<PAGE>
PIMCO TOTAL RETURN FUND
- --------------------------------------------------------------------------------
OBJECTIVE
Seeking maximum total return, consistent with preservation of capital and
prudent investment management.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENTS
An intermediate-term portfolio of investment grade fixed income securities.
- --------------------------------------------------------------------------------
INVESTMENT STYLE
TOTAL RETURN STRATEGY The fund seeks total return -- yield plus appreciation.
RISK MANAGEMENT The portfolio manager seeks to manage risk in a number of ways,
such as maintaining an intermediate-term portfolio with a duration that normally
varies within a 3- to 6-year time frame. However, net asset value will
fluctuate.
QUALITY The Fund maintains a portfolio primarily consisting of investment grade
fixed income securities.
DIVERSIFICATION Subject to market conditions, the Fund actively invests across
all sectors of the fixed income market in order to maximize investment
opportunities.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
Bill Gross of Pacific Investment Management Company, a PIMCO Advisors
institutional investment firm. With over $118 billion in assets under
management ($26 billion in mutual funds), the firm is one of the largest bond
managers in the country. Bill Gross has over 27 years of investment experience.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
For the latest PIMCO Total Return Fund performance, call 1-800-227-7337 or visit
our Web site at http://www.pimcofunds.com.
For more information about the Fund, see the following prospectus. PIMCO Funds
Distributors LLC, 2187 Atlantic Street, Stamford, CT 06902, www.pimcofunds.com.
P I M C O
FUNDS
<PAGE>
Prospectus
PIMCO Total Return Fund
April 20, 1998
PIMCO Funds (the "Trust") is an open-end series management invest-
ment company consisting of twenty-five separate investment portfo-
lios, each with different investment objectives and strategies.
The Total Return Fund (the "Fund") is described herein. The Trust
is designed to provide access to the professional investment man-
agement services offered by Pacific Investment Management Company
("Pacific Investment Management"), which serves as investment ad-
visor (the "Advisor") to the Fund. The address of PIMCO Funds is
840 Newport Center Drive, Suite 360, Newport Beach, CA 92660.
The Fund offers Class A shares in this Prospectus, which is in-
tended for participants in designated employer-sponsored retire-
ment or savings plans. Through other prospectuses, the Fund and
the other series of the Trust offer Class A shares (sold subject
to a front-end sales charge) for public investment, and offer up
to five additional classes of shares, including Institutional
Class shares, Administrative Class shares, Class B shares (sold
subject to a contingent deferred sales charge), Class C shares
(sold subject to an asset based sales charge) and Class D Shares.
See "Description of the Trust--Multiple Classes of Shares."
This Prospectus concisely describes the information investors
should know before investing in the Fund. Please read this Pro-
spectus carefully and keep it for further reference. Information
about the investment objective of the Fund, along with a detailed
description of the types of securities in which the Fund may in-
vest and of investment policies and restrictions applicable to the
Fund, are set forth in this Prospectus. There can be no assurance
that the investment objective of the Fund will be achieved. Be-
cause the market value of the Fund's investments will change, the
investment returns and net asset value per share of the Fund will
vary.
The Fund is an investment option under an employer-sponsored re-
tirement or savings program. The administrator of a retirement
plan or an employee benefits office can provide participants with
detailed information on how to participate in such a plan and how
to elect the Fund as an investment option. Please call 800-426-
0107 with any questions about the Fund. Questions about a partici-
pant's plan account should be directed to the plan administrator
or the organization that provides recordkeeping services for the
plan.
A Statement of Additional Information, dated April 1, 1998, as
amended or supplemented from time to time, is available free of
charge by writing to PIMCO Funds Distributors LLC (the "Distribu-
tor"), 2187 Atlantic Street, Stamford, Connecticut 06902, or by
telephoning 800-426-0107. The Statement of Additional Information,
which contains more detailed information about the Trust, has been
filed with the Securities and Exchange Commission and is incorpo-
rated by reference in this Prospectus. The Securities and Exchange
Commission maintains an Internet World Wide Web site (at
http://www.sec.gov) which contains the Statement of Additional In-
formation, materials that are incorporated by reference in this
Prospectus and the Statement of Additional Information, and other
information about the Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SE-
CURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORA-
TION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE FUND MAY INVEST ALL OF ITS ASSETS IN DERIVATIVE INSTRUMENTS,
SOME OF WHICH MAY BE PARTICULARLY SENSITIVE TO CHANGES IN PREVAIL-
ING INTEREST RATES. UNEXPECTED CHANGES IN INTEREST RATES MAY AD-
VERSELY AFFECT THE VALUE OF THE FUND'S INVESTMENTS IN PARTICULAR
DERIVATIVE INSTRUMENTS.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview...................... 3
Schedule of Fees.............. 3
Financial Highlights.......... 4
Investment Objective and
Policies...................... 5
Investment Risks and
Considerations................ 6
Characteristics and Risks of
Securities
and Investment Techniques.... 7
Performance Information....... 20
How to Buy Shares............. 22
Exchange Privilege............ 22
</TABLE>
<TABLE>
<S> <C>
How to Redeem..................... 23
Distributor and Distribution and
Servicing Plan.................... 23
How Net Asset Value Is Determined
.................................. 24
Distributions..................... 24
Taxes............................. 25
Management of the Trust........... 26
Description of the Trust.......... 28
Mailings to Shareholders.......... 28
Appendix A -- Description of
Duration.......................... 29
Appendix B -- Description of
Securities Ratings................ 30
</TABLE>
PIMCO Funds: Pacific Investment Management Series
2
<PAGE>
Overview
Pacific Investment Management, a subsidiary partnership of PIMCO
Advisors L.P., is the investment adviser of the Fund. Pacific In-
vestment Management is one of the premier fixed income investment
management firms in the U.S. As of December 31, 1997, Pacific In-
vestment Management had over $118 billion in assets under manage-
ment. Pacific Investment Management invests in all sectors of the
fixed income market, using its total return philosophy--seeking
capital appreciation as well as yield.
FUND
PROFILE <TABLE>
<CAPTION>
PIMCO FUND NAME PRIMARY OBJECTIVE DURATION CREDIT QUALITY(/1/)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL RETURN FUND Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital 10% below Baa
and prudent investment management
</TABLE>
1. As rated by Moody's Investors Service, Inc., or if unrated, de-
termined to be of comparable quality. For specific information
concerning the credit quality of the securities in the Fund's
portfolio, see "Investment Objective and Policies."
Schedule of Fees
SHAREHOLDER
TRANSACTION
EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------
<S> <C>
MAXIMUM INITIAL SALES CHARGE IMPOSED ON
PURCHASES None(/1/)
--------------------------------------------------------------
MAXIMUM SALES CHARGE IMPOSED ON REINVESTED
DIVIDENDS None
--------------------------------------------------------------
MAXIMUM CONTINGENT DEFERRED SALES CHARGE
("CDSC") None(/1/)
--------------------------------------------------------------
EXCHANGE FEE None
</TABLE>
1. Applies only to shares purchased through designated 401(k)
plans.
