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PIMCO FUNDS:
Pacific Investment Management Series
STATEMENT OF ADDITIONAL INFORMATION
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") currently consisting of twenty-five separate investment
portfolios (the "Funds"): the PIMCO MONEY MARKET FUND; the PIMCO SHORT-TERM
FUND; the PIMCO LOW DURATION FUND; the PIMCO LOW DURATION FUND II; the PIMCO LOW
DURATION FUND III; the PIMCO LOW DURATION MORTGAGE FUND; the PIMCO MODERATE
DURATION FUND; the PIMCO REAL RETURN BOND FUND; the PIMCO TOTAL RETURN FUND; the
PIMCO TOTAL RETURN FUND II; the PIMCO TOTAL RETURN FUND III; the PIMCO TOTAL
RETURN MORTGAGE FUND; the PIMCO COMMERCIAL MORTGAGE SECURITIES FUND; the PIMCO
HIGH YIELD FUND; the PIMCO LONG-TERM U.S. GOVERNMENT FUND; the PIMCO LONG
DURATION FUND; the PIMCO GLOBAL BOND FUND; the PIMCO GLOBAL BOND FUND II; the
PIMCO FOREIGN BOND FUND; the PIMCO INTERNATIONAL BOND FUND; the PIMCO EMERGING
MARKETS BOND FUND; the PIMCO EMERGING MARKETS BOND FUND II; the PIMCO MUNICIPAL
BOND FUND; the PIMCO STRATEGIC BALANCED FUND; the PIMCO STOCKSPLUS FUND; and the
PIMCO STOCKSPLUS SHORT STRATEGY FUND. Shares of the PIMCO International Bond
Fund and PIMCO Emerging Markets Bond Fund II are offered only to clients of
PIMCO who maintain separately managed private accounts.
The Trust's investment adviser is Pacific Investment Management Company
("PIMCO" or the "Adviser"), 840 Newport Center Drive, Suite 300, Newport Beach,
California 92660. PIMCO is a subsidiary partnership of PIMCO Advisors L.P.
("PIMCO Advisors").
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with a Prospectus for the Trust. Each Fund offers up to six
classes of shares, offered through four Prospectuses. Class A, Class B, and
Class C shares of certain Funds are offered through the "Class A, B and C
Prospectus", Class D shares of certain Funds are offered through the "Class D
Prospectus", and Institutional Class and Administrative Class shares of the
Funds are offered through the "Institutional Prospectus", each dated November
25, 1998, as amended or supplemented from time to time, and Class A shares of
the Total Return Fund also are offered through a separate prospectus, dated
August 1, 1998, as amended or supplemented from time to time (collectively, the
"Prospectuses"). A copy of each Prospectus may be obtained free of charge at
the address and telephone number listed below.
Class A, B and C Prospectus
Institutional Prospectus: and Class D Prospectus:
PIMCO Funds PIMCO Funds Distributors LLC
840 Newport Center Drive 2187 Atlantic Street
Suite 300 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: (800) 426-0107
Telephone: (800) 927-4648 (Current Shareholders)
(800) 800-0952 (New Accounts)
November 25, 1998
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES.......................................................................... 1
Borrowing.............................................................................................. 1
Corporate Debt Securities.............................................................................. 2
Participation on Creditors Committees.................................................................. 3
Mortgage-Related and Other Asset-Backed Securities..................................................... 4
Foreign Securities..................................................................................... 8
Foreign Currency Transactions.......................................................................... 9
Foreign Currency Exchange-Related Securities........................................................... 11
Bank Obligations....................................................................................... 12
Loan Participations.................................................................................... 13
Delayed Funding Loans and Revolving Credit Facilities.................................................. 14
Short Sales............................................................................................ 15
Derivative Instruments................................................................................. 15
Warrants to Purchase Securities........................................................................ 22
Illiquid Securities.................................................................................... 22
Municipal Bonds........................................................................................ 23
Social Investment Policies............................................................................. 25
INVESTMENT RESTRICTIONS..................................................................................... 25
Fundamental Investment Restrictions.................................................................... 25
Non-Fundamental Investment Restrictions................................................................ 27
Non-Fundamental Operating Policies Relating to the Sale of Shares of PIMCO Total Return Fund in Japan.. 30
MANAGEMENT OF THE TRUST..................................................................................... 32
Trustees and Officers.................................................................................. 32
Compensation Table..................................................................................... 35
Investment Adviser..................................................................................... 36
Fund Administrator..................................................................................... 38
DISTRIBUTION OF TRUST SHARES................................................................................ 41
Distributor and Multi-Class Plan....................................................................... 41
Contingent Deferred Sales Charge and Initial Sales Charge.............................................. 42
Distribution and Servicing Plans for Class A, Class B and Class C Shares............................... 43
Distribution and Administrative Services Plans for Administrative Class Shares......................... 47
Plan for Class D Shares................................................................................ 49
Purchases, Exchanges and Redemptions................................................................... 50
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................................................ 52
Investment Decisions................................................................................... 52
Brokerage and Research Services........................................................................ 52
Portfolio Turnover..................................................................................... 53
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NET ASSET VALUE............................................................................................. 53
TAXATION.................................................................................................... 54
Distributions.......................................................................................... 56
Sales of Shares........................................................................................ 56
Backup Withholding..................................................................................... 56
Options, Futures and Forward Contracts, and Swap Agreements............................................ 56
Short Sales............................................................................................ 57
Passive Foreign Investment Companies................................................................... 57
Foreign Currency Transactions.......................................................................... 58
Foreign Taxation....................................................................................... 58
Original Issue Discount and Market Discount............................................................ 59
Other Taxation......................................................................................... 60
OTHER INFORMATION........................................................................................... 60
Capitalization......................................................................................... 60
Performance Information................................................................................ 60
Potential College Cost Table........................................................................... 69
Voting Rights.......................................................................................... 72
The Reorganization of the PIMCO Money Market and Total Return II Funds................................. 92
The Reorganization of the PIMCO Global Bond Fund II.................................................... 92
Code of Ethics......................................................................................... 92
Year 2000 Compliance Efforts........................................................................... 93
Custodian, Transfer Agent and Dividend Disbursing Agent................................................ 94
Independent Accountants................................................................................ 94
Counsel................................................................................................ 94
Registration Statement................................................................................. 94
Financial Statements................................................................................... 95
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund are
described in the Prospectuses. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
BORROWING
A Fund may borrow for temporary administrative purposes. This borrowing
may be unsecured. Provisions of the Investment Company Act of 1940 ("1940 Act")
require a Fund to maintain continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed, with an exception for borrowings not in excess of 5% of the
Fund's total assets made for temporary administrative purposes. Any borrowings
for temporary administrative purposes in excess of 5% of the Fund's total assets
must maintain continuous asset coverage. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, a Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time. As noted below, a
Fund also may enter into certain transactions, including reverse repurchase
agreements, mortgage dollar rolls, and sale-buybacks, that can be viewed as
constituting a form of borrowing or financing transaction by the Fund. To the
extent a Fund covers its commitment under a reverse repurchase agreement (or
economically similar transaction) by the segregation of assets determined in
accordance with procedures adopted by the Trustees, equal in value to the amount
of the Fund's commitment to repurchase, such an agreement will not be considered
a "senior security" by the Fund and therefore will not be subject to the 300%
asset coverage requirement otherwise applicable to borrowings by the Funds.
Borrowing will tend to exaggerate the effect on net asset value of any increase
or decrease in the market value of a Fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate. The PIMCO Global
Bond Fund II may not borrow in excess of 10% of the value of its total assets
and then only from banks as a temporary measure to facilitate the meeting of
redemption requests (not for leverage) or for extraordinary or emergency
purposes.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements, mortgage dollar rolls, and economically similar
transactions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. Under a reverse repurchase agreement,
the Fund continues to receive any principal and interest payments on the
underlying security during the term of the agreement. The Fund typically will
segregate assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, equal (on a daily mark-to-
market basis) to its obligations under reverse repurchase agreements. However,
reverse repurchase agreements involve the risk that the market value of
securities retained by the Fund may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. To the extent
that positions in reverse repurchase agreements are not covered through the
segregation of liquid assets at least equal to the amount of any forward
purchase commitment, such transactions would be subject to the Funds'
limitations on borrowings, which would restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% (for each Fund except the
PIMCO Global Bond Fund II) of a Fund's total assets.
A "mortgage dollar roll" is similar to a reverse repurchase agreement in
certain respects. In a "dollar roll" transaction a Fund sells a mortgage-
related security, such as a security issued by the Government National Mortgage
Association ("GNMA"), to a dealer and simultaneously agrees to
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repurchase a similar security (but not the same security) in the future at a
pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase
agreement, as a collateralized borrowing in which a Fund pledges a mortgage-
related security to a dealer to obtain cash. Unlike in the case of reverse
repurchase agreements, the dealer with which a Fund enters into a dollar roll
transaction is not obligated to return the same securities as those originally
sold by the Fund, but only securities which are "substantially identical." To be
considered "substantially identical," the securities returned to a Fund
generally must: (1) be collateralized by the same types of underlying mortgages;
(2) be issued by the same agency and be part of the same program; (3) have a
similar original stated maturity; (4) have identical net coupon rates; (5) have
similar market yields (and therefore price); and (6) satisfy "good delivery"
requirements, meaning that the aggregate principal amounts of the securities
delivered and received back must be within 2.5% of the initial amount delivered.
A Fund's obligations under a dollar roll agreement must be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Fund. As with reverse repurchase agreements, to the extent that
positions in dollar roll agreements are not covered by segregated liquid assets
at least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Funds' limitations on borrowings.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to a Fund's overall limitations on investments in illiquid securities.
A Fund also may effect simultaneous purchase and sale transactions that are
known as "sale-buybacks". A sale-buyback is similar to a reverse repurchase
agreement, except that in a sale-buyback, the counterparty who purchases the
security is entitled to receive any principal or interest payments make on the
underlying security pending settlement of the Fund's repurchase of the
underlying security. A Fund's obligations under a sale-buyback typically would
be offset by liquid assets equal in value to the amount of the Fund's forward
commitment to repurchase the subject security.
CORPORATE DEBT SECURITIES
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are in the
Adviser's opinion comparable in quality to corporate debt securities in which
the Fund may invest. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies.
Among the corporate debt securities in which the Funds may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to non-
convertible debt securities. Convertible securities rank senior to common stock
in a corporation's capital structure and, therefore, generally entail less risk
than the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party. A Fund generally would invest in
convertible securities for their favorable price characteristics and total
return potential and would normally not exercise an option to convert.
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Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's Investor Service, Inc. ("Moody's")
describes securities rated Baa as "medium-grade" obligations; they are "neither
highly protected nor poorly secured . . . [i]nterest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." Standard & Poor's Ratings Services ("S&P")
describes securities rated BBB as "regarded as having an adequate capacity to
pay interest and repay principal . . . [w]hereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal .
. . than in higher rated categories."
Investments in securities rated below investment grade that are eligible
for purchase by certain of the Funds (i.e., rated B or better by Moody's or
S&P), and in particular, by the PIMCO High Yield Fund, are described as
"speculative" by both Moody's and S&P. Investment in lower rated corporate debt
securities ("high yield securities" or "junk bonds") generally provides greater
income and increased opportunity for capital appreciation than investments in
higher quality securities, but they also typically entail greater price
volatility and principal and income risk. These high yield securities are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Analysis of the
creditworthiness of issuers of debt securities that are high yield may be more
complex than for issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities have been found to be less sensitive to
interest-rate changes than higher-rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection
of an economic downturn or of a period of rising interest rates, for example,
could cause a decline in high yield security prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Funds investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Funds
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly-traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
The Adviser seeks to minimize the risks of investing in all securities through
diversification, in-depth credit analysis and attention to current developments
in interest rates and market conditions.
PARTICIPATION ON CREDITORS COMMITTEES
A Fund (in particular, the PIMCO High Yield Fund) may from time to time
participate on committees formed by creditors to negotiate with the management
of financially troubled issuers of securities held by the Fund. Such
participation may subject a Fund to expenses such as legal fees and may make a
Fund an "insider" of the issuer for purposes of the federal securities laws, and
therefore may restrict such Fund's ability to trade in or acquire additional
positions in a particular security when it might otherwise desire to do so.
Participation by a Fund on such committees also may expose the Fund to potential
liabilities under the federal bankruptcy laws or other laws governing the rights
of creditors and debtors. A Fund will participate on such committees only when
the Adviser believes that such participation
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is necessary or desirable to enforce the Fund's rights as a creditor or to
protect the value of securities held by the Fund.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." Certain of the Funds may also invest in debt securities which are
secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment
on underlying mortgages increase in the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs
(the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government. FHLMC was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. It is a government-sponsored corporation
formerly owned by the twelve Federal Home Loan Banks and now owned entirely by
private stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the United
States Government.
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Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the Trust's
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Funds may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the originator/servicers and poolers, the Adviser
determines that the securities meet the Trust's quality standards. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. No Fund will
purchase mortgage-related securities or any other assets which in the Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the Fund's
net assets will be illiquid (10% in the case of the PIMCO Money Market Fund.)
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
VA. In the case of private issue mortgage-related securities whose underlying
assets are neither U.S. Government securities nor U.S. Government-insured
mortgages, to the extent that real properties securing such assets may be
located in the same geographical region, the security may be subject to a
greater risk of default than other comparable securities in the event of adverse
economic, political or business developments that may affect such region and,
ultimately, the ability of residential homeowners to make payments of principal
and interest on the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the
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Bonds. Principal and interest payments from the Collateral are used to pay
principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all
bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
COMMERCIAL MORTGAGE-BACKED SECURITIES include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including mortgage dollar rolls, CMO residuals or stripped
mortgage-backed securities ("SMBS"). Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
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flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities--Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped mortgage-
backed securities, in certain circumstances a Fund may fail to recoup fully its
initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. SMBS are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the "IO"
class), while the other class will receive all of the principal (the principal-
only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to recoup some or all of
its initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES. Similarly, the Adviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables/SM/
("CARS/SM/"). CARS/SM/ represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS/SM/ are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS/SM/ may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is
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exhausted, the trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Consistent with a Fund's investment objectives and policies, the Adviser
also may invest in other types of asset-backed securities.
FOREIGN SECURITIES
All Funds (except the PIMCO Low Duration II, Total Return II, Long-Term
U.S. Government and Municipal Bond Funds) may invest in corporate debt
securities of foreign issuers (including preferred or preference stock), certain
foreign bank obligations (see "Bank Obligations") and U.S. dollar or foreign
currency-denominated obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. The PIMCO Money Market, High Yield, Commercial Mortgage Securities,
Low Duration Mortgage and Total Return Mortgage Funds may invest in securities
of foreign issuers only if they are U.S. dollar-denominated.
Securities traded in certain emerging market countries, including the
emerging market countries in Eastern Europe, may be subject to risks in addition
to risks typically posed by international investing due to the inexperience of
financial intermediaries, the lack of modern technology, and the lack of a
sufficient capital base to expand business operations. Additionally, former
Communist regimes of a number of Eastern European countries previously
expropriated a large amount of property, the claims on which have not been
entirely settled. There can be no assurance that a Fund's investments in
Eastern Europe will not also be expropriated, nationalized or otherwise
confiscated.
Each of the Fixed Income Funds (except the PIMCO Low Duration II, Total
Return II, Long-Term U.S. Government and Municipal Bond Funds) may invest in
Brady Bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented in a number of countries,
including: Argentina, Bolivia, Bulgaria, Costa Rica, the Dominican Republic,
Ecuador, Jordan, Mexico, Niger, Nigeria, the Philippines, Poland, Uruguay, and
Venezuela. In addition, Brazil has concluded a Brady-like plan. It is expected
that other countries will undertake a Brady Plan in the future, including Panama
and Peru.
Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the Brady Bonds.
Interest payments on these Brady Bonds generally are collateralized on a one-
year or longer rolling-forward basis by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of interest payments
or, in the case of floating rate bonds, initially is equal to at least one
year's interest payments based on the applicable interest rate at that time and
is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled
to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk").
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Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Funds may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Funds to suffer
a loss of interest or principal on any of its holdings.
Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign
debt. Holders of sovereign debt (including the Funds) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt on which governmental entities have defaulted may be collected in whole or
in part.
Each of the PIMCO Emerging Markets Bond Fund and PIMCO Emerging Markets
Bond Fund II will consider an issuer to be economically tied to a country with
an emerging securities market if (1) the issuer is organized under the laws of,
or maintains its principal place of business in, the country, (2) its securities
are principally traded in the country's securities markets, or (3) the issuer
derived at least half of its revenues or profits from goods produced or sold,
investments made, or services performed in the country, or has at least half of
its assets in that country.
FOREIGN CURRENCY TRANSACTIONS
All Funds that may invest in foreign currency-denominated securities also
may purchase and sell foreign currency options and foreign currency futures
contracts and related options (see "Derivative Instruments"), and may engage in
foreign currency transactions either on a spot (cash) basis at the rate
prevailing in the currency exchange market at the time or through forward
currency contracts ("forwards") with terms generally of less than one year.
Funds may engage in these transactions in order to protect against uncertainty
in the level of future foreign exchange rates in the purchase and sale of
securities. The Funds may also use foreign currency options and foreign
currency forward contracts to increase exposure to a foreign currency or to
shift exposure to foreign currency fluctuations from one country to another.
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A forward involves an obligation to purchase or sell a specific currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts may be bought or sold to protect a Fund against a possible loss
resulting from an adverse change in the relationship between foreign currencies
and the U.S. dollar or to increase exposure to a particular foreign currency.
Open positions in forwards used for non-hedging purposes will be covered by the
segregation with the Trust's custodian of assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, and
are marked to market daily. Although forwards are intended to minimize the risk
of loss due to a decline in the value of the hedged currencies, at the same
time, they tend to limit any potential gain which might result should the value
of such currencies increase. Forwards will be used primarily to adjust the
foreign exchange exposure of each Fund with a view to protecting the outlook,
and the Funds might be expected to enter into such contracts under the following
circumstances:
LOCK IN. When the Adviser desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
CROSS HEDGE. If a particular currency is expected to decrease against
another currency, a Fund may sell the currency expected to decrease and purchase
a currency which is expected to increase against the currency sold in an amount
approximately equal to some or all of the Fund's portfolio holdings denominated
in the currency sold.
DIRECT HEDGE. If the Adviser wants to a eliminate substantially all of the
risk of owning a particular currency, and/or if the Adviser thinks that a Fund
can benefit from price appreciation in a given country's bonds but does not want
to hold the currency, it may employ a direct hedge back into the U.S. dollar.
In either case, a Fund would enter into a forward contract to sell the currency
in which a portfolio security is denominated and purchase U.S. dollars at an
exchange rate established at the time it initiated the contract. The cost of
the direct hedge transaction may offset most, if not all, of the yield advantage
offered by the foreign security, but a Fund would hope to benefit from an
increase (if any) in value of the bond.
PROXY HEDGE. The Adviser might choose to use a proxy hedge, which may be
less costly than a direct hedge. In this case, a Fund, having purchased a
security, will sell a currency whose value is believed to be closely linked to
the currency in which the security is denominated. Interest rates prevailing in
the country whose currency was sold would be expected to be closer to those in
the U.S. and lower than those of securities denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge
because it is dependent on a stable relationship between the two currencies
paired as proxies and the relationships can be very unstable at times.
COSTS OF HEDGING. When a Fund purchases a foreign bond with a higher
interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially reduced or lost if
the Fund were to enter into a direct hedge by selling the foreign currency and
purchasing the U.S. dollar. This is what is known as the "cost" of hedging.
Proxy hedging attempts to reduce this cost through an indirect hedge back to the
U.S. dollar.
It is important to note that hedging costs are treated as capital
transactions and are not, therefore, deducted from a Fund's dividend
distribution and are not reflected in its yield. Instead such costs will, over
time, be reflected in a Fund's net asset value per share.
TAX CONSEQUENCES OF HEDGING. Under applicable tax law, the Funds may be
required to limit their gains from hedging in foreign currency forwards,
futures, and options. Although the Funds are expected to comply with such
limits, the extent to which these limits apply is subject to tax regulations as
yet unissued. Hedging may also result in the application of the marked-to-
market and straddle provisions of the Internal Revenue Code. Those provisions
could result in an increase (or decrease) in the amount of taxable dividends
paid by the Funds and could affect whether dividends paid by the Funds are
classified as capital gains or ordinary income.
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FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS. Foreign currency warrants such as Currency
Exchange Warrants/SM /("CEWs/SM/") are warrants which entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms
of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate linked
securities ("PERLs/SM"/) are debt obligations the principal on which is payable
at maturity in an amount that may vary based on the exchange rate between the
U.S. dollar and a particular foreign currency at or about that time. The return
on "standard" principal exchange rate linked securities is enhanced if the
foreign currency to which the security is linked appreciates against the U.S.
dollar, and is adversely affected by increases in the foreign exchange value of
the U.S. dollar; "reverse" principal exchange rate linked securities are like
the "standard" securities, except that their return is enhanced by increases in
the value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in
U.S. dollars at rates that reflect the degree of foreign currency risk assumed
or given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders
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of the securities), which may have an adverse impact on the value of the
principal payment to be made at maturity.
PERFORMANCE INDEXED PAPER. Performance indexed paper ("PIPs/SM/") is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
BANK OBLIGATIONS
Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 15% of its net assets (10% in the case of the PIMCO Money
Market Fund) would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
Each Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
Each Fund (except the PIMCO Money Market, Low Duration Mortgage, Total
Return Mortgage, Commercial Mortgage Securities, High Yield and Long-Term U.S.
Government Funds) limits its investments in foreign bank obligations to United
States dollar-or foreign currency-denominated obligations of foreign banks
(including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Adviser, are of an investment quality comparable to
obligations of United States banks in which the Funds may invest. The PIMCO
Money Market, Low Duration Mortgage, Total Return Mortgage, Commercial Mortgage
Securities, High Yield and Long-Term U.S. Government Funds may invest in the
same types of bank obligations as the other Funds, but they must be U.S. dollar-
denominated. Subject to the Trust's limitation on concentration of no more than
25% of its assets in the securities of issuers in a particular industry, there
is no limitation on the amount of a Fund's assets which may be invested in
obligations of foreign banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because
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of future political and economic developments, that their obligations may be
less marketable than comparable obligations of United States banks, that a
foreign jurisdiction might impose withholding taxes on interest income payable
on those obligations, that foreign deposits may be seized or nationalized, that
foreign governmental restrictions such as exchange controls may be adopted which
might adversely affect the payment of principal and interest on those
obligations and that the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing and financial reporting standards, practices
and requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
LOAN PARTICIPATIONS
Each Fund (except the PIMCO Municipal Bond Fund) may purchase
participations in commercial loans. Such indebtedness may be secured or
unsecured. Loan participations typically represent direct participation in a
loan to a corporate borrower, and generally are offered by banks or other
financial institutions or lending syndicates. When purchasing loan
participations, a Fund assumes the credit risk associated with the corporate
borrower and may assume the credit risk associated with an interposed bank or
other financial intermediary. The participation interests in which a Fund
intends to invest may not be rated by any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated in
the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of a Fund were determined to be
subject to the claims of the agent bank's general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the corporate borrower for payment of principal and
interest. If a Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer a Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower's obligation, or that the collateral
can be liquidated.
The Funds may invest in loan participations with credit quality comparable
to that of issuers of its securities investments. Indebtedness of companies
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Some companies may never pay off their indebtedness, or may
pay only a small fraction of the amount owed. Consequently, when investing in
indebtedness of companies with poor credit, a Fund bears a substantial risk of
losing the entire amount invested.
Each Fund limits the amount of its total assets that it will invest in any
one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, a Fund generally will treat the
corporate borrower as the "issuer" of indebtedness held by the Fund. In the case
of loan
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participations where a bank or other lending institution serves as a financial
intermediary between a Fund and the corporate borrower, if the participation
does not shift to the Fund the direct debtor-creditor relationship with the
corporate borrower, Securities and Exchange Commission ("SEC") interpretations
require the Fund to treat both the lending bank or other lending institution and
the corporate borrower as "issuers" for the purposes of determining whether the
Fund has invested more than 5% of its total assets in a single issuer. Treating
a financial intermediary as an issuer of indebtedness may restrict a Funds'
ability to invest in indebtedness related to a single financial intermediary, or
a group of intermediaries engaged in the same industry, even if the underlying
borrowers represent many different companies and industries.
Loans and other types of direct indebtedness may not be readily marketable
and may be subject to restrictions on resale. In some cases, negotiations
involved in disposing of indebtedness may require weeks to complete.
Consequently, some indebtedness may be difficult or impossible to dispose of
readily at what the Adviser believes to be a fair price. In addition, valuation
of illiquid indebtedness involves a greater degree of judgment in determining a
Fund's net asset value than if that value were based on available market
quotations, and could result in significant variations in the Fund's daily share
price. At the same time, some loan interests are traded among certain financial
institutions and accordingly may be deemed liquid. As the market for different
types of indebtedness develops, the liquidity of these instruments is expected
to improve. In addition, the Funds currently intend to treat indebtedness for
which there is no readily available market as illiquid for purposes of the
Funds' limitation on illiquid investments. Investments in loan participations
are considered to be debt obligations for purposes of the Trust's investment
restriction relating to the lending of funds or assets by a Portfolio.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Funds. For example, if a loan is foreclosed, a Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, a Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct
indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, the Funds
rely on the Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Funds.
DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES
The Funds (except the PIMCO Money Market and Municipal Bond Funds) may enter
into, or acquire participations in, delayed funding loans and revolving credit
facilities. Delayed funding loans and revolving credit facilities are borrowing
arrangements in which the lender agrees to make loans up to a maximum amount
upon demand by the borrower during a specified term. These commitments may have
the effect of requiring a Fund to increase its investment in a company at a time
when it might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that a Fund is committed to advance additional funds, it
will at all times segregate assets, determined to be liquid by the Adviser in
accordance with procedures established by the Board of Trustees, in an amount
sufficient to meet such commitments. The Funds may invest in delayed funding
loans and revolving credit facilities with credit quality comparable to that of
issuers of its securities investments. Delayed funding loans and revolving
credit facilities may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, a Fund may be
unable to sell such investments at an opportune time or may have to resell them
at less than fair market value. The Funds currently intend to treat delayed
funding loans and revolving credit facilities for which there is no readily
available market as illiquid for purposes of the Funds' limitation on illiquid
investments. For a further discussion of the risks involved in investing in
loan participations and other forms of direct indebtedness see "Loan
Participations." Participation interests in revolving credit facilities will be
subject to the limitations discussed in "Loan Participations." Delayed funding
loans and revolving credit facilities are considered to be debt obligations for
purposes of the Trust's investment restriction relating to the lending of funds
or assets by a Portfolio.
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SHORT SALES
Certain of the Funds, particularly the PIMCO StocksPLUS Short Strategy
Fund, may make short sales of securities as part of their overall portfolio
management strategies involving the use of derivative instruments and to offset
potential declines in long positions in similar securities. A short sale is a
transaction in which a Fund sells a security it does not own in anticipation
that the market price of that security will decline.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of the
short sale and the time and the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
To the extent that a Fund engages in short sales, it will provide
collateral to the broker-dealer and (except in the case of short sales "against
the box") will maintain additional asset coverage in the form of segregated
assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees. Each Fund, except the PIMCO StocksPLUS
Short Strategy Fund, does not intend to enter into short sales (other than those
"against the box") if immediately after such sale the aggregate of the value of
all collateral plus the amount of the segregated assets exceeds one-third of the
value of the Fund's net assets. This percentage may be varied by action of the
Trustees. A short sale is "against the box" to the extent that the Fund
contemporaneously owns, or has the right to obtain at no added cost, securities
identical to those sold short. The Funds will engage in short selling to the
extent permitted by the 1940 Act and rules and interpretations thereunder. The
PIMCO Global Bond Fund II may only engage in short sales that are "against the
box."
DERIVATIVE INSTRUMENTS
In pursuing their individual objectives the Funds may, as described in the
Prospectuses, purchase and sell (write) both put options and call options on
securities, securities indexes, and foreign currencies, and enter into interest
rate, foreign currency and index futures contracts and purchase and sell options
on such futures contracts ("futures options") for hedging purposes, except that
those Funds that may not invest in foreign currency-denominated securities may
not enter into transactions involving currency futures or options. The Funds
(except the PIMCO Money Market and Municipal Bond Funds) also may purchase and
sell foreign currency options for purposes of increasing exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another. The Funds (except the PIMCO Money Market and Municipal Bond Funds)
also may enter into swap agreements with respect to foreign currencies, interest
rates and indexes of securities. The Funds may invest in structured notes. If
other types of financial instruments, including other types of options, futures
contracts, or futures options are traded in the future, a Fund may also use
those instruments, provided that the Trustees determine that their use is
consistent with the Fund's investment objective.
OPTIONS ON SECURITIES AND INDEXES. A Fund may, to the extent specified for
the Fund in the Prospectuses, purchase and sell both put and call options on
fixed income or other securities or indexes in standardized contracts traded on
foreign or domestic securities exchanges, boards of trade, or similar entities,
or quoted on NASDAQ or on a regulated foreign over-the-counter market, and
agreements, sometimes called cash puts, which may accompany the purchase of a
new issue of bonds from a dealer.
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An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees,
in such amount are segregated by its custodian) upon conversion or exchange of
other securities held by the Fund. For a call option on an index, the option is
covered if the Fund maintains with its custodian assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, in an amount equal to the contract value of the index. A call option
is also covered if the Fund holds a call on the same security or index as the
call written where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise
price of the call written, provided the difference is maintained by the Fund in
segregated assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees. A put option on a security or
an index is "covered" if the Fund segregates assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees
equal to the exercise price. A put option is also covered if the Fund holds a
put on the same security or index as the put written where the exercise price of
the put held is (i) equal to or greater than the exercise price of the put
written, or (ii) less than the exercise price of the put written, provided the
difference is maintained by the Fund in segregated assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the market
value of a put or a call option include supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or
index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
The Funds may write covered straddles consisting of a combination of a call
and a put written on the same underlying security. A straddle will be covered
when sufficient assets are deposited to meet the Funds' immediate obligations.
The Funds may use the same liquid assets to cover both the call and put
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options where the exercise price of the call and put are the same, or the
exercise price of the call is higher than that of the put. In such cases, the
Funds will also segregate liquid assets equivalent to the amount, if any, by
which the put is "in the money."
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Fund forgoes,
during the option's life, the opportunity to profit from increases in the market
value of the security covering the call option above the sum of the premium and
the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
FOREIGN CURRENCY OPTIONS. A Fund may buy or sell put and call options on
foreign currencies either on exchanges or in the over-the-counter market, as
specified for that Fund in the Prospectuses. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the
exercise price until the option expires. A call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options. Over-the-counter
options differ from traded options in that they are two-party contracts with
price and other terms negotiated between buyer and seller, and generally do not
have as much market liquidity as exchange-traded options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectuses. An interest rate, foreign currency or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument, foreign
currency or the cash value of an index at a specified price and time. A futures
contract on an index is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the difference between the value
of the index at the close of the last trading day of the contract and the price
at which the index contract was originally written. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of these securities is made. A public market exists in
futures contracts covering a number of indexes as well as financial instruments
and foreign currencies, including: the S&P 500; the S&P Midcap 400; the Nikkei
225; the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA
Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank
certificates of deposit; Eurodollar certificates of deposit; the Australian
dollar; the Canadian dollar; the British pound; the German mark; the Japanese
yen; the French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the European Currency Unit ("ECU"). It is
expected that other futures contracts will be developed and traded in the
future.
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A Fund may purchase and write call and put futures options, as specified
for that Fund in the Prospectuses. Futures options possess many of the same
characteristics as options on securities and indexes (discussed above). A
futures option gives the holder the right, in return for the premium paid, to
assume a long position (call) or short position (put) in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in the futures
contract and the writer is assigned the opposite short position. In the case of
a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission
("CFTC") under which the Trust and the Funds avoid being deemed a "commodity
pool" or a "commodity pool operator," each Fund intends generally to limit its
use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. A Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce that Fund's exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
A Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets determined to be liquid by the Adviser in accordance
with procedures established by the Board of Trustees ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. Margin
requirements on foreign exchanges may be different than U.S. exchanges. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
The Funds may write covered straddles consisting of a call and a put
written on the same underlying futures contract. A straddle will be covered
when sufficient assets are deposited to meet the
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Funds' immediate obligations. A Fund may use the same liquid assets to cover
both the call and put options where the exercise price of the call and put are
the same, or the exercise price of the call is higher than that of the put. In
such cases, the Funds will also segregate liquid assets equivalent to the
amount, if any, by which the put is "in the money."
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. In general, the Funds
intend to enter into positions in futures contracts and related options only for
"bona fide hedging" purposes. With respect to positions in futures and related
options that do not constitute bona fide hedging positions, a Fund will not
enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of the Fund's net
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees,
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, that
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that, when added to the amounts deposited with a futures commission
merchant as margin, equal the total market value of the futures contract
underlying the call option. Alternatively, the Fund may cover its position by
entering into a long position in the same futures contract at a price no higher
than the strike price of the call option, by owning the instruments underlying
the futures contract, or by holding a separate call option permitting the Fund
to purchase the same futures contract at a price not higher than the strike
price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the Fund may cover the position either by entering
into a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Fund.
To the extent that securities with maturities greater than one year are
used to segregate assets to cover a Fund's obligations under futures contracts
and related options, such use will not eliminate the risk of a form of leverage,
which may tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio, and may require liquidation
of portfolio positions when it is not advantageous to do so. However, any
potential risk of leverage resulting from the use of securities with maturities
greater than one year may be mitigated by the overall duration limit on a Fund's
portfolio
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securities. Thus, the use of a longer-term security may require a Fund to hold
offsetting short-term securities to balance the Fund's portfolio such that the
Fund's duration does not exceed the maximum permitted for the Fund in the
Prospectuses.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures contracts on U.S. Government securities historically have reacted
to an increase or decrease in interest rates in a manner similar to that in
which the underlying U.S. Government securities reacted. To the extent,
however, that the PIMCO Municipal Bond Fund enters into such futures contracts,
the value of such futures will not vary in direct proportion to the value of the
Fund's holdings of Municipal Bonds (as defined below). Thus, the anticipated
spread between the price of the futures contract and the hedged security may be
distorted due to differences in the nature of the markets. The spread also may
be distorted by differences in initial and variation margin requirements, the
liquidity of such markets and the participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS THEREON.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Trust's ability to act upon economic
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events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.
SWAP AGREEMENTS. The Funds (except the PIMCO Money Market and Municipal
Bond Funds) may enter into interest rate, index and currency exchange rate swap
agreements. These transactions are entered into in a attempt to obtain a
particular return when it is considered desirable to do so, possibly at a lower
cost to the Fund than if the Fund had invested directly in an instrument that
yielded that desired return. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or "swapped" between the
parties are generally calculated with respect to a "notional amount," i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Forms of swap agreements include
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
fall below a specified rate, or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
Most swap agreements entered into by the Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). A Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, to avoid any potential
leveraging of the Fund's portfolio. Obligations under swap agreements so covered
will not be construed to be "senior securities" for purposes of the Fund's
investment restriction concerning senior securities. A Fund will not enter into
a swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on the Adviser's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Funds will enter
into swap agreements only with counterparties that meet certain standards of
creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Funds' repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which includes the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or
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credit union, insurance company, investment company subject to regulation under
the 1940 Act, commodity pool, corporation, partnership, proprietorship,
organization, trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have assets exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
STRUCTURED NOTES. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that
multiplies the indexed element by a specified factor and, therefore, the value
of such securities may be very volatile. To the extent a Fund invests in these
securities, however, the Adviser analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
WARRANTS TO PURCHASE SECURITIES
The Funds may invest in or acquire warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a Fund to buy
additional bonds at the favorable rate or to sell the warrants at a profit. If
interest rates rise, the warrants would generally expire with no value.
A Fund will not invest more than 5% of its net assets, valued at the lower
of cost or market, in warrants to purchase securities. Warrants acquired in
units or attached to securities will be deemed without value for purposes of
this restriction.
ILLIQUID SECURITIES
The Funds may invest up to 15% of their net assets in illiquid securities
(10% in the case of the PIMCO Money Market Fund). The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities. Illiquid securities are considered to
include, among other things, written over-the-counter options, securities or
other liquid assets being used as cover for such options, repurchase agreements
with maturities in excess of seven days, certain loan participation interests,
fixed time deposits which are not subject to prepayment or provide for
withdrawal penalties upon prepayment (other than overnight deposits), and other
securities whose disposition is restricted under the federal securities laws
(other than securities issued pursuant to Rule 144A under the 1933 Act and
certain commercial paper that the Adviser has determined to be liquid under
procedures approved by the Board of Trustees).
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MUNICIPAL BONDS
It is a policy of the PIMCO Municipal Bond Fund to have 80% of its net
assets invested in debt obligations the interest on which, in the opinion of
bond counsel to the issuer at the time of issuance, is exempt from federal
income tax ("Municipal Bonds"). The Fund may invest up to 10% of its net assets
in Municipal Bonds rated in the fifth highest rating category by Moody's or S&P,
or unrated obligations determined by the Adviser to be of quality comparable to
obligations so rated. A description of these ratings is set forth in Appendix B
to the Prospectuses. The ability of the Fund to invest in securities other than
Municipal Bonds is limited by a requirement of the Internal Revenue Code that at
least 50% of the Fund's total assets be invested in Municipal Bonds at the end
of each calendar quarter. See "Taxes."
Municipal Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and multi-
state agencies or authorities. The Municipal Bonds which the PIMCO Municipal
Bond Fund may purchase include general obligation bonds and limited obligation
bonds (or revenue bonds), including industrial development bonds issued pursuant
to former federal tax law. General obligation bonds are obligations involving
the credit of an issuer possessing taxing power and are payable from such
issuer's general revenues and not from any particular source. Limited
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Tax-exempt private activity
bonds and industrial development bonds generally are also revenue bonds and thus
are not payable from the issuer's general revenues. The credit and quality of
private activity bonds and industrial development bonds are usually related to
the credit of the corporate user of the facilities. Payment of interest on and
repayment of principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
Under the Internal Revenue Code, certain limited obligation bonds are
considered "private activity bonds" and interest paid on such bonds is treated
as an item of tax preference for purposes of calculating federal alternative
minimum tax liability.
The PIMCO Municipal Bond Fund may invest in municipal lease obligations. A
lease is not a full faith and credit obligation of the issuer and is usually
backed only by the borrowing government's unsecured pledge to make annual
appropriations for lease payments. There have been challenges to the legality of
lease financing in numerous states, and, from time to time, certain
municipalities have considered not appropriating money for lease payments. In
deciding whether to purchase a lease obligation, the PIMCO Municipal Bond Fund
would assess the financial condition of the borrower, the merits of the project,
the level of public support for the project, and the legislative history of
lease financing in the state. These securities may be less readily marketable
than other municipals. The PIMCO Municipal Bond Fund may also purchase unrated
lease obligations if determined by the Adviser to be of comparable quality to
rated securities in which the Fund is permitted to invest.
The PIMCO Municipal Bond Fund may seek to enhance its yield through the
purchase of private placements. These securities are sold through private
negotiations, usually to institutions or mutual funds, and may have resale
restrictions. Their yields are usually higher than comparable public securities
to compensate the investor for their limited marketability. The PIMCO Municipal
Bond Fund may not invest more than 15% of its net assets in illiquid securities,
including unmarketable private placements.
Some longer-term Municipal Bonds give the investor the right to "put" or
sell the security at par (face value) within a specified number of days
following the investor's request-usually one to seven days. This demand feature
enhances a security's liquidity by shortening its effective maturity and enables
it to trade at a price equal to or very close to par. If a demand feature
terminates prior to being exercised, the PIMCO Municipal Bond Fund would hold
the longer-term security, which could experience substantially more volatility.
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The PIMCO Municipal Bond Fund may invest in municipal warrants, which are
essentially call options on Municipal Bonds. In exchange for a premium, they
give the purchaser the right, but not the obligation, to purchase a Municipal
Bond in the future. The PIMCO Municipal Bond Fund might purchase a warrant to
lock in forward supply in an environment where the current issuance of bonds is
sharply reduced. Like options, warrants may expire worthless and they may have
reduced liquidity. The PIMCO Municipal Bond Fund will not invest more than 5%
of its net assets in municipal warrants.
The PIMCO Municipal Bond Fund may invest in Municipal Bonds with credit
enhancements such as letters of credit, municipal bond insurance and Standby
Bond Purchase Agreements ("SBPAs"). Letters of credit that are issued by a
third party, usually a bank, to enhance liquidity and ensure repayment of
principal and any accrued interest if the underlying Municipal Bond should
default. Municipal bond insurance, which is usually purchased by the bond
issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal and
interest will be paid when due. Insurance does not guarantee the price of the
bond or the share price of any fund. The credit rating of an insured bond
reflects the credit rating of the insurer, based on its claims-paying ability.
The obligation of a municipal bond insurance company to pay a claim extends over
the life of each insured bond. Although defaults on insured Municipal Bonds have
been low to date and municipal bond insurers have met their claims, there is no
assurance this will continue. A higher-than-expected default rate could strain
the insurer's loss reserves and adversely affect its ability to pay claims to
bondholders. The number of municipal bond insurers is relatively small, and not
all of them have the highest rating. An SBPA is a liquidity facility provided to
pay the purchase price of bonds that cannot be re-marketed. The obligation of
the liquidity provider (usually a bank) is only to advance funds to purchase
tendered bonds that cannot be remarketed and does not cover principal or
interest under any other circumstances. The liquidity provider's obligations
under the SBPA are usually subject to numerous conditions, including the
continued creditworthiness of the underlying borrower.
The PIMCO Municipal Bond Fund may invest in Residual Interest Bonds, which
are created by dividing the income stream provided by an underlying bond to
create two securities, one short term and one long term. The interest rate on
the short-term component is reset by an index or auction process normally every
seven to 35 days. After income is paid on the short-term securities at current
rates, the residual income goes to the long-term securities. Therefore, rising
short-term interest rates result in lower income for the longer-term portion,
and vice versa. The longer-term bonds can be very volatile and may be less
liquid than other Municipal Bonds of comparable maturity. The PIMCO Municipal
Bond Fund will not invest more than 10% of its total assets in Residual Interest
Bonds.
The PIMCO Municipal Bond Fund also may invest in participation interests.
Participation interests are various types of securities created by converting
fixed rate bonds into short-term, variable rate certificates. These securities
have been developed in the secondary market to meet the demand for short-term,
tax-exempt securities. The Fund will invest only in securities deemed tax-exempt
by a nationally recognized bond counsel, but there is no guarantee the interest
will be exempt because the IRS has not issued a definitive ruling on the matter.
Municipal Bonds are subject to credit and market risk. Generally, prices
of higher quality issues tend to fluctuate less with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues.
The PIMCO Municipal Bond Fund may purchase and sell portfolio investments
to take advantage of changes or anticipated changes in yield relationships,
markets or economic conditions. The Fund may also sell Municipal Bonds due to
changes in the Adviser's evaluation of the issuer or cash needs resulting from
redemption requests for Fund shares. The secondary market for Municipal Bonds
typically has been less liquid than that for taxable debt/fixed income
securities, and this may affect the Fund's ability to sell particular Municipal
Bonds at then-current market prices, especially in periods when other investors
are attempting to sell the same securities.
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Prices and yields on Municipal Bonds are dependent on a variety of factors,
including general money- market conditions, the financial condition of the
issuer, general conditions of the Municipal Bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of Municipal Bonds may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
Obligations of issuers of Municipal Bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of interest and principal on their Municipal Bonds may be materially
affected or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for Municipal Bonds or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments might affect all or
a substantial portion of the Fund's Municipal Bonds in the same manner.
SOCIAL INVESTMENT POLICIES
The PIMCO Low Duration Fund III and PIMCO Total Return Fund III will not,
as a matter of non-fundamental operating policy, invest in the securities of any
issuer determined by the Adviser to be engaged principally in the provision of
healthcare services, the manufacture of alcoholic beverages, tobacco products,
pharmaceuticals, military equipment, or the operation of gambling casinos. The
Funds will also avoid, to the extent possible on the basis of information
available to the Adviser, the purchase of securities of issuers engaged in the
production or trade of pornographic materials. An issuer will be deemed to be
principally engaged in an activity if it derives more than 10% of its gross
revenues from such activities. Evaluation of any particular issuer with respect
to these criteria may involve the exercise of subjective judgment by the
Adviser. The Adviser's determination of issuers engaged in such activities at
any given time will, however, be based upon its good faith interpretation of
available information and its continuing and reasonable best efforts to obtain
and evaluate the most current information available, and to utilize such
information, as it becomes available, promptly and expeditiously in portfolio
management for the Funds. In making its analysis, the Adviser may rely, among
other things, upon information contained in such publications as those produced
by the Investor Responsibility Research Center, Inc.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund's investment objective, except for the PIMCO Global Bond Fund II,
as set forth in the Prospectuses under "Investment Objectives and Policies,"
together with the investment restrictions set forth below, are fundamental
policies of the Fund and may not be changed with respect to a Fund without
shareholder approval by vote of a majority of the outstanding shares of that
Fund. Under these restrictions a Fund may not:
(1) (a) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry,
or, in the case of the PIMCO Municipal Bond Fund, in industrial development
revenue bonds based, directly or indirectly, on the credit of private
entities in any one industry; except that this restriction does not apply
(a) to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (or repurchase agreements with respect
thereto) and (b) with respect to the Money Market Fund, to securities or
obligations issued by U.S.
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banks. Investments of the PIMCO Municipal Bond Fund in utilities, gas,
electric, water and telephone companies will be considered as being in
separate industries;
(b) for the Global Bond Fund II, concentrate more than 25% of the value of
its total assets in any one industry (The SEC staff takes the position that
investments in government securities of a single foreign country (including
agencies and instrumentalities of such government, to the extent such
obligations are backed by the assets and revenues of such government)
represent investments in a separate industry for these purposes.);
(2) with respect to 75% of its assets, invest in a security if, as a result of
such investment, more than 5% of its total assets (taken at market value at
the time of such investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
(This investment restriction is not applicable to the Real Return Bond,
Commercial Mortgage Securities, Global Bond, Global Bond II, Foreign Bond,
International Bond, Emerging Markets Bond or the Emerging Markets Bond II
Funds.). For the purpose of this restriction, each state and each separate
political subdivision, agency, authority or instrumentality of such state,
each multi-state agency or authority, and each guarantor, if any, are
treated as separate issuers of Municipal Bonds;
(3) with respect to 75% of its assets, invest in a security if, as a result of
such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer (This
restriction is not applicable to the Real Return Bond, Commercial Mortgage
Securities, Global Bond, Global Bond II, Foreign Bond, International Bond,
Emerging Markets Bond or the Emerging Markets Bond II Funds.);
(4) (a) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein;
(b) for the Global Bond Fund II, purchase or sell real estate, although it
may purchase securities of issuers which deal in real estate, including
securities of real estate investment trusts, and may purchase securities
which are secured by interests in real estate;
(5) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit a Fund, subject to
restrictions described in the Prospectuses and elsewhere in this Statement
of Additional Information, from purchasing, selling or entering into
futures contracts, options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate, securities-
related or foreign currency-related hedging instrument, including swap
agreements and other derivative instruments, subject to compliance with any
applicable provisions of the federal securities or commodities laws (This
restriction is not applicable to the Global Bond Fund II, but see non-
fundamental restriction "F".);
(6) for the Total Return III, High Yield, International Bond and StocksPLUS
Funds: purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but
it may make margin deposits in connection with transactions in options,
futures, and options on futures;
(7) (a) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that a Fund may (i) borrow from banks or
enter into reverse repurchase agreements, or employ similar investment
techniques, and pledge its assets in connection therewith, but only if
immediately after each borrowing there is asset coverage of 300% and (ii)
enter into transactions in options, futures, options on futures, and other
derivative instruments as described in the Prospectuses and in this
Statement of Additional Information (the deposit of assets in escrow in
connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis,
collateral arrangements with respect to initial or variation
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margin deposits for futures contracts and commitments entered into under
swap agreements or other derivative instruments, will not be deemed to be
pledges of a Fund's assets);
(b) for the Global Bond Fund II, borrow money in excess of 10% of the value
(taken at the lower of cost or current value) of the Fund's total assets
(not including the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the meeting of
redemption requests (not for leverage) which might otherwise require the
untimely disposition of portfolio investments or for extraordinary or
emergency purposes (Such borrowings will be repaid before any additional
investments are purchased.); or pledge, hypothecate, mortgage or otherwise
encumber its assets in excess of 10% of the Fund's total assets (taken at
cost) and then only to secure borrowings permitted above (The deposit of
securities or cash or cash equivalents in escrow in connection with the
writing of covered call or put options, respectively, is not deemed to be
pledges or other encumbrances. For the purpose of this restriction,
collateral arrangements with respect to the writing of options, futures
contracts, options on futures contracts, and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge of
assets and neither such arrangements nor the purchase or sale of futures or
related options are deemed to be the issuance of a senior security.);
(8) lend any funds or other assets, except that a Fund may, consistent with its
investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances
and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and
(c) lend its portfolio securities in an amount not to exceed one-third of
the value of its total assets, provided such loans are made in accordance
with applicable guidelines established by the Securities and Exchange
Commission and the Trustees of the Trust (This restriction is not
applicable to the Global Bond Fund II, but see non-fundamental restriction
"G".);
(9) (a) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under the federal securities laws;
(b) for the Global Bond Fund II, underwrite securities issued by other
persons except to the extent that, in connection with the disposition of
its portfolio investments, it may be deemed to be an underwriter under
federal securities laws; or
(10) (a) for the Total Return III, High Yield, and StocksPLUS Funds: maintain
a short position, or purchase, write or sell puts, calls, straddles,
spreads or combinations thereof, except as set forth in the Prospectuses
and in this Statement of Additional Information for transactions in
options, futures, options on futures, and transactions arising under swap
agreements or other derivative instruments;
(b) for the Money Market, Short-Term, Low Duration, Low Duration II, Low
Duration III, Low Duration Mortgage, Moderate Duration, Total Return, Total
Return II, Total Return Mortgage, Commercial Mortgage Securities, Long-Term
U.S. Government, Long Duration, Global Bond, Foreign Bond, International,
Emerging Markets Bond, Emerging Markets Bond II, Strategic Balanced and
StocksPLUS Short Strategy Funds: maintain a short position, or purchase,
write or sell puts, calls, straddles, spreads or combinations thereof,
except on such conditions as may be set forth in the Prospectuses and in
this Statement of Additional Information.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund is also subject to the following non-fundamental restrictions and
policies (which may be changed without shareholder approval) relating to the
investment of its assets and activities. Unless otherwise indicated, a Fund may
not:
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(A) (a) invest more than 15% of the net assets of a Fund (10% in the case of
the PIMCO Money Market Fund) (taken at market value at the time of the
investment) in "illiquid securities," illiquid securities being defined to
include securities subject to legal or contractual restrictions on resale
(which may include private placements), repurchase agreements maturing in
more than seven days, certain loan participation interests, fixed time
deposits which are not subject to prepayment or provide for withdrawal
penalties upon prepayment (other than overnight deposits), certain options
traded over the counter that a Fund has purchased, securities or other
liquid assets being used to cover such options a Fund has written,
securities for which market quotations are not readily available, or other
securities which legally or in the Adviser's opinion may be deemed illiquid
(other than securities issued pursuant to Rule 144A under the Securities
Act of 1933 and certain commercial paper that PIMCO has determined to be
liquid under procedures approved by the Board of Trustees);
(b) for the Global Bond Fund II, invest in (a) securities which at the
time of such investment are not readily marketable, (b) securities the
disposition of which is restricted under federal securities laws, (c)
repurchase agreements maturing in more than seven days (d) OTC options (to
the extent described below), and (e) IO/PO stripped mortgage-backed
securities (as defined in the Prospectuses) if, as a result, more than 15%
of the Fund's net assets, taken at current value, would then be invested in
securities described in (a), (b), (c), (d) and (e) above (For the purpose
of this restriction securities subject to a 7-day put option or convertible
into readily saleable securities or commodities are not included with
subsections (a) or (b).); or purchase securities the disposition of which
is restricted under the federal securities laws (excluding for purposes of
this restriction securities offered and sold pursuant to Rule 144A of the
Securities Act of 1933 and Section 4(2) commercial paper) if, as a result,
such investments would exceed 10% of the value of the net assets of the
Fund;
(B) (a) for the PIMCO Money Market, Short-Term, Low Duration, Low Duration II,
Low Duration III, Moderate Duration, Total Return, Total Return II,
Commercial Mortgage Securities, Long-Term U.S. Government, Long Duration,
Municipal Bond, Global Bond, Foreign Bond, Strategic Balanced and
StocksPLUS Short Strategy Funds: purchase securities on margin, except for
use of short-term credit necessary for clearance of purchases and sales of
portfolio securities, but it may make margin deposits in connection with
covered transactions in options, futures, options on futures and short
positions;
(b) for the Global Bond Fund II, purchase securities on margin, except such
short-term credits as may be necessary for the clearance of purchases and
sales of securities (For this purpose, the deposit or payment by the Fund
of initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a security
on margin.);
(C) invest more than 5% (10% in the case of the PIMCO Low Duration Mortgage and
Total Return Mortgage Funds) of the assets of a Fund (taken at market value
at the time of investment) in any combination of interest only, principal
only, or inverse floating rate securities (This restriction is not
applicable to the Global Bond Fund II, but see fundamental investment
restriction 7(b).);
(D) borrow money (excluding uncovered dollar rolls, reverse repurchase
agreements, sale-buybacks, and economically similar transactions, which are
subject to the Fund's fundamental borrowing restriction), except for
temporary administrative purposes (This restriction is not applicable to
the Global Bond Fund II, but see fundamental investment restriction 7(b).);
(E) for the Global Bond Fund II, make short sales of securities or maintain a
short position for the account of the Fund unless at all times when a short
position is open the Fund owns an equal amount of such securities or owns
securities which, without payment of any further consideration,
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are convertible into or exchangeable for securities of the same issue as,
and equal in amount to, the securities sold short;
(F) for the Global Bond Fund II, purchase or sell commodities or commodity
contracts except that the Fund may purchase and sell financial futures
contracts and related options;
(G) for the Global Bond Fund II, make loans, except by purchase of debt
obligations or by entering into repurchase agreements or through the
lending of the Fund's portfolio securities with respect to not more than
25% of its total assets;
(H) for the Global Bond Fund II, write (sell) or purchase options except that
the Fund may (a) write covered call options or covered put options on
securities that it is eligible to purchase (and on stock indices) and enter
into closing purchase transactions with respect to such options, and (b) in
combination therewith, or separately, purchase put and call options on
securities it is eligible to purchase; provided that the premiums paid by
the Fund on all outstanding options it has purchased do not exceed 5% of
its total assets (The Fund may enter into closing sale transactions with
respect to options it has purchased.);
In addition, the Trust has adopted a non-fundamental policy pursuant to
which each Fund that may invest in securities denominated in foreign currencies,
except the PIMCO Global Bond, Emerging Markets Bond and Emerging Markets Bond II
Funds, will hedge at least 75% of its exposure to foreign currency using the
techniques described in the Prospectuses. There can be no assurance that
currency hedging techniques will be successful.
