion of
the premiums from certain expired call or put options written by the Municipal
Bond Fund, net gains from closing purchase and sale transactions with respect
to such options, and net gains from futures transactions are treated as short-
term capital gains. The Municipal Bond Fund distributes substantially all of
its net realized capital gains, if any, after giving effect to any available
capital loss carry-over.
Shares begin earning dividends on the day after the date that funds are
received by the Trust for the purchase of shares. For the Municipal Bond Fund,
dividends are declared daily from net investment income to shareholders of
record at the close of the previous business day, and distributed to
shareholders monthly. Any net realized capital gains from the sale of
portfolio securities will be distributed no less frequently than once yearly.
Dividend and capital gain distributions of the Municipal Bond Fund will be
reinvested in additional shares of the Municipal Bond Fund unless the
shareholder elects to have them paid in cash. There are no sales charges on
reinvested dividends. If a shareholder has elected to receive dividends and/or
capital gain distributions in cash and the postal or other delivery service is
unable to deliver checks to the shareholder's address of record, such
shareholder's distributions will automatically be invested in the Money Market
Fund until such shareholder is located. Dividends from net investment income
with respect to Class B and Class C shares are expected to be lower than those
paid with respect to Class A shares as a result of the distribution fees
applicable to Class B and C shares.
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Shareholders may elect to invest dividends and/or distributions paid by the
Municipal Bond Fund in shares of the same class of any other Fund of the Trust
at net asset value. The shareholder must have an account existing in the Fund
selected for investment with the identical registered name and address and
must elect this option on the account application, on a form provided for that
purpose or by a telephone request to the Transfer Agent at 800-426-0107. For
further information on this option, contact your broker or call the
Distributor at 800-426-0107.
TAXES
The Municipal Bond Fund intends to qualify as a regulated investment company
annually and to elect to be treated as a regulated investment company under
the Code. As such, the Municipal Bond Fund generally will not pay federal
income tax on the income and gains it pays as dividends to its shareholders.
In order to avoid a 4% federal excise tax, the Municipal Bond Fund intends to
distribute each year substantially all of its net income and gains.
Shareholders subject to U.S. federal income tax will be subject to tax on
any taxable distributions received from the Municipal Bond Fund, regardless of
whether received in cash or reinvested in additional shares. Distributions
received by tax-exempt shareholders generally will not be subject to federal
income tax to the extent permitted under applicable tax law. All shareholders
must treat dividends, other than capital gain dividends or dividends that
represent a return of capital to shareholders, as ordinary income.
Dividends designated by the Municipal Bond Fund as capital gain dividends
derived from the Municipal Bond Fund's net capital gain (that is, the excess
of net long-term gain over net short-term loss) are taxable to shareholders as
long-term capital gain except as provided by an applicable tax exemption.
Under the Taxpayer Relief Act of 1997, long-term capital gains will generally
be taxed at a 28% or 20% rate, depending upon the holding period of the
portfolio securities. Any distributions that are not from the Municipal Bond
Fund's net investment income, short-term capital gain, or net capital gain may
be characterized as a return of capital to shareholders or, in some cases, as
capital gain. Certain dividends declared in October, November or December of a
calendar year are taxable to shareholders (who are subject to tax on
dividends) as though received on December 31 of that year if paid to
shareholders during January of the following calendar year. For state income
tax purposes, interest on some federal obligations generally is not exempt
from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA and GNMA Certificates). The Municipal Bond Fund will advise shareholders
annually of the amount and nature of the dividends paid to them.
Dividends paid to shareholders by the Municipal Bond Fund which are derived
from interest on Municipal Bonds are expected to be designated by the Fund as
"exempt-interest dividends," and shareholders generally may exclude such
dividends from gross income for federal income tax purposes. However, if a
shareholder receives social security or railroad retirement benefits, the
shareholder may be taxed on a portion of those benefits as a result of
receiving tax-exempt income. In addition, certain exempt-interest dividends
could, as discussed below, cause certain shareholders to become subject to the
alternative minimum tax and may increase the alternative minimum tax liability
of shareholders already subject to this tax.
To the extent that dividends paid to shareholders by the Municipal Bond Fund
are derived from taxable interest or from capital gains, such dividends will
be subject to federal income tax. Any gain realized on a redemption of shares
will be taxable gain, subject to any applicable tax exemption for which an
investor may qualify.
Dividends derived from interest on certain U.S. Government securities may be
exempt from state and local taxes, although interest on mortgage-backed U.S.