OPERATING
EXPENSES
<TABLE>
<CAPTION>
EXAMPLE: You
would pay the
following
expenses on a
$1,000 investment
assuming (1) 5%
annual return and
(2) redemption at
ANNUAL FUND OPERATING EXPENSES the end of each
(As a percentage of average net assets): time period:
TOTAL FUND
ADVISORY ADMINISTRATIVE 12b-1 OPERATING YEAR
FUND FEE FEE FEES(/1/) EXPENSES 1 3 5 10
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL
RETURN .25% .40% .25% .90% $9 $29 $50 $111
-----------------------------------------------------------------------
</TABLE>
1. 12b-1 fees represent servicing fees which are paid annually to
the Distributor and repaid to participating brokers, certain banks
and other financial intermediaries. See "Distributor and Distribu-
tion and Servicing Plans."
The purpose of the foregoing tables is to assist investors in un-
derstanding the various costs and expenses of the Trust that are
borne directly or indirectly by Class A shareholders of the Fund.
The information has been restated to reflect the Fund's current
fees and expenses.
NOTE: THE FIGURES SHOWN IN THE EXAMPLE ARE ENTIRELY HYPOTHETICAL,
AND ASSUME NO PAYMENT OF A SALES LOAD. THEY ARE NOT REPRESENTA-
TIONS OF PAST OR FUTURE PERFORMANCE OR EXPENSES; ACTUAL PERFOR-
MANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN.
April 20, 1998 Prospectus
3
<PAGE>
Financial Highlights
The following information regarding selected per share data and
ratios for shares of the Total Return Fund is part of the Trust's
financial statements, which are included in the Trust's Annual Re-
port dated March 31, 1997, and incorporated by reference in the
Statement of Additional Information. The Trust's audited financial
statements and selected per share data and ratios appearing below
have been examined by Price Waterhouse LLP, independent accoun-
tants, whose opinion thereon is also included in the Annual Re-
port, which may be obtained without charge.
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
TOTAL RETURN FUND CLASS A/a/
----------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.40
--------
INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME 0.12
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND
UNREALIZED) (0.12)
--------
TOTAL INCOME FROM INVESTMENT OPERATIONS (0.00)
--------
LESS DISTRIBUTIONS:
DIVIDENDS (FROM NET INVESTMENT INCOME) (0.13)
--------
NET ASSET VALUE, END OF PERIOD $ 10.27
========
TOTAL RETURN (WITHOUT SALES CHARGE) 0.02%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (IN 000S) $115,742
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.91%+
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.08%+
PORTFOLIO TURNOVER RATE 173.24%
</TABLE>
a From commencement of operations, January 13, 1997.
+ Annualized.
PIMCO Funds: Pacific Investment Management Series
4
<PAGE>
Investment Objective and Policies
The investment objective and general investment policies of the
Fund are described below. There can be no assurance that the in-
vestment objective of the Fund will be achieved. For temporary,
defensive or emergency purposes, the Fund may invest without limit
in U.S. debt securities, including short-term money market securi-
ties, when in the opinion of the Advisor it is appropriate to do
so. It is impossible to predict for how long such alternative
strategies will be utilized. The value of all securities and other
instruments held by the Fund will vary from time to time in re-
sponse to a wide variety of market factors. Consequently, the net
asset value per share of the Fund will vary.
The investment objective of the Fund is fundamental and may not
be changed without shareholder approval by vote of a majority of
the outstanding shares of the Fund. If there is a change in the
Fund's investment objective, including a change approved by a
shareholder vote, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current
financial position and needs.
Specific portfolio securities eligible for purchase by the
Fund, investment techniques that may be used by the Fund, and the
risks associated with these securities and techniques are de-
scribed more fully under "Characteristics and Risks of Securities
and Investment Techniques" in this Prospectus and "Investment Ob-
jectives and Policies" in the Statement of Additional Information.
TOTAL The investment objective of the Fund is to seek to maximize total
RETURN FUND return, consistent with preservation of capital and prudent in-
DESCRIPTION vestment management.
In selecting securities for the Fund, the Advisor utilizes eco-
nomic forecasting, interest rate anticipation, credit and call
risk analysis, foreign currency exchange rate forecasting, and
other security selection techniques. The proportion of the Fund's
assets committed to investment in securities with particular char-
acteristics (such as maturity, type and coupon rate) will vary
based on the Advisor's outlook for the U.S. and foreign economies,
the financial markets, and other factors.
The Fund invests under normal circumstances at least 65% of its
assets in a diversified portfolio of the following types of secu-
rities, which may have a variety of maturities: securities issued
or guaranteed by the U.S. Government, its agencies or instrumen-
talities ("U.S. Government securities"); corporate debt securi-
ties, including convertible securities and corporate commercial
paper; mortgage-backed and other asset-backed securities; infla-
tion-indexed bonds issued by both governments and corporations;
structured notes, including hybrid or "indexed" securities, and
loan participations; delayed funding loans and revolving credit
facilities; bank certificates of deposit, fixed time deposits and
bankers' acceptances; repurchase agreements and reverse repurchase
agreements; obligations of foreign governments or their subdivi-
sions, agencies and instrumentalities; and obligations of interna-
tional agencies or supranational entities. Fixed income securities
may have fixed, variable, or floating rates of interest, including
rates of interest that vary inversely at a multiple of a desig-
nated or floating rate, or that vary according to changes in rela-
tive values of currencies.
The average portfolio duration of the Fund will normally vary
within a three- to six-year time frame based on the Advisor's
forecast for interest rates. The Fund may invest up to 10% of its
assets in fixed income securities that are rated below investment
grade (i.e., securities rated at least Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Services ("S&P")) but rated B or higher by Moody's or S&P (or, if
unrated, determined by the Advisor to be of comparable quality).
For information on the risks associated with investments in secu-
rities rated below investment grade, see "Appendix B--Description
of Securities Ratings." The Fund may also invest up to 20% of its
assets in securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities of
foreign issuers. Portfolio holdings will be concentrated in areas
of the bond market (based on quality, sector, coupon or maturity)
which the Advisor believes to be relatively undervalued. The Fund
may invest all of its assets in derivative instruments or in mort-
gage- or asset-backed securities.
The Fund may adhere to its investment policy by entering into a
series of purchase and sale contracts or utilizing other invest-
ment techniques by which it may obtain market exposure to the se-
curities in which it primarily invests. In addition, the Fund may
lend its portfolio securities to brokers, dealers and other finan-
cial institutions in order to earn income. The Fund may purchase
and sell options and futures subject to the limits discussed be-
low, engage in credit spread trades and enter into forward foreign
currency contracts.
April 20, 1998 Prospectus
5
<PAGE>
As a non-fundamental, operating policy, the Advisor intends to
use foreign currency-related derivative instruments (currency
futures and related options, currency options, forward contracts
and swap agreements) in an effort to hedge foreign currency risk
with respect to at least 75% of the assets of the Fund denominated
in currencies other than the U.S. dollar. There can be no assur-
ance that the Advisor will be successful in doing so. The active
use of currency derivatives involves transaction costs which may
adversely affect yield and return.
