As filed with the Securities and Exchange Commission on April 21, 1998
Securities Act File No. 333-48119
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
--
Pre-Effective Amendment No. 1 /X/
--
Post-Effective Amendment No. /__/
PIMCO FUNDS
(Exact Name of Registrant as Specified in Charter)
840 Newport Center Drive, Newport Beach, California 92660
(Address of Principal Executive Offices) (Zip Code)
(714) 760-4867
(Registrant's Area Code and Telephone Number)
R. Wesley Burns
Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, California 92660
(Name and Address of Agent for Service)
With copies to:
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Newton B. Schott, Jr., Esq. Robert W. Helm, Esq. Joseph B. Kittredge, Esq.
PIMCO Funds Distributors LLC Dechert Price & Rhoads Ropes & Gray
2187 Atlantic Street 1775 Eye Street, N.W. One International Place
Stamford, Connecticut 06902 Washington, D.C. 20006 Boston, Massachusetts 02110
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Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Title of Securities Being Registered: Class A, Class B, and Class C shares of
beneficial interest of the registrant's PIMCO Municipal Bond Fund. No filing fee
is due because of reliance on Section 24(f) of the Investment Company Act of
1940.
Pursuant to Rule 429 under the Securities Act of 1933, this registration
statement relates to shares of beneficial interest previously registered on Form
N-1A (File No. 33-12113).
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CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act of 1933
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Item of Form N-14 Location in the Prospectus
PART A
1. Beginning of Registration Statement and Outside Cross Reference Sheet; Notice of Special Meeting of
Front Cover Page of Prospectus Shareholders; Introduction
2. Beginning and Outside Back Cover Page of Prospectus Table of Contents
3. Fee Table, Synopsis Information, and Risk Factors Overview; Investment Practices and Risk Considerations
4. Information About the Transactions Overview; Information About the Reorganization
5. Information About the Registrant Introduction; Overview; Special Considerations and Risk
Factors; Fees and Expenses; Additional Information
about the Funds; Appendix B
6. Information About the Company Being Acquired Introduction; Overview; Special Considerations and Risk
Factors; Fees and Expenses; Additional Information
about the Funds; Incorporation by reference of
prospectus for Class A, B and C shares of PIMCO Funds:
Multi-Manager Series.
7. Voting Information Notice of Special Meeting of Shareholders;
Introduction; General Information
8. Interest of Certain Persons and Experts General Information
9. Additional Information Required for Reoffering by (Not Applicable)
Persons Deemed to be Underwriters
PART B
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. Additional Information about the Registrant Incorporation of Documents by Reference in Statement of
Additional Information
13. Additional Information about the Company Being Not Applicable
Acquired
14. Financial Statements Incorporation of Documents by Reference in Statement of
Additional Information; Exhibits to Statement of
Additional Information
PART C
15 - 17 Information required to be included in Part C is set
forth under the appropriate Item, so numbered, in Part
C of this Registration Statement.
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<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 __, 1998
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PROXY STATEMENT/PROSPECTUS
April __, 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 __, 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.
<PAGE>
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.
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.
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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.
<PAGE>
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.
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 approximately $118 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:
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Advisory Fee Rate(1) Administrative Fee Rate(2)
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
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(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 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).
<PAGE>
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.
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.
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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."
<PAGE>
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 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.
<PAGE>
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
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.
<PAGE>
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.
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.
<PAGE>
Mortgage-Related Securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property.
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."
<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.
<PAGE>
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.
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>
<S> <C> <C> <C> <C>
Class A Class B Class C
Shares Shares Shares
Shareholder Maximum initial sales charge imposed on purchases
Transaction (as a percentage of offering price at time of purchase)
Expenses Municipal Bond Fund 3.00% None None
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) None None None
Municipal Bond Fund None None None
Tax Exempt Fund None None None
Pro Forma
-------------------------------------------------------------------------------------------------
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.
<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>
<S> <C> <C> <C>
Example: You would Example: You would
pay the pay the
following expenses following expenses
on a on a
$1,000 investment $1,000 investment
Annual Fund Operating Expenses assuming assuming
(As a percentage of average net (1) 5% annual return (1) 5% annual return
assets): and and
(2) redemption at the (2) no redemption:
end of
each time period:
Total
Admini- Fund
Advisory strative 12b-1 Operating
Fund Fee Fee Fees(1) Expenses Year Year
1 3 5 10 1 3 5 10
--------------------------------------------------------------------------------------------------
Class A Shares Municipal Bond .25% .35% .25% .85% $38 $56 $76 $132 $38 $56 $76 $132
Fund
--------------------------------------------------------------------------------------------------
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 Shares Municipal Bond .25% .35% 1.00% 1.60% $66 $80 $107 $160 $16 $50 $87 $160
Fund
--------------------------------------------------------------------------------------------------
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 Shares Municipal Bond .25% .35% .75%(2) 1.35%(3) $24 $43 $74 $162 $14 $43 $74 $162
Fund
--------------------------------------------------------------------------------------------------
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.
<PAGE>
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.
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.
<PAGE>
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.