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes
if it is repaid within sixty days and is not extended or renewed.
Notwithstanding the provisions of fundamental investment restriction (7)(a)
above, a Fund may borrow money for temporary administrative purposes. To the
extent that borrowings for temporary administrative purposes exceed 5% of the
total assets of a Fund (except the PIMCO Global Bond Fund II), such excess shall
be subject to the 300% asset coverage requirement of that restriction.
To the extent a Fund covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the segregation of assets
determined to be liquid in accordance with procedures adopted by the Trustees,
equal in value to the amount of the Fund's commitment to repurchase, such an
agreement will not be considered a "senior security" by the Fund and therefore
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by the Fund.
The staff of the SEC has taken the position that purchased over-the-counter
("OTC") options and the assets used as cover for written OTC options are
illiquid securities. Therefore, the Funds have adopted an investment policy
pursuant to which a Fund will not purchase or sell OTC options if, as a result
of such transactions, the sum of the market value of OTC options currently
outstanding which are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding which were sold by
the Fund and margin deposits on the Fund's existing OTC options on futures
contracts exceeds 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are otherwise
not readily marketable. However, if an OTC option is sold by the Fund to a
primary U.S. Government securities dealer recognized by the Federal Reserve Bank
of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities equal to
the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
is not a fundamental policy of the
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Funds and may be amended by the Trustees without the approval of shareholders.
However, the Funds will not change or modify this policy prior to the change or
modification by the SEC staff of its position.
Unless otherwise indicated, all limitations applicable to Fund investments
(as stated above and elsewhere in this Statement of Additional Information)
apply only at the time a transaction is entered into. Any subsequent change in a
rating assigned by any rating service to a security (or, if unrated, deemed to
be of comparable quality), or change in the percentage of Fund assets invested
in certain securities or other instruments, or change in the average duration of
a Fund's investment portfolio, resulting from market fluctuations or other
changes in a Fund's total assets will not require a Fund to dispose of an
investment until the Adviser determines that it is practicable to sell or close
out the investment without undue market or tax consequences to the Fund. In the
event that ratings services assign different ratings to the same security, the
Adviser will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the several assigned
ratings.
NON-FUNDAMENTAL OPERATING POLICIES RELATING TO THE SALE OF SHARES OF PIMCO TOTAL
RETURN FUND IN JAPAN
In connection with an offering of Administrative Class shares of the PIMCO
Total Return Fund in Japan, the Trust has adopted the following non-fundamental
operating policies (which may be changed without shareholder approval) with
respect to the PIMCO Total Return Fund. These non-fundamental policies will
remain in effect only so long as (i) they are required in accordance with
standards of the Japanese Securities Dealers Association and (ii) shares of the
PIMCO Total Return Fund are being offered in Japan.
(1) The Trust will not sell shares of the PIMCO Total Return Fund in Japan
except through PIMCO Funds Distributors LLC.
(2) The Trust will not sell shares of the PIMCO Total Return Fund in Japan with
any special services, such as life insurance and pension, and/or any
commodities.
(3) The Trust has appointed, and will maintain the appointment of, a bank or
trust company as the place for safe-keeping of its assets in connection
with the PIMCO Total Return Fund.
(4) The Tokyo District Court shall have the jurisdiction over any and all
litigation related to transactions in any class of shares of the PIMCO
Total Return Fund acquired by Japanese investors as required by Section
5(2) of the Standards of Foreign Investment Fund Securities of the Japan
Securities Dealers Association.
(5) The assets of the PIMCO Total Return Fund may not be used to underwrite
securities issued by other persons.
(6) The PIMCO Total Return Fund may not make short sales of securities or
maintain a short position for the account of the Fund unless at all times
when a short position is open it owns an equal amount of such securities or
owns securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short.
(7) The PIMCO Total Return Fund may not borrow money in excess of 10% of the
value (taken at the lower of cost or current value) of its total assets
(not including the amount borrowed) at the time the borrowing is made,
except for extraordinary or emergency purposes, such as in the case of a
merger, amalgamation or the like.
30
<PAGE>
(8) The PIMCO Total Return Fund may not invest in voting securities of any
issuer if, immediately after such investment, more than 10% of the total
assets of the Fund (taken at current value) would be invested in such
securities of such issuer.
(9) The PIMCO Total Return Fund may not acquire more than 10% of the
outstanding voting securities of any issuer; and may not acquire more than
15% of the outstanding voting securities of any issuer, if aggregated with
the portion of holding in such securities by any and all other mutual funds
managed by PIMCO.
(10) The PIMCO Total Return Fund may not invest more than 10% of its total
assets in the securities of any other investment funds or companies, except
as they may be acquired temporarily as part of a merger, consolidation or
acquisition of assets.
(11) The PIMCO Total Return Fund may not invest more than 10% of its total
assets in voting securities privately placed, mortgage securities or
unlisted voting securities which cannot be readily disposed of. This
restriction shall not be applicable to securities determined by PIMCO to be
liquid and for which a market price (including a dealer quotation) is
generally obtainable or determinable.
(12) The PIMCO Total Return Fund many not grant any rights or privileges to
purchase shares of the Fund to shareholders or investors by issuing
warrants, subscription rights or options, or other similar rights.
(13) None of the portfolio securities of the PIMCO Total Return Fund may be
purchased from or sold or loaned to any Trustee of the Trust, PIMCO, acting
as investment adviser of the Trust, or any affiliate thereof or any of
their directors, officers or employees, or any major shareholder thereof
(meaning a shareholder who holds to the actual knowledge of PIMCO, on his
own account whether in his own or other name (as well as a nominee's name),
10% or more of the total issued outstanding shares of such a company)
acting as principal or for their own account unless the transaction is made
within the investment restrictions set forth in the Fund's prospectus and
statement of additional information and either (i) at a price determined by
current publicly available quotations (including a dealer quotation) or
(ii) at competitive prices or interest rates prevailing from time to time
on internationally recognized securities markets or internationally
recognized money markets (including a dealer quotation).
All percentage limitations on investments described in the restrictions
relating to the sale of shares in Japan will apply at the time of the making of
an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment. If any violation of the foregoing investment restrictions occurs,
the Trust will, promptly after discovery of the violations, take such action as
may be necessary to cause the violation to cease, which shall be the only
obligation of the Trust and the only remedy in respect of the violation.
31
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Trust, their business address
and principal occupations during the past five years are as follows (unless
otherwise indicated, the address of all persons below is 840 Newport Center
Drive, Suite 300, Newport Beach, California 92660):
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE THE TRUST DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brent R. Harris* Chairman of the Board and Managing Director, PIMCO; Board of Governors,
Age 39 Trustee Investment Company Institute; Director,
Harris Holdings; Director, Harris Oil
Company; Chairman and Director, PIMCO
Commercial Mortgage Securities Trust, Inc.;
Chairman and Trustee, PIMCO Variable
Insurance Trust.
R. Wesley Burns* President and Trustee Executive Vice President, PIMCO; President
Age 39 and Director, PIMCO Commercial Mortgage
Securities Trust, Inc.; President and
Trustee, PIMCO Variable Insurance Trust;
Executive Vice President, PIMCO Funds:
Multi-Manager Series. Formerly Vice
President, PIMCO.
Guilford C. Babcock Trustee Associate Professor of Finance, University of
1575 Circle Drive Southern California; Director, PIMCO
San Marino, California Commercial Mortgage Securities Trust, Inc.;
91108 Trustee, PIMCO Variable Insurance Trust;
Age 67 Director, Growth Fund of America and
Fundamental Investors Fund of the Capital
Group; Director, Good Hope Medical Foundation.
Vern O. Curtis Trustee Private Investor; Director, PIMCO Commercial
14158 N.W. Bronson Creek Drive Mortgage Securities Trust, Inc.; Trustee,
Portland, Oregon PIMCO Variable Insurance Trust; Director,
97229 American Office Park Properties, Inc., a Real
Age 64 Estate Investment Trust; Director, Fresh
Choice, Inc. Formerly charitable work, The
Church of Jesus Christ of Latter Day Saints.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE THE TRUST DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas P. Kemp Trustee Private Investor; Director, PIMCO Commercial
1141 Marine Drive Mortgage Securities Trust, Inc.; Trustee,
Laguna Beach, California PIMCO Variable Insurance Trust. Formerly
92651 Co-Chairman, U.S. Committee to Assist Russian
Age 68 Reform; Director, Union Financial Corp.;
Senior Consultant, World Cup 1994 Organizing
Committee.
William J. Popejoy Trustee Director, PacPro (formerly Western Printing);
29 Chatham Court Director, PIMCO Commercial Mortgage
Newport Beach, California Securities Trust, Inc.; Trustee, PIMCO
92660 Variable Insurance Trust. Formerly Director,
Age 60 California State Lottery; Chief Executive
Officer, Orange County, California.
William H. Gross Senior Vice President Managing Director, PIMCO; Senior Vice
Age 54 President, PIMCO Variable Insurance Trust.
Margaret Isberg Senior Vice President Executive Vice President, PIMCO.
Age 42
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO. Formerly Vice
Age 46 President, PIMCO.
Michael G. Dow Vice President Account Manager, PIMCO. Formerly Fixed
Age 35 Income Specialist, Salomon Brothers, Inc.;
Vice President Operations, Citibank NA Global
Consumer Banking Group.
U. Teri Frisch Vice President Account Manager, PIMCO.
Age 45
Raymond C. Hayes Vice President Account Manager, PIMCO. Formerly Marketing
Age 53 Director, Pacific Financial Asset Management
Corporation.
Thomas J. Kelleher, III Vice President Vice President, PIMCO. Previously associated
Age 48 with Delaware, Mellon and Girard Trusts.
Andre Mallegol Vice President Vice President, PIMCO. Formerly associated
Age 32 with Fidelity Investments Institutional
Services Company.
Dean S. Meiling Vice President Managing Director, PIMCO.
Age 50
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE THE TRUST DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James F. Muzzy Vice President Managing Director, PIMCO; Senior Vice
Age 59 President, PIMCO Variable Insurance Trust.
Douglas J. Ongaro Vice President Account Manager, PIMCO. Formerly Regional
Age 37 Marketing Manager, Charles Schwab & Co., Inc.
David J. Pittman Vice President Vice President, PIMCO. Formerly a senior
Age 50 executive with Bank of America, the Northern
Trust Co. and NationsBank.
Mark A. Romano Vice President Account Manager, PIMCO. Previously
Age 40 associated with Wells Fargo's institutional
money management group and First Interstate's
Pacifica family of mutual funds.
Jeffrey M. Sargent Vice President Vice President and Manager of Investment
Age 35 Operations Shareholder Services, PIMCO; Vice
President, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds:
Multi-Manager Series and PIMCO Variable
Insurance Trust.
William S. Thompson, Jr. Vice President Chief Executive Officer and Managing
Age 53 Director, PIMCO; Senior Vice President, PIMCO
Variable Insurance Trust. Formerly Managing
Director, Salomon Brothers, Inc.
Kristen M. Wilsey Vice President Senior Vice President, PIMCO. Formerly Vice
Age 38 President, Account Manager, PIMCO.
John P. Hardaway Treasurer Vice President and Manager of Investment
Age 41 Operations Accounting, PIMCO; Treasurer,
PIMCO Commercial Mortgage Securities Trust,
Inc., PIMCO Funds: Multi-Manager Series and
PIMCO Variable Insurance Trust.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE THE TRUST DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Garlin G. Flynn Secretary Specialist, PIMCO; Secretary, PIMCO
Age 52 Commercial Mortgage Securities Trust, Inc.
and PIMCO Variable Insurance Trust; Assistant
Secretary, PIMCO Funds: Multi-Manager Series.
Formerly Senior Fund Administrator, PIMCO;
Senior Mutual Fund Analyst, PIMCO Advisors
Institutional Services.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Fund Taxation,
Age 34 PIMCO; Assistant Treasurer, PIMCO Funds:
Multi-Manager Series, PIMCO Commercial
Mortgage Securities Trust, Inc. and PIMCO
Variable Insurance Trust. Formerly Director
of Financial Reporting, Carl I. Brown & Co.;
Tax Manager, Price Waterhouse LLP.
Michael J. Willemsen Assistant Secretary Manager, PIMCO; Assistant Secretary, PIMCO
Age 38 Commercial Mortgage Securities Trust, Inc.
and PIMCO Variable Insurance Trust. Formerly
Project Lead, PIMCO.
</TABLE>
___________________
*Each of Mr. Harris and Mr. Burns is an "interested person" of the Trust
(as that term is defined in the 1940 Act) because of his affiliations with
PIMCO.
COMPENSATION TABLE
The following table sets forth information regarding compensation received
by the Trustees for the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION TRUST AND FUND COMPLEX
NAME AND POSITION FROM TRUST/1/ PAID TO TRUSTEES/2/
----------------- --------------- -----------------------
<S> <C> <C>
Guilford C. Babcock $57,500 $70,500
Trustee
Vern O. Curtis $60,090 $74,123
Trustee
Thomas P. Kemp $57,500 $70,500
Trustee
William J. Popejoy $57,500 $70,500
Trustee
</TABLE>
____________________
/1/ Each Trustee, other than those affiliated with the Adviser or its
affiliates, receives an annual retainer of $45,000 plus $3,000 for each
Board of Trustees meeting attended in person and $500 for each meeting
attended telephonically, plus reimbursement of related expenses. In
addition, a
35
<PAGE>
Trustee serving as a Committee Chair, other than those affiliated with the
Adviser or its affiliates, receives an additional annual retainer of
$1,500. For the fiscal year ended March 31, 1998, the unaffiliated Trustees
as a group received compensation in the amount of $232,590.
/2/ Each Trustee also serves as a Director of PIMCO Commercial Mortgage
Securities Trust, Inc., a registered closed-end management investment
company, and as a Trustee of PIMCO Variable Insurance Trust, a registered
open-end management investment company. For their services to PIMCO
Commerical Mortgage Securities Trust, Inc., the Directors listed above
received an annual retainer of $6,000 plus $1,000 for each Board of
Directors meeting attended in person and $500 for each meeting attended
telephonically, plus reimbursement of related expenses. In addition, a
Director serving as a Committee Chair, other than those affiliated with the
Adviser or its affiliates, receives an additional annual retainer of $500.
For the one year period ended March 31, 1998, the unaffiliated Directors as
a group received compensation in the amount of $42,790.
The Trustees listed above, for their services as Trustees of PIMCO Variable
Insurance Trust, receive an annual retainer of $4,000 plus $1,500 for each
Board of Trustees meeting attended in person and $250 for each meeting
attended telephonically, plus reimbursement of related expenses. In
addition, a Trustee serving as a Committee Chair, other than those
affiliated with the Adviser or it affiliates, receives an additional annual
retainer of $500. For the one year period ended March 31, 1998, the
unaffiliated Trustees as a group received compensation in the amount of
$10,243.
INVESTMENT ADVISER
PIMCO serves as investment adviser to the Funds pursuant to an investment
advisory contract ("Advisory Contract") between PIMCO and the Trust. PIMCO is a
subsidiary partnership of PIMCO Advisors. The general partners of PIMCO Advisors
are PIMCO Partners, G.P. and PIMCO Advisors Holdings L.P. ("PAH"). PIMCO
Partners, G.P. is a general partnership between PIMCO Holding LLC, a Delaware
limited liability company and an indirect wholly-owned subsidiary of Pacific
Life Insurance Company, and PIMCO Partners LLC, a California limited liability
company controlled by the current Managing Directors and two former Managing
Directors of PIMCO. PIMCO Partners, G.P. is the sole general partner of PAH.
PIMCO is responsible for making investment decisions and placing orders for
the purchase and sale of the Trust's investments directly with the issuers or
with brokers or dealers selected by it in its discretion. See "Portfolio
Transactions." PIMCO also furnishes to the Board of Trustees, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of each Fund.
Under the terms of the Advisory Contract, PIMCO is obligated to manage the
Funds in accordance with applicable laws and regulations. The investment
advisory services of PIMCO to the Trust are not exclusive under the terms of the
Advisory Contract. PIMCO is free to, and does, render investment advisory
services to others. The current Advisory Contract was approved by the Board of
Trustees, including a majority of the Trustees who are not parties to the
Advisory Contract or interested persons of such parties ("Independent
Trustees"), at a meeting held on November 22, 1994, as supplemented at meetings
held on October 1, 1995, November 21, 1995, February 27, 1996, November 19,
1996, January 14, 1997, May 27, 1997, February 24, 1998, and August 25, 1998,
and was last approved by the Trustees on August 25, 1998 and by shareholders of
all then-operational Funds on October 17, 1994.
The Advisory Contract will continue in effect on a yearly basis provided
such continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Trust or by the Board of Trustees and (ii)
by a majority of the Independent Trustees. The Advisory Contract may be
terminated without penalty by vote of the Trustees or the shareholders of the
Trust, or by the Adviser, on 60 days' written notice by either party to the
contract and will terminate automatically if assigned.
36
<PAGE>
The Adviser currently receives a monthly investment advisory fee from each
Fund at an annual rate based on average daily net assets of the Funds as
follows:
ADVISORY
FUND FEE RATE
- ---- --------
Money Market Fund.......................................... 0.15%
Commercial Mortgage Securities, Strategic Balanced,
StocksPLUS, and StocksPLUS Short Strategy Funds........... 0.40%
Emerging Markets Bond and Emerging Markets Bond II Funds... 0.45%
All other Funds............................................ 0.25%
For the fiscal years ended March 31, 1998, 1997, and 1996, the aggregate
amount of the advisory fees paid by each operational Fund was as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/98 3/31/97 3/31/96
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund* $ 205,384 $ 67,626 $ 10,118
Short-Term Fund 487,226 311,485 249,319
Low Duration Fund 7,416,427 6,877,132 6,267,607
Low Duration Fund II 869,853 685,047 575,730
Low Duration Fund III 32,700 6,114 N/A
Low Duration Mortgage Fund 5,914 N/A N/A
Moderate Duration Fund 294,466 6,525 N/A
Real Return Bond Fund 18,838 2,453 N/A
Total Return Fund 38,327,843 29,232,090 22,775,075
Total Return Fund II* 1,145,766 1,171,011 486,935
Total Return Fund III 701,110 423,216 327,029
Total Return Mortgage Fund 5,679 N/A N/A
High Yield Fund 3,670,999 1,983,580 1,186,819
Long-Term U.S. Government Fund 117,242 64,058 101,042
Global Bond Fund 642,260 423,547 264,783
Global Bond Fund II** 50,123 41,683 N/A
Foreign Bond Fund 811,698 541,283 640,157
International Bond Fund 2,045,487 2,810,494 4,937,820
Emerging Markets Bond Fund 11,365 N/A N/A
Strategic Balanced Fund 117,547 31,660 N/A
StocksPLUS Fund 1,919,328 779,413 324,388
</TABLE>
- --------------------
*The PIMCO Money Market Fund, for the fiscal year ended October 31, 1995,
paid aggregate advisory fees in the amount of $14,500. The PIMCO Total Return
Fund II, for the fiscal year ended October 31, 1995, paid aggregate advisory
fees in the amount of $1,009,081. See "The Reorganization of the PIMCO Money
Market and Total Return II Funds" for additional information.
**The PIMCO Global Bond Fund II, for the fiscal year ended September 30,
1996, paid aggregate management fees in the amount of $54,325, pursuant to a
management contract between PIMCO Advisors Funds and PIMCO Advisors, under which
PIMCO Advisors provided or procured investment advisory services for the Fund.
See "The Reorganization of the PIMCO Global Bond Fund II" for additional
information.
In connection with the former expense limitation provision, which was
terminated October 1, 1995, the Adviser reimbursed advisory fees for the fiscal
years ended March 31, 1998, 1997, and 1996, in the following amounts:
37
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/98 3/31/97 3/31/96
- ---- ------- ------- -------
<S> <C> <C> <C>
Short-Term Fund $ 0 $ 0 $ 10,244
Low Duration Fund II 0 0 0
Total Return Fund III 0 0 1,775
High Yield Fund 0 0 0
Long-Term U.S. Government Fund 0 0 13,554
Global Bond Fund 0 0 (17,114)
StocksPLUS Fund 0 0 26,176
</TABLE>
FUND ADMINISTRATOR
PIMCO also serves as Administrator to the Funds pursuant to an
administration agreement (the "Administration Agreement") with the Trust. PIMCO
provides the Funds with certain administrative and shareholder services
necessary for Fund operations and is responsible for the supervision of other
Fund service providers. PIMCO may in turn use the facilities or assistance of
its affiliates to provide certain services under the Administration Agreement,
on terms agreed between PIMCO and such affiliates. The administrative services
provided by PIMCO include but are not limited to: (1) shareholder servicing
functions, including preparation of shareholder reports and communications, (2)
regulatory compliance, such as reports and filings with the SEC and state
securities commissions, and (3) general supervision of the operations of the
Funds, including coordination of the services performed by the Funds' transfer
agent, custodian, legal counsel, independent accountants, and others. PIMCO (or
an affiliate of PIMCO) also furnishes the Funds with office space facilities
required for conducting the business of the Funds, and pays the compensation of
those officers, employees and Trustees of the Trust affiliated with PIMCO. In
addition, PIMCO, at its own expense, arranges for the provision of legal, audit,
custody, transfer agency and other services for the Funds, and is responsible
for the costs of registration of the Trust's shares and the printing of
prospectuses and shareholder reports for current shareholders. PIMCO has
contractually agreed to provide these services, and to bear these expenses, at
the following rates for each Fund (each expressed as a percentage of the Fund's
average daily net assets attributable to its classes of shares on an annual
basis):
38
<PAGE>
<TABLE>
<CAPTION>
ADMINISTRATIVE FEE RATE
-----------------------
INSTITUTIONAL AND CLASS A,
FUND ADMINISTRATIVE CLASS B AND C CLASS D*
- ---- -------------------- -------- --------
<S> <C> <C> <C>
Money Market 0.20% 0.35% 0.45%
Short-Term Fund 0.20% 0.35% 0.50%
Low Duration and Total Return
Funds 0.18% 0.40% 0.50%
Moderate Duration Fund 0.20% 0.40% 0.65%
Municipal Bond Fund 0.25% 0.35% 0.60%
Global Bond and Global Bond II
Funds 0.30% 0.45% 0.70%
Foreign Bond and International
Bond Funds 0.25% 0.45% 0.70%
Emerging Markets Bond and Emerging
Markets Bond II Funds 0.40% 0.55% 0.80%
All other Funds 0.25% 0.40% 0.65%
</TABLE>
__________________
* As described below, the Administration Agreement includes a plan adopted
under Rule 12b-1 which provides for the payment of up to .25% of the Class
D Administrative Fee rate as reimbursement for expenses in respect of
activities that may be deemed to be primarily intended to result in the
sale of Class D shares.