TOTAL The "total return" sought by the Fund will consist of interest and
RETURN dividends from underlying securities, capital appreciation re-
flected in unrealized increases in value of portfolio securities
(realized by the shareholder only upon selling shares), or real-
ized from the purchase and sale of securities and use of futures
and options, or gains from favorable changes in foreign currency
exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income secu-
rities is not expected to be as great as that obtained by a port-
folio that invests primarily in equity securities. At the same
time, the market risk and price volatility of a fixed income port-
folio is expected to be less than that of an equity portfolio, so
that a fixed income portfolio is generally considered to be a more
conservative investment. The change in market value of fixed in-
come securities (and therefore their capital appreciation or de-
preciation) is largely a function of changes in the current level
of interest rates.
In managing fixed income securities, one of the principal tools
generally used by the Advisor is "duration," which is a measure of
the expected life of a fixed income security on a present value
basis, incorporating a bond's yield, coupon interest payments, fi-
nal maturity and call features. See "Appendix A--Description of
Duration." Generally, when interest rates are falling, a portfolio
with a shorter duration will not generate as high a level of total
return as a portfolio with a longer duration. Conversely, when in-
terest rates are rising, a portfolio with a shorter duration will
generally outperform longer duration portfolios. When interest
rates are flat, shorter duration portfolios generally will not
generate as high a level of total return as longer duration port-
folios (assuming that long-term interest rates are higher than
short-term rates, which is commonly the case). With respect to the
composition of any fixed income portfolio, the longer the duration
of the portfolio, the greater the anticipated potential for total
return, with, however, greater attendant market risk and price
volatility than for a portfolio with a shorter duration. The mar-
ket value of fixed income securities denominated in currencies
other than the U.S. dollar also may be affected by movements in
foreign currency exchange rates.
Investment Risks and Considerations
The following are some of the principal risks of investing in the
Fund. Investors should read this Prospectus carefully for a more
complete discussion of the risks relating to an investment in the
Fund. The net asset value per share of the Fund may be less at the
time of redemption than it was at the time of investment. General-
ly, the value of fixed income securities can be expected to vary
inversely with changes in prevailing interest rates, i.e., as in-
terest rates rise, market value tends to decrease, and vice versa.
In addition, the Fund may invest in securities rated lower than
Baa by Moody's or BBB by S&P. Such securities carry a high degree
of credit risk and are considered speculative by the major rating
agencies.
The Fund may invest in securities of foreign issuers, which may
be subject to additional risk factors, including foreign currency
and political risks, not applicable to securities of U.S. issuers.
The Fund's investment techniques may involve a form of borrowing,
which may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio
and may require liquidation of portfolio positions when it is not
advantageous to do so. The Fund may sell securities short, which
exposes the Fund to a risk of loss if the value of the security
sold short should increase.
The Fund may use derivative instruments, consisting of futures,
options, options on futures, and swap agreements, for hedging pur-
poses or as part of its investment strategies. Use of these in-
struments may involve certain costs and risks,
PIMCO Funds: Pacific Investment Management Series
6
<PAGE>
including the risk that the Fund could not close out a position
when it would be most advantageous to do so, the risk of an imper-
fect correlation between the value of the securities being hedged
and the value of the particular derivative instrument, and the
risk that unexpected changes in interest rates may adversely af-
fect the value of the Fund's investments in particular derivative
instruments. Unless otherwise indicated, all limitations applica-
ble to the Fund's investments (as stated in this Prospectus and in
the Statement of Additional Information) apply only at the time a
transaction is entered into. Any subsequent change in a rating as-
signed by any rating service to a security (or, if unrated, deemed
to be of comparable quality), or change in the percentage of the
Fund's assets invested in certain securities or other instruments,
or change in the average duration of the Fund's investment portfo-
lio, resulting from market fluctuations or other changes in the
Fund's total assets, will not require the Fund to dispose of an
investment until the Advisor determines that it is practicable to
sell or close out the investment without undue market or tax con-
sequences to the Fund. In the event that ratings services assign
different ratings to the same security, the Advisor will determine
which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned
ratings.
The Fund offers its shares to both retail and institutional in-
vestors. Institutional shareholders, some of whom also may be in-
vestment advisory clients of Pacific Investment Management, may
hold large positions in the Fund. Such shareholders may on occa-
sion make large redemptions of their holdings in the Fund to meet
their liquidity needs, in connection with strategic adjustments to
their overall portfolio of investments, or for other purposes.
Large redemptions from the Fund could require the Advisor to liq-
uidate portfolio positions when it is not most desirable to do so.
Liquidation of portfolio holdings also may cause the Fund to real-
ize taxable capital gains.
Characteristics and Risks of
Securities and Investment Techniques
The following describes in greater detail different types of secu-
rities and investment techniques used by the Fund, and discusses
certain concepts relevant to the investment policies of the Fund.
Additional information about the Fund's investments and investment
practices may be found in the Statement of Additional Information.
U.S. U.S. Government securities are obligations of, or guaranteed by,
GOVERNMENT the U.S. Government, its agencies or instrumentalities. The U.S.
SECURITIES Government does not guarantee the net asset value of the Fund's
shares. Some U.S. Government securities, such as Treasury bills,
notes and bonds, and securities guaranteed by the Government Na-
tional Mortgage Association ("GNMA"), are supported by the full
faith and credit of the United States; others, such as those of
the Federal Home Loan Banks, are supported by the right of the is-
suer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association ("FNMA"), are supported
by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. Government securities include
securities that have no coupons, or have been stripped of their
unmatured interest coupons, individual interest coupons from such
securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are pur-
chased at a deep discount from their value at maturity. Because
interest on zero coupon securities is not distributed on a current
basis but is, in effect, compounded, zero coupon securities tend
to be subject to greater market risk than interest-paying securi-
ties of similar maturities. Custodial receipts issued in connection
with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are therefore not
U.S. Government securities, although the underlying bond represented
by such receipt is a debt obligation of the U.S. Treasury. Other
zero coupon Treasury securities (STRIPs and CUBEs) are direct
obligations of the U.S. Government.
April 20, 1998 Prospectus
7
<PAGE>
CORPORATE Corporate debt securities include corporate bonds, debentures,
DEBT notes and other similar corporate debt instruments, including con-
SECURITIES vertible securities. Debt securities may be acquired with warrants
attached. Corporate income-producing securities may also include
forms of preferred or preference stock. The rate of interest on a
corporate debt security may be fixed, floating or variable, and
may vary inversely with respect to a reference rate. See "Variable
and Floating Rate Securities" below. The rate of return or return
of principal on some debt obligations may be linked or indexed to
the level of exchange rates between the U.S. dollar and a foreign
currency or currencies.