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 approximately
$118 billion under management as of December 31, 1997, almost exclusively in
fixed income portfolios.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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 and 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>
<S> <C> <C> <C>
Net Asset Value
Net Assets Per Share Shares Outstanding
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 6,637,120 12.26 541,601
Class B 3,853,835 12.26 314,478
Class C 38,285,078 12.26 3,124,127
</TABLE>
*Pro forma net assets have been reduced by Reorganization-related legal and
accounting costs and certain other expenses.
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 __, 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.
<PAGE>
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.
<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>
<S> <C> <C> <C>
Percentage of
Shares Outstanding
Owner Owned Shares
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
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>
<PAGE>
* 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.
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 are incorporated by reference into the prospectuses and Statements of
Additional Information, and other information about PIMS, MMS and the Funds.
<PAGE>
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 __, 1998
840 Newport Center Drive
Newport Beach, CA 92660
<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.
<PAGE>
(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
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.
<PAGE>
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 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
<PAGE>
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:
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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."
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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:_________________________
<PAGE>
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
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
Any increase in the principal amount of an inflation-indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity. See "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.
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.
<PAGE>
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. 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 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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) to 331/3% 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 331/3% 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.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
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 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 Auto Invest plan, the PIMCO 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
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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.
<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.
<PAGE>
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
591/2, (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 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
591/2; (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."
<PAGE>
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>
<S> <C> <C> <C> <C>
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
--------------------------------------------------------------------------------------------------
$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.
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.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
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.
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:
Year Since Purchase Percentage
Payment was Made Contingent
Deferred Sales
Charge
-------------------------------------------------
First 5%
-------------------------------------------------
Second 4
-------------------------------------------------
Third 3
-------------------------------------------------
Fourth 3
-------------------------------------------------
Fifth 2
-------------------------------------------------
Sixth 1
-------------------------------------------------
Seventh 0*
*After the seventh year, Class B shares convert into
Class A shares as described below.
<PAGE>
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.
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.
<PAGE>
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:
Year Since Purchase Percentage
Payment was Made Contingent
Deferred Sales Charge
----------------------------------------------
First 1
----------------------------------------------
Thereafter 0
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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 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."
<PAGE>
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.
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).
Servicing
Fund Fee
-----------------------------------------------------
Municipal Bond Fund .25%
<PAGE>
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):
Servicing Distribution
Fund Fee Fee
------------------------------------------------------
Municipal Bond Fund .25% .75
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):
Servicing Distribution
Fund Fee Fee
------------------------------------------------------
Municipal Bond Fund .25% .50%*
* 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.
<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
Servicing
Fee
--------------------------------------------------------
Municipal Bond Fund .25%
Class B Shares(1)
Servicing
Fee
--------------------------------------------------------
Municipal Bond Fund .25%
Class C Shares (2)
Servicing Distribution
Fee Fee
--------------------------------------------------------
Municipal Bond Fund .25% .65%
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
Moody's Investors Service, Inc.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
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.
<PAGE>
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Services
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
[Outside Back Cover]
TABLE OF CONTENTS
Page
OVERVIEW ......................................................................3
The Proposed Reorganization...........................................3
Investment Objectives and Policies....................................4
Investment Advisers...................................................4
Fees and Expenses.....................................................4
Classes of Shares.....................................................5
Purchase, Redemption, and Exchange Information........................5
Federal Income Tax Consequences of the Reorganization.................5
INVESTMENT PRACTICES AND RISK CONSIDERATIONS...................................5
Comparison of Objectives and Primary Investments......................6
Comparison of Securities and Investment Techniques....................7
FEES AND EXPENSES.............................................................13
INFORMATION ABOUT THE REORGANIZATION..........................................15
ADDITIONAL INFORMATION ABOUT THE FUNDS........................................18
GENERAL INFORMATION...........................................................20
Solicitation of Proxies..............................................20
Voting Rights........................................................21
Other Matters to Come Before the Meeting.............................23
Principal Underwriter................................................23
Shareholder Proposals................................................24
Information About the Funds..........................................24
Reports to Shareholders..............................................24
APPENDIX A.....................................................................1
Form of Agreement and Plan of Reorganization..........................1
APPENDIX B.....................................................................1
Additional Information About the Municipal Bond Fund..................1
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK. EXAMPLE [*]
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the meeting. The Trustees recommend a vote FOR the
proposal.
Proposal to approve the acquisition of all assets, [] FOR [] AGAINST [] ABSTAIN
and the assumption of all liabilities, of the
PIMCO Tax Exempt Fund by the PIMCO
Municipal Bond Fund, as described in the
Proxy Statement /Prospectus and the
Agreement and Plan of Reorganization.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
PIMCO Tax Exempt Fund Proxy Solicited By the Board of Trustees
A Series of PIMCO Funds: Multi-Manager Series
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS - June 19, 1998
The undersigned hereby appoints Stephen J. Treadway, Newton B. Schott, Jr., and
Edward W. Janeczek, Jr., and each of them, proxies, with power of substitution
to each, and hereby authorizes them to represent and to vote, as designated
below, at the Special Meeting of Shareholders of the PIMCO Tax Exempt Fund, a
series of the Trust indicated above, on June 19, 1998 at 10:00 a.m., Eastern
Time, and at any adjournments thereof, all of the shares of the Fund which the
undersigned would be entitled to vote if personally present.