Government securities is generally not so exempt. The distributions of
"exempt-interest dividends" paid by the Municipal Bond Fund may be exempt from
state and local taxation when received by a shareholder to the extent that
they are derived from interest on Municipal Bonds issued by the state or
political subdivision in which such shareholder resides. The federal exemption
for "exempt-interest dividends" attributable to Municipal Bonds does not
necessarily result in exemption of such
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<PAGE>
dividends from income for the purpose of state and local taxes. The Trust will
report annually on a state-by-state basis the source of income the Municipal
Bond Fund receives on Municipal Bonds that was paid out as dividends during
the preceding year.
The Code also provides that exempt-interest dividends allocable to interest
received from "private activity bonds" issued after August 7, 1986 are an item
of tax preference for individual and corporate alternative minimum tax at the
applicable rate for individuals and corporations. Therefore, if the Municipal
Bond Fund invests in such private activity bonds, certain of its shareholders
may become subject to the alternative minimum tax on that part of its
distributions to them that are derived from interest income on such bonds, and
certain shareholders already subject to such tax may have increased liability
therefor. However, it is the present policy of the Municipal Bond Fund to
invest no more than 20% of its assets in such bonds. Other provisions of the
Code affect the tax treatment of distributions from the Municipal Bond Fund
for corporations, casualty insurance companies, and financial institutions. In
particular, under the Code, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which the
corporation's "adjusted current earnings" (which includes various items of tax
exempt income) exceeds the amount otherwise determined to be alternative
minimum taxable income. Accordingly, an investment in the Municipal Bond Fund
may cause shareholders to be subject to (or result in an increased liability
under) the alternative minimum tax.
Dividends to shareholders of the Municipal Bond Fund derived from money
market instruments and U.S. Government securities are generally taxable as
ordinary income. The Fund may seek to reduce fluctuations in its net asset
value by engaging in portfolio strategies involving options on securities,
futures contracts, and options on futures contracts. Any gain derived by the
Fund from the use of such instruments, including by reason of "marking to
market," will be treated as a combination of short-term and long-term capital
gain and, if not offset by realized capital losses incurred by the Fund, will
be distributed to shareholders (possibly requiring the liquidation of other
portfolio securities) and will be taxable to shareholders as a combination of
ordinary income and long-term capital gain.
Interest accrued by the Municipal Bond Fund from inflation-indexed bonds
will be includable in the Municipal Bond Fund's gross income in the period in
which they accrue. Periodic adjustments for inflation in the principal value
of these securities also may give rise to original issue discount, which,
likewise, will be includable in the Municipal Bond Fund's gross income on a
current basis, regardless of whether the Municipal Bond Fund receives any cash
payments. See "Taxation--Original Issue Discount" in the Trust's Statement of
Additional Information. Amounts includable in the Municipal Bond Fund's gross
income become subject to tax-related distribution requirements. Accordingly,
the Municipal Bond Fund may be required to make annual distributions to
shareholders in excess of the cash received in a given period from these
investments. As a result, the Municipal Bond Fund may be required to liquidate
certain investments at a time when it is not advantageous to do so. If the
principal value of an inflation-indexed bond is adjusted downward in any
period as a result of deflation, the reduction may be treated as a loss to the
extent the reduction exceeds coupon payments received in that period; in that
case, the amount distributable by the Municipal Bond Fund may be reduced and
amounts distributed previously in the taxable year may be characterized in
some circumstances as a return of capital.
Taxable shareholders should note that the timing of their investment could
have undesirable tax consequences. If shares are purchased on or immediately
before the record date of a dividend, taxable shareholders will pay full price
for the shares and may receive a portion of their investment back as a taxable
distribution.
The preceding discussion relates only to federal income tax; the
consequences under other tax laws may differ. For additional information
relating to the tax aspects of investing in the Municipal Bond Fund, see the
Trust's Statement of Additional Information.
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<PAGE>
MANAGEMENT OF THE TRUST
The business affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are Guilford C. Babcock, R. Wesley Burns, Vern
O. Curtis, Brent R. Harris, Thomas P. Kemp, and William J. Popejoy. Additional
information about the Trustees and the Trust's executive officers may be found
in the Trust's Statement of Additional Information under the heading
"Management--Trustees and Officers."
INVESTMENT ADVISOR
Pacific Investment Management Company serves as investment adviser
("Advisor") to the Municipal Bond Fund pursuant to an investment advisory
contract. Pacific Investment Company is an investment counseling firm founded
in 1971, and had approximately $118 billion in assets under management as of
December 31, 1997. Pacific Investment Management is a subsidiary of PIMCO
Advisors. The general partners of PIMCO Advisors are PIMCO Partners, G.P. and
PIMCO Advisors Holdings L.P. 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 Managing
Directors of Pacific Investment Management. PIMCO Partners, G.P. is the sole
general partner of PIMCO Advisors Holdings L.P. Pacific Investment
Management's address is 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. Pacific Investment Management is registered as an investment
adviser with the SEC and as a commodity trading advisor with the CFTC.