Investments in corporate debt securities that are rated below
investment grade (rated below Baa (Moody's) or BBB (S&P)) are de-
scribed as "speculative" both by Moody's and S&P. Such securities
are sometimes referred to as "junk bonds," and may be subject to
greater market fluctuations, less liquidity and greater risk of
loss of income or principal, including a greater possibility of
default or bankruptcy of the issuer of such securities, than are
more highly rated debt securities. Moody's also describes securi-
ties rated Baa as having speculative characteristics. The Advisor
seeks to minimize these risks through diversification, in-depth
credit analysis and attention to current developments in interest
rates and market conditions. See "Appendix B--Description of Secu-
rities Ratings." Investments in high yield securities are dis-
cussed separately below under "High Yield Securities ("Junk
Bonds")."
CONVERTIBLE The Fund may invest in convertible securities, which may offer
SECURITIES higher income than the common stocks into which they are convert-
ible. Typically, convertible securities are callable by the compa-
ny, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Fund may invest consist
of bonds, notes, debentures and preferred stocks which may be con-
verted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. The Fund may be required
to permit the issuer of a convertible security to redeem the secu-
rity, convert it into the underlying common stock, or sell it to a
third party. Thus, the Fund may not be able to control whether the
issuer of a convertible security chooses to convert that security.
If the issuer chooses to do so, this action could have an adverse
effect on the Fund's ability to achieve its investment objectives.
While the Fund intends to invest primarily in fixed income se-
curities, it may invest in convertible securities or equity secu-
rities. While some countries or companies may be regarded as fa-
vorable investments, pure fixed income opportunities may be unat-
tractive or limited due to insufficient supply, legal or technical
restrictions. In such cases, the Fund may consider equity securi-
ties or convertible bonds to gain exposure to such investments.
LOAN The Fund may invest in fixed- and floating-rate loans arranged
PARTICIPA- through private negotiations between an issuer of debt instruments
TIONS AND and one or more financial institutions ("lenders"). Generally, the
ASSIGNMENTS Fund's investments in loans are expected to take the form of loan
participations and assignments of portions of loans from third
parties.
Large loans to corporations or governments may be shared or
syndicated among several lenders, usually banks. The Fund may par-
ticipate in such syndicates, or can buy part of a loan, becoming a
direct lender. Participations and assignments involve special
types of risk, including limited marketability and the risks of
being a lender. See "Illiquid Securities" for a discussion of the
limits on the Fund's investments in loan participations and as-
signments with limited marketability. If the Fund purchases a par-
ticipation, it may only be able to enforce its rights through the
lender, and may assume the credit risk of the lender in addition
to the borrower. In assignments, the Fund's rights against the
borrower may be more limited than those held by the original lend-
er.
DELAYED The Fund may also enter into, or acquire participations in, de-
FUNDING layed funding loans and revolving credit facilities. Delayed fund-
LOANS AND ing loans and revolving credit facilities are borrowing arrange-
REVOLVING ments in which the lender agrees to make loans up to a maximum
CREDIT amount upon demand by the borrower during a specified term. A re-
FACILITIES volving credit facility differs from a delayed funding loan in
that as the borrower repays the loan, an amount equal to the re-
payment may be borrowed again during the term of the revolving
credit facility. These commitments may have the effect of requir-
ing the Fund to
PIMCO Funds: Pacific Investment Management Series
8
<PAGE>
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).
The Fund may acquire a participation interest in delayed fund-
ing loans or revolving credit facilities from a bank or other fi-
nancial institution. See "Loan Participations and Assignments."
The terms of the participation require the Fund to make a pro rata
share of all loans extended to the borrower and entitles the Fund
to a pro rata share of all payments made by the borrower. Delayed
funding loans and revolving credit facilities usually provide for
floating or variable rates of interest. To the extent that the
Fund is committed to advance additional funds, it will at all
times segregate assets, determined to be liquid by the Advisor in
accordance with procedures established by the Board of Trustees,
in an amount sufficient to meet such commitments.
VARIABLE Variable and floating rate securities provide for a periodic ad-
AND justment in the interest rate paid on the obligations. The terms
FLOATING of such obligations must provide that interest rates are adjusted
RATE periodically based upon an interest rate adjustment index as pro-
SECURITIES vided in the respective obligations. The adjustment intervals may
be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Fund may engage in credit spread trades and invest in
floating rate debt instruments ("floaters"). A credit spread trade
is an investment position relating to a difference in the prices
or interest rates of two securities or currencies, where the value
of the investment position is determined by movements in the dif-
ference between the prices or interest rates, as the case may be,
of the respective securities or currencies. The interest rate on a
floater is a variable rate which is tied to another interest rate,
such as a money-market index or Treasury bill rate. The interest
rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters pro-
vide the Fund with a certain degree of protection against rises in
interest rates, the Fund will participate in any declines in in-
terest rates as well.
The Fund may also invest in inverse floating rate debt instru-
ments ("inverse floaters"). The interest rate on an inverse
floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse
floating rate security may exhibit greater price volatility than a
fixed rate obligation of similar credit quality. The Fund has
adopted a policy under which the Fund will invest no more than 5%
of its net assets in any combination of inverse floater, interest
only ("IO"), or principal only ("PO") securities. See "Mortgage-
Related and Other Asset-Backed Securities" for a discussion of IOs
and POs.
INFLATION- Inflation-indexed bonds are fixed income securities whose princi-
INDEXED pal value is periodically adjusted according to the rate of infla-
BONDS tion. The interest rate on these bonds is generally fixed at issu-
ance at a rate lower than typical bonds. Over the life of an in-
flation-indexed bond, however, interest will be paid based on a
principal value which is adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will
initially have maturities of five or ten years, although it is an-
ticipated that securities with other maturities will be issued in
the future. The securities will pay interest on a semi-annual ba-
sis, equal to a fixed percentage of the inflation-adjusted princi-
pal amount. For example, if an investor purchased an inflation-in-
dexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first
six months were 1%, the mid-year par value of the bond would be
$1,010 and the first semi-annual interest payment would be $15.15
($1,010 times 1.5%). If inflation during the second half of the
year reached 3%, the end-of-year par value of the bond would be
$1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted down-
ward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be
reduced. Repayment of the original bond principal upon maturity
(as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation-indexed bonds, even during a period of defla-
tion. However, the current market value of the bonds is not guar-
anteed, and will fluctuate. The Fund may also invest in other in-
flation
April 20, 1998 Prospectus
9
<PAGE>
related bonds which may or may not provide a similar guarantee. If
such a guarantee of principal is not provided, the adjusted prin-
cipal value of the bond repaid at maturity may be less than the
original principal.
The value of inflation-indexed bonds is expected to change in
response to changes in real interest rates. Real interest rates in
turn are tied to the relationship between nominal interest rates
and the rate of inflation. Therefore, if inflation were to rise at
a faster rate than nominal interest rates, real interest rates
might decline, leading to an increase in value of inflation-in-
dexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, lead-
ing to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-
term inflationary trends, short-term increases in inflation may
lead to a decline in value. If interest rates rise due to reasons
other than inflation (for example, due to changes in currency ex-
change rates), investors in these securities may not be protected
to the extent that the increase is not reflected in the bond's in-
flation measure.