NOTE: Please sign exactly as your name appears on this
card. All joint owners should sign. When signing as
executor, administrator, attorney, trustee or guardian
or as custodian for a minor, please give full title as
such. If a corporation, please sign in full corporate
name and indicate the signer's office. If a partner,
sign in the partnership name.
Signature(s):
-------------------------------------------------------
-------------------------------------------------------
Date:
-------------------------------------------------------
<PAGE>
PART B
PIMCO FUNDS: PACIFIC INVESTMENT MANAGEMENT SERIES
------------------------------------------------------------------------------
Statement of Additional Information
April __, 1998
------------------------------------------------------------------------------
<TABLE>
<S> <C>
Acquisition of the Assets of PIMCO Tax Exempt Fund (a By and in Exchange for Shares of PIMCO Municipal Bond
Series of PIMCO Funds: Multi-Manager Series) Fund (a Series of PIMCO Funds: Pacific Investment
840 Newport Center Drive Management Series)
Newport Beach, California 92660 840 Newport Center Drive
Newport Beach, California 92660
</TABLE>
This Statement of Additional Information is available to the Shareholders of
PIMCO Tax Exempt Fund ("Tax Exempt Fund") in connection with a proposed
transaction whereby PIMCO Municipal Bond Fund ("Municipal Bond Fund"), a series
of PIMCO Funds: Pacific Investment Management Series ("PIMS"), will acquire all
of the assets of the Tax Exempt Fund, a series of PIMCO Funds: Multi-Manager
Series ("MMS"), and certain liabilities, in exchange for shares of Municipal
Bond Fund.
This Statement of Additional Information of PIMS consists of this cover page and
the following documents, each of which has been filed electronically and is
incorporated by reference herein:
(1) The Statement of Additional Information of PIMS dated April 1, 1998,
including financial statements and report of independent accountants regarding
the Municipal Bond Fund;
(2) Financial statements and report of independent accountants regarding the Tax
Exempt Fund included in the June 30, 1997 Annual Report of MMS; and
(3) Financial statements regarding the Tax Exempt Fund included in the December
31, 1997 Semi-Annual Report of MMS.
This Statement of Additional Information is not a prospectus. A Proxy
Statement/Prospectus dated April __, 1998 relating to the reorganization of Tax
Exempt Fund may be obtained by writing to PIMCO Funds Distributors LLC, 2187
Atlantic Street, Stamford, Connecticut 06902, Attn.: Proxy Department, or
calling (800) 426-0107. This Statement of Additional Information should be read
in conjunction with the Proxy Statement/Prospectus.
Financial Statements
Unaudited pro forma financial statements for the Funds relating to the
Reorganization, are set forth below. The following pro forma financial
statements should be read in conjunction with the financial statements referred
to above.
<PAGE>
PIMCO FUNDS
March 31, 1998
Pro Forma Combined Statement of Assets and Liabilities
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------------------------- ----------- ----------------------- --- -------------- -- -- -----------------------
Municipal Bond Tax Exempt Pro Forma Pro Forma
Fund Fund Adjustments Combined
------------------- ------------------------ -------------- -------------------
ASSETS:
Investments at value $ 2,933,374 $ 49,218,631 $ - $ 52,152,005
Cash 149 49,895 - 50,044
Receivable for securities sold 148,896 - - 148,896
Receivable for fund shares sold - 128,788 - 128,788
Interest receivable 40,932 716,735 - 757,667
Other assets - 16,500 - 16,500
------------------- ------------------------ -------------- ----------------
Total Assets 3,123,351 50,130,549 - 53,253,900
------------------- ------------------------ -------------- ----------------
LIABILITIES:
Payable for investments purchased 98,734 976,020 - 1,074,754
Payable for fund shares redeemed - 96,961 - 96,961
Accrued administration fees 618 16,108 - 16,726
Accrued investment advisory fees 618 12,082 - 12,700
Accrued shareholder servicing & distribution - 36,181 - 36,181
fees
Distribution payable 11,593 192,923 - 204,516
Other 31 - 24,241 (1) 24,272
------------------- ------------------ -------------- --------------
Total Liabilities 111,594 1,330,275 24,241 1,466,110
------------------- ------------------ --------------
- -------------------------------------------
NET ASSETS $ 3,011,757 $ 48,800,274 $ (24,241) $ 51,787,790
=== =================== =================== ============== ===========
Cost of investments owned $ 2,942,249 $ 45,956,255 $ - $ 48,898,504
=== =================== =================== ============== ============
NET ASSETS CONSIST OF:
Paid-in capital $ 3,021,193 $ 44,980,612 - $ 48,001,805
Accumulated undistributed net
investment income - 194,669 (24,241)(1) 170,428
Accumulated undistributed net realized gain
(loss) (561) 362,617 - 362,056
Net unrealized appreciation (depreciation) (8,875) 3,262,376 - 3,253,501
=== =================== ======================== ============== =========
NET ASSETS $ 3,011,757 $ 48,800,274 $ (24,241) $ 51,787,790
=== =================== ======================== ============== ===========
<PAGE>
PIMCO FUNDS
March 31, 1998
Pro Forma Combined Statement of Assets and Liabilities
(unaudited)
- ------------------------------------- ----------- ----------------------- --- -------------- -- -- -----------------------
Municipal Bond Tax Exempt Pro Forma Pro Forma
Fund Fund Adjustments Combined
------------------- ------------------------ -------------- -------------------
SHARES OUTSTANDING:
Municipal Bond Fund
Institutional class 302,110 - - 302,110
Class A - - 541,601 541,601
Class B - - 314,478 314,478
Class C - - 3,124,127 3,124,127
Tax Exempt Fund
Institutional class - -
Class A - 541,601 (541,601) -
Class B - 314,478 (314,478) -
Class C - 3,124,127 (3,124,1270 -
NET ASSET VALUE PER SHARE (2):
Municipal Bond Fund
Institutional class $ 9.97 $ - $ - $ 9.97
Class A - - 12.26 12.26
Class B - - 12.26 12.26
Class C - - 12.26 12.26
Tax Exempt Fund
Class A - 12.26 (12.26) -
Class B - 12.26 (12.26) -
Class C - 12.26 (12.26) -
(1) In connection with the reorganization, the shareholders of the Tax Exempt Fund will incur non-recurring reorganization costs
of approximately $24,241.