Except for the expenses paid by PIMCO, the Trust bears all costs of its
operations. The Funds are responsible for: (i) salaries and other compensation
of any of the Trust's executive officers and employees who are not officers,
directors, stockholders, or employees of PIMCO or its subsidiaries or
affiliates; (ii) taxes and governmental fees; (iii) brokerage fees and
commissions and other portfolio transaction expenses; (iv) costs of borrowing
money, including interest expenses; (v) fees and expenses of the Trustees who
are not "interested persons" of PIMCO or the Trust, and any counsel retained
exclusively for their benefit; (vi) extraordinary expenses, including costs of
litigation and indemnification expenses; (vii) expenses, such as organizational
expenses, which are capitalized in accordance with generally accepted accounting
principles; and (viii) any expenses allocated or allocable to a specific class
of shares ("Class-specific expenses").
Class-specific expenses include distribution and service fees payable with
respect to different classes of shares and administrative fees as described
above, and may include certain other expenses as permitted by the Trust's
Amended and Restated Multi-Class Plan adopted pursuant to Rule 18f-3 under the
1940 Act and subject to review and approval by the Trustees.
The Administration Agreement may be terminated by the Trustees, or by a
vote of a majority of the outstanding voting securities of the Trust, Fund, or
Class as applicable, at any time on 60 days' written notice. Following the
expiration of the one-year period commencing with the effectiveness of the
Administration Agreement, it may be terminated by PIMCO, also on 60 days'
written notice.
The Administration Agreement is subject to annual approval by the Board,
including a majority of the Trust's Independent Trustees (as that term is
defined in the 1940 Act). The current Administration Agreement was approved by
the Board of Trustees, including all of the Independent Trustees at a meeting
held on February 24, 1998, as supplemented on August 25, 1998. In approving the
Administration Agreement, the Trustees determined that: (1) the Administration
Agreement is in the best interests of the Funds and their shareholders; (2) the
services to be performed under the Agreement are services required for the
operation of the Funds; (3) PIMCO is able to provide, or to procure, services
for the Funds which are at least equal in nature and quality to services that
could be provided by others; and (4) the fees to be charged pursuant to the
Agreement are fair and reasonable in light of the usual and customary charges
made by others for services of the same nature and quality.
39
<PAGE>
Under the Administration Agreement, the Administrator or an affiliate may
pay financial service firms a portion of the Class D administration fees in
return for the firms' services (normally not to exceed an annual rate of .35% of
a Fund's average daily net assets attributable to Class D shares purchase
through such firms). The Administration Agreement includes a plan specific to
Class D shares that has been adopted in conformity with the requirements set
forth under Rule 12b-1 of the 1940 Act to allow for payment of up to .25% per
annum of the Class D administrative fees as reimbursement for expenses in
respect of activities that may be deemed to be primarily intended to result in
the sale of Class D shares. The principal types of activities for which such
payments may be made are services in connection with the distribution and
marketing of Class D shares and/or the provision of shareholder services. See
"Distribution of Trust Shares - Plan for Class D Shares."
For the fiscal years ended March 31, 1998, 1997, and 1996, the aggregate
amount of the administration fees paid by each operational Fund was as follows
(Class D shares were not offered during the periods listed):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/98 3/31/97 3/31/96
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund* $ 423,936 $ 117,570 $ 13,462
Short-Term Fund 410,894 249,655 137,477
Low Duration Fund 5,665,996 5,005,045 3,520,078
Low Duration Fund II 869,853 685,047 391,248
Low Duration Fund III 32,700 6,114 N/A
Low Duration Mortgage Fund 5,914 N/A N/A
Moderate Duration Fund 235,572 5,220 N/A
Real Return Bond Fund 21,841 2,503 N/A
Total Return Fund 29,219,721 21,266,359 13,084,413
Total Return Fund II* 1,145,766 1,171,011 486,935
Total Return Fund III 701,110 423,216 217,584
Total Return Mortgage Fund 5,679 N/A N/A
High Yield Fund 4,258,485 2,071,177 842,032
Long-Term U.S. Government Fund 130,444 64,374 65,155
Global Bond Fund 770,719 508,256 208,234
Global Bond Fund II** 87,617 14,646 N/A
Foreign Bond Fund 849,691 540,519 428,175
International Bond Fund 2,045,487 2,810,494 3,800,674
Emerging Markets Bond Fund 10,526 N/A N/A
Strategic Balanced Fund 73,467 19,788 N/A
StocksPLUS Fund 1,392,509 491,519 149,888
</TABLE>
- --------------------
*The PIMCO Money Market Fund, for the fiscal year ended October 31, 1995,
paid aggregate administration fees in the amount of $24,166. The PIMCO Total
Return Fund II, for the fiscal year ended October 31, 1995, paid aggregate
administration fees in the amount of $1,009,081. See "The Reorganization of the
PIMCO Money Market and Total Return II Funds" for additional information.
**The PIMCO Global Bond Fund II, for the fiscal year ended September 30,
1996, paid aggregate management fees in the amount of $54,325, pursuant to a
management contract between PIMCO Advisors Funds and PIMCO Advisors, under which
PIMCO Advisors provided or procured administrative services for the Fund. See
"The Reorganization of the PIMCO Global Bond Fund II" for additional
information.
In connection with the former expense limitation provision which was
terminated October 1, 1995, the Administrator reimbursed administration fees for
the fiscal years ended March 31, 1998, 1997, and 1996, in the following amounts:
40
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 3/31/98 3/31/97 3/31/96
- ---- ------- ------- -------
<S> <C> <C> <C>
Short-Term Fund $ 0 $ 0 $ 2,923
Low Duration Fund II 0 0 0
Total Return Fund III 0 0 507
High Yield Fund 0 0 0
Long-Term U.S. Government Fund 0 0 3,867
Global Bond Fund 0 0 (4,884)
StocksPLUS Fund 0 0 7,469
</TABLE>
DISTRIBUTION OF TRUST SHARES
DISTRIBUTOR AND MULTI-CLASS PLAN
PIMCO Funds Distributors LLC (the "Distributor") serves as the distributor
of each class of the Trust's shares pursuant to a distribution contract
("Distribution Contract") with the Trust which is subject to annual approval by
the Board. The Distributor is a wholly owned subsidiary of PIMCO Advisors. The
Distribution Contract is terminable with respect to a Fund or class without
penalty, at any time, by the Fund or class by not more than 60 days' nor less
than 30 days' written notice to the Distributor, or by the Distributor upon not
more than 60 days' nor less than 30 days' written notice to the Trust. The
Distributor is not obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect with respect to each Fund
and each class of shares thereof for successive one-year periods, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Trustees who are not interested persons of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the Distribution
Contract, the Administration Agreement or the Distribution and/or Servicing
Plans described below; and (ii) by the vote of a majority of the entire Board of
Trustees cast in person at a meeting called for that purpose. If the
Distribution Contract is terminated (or not renewed) with respect to one or more
Funds or classes thereof, it may continue in effect with respect to any class of
any Fund as to which it has not been terminated (or has been renewed).
The Trust offers six classes of shares: Class A, Class B, Class C, Class D,
the Institutional Class and the Administrative Class.
Class A, Class B and Class C shares of the Trust are offered through firms
("participating brokers") which are members of the National Association of
Securities Dealers, Inc. ("NASD"), and which have dealer agreements with the
Distributor, or which have agreed to act as introducing brokers for the
Distributor ("introducing brokers").
Class D shares are generally offered to clients of financial service firms,
such as broker-dealers or registered investment advisors, with which the
Distributor has an agreement for the use of PIMCO Funds: Pacific Investment
Management Series in particular investment products, programs or accounts for
which a fee may be charged.
Institutional Class shares are offered primarily for direct investment by
investors such as pension and profit sharing plans, employee benefit trusts,
endowments, foundations, corporations and high net individuals. (Institutional
Class shares may also be offered through certain financial intermediaries that
charge their customers transaction or other fees with respect to the customer's
investment in the Funds.) Administrative Class shares are offered primarily
through employee benefit plans alliances, broker-dealers, and other
intermediaries, and each Fund pays service or distribution fees to such entities
for services they provide to Administrative Class shareholders.
41
<PAGE>
The Trust has adopted an Amended and Restated Multi-Class Plan ("Multi-
Class Plan") pursuant to Rule 18f-3 under the 1940 Act. Under the Multi-Class
Plan, shares of each class of each Fund represent an equal pro rata interest in
such Fund and, generally, have identical voting, dividend, liquidation, and
other rights, preferences, powers, restrictions, limitations, qualifications and
terms and conditions, except that: (a) each class has a different designation;
(b) each class of shares bears any class-specific expenses allocated to it; and
(c) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its distribution or service arrangements,
and each class has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class. In addition, each class may have a differing sales charge
structure, and differing exchange and conversion features.
CONTINGENT DEFERRED SALES CHARGE AND INITIAL SALES CHARGE
As described in the Class A, B and C Prospectus under the caption "How to
Redeem," a contingent deferred sales charge is imposed upon certain redemptions
of the Class A, Class B and Class C shares. No contingent deferred sales charge
is currently imposed upon redemptions of Class D, Institutional Class or
Administrative Class shares. Because contingent deferred sales charges are
calculated on a Fund-by-Fund basis, shareholders should consider whether to
exchange shares of one Fund for shares of another Fund prior to redeeming an
investment if such an exchange would reduce the contingent deferred sales charge
applicable to such redemptions.
During the fiscal years ended March 31, 1998 and March 31, 1997, the
Distributor received the following aggregate amounts in contingent deferred
sales charges on Class A shares, Class B shares and Class C shares of the Funds:
<TABLE>
<CAPTION>
Class Year Ended 3/31/98 Year Ended 3/31/97
----- -------------------- ------------------
<S> <C> <C>
Class A $ 37,724 $ 670
Class B $694,715 $85,380
Class C $246,969 $44,409
</TABLE>
For the fiscal year ended September 30, 1996, the Distributor received $0,
$1,946 and $2,704 in contingent deferred sales charges on Class A, Class B and
Class C shares, respectively, of the Global Bond Fund II while the Fund was a
series of PIMCO Advisors Funds ("PAF"). See "The Reorganization of the PIMCO
Global Bond Fund II."
In certain cases described in the Class A, B and C Prospectus, the
contingent deferred sales charge is waived on redemptions of Class A, Class B or
Class C shares for certain classes of individuals or entities on account of (i)
the fact that the Trust's sales-related expenses are lower for certain of such
classes than for classes for which the contingent deferred sales charge is not
waived, (ii) waiver of the contingent deferred sales charge with respect to
certain of such classes is consistent with certain Internal Revenue Code
policies concerning the favored tax treatment of accumulations, and (iii) with
respect to certain of such classes, considerations of fairness, and competitive
and administrative factors.
As described in the Class A, B and C Prospectus under the caption
"Alternative Purchase Arrangements -- Class A," Class A shares of the Trust
(except with respect to the Money Market Fund) are sold pursuant to an initial
sales charge, which declines as the amount of purchase reaches certain defined
levels. For the fiscal years ended March 31, 1998 and March 31, 1997, the
Distributor received an aggregate of $2,598,104 and 389,133, respectively, and
retained $186,443 and $45,871, respectively, in initial sales charges paid by
Class A shareholders of the Trust.
42
<PAGE>
For the fiscal year ended September 30, 1996, the Distributor received
$48,106, and retained $9,896, in initial sales charges paid by shareholders of
the Class A shares of the Global Bond Fund II while the Fund was a series of
PAF.
DISTRIBUTION AND SERVICING PLANS FOR CLASS A, CLASS B AND CLASS C SHARES
As stated in the text of the Class A, B and C Prospectus under the caption
"Distributor and Distribution and Servicing Plans," Class A, Class B and Class C
shares of the Trust are continuously offered through participating brokers which
are members of the NASD and which have dealer agreements with the Distributor,
or which have agreed to act as introducing brokers.
Pursuant to separate Distribution and Servicing Plans for Class A, Class B
and Class C shares (the "Retail Plans"), as described in the Class A, B and C
Prospectus, in connection with the distribution of Class B and Class C shares of
the Trust, the Distributor receives certain distribution fees from the Trust,
and in connection with personal services rendered to Class A, Class B and Class
C shareholders of the Trust and the maintenance of shareholder accounts, the
Distributor receives certain servicing fees from the Trust. Subject to the
percentage limitations on these distribution and servicing fees set forth in the
Class A, B and C Prospectus, the distribution and servicing fees may be paid
with respect to services rendered and expenses borne in the past with respect to
Class A, Class B and Class C shares as to which no distribution and servicing
fees were paid on account of such limitations. As described in the Class A, B
and C Prospectus, the Distributor pays (i) all or a portion of the distribution
fees it receives from the Trust to participating and introducing brokers, and
(ii) all or a portion of the servicing fees it receives from the Trust to
participating and introducing brokers, certain banks and other financial
intermediaries.
Each Retail Plan may be terminated with respect to any Fund to which the
Plan relates by vote of a majority of the Trustees who are not interested
persons of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or the Distribution
Contract ("Disinterested Trustees") or by vote of a majority of the outstanding
voting securities of the relevant class of that Fund. Any change in any Retail
Plan that would materially increase the cost to the class of shares of any Fund
to which the Plan relates requires approval by the affected class of
shareholders of that Fund. The Trustees review quarterly written reports of such
costs and the purposes for which such costs have been incurred. Each Retail
Plan may be amended by vote of the Disinterested Trustees cast in person at a
meeting called for the purpose. As long as the Retail Plans are in effect,
selection and nomination of those Trustees who are not interested persons of the
Trust shall be committed to the discretion of such Disinterested Trustees.
The Retail Plans will continue in effect with respect to each Fund and each
class of shares thereof for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a majority of the
Disinterested Trustees and (ii) by the vote of a majority of the entire Board of
Trustees cast in person at a meeting called for that purpose.
The Retail Plans went into effect for the Funds in January 1997. If a
Retail Plan is terminated (or not renewed) with respect to one or more Funds, it
may continue in effect with respect to any class of any Fund as to which it has
not been terminated (or has been renewed).
The Trustees believe that the Retail Plans will provide benefits to the
Trust. The Trustees believe that the Retail Plans will result in greater sales
and/or fewer redemptions of Trust shares, although it is impossible to know for
certain the level of sales and redemptions of Trust shares that would occur in
the absence of the Retail Plans or under alternative distribution schemes.
Although the Funds' expenses are essentially fixed, the Trustees believe that
the effect of the Retail Plans on sales and/or redemptions may benefit the Trust
by reducing Fund expense ratios and/or by affording greater flexibility to
Portfolio Managers. From time to time, expenses of the Distributor incurred in
connection with the sale of Class B and Class C shares of the Funds, and in
connection with the servicing of Class B and Class C shareholders
43
<PAGE>
of the Funds and the maintenance of shareholder accounts, may exceed the
distribution and servicing fees collected by the Distributor. The Trustees
consider such unreimbursed amounts, among other factors, in determining whether
to cause the Funds to continue payments of distribution and servicing fees in
the future with respect to Class B and Class C shares.
PAYMENTS PURSUANT TO CLASS A PLAN
For the fiscal year ended March 31, 1998, the Trust paid the Distributor an
aggregate of $1,180,030 pursuant to the Distribution and Servicing Plan for
Class A shares, of which the indicated amounts were attributable to the
following Funds:
<TABLE>
<CAPTION>
Year Ended
Fund 3/31/98
- ---- -------
<S> <C>
Money Market Fund $ 38,216
Short-Term Fund 23,033
Low Duration Fund 192,859
Real Return Fund 1,143
Total Return Fund 679,157
High Yield Fund 121,858
Long-Term U.S. Government Fund 8,199
Global Bond Fund II 20,868
Foreign Bond Fund 10,245
Emerging Markets Bond Fund 316
StocksPLUS Fund 84,136
</TABLE>
During the fiscal year ended March 31, 1998, the amounts collected pursuant
to the Distribution and Servicing Plan for Class A shares were used as follows:
sales commissions and other compensation to sales personnel, $885,023;
preparing, printing and distributing sales material and advertising (including
preparing, printing and distributing prospectuses to non-shareholders), and
other expenses (including data processing, legal and operations), $295,007.
These totals, if allocated among (i) compensation and (ii) sales materials and
other expenses for each Fund, were as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Fund Compensation Expenses Total
- ---- ------------ -------- -----
<S> <C> <C> <C>
Money Market Fund $ 28,662 $ 9,554 $ 38,216
Short-Term Fund 17,275 5,758 23,033
Low Duration Fund 144,644 48,215 192,859
Real Return Bond Fund 857 286 1,143
Total Return Fund 509,368 169,789 679,157
High Yield Fund 91,394 30,465 121,858
Long-Term U.S. Government Fund 6,149 2,050 8,199
Global Bond Fund II 15,651 5,217 20,868
Foreign Bond Fund 7,684 2,561 10,245
Emerging Markets Bond Fund 237 79 316
StocksPLUS Fund 63,102 21,034 84,136
</TABLE>
44
<PAGE>
PAYMENTS PURSUANT TO CLASS B PLAN
For the fiscal year ended March 31, 1998, the Trust paid the Distributor an
aggregate of $2,879,743 pursuant to the Distribution and Servicing Plan for
Class B shares, of which the indicated amounts were attributable to the
following Funds:
<TABLE>
<CAPTION>
Year Ended
Fund 3/31/98
- ---- -------
<S> <C>
Money Market Fund $ 27,747
Short-Term Fund 7,508
Low Duration Fund 95,153
Real Return Fund 5,280
Total Return Fund 1,153,121
High Yield Fund 1,013,423
Long-Term U.S. Government Fund 28,337
Global Bond Fund II 42,965
Foreign Bond Fund 58,084
Emerging Markets Bond Fund 928
StocksPLUS Fund 447,197
</TABLE>
During the fiscal year ended March 31, 1998, the amounts collected pursuant
to the Distribution and Servicing Plan for Class B shares were used as follows:
sales commissions and other compensation to sales personnel, $2,159,807;
preparing, printing and distributing sales material and advertising (including
preparing, printing and distributing prospectuses to non-shareholders), and
other expenses (including data processing, legal and operations), $719,936.
These totals, if allocated among (i) compensation and (ii) sales materials and
other expenses for each Fund, were as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Fund Compensation Expenses Total
- ---- ------------ -------------- -----
<S> <C> <C> <C>
Money Market Fund $ 20,810 $ 6,937 $ 27,747
Short-Term Fund 5,631 1,877 7,508
Low Duration Fund 71,365 23,788 95,153
Real Return Bond Fund 3,960 1,320 5,280
Total Return Fund 864,841 288,280 1,153,121
High Yield Fund 760,067 253,356 1,013,423
Long-Term U.S. Government Fund 21,253 7,084 28,337
Global Bond Fund II 32,224 10,741 42,965
Foreign Bond Fund 43,563 14,521 58,084
Emerging Markets Bond Fund 696 232 928
StocksPLUS Fund 335,398 111,799 447,197
</TABLE>
PAYMENTS PURSUANT TO CLASS C PLAN
For the fiscal year ended March 31, 1998, the Trust paid the Distributor an
aggregate of $6,380,736 pursuant to the Distribution and Servicing Plan for
Class C shares, of which the indicated amounts were attributable to the
following Funds:
45
<PAGE>
Year Ended
Fund March 31, 1998
- ---- --------------
Money Market Fund $ 59,070
Short-Term Fund 22,612
Low Duration Fund 461,997
Real Return Fund 4,292
Total Return Fund 3,510,589
High Yield Fund 1,812,394
Long-Term U.S. Government Fund 26,880
Global Bond Fund II 14,300
Foreign Bond Fund 91,131
Emerging Markets Bond Fund 635
StocksPLUS Fund 376,836
During the fiscal year ended March 31, 1998, the amounts collected pursuant
to the Distribution and Servicing Plan for Class C shares were used as follows:
sales commissions and other compensation to sales personnel, $4,785,552;
preparing, printing and distributing sales material and advertising (including
preparing, printing and distributing prospectuses to non-shareholders), and
other expenses (including data processing, legal and operations), $1,595,184.
These totals, if allocated among (i) compensation and (ii) sales materials and
other expenses for each Fund, were as follows:
Sales Material
and Other
Fund Compensation Expenses Total
- ---- ------------ -------- -----
Money Market Fund $ 44,303 $ 14,768 $ 59,070
Short-Term Fund 16,959 5,653 22,612
Low Duration Fund 346,498 115,499 461,997
Real Return Bond Fund 3,219 1,073 4,292
Total Return Fund 2,632,942 877,647 3,510,589
High Yield Fund 1,359,296 453,099 1,812,394
Long-Term U.S. Government Fund 20,160 6,720 26,880
Global Bond Fund II 10,725 3,575 14,300
Foreign Bond Fund 68,348 22,783 91,131
Emerging Markets Bond Fund 476 159 635
StocksPLUS Fund 282,627 94,209 376,836
From time to time, expenses of principal underwriters incurred in
connection with the distribution of Class B and Class C shares of the Funds, and
in connection with the servicing of Class A, Class B and Class C shareholders of
the Funds and the maintenance of Class A, Class B and Class C shareholder
accounts, may exceed the distribution and/or servicing fees collected by the
Distributor. Class A, Class B and Class C Distribution and Servicing Plans,
which are similar to the Trust's current Plans, were in effect prior to January
17, 1997 in respect of the series of PAF that was the predecessor of the Global
Bond Fund II. As of March 31, 1998, such expenses were approximately $6,411,000
in excess of payments under the Class A Plan, and $17,203,000 in excess of
payments under the Class B Plan. There were no excess payments under the Class
C Plan.
46
<PAGE>
The allocation of such excess (on a pro rata basis) among the Funds listed
below as of March 31, 1998 was as follows:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund $ 484,847 $ 108,779 $0
Short-Term Fund 172,669 44,984 0
Low Duration Fund 832,750 620,660 0
Total Return Fund 3,800,154 6,575,246 0
Real Return Fund 2,644 52,809 0
High Yield Fund 505,638 5,496,743 0
Long-Term U.S. Government Fund 43,850 265,244 0
Global Bond Fund II 48,705 158,301 0
Foreign Bond Fund 68,239 375,002 0
Emerging Markets Bond Fund 2,262 10,727 0
StockPLUS Fund 449,243 3,494,504 0
</TABLE>
The allocation of such excess (on a pro rata basis) among the Funds,
calculated as a percentage of net assets of each Fund listed below as of March
31, 1998 was as follows:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Money Market Fund 0.72% 3.54% 0.00%
Short-Term Fund 0.72 3.54 0.00
Low Duration Fund 0.72 3.54 0.00
Total Return Fund 0.72 3.54 0.00
Real Return Fund 0.72 3.54 0.00
High Yield Fund 0.72 3.54 0.00
Long-Term U.S. Government Fund 0.72 3.54 0.00
Global Bond Fund II 0.72 3.54 0.00
Foreign Bond Fund 0.72 3.54 0.00
Emerging Markets Bond Fund 0.72 3.54 0.00
StockPLUS Fund 0.72 3.54 0.00
</TABLE>
DISTRIBUTION AND ADMINISTRATIVE SERVICES PLANS FOR ADMINISTRATIVE CLASS SHARES
The Trust has adopted an Administrative Services Plan and an Administrative
Distribution Plan (together, the "Administrative Plans") with respect to the
Administrative Class shares of each Fund.
Under the terms of the Administrative Distribution Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each Fund, in an amount up to 0.25% on an annual basis of the
average daily net assets of that class, financial intermediaries for costs and
expenses incurred in connection with the distribution and marketing of
Administrative Class shares and/or the provision of certain shareholder services
to its customers that invest in Administrative Class shares of the Funds. Such
services may include, but are not limited to, the following: providing
facilities to answer questions from prospective investors about a Fund;
receiving and answering correspondence, including requests for prospectuses and
statements of additional information; preparing, printing and delivering
prospectuses and shareholder reports to prospective shareholders; complying with
federal and state securities laws pertaining to the sale of Administrative Class
shares; and assisting investors in completing application forms and selecting
dividend and other account options.
Under the terms of the Administrative Services Plan, the Trust is permitted
to reimburse, out of the assets attributable to the Administrative Class shares
of each Fund, in an amount up to 0.25% on an annual basis of the average daily
net assets of that class, financial intermediaries that provide certain
administrative services for Administrative Class shareholders. Such services
may include, but are not limited to, the following functions: receiving,
aggregating and processing shareholder orders; furnishing shareholder sub-
47
<PAGE>
accounting; providing and maintaining elective shareholder services such as
check writing and wire transfer services; providing and maintaining pre-
authorized investment plans; communicating periodically with shareholders;
acting as the sole shareholder of record and nominee for shareholders;
maintaining accounting records for shareholders; answering questions and
handling correspondence from shareholders about their accounts; and performing
similar account administrative services.
The same entity may be the recipient of fees under both the Administrative
Class Distribution Plan and the Administrative Services Plan, but may not
receive fees under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to materially
increase the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (ii) those Trustees who are not "interested persons" of the Trust
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreements related to it (the "Plan
Trustees"), cast in person at a meeting called for the purpose of voting on the
Plan and any related amendments.