The U.S. Treasury has only recently begun issuing inflation-in-
dexed bonds. As such, there is no trading history of these securi-
ties, and there can be no assurance that a liquid market in these
instruments will develop, although one is expected. Lack of a liq-
uid market may impose the risk of higher transaction costs and the
possibility the Fund may be forced to liquidate positions when it
would not be advantageous to do so. There also can be no assurance
that the U.S. Treasury will issue any particular amount of infla-
tion-indexed bonds. Certain foreign governments, such as the
United Kingdom, Canada and Australia, have a longer history of is-
suing inflation-indexed bonds, and there may be a more liquid mar-
ket in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied
to the Consumer Price Index for Urban Consumers ("CPI-U"), which
is calculated monthly by the U.S. Bureau of Labor Statistics. The
CPI-U is a measurement of changes in the cost of living, made up
of components such as housing, food, transportation and energy.
Inflation-indexed bonds issued by a foreign government are gener-
ally adjusted to reflect a comparable inflation index, calculated
by that government. There can be no assurance that the CPI-U or
any foreign inflation index will accurately measure the real rate
of inflation in the prices of goods and services. Moreover, there
can be no assurance that the rate of inflation in a foreign coun-
try will be correlated to the rate of inflation in the United
States.
MORTGAGE- The Fund may invest all of its assets in mortgage- or other asset-
RELATED AND backed securities. The value of some mortgage- or asset-backed se-
OTHER curities in which the Fund invests may be particularly sensitive
ASSET- to changes in prevailing interest rates, and, like the other in-
BACKED vestments of the Fund, the ability of the Fund to successfully
SECURITIES utilize these instruments may depend in part upon the ability of
the Advisor to forecast interest rates and other economic factors
correctly.
MORTGAGE-PASS-THROUGH SECURITIES are securities representing in-
terests in "pools" of mortgage loans secured by residential or
commercial real property in which payments of both interest and
principal on the securities are generally made monthly, in effect
"passing through" monthly payments made by the individual borrow-
ers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early re-
payment of principal on some mortgage-related securities (arising
from prepayments of principal due to sale of the underlying prop-
erty, refinancing, or foreclosure, net of fees and costs which may
be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepay-
ment has been purchased at a premium, the value of the premium
would be lost in the event of prepayment. Like other fixed income
securities, when interest rates rise, the value of a mortgage-re-
lated security generally will decline; however, when interest
rates are declining, the value of mortgage-related securities with
prepayment features may not increase as much as other fixed income
securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security,
and may have the effect of shortening or extending the effective
maturity of the security beyond what was anticipated at the time
of purchase. To the extent that unanticipated rates of prepayment
on underlying mortgages increase the effective maturity of a mort-
gage-related security, the volatility of such security can be ex-
pected to increase.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves)
may be guaranteed by the full faith and credit of the U.S. Govern-
ment (in the case of securities guaranteed by GNMA); or guaranteed
by agencies or instrumentalities of the U.S. Government (in the
case of securi-
10
PIMCO Funds: Pacific Investment Management Series
<PAGE>
ties guaranteed by FNMA or the Federal Home Loan Mortgage Corpora-
tion ("FHLMC"), which are supported only by the discretionary au-
thority of the U.S. Government to purchase the agency's obliga-
tions). Mortgage-related securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of in-
surance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit, which may be issued by
governmental entities, private insurers or the mortgage poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs") are hybrid mortgage-
related instruments. Interest and pre-paid principal on a CMO are
paid, in most cases, on a monthly basis. CMOs may be collateral-
ized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA. CMOs are structured into multiple classes,
with each class bearing a different stated maturity. Monthly pay-
ments of principal, including prepayments, are first returned to
investors holding the shortest maturity class; investors holding
the longer maturity classes receive principal only after the first
class has been retired. CMOs that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities
will be considered U.S. Government securities by the Fund, while
other CMOs, even if collateralized by U.S. Government securities,
will have the same status as other privately issued securities for
purposes of applying the Fund's diversification tests.
COMMERCIAL MORTGAGE-BACKED SECURITIES include securities that re-
flect an interest in, and are secured by, mortgage loans on com-
mercial real property. The market for commercial mortgage-backed
securities developed more recently and in terms of total outstand-
ing principal amount of issues is relatively small compared to the
market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed secu-
rities reflect the risks of investing in the real estate securing
the underlying mortgage loans. These risks reflect the effects of
local and other economic conditions on real estate markets, the
ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility
than other types of mortgage-related or asset-backed securities.
MORTGAGE-RELATED SECURITIES include securities other than those
described above that directly or indirectly represent a participa-
tion in, or are secured by and payable from, mortgage loans on
real property, such as mortgage dollar rolls (see "Reverse Repur-
chase Agreements, Dollar Rolls, and Borrowings"), CMO residuals or
stripped mortgage-backed securities ("SMBS"), and may be struc-
tured in classes with rights to receive varying proportions of
principal and interest.
A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while
the other class will receive most of the interest and the remain-
der of the principal. In the most extreme case, one class will re-
ceive all of the interest (the interest-only, or "IO" class),
while the other class will receive all of the principal (the prin-
cipal-only, or "PO" class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (includ-
ing prepayments) on the related underlying mortgage assets, and a
rapid rate of principal payments may have a material adverse ef-
fect on the Fund's yield to maturity from these securities. The
Fund has adopted a policy under which the Fund will invest no more
than 5% of its net assets in any combination of IO, PO, or inverse
floater securities. The Fund may invest in other asset-backed se-
curities that have been offered to investors. For a discussion of
the characteristics of some of these instruments, see the State-
ment of Additional Information.
REPURCHASE For the purpose of achieving income, the Fund may enter into re-
AGREEMENTS purchase agreements, which entail the purchase of a portfolio-eli-
gible security from a bank or broker-dealer that agrees to repur-
chase the security at the Fund's cost plus interest within a spec-
ified time (normally one day). If the party agreeing to repurchase
should default, as a result of bankruptcy or otherwise, the Fund
will seek to sell the securities which it holds, which action
could involve procedural costs or delays in addition to a loss on
the securities if their value should fall below their repurchase
price. The Fund will invest no more than 15% of its net assets
(taken at current market value) in repurchase agreements maturing
in more than seven days.
11
April 20, 1998 Prospectus
<PAGE>
REVERSE A reverse repurchase agreement involves the sale of a security by
REPURCHASE the Fund and its agreement to repurchase the instrument at a spec-
AGREEMENTS, ified time and price. Under a reverse repurchase agreement, the
DOLLAR Fund continues to receive any principal and interest payments on
ROLLS, AND the underlying security during the term of the agreement. The Fund
BORROWINGS generally will maintain a segregated account consisting of assets
determined to be liquid by the Advisor in accordance with proce-
dures established by the Board of Trustees to cover its obliga-
tions under reverse repurchase agreements and, to this extent, a
reverse repurchase agreement (or economically similar transaction)
will not be considered a "senior security" subject to the 300% as-
set coverage requirements otherwise applicable to borrowings by
the Fund.