(2) All amounts per share represent Net Asset Value per share. Maximum offering
price of $12.64 per share for Class A reflects the 3.0% sales commission
charged up front as set forth in the prospectus. Class B and C shares may
be subject to a deferred sales charge depending on the length of time held.
</TABLE>
See Notes to Pro Forma Combined Financial Statement
<PAGE>
PIMCO FUNDS
March 31, 1998
Pro Forma Combined Statement of Operations (unaudited)
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------- ------------------- ------------------------ -- ----- -- ------------------
Municipal Bond Tax Exempt Fund(2) Pro Forma Pro Forma
Fund(1) Adjustments Combined
----------------------------------------- ------------- -------------------
INVESTMENT INCOME:
Interest income $ 36,345 $ 2,707,155 $ - $ 2,743,500
EXPENSES
Investment advisory fees 1,779 146,232 (24,372) 123,639
Administration fees (Institutional shares) 1,779 - - 1,779
Administration fees (Class A, B, & C shares) 194,975 (24,372) 170,603
Shareholder servicing fees:
Class A - 14,307 - 14,307
Class B - 7,412 - 7,412
Class C - 100,141 - 100,141
Distribution fees:
Class A - - - -
Class B - 22,235 - 22,235
Class C - 300,424 (100,141) 200,283
Trustees' fees 7 3,371 - 3,378
Other - 1,070 - 1,070
----------------------------------------- ------------- -------------------
Total Expenses 3,565 790,167 (148,885) 644,847
----------------- -------------------
------------------------ -------------
NET INVESTMENT INCOME 32,780 1,916,988 148,885 2,098,653
----------------------------------------- -- ------------- -------------------
NET REALIZED AND UNREALIZED LOSS:
Net realized gain (loss) on investments (561) 1,004,990 - 1,004,429
Net unrealized appreciation (depreciation)on
investments (8,875) 1,112,602 - 1,103,727
----------------------------------------- ------------- -------------------
Net Gain (Loss) on Investments (9,436) 2,117,592 - 2,108,156
----------------------------------------- ------------- -------------------
NET INCREASE IN ASSETS RESULTING FROM OPERATIONS
$ 23,344 $ 4,034,580 $ 148,885 $ 4,206,809
=== ============== ============== ============= ================
(1) For the period January 2, 1998 (commencement of operations) through March
31, 1998.
(2) For the period April 1, 1997 through March 31, 1998.
See Notes to Pro Forma Combined Financial Statement
<PAGE>
PIMCO Funds
Pro Forma Combined Schedule of Investments (unaudited)
March 31, 1998
- --------------------------------------------------------- ----------------- ----- ------------- -------------- -------------- ----
Principal Municipal Tax Exempt
Security Maturity Date Rate Amount Bond Fund Fund Combined
- --------------------------------------------------------- ----------------- ------ ------------ -------------- ----------- --------
MUNICIPAL BONDS AND NOTES
Alabama
Huntsville HLTH SER A 6/01/2017 5.000% 150,000 $ 146,813 - $ 146,813
------- ------ --------
146,813 - 146,813
----------- ------ --------
Arizona
PIMA County, Arizona Community College
District 7/01/2016 5.000% 150,000 149,625 - 149,625
Scottsdale, Arizona Industrial Development
Authority Hospital Revenue Bonds
(AMBAC Insured), Series 1997 A 9/01/2004 6.500% 1,130,00 - 1,264,188 1,264,188
149,625 1,264,188 1,413,813
------- --------- ---------
California
Los Angeles County Metropolitan Transportation
Authority 7/01/2018 4.750% 150,000 141,563 - 141,563
Los Angeles County Transportation Commission,
Sales Tax Revenue Refunding Bonds, Series 1991
B 7/01/2013 6.500% 1,000,000 - 1,075,000 1,075,000
Los Angeles Convention and Exhibition Center 12/01/2010 9.000% 1,250,000 - 1,629,688 1,629,688
Los Angeles Convention and Exhibition Center 12/01/2020 9.000% 1,750,000 - 2,288,125 2,288,125
San Jose Redevelopment Agency Merged Area
Project, Tax Allocation Bonds (MBIA Insured)
Series 1993 8/01/2015 6.000% 500,000 - 560,625 560,625
San Jose Redevelopment Agency Tax Allocation
Bonds 8/01/2021 5.000% 1,000,000 - 972,500 972,500
Southern California Public Power Authority 7/01/2005 5.500% 100,000 107,750 - 107,750
---------- ------- --------
249,313 6,525,938 6,775,251
-------- --------- --------
Colorado
E-470 Public Highway Authority Colorado
Redevelopment 9/01/2026 5.000% 150,000 $ 144,938 1,449,375 $1,594,313
---------- -----------
144,938 1,449,375 1,594,313
----------- ------------- -------
<PAGE>
District of Columbia
District of Columbia Revenue 2/01/2011 4.750% 150,000 148,125 - 148,125