Pacific Investment Management manages the investment and reinvestment of the
assets of the Municipal Bond Fund. Pacific Investment Management is
responsible for placing orders for the purchase and sale of the Fund's
investments directly with brokers or dealers selected by it in its discretion.
See "Portfolio Transactions" in the Trust's Statement of Additional
Information.
The portfolio manager for the Municipal Bond Fund is Benjamin Ehlert,
Executive Vice President of Pacific Investment Management. A Fixed Income
Portfolio Manager, Mr. Ehlert has been associated with Pacific Investment
Management for over 23 years.
FUND ADMINISTRATOR
Pacific Investment Management also serves as administrator for the Municipal
Bond Fund's Class A, Class B and Class C shares pursuant to an administration
agreement with the Trust. Pacific Investment Management provides
administrative services for Class A, Class B and Class C shareholders of the
Municipal Bond Fund, which include clerical help and accounting, bookkeeping,
internal audit services, and certain other services required by the Municipal
Bond Fund, preparation of reports to the Municipal Bond Fund's shareholders
and regulatory filings. Pacific Investment Management may also retain certain
of its affiliates to provide certain of these services. In addition, Pacific
Investment Management, at its own expense, arranges for the provision of
legal, audit, custody, transfer agency (including sub-transfer agency and
other administrative services) and other services for the Municipal Bond Fund,
and is responsible for the costs of registration of the Trust's shares and the
printing of prospectuses and shareholder reports for current shareholders.
The Trust's Funds (and not Pacific Investment Management) are responsible
for the following expenses: (i) salaries and other compensation of any of the
Trust's executive officers and employees who are not officers, directors,
stockholders or employees of Pacific Investment Management or its subsidiaries
or affiliates; (ii) taxes and governmental fees; (iii) brokerage fees and
commissions and other portfolio transaction expenses; (iv) the costs of
borrowing money, including interest expenses; (v) fees and expenses of the
Trustees who are not "interested persons" of Pacific Investment Management or
the Trust, and any counsel retained exclusively for their benefit; (vi)
extraordinary expenses, including costs of litigation and indemnification
expenses; (vii) expenses, such as organizational expenses, which are
capitalized in accordance with generally accepted accounting principles; and
(viii) any expenses allocated or allocable to a specific class of shares,
which include distribution and servicing fees payable with respect to Class A,
Class B and Class C shares, and may include certain other expenses as
permitted by the Trust's Multi-Class Plan adopted pursuant to Rule 18f-3 under
the 1940 Act, subject to review and approval by the Trustees.
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<PAGE>
ADVISORY AND ADMINISTRATIVE FEES
The Municipal Bond Fund features fixed advisory and administrative fee
rates. For providing investment advisory and administrative services to the
Municipal Bond Fund as described above, Pacific Investment Management receives
monthly fees from the Municipal Bond Fund at an annual rate of (i) 0.25% based
on the average daily net assets of the Municipal Bond Fund for advisory fees,
and (ii) 0.35% attributable in the aggregate to the Municipal Bond Fund's
Class A, Class B and Class C shares for administrative fees.
Both the investment advisory contract and administration agreement with
respect to Class A, Class B and Class C shares of the Municipal Bond Fund may
be terminated by the Trustees at any time on 60 days' written notice. The
investment advisory contract may be terminated by Pacific Investment
Management on 60 days' written notice. Following the expiration of the one-
year period commencing with the effectiveness of the administration agreement,
it may be terminated by Pacific Investment Management on 60 days' written
notice. Following its initial two-year term, the investment advisory contract
will continue from year to year if approved by the Trustees. Following its
initial one-year term, the administration agreement with respect to Class A,
Class B and Class C shares of the Fund will continue from year-to-year if
approved by the Trustees.
PORTFOLIO TRANSACTIONS
Pursuant to the advisory contract, Pacific Investment Management places
orders for the purchase and sale of portfolio investments for the Municipal
Bond Fund's accounts with brokers or dealers selected by it in its discretion.
In effecting purchases and sales of portfolio securities for the account of
the Municipal Bond Fund, Pacific Investment Management will seek the best
price and execution of the Municipal Bond Fund's orders. In doing so, the
Municipal Bond Fund may pay higher commission rates than the lowest available
when Pacific Investment Management believes it is reasonable to do so in light
of the value of the brokerage and research services provided by the broker
effecting the transaction.