The Fund may enter into dollar rolls, in which the Fund sells
mortgage-backed or other securities for delivery in the current
month and simultaneously contracts to purchase substantially simi-
lar securities on a specified future date. In the case of dollar
rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will
have the same interest rate as those sold, but will be supported
by different pools of mortgages. The Fund forgoes principal and
interest paid during the roll period on the securities sold in a
dollar roll, but the Fund is compensated by the difference between
the current sales price and the lower price for the future pur-
chase as well as by any interest earned on the proceeds of the se-
curities sold. The Fund also could be compensated through the re-
ceipt of fee income equivalent to a lower forward price. The Fund
will maintain a segregated account consisting of assets determined
to be liquid by the Advisor in accordance with procedures estab-
lished by the Board of Trustees to cover its obligations under
dollar rolls.
To the extent that positions in reverse repurchase agreements,
dollar rolls or similar transactions are not covered through the
maintenance of a segregated account consisting of liquid assets at
least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Fund's limitations on
borrowings, which would restrict the aggregate of such transac-
tions (plus any other borrowings) to 33 1/3% of the Fund's total
assets. Apart from such transactions, the Fund will not borrow
money, except for temporary administrative purposes.
LOANS OF For the purpose of achieving income, the Fund may lend its portfo-
PORTFOLIO lio securities to brokers, dealers, and other financial institu-
SECURITIES tions, provided:
(i) the loan is secured continuously by collateral consisting of
U.S. Government securities, cash or cash equivalents (nego-
tiable certificates of deposit, bankers' acceptances or let-
ters of credit) maintained on a daily mark-to-market basis in
an amount at least equal to the current market value of the
securities loaned;
(ii) the Fund may at any time call the loan and obtain the return
of the securities loaned;
(iii) the Fund will receive any interest or dividends paid on the
loaned securities; and
(iv) the aggregate market value of securities loaned will not at
any time exceed 33 1/3% of the total assets of the Fund.
The Fund's performance will continue to reflect changes in the
value of the securities loaned and will also reflect the receipt
of either interest, through investment of cash collateral by the
Fund in permissible investments, or a fee, if the collateral is
U.S. Government securities. Securities lending involves the risk
of loss of rights in the collateral or delay in recovery of the
collateral should the borrower fail to return the security loaned
or become insolvent. The Fund may pay lending fees to the party
arranging the loan.
WHEN-
ISSUED, The Fund may purchase or sell securities on a when-issued, delayed
DELAYED delivery, or forward commitment basis. These transactions involve
DELIVERY a commitment by the Fund to purchase or sell securities for a pre-
AND FORWARD determined price or yield, with payment and delivery taking place
COMMITMENT more than seven days in the future, or after a period longer than
TRANSAC- the customary settlement period for that type of security. When
TIONS such purchases are outstanding, the Fund will set aside and main-
tain until the settlement date in a segregated account, assets de-
termined to be liquid by the Advisor in accordance with procedures
established by the Board of Trustees, in an amount sufficient to
meet the purchase price. Typically, no income accrues on securi-
ties the Fund has committed to purchase prior to the time delivery
of the securities is made, although the Fund may earn income on
securities it has deposited in a segregated account. When purchas-
ing a security
12
PIMCO Funds: Pacific Investment Management Series
<PAGE>
on a when-issued, delayed delivery, or forward commitment basis,
the Fund assumes the rights and risks of ownership of the securi-
ty, including the risk of price and yield fluctuations, and takes
such fluctuations into account when determining its net asset val-
ue. Because the Fund is not required to pay for the security until
the delivery date, these risks are in addition to the risks asso-
ciated with the Fund's other investments. If the Fund remains sub-
stantially fully invested at a time when when-issued, delayed de-
livery, or forward commitment purchases are outstanding, the pur-
chases may result in a form of leverage. When the Fund has sold a
security on a when-issued, delayed delivery, or forward commitment
basis, the Fund does not participate in future gains or losses
with respect to the security. If the other party to a transaction
fails to deliver or pay for the securities, the Fund could miss a
favorable price or yield opportunity or could suffer a loss. The
Fund may dispose of or renegotiate a transaction after it is en-
tered into, and may sell when-issued or forward commitment securi-
ties before they are delivered, which may result in a capital gain
or loss. There is no percentage limitation on the extent to which
the Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis.
SHORT SALES The Fund may from time to time effect short sales as part of its
overall portfolio management strategies, including the use of de-
rivative instruments, or to offset potential declines in value of
long positions in similar securities as those sold short. A short
sale (other than a short sale against the box) is a transaction in
which the Fund sells a security it does not own at the time of the
sale in anticipation that the market price of that security will
decline. To the extent that the Fund engages in short sales, it
must (except in the case of short sales "against the box") main-
tain asset coverage in the form of assets determined to be liquid
by the Advisor in accordance with procedures established by the
Board of Trustees, in a segregated account, or otherwise cover its
position in a permissible manner. A short sale is "against the
box" to the extent that the Fund contemporaneously owns, or has
the right to obtain at no added cost, securities identical to
those sold short.
FOREIGN The Fund may invest directly in fixed income securities of non-
SECURITIES U.S. issuers. The Fund will concentrate its foreign investments in
securities of issuers based in developed countries; however, the
Fund may invest up to 10% of its assets in securities of issuers
based in emerging market countries.
Individual foreign economies may differ favorably or unfavor-
ably from the U.S. economy in such respects as growth of gross do-
mestic product, rate of inflation, capital reinvestment, re-
sources, self-sufficiency and balance of payments positions. The
securities markets, values of securities, yields and risks associ-
ated with securities markets in differ- ent countries may change
independently of each other. Investing in the securities of is-
suers in any foreign country involves special risks and considera-
tions not typically associated with investing in U.S. companies.
Shareholders should consider carefully the substantial risks in-
volved in investing in securities issued by companies and govern-
ments of foreign nations. These risks include: differences in ac-
counting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory tax-
ation; adverse changes in investment or exchange control regula-
tions (which may include suspension of the ability to transfer
currency from a country); and political instability which could
affect U.S. investments in foreign countries. Additionally, for-
eign securities and dividends and interest payable on those secu-
rities may be subject to foreign taxes, including taxes withheld
from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and there-
fore may exhibit greater price volatility. Additional costs asso-
ciated with an investment in foreign securities may include higher
custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in for-
eign exchange rates also will affect the value of securities de-
nominated or quoted in currencies other than the U.S. dollar.