District of Columbia Housing Finance Agency 12/01/2018 5.850% 1,000,000 - 1,028,750 1,028,750
------------- ------------- ---------
148,125 1,028,750 1,176,875
------------- ------------- ---------
Florida
Dade County 10/01/2006 7.600% 1,690,000 - 2,076,588 2,076,588
Jacksonville Electric Authority, Bulk Power
Supply System Revenue Bonds,
(Prerefunded 10/01/00), Scherer
41--A Project, Issue One, Series 1991 10/01/2021 6.750% 1,000,000 - 1,077,500 1,077,500
------------ ---------- ---------
- 3,154,088 3,154,088
------------- ----------- ---------
Georgia
Dawson County School District 4/01/2012 4.900% 105,000 105,656 - 105,656
Georgia Housing & Finance Authority 12/01/2020 5.750% 1,000,000 - 1,017,500 1,017,500
State of Georgia, General Obligation Bond,
Series 1993 12/01/2004 6.500% 2,000,000 - 2,267,500 2,267,500
---------- --------- ---------
105,656 3,285,000 3,390,656
----------- ---------- ---------
Hawaii
State of Hawaii, Airport System Revenue Bonds,
Second Series of 1991 7/01/2012 6.900% 1,000,000 - 1,180,000 1,180,000
---------- ---------- ---------
Illinois
Chicago, Illinois Wastewater Transmission 1/01/2019 5.000% 1,000,000 $ - 967,500 967,500
State of Illinois, Sales Tax Revenue Refunding
Bonds, Series 6/15/2012 5.000% 1,000,000 - 1,108,750 1,108,750
---------- ----------- ----------
- 2,076,250 2,076,250
---------- ------------ ---------
Indiana
Indianapolis, Local Public Improvement Bonds
Bank, Transportation Revenue Bonds, Series
1992 and 1992 D 2/01/2014 6.750% 1,000,000 - 1,177,500 1,177,500
-------- ----------------- ----------
- 1,177,500 1,177,500
<PAGE>
Massachusetts
Massachusetts-CONS LN-SER C 8/01/2017 5.000% 150,000 146,625 - 146,625
Massachusetts State Health & Building
Facilities 1/01/2035 3.650% 600,000 - 600,000 600,000
METHUEN (FGIC) 11/01/2016 5.000% 150,000 148,875 - 148,875
--------- ------------------ --------
295,500 600,000 895,500
--------- ------------------ --------
Michigan
Michigan State Building Authority Revenue
Bonds 10/15/2014 5.000% 100,000 99,375 - 99,375
Michigan State Environmental Protection
General Obligations Bonds, Series 1992 11/01/2012 6.250% 1,100,000 - 1,263,625 -------
1,263,625
---------- -------------- ---------
99,375 1,263,625 1,363,000
------------ ------------ ---------
Mississippi
Mississippi State Dept. Corrections CTF 1/01/2008 4.600% 150,000 150,000 - 150,000
-------------- ----------- ---------
150,000 - 150,000
------------- ---------- ---------
North Carolina
North Carolina Municipal Power Agency,
Catawaba Electric Revenue Bonds, (AMBAC Insured),
Series 1992 1/01/2008 6.000% 1,100,000 $ - 1,105,000 $ 1,105,000
--------------- ----------- ---------
- 1,105,000 1,105,000
--------------- ----------- ---------
North Dakota
Mercer County Pollution Control Revenue Bonds,
Series 1991 2/01/2019 6.900% 1,000,000
- 1,078,750 1,078,750
------------- ------------- ----------
- 1,078,750 1,078,750
-------------- ------------ ----------
New Hampshire
New Hampshire Turnpike System, Refunding
Revenue Bonds, (FGIC Insured),
Series 1991 11/01/2011 6.750% 1,000,000 - 1,160,000 1,160,000
------------- ---------- --------
- 1,160,000 1,160,000
--------- ----------- ----------
New Jersey
New Jersey State Transportation TR FD 6/15/2018 5.000% 150,000 147,750 - 147,750
Rutgers State University, New Jersey 5/01/2011 4.800% 150,000 150,563 - 150,563
---------- --------- -------
298,313 - 298,313
<PAGE>
------------ --------- ---------
New Mexico
Bernalillo County, New Mexico 12/01/2013 4.750% 150,000 149,250 - 149,250
Los Alamos County, Utility Revenue Bonds,
Series 1994A 7/01/2008 6.000% 1,000,000 - 1,096,250 1,096,250
--------- ----------------- ---------
149,250 1,096,250 1,245,500
---------- ---------------- --------
New York
Metropolitan Transportation Authority
NY Commuter 7/01/2021 5.500% 1,000,000 - 1,011,250 1,011,250
NEW YORK 8/15/2003 6.750% 1,000,000 $ - 1,110,000 1,110,000
New York City General Obligation Bonds,
Series 1996 A 8/01/2007 7.000% 1,000,000 - 1,161,250 1,161,250
New York City Municipal Water Finance
Authority 6/15/2025 4.750% 1,000,000 - 922,500 922,500
New York Dorm-St Clare Hosp B 2/15/2009 4.900% 100,000 98,625 - 98,625
New York State Dorm Authority Mental
Health Services Revenue Bonds,
Series 1997 B 8/15/2005 6.000% 1,850,000 - 1,991,111 1,991,111
New York State Environmental FACS CORP 4/01/2022 5.125% 1,000,000 - 982,500 982,500
New York State Urban Development Corp. 1/01/2009 4.800% 100,000 98,875 - 98,875