Each Administrative Plan provides that it may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Trustees defined above. The Administrative Class Distribution
Plan further provides that it may not take effect unless approved by the vote of
a majority of the outstanding voting securities of the Administrative Class.
Each Administrative Plan provides that it shall continue in effect so long
as such continuance is specifically approved at least annually by the Trustees
and the disinterested Trustees defined above. Each Administrative Plan provides
that any person authorized to direct the disposition of monies paid or payable
by a class pursuant to the Plan or any related agreement shall provide to the
Trustees, and the Board shall review at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made.
Each Administrative Plan provides that expenses payable under the Plan may
be carried forward for reimbursement for up to twelve months beyond the date in
which the expense is incurred, subject to the limit that not more that 0.25% of
the average daily net assets of Administrative Class shares may be used in any
month to pay expenses under the Plan. Each Plan requires that Administrative
Class shares incur no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that some, if not
all, of the fees paid pursuant to both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
PAYMENTS PURSUANT TO THE ADMINISTRATIVE PLANS
For the fiscal year ended March 31, 1998, the Administrative Class shares
of the Funds paid aggregate fees under the Administrative Plans to qualified
service providers in the following amounts:
<TABLE>
<CAPTION>
Fund Service Fees Distribution Fees Total
- ---- ------------ ----------------- -----
<S> <C> <C> <C>
Money Market Fund $ 649 $ 22 $ 671
Short-Term Fund 8,922 1,417 10,339
Low Duration Fund 60,365 10,699 71,063
Total Return Fund 601,234 98,741 699,976
Total Return Fund II 10,833 11,898 22,730
Total Return Fund III 305 10 315
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Fund Service Fees Distribution Fees Total
- ---- ------------ ----------------- -----
<S> <C> <C> <C>
High Yield Fund 50,175 10,733 60,908
Long-Term U.S. Government Fund 3,764 - 3,764
Global Bond Fund II 1,018 7,934 8,951
Foreign Bond Fund - 535 535
StocksPLUS Fund 1,942 1,051 2,993
</TABLE>
PLAN FOR CLASS D SHARES
As described under "Management of the Trust- Fund Administrator," the
Funds' Administration Agreement includes a plan (the "Class D Plan") adopted
pursuant to Rule 12b-1 under the 1940 Act which provides for the payment of up
to .25% of the Class D administrative fees as reimbursement for expenses in
respect of activities that may be deemed to be primarily intended to result in
the sale of Class D shares.
Specifically, the Administration Agreement provides that the Administrator
shall provide in respect of Class D shares (either directly or by procuring
through other entities, including various financial services firms such as
broker-dealers and registered investment advisors ("Service Organizations"))
some or all of the following services and facilities in connection with direct
purchases by shareholders or in connection with products, programs or accounts
offered by such Service Organizations ("Special Class D Services"): (i)
facilities for placing orders directly for the purchase of a Fund's shares and
tendering a Fund's Class D shares for redemption; (ii) advertising with respect
to a Fund's Class D shares; (iii) providing information about the Funds; (iv)
providing facilities to answer questions from prospective investors about the
Funds; (v) receiving and answering correspondence, including requests for
prospectuses and statements of additional information; (vi) preparing, printing
and delivering prospectuses and shareholder reports to prospective shareholders;
(vii) assisting investors in applying to purchase Class D shares and selecting
dividend and other account options; and (viii) shareholder services provided by
a Service Organization that may include, but are not limited to, the following
functions: receiving, aggregating and processing shareholder orders; furnishing
shareholder sub-accounting; providing and maintaining elective shareholder
services such as check writing and wire transfer services; providing and
maintaining pre-authorized investment plans; communicating periodically with
shareholders; acting as the sole shareholder of record and nominee for
shareholders; maintaining accounting records for shareholders; answering
questions and handling correspondence from shareholders about their accounts;
issuing confirmations for transactions by shareholders; performing similar
account administrative services; providing such shareholder communications and
recordkeeping services as may be required for any program for which the Service
Organization is a sponsor that relies on Rule 3a-4 under the 1940 Act; and
providing such other similar services as may reasonably be requested to the
extent the Service Organization is permitted to do so under applicable statutes,
rules, or regulations.
The Administrator has entered into an agreement with the Distributor under
which the distributor is compensated for providing or procuring certain of the
Class D Services at the rate of .25% per annum of all assets attributable to
Class D shares sold through the Distributor.
The Trust and the Administrator understand that some or all of the Special
Class D Services pursuant to the Administration Agreement may be deemed to
represent services primarily intended to result in the sale of Class D shares.
The Administration Agreement includes the Class D Plan to account for this
possibility. The Administration Agreement provides that any portion of the fees
paid thereunder in respect of Class D shares representing reimbursement for the
Administrator's and the Distributor's expenditures and internally allocated
expenses in respect of Class D Services of any Fund shall not exceed the rate of
.25% per annum of the average daily net assets of such Fund attributable to
Class D shares.
In accordance with Rule 12b-1 under the 1940 Act, the Class D Plan may not
be amended to increase materially the costs which Class D shareholders may bear
under the Plan without approval of a majority of the outstanding Class D shares,
and by vote of a majority of both (i) the Trustees of the Trust
49
<PAGE>
and (ii) those Trustees ("disinterested Class D Plan Trustees") who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Plan or any
agreements related to it, cast in person at a meeting called for the purpose of
voting on the Plan and any related amendments. The Class D Plan may not take
effect until approved by a vote of a majority of both (i) the Trustees of the
Trust and (ii) the disinterested Class D Plan Trustees. In addition, the Class D
Plan may not take effect unless it is approved by the vote of a majority of the
outstanding Class D shares and it shall continue in effect so long as such
continuance is specifically approved at least annually by the Trustees and the
disinterested Class D Plan Trustees.
With respect to the Class D Plan, the Administration Agreement requires the
Administrator to present reports as to out-of-pocket expenditures and internal
expenses allocations of the Administrator and the Distributor at least quarterly
and in a manner that permits the disinterested Class D Plan Trustees to
determine that portion of the Class D administrative fees paid thereunder which
represents reimbursements in respect of Special Class D Services.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to the Class D Plan will qualify as "service
fees" and therefore will not be limited by NASD rules.
PURCHASES, EXCHANGES AND REDEMPTIONS
Purchases, exchanges and redemptions of Class A, Class B, Class C and Class
D shares are discussed in the Class A, B and C and Class D Prospectuses under
the headings "How to Buy Shares," "Exchange Privilege," and "How to Redeem," and
that information is incorporated herein by reference. Purchases, exchanges and
redemptions of Institutional and Administrative Class shares are discussed in
the Institutional Prospectus under the headings "Purchase of Shares,"
"Redemption of Shares," and "Net Asset Value," and that information is
incorporated herein by reference.
Certain managed account clients of the Adviser may purchase shares of the
Trust. To avoid the imposition of duplicative fees, the Adviser may be required
to make adjustments in the management fees charged separately by the Adviser to
these clients to offset the generally higher level of management fees and
expenses resulting from a client's investment in the Trust.
Certain clients of the Adviser whose assets would be eligible for purchase
by one or more of the Funds may purchase shares of the Trust with such assets.
Assets so purchased by a Fund will be valued in accordance with procedures
adopted by the Board of Trustees.
Certain shares of the Funds are not qualified or registered for sale in all
states. Prospective investors should inquire as to whether shares of a
particular Fund or class are available for offer and sale in their state of
domicile or residence. Shares of a Fund may not be offered or sold in any state
unless registered or qualified in that jurisdiction, unless an exemption from
registration or qualification is available.
Independent financial intermediaries unaffiliated with PIMCO may perform
shareholder servicing functions with respect to certain of their clients whose
assets may be invested in the Funds. These services, normally provided by PIMCO
directly to Trust shareholders, may include the provision of ongoing information
concerning the Funds and their investment performance, responding to shareholder
inquiries, assisting with purchases, redemptions and exchanges of Trust shares,
and other services. PIMCO may pay fees to such entities for the provision of
these services which PIMCO normally would perform, out of PIMCO's own resources.
50
<PAGE>
As described in the Class A, B and C and Class D Prospectuses under the
caption "Exchange Privilege," and in the Institutional Prospectus under the
caption "Redemption of Shares," a shareholder may exchange shares of any Fund
for shares of any other Fund of the Trust (except the PIMCO International Fund
and the PIMCO Emerging Markets Bond Fund II, each of which is only available to
private account clients of PIMCO) or any series of PIMCO Funds: Multi-Manager
Series, within the same class on the basis of their respective net asset values.
The original purchase date(s) of shares exchanged for purposes of calculating
any contingent deferred sales charge will carry over to the investment in the
new Fund. For example, if a shareholder invests in the Class C shares of one
Fund and 6 months later (when the contingent deferred sales charge upon
redemption would normally be 1%) exchanges his shares for Class C shares of
another Fund, no sales charge would be imposed upon the exchange but the
investment in the other Fund would be subject to the 1% contingent deferred
sales charge until one year after the date of the shareholder's investment in
the first Fund as described in the Class A, B and C Prospectus under
"Alternative Purchase Arrangements." With respect to Class B or Class C shares,
or Class A shares subject to a contingent deferred sales charge, if less than
all of an investment is exchanged out of a Fund, any portion of the investment
attributable to capital appreciation and/or reinvested dividends or capital
gains distributions will be exchanged first, and thereafter any portions
exchanged will be from the earliest investment made in the Fund from which the
exchange was made.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of regular
trading on the Exchange on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12-month
period or in any calendar quarter; provided, that if such a limitation on
exchanges is adopted, exchanges into the PIMCO Money Market Fund from any other
Fund would not be counted. The Trust reserves the right to modify or
discontinue the exchange privilege at any time.
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Funds, limited in amount with respect to each
shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1%
of the net asset value of the Trust at the beginning of such period. Although
the Trust will normally redeem all shares for cash, it may, in unusual
circumstances, redeem amounts in excess of the lesser of (i) or (ii) above by
payment in kind of securities held in the Funds' portfolios.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, the minimums of which are currently set at $250 for Class A,
Class B and Class C shares, $2,000 for Class D shares, and $100,000 for
Institutional Class and Administrative Class shares ($10,000 with respect to
Institutional Class and Administrative Class accounts opened before January 1,
1995). The Prospectuses may set higher minimum account balances for one or more
classes from time to time depending upon the Trust's current policy. An
investor will be notified that the value of his account is less than the minimum
and allowed at least 30 days to bring the value of the account up to at least
the specified amount before the redemption is processed. The Declaration of
Trust also authorizes the Trust to redeem shares under certain other
circumstances as may be specified by the Board of Trustees. The Trust may also
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charge periodic account fees for accounts that fall below minimum balances, as
described in the Prospectuses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved (including the
Trust). Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling the security. In some instances, one
client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in the Adviser's opinion is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction.
Transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the relevant Fund and buys and
sells such securities, options and futures for the Trust through a substantial
number of brokers and dealers. In so doing, the Adviser uses its best efforts
to obtain for the Trust the most favorable price and execution available, except
to the extent it may be permitted to pay higher brokerage commissions as
described below. In seeking the most favorable price and execution, the
Adviser, having in mind the Trust's best interests, considers all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser receives research services from many broker-dealers with which the
Adviser places the Trust's portfolio transactions. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews, evaluations
of securities and recommendations as to the purchase and sale of securities.
Some of these services are of value to the Adviser in advising various of its
clients (including the Trust), although not all of these services are
necessarily useful and of value in managing the Trust. The management fee paid
by the Trust is not reduced because the Adviser and its affiliates receive such
services.
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As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser may cause the Trust to pay a broker-dealer which provides "brokerage and
research services" (as defined in the Act) to the Adviser an amount of disclosed
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, the Adviser may also consider sales of shares of the Trust as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Trust.
PORTFOLIO TURNOVER
The Adviser manages the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on their ability to engage in short-
term trading by provisions of the federal tax laws, see "Taxation." The use of
certain derivative instruments with relatively short maturities may tend to
exaggerate the portfolio turnover rate for some of the Funds. Trading in fixed
income securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. The use of futures
contracts may involve the payment of commissions to futures commission
merchants. The higher the rate of portfolio turnover of a Fund, the higher
these transaction costs borne by the Fund generally will be.
The portfolio turnover rate of a Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less. Proceeds from short sales and assets used to
cover short positions undertaken are included in the amounts of securities sold
and purchased, respectively, during the year.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Institutional Prospectus and
"How Net Asset Value is Determined" in the Class A, B and C Prospectus, the
Trust's net asset value per share for the purpose of pricing purchase and
redemption orders will be determined once on each day on which the New York
Stock Exchange is open for trading as of the close of regular trading
(ordinarily 4:00 p.m., Eastern time). Net asset value will not be determined on
the following holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
The PIMCO Money Market Fund's securities are valued using the amortized
cost method of valuation. This involves valuing a security at cost on the date
of acquisition and thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument. During such periods the yield to investors
in the Fund may differ somewhat from that obtained in a similar investment
company which uses available market quotations to value all of its portfolio
securities.
The SEC's regulations require the PIMCO Money Market Fund to adhere to
certain conditions. The Trustees, as part of their responsibility within the
overall duty of care owed to the shareholders, are required to establish
procedures reasonably designed, taking into account current market conditions
and the Fund's investment objective, to stabilize the net asset value per share
as computed for the purpose of distribution and redemption at $1.00 per share.
The Trustees' procedures include a requirement to periodically monitor, as
appropriate and at such intervals as are reasonable in light of current market
conditions, the relationship
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between the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will consider
what steps should be taken, if any, in the event of a difference of more than
1/2 of 1% between the two. The Trustees will take such steps as they consider
appropriate, (e.g., selling securities to shorten the average portfolio
maturity) to minimize any material dilution or other unfair results which might
arise from differences between the two. The Fund also is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, to limit its
investments to instruments having remaining maturities of 397 days or less
(except securities held subject to repurchase agreements having 397 days or less
maturity) and to invest only in securities determined by the Adviser under
procedures established by the Board of Trustees to be of high quality with
minimal credit risks.
TAXATION
The following summarizes certain additional federal income tax
considerations generally affecting the Funds and their shareholders. The
discussion is for general information only and does not purport to consider all
aspects of U.S. federal income taxation that might be relevant to beneficial
owners of shares of the Funds. The discussion is based upon current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, which change could
be retroactive. The discussion applies only to beneficial owners of Fund shares
in whose hands such shares are capital assets within the meaning of Section 1221
of the Code, and may not apply to certain types of beneficial owners of shares
(such as insurance companies, tax exempt organizations, and broker-dealers) who
may be subject to special rules. Persons who may be subject to tax in more than
one country should consult the provisions of any applicable tax treaty to
determine the potential tax consequences to them. Prospective investors should
consult their own tax advisers with regard to the federal tax consequences of
the purchase, ownership and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction. The discussion here and in the Prospectuses is not
intended as a substitute for careful tax planning.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under the Code. To qualify as a regulated
investment company, each Fund generally must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test"); (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies); and (c) distribute each taxable year the sum of
(i) at least 90% of its investment company taxable income (which includes
dividends, interest and net short-term capital gains in excess of any net long-
term capital losses) and (ii) 90% of its tax exempt interest, net of expenses
allocable thereto. The Treasury Department is authorized to promulgate
regulations under which gains from foreign currencies (and options, futures, and
forward contracts on foreign currency) would constitute qualifying income for
purposes of the Qualifying Income Test only if such gains are directly related
to investing in securities. To date, such regulations have not been issued.
As a regulated investment company, a Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders on a
timely basis. Each Fund intends to distribute to its shareholders, at least
annually, all or substantially all of its investment company taxable income and
any net capital gains. In addition, amounts not distributed by a Fund on a
timely basis
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in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the twelve month period
ending on October 31, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. A distribution will be
treated as paid on December 31 of the calendar year if it is declared by a Fund
in October, November, or December of that year to shareholders of record on a
date in such a month and paid by the Fund during January of the following year.
Such distributions will be taxable to shareholders (other than those not subject
to federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
The PIMCO Municipal Bond Fund must have at least 50% of its total assets
invested in Municipal Bonds at the end of each calendar quarter so that
dividends derived from its net interest income on Municipal Bonds and so
designated by the Fund will be "exempt-interest dividends," which are generally
exempt from federal income tax when received by an investor. Certain exempt-
interest dividends, as described in the Class A, B and C Prospectus, may
increase alternative minimum taxable income for purposes of determining a
shareholder's liability for the alternative minimum tax. In addition, exempt-
interest dividends allocable to interest from certain "private activity bonds"
will not be tax exempt for purposes of the regular income tax to shareholders
who are "substantial users" of the facilities financed by such obligations or
"related persons" of "substantial users." The tax-exempt portion of dividends
paid for a calendar year constituting "exempt-interest dividends" will be
designated after the end of that year and will be based upon the ratio of net
tax-exempt income to total net income earned by the Fund during the entire year.
That ratio may be substantially different than the ratio of net tax-exempt
income to total net income earned during a portion of the year. Thus, an
investor who holds shares for only a part of the year may be allocated more or
less tax-exempt interest dividends than would be the case if the allocation were
based on the ratio of net tax-exempt income to total net income actually earned
by the Fund while the investor was a shareholder. All or a portion of interest
on indebtedness incurred or continued by a shareholder to purchase or carry
shares of the PIMCO Municipal Bond Fund will not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Fund's total distributions (not including distributions of the excess of
net long-term capital gains over net short-term capital losses) paid to the
shareholder that are exempt-interest dividends. Under rules used by the
Internal Revenue Service for determining when borrowed funds are considered used
for the purpose of purchasing or carrying particular assets, the purchase of
shares may be considered to have been made with borrowed funds even though such
funds are not directly traceable to the purchase of shares.
Shareholders of the PIMCO Municipal Bond Fund receiving social security or
railroad retirement benefits may be taxed on a portion of those benefits as a
result of receiving tax exempt income (including exempt-interest dividends
distributed by the Fund). The tax may be imposed on up to 50% of a recipient's
benefits in cases where the sum of the recipient's adjusted gross income (with
certain adjustments, including tax-exempt interest) and 50% of the recipient's
benefits, exceeds a base amount. In addition, up to 85% of a recipient's
benefits may be subject to tax if the sum of the recipient's adjusted gross
income (with certain adjustments, including tax-exempt interest) and 50% of the
recipient's benefits exceeds a higher base amount. Shareholders receiving
social security or railroad retirement benefits should consult with their tax
advisors.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares. Since certain of the PIMCO Municipal
Bond Fund's expenses attributable to earning tax-exempt income do not reduce
such Fund's current earnings and profits, it is possible that distributions, if
any, in excess of such Fund's net tax-exempt and taxable
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income will be treated as taxable dividends to the extent of such Fund's
remaining earnings and profits (i.e., the amount of such expenses).
DISTRIBUTIONS
Except for exempt-interest dividends paid by the PIMCO Municipal Bond Fund,
all dividends and distributions of a Fund, whether received in shares or cash,
generally are taxable and must be reported on each shareholder's federal income
tax return. Dividends paid out of a Fund's investment company taxable income
will be taxable to a U.S. shareholder as ordinary income. Distributions
received by tax-exempt shareholders will not be subject to federal income tax to
the extent permitted under the applicable tax exemption.
A portion of the dividends paid by the PIMCO StocksPLUS Fund may qualify
for the deduction for dividends received by corporations. Dividends paid by the
other Funds generally are not expected to qualify for the deduction for
dividends received by corporations, although certain distributions from the
PIMCO High Yield Fund may qualify. Distributions of net capital gains, if any,
designated as capital gain dividends, are taxable as long-term capital gains,
regardless of how long the shareholder has held a Fund's shares and are not
eligible for the dividends received deduction. Any distributions that are not
from a Fund's investment company taxable income or net realized capital gains
may be characterized as a return of capital to shareholders or, in some cases,
as capital gain. The tax treatment of dividends and distributions will be the
same whether a shareholder reinvests them in additional shares or elects to
receive them in cash.
SALES OF SHARES
Upon the disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Any loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of shares held by the shareholder for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect to such shares.
BACKUP WITHHOLDING
A Fund may be required to withhold 31% of all taxable distributions payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
OPTIONS, FUTURES AND FORWARD CONTRACTS, AND SWAP AGREEMENTS
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Funds may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by a Fund at the end of each taxable year
(and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as ordinary or 60/40 gain or loss.
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Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund, may result in
"straddles" for U.S. federal income tax purposes. In some cases, the straddle
rules also could apply in connection with swap agreements. The straddle rules
may affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to a Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Funds intend to account for such transactions in a manner they deem to be
appropriate, the Internal Revenue Service might not accept such treatment. If
it did not, the status of a Fund as a regulated investment company might be
affected. The Trust intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
regulated investment company may limit the extent to which a Fund will be able
to engage in swap agreements.
The qualifying income and diversification requirements applicable to a
Fund's assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, forward contracts, and swap
agreements.
SHORT SALES
Certain Funds may make short sales of securities. Short sales may increase
the amount of short-term capital gain realized by a Fund, which is taxed as
ordinary income when distributed to shareholders.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain Funds may invest in the stock of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to stockholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC stock. A Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior taxable years and an interest factor will be added to the
tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC stock are
treated as excess distributions. Excess distributions are characterized as
ordinary income even
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though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, another election may be
available that would involve marking to market a Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized and
reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of PFIC shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. A Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains and the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, and may subject a Fund itself
to tax on certain income from PFIC shares, the amount that must be distributed
to shareholders and will be taxed to shareholders as ordinary income or long-
term capital gain may be increased or decreased substantially as compared to a
fund that did not invest in PFIC shares.
FOREIGN CURRENCY TRANSACTIONS
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of certain
other instruments, gains or losses attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
FOREIGN TAXATION
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser intends to manage the Funds with the intention
of minimizing foreign taxation in cases where it is deemed prudent to do so. If
more than 50% of the value of the PIMCO Global Bond, Global Bond II, Foreign
Bond, International Bond, Emerging Markets Bond or Emerging Markets Bond II
Funds' total assets at the close of their taxable year consists of securities of
foreign corporations, such Fund will be eligible to elect to "pass-through" to
the Fund's shareholders the amount of foreign income and similar taxes paid by
the Fund. If this election is made, a shareholder generally subject to tax will
be required to include in gross income (in addition to taxable dividends
actually received) his pro rata share of the foreign taxes paid by the Fund, and
may be entitled either to deduct (as an itemized deduction) his or her pro rata
share of foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his or her U.S. federal income tax
liability. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Each shareholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by the
Fund will "pass-through" for that year.
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Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election
is made, the source of the PIMCO Global Bond, Global Bond II, Foreign Bond,
International Bond, Emerging Markets Bond or Emerging Markets Bond II Funds'
income will flow through to shareholders of the Trust. With respect to such
Funds, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency-denominated debt securities, receivables and payables will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income, and
to certain other types of income. Shareholders may be unable to claim a credit
for the full amount of their proportionate share of the foreign taxes paid by
the Fund. The foreign tax credit can be used to offset only 90% of the revised
alternative minimum tax imposed on corporations and individuals and foreign
taxes generally are not deductible in computing alternative minimum taxable
income.
ORIGINAL ISSUE DISCOUNT AND MARKET DISCOUNT
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. A
Fund may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if a
Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
59
<PAGE>
OTHER TAXATION
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund will provide information
annually to shareholders indicating the amount and percentage of a Fund's
dividend distribution which is attributable to interest on federal obligations,
and will indicate to the extent possible from what types of federal obligations
such dividends are derived. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a Declaration
of Trust dated February 19, 1987. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.0001 each. The Board of Trustees may establish additional series (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of a Fund, each shareholder is
entitled to receive his pro rata share of the net assets of that Fund.
Expenses incurred by the Trust in connection with its organization and the
public offering of its shares were deferred and amortized on a straight line
basis over a period not less than five years. Expenses incurred in the
organization of subsequently offered Funds are charged to those Funds and are
being amortized on a straight line basis over a period not less than five years.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield of
the PIMCO Money Market Fund, and the yield and total return for each class of
shares of all of the Funds, computed in accordance with SEC-prescribed formulas,
in advertisements or reports to shareholders or prospective investors. As noted
below, in accordance with methods approved by the Securities and Exchange
Commission in various pronouncements, total return presentations for periods
prior to the inception date of a particular class of a Fund are based on the
historical performance of an older class of the Fund (specified below) restated
to reflect the current sales charges (if any) of the newer class, but not
reflecting any higher operating expenses such as 12b-1 distribution and
servicing fees and administration fees associated with the newer class. All
other things being equal, such higher expenses would have adversely affected
(i.e., reduced) total return for the newer classes by the amount of such higher
expenses compounded over the relevant periods. The Funds also may compute
current distribution rates and use this information in their prospectuses and
statement of additional information, in reports to current shareholders, or in
certain types of sales literature provided to prospective investors.
60
<PAGE>
Current yield for the PIMCO Money Market Fund will be based on the change
in the value of hypothetical investment (exclusive of capital changes) over a
particular 7-day period less a pro-rata share of Fund expenses accrued over that
period (the "base period"), and stated as a percentage of the investment at the
start of the base period (the "base period return"). The base period return is
then annualized by multiplying by 365/7, with the resulting yield figure carried
to at least the nearest hundredth of one percent. "Effective yield" for the
PIMCO Money Market Fund assumes that all dividends received during an annual
period have been reinvested. Calculation of "effective yield" begins with the
same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return +1)/365/7/] - 1
The yield of the PIMCO Money Market Fund for the seven day period ended
September 30, 1997 was as follows: Institutional Class - 5.31%, Administrative
Class - 5.07%, Class A - 5.02%, Class B - 4.16% and Class C - .05%. The
effective yield of the PIMCO Money Market Fund for the seven day period ended
September 30, 1997 was as follows: Institutional Class - 5.47%, Administrative
Class - 5.18%, Class A - 5.20%, Class B - 4.21% and Class C - 5.18%.