The Fund may invest in the securities of issuers based in coun-
tries with developing economies. Investing in developing (or
"emerging market") countries involves certain risks not typically
associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign,
developed countries. A number of emerging market countries re-
strict, to varying degrees, foreign investment in securities. Re-
patriation of investment
13
April 20, 1998 Prospectus
<PAGE>
income, capital, and the proceeds of sales by foreign investors
may require governmental registration and/or approval in some
emerging market countries. A number of the currencies of emerging
market countries have experienced significant declines against the
U.S. dollar in recent years, and devaluation may occur subsequent
to investment in these currencies by the Fund. Inflation and rapid
fluctuations in inflation rates have had, and may continue to
have, negative effects on the economies and securities markets of
certain emerging market countries. Many of the emerging securities
markets are relatively small, have low trading volumes, suffer pe-
riods of relative illiquidity, and are characterized by signifi-
cant price volatility. There is a risk in emerging market coun-
tries that a future economic or political crisis could lead to
price controls, forced mergers of companies, expropriation or con-
fiscatory taxation, seizure, nationalization, or creation of gov-
ernment monopolies, any of which may have a detrimental effect on
the Fund's investment.
Additional risks of investing in emerging market countries may
include: currency exchange rate fluctuations; greater social, eco-
nomic and political uncertainty and instability (including the
risk of war); more substantial governmental involvement in the
economy; less governmental supervision and regulation of the secu-
rities markets and participants in those markets; unavailability
of currency hedging techniques in certain emerging market coun-
tries; the fact that companies in emerging market countries may be
newly organized and may be smaller and less seasoned companies;
the difference in, or lack of, auditing and financial reporting
standards, which may result in unavailability of material informa-
tion about issuers; the risk that it may be more difficult to ob-
tain and/or enforce a judgment in a court outside the United
States; and significantly smaller market capitalization of securi-
ties markets. Also, any change in the leadership or policies of
Eastern European countries, or the countries that exercise a sig-
nificant influence over those countries, may halt the expansion of
or reverse the liberalization of foreign investment policies now
occurring and adversely affect existing investment opportunities.
Emerging securities markets may have different clearance and
settlement procedures, which may be unable to keep pace with the
volume of securities transactions or otherwise make it difficult
to engage in such transactions. Settlement problems may cause the
Fund to miss attractive investment opportunities, hold a portion
of its assets in cash pending investment, or delay in disposing of
a portfolio security. Such a delay could result in possible lia-
bility to a purchaser of the security.
The Fund may invest in Brady Bonds, which are securities cre-
ated 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 for-
mer U.S. Secretary of the Treasury, Nicholas F. Brady. Brady Bonds
have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily
the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Gov-
ernment securities. In light of the residual risk of Brady Bonds
and, among other factors, the history of defaults with respect to
commercial bank loans by public and private entities in countries
issuing Brady Bonds, investments in Brady Bonds may be viewed as
speculative. There can be no assurance that Brady Bonds acquired
by the Fund will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Fund to suffer a
loss of interest or principal on any of its holdings. For further
information, see the Statement of Additional Information.
The Fund's investments in foreign currency denominated debt ob-
ligations and hedging activities will likely produce a difference
between its book income and its taxable income. This difference
may cause a portion of the Fund's income distributions to consti-
tute returns of capital for tax purposes or require the Fund to
make distributions exceeding book income to qualify as a regulated
investment company for federal tax purposes.
FOREIGN Foreign currency exchange rates may fluctuate significantly over
CURRENCY short periods of time. They generally are determined by the forces
TRANSAC- of supply and demand in the foreign exchange markets and the rela-
TIONS tive merits of investments in different countries, actual or per-
ceived changes in interest rates and other complex factors, as
seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention (or the failure
to intervene) by U.S. or foreign governments or central banks, by
currency controls or political developments in the U.S. or abroad.
For example, significant uncertainty surrounds the proposed
intoduction of the euro (a common currency unit for the European
14
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Union) in January 1999 and its effect on the value of securities
denominated in local European currencies. These and other curren-
cies in which the Fund's assets are denominated may be devalued
against the U.S. dollar, resulting in a loss to the Fund.
The Fund may buy and sell foreign currencies on a spot and for-
ward basis to reduce the risks of adverse changes in foreign ex-
change rates. A forward foreign currency exchange contract in-
volves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the
time of the contract. By entering into a forward foreign currency
exchange contract, the Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for
the duration of the contract. As a result, the Fund reduces its
exposure to changes in the value of the currency it will deliver
and increases its exposure to changes in the value of the currency
it will exchange into. The effect on the value of the Fund is sim-
ilar to selling securities denominated in one currency and pur-
chasing securities denominated in another. Contracts to sell for-
eign currency would limit any potential gain which might be real-
ized by the Fund if the value of the hedged currency increases.
The Fund may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Fund's investment
or anticipated investment in securities denominated in foreign
currencies. The Fund also may enter into these contracts for pur-
poses of increasing exposure to a foreign currency or to shift ex-
posure to foreign currency fluctuations from one country to anoth-
er. The Fund may use one currency (or a basket of currencies) to
hedge against adverse changes in the value of another currency (or
a basket of currencies) when exchange rates between the two cur-
rencies are positively correlated. The Fund will segregate assets
determined to be liquid by the Advisor in accordance with proce-
dures established by the Board of Trustees, in a segregated ac-
count to cover its obligations under forward foreign currency ex-
change contracts entered into for non-hedging purposes.
The Fund may invest in options on foreign currencies and for-
eign currency futures and options thereon. The Fund also may in-
vest in foreign currency exchange-related securities, such as for-
eign currency warrants and other instruments whose return is
linked to foreign currency exchange rates. The Fund will use these
techniques to hedge at least 75% of its exposure to foreign cur-
rency. For a description of these instruments, see "Derivative In-
struments" below and the Statement of Additional Information.
HIGH YIELD The Fund may invest up to 10% of its assets in fixed income secu-
SECURITIES rities rated lower than Baa by Moody's or lower than BBB by S&P
("JUNK but rated at least B by Moody's or S&P (or, if not rated, of com-
BONDS") parable quality). Securities rated lower than Baa by Moody's or
lower than BBB by S&P are sometimes referred to as "high yield" or
"junk" bonds. Securities rated Baa are considered by Moody's to
have some speculative characteristics. Investors should consider
the following risks associated with high yield securities before
investing in the Fund.
Investing in high yield securities involves special risks in
addition to the risks associated with investments in higher rated
fixed income securities. High yield securities may be regarded as
predominately speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Analysis of the
creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and
the ability of the Fund to achieve its investment objective may,
to the extent of its investments in high yield securities, be more
dependent upon such creditworthiness analysis than would be the
case if the Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or per-
ceived adverse economic and competitive industry conditions than
higher grade securities. The prices of high yield securities have
been found to be less sensitive to interest rate changes than more
highly rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for ex-
ample, could cause a decline in high yield security prices because
the advent of a recession could lessen the ability of a highly
leveraged company to make principal and interest payments on its
debt securities. If the issuer of high yield securities defaults,
the Fund may incur additional expenses to seek recovery. In the
case of high yield securities structured as zero coupon or pay-
ment-in-kind securities, the market prices of such securities are
affected to a greater extent by interest rate changes, and there-
fore tend to be more volatile than securities which pay interest
periodically and in cash.
April 20, 1998 Prospectus
15
<PAGE>
The secondary markets on which high yield securities are traded
may be less liquid than the market for higher grade securities.