State of New York Thruway Authority Revenue
Bonds, (AMBRAC-TCRS Insured), Series
1995 A 4/01/2005 6.000% 1,000,000 - 1,103,750 1,103,750
State of New York Thruway Authority Revenue
Bonds, (MBIA Insured), Series 1995 A 4/01/2015 5.500% 1,000,000 - ------------- ---------
1,028,750 1,028,750
------------- ---------
197,500 9,311,111 9,508,611
----------- ---------- ---------
<PAGE>
Ohio
Cleveland Water and Sewer Refunding and
Improvement Revenue Bonds, (MBIA Insured),
Series 1993 G 1/01/2021 5.500% 1,000,000 $ - 1,046,501 1,046,501
Ohio State PUB FACS COMMN 11/01/1999 4.500% 100,000 101,125 - 101,125
Ohio State Water Development Authority
Pollution Control Revenue Bonds,
(MBIA Insured), Series 1995 6/01/2005 6.000% 1,000,000 - 1,097,500 1,097,500
------------ -------- ----------
101,125 2,144,001 2,245,126
-------------- ---------- ---------
Pennsylvania
Pittsburgh , Pennsylvania General Obligation
Bonds, (AMBAC Insured), Series 1993 A 9/01/2014 5.500% 1,525,000 - 1,647,000 1,647,000
----------- ---------- ---------
- 1,647,000 1,647,000
------------- ----------- ---------
Puerto Rico
Puerto Rico Commonwealth Aqueduct & Sewer 7/01/2015 5.000% 150,000 148,875 - 148,875
Puerto Rico Indl. Tourist Edl. Med. 10/01/2018 5.000% 1,000,000 - 985,000 985,000
---------- -----------
148,875 985,000 1,133,875
----------- ---------- ----------
South Carolina
Piedmont Municipal Power Agency Electric
Revenue Bonds, (MBIA Insured),
Series 1996 B 1/01/2013 5.250% 1,000,000 - 1,022,500 1,022,500
---------- -------- ---------
- 1,022,500 1,022,500
----------- -------- --------
Tennessee
Memphis-Shelby County, Tennessee ARPT SPL 9/01/2012 5.350% 1,000,000 - 1,023,750 1,023,750
----------------
- 1,023,750 1,023,750
<PAGE>
--------- ------------ ------------
Texas
Beaumont, Texas Indpt Sch Dist 2/15/2016 5.000% 150,000 147,938 - 147,938
Houston, Texas, Water & Sewer System
Revenue Bonds, Series 1993 B 12/01/2018 5.000% 2,000,000 $ 1,971,982
<PAGE>
Pflugerville, Texas Independent School
District 8/15/2017 5.000% 150,000 146,813 - 146,813
University of Texas Revenue Bonds 8/15/2013 6.750% 735,000 - 804,823 804,823
University of Texas Revenue Bonds,
Series 1996 8/15/2007 5.250% 1,000,000 - 1,063,750 1,063,750
Waco, Texas 2/01/2011 4.800% 150,000 149,815 - 149,815
------------ ---------- ----------
444,566 3,840,555 4,285,121
----------- ----------- --------
Washington
King Hospital 1 REF AMBAC 9/01/2010 4.750% 100,000 98,500 - 98,500
------------- ----------- --------
98,500 - 98,500
------------- ------------ --------
Wisconsin
La Crosse, Wisconsin Pollution Control
Revenue Bonds 9/01/2014 3.500% 900,000 - 900,000 900,000
----------- ------------- --------
- 900,000 900,000
------------- ------------ -------
Wyoming
Lincoln County Pollution Control Revenue
Bonds 11/01/2014 3.650% 400,000 - 400,000 400,000
Lincoln County Pollution Control Revenue
Bonds 11/01/2014 3.500% 500,000 - 500,000 500,000
-------------- ----------- -------
- 900,000 900,000
------------- ----------- ------
TOTAL MUNICIPAL BONDS AND NOTES 2,927,474 49,218,631 52,146,105
-------------- ---------- ----------
<PAGE>
SHORT-TERM INSTRUMENTS
State Street Global Advisors Tax
Free Money Market 4/1/1998 3.070% 5,900 5,900 - 5,900
----------- -----------
5,900 - 5,900
-------- ------------- - -----------
TOTAL INVESTMENTS 2,933,374 49,218,631 52,152,005
OTHER ASSETS AND LIABILITIES 78,383 (418,357) (364,215)
---------------------------
NET ASSETS $ 3,011,757 $ 48,800,274 $ 51,787,790
=========== ============ ===========
</TABLE>
<PAGE>
PIMCO Funds
Notes to Pro Forma Combined Financial Statement (unaudited)
March 31, 1998
- --------------------------------------------------------------------------------
Basis of Presentation:
Subject to the approval of the Agreement and Plan of Reorganization ("Plan of
Reorganization") by the shareholders of the Tax Exempt Fund (the "Acquired
Fund"), a series of PIMCO Funds: Multi-Manager Series ("MMS"), the Municipal
Bond Fund (the "Acquiring Fund"), a series of the PIMCO Funds: Pacific
Investment Management Series ("PF") would acquire all the assets of the Acquired
Fund in exchange for newly issued shares of beneficial interest of the Acquiring
Fund (the "Merger Shares") and the assumption by the respective Acquiring Fund
of all of the liabilities of the Acquired Fund followed by a distribution of the
Merger Shares to the shareholders of the Acquired Fund.