Quotations of yield for the remaining Funds will be based on all investment
income per share (as defined by the SEC) during a particular 30-day (or one
month) period (including dividends and interest), less expenses accrued during
the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[( a-b + 1)/6/-1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
For the one month period ended March 31, 1998, the yield of the Funds was
as follows (all numbers are annualized) (Class D shares were not offered during
the period listed):
61
<PAGE>
<TABLE>
<CAPTION>
YIELD FOR PERIOD
ENDED MARCH 31, 1998
--------------------
INSTITUTIONAL ADMINISTRATIVE
------------- --------------
FUND CLASS CLASS A B C
- ---- ----- ----- - - -
<S> <C> <C> <C> <C> <C>
Money Market Fund
Short-Term Fund 6.00% 5.75% 5.47% 4.86% 5.29%
Low Duration Fund 5.77% 5.52% 5.13% 4.52% 4.79%
Low Duration Fund II 5.40% 5.15% N/A N/A N/A
Low Duration Fund III 5.33% N/A N/A N/A N/A
Low Duration Mortgage 5.85% N/A N/A N/A N/A
Moderate Duration Fund 5.80% N/A N/A N/A N/A
Real Return Bond Fund 4.62% N/A 4.09% 3.45% 3.72%
Total Return Fund 5.73% 5.47% 5.01% 4.48% 4.49%
Total Return Fund II 5.42% 5.16% N/A N/A N/A
Total Return Fund III 5.66% 5.41% N/A N/A N/A
Total Return Mortgage 5.87% N/A N/A N/A N/A
High Yield 7.48% 7.22% 6.75% 6.31% 6.31%
Long-Term U.S. Govt. 5.30% 5.05% 4.68% 4.13% 4.13%
Global Bond Fund 6.30% 5.96% N/A N/A N/A
Global Bond Fund II 6.02% N/A 5.44% 4.95% 4.95%
Foreign Bond Fund 6.56% 6.31% 5.82% 5.34% 5.34%
International Bond Fund 6.26% N/A N/A N/A N/A
Emerging Markets Bond 7.49% N/A 6.77% 6.31% 6.34%
Strategic Balanced Fund 5.55% N/A N/A N/A N/A
StocksPLUS Fund 5.40% 5.15% 4.86% 4.33% 4.55%
</TABLE>
The yield of each such Fund will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses of the Trust allocated to the Fund or its classes of shares. These
factors, possible differences in the methods used in calculating yield (and the
tax exempt status of distributions for the PIMCO Municipal Bond Fund) should be
considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's various classes of
shares. These yields do not take into account any applicable contingent
deferred sales charges.
The PIMCO Municipal Bond Fund may advertise a tax equivalent yield of each
class of its shares, calculated as described above except that, for any given
tax bracket, net investment income of each class will be calculated using as
gross investment income an amount equal to the sum of (i) any taxable income of
each class of the Fund plus (ii) the tax exempt income of each class of the Fund
divided by the difference between 1 and the effective federal income tax rates
for taxpayers in that tax bracket. For example, taxpayers with the marginal
federal income tax rates indicated in the following table would have to earn the
tax equivalent yields shown in order to realize an after-tax return equal to the
corresponding tax-exempt yield shown.
62
<PAGE>
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF
FILING STATUS IS EQUIVALENT TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C>
Single (Married filing jointly) 3% 4% 5% 6% 7%
TAXABLE INCOME MARGINAL TAX RATE*
$23,350 or less $39,000 or less 15% 3.53% 4.71% 5.88% 7.06% 8.24%
Over $23,350 but Over $39,000 but 28% 4.17% 5.56% 6.94% 8.33% 9.72%
not over $56,550 not over $94,250
Over $56,550 but Over $94,250 but 31% 4.35% 5.80% 7.25% 8.70% 10.14%
not over $117,950 not over $143,600
Over $117,950 but Over $143,600 but 36% 4.69% 6.25% 7.81% 9.38% 10.94%
not over $256,500 not over $256,500
Over $256,500 Over $256,500 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
</TABLE>
______________
* These marginal tax rates do not take into account the effect of the phaseout
of itemized deductions and personal exemptions.
As is shown in the above table, the advantage of tax-exempt investing
becomes more advantageous to an investor as his or her marginal tax rate
increases.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time
in the future, yields and total return may be higher or lower than past yields
and there can be no assurance that any historical results will continue.
Quotations of average annual total return for a Fund or class will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, five and ten
years (up to the life of the Fund), calculated pursuant to the following
formula: P (1 + T)/n/ = ERV (where P = a hypothetical initial payment of
$1,000, T = the average annual total return, n = the number of years, and ERV =
the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). Except as noted below all total return figures
reflect the deduction of a proportional share of Fund or class expenses on an
annual basis, and assume that (i) the maximum sales load (or other charges
deducted from payments) is deducted from the initial $1,000 payment and that the
maximum contingent deferred sales charge, if any, is deducted at the times, in
the amounts, and under the terms disclosed in the Prospectuses and (ii) all
dividends and distributions are reinvested when paid. The Funds also may, with
respect to certain periods of less than one year, provide total return
information for that period that is unannualized. Quotations of total return
may also be shown for other periods. Any such information would be accompanied
by standardized total return information.
The table below sets forth the average annual total return of each class of
shares of the following Funds for the periods ended March 31, 1998. For periods
prior to the "Inception Date" of a particular class of a Fund's shares, total
return presentations for the class are based on the historical performance of
Institutional Class shares of the Fund (the oldest class) adjusted, as
necessary, to reflect any current sales charges (including any contingent
deferred sales charges) associated with the newer class and any different
operating expenses associated with the newer class, such as 12b-1 distribution
and servicing fees (which are not paid by the Institutional Class) and
administrative fee charges.
63
<PAGE>
Total Return for Periods Ended March 31, 1998*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Since Inception Inception Inception
of Fund Date of Date of
Fund Class** 1 Year 5 Years 10 Years (Annualized) Fund Class
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market Institutional 5.40% 4.80% N/A 4.63% 03/01/91 03/01/91
Administrative 5.12 4.55 4.38 01/25/95
Class A 5.10 4.53 4.37 01/13/97
Class B 4.21 3.61 3.45 01/13/97
Class C 5.14 4.54 4.38 01/13/97
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Institutional 7.06% 6.14% 6.58% 6.60% 10/07/87 10/07/87
Administrative 6.80 5.88 6.32 6.34 02/01/96
Class A 4.51 5.29 5.94 5.98 01/20/97
Class B 0.95 4.63 5.38 5.41 01/20/97
Class C 5.33 5.41 5.84 5.87 01/20/97
Class D 6.74 5.83 6.26 6.29 04/08/98
- -------------------------------------------------------------------------------------------------------------------------
Low Duration Institutional 9.00% 6.63% 8.26% 8.29% 05/11/87 05/11/87
Administrative 8.73 6.36 7.99 8.02 01/03/95
Class A 5.24 5.49 7.43 7.49 01/13/97
Class B 2.68 5.02 6.96 6.99 01/13/97
Class C 7.01 5.62 7.23 7.26 01/13/97
Class D 8.66 6.29 7.92 7.95 04/08/98
- -------------------------------------------------------------------------------------------------------------------------
Low Duration II Institutional 8.29% 5.96% N/A 6.53% 11/01/91 11/01/91
- -------------------------------------------------------------------------------------------------------------------------
Low Duration III Institutional 7.93% N/A N/A 6.80% 12/31/96 12/31/96
- -------------------------------------------------------------------------------------------------------------------------
Low Duration Institutional N/A N/A N/A 5.86%+ 07/31/97 07/31/97
Mortgage
- -------------------------------------------------------------------------------------------------------------------------
Moderate Duration Institutional 9.80% N/A N/A 7.57% 12/31/96 12/31/96
- -------------------------------------------------------------------------------------------------------------------------
Real Return Bond Institutional 4.70% N/A N/A 4.09% 01/29/97 01/29/97
Class A 1.00 0.99 01/29/97
Class B -1.41 -0.42 01/29/97
Class C 2.74 3.13 01/29/97
Class D 4.27 3.67 04/08/98
- -------------------------------------------------------------------------------------------------------------------------
Total Return Institutional 12.63% 7.78% 9.96% 9.82% 05/11/87 05/11/87
Administrative 12.36 7.52 9.70 9.56 09/08/94
Class A 7.07 6.31 8.96 8.87 01/13/97
Class B 6.26 6.21 8.67 8.54 01/13/97
Class C 10.28 6.52 8.67 8.54 01/13/97
Class D 12.30 7.45 9.63 9.49 04/08/98
- -------------------------------------------------------------------------------------------------------------------------
Total Return II Institutional 11.99% 7.42% N/A 8.21% 12/30/91 12/30/91
Administrative 11.71 7.15 7.94 11/30/94
- -------------------------------------------------------------------------------------------------------------------------
Total Return III Institutional 12.62% 7.96% N/A 9.61% 05/01/91 05/01/91
Administrative 12.33 7.68 9.34 04/11/97
- -------------------------------------------------------------------------------------------------------------------------
Total Return Institutional N/A N/A N/A 6.69%+ 07/31/97 07/31/97
Mortgage
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Since Inception Inception Inception
of Fund Date of Date of
Fund Class** 1 Year 5 Years 10 Years (Annualized) Fund Class
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Institutional 15.26% 12.46% N/A 13.08% 12/16/92 12/16/92
Administrative 14.98 12.19 12.81 01/16/95
Class A 9.63 11.01 11.69 01/13/97
Class B 8.94 10.98 11.74 01/13/97
Class C 12.95 11.25 11.86 01/13/97
Class D 14.86 12.05 12.67 04/08/98
- ----------------------------------------------------------------------------------------------------------
Long-Term U.S. Institutional 20.23% 9.65% N/A 12.76% 07/01/91 07/01/91
Government Administrative 19.94 9.39 12.51 09/23/97
Class A 14.39 8.24 11.59 01/20/97
Class B 13.85 8.16 11.54 01/20/97
Class C 17.85 8.45 11.56 01/20/97
- ----------------------------------------------------------------------------------------------------------
Global Bond Institutional 5.85% N/A N/A 8.01% 11/23/93 11/23/93
Administrative 5.57 7.76 07/31/96
- ----------------------------------------------------------------------------------------------------------
Foreign Bond Institutional 12.64% 11.31% N/A 11.59% 12/03/92 12/03/92
Administrative 12.34 11.04 11.33 01/28/97
Class A 7.09 9.80 10.15 01/20/97
Class B 6.28 9.73 10.18 01/20/97
Class C 10.29 10.01 10.31 01/20/97
Class D 12.17 10.83 11.12 04/08/98
- ----------------------------------------------------------------------------------------------------------
International Institutional 11.49% 9.35% N/A 9.44% 12/13/89 12/13/89
Bond
- ----------------------------------------------------------------------------------------------------------
Emerging Markets Institutional N/A N/A N/A 3.10%+ 07/31/97 07/31/97
Bond Class A -2.67+ 07/31/97
Class B -3.80+ 07/31/97
Class C 1.99+ 07/31/97
- ----------------------------------------------------------------------------------------------------------
Municipal Bond Insitutional N/A N/A N/A 0.80% 12/31/97 12/31/97
Class A -2.32 04/01/98
Class B -4.47 04/01/98
Class C -0.42 04/01/98
Class D 0.70 04/08/98
- ----------------------------------------------------------------------------------------------------------
Strategic Balanced Institutional 33.40% N/A N/A 25.67% 06/28/96 06/28/96
Class D 32.87 25.12 04/08/98
- ----------------------------------------------------------------------------------------------------------
StocksPLUS Institutional 47.75% N/A N/A 24.57% 05/13/93 05/13/93
Administrative 47.19 24.23 01/07/97
Class A 42.66 23.32 01/20/97
Class B 41.11 23.01 01/20/97
Class C 45.38 23.47 01/20/97
Class D 47.22 24.09 04/08/98
- ----------------------------------------------------------------------------------------------------------
</TABLE>
+ unannualized
* Average annual total return presentations for a particular class of shares
assume payment of the current maximum sales charge (if any) applicable to that
class at the time of purchase and assume that the maximum CDSC (if any) for
Class A, Class B and Class C shares was deducted at the times, in the amounts,
and under the terms discussed in the Class A, B and C Prospectus.
** For all Funds listed above, Class A, Class B, Class C, Class D and
Administrative Class total return presentations for periods prior to the
Inception Date of that class reflect the prior performance of Institutional
Class shares of the Fund (the oldest class) adjusted to reflect the actual
sales charges (none
65
<PAGE>
in the case of Class D and Administrative Class) of the newer class. The
adjusted performance also reflects the higher Fund operating expenses
associated with Class A, Class B, Class C, Class D and Administrative Class
shares. These include (i) 12b-1 distribution and servicing fees, which are not
paid by the Institutional Class but are paid by Class B and Class C (at a
maximum rate of 1.00% per annum) and Class A and the Administrative Class (at
a maximum rate of 0.25% per annum), and may be paid by Class D (at a maximum
of 0.25% per annum), and (ii) administration fee charges associated with Class
A, Class B and Class C shares (at a maximum differential of 0.22% per annum)
and Class D shares (at a maximum differential of 0.45% per annum).
The table below sets forth the average annual total return of certain
classes of shares of the PIMCO Global Bond Fund II (which was a series of PIMCO
Advisors Funds ("PAF") prior to its reorganization as a Fund of the Trust on
January 17, 1997) for the periods ended March 31, 1998. Accordingly, "Inception
Date of Fund" refers to the inception date of the PAF predecessor series. Since
Class A shares were offered since the inception of PIMCO Global Bond Fund II,
total return presentations for periods prior to the Inception Date of the
Institutional Class are based on the historical performance of Class A shares,
adjusted to reflect that the Institutional Class does not have a sales charge,
and the different operating expenses associated with the Institutional Class,
such as 12b-1 distribution and servicing fees and administration fee charges.
Total Return for Periods Ended March 31, 1998*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Since Inception Inception Inception
of Fund Date of Date of
Fund Class** 1 Year 5 Years 10 Years (Annualized) Fund Class
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Global Bond II Institutional 11.65% N/A N/A 12.76% 10/02/95 02/25/98
Class A 6.20 9.78 10/02/95
Class B 5.82 9.93 10/02/95
Class C 9.47 10.96 10/02/95
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of shares
assume payment of the current maximum sales charge (if any) applicable to that
class at the time of purchase and assume that the maximum CDSC (if any) for
Class A, Class B and Class C shares was deducted at the times, in the amounts,
and under the terms discussed in the Class A, B and C Prospectus.
** Institutional Class total return presentations for periods prior to the
Inception Date of that class reflect the prior performance of Class A shares
of the former PAF series, adjusted to reflect the fact that there are no sales
charges on Institutional Class shares of the Fund. The adjusted performance
also reflects any different operating expenses associated with Institutional
Class shares. These include (i) 12b-1 distribution and servicing fees, which
are not paid by the Institutional Class but are paid by Class A (at a maximum
rate of 0.25% per annum), and (ii) administration fee charges, which are lower
for Institutional class shares (at a differential of 0.15% per annum).
Note also that, prior to January 17, 1997, Class A, Class B and Class C shares
of the PIMCO Global Bond Fund II were subject to a variable level of expenses
for such services as legal, audit, custody and transfer agency services. As
described in the Class A, B and C Prospectus, for periods subsequent to
January 17, 1997, Class A, Class B and Class C shares of the Trust are subject
to a fee structure which essentially fixes these expenses (along with other
administrative expenses) under a single administrative fee based on the
average daily net assets of the Fund attributable to Class A, Class B and
Class C shares. Under the current fee structure, the PIMCO Global Bond Fund II
is expected to have lower total Fund operating expenses than its predecessor
had under the fee structure for PAF (prior to
66
<PAGE>
January 17, 1997). All other things being equal, the higher expenses of PAF
would have adversely affected total return performance for the Fund after
January 17, 1997.
THE METHOD OF ADJUSTMENT USED IN THE TABLE ABOVE FOR PERIODS PRIOR TO THE
INCEPTION DATE OF INSTITUTIONAL CLASS SHARES OF THE PIMCO GLOBAL BOND FUND II
RESULTED IN PERFORMANCE FOR THE PERIOD SHOWN WHICH IS HIGHER THAN IF THE
HISTORICAL CLASS A PERFORMANCE WERE NOT ADJUSTED TO REFLECT THE LOWER
OPERATING EXPENSES OF THE NEWER CLASS. The following table shows the lower
performance figures that would be obtained if the performance for the
Institutional Class was calculated by tacking to the Institutional Class'
actual performance the actual performance of Class A shares (with their higher
operating expenses) for periods prior to the initial offering date of the
newer class (i.e. the total return presentations below are based, for periods
prior to the inception date of the Institutional Class, on the historical
performace of Class A shares adjusted to reflect the current sales charges
associated with Class A shares, but not reflecting lower operating expenses
---
associated with the Institutional Class, such as lower administrative fee
charges and/or distribution and servicing fee charges).
TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
(with no adjustment for operating expenses of the Institutional
Class for periods prior to its Inception Date)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Since Inception
of Fund
Fund Class 1 Year 5 Years 10 Years (Annualized)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Bond II Institutional 11.25% N/A N/A 12.33%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Current distribution information for a Fund will be based on distributions
for a specified period (i.e., total dividends from net investment income),
divided by Fund net asset value per share on the last day of the period and
annualized according to the following formula:
DIVIDEND YIELD = (((a/b)*365)/c)
where a = actual dividends distributed for the calendar month in
question,
b = number of days of dividend declaration in the month in question,
and
c = net asset value (NAV) calculated on the last business day of the
month in question.
The rate of current distributions does not reflect deductions for
unrealized losses from transactions in derivative instruments such as options
and futures, which may reduce total return. Current distribution rates differ
from standardized yield rates in that they represent what a Fund has declared
and paid to shareholders as of the end of a specified period rather than the
Fund's actual net investment income for that same period. Distribution rates
will exclude net realized short-term capital gains. The rate of current
distributions for a Fund should be evaluated in light of these differences and
in light of the Fund's total return figures, which will always accompany any
calculation of the rate of current distributions.
For the month ended March 31, 1998, the current distribution rates
(annualized) for the Funds were as follows (Class D shares were not offered
during the period listed):
67
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
------------------
INSTITUTIONAL ADMINISTRATIVE
------------- --------------
FUND CLASS CLASS A B C
- ---- ----- ----- - - -
<S> <C> <C> <C> <C> <C>
Money Market Fund 5.22% 4.96% 4.93% 4.07% 4.98%
Short-Term Fund 6.00% 5.75% 5.62% 4.83% 5.31%
Low Duration Fund 6.47% 6.22% 5.99% 5.23% 5.49%
Low Duration Fund II 5.74% 5.18% N/A N/A N/A
Low Duration Fund III 5.57% N/A N/A N/A N/A
Low Duration Mortgage Fund 6.49% N/A N/A N/A N/A
Moderate Duration Fund 6.10% N/A N/A N/A N/A
Real Return Bond Fund 3.98% N/A 3.31% 2.91% 3.08%
Total Return Fund 5.26% 5.01% 4.79% 4.04% 4.04%
Total Return Fund II 6.02% 5.77% N/A N/A N/A
Total Return Fund III 5.46% 5.21% N/A N/A N/A
Total Return Mortgage Fund 5.84% N/A N/A N/A N/A
High Yield Fund 8.50% 8.26% 8.11% 7.36% 7.36%
Long-Term U.S. Government Fund 5.86% 5.61% 5.50% 4.72% 4.69%
Global Bond Fund 6.78% 6.51% N/A N/A N/A
Global Bond Fund II 5.62% N/A 5.22% 4.47% 4.47%
Foreign Bond Fund 4.97% 4.75% 4.53% 3.77% 3.77%
International Bond Fund N/A N/A N/A N/A N/A
Emerging Markets Bond Fund 7.96% N/A 7.66% 6.80% 6.82%
Strategic Balanced Fund N/A N/A N/A N/A N/A
StocksPLUS Fund N/A N/A N/A N/A N/A
</TABLE>
Performance information for a Fund may also be compared to various
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Lehman Brothers Aggregate Bond
Index, the Lehman Brothers Mortgage-Backed Securities Index, the Merrill Lynch 1
to 3 Year Treasury Index, the Lehman Intermediate and 20+ Year Treasury Blend
Index, the Lehman BB Intermediate Corporate Index, indexes prepared by Lipper
Analytical Services, the J.P. Morgan Global Index, the J.P. Morgan Emerging
Markets Bond Index Plus, the Salomon Brothers World Government Bond Index-10 Non
U.S.-Dollar Hedged and the J.P. Morgan Government Bond Index Non U.S.-Dollar
Hedged. Unmanaged indexes (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses. PIMCO may
report to shareholders or to the public in advertisements concerning the
performance of PIMCO as adviser to clients other than the Trust, or on the
comparative performance or standing of PIMCO in relation to other money
managers. PIMCO also may provide current or prospective private account
clients, in connection with standardized performance information for the Funds,
performance information for the Funds gross of fees and expenses for the purpose
of assisting such clients in evaluating similar performance information provided
by other investment managers or institutions. Comparative information may be
compiled or provided by independent ratings services or by news organizations.
Any performance information, whether related to the Funds or to the Adviser,
should be considered in light of the Funds' investment objectives and policies,
characteristics and quality of the Funds, and the market conditions during the
time period indicated, and should not be considered to be representative of what
may be achieved in the future.
Advertisements and information relating to the PIMCO Global Bond Fund II
may use data comparing the total returns of the top foreign bond market as
compared to the total return of the U.S. bond market for a particular year. For
instance, the following table sets forth the total return of the top foreign
bond market compared to the total return for the U.S. bond market for the years
1986 through 1996. Performance is shown in U.S. dollar terms, hedged for
currency rate changes and is no way indicative of the performance of the PIMCO
Global Bond Fund II.
68
<PAGE>
<TABLE>
<CAPTION>
Top Foreign
Year Performer U.S.
------ ----------- ------
<S> <C> <C> <C>
1986 +13.1% Japan +15.7%
1987 +12.8 UK +1.9
1988 +15.0 France +7.0
1989 +10.0 Canada +14.4
1990 +11.0 Australia +8.6
1991 +20.0 Australia +15.3
1992 +10.5 UK +7.2
1993 +20.0 Italy +11.0
1994 -0.9 Japan -3.4
1995 +21.0 Netherlands +18.3
1996 +18.8 Spain +2.7
1997 +13.5 UK +9.6
</TABLE>
Source: Salomon Brothers World Government Bond Index 1986-1997.
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1996/1997 costs of college and an assumed rate of increase for such costs. For
example, the table below sets forth the projected cost of four years of college
at a public college and a private college assuming a steady increase in both
cases of 3% per year. In presenting this information, the Trust is making no
prediction regarding what will be the actual growth rate in the cost of a
college education, which may be greater or less than 3% per year and may vary
significantly from year to year. The Trust makes no representation that an
investment in any of the Funds will grow at or above the rate of growth of the
cost of a college education.
POTENTIAL COLLEGE COST TABLE
<TABLE>
<CAPTION>
Start Public Private Start Public Private
Year College College Year College College
- ---- ------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C>
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306 2012 $20,278 $89,061
</TABLE>
Costs assume a steady increase in the annual cost of college of 3% per year from
a 1996-97 base year amount. Actual rates of increase may be more or less than 3%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the 25 years from 1973 to 1997 was:
*Stocks: 13.1%
Bonds: 9.5%
T-Bills: 7.1%
Inflation: 5.5%
*Returns of unmanaged indices do not reflect past or future performance of
any of the Funds of PIMCO Funds: Pacific Investment Management Series. Stocks
are represented by Ibbotson's Common
69
<PAGE>
Stock Total Return Index. Bonds are represented by Ibbotson's Long-term
Corporate Bond Index. T-bills are represented by Ibbotson's Treasury Bill Index
and Inflation is represented by the Cost of Living Index. These are all
unmanaged indices, which can not be invested in directly. While Treasury bills
are insured and offer a fixed rate of return, both the principal and yield of
investment securities will fluctuate with changes in market conditions. Source:
Ibbotson, Roger G., and Rex A. Sinquefiled, Stocks, Bonds, Bill and Inflation
(SBBI), 1989, updated in Stocks, Bonds, Bills and Inflation 1997 Yearbook,
Ibbotson Associates, Chicago. All rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1973-1997, the average annual return of stocks comprising the Ibbotson's
Common Stock Total Return Index ranged from -26.5% to 37.4% while the annual
return of a hypothetical portfolio comprised 40% of such common stocks, 40% of
bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1973
through 1997 is set forth in the following table.
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ------ ------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
</TABLE>
*Returns of unmanaged indices do not reflect past or future performance of any
of the Funds of PIMCO Funds: Pacific Investment Management Series. Stocks are
represented by Ibbotson's Common Stock Total Return Index. Bonds are represented
by Ibbotson's Long-term Corporate Bond Index. T'bills are represented by
Ibbotson's Treasury Bill Index and Inflation is represented by the Cost of
Living Index. These are all unmanaged indices, which can not be invested in
directly. While Treasury bills are insured and offer a fixed rate of return,
both the principal and yield of investment securities will fluctuate with
changes in market conditions. Source: Ibbotson, Roger G., and Rex A.
Sinquefiled, Stocks, Bonds, Bill and Inflation (SBBI), 1989, updated in Stocks,
Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates, Chicago. All
rights reserved.
70
<PAGE>
The Trust may use in its advertisement and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
<S> <C> <C> <C>
30 Years $ 1,979 $ 59,370 $200,000
25 Years $ 2,955 $ 73,875 $200,000
20 Years $ 4,559 $ 91,180 $200,000
15 Years $ 7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</TABLE>
This hypothetical example assumes a fixed 7% return compounded annually and a
guaranteed return of principal. The example is intended to show the benefits of
a long-term, regular investment program, and is in no way representative of any
past or future performance of a PIMCO Fund. There can be no guarantee that you
will be able to find an investment that would provide such a return at the times
you invest and an investor in any of the PIMCO Funds should be aware that
certain of the PIMCO Funds have experienced periods of negative growth in the
past and may again in the future.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1997:
% of Income for Individuals
Aged 65 Years and Older in 1997*
--------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
1997 43% 57%
* For individuals with an annual income of at least $51,000. Other
includes personal savings, earnings and other undisclosed sources of income.