Pacific Investment Management manages the Municipal Bond Fund without regard
generally to restrictions on portfolio turnover. The use of certain derivative
instruments with relatively short maturities may tend to exaggerate the
portfolio turnover rate for the Municipal Bond Fund. Trading in fixed income
securities does not generally involve the payment of brokerage commissions,
but does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. The higher
the rate of portfolio turnover of the Municipal Bond Fund, the higher all
these transaction costs borne by the Municipal Bond Fund generally will be.
Some securities considered for investments by the Municipal Bond Fund may
also be appropriate for other clients served by Pacific Investment Management.
If a purchase or sale of securities consistent with the investment policies of
the Municipal Bond Fund and one or more of these clients served by Pacific
Investment Management is considered at or about the same time, transactions in
such securities will be allocated among the Municipal Bond Fund and clients in
a manner deemed fair and reasonable by Pacific Investment Management. Pacific
Investment Management may aggregate orders for the Municipal Bond Fund with
simultaneous transactions entered into on behalf of other clients of Pacific
Investment Management so long as price and transaction expenses are averaged
either for that transaction or for the day.
DESCRIPTION OF DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of "term to
maturity." Traditionally, a fixed income security's "term to maturity" has
been used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a fixed
income security provides its final payment, taking no account of the pattern
of the security's payments prior to maturity. In contrast, duration
incorporates a bond's yield, coupon interest payments, final maturity and call
features into one measure. Duration management is one of the fundamental tools
used by Pacific Investment Management.
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<PAGE>
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being equal, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen a Fund's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have
the effect of reducing portfolio duration by approximately the same amount
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. For inflation-indexed bonds, duration is calculated on
the basis of modified real duration, which measures price changes of
inflation-indexed bonds on the basis of changes in real, rather than nominal,
interest rates. Another example where the interest rate exposure is not
properly captured by duration is the case of mortgage pass-through securities.
The stated final maturity of such securities is generally 30 years, but
current prepayment rates are more critical in determining the securities'
interest rate exposure. Finally, the duration of a fixed income security may
vary over time in response to changes in interest rates and other market
factors. In these and other similar situations, Pacific Investment Management
will use more sophisticated analytical techniques that incorporate the
anticipated economic life of a security into the determination of its interest
rate exposure.
DESCRIPTION OF SECURITIES RATINGS
The Municipal Bond Fund makes use of average portfolio credit quality
standards to assist institutional investors whose own investment guidelines
limit their investments accordingly. In determining the Municipal Bond Fund's
overall dollar-weighted average quality, unrated securities are treated as if
rated, based on Pacific Investment Management's view of their comparability to
rated securities. The Municipal Bond Fund's use of average quality criteria is
intended to be a guide for those institutional investors whose investment
guidelines require that assets be invested according to comparable criteria.
Reference to an overall average quality rating for the Municipal Bond Fund
does not mean that all securities held by the Fund will be rated in that
category or higher. The Municipal Bond Fund's investments may range in quality
from securities rated in the lowest category in which the Fund is permitted to
invest to securities rated in the highest category (as rated by Moody's or S&P
or, if unrated, determined by Pacific Investment Management to be of
comparable quality). The percentage of the Municipal Bond Fund's assets
invested in securities in a particular rating category will vary. Following is
a description of Moody's and S&P's ratings applicable to fixed income
securities.
MOODY'S INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
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Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
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<PAGE>
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
CORPORATE AND MUNICIPAL BOND RATINGS
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The B rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
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CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
B-39
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
OVERVIEW.................................................................... 2
The Proposed Reorganization............................................... 2
Investment Objectives and Policies........................................ 2
Investment Advisers....................................................... 3
Fees and Expenses......................................................... 3
Classes of Shares......................................................... 3
Purchase, Redemption, and Exchange Information............................ 4
Federal Income Tax Consequences of the Reorganization..................... 4
INVESTMENT PRACTICES AND RISK CONSIDERATIONS................................ 4
Comparison of Objectives and Primary Investments.......................... 4
Comparison of Securities and Investment Techniques........................ 5
FEES AND EXPENSES........................................................... 9
INFORMATION ABOUT THE REORGANIZATION........................................ 12
ADDITIONAL INFORMATION ABOUT THE FUNDS...................................... 14
GENERAL INFORMATION......................................................... 16
Solicitation of Proxies................................................... 16
Voting Rights............................................................. 16
Other Matters to Come Before the Meeting.................................. 18
Principal Underwriter..................................................... 18
Shareholder Proposals..................................................... 18
Information About the Funds............................................... 18
Reports to Shareholders................................................... 19
APPENDIX A.................................................................. A-1
Form of Agreement and Plan of Reorganization.............................. A-1
APPENDIX B.................................................................. B-1
Additional Information About the Municipal Bond Fund...................... B-1
</TABLE>