As a result of the proposed transaction, the Acquired Fund will receive a number
of Class A, Class B and Class C shares of the Acquiring Fund equal in value to
the value of the net assets of the Acquired Fund, net of costs incurred to
effect the acquisition, being transferred and attributable to the Class A, Class
B and Class C shares of the Acquired Fund. Following the transfer, each Class A,
Class B and Class C share of the Acquired Fund will receive, on a tax-free
basis, a number of full and fractional Class A, Class B or Class C Merger Shares
of the Acquiring Fund equal in value, as of the close of business on the day of
the exchange, to the value of the shareholder's Class A, Class B or Class C
Acquired Fund shares.
The pro forma combined financial statements reflect the combined financial
position of the PF Municipal Bond Fund with the MMS Tax Exempt Fund (hereafter
the "Combined Fund") at March 31, 1998, and the pro forma combined results of
operations of the Combined Fund for the period from April 1, 1997 to March 31,
1998, as though the reorganization had occurred on April 1, 1997.
The pro forma combined financial statements are presented for the information of
the reader and may not necessarily be representative of how the pro forma
combined financial statements would have appeared had the reorganization
actually occurred. The pro forma combined financial statements should be read in
conjunction with the historical financial statements of the respective
portfolios.
Pro Forma Adjustments:
The pro forma combined Statements of Assets and Liabilities reflect the
reclassification of capital for the Acquired Fund into shares of beneficial
interest of the Acquiring Fund. Also, the paid in capital and total liabilities
reflect an adjustment for $24,241 at March 31, 1998 for the MMS Tax Exempt Fund,
relating to the estimated non-recurring costs to effect the reorganization
including such items as legal, accounting, registration and proxy costs.
The pro forma combined Statements of Operations reflect the following
adjustments:
A decrease in the advisory fee paid by the MMS Tax Exempt Fund as a
result of the application of the .25% advisory fee of the PF Municipal
Bond Fund. Previously, the advisory fees paid by the Acquired Fund
included certain administrative services which will be included under
an administrative fee paid by the retail shareholders of the combined
Funds as described below.
The administration fee paid by the Class A, B and C shareholders of
MMS Tax Exempt Fund was decreased as a result of the application of the
.35% administration fee applicable to the corresponding share classes
of the PF Municipal Bond Fund.
The 12b-1 fee paid by the Class C shareholders of the MMS Tax Exempt
Fund has been decreased by .25% to reflect the voluntary waiver
undertaken by the Distributor.
<PAGE>
PART C
OTHER INFORMATION
Item 15. Indemnification
Reference is made to Article IV of the Registrant's
Declaration of Trust, which was filed with the Registrant's
initial Registration Statement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in
connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issues.
Item 16. Exhibits
<TABLE>
<S> <C> <C>
(1) (i) Form of Declaration of Trust of Registrant7/
(ii) Form of Amended and Restated Establishment and Designation of Series of Shares of Beneficial
Interest, Par Value $0.0001
Per Share8/
-
(2) Form of By-laws of Registrant7/
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization*
(5) See Exhibits 1 and 2.