Source: Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds may appear in various national
publications and services including, but not limited to: The Wall Street
Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual Fund
Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies and The
Donoghue Organization. Some or all of these publications or reports may publish
their own rankings or performance reviews of mutual funds, including the Funds,
and may provide information relating to the Adviser, including descriptions of
assets under management and client base, and opinions of the author(s) regarding
the skills of personnel and employees of the Adviser who have portfolio
management responsibility. From time to time, the Trust may include references
to or reprints of such publications or reports in its advertisements and other
information relating to the Funds.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Funds over a specified period of time and may use charts and
graphs to display that growth.
71
<PAGE>
From time to time, the Trust may set forth in its advertsiements and other
materials the names of and additional information regarding investment analysts
employed by the Adviser who assist with portfolio management and research
activities on behalf of the Funds. The following lists various analysts
associated with the Adviser: Jane Howe, Mark Hudoff, Doris Nakamura and Ray
Kennedy.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
Funds and relevant benchmark market indexes in a variety of market conditions.
Based on its independent research and analysis, Ibbotson has developed model
portfolios of the Funds and series of PIMCO Funds: Multi-Manager Series ("MMS")
which indicate how, in Ibbotson's opinion, a hypothetical investor with a 5+
year investment horizon might allocate his or her assets among the Funds and
series of MMS. Ibbotson bases its model portfolios on five levels of investor
risk tolerance which it developed and defines as ranging from "Very
Conservative" (low volatility; emphasis on capital preservation, with some
growth potential) to "Very Aggressive" (high volatility; emphasis on long-term
growth potential). However, neither Ibbotson nor the Trust offers Ibbotson's
model portfolios as investments. Moreover, neither the Trust, the Adviser nor
Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. In addition, the Declaration of Trust provides that
the holders of not less than two-thirds of the outstanding shares of the Trust
may remove a person serving as Trustee either by declaration in writing or at a
meeting called for such purpose. The Trustees are required to call a meeting
for the purpose of considering the removal of a person serving as Trustee if
requested in writing to do so by the holders of not less than ten percent of the
outstanding shares of the Trust. In the event that such a request was made, the
Trust has represented that it would assist with any necessary shareholder
communications. Shareholders of a class of shares have different voting rights
with respect to matters that affect only that class.
The Trust's shares do not have cumulative voting rights, so that the holder
of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees. As of September 3, 1998, the following persons owned of
record or beneficially 5% or more of the noted class of shares of the following
Funds:
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
- -------------------------------------------------------------------------------
PIMCO MONEY MARKET FUND
INSTITUTIONAL
- -------------
<S> <C> <C>
California Community Foundation 13,880,896.860 26.72%*
606 South Olive Street, Suite 2400
Los Angeles, California 90014
Batrus & Co.** 11,415,702.600 21.97%
P. O. Box 9005
Church Street Station
New York, New York 10015
</TABLE>
72
<PAGE>
<TABLE>
<S> <C> <C>
QueensCare 10,000,000.000 19.25%
1300 N. Vermont Avenue #907 D&T
Los Angeles, California 90027
Stussy Inc. 3,136,135.240 6.04%
1852 Langley Avenue
Irvine, California
Columbus Circle Trust Co-SV** 3,122,673.450 6.01%
1 Station Place Metro Center
Stamford, Connecticut 06902
Charles Schwab & Co., Inc. Rein** 2,601,318.28 5.01%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
Maltrust & Co. (Hooker & Holcombe, Inc.) 603,251.820 24.40%
225 Essex Street
Salem, Massachusetts 01970
CLASS A
- -------
Carn & Co. 7,617,407.620 6.88%
PIMCO Advisors
401K Savings and Investment Plan
Attention: Mutual Fund Department
P. O. Box 96211
Washington D.C. 20090-6211
Union Bank of California 3,454,551.760 3.12%
The Faroah Group A California
Limited Partnership
P. O. BOX 2969
Saratoga, California 95070-0969
Union Bank of California 2,618,154.850 2.36%
The Faroah Group A California
Limited Partnership
P. O. BOX 2969
Saratoga, California 95070-0969
CLASS C
- --------
WD Jennett & C. Cooper & TJ Viola 14,250,651.250 14.74%
COTR UA MAR 01 68
Gilbert Kelly Crowley Jennett Retirement Trust
1200 Wilshire Blvd., Ste. 6
Los Angeles, California 90017-1908
PIMCO SHORT-TERM FUND
INSTITUTIONAL
- -------------
William Barron Hilton Trustee 14,910,536.779 33.90%*
9336 Civic Center Drive
Beverly Hills, California 90210
</TABLE>
73
<PAGE>
<TABLE>
<S> <C> <C>
Soka University of America 5,319,544.594 12.10%
26800 W. Mulholland Highway
Attention: Arnold Kawasaki
Calabasas, California 91302
Trustee of Columbia University 4,150,887.578 9.44%
in the City of New York
Office of Investments
475 Riverside Drive, Suite 401
New York, New York 10115
Charles Schwab & Co., Inc. ** 2,631,827.316 5.98%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
Lau & Co. (Frost Natl Bank)** 45,438.627 22.50%
P.O. Box 2479
San Antonio, Texas 78298-2479
CLASS A
- --------
MLPF&S For the Sole Benefit of its Customers ** 933,027.029 20.03%
Attention: Fund Administration #97MY2
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
Mr. Ronald S. Taft TR 509,216.582 10.93%
Artist Management Inc.
Defined Benefit Pension Plan 61284
18 W. 55/th/ Street, Apt. 4
New York, New York 10019-5368
Mr. Ronald S. Taft TR 456,990.276 9.81%
Ronald S. Taft Employee Defined Benefit Plan 1184
18 W. 55/th/ Street, Apt. 4
New York, New York 10019-5368
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 133,988.932 77.88%*
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
Prudential Securities Inc. FBO 14,637.127 9.77%
Mr. Joseph P. Knight
IRA Rollover DTD 012098
12654 S. Central Avenue
Palos Heights, Illinois 60463-2414
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 222,530.659 16.04%
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
</TABLE>
74
<PAGE>
<TABLE>
<S> <C> <C>
Prudential Securities FBO 93,152.014 6.71%
Mr. Joe Barr Jr.
1550 Scottys Road
Kissimmee, Florida, 34744-6642
Prudential Securities FBO 80,822.014 5.82%
James W. Carell
4015 Travis Drive, Suite 200
Nasheville, Tennessee 37211-3727
CLASS D
- -------
Charles Schwab & Co., Inc.** 30,272.034 74.89%*
Special Custody Accounts
FBO Customers
Attention: Mutual Funds
101 Montgomery Street
San Francisco, California 94104-4122
PIMCO Advisors L.P. 10,053.152 99.99%*
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
PIMCO LOW DURATION FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. Rein** 30,125,961.062 10.26%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
Centurion Trust Co. 5,013,977.920 39.71%*
801 Pennsylvania
Kansas City, Missouri 64105
Certain Employee (Fidelity) ** 2,146,796.192 17.00%
100 Magellan KW1C
Covington, Kentucky 41015
McClatchy Newspapers Defined Comp. Inv. Plan 1,682,182.590 13.32%
550 Kearny Street #600
San Francisco, California 94108
Sonnenschein, Nath &Rosenthal 1,034,985.267 8.20%
P. O. Box 419260
Kansas City, Missouri 64141-6260
Certain Non-Qualified Employees Ben Pln** 658,836.182 5.22%
100 Magellan Way (KWIC)
Covington, Kentucky 41015
</TABLE>
75
<PAGE>
<TABLE>
CLASS A
- --------
<S> <C> <C>
Richard J. Steinhelper Tr 3,439,692.181 23.29%
Michigan Tooling Association
Benefit Plans Investment Trust
28237 Orchard Lake Road
P. O. Box 9151
Farmington Hills, Michigan 48333-9151
MLPF&S For the Sole Benefit of its Customers ** 2,740,244.194 18.56%
Attention: Fund Administration
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 698,157.099 18.65%
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 2,013,218.353 25.70%*
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS D
- ---------
Charles Schwab & Co., Inc. 128,160.260 92.72%*
Special Custody Accounts
FBO Customers
Attention: Mutual Funds
101 Montgomery Street
San Francisco, California 94104-4122
PIMCO Advisors L.P. 10,055.113 7.27%
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
PIMCO LOW DURATION FUND II
INSTITUTIONAL
- -------------
Sprint Retirement Savings Plan 14,736,881.667 36.38%*
82 Devonshire Street - E1GA
Boston, Massachusetts 02109
American Bible Society 6,696,279.133 16.53%
1865 Broadway
New York, New York 10023
Salt River Project Decom Trust 3,424,114.665 8.45%
P. O. Box 52025
Phoenix, Arizona 85072
University of Illinois Foundation 2,236,328.299 5.52%
1305 West Green Street
Urbana, Illinois 61801
</TABLE>
76
<PAGE>
<TABLE>
ADMINISTRATIVE
- ---------------
<S> <C> <C>
Integris Baptist Med. Ctr. Funded Dep 320,318.264 42.27%*
9520 North May Avenue, Suite 200
Oklahoma City, Oklahoma 73120-2711
Integris Retirement Pension Plan 306,903.333 40.50%*
9520 North May Avenue, Suite 200
Oklahoma City, Oklahoma 73120-2711
Integris SW Med. Ctr. Funded Dep 106,849.284 14.10%
9520 North May Avenue, Suite 200
Oklahoma City, Oklahoma 73120-2711
PIMCO LOW DURATION FUND III
INSTITUTIONAL
- -------------
Loyola Academy Endowment Fund 957,376.308 39.97%*
135 S. LaSalle Street
P. O. Box 1443
Chicago, Illinois 60690
Sisters of St. Joseph/Michigan 743,280.333 31.03%*
3427 Gull Road
P. O. Box 13
Nazareth, Michigan 49074
St. John Health System 553,802.872 23.12%
22101 Moross Road
Detroit, Michigan 48236
Charles Schwab & Co., Inc. Rein** 140,232.344 5.86%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
PIMCO LOW DURATION MORTGAGE FUND
INSTITUTIONAL
- -------------
Pacific Investment Management Company 354,414.214 93.42%*
840 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc. Rein** 24,958.883 6.58%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
PIMCO MODERATE DURATION FUND
INSTITUTIONAL
- -------------
Sparrow Health Systems 5,974,502.991 25.35%*
Mutual Funds Operations
Pittsburgh, Pennsylvania 15230-3198
Columbus Circle Trust Co-SV** 3,680,898.602 15.62%
1 Station Place Metro Center
Stamford, Connecticut 06902
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C>
Baystate Health System Inc. 2,819,752.152 11.96%
Mutual Funds Operations
P. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Baystate Health Systems 1,842,935.614 7.82%
Mutual Funds Operations
P. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Washington Teamsters 1,733,757.466 7.36%
Attention: Jack Cowan
2323 Eastlake Avenue E.
Seattle, Washington 98102
St. John Hospital of Detroit, Michigan 1,685,493.433 7.15%
P. O. Box 771072
Detroit, Michigan 48277-1072
Baptist/St. Vincent Health Systems 1,210,110.973 5.13%
800 Prudential Drive
Jacksonville, Florida 32207
PIMCO REAL RETURN BOND FUND
INSTITUTIONAL
- -------------
National Financial Services Corporation ** 389,370.643 63.10%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
Charles Schwab & Co., Inc. Rein** 74,259.775 12.03%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Chris P. Dialynas 54,952.660 8.91%
2140 Mesa Drive
Newport Beach, California 92660
Hofstra University 52,542.224 8.51%
128 Hofstra University
Hempstead, New York 11549
CLASS A
- -------
Prudential Securities Inc. 16,327.997 37.73*
Dima Ventures Inc.
Fund Account
4199 Campus Drive, Suite 830
Irvine, California 92612-2698
MLPF&S For the Sole Benefit of its Customers** 9,885.103 22.84%
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
</TABLE>
78
<PAGE>
<TABLE>
<S> <C> <C>
U.S. Clearing Corporation 4,234.842 9.78%
FBO 013-92879-16
26 Broadway
New York, New York 10004-1798
Everen Clearing Corporation 3,485.020 8.05%
A/C 2030-0694
Robert M. Calcote &
Genevieve E. Calcote Ten Com.
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Gorman D. McMullen & 2,378.595 5.49%
Alice M. McMullen
6407 Earlham Drive
Bethesda, Maryland 20817-2319
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 52,143.834 18.16%
Attention: Fund Administration
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
Dain Rauscher Inc. FBO 24,587.444 8.57%
Evangelical Free Church of America
EFCM Project & Capital #2
Attention: William V. Arvold III
901 East 78/th/ Street
Minneapolis, Minnesota 55420-1300
Anna Forman Trust FBO 20,885.422 7.28%
Anna Forman Trust
1055 Perkins Way
Sacramento, California 95818-3638
Dain Rauscher Inc. FBO 15,126.518 5.27%
Evangelical Free Church of America
SEI Managed Account - Fixed Income
901 East 78/th/ Street
Minneapolis, Minnesota 55420-1300
CLASS D
- -------
PIMCO Advisors L.P. 10,460.795 99.99%*
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
PIMCO TOTAL RETURN FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. Rein** 105,578,517.629 5.94%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
</TABLE>
79
<PAGE>
<TABLE>
ADMINISTRATIVE
- --------------
<S> <C> <C>
Nikko Securities Co., Ltd.** 26,646,650.000 28.62%*
3-1 Marunouchi 3Chrome, Chiyodaku
Tokyo, Japan 101-0064
Certain Employee (Fidelity) ** 21,319,746.809 22.90%
100 Magellan KW1C
Covington, Kentucky 41015
American Express Trust Company ** 9,748,736.100 10.47%
N10/996
P. O. Box 534
Minneapolis, Minnesota 55440-0534
National Financial Services Corporation ** 8,530,558.838 9.16%
1 World Financial Center
200 Liberty Street
New York, New York 10281
CLASS A
- -------
MLPF&S For the Sole Benefit of its Customers ** 35,382,283.461 51.02%*
Attention: Fund Administration
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 10,063,295.743 36.98%*
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 13,162,531.868 28.95%*
Attention: Fund Administration
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS D
- -------
Charles Schwab & Co., Inc. 336,676.039 97.22%*
Special Custody Accounts
FBO Customers
Attention: Mutual Funds
101 Montgomery Street
San Francisco, California 94104-4122
PIMCO TOTAL RETURN FUND II
INSTITUTIONAL
- -------------
John Muir/Mt. Diablo Health System 10,412,183.070 13.22%
1400 Treat Boulevard
Walnut Creek, California 94598
IUE AFL-CIO Pension Plan 6,554,114.310 8.32%
1460 Broad Street
Blommfield, New Jersey 07003
</TABLE>
80
<PAGE>
<TABLE>
<S> <C> <C>
Charles Schwab & Co., Inc. Rein** 6,256,476.844 7.95%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
The Trustee of GMP Employee Pension 5,709,958.345 7.25%
1100 Fifth & Race Tower
Cincinnati, Ohio 45202
Macmillan Bloedel Pension Plan 5,303,245.504 6.74%
c/o State Street Bank and Trust Co.
200 Newport Avenue #JQ7
North Quincy, Massachusetts 02171
Witco Corp. Retirement Plan 4,866,627.640 6.18%
One American Lane
Greenwich, Connecticut 06831
Morley Capital Management 4,142,366.761 5.26%
5665 SW Meadows Road, Suite 400
Lake Oswego, Oregon 97035
ADMINISTRATIVE
- --------------
Twin City Pipe Trades Retire Plan 3,547,277.160 62.62%*
2525 E. Camelback Rd. #570
Phoenix, Arizona 85016
Datalynx #083 (Hunt, Dupree, Rhine) ** 403,539.553 7.12%
P. O. Box 173736
Denver, Colorado 80217-3736
Integris Baptist Med. Ctr. Funded Dep. 309,372.269 5.46%
9520 North May Avenue, Suite 200
Oklahoma City, Oklahoma 93120-2711
Integris Retirement Pension Plan 296,388.321 5.23%
9520 North May Avenue, Suite 200
Oklahoma City, Oklahoma 93120-2711
PIMCO TOTAL RETURN FUND III
INSTITUTIONAL
- -------------
Archdiocese of LA/Corp/Diocese Tucson 9,173,370.788 21.38%
3424 Wilshire Boulevard, 10/th/ Floor
Los Angeles, California 90010-2241
Holy Cross Resources 4,747,883.301 11.07%
St. Mary's Lourdes Hall
Notre Dame, Indiana 46556
Diocese of Orange 3,037,378.965 7.08%
2811 East Villa Road
Orange, California 92667
</TABLE>
81
<PAGE>
<TABLE>
<S> <C> <C>
Baptist Health System, Inc. 2,547,785.369 5.94%
2811 East Villa Road
Orange, California 92667
Society of Mount Carmel 2,270,902.419 5.29%
1317 Frontage Road
Darien, Illinois 60561
ADMINISTRATIVE
- --------------
Lumpkin Foundation (PaineWebber) 158,333.250 88.41%*
P. O. Box 1097
Mattoon, Illinois 61938
Dubuque Bank & Trust Co. ** 16,167.197 9.03%
Attention: Trust Department
Dubuque, Iowa 5200-0747
PIMCO TOTAL RETURN MORTGAGE FUND
INSTITUTIONAL
- -------------
Pacific Investment Management Company 352,087.780 98.15%*
840 Newport Center Drive
Newport Beach, California 92660
CLASS D
- -------
PIMCO Advisors L.P. 9,942.324 100.00%*
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
PIMCO HIGH YIELD FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. Rein** 19,443,101.851 12.36%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
ADMINISTRATIVE
- --------------
National Financial Services Corporation ** 6,437,024.344 67.57%*
1 World Financial Center
200 Liberty Street
New York, New York 10281
Certain Employee (Fidelity) ** 1,786,202.591 18.75%
100 Magellan KW1C
Covington, Kentucky 41015
CLASS A
- -------
MLPF&S For the Sole Benefit of its Customers ** 1,889,941.648 27.04%*
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
</TABLE>
82
<PAGE>
<TABLE>
CLASS B
- -------
<S> <C> <C>
MLPF&S For the Sole Benefit of its Customers ** 4,935,426.345 29.61%*
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 4,313,062.347 16.96%
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS D
- -------
Charles Schwab & Co., Inc. 45,505.080 83.73%*
Special Custody Accounts
FBO Customers
Attention: Mutual Funds
101 Montgomery Street
San Francisco, California 94104-4122
PIMCO HIGH YIELD FUND
CLASS D
- -------
PIMCO Advisors L.P. 8,836.522 16.26%
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
PIMCO LONG-TERM U.S. GOVERNMENT FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. Rein** 1,968,340.588 20.22%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
Allianz Defined Contribution Plan 1,444,200.686 14.83%
P. O. Box 92956
Chicago, Illinois 60675
Chicago Symphony Orchestra 1,376,146.789 14.14%
220 South Michigan Avenue
Chicago, Illinois 60604
Society of the Holy Child Jesus Retirement 856,844.496 8.80%
P. O. Box 34480
West Bethesda, Maryland 20827-0480
FTC & Co. DATAlynx House Account** 841,015.244 8.64%
P. O. Box173736
Denver, Colorado 80217-3736
Donaldson Lufkin Jennrette - ** 611,746.379 6.28%
Pershing Division
1 Pershing Plaza, P. O. Box 2052
Jersey City, New Jersey 07399
</TABLE>
83
<PAGE>
<TABLE>
ADMINISTRATIVE
- --------------
<S> <C> <C>
Sealed Air P/S Plan (Met Life) 385,666.121 85.55%*
100 Plaza One MS 3064
Jersey City, New Jersey
New York Life Trust Company ** 63,803.034 14.15%
51 Madison Avenue, Room 117A
New York, New York 10010
CLASS A
- -------
MLPF&S For the Sole Benefit of its Customers ** 124,343.626 8.79%
Attention: Fund Administration #97MY2
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 556,061.533 31.70%*
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 466,129.203 31.29%*
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
PIMCO GLOBAL BOND FUND
INSTITUTIONAL
- -------------
Georgetown University 2,951,047.219 11.11%
3600 M. Street, NW
Washington DC 20007
Walker Art Center, Inc. 2,822,447.465 10.63%
Vineland Place
Minneapolis, Minnesota 55403
Kamehameha Schools 2,166,028.387 8.15%
P. O. Box 3466
Honolulu, Hawaii 96801
University of Denver (Colorado Seminary) 2,035,943.165 7.66%
2199 South University Blvd.
Denver, Colorado 80208
Hobart and William Smith Colleges 1,991,727.098 7.50%
337 Pulteney Street
Geneva, New York 14456
Worcester Polytechnic 1,625,697.32 6.12%
100 Institute Road
Worcester, Massachusetts 01609
</TABLE>
84
<PAGE>
<TABLE>
<S> <C> <C>
Sunkist Master Trust 1,514,579.045 5.70%
14130 Riverside Drive
Sherman Oaks, California 91423
ADMINISTRATIVE
- --------------
Certain Employee (Fidelity) ** 85,805.843 99.99%*
100 Magellan KW1C
Covington, Kentucky 41015
PIMCO GLOBAL BOND FUND II
INSTITUTIONAL
- -------------
Canterbury/Uniform Code Council 1,730,226.425 63.51%*
Mutual Funds Operations
Pittsburgh, Pennsylvania 15230-3198
GMP & Employers Retiree Trust 893,115.975 32.78%*
MIDF965N032
Mutual Funds Operations
Pittsburgh, Pennsylvania 15230-3198
CLASS A
- -------
Wachovia Bank NA 231,291.622 36.35%*
FBO OBICI Foundation
O. Box 3073
301 N. Main Street
Winston Salem, North Carolina 27150-0001
DLJ Securities Corporation, Inc. ** 52,498.016 8.25%
Securities Corporation Inc.
P. O. Box 2052
Jersey City, New Jersey 07303-9998
MLPF&S For the Sole Benefit of its Customers ** 39,606.279 6.22%
Attention: Fund Administration #97RD3
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 136,973.007 29.23%*
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 121,507.308 19.72%
Attention: Fund Administration #97UU0
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
PIMCO FOREIGN BOND FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. Rein** 22,871,200.850 51.65%*
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
</TABLE>
85
<PAGE>
<TABLE>
<S> <C> <C>
Donaldson Lufkin Jennrette** 9,581,669.874 21.64%
1 Pershing Plaza
P. O. Box 2052
Jersey City, New Jersey 07399
FTC & Co. DATAlynx House Account** 2,430,770.189 5.49%
O. Box 173736
Denver, Colorado 80217-3736
ADMINISTRATIVE
- --------------
CBNA FBO Clients of Benefit Plans 104,805.198 76.10%*
1500 Genesee Street
Utica, New York 13502
National Financial Services Corporation ** 32,914.961 23.90%
1 World Financial Center
200 Liberty Street
New York, New York 10281
CLASS A
- -------
MLPF&S For the Sole Benefit of its Customers ** 138,782.728 6.81%
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 185,018.337 12.47%
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 157,838.119 7.29%
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS D
- -------
Charles Schwab & Co., Inc. 328,422.915 96.90%*
Special Custody Accounts
FBO Customers
Attention: Mutual Funds
101 Montgomery Street
San Francisco, California 94104-4122
PIMCO INTERNATIONAL BOND FUND
INSTITUTIONAL
- -------------
3M Company 4,527,398.891 6.38%
c/o Bostom State Deposit
1 Cabot Road WT04G
Medford, Massachusetts 02155-5160
</TABLE>
86
<PAGE>
<TABLE>
PIMCO EMERGING MARKETS BOND FUND
<S> <C> <C>
INSTITUTIONAL
- -------------
Pacific Investment Management Company 376,985.013 84.79%*
840 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc. Rein** 46,197.826 10.39%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
CLASS A
- -------
MLPF&S For the Sole Benefit of its Customers ** 9,067.000 35.63%*
Attention: Fund Administration #97RD2
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
RPSS TR ROLLOVER IRA 6,073.357 23.87%
FBO Glenda D. Stubbs
1503 Drop Tine Drive
Cedar Park, Texas 78613-4901
Steve M. Foulke & 2,269.966 8.92%
Maria M. Foulke
Community Property
1 Altimira
Coto de Caza, California 92679-4901
Patricia D. Rodilosso Cust. 2,120.340 8.33%
FBO Christopher Adam Rodilosso
Unif GIFT MIN ACT NJ
9 River Edge Drive
Rumson, New Jersey 07760-1025
Thomas Rodilosso & 1,623.759 6.38%
Patricia D. Rodilosso
Joint TEN WROS NOT TC
9 River Edge Drive
Rumson, New Jersey 07760-1025
CLASS B
- -------
RPSS TR IAA 4,381.454 24.31%
FBO Gregory D. McDonald
15618 Gettysburg Drive
Tomball, Texas 77375-8609
Jennifer H. McMillian 1,386.005 7.69%
Sole Owner
12016 Naughton Street
Houston, Texas 77024-6246
Prudential Securities Inc FBO 1,237.990 6.86%
Mary A. Ryan & Edward J. Ryan
13011 Mead Avenue
Palos Heights, Illinois 60463-2357
</TABLE>
87
<PAGE>
<TABLE>
<S> <C> <C>
NFSC FEBO #0C8-074527 1,175.860 6.52%
FBO Walter R. Barletta
420 Northwood Drive
Guilford, Connecticut 06437
Raymond James & Assoc. Inc., CSDN 1,142.964 6.34%
Thomas W. Stacy SEP
4801 Dorsey Hall Drive, Suite 210
Ellicott City, Maryland 21042-7749
Nancy T. Yasutake & 1,059.229 5.87%
Tom T. Yasutake
JT TEN WRUS NOT TC
6132 North Lenox Avenue
Chicago, Illinois 60646-4820
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 7,671.637 46.59%*
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
NFSC FEBO #120-077852 4,885.000 29.66%*
FMT CO CUST IRA
FBO John J. Jordan
P. O. Box 466
Rye Beach, New Hampshire 03871
CIBC Oppenheimer Corp. FBO 4,176.072 25.36%*
020-66126-24
P. O. Box 3484
Church Street Station
New York, New York 10008-8484
Robert W. Baird & Co., Inc. 1,197.430 7.27%
A/C 5407-4903
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5391
Wheat First Securities Customer IRA FBO 1,089.104 6.61%
William Dean Conduit
2718-1609
3706 Takoya Drive
Ellicott City, Maryland 21042-4822
PIMCO EMERGING MARKETS BOND FUND II
INSTITUTIONAL
- -------------
IBM Retirement Plan Enh Cash Portfolio 3,644,082.997 36.70%*
Global Securities Services
3 Chase Metrotech Center
7/th/ Floor, Brooklyn, New York 11245
</TABLE>
88
<PAGE>
<TABLE>
<S> <C> <C>
Northeast Utilities 1,305,554.291 13.15%
IT Division 027-002C
20 Cabot Road
Medford, Massachusetts 02155-5160
Nebraska Public Employees Retirement System 827,441.652 8.33%
P. O. Box 1992
Boston, Massachusetts 02105-1992
Olin Corporation 745,929.309 7.51%
c/o BT Services Tennessee, Inc.