(6) (i) Form of Investment Advisory Contract7/
(ii) Form of Amendment to Investment Advisory Contract7/
(iii) Form of Supplement to Investment Advisory Contract Relating to StocksPLUS Short Strategy Fund2/
(iv) Form of Supplement to Investment Advisory Contract Relating to Balanced Fund3/
(v) Form of Supplement to Investment Advisory Contract Relating to Global Bond Fund II5/
(vi) Form of Supplement to Investment Advisory Contract Relating to Real Return Bond Fund5/
<PAGE>
(vii) Supplement to Investment Advisory Contract Relating to Low Duration Mortgage, Total Return
Mortgage, Emerging Markets
Bond and Emerging Markets Bond II Funds6/
(viii) Supplement to Investment Advisory Contract Relating to Municipal Bond Fund9/
(7) Form of Amended and Restated Distribution Contract9/
(8) Not Applicable
(9) Form of Custodian Agreement7/
(10) (i) Form of Distribution and Servicing Plan for Class A Shares4/
(ii) Form of Distribution and Servicing Plan for Class B Shares4/
(iii) Form of Distribution and Servicing Plan for Class C Shares4/
(iv) Form of Amended and Restated Distribution Plan for Administrative Class Shares7/
(v) Form of Amended and Restated Administrative Services Plan for Administrative Class Shares7/
(vi) Form of Amended and Restated Multi-Class Plan9/
(11) Opinion and Consent of Counsel10/
(12) Opinion and Consent of Counsel supporting tax matters and consequences.**
(13) (i) Form of Transfer Agency Agreement7/
(ii) Form of Transfer Agency Agreement with Shareholder Services, Inc.1/
(iii) Form of Amended and Restated Administration Agreement9/
(iv) Form of Shareholder Servicing Agreement9/
(14) Consents of Independent Auditors
(15) Not Applicable
(16) Powers of Attorney10/
(17) Not Applicable
------------------------------------
1/ Filed with Post-Effective Amendment No. 33 to the Registration Statement of PIMCO Advisors Funds
(File No. 2-87203) on November 30, 1995.
-
2/ Filed with Post-Effective Amendment No. 27 on January 16, 1996.
3/ Filed with Post-Effective Amendment No. 28 on April 1, 1996.
4/ Filed with Registration Statement on Form N-14
(File No. 333-12871) on September 27, 1996.
5/ Filed with Post-Effective Amendment No. 33 on January 13, 1997.
6/ Filed with Post-Effective Amendment No. 36 on July 11, 1997.
7/ Filed with Post-Effective Amendment No. 37 on November 17, 1997.
8/ Filed with Post-Effective Amendment No. 39 on December 31, 1997.
9/ Filed with Post-Effective Amendment No. 40 on March 13, 1998.
10/ Filed with the initial Registration Statement on Form N-14
(File No. 333-48119) on March 17, 1998.
* Filed herewith as Appendix "A" to the Proxy Statement/Prospectus.
** To be filed by post-effective amendment.
</TABLE>
<PAGE>
Item 17. Undertakings
(1) The undersigned registrant agrees that prior to any
public reoffering of the securities registered through the use
of a prospectus which is a part of this registration statement
by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act [17
CFR 230.145c], the reoffering prospectus will contain the
information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of
the applicable form.
(2) The undersigned registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a
part of an amendment to the registration statement and will
not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and
the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.
(3) The undersigned registrant agrees to file, by
post-effective amendment, an opinion of counsel or a copy of
an Internal Revenue Service ruling supporting the tax
consequences of the proposed reorganization described in this
registration statement within a reasonable time after receipt
of such opinion or ruling.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the
Registrant has duly caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Washington in the District of Columbia on the 20th day of April, 1998.
PIMCO FUNDS
(Registrant)
By: ___________________________________
R. Wesley Burns*
President
*By: __/s/ Robert W. Helm_______________
Robert W. Helm, as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
____________________________ Trustee April 20, 1998
Guilford C. Babcock*
____________________________ Trustee April 20, 1998
Thomas P. Kemp*
____________________________ Trustee April 20, 1998
Brent R. Harris*
____________________________ Trustee April 20, 1998
William J. Popejoy*
____________________________ Trustee April 20, 1998
Vern O. Curtis*
____________________________ Trustee and April 20, 1998
R. Wesley Burns* President (Principal
Executive Officer)
____________________________ Treasurer April 20, 1998
John P. Hardaway* (Principal Financial
and Accounting
Officer)
*By: _/s/ Robert W. Helm____
Robert W. Helm,
as attorney-in-fact
* Pursuant to power of attorney filed with the initial Registration
Statement on Form N-14 (File No. 333-48119) on March 17, 1998.
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Name
14 Consents of Independent Auditors
Consent of Independent Accountants
We hereby consent to the incorporation by reference of our reports dated August
15, 1997, relating to the financial statements and financial highlights
appearing in the June 30, 1997 Annual Reports to Shareholders of the PIMCO
Funds: Multi-Manager Series, which have been further incorporated into the Proxy
Statement/Prospectuses constituting part of the registration statement on Form
N-14 (the "Registration Statement"). We also consent to the references to us
under the headings "Independent Accountants" and "Financial Statements" in the
Statement of Additional Information in such Registration Statement.
Price Waterhouse LLP
Kansas City, Missouri
April 17, 1998
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference of our report dated March
11, 1998, relating to the financial statements dated January 2, 1998 of the
PIMCO Funds: Investment Management Series: Municipal Bond Fund, which has been
further incorporated into the Proxy Statement/Prospectus constituting part of
the registration statement on Form N-14 (the "Registration Statement"). We also
consent to the references to us under the headings "Independent Accountants" and
"Financial Statements" in the Statement of Additional Information in such
Registration Statement.
Price Waterhouse LLP
Kansas City, Missouri
April 17, 1998