648 Grassemere Business Park Road
Advisors Services Group, 2/nd/ Floor
Nashville, Tennessee 37211
Midwest Operating Engineers 677,668.328 6.83%
P. O. Box 92923
Chicago, Illinois 60675
GTE Services Corp. 620,276.729 6.25%
c/o BT Services Tennessee, Inc.
648 Grassemere Business Park Road
Advisors Services Group, 2/nd/ Floor
Nashville, Tennessee 37211
Tektronix, Inc. 600,969.436 6.05%
O. Box 92923
Chicago, Illinois 60675
PIMCO MUNICIPAL BOND FUND
INSTITUTIONAL
- -------------
Pacific Investment Management Company 308,781.140 69.30%*
840 Newport Center Drive
Newport Beach, California 92660
Phyllis K. Curtis 70,968.241 15.93%
14158 N. W. Bronson Creek Drive
Portland, Oregon 97229
MediaOne VEBA Trust 62,818.847 14.10%
188 Inverness Drive West
Englewood, Colorado 80112
CLASS A
- -------
Nationsbanc Montgomery Securities 200,493.362 26.05%*
810-10433-16
Attention: Mutual Funds - 4/th/ Floor
600 Montgomery Street
San Francisco, California 94111
MLPF&S For the Sole Benefit of its Customers ** 157,221.310 20.42%
Attention: Fund Administration #97RD3
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
</TABLE>
89
<PAGE>
<TABLE>
<S> <C> <C>
Nationsbanc Montgomery Securities 84,830.265 11.02%
712-02020-10
Attention: Mutual Funds - 4/th/ Floor
600 Montgomery Street
San Francisco, California 94111
Joseph R White 63,039.815 8.19%
P. O. Box 572
Waltham, Massachusetts 02254-0572
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 90,887.335 19.07%
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
Dain Rauscher Incorporated FBO 66,529.644 13.96%
K. K. Kinsey Trustee
K. K. Kinsey Rev Intervivos TR
UA DTD 04-18-1997
2801 NE 14/th/ Street
Ft. Lauderdale, Florida 33304
Prudential Securities Inc. FBO 60,771.701 12.75%
Ruth G. Battel
6 Willowbank Ct.
Mahwah, New Jersey 07430-2909
CLASS C
- -------
MLPF&S For the Sole Benefit of its Customers ** 551,527.464 14.97%
Attention: Fund Administration #97UU0
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS D
- -------
PIMCO Advisors L.P. 10,178.859 99.99%*
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
PIMCO STRATEGIC BALANCED FUND
INSTITUTIONAL
- -------------
California Community Foundation 2,452,383.165 79.31%*
606 South Olive Street, Suite 2400
Los Angeles, California 90014
Pacific Asset Management LLC 569,336.779 18.41%
700 Newport Center Drive
Newport Beach, California 92660-6307
CLASS D
- -------
PIMCO Advisors L.P. 7,969.702 100.00%*
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
</TABLE>
90
<PAGE>
<TABLE>
<S> <C> <C>
PIMCO STOCKSPLUS FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. Rein** 4,177,037.080 12.69%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104
St. Benedict Retirement Plan Trust 5,240,043.494 15.93%
P. O. Box 64010
St. Paul, Minnesota 55164-0010
PIMCO STOCKSPLUS FUND
INSTITUTIONAL
- -------------
Iowa Methodist 2,319,484.564 7.05%
1200 Pleasant Street
Des Moines, Iowa 50309
ADMINISTRATIVE
- --------------
Colorado County Off and Emp (Sungard) 84,743.205 32.22%*
1666 S. University Blvd. #D
Denver, Colorado 80210
New York Life Trust Company 75,097.546 28.55%*
51 Madison Avenue, Room 117A
New York, New York 10010
National Financial Services Corporation ** 54,067.062 20.56%
1 World Financial Center
200 Liberty Street
New York, New York 10281
Public Service of New Mexico #90701 37,924.943 14.42%
The Vanguard Group
P. O. Box 2600 VM 421
Valley Forge, Pennsylvania 19482
CLASS A
- -------
MLPF&S For the Sole Benefit of its Customers ** 735,577.195 12.13%
Attention: Fund Administration #97M34
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
FTC & Co. ** 531,103.523 8.76%
Attention: Datalynx #179
P. O. Box 173736
Denver, Colorado 80217-3736
CLASS B
- -------
MLPF&S For the Sole Benefit of its Customers ** 1,469,141.827 13.53%
Attention: Fund Administration #97M35
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
</TABLE>
91
<PAGE>
<TABLE>
CLASS C
- -------
<S> <C> <C>
MLPF&S For the Sole Benefit of its Customers ** 1,176,450.545 12.48%
Attention: Fund Administration #97M36
4800 Deer Lake Drive E. Floor 3
Jacksonville, Florida 32246-6484
CLASS D
- -------
Charles Schwab & Co., Inc. 21,816.432 75.35%*
Special Custody Accounts
FBO Customers
Attention: Mutual Funds
101 Montgomery Street
San Francisco, California 94104-4122
CLASS D
- -------
PIMCO Advisors L.P. 7,133.270 24.64%
Attention: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660-6309
</TABLE>
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Fund, and therefore may be presumed to "control" the Fund, as that term is
defined in the 1940 Act.
** Shares are believed to be held only as nominee.
THE REORGANIZATION OF THE PIMCO MONEY MARKET AND TOTAL RETURN II FUNDS
On November 1, 1995, the Money Market Fund and the PIMCO Managed Bond and
Income Fund, two former series of PIMCO Funds: Equity Advisors Series, were
reorganized as series of the Trust, and were renamed PIMCO Money Market Fund and
PIMCO Total Return Fund II, respectively. All information presented for these
Funds prior to this date represents their operational history as series of PIMCO
Funds: Equity Advisors Series. In connection with the Reorganization, the
Funds changed their fiscal year end from October 31 to March 31.
THE REORGANIZATION OF THE PIMCO GLOBAL BOND FUND II
On January 17, 1997, the Global Income Fund, a former series of PIMCO
Advisors Funds, was reorganized as a series of the Trust, and was renamed the
PIMCO Global Bond Fund II. All information presented for this Fund prior to
that date represents its operational history as a series of PIMCO Advisors
Funds. In connection with the Reorganization, the Fund changed its fiscal year
end from September 30 to March 31.
CODE OF ETHICS
The Trust and PIMCO have each adopted a Code of Ethics governing personal
trading activities of all Trustees and officers of the Trust, and Directors,
officers and employees of PIMCO who, in connection with their regular functions,
play a role in the recommendation of any purchase or sale of a security by the
Trust or obtain information pertaining to such purchase or sale or who have the
power to influence the management or policies of the Trust or PIMCO. Such
persons are prohibited from effecting certain transactions, allowed to effect
certain exempt transactions, required to preclear certain security transactions
with PIMCO's Compliance Officer or his designee and to report certain
transactions on a regular basis. PIMCO has developed procedures for
administration of the Codes.
92
<PAGE>
YEAR 2000 COMPLIANCE EFFORTS
Many of the world's computer systems may be unable to correctly recognize,
interpret or use dates beyond the year 1999. This inability might lead to
significant business disruptions. PIMCO Advisors and PIMCO are taking steps to
assure that their computer systems will function properly. PIMCO Advisors has
designated a team of information and business professionals to address the Year
2000 problem and developed a written Year 2000 Plan.
The PIMCO Advisors Year 2000 Plan consists of five general phases:
Awareness, Assessment, Remediation, Testing, and Implementation. During the
Awareness phase, the Year 2000 team informed the employees of PIMCO Advisors and
its subsidiaries, including the highest levels of management, about the Year
2000 problem. A written Year 2000 Plan and budget was prepared and approved by
the PIMCO Advisors Management Board. During the Assessment phase, the Year 2000
team prepares an inventory of information technology ("IT") and non-IT systems
used in PIMCO Advisors and its subsidiaries business. Systems are classified as
software, hardware, and embedded chips. Separately, systems are also classified
as mission critical and non-mission critical systems. As the inventory is
compiled and verified, each system is preliminarily assessed for Year 2000
compliance. This preliminary assessment is made by obtaining manufacturers'
representations that a given product is Year 2000 compliant or other evidence of
compliance. Systems for which no such evidence can be obtained are identified as
candidates for correction or replacement ("Remediation"). During the Remediation
phase, software, hardware, and embedded chips identified during the Assessment
phase to be non-Year 2000 compliant will be corrected or replaced. Necessarily,
further corrections and replacements may need to be made after the Remediation
phase has been completed as a result of problems identified during the Testing
phase or otherwise. During the Testing phase, PIMCO Advisors plans to perform
internal testing, point-to-point testing, and industry testing programs. Testing
generally will be performed in order of criticality (mission critical, then non-
mission critical). PIMCO Advisors does not plan to test non-mission critical
systems that are not used in its business (e.g., software applications
incidentally installed on PCs). PIMCO Advisors and PIMCO plan on participating
in the Securities Industry Association's industry-wide testing forum. During the
Implementation phase, systems that have been tested and identified as being Year
2000 Compliant will be put into normal business operation and contingency plans
will be finalized.
As all investment advisers, PIMCO Advisors' and PIMCO's business operations
are heavily dependent upon a complex worldwide network of financial systems that
utilize date fields. PIMCO Advisors' and PIMCO's ability to endure any adverse
effects of the transition to Year 2000 is highly dependent upon the efforts of
third parties, particularly brokers, dealers, and custodians. The failure of
third party organizations to resolve their own processing issues with respect to
the Year 2000 Problem in a timely manner could have a material adverse effect on
PIMCO Advisors' or PIMCO's business. The management of PIMCO Advisors and PIMCO
believe that the transition to Year 2000 will not have a material adverse effect
on their business or operations as of the date of this Statement of Additional
Information. However, complications as yet unidentified may arise in internal
or external systems, with data providers, with other securities firms or
institutions, with other counterparties, or even with general economic
conditions related to the Year 2000 in general. Although PIMCO Advisors'
efforts and expenditures on Year 2000 issues are substantial, there can be no
assurances that clients or others will not suffer from disruptions or adverse
results arising as a consequence of entering Year 2000.
Another potential computer system problem may arise in conjunction with the
introduction of the Euro. Whether introducing the Euro to financial companies'
systems will be problematic is not fully known; however, the cost associated
with making systems recognize the Euro is not currently expected to be material.
93
<PAGE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC") 801 Pennsylvania, Kansas City,
Missouri 64105 serves as custodian for assets of all Funds, and also serves as
transfer agent and dividend disbursing agent for the Institutional Class and
Administrative Class shares of the Funds. Shareholder Services, Inc., P.O. Box
5866, Denver, Colorado 80217 serves as transfer agent and dividend disbursing
agent for the Class A, Class B, Class C and Class D shares of the Funds.
Pursuant to a sub-custody agreement between IFTC and State Street Bank and Trust
Company ("State Street"), State Street serves as subcustodian of the Trust for
the custody of the foreign securities acquired by those Funds that invest in
foreign securities. Under the agreement, State Street may hold the foreign
securities at its principal office at 225 Franklin Street, Boston. Massachusetts
02110, and at State Street's branches, and subject to approval by the Board of
Trustees, at a foreign branch of a qualified U.S. bank, with an eligible foreign
subcustodian, or with an eligible foreign securities depository.
Pursuant to rules adopted under the 1940 Act, the Trust may maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Trust; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Trust assets. The Board of Trustees reviews annually the
continuance of foreign custodial arrangements for the Trust. No assurance can
be given that the Trustees' appraisal of the risks in connection with foreign
custodial arrangements will always be correct or that expropriation,
nationalization, freezes, or confiscation of assets that would impact assets of
the Funds will not occur, and shareholders bear the risk of losses arising from
these or other events.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105, serves
as independent public accountants for all Funds. PricewaterhouseCoopers LLP
provides audit services, tax return preparation and assistance and consultation
in connection with review of SEC filings. Prior to November 1, 1995, Deloitte &
Touche LLP served as independent accountants for the PIMCO Money Market and
Total Return II Funds. See "The Reorganization of the PIMCO Money Market and
Total Return II Funds" for additional information.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also act as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectuses do not
contain all of the information included in the Trust's registration statement
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits
filed therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
94
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Trust as of March 31, 1998 for its fiscal year
then ended, including notes thereto, and the reports of PricewaterhouseCoopers
LLP thereon dated May 22, 1998, are incorporated by reference from the Trust's
1998 Annual Report. A copy of the Reports delivered with this Statement of
Additional Information should be retained for future reference. Financial
statements for the PIMCO Municipal Bond Fund as of March 31, 1998, including
notes thereto, and the report of Price Waterhouse thereon dated May 22, 1998,
are included herein.
95
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
May 22, 1998
To the Board of Trustees and
Shareholders of the PIMCO Funds
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of income, changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of the Municipal Bond Fund (the "Fund") at
March 31, 1998, and the results of its operations, the changes in its net assets
and the financial highlights for the period January 2, 1998 (commencement of
operations) through March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and the financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at March 31, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
96
<PAGE>
PIMCO FUNDS
MUNICIPAL BOND FUND
STATEMENT OF ASSETS & LIABILITIES
March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (cost $2,942,244) $2,933,369
Cash 149
Receivable for securities sold 148,896
Interest receivable 40,932
------------------
Total Assets 3,123,346
------------------
LIABILITIES:
Payable for investments purchased 98,734
Accrued advisory fee 639
Accrued administration fee 639
Other 31
------------------
Total Liabilities 100,043
------------------
------------------
NET ASSETS: $3,023,303
==================
Net assets consist of:
Paid-in capital $3,032,779
Accumulated undistributed realized loss (560)
Distributions in excess of net investment income prior years (41)
Unrealized depreciation (8,875)
------------------
Net assets $3,023,303
==================
Net asset value per share* (303,272 shares outstanding) $ 9.97
=================
*Offering price.
</TABLE>
97
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
PIMCO FUNDS
MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 2, 1998* THROUGH MARCH 31, 1998
<S> <C>
INTEREST INCOME: $ 36,345
EXPENSES
Advisory fees 1,800
Administration fees 1,800
Trustees' fee 7
-----------------
Total Expenses 3,607
-----------------
NET INVESTMENT INCOME 32,738
-----------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss on investments (560)
Net unrealized depreciation on investments (8,875)
-----------------
Net loss (9,435)
-----------------
-----------------
NET INCREASE IN ASSETS RESULTING FROM OPERATIONS $ 23,303
=================
</TABLE>
* Commencement of operations
98
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 2, 1998* THROUGH MARCH 31, 1998
<TABLE>
<CAPTION>
<S> <C>
INCREASE IN NET ASSETS FROM:
Operations:
Net investment income $ 32,738
Net realized loss on investments (560)
Net unrealized depreciation on investments (8,875)
------------------
Net increase (decrease) resulting from operations 23,303
------------------
DISTRIBUTIONS TO SHAREHOLDER:
Net investment income (32,780)
FUND SHARE TRANSACTIONS:
Receipts for shares sold 3,000,000
Issued as reinvestment of distributions 32,780
------------------
Net increase from fund share transactions 3,032,780
------------------
------------------
TOTAL INCREASE IN NET ASSETS $3,023,303
==================
NET ASSETS:
Beginning of period $
------------------
End of period** $3,023,303
------------------
**Including net undistributed (overdistributed) investment income of: $ (41)
------------------
</TABLE>
*Commencement of operations.
99
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
PIMCO FUNDS
MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 2, 1998* THROUGH MARCH 31, 1998
<S> <C>
Net Asset Value at Beginning of Period $ 10.00
Net investment income 0.11
Net realized/unrealized loss on investments (0.03)
-----------------
Total income from operations 0.08
-----------------
Dividends from net investment income (0.11)
-----------------
-----------------
Net Asset Value at End of Period 9.97
-----------------
Total Return 0.77%
Ratio of expenses to net average assets** 0.50%
Ratio of net investment income to average net assets** 4.46%
Portfolio turnover rate 60.41%
</TABLE>
*Commencement of operations.
**Annualized.
100
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
MUNICIPAL BOND FUND
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
PIMCO Funds (the "Trust") was established as a Massachusetts business trust
on February 19, 1987. The Trust is registered under the Investment Company
Act of 1940 (the "Act"), as amended, as an open-end investment management
company. The Trust currently consists of twenty-five separate investment
funds. Information presented in these financial statements pertains only to
the Municipal Bond Fund (the "Fund"). The Fund commenced operation on
January 2, 1998. The Fund seeks high current income exempt from federal
income tax, consistent with the preservation of capital. The Fund is
authorized to offer six classes of shares. As of March 31, 1998 the Fund has
only one class of shares outstanding; the Institutional Class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
SECURITY VALUATION. Portfolio securities and other financial instruments for
which market quotations are stated at market value. Market value is
determined on the basis of last reported sales prices, or if no sales are
reported, as is the case for most securities traded over-the-counter, the
mean between representative bid and asked quotations obtained from a
quotation reporting system or from established market markers. Fixed income
securities, including those to be purchased under firm commitment agreements,
are normally valued on the basis of quotes obtained from brokers and dealers
or pricing services. Short-term investments which mature in 60 days or less
are valued at amortized cost, which approximates market value. Certain fixed
income securities for which daily market quotations are not readily available
may be valued, pursuant to guidelines established by the Board of Trustees,
with reference to fixed income securities whose prices are more readily
obtainable.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
sold are recorded on the identified cost basis. Interest income is recorded
on the accrual basis commencing on the settlement date of the transaction,
and includes the accretion of discounts and amortization of premiums.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income of the Fund, are declared on each day the Trust is open for business
and are distributed to shareholders monthly.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
101
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
MUNICIPAL BOND FUND
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 1998
- --------------------------------------------------------------------------------
These differences are primarily due to differing treatments for such items as
wash sales, net operating losses and capital loss carryforwards.
FEDERAL INCOME TAXES. The Fund intends to qualify as a regulated investment
company and distribute all of its taxable income and net realized gains, if
applicable, to shareholders. Accordingly, no provision for federal income
taxes has been made.
ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
3. FEES, EXPENSES, AND RELATED PARTY TRANSACTIONS
INVESTMENT ADVISORY FEE. Pacific Investment Management Company ("PIMCO")
serves as investment adviser (the "Adviser") to the Fund, pursuant to an
investment advisory contract. The Adviser receives a monthly fee based on
average daily net assets of the Fund at an annual rate of 0.25% from the
Fund.
ADMINISTRATION FEE. PIMCO also serves as administrator (the
"Administrator"), and provides administrative services to the Fund for which
it receives a monthly fee based on average daily net assets of the Fund at an
annual rate of 0.25% from the Fund.
OTHER EXPENSES. The Fund is responsible for certain other expenses: (i)
salaries and other compensation of any of the Trust's executive officers and
employees who are not officers, directors, stockholders or employees of PIMCO
or its subsidiaries or affiliates; (ii) taxes and governmental fees; (iii)
brokerage fees and commissions and other portfolio transaction expenses; (iv)
the costs of borrowing money, including interest expenses; (v) fees and
expenses of the Trustees who are not "interested persons" of PIMCO or the
Trust, and any counsel retained exclusively for their benefit; (vi)
extraordinary expenses, including costs of litigation and indemnification
expenses; (vii) expenses, such as organizational expenses, which are
capitalized in accordance with generally accepted accounting principles; and
(viii) any expenses allocated or allocable to a specific class of shares,
which may include certain other expenses as permitted by the Trust's Multi-
Class Plan adopted pursuant to Rule 18f-3 under the 1940 Act and subject to
review and approval by the Trustees.
4. PURCHASES AND SALES OF SECURITIES
The aggregate cost of purchases and proceeds from the sales of securities,
excluding short-term securities, for the period ended March 31, 1998 were
$4,716,478 and $1,779,140, respectively.
102
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
MUNICIPAL BOND FUND
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 1998
- --------------------------------------------------------------------------------
5. SHARES OF BENEFICIAL INTEREST
As of March 31, 1998, the Fund has 303,272 Institutional Class shares
outstanding, all of which are owned by PIMCO. Activity during the period was
as follows:
Shares sold 300,000
Issued as reinvestment of dividends 3,272
Redeemed --
-------
Net Increase 303,272
-------
103
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
Municipal Bond Fund
Schedule of Investments - March 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITY PRINCIPAL
SECURITY DATE RATE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (96.83%)
ALABAMA 4.86%
Huntsville HLTH SER A 6/01/2017 5.000% 150,000 $ 146,813
-------------
146,813
-------------
ARIZONA 4.95%
PIMA County, Arizona Community College District 7/01/2016 5.000% 150,000 149,625
-------------
149,625
-------------
CALIFORNIA 8.25%
Los Angeles County Metropolitan Transportation Authority 7/01/2018 4.750% 150,000 141,563
Southern California Public Power Authority 7/01/2005 5.500% 100,000 107,750
-------------
249,313
-------------
COLORADO 4.79%
E-470 Public Highway Authority Colorado Redevelopment 9/01/2026 5.000% 150,000 144,938
-------------
144,938
-------------
DISTRICT OF COLUMBIA 4.90%
District of Columbia Revenue 2/01/2011 4.750% 150,000 148,125
-------------
148,125
-------------
GEORGIA 3.49 %
Dawson County School District 4/01/2012 4.900% 105,000 105,656
-------------
105,656
-------------
MASSACHUSETTS 9.77%
Massachusetts-CONS LN-SER C 8/01/2017 5.000% 150,000 146,625
METHUEN (FGIC) 11/01/2016 5.000% 150,000 148,875
-------------
295,500
-------------
MICHIGAN 3.29%
Michigan State Building Authority Revenue Bonds 10/15/2014 5.000% 100,000 99,375
-------------
99,375
-------------
</TABLE>
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
Municipal Bond Fund
Schedule of Investments - March 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
MATURITY PRINCIPAL
SECURITY DATE RATE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSISSIPPI 4.96%
Mississippi State Dept. Corrections CTF 1/01/2008 4.600% 150,000 150,000
---------
150,000
---------
NEW JERSEY 9.87%
New Jersey State Transportation TR FD 6/15/2018 5.000% 150,000 147,750
Rutgers State University, New Jersey 5/01/2011 4.800% 150,000 150,563
---------
298,313
NEW MEXICO 4.94%
Bernalillo County, New Mexico 12/01/2013 4.750% 150,000 149,250
---------
149,250
---------
NEW YORK 6.53%
New York Dorm-St. Clare Hosp B 2/15/2009 4.900% 100,000 98,875
New York State Urban Development Corp. 1/01/2009 4.800% 100,000 98,875
---------
197,500
OHIO 3.34%
Ohio State PUB FACS COMMN 11/01/1999 4.500% 100,000 101,125
---------
101,125
---------
PUERTO RICO 4.92%
Puerto Rico Commonwealth Aqueduct & Sewer 7/01/2015 5.000% 150,000 148,875
---------
148,875
---------
TEXAS 14.70%
Beaumont, Texas Indpt Sch District 2/15/2016 5.000% 150,000 147,938
Pflugerville, Texas Independent School District 8/15/2017 5.000% 150,000 146,813
Waco, Texas 2/01/2011 4.800% 150,000 149,810
---------
444,561
---------
</TABLE>
See Notes to Financial Statements
<PAGE>
PIMCO FUNDS
Municipal Bond Fund
Schedule of Investments - March 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY MATURITY PRINCIPAL
DATE RATE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WASHINGTON 3.27%
King Hospital 1 REF AMBAC 9/01/2010 4.750% 100,000 98,500
-----------
98,500
------------
TOTAL MUNICIPAL BONDS AND NOTES (COST $2,936,344) $2,927,469
============
SHORT-TERM INSTRUMENTS 0.20%
State Street Global Advisors Tax Free Money Market* 4/1/1998 3.070% 5,900 $ 5,900
------------
(Cost $5,900) $ 5,900
------------
TOTAL INVESTMENTS (TOTAL COSTS: $2,942,244)** $2,933,369
------------
OTHER ASSETS AND LIABILITIES (2.97%) 89,934
------------
NET ASSETS (100%) $3,023,303
============
</TABLE>
* The 7 day annualized yield was 3.11% at March 31, 1998.
** At March 31, 1998, net unrealized depreciation for tax purposes was
$8,875, which is comprised of gross appreciation of $5,776 and gross
depreciation of $14,651.
See Notes to Financial Statements