Less liquidity in the secondary trading markets could adversely
affect and cause large fluctuations in the daily net asset value
of the Fund's shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a
thinly traded market.
The use of credit ratings as the sole method of evaluating high
yield securities can involve certain risks. For example, credit
ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield securities. Also, credit
rating agencies may fail to change credit ratings in a timely
fashion to reflect events since the security was last rated. The
Advisor does not rely solely on credit ratings when selecting se-
curities for the Fund, and develops its own independent analysis
of issuer credit quality. If a credit rating agency changes the
rating of a portfolio security held by the Fund, the Fund may re-
tain the portfolio security if the Advisor deems it in the best
interest of shareholders.
During the year ended March 31, 1997, based upon the dollar-
weighted average ratings of the Fund's portfolio holdings at the
end of each month in the Fund's fiscal year, the Fund had the fol-
lowing percentages of its net assets invested in securities rated
in the categories indicated as rated by Moody's (or, if unrated,
determined by the Advisor to be of comparable quality). See "Ap-
pendix B--Description of Securities Ratings," for further informa-
tion.
FIXED INCOME SECURITIES RATINGS
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Below
Prime 1 Aaa Aa A Prime 1 Baa Ba B
-------------------------------------------------------------------------------
13% 66% 2% 4% 0% 9% 5% 1%
</TABLE>
These figures are intended solely to provide disclosure about
the Fund's asset composition during its most recent fiscal year.
The asset composition after this time may or may not be approxi-
mately the same as represented by such figures. In addition, the
categories reflect ratings by Moody's, and ratings assigned by S&P
may not be consistent with ratings assigned by Moody's or other
credit ratings services, and the Advisor may not necessarily agree
with a rating assigned by any credit rating agency.
DERIVATIVE The Fund may purchase and write call and put options on securi-
INSTRUMENTS ties, securities indexes and foreign currencies, and enter into
futures contracts and use options on futures contracts as further
described below. The Fund also may enter into swap agreements with
respect to foreign currencies, interest rates, and securities in-
dexes. The Fund may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates or securities
prices or as part of its overall investment strategies. The Fund
may also purchase and sell options relating to foreign currencies
for purposes of increasing exposure to a foreign currency or to
shift exposure to foreign currency fluctuations from one country
to another. The Fund will maintain a segregated account consisting
of assets determined to be liquid by the Advisor in accordance
with procedures established by the Board of Trustees (or, as per-
mitted by applicable regulation, enter into certain offsetting po-
sitions) to cover its obligations under options, futures, and
swaps to avoid leveraging of the Fund.
The Fund considers derivative instruments to consist of securi-
ties or other instruments whose value is derived from or related
to the value of some other instrument or asset, and not to include
those securities whose payment of principal and/or interest de-
pends upon cash flows from underlying assets, such as mortgage-re-
lated or asset-backed securities. The Fund may invest all of its
assets in derivative instruments.The value of some derivative in-
struments in which the Fund invests may be particularly sensitive
to changes in prevailing interest rates, and, like the other in-
vestments of the Fund, the ability of the Fund to successfully
utilize these instruments may depend in part upon the ability of
the Advisor to forecast interest rates and other economic factors
correctly. If the Advisor incorrectly forecasts such factors and
has taken positions in derivative instruments contrary to prevail-
ing market trends, the Fund could be exposed to the risk of loss.
16
PIMCO Funds: Pacific Investment Management Series
<PAGE>
The Fund might not employ any of the strategies described be-
low, and no assurance can be given that any strategy used will
succeed. If the Advisor incorrectly forecasts interest rates, mar-
ket values or other economic factors in utilizing a derivatives
strategy for the Fund, the Fund might have been in a better posi-
tion if it had not entered into the transaction at all. The use of
these strategies involves certain special risks, including a pos-
sible imperfect correlation, or even no correlation, between price
movements of derivative instruments and price movements of related
investments. While some strategies involving derivative instru-
ments can reduce the risk of loss, they can also reduce the oppor-
tunity for gain or even result in losses by offsetting favorable
price movements in related investments, or due to the possible in-
ability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a dis-
advantageous time, because the Fund is required to maintain asset
coverage or offsetting positions in connection with transactions
in derivative instruments, and the possible inability of the Fund
to close out or to liquidate its derivatives positions.
OPTIONS ON SECURITIES, SECURITIES INDEXES, AND CURRENCIES The Fund
may purchase put options on securities and indexes. One purpose of
purchasing put options is to protect holdings in an underlying or
related security against a substantial decline in market value.
The Fund may also purchase call options on securities and indexes.
One purpose of purchasing call options is to protect against sub-
stantial increases in prices of securities the Fund intends to
purchase pending its ability to invest in such securities in an
orderly manner. An option on a security (or index) is a contract
that gives the holder of the option, in return for a premium, the
right to buy from (in the case of a call) or sell to (in the case
of a put) the writer of the option the security underlying the op-
tion (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the op-
tion to deliver the underlying security upon payment of the exer-
cise price or to pay the exercise price upon delivery of the un-
derlying security. Upon exercise, the writer of an option on an
index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified mul-
tiplier for the index option. An index is designed to reflect
specified facets of a particular financial or securities market, a
specific group of financial instruments or securities, or certain
economic indicators.
The Fund may sell put or call options it has previously pur-
chased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call option
which is sold. The Fund may write a call or put option only if the
option is "covered" by the Fund holding a position in the under-
lying securities or by other means which would permit immediate
satisfaction of the Fund's obligation as writer of the option.
Prior to exercise or expiration, an option may be closed out by an
offsetting purchase or sale of an option of the same series.
The Fund may write covered straddles consisting of a combina-
tion of a call and a put written on the same underlying security.
A straddle will be covered when sufficient assets are deposited to
meet the Fund's immediate obligations. The Fund may use the same
liquid assets to cover both the call and put options where the ex-
ercise price of the call and put are the same, or the exercise
price of the call is higher than that of the put. In such cases,
the Fund will also segregate liquid assets equivalent to the
amount, if any, by which the put is "in the money."
The purchase and writing of options involves certain risks.
During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit
from a price increase in the underlying security above the exer-
cise price, but, as long as its obligation as a writer continues,
has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer
of the option. Once an option writer has received an exercise no-
tice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the un-
derlying security at the exercise price. If a put or call option
purchased by the Fund is not sold when it has remaining value, and
if the market price of the underlying security remains equal to or
greater than the exercise price (in the case of a put), or remains
less than or equal to the exercise price (in the case of a call),
the Fund will lose its entire investment in the option. Also,
where a put or call option on a particular security is purchased
to hedge against price
April 20, 1998 Prospectus
17
<PAGE>
movements in a related security, the price of the put or call op-
tion may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when the
Fund seeks to close out an option position. Furthermore, if trad-
ing restrictions or suspensions are imposed on the options mar-
kets, the Fund may be unable to close out a position.
The Fund may buy or sell put and call options on foreign cur-
rencies. Currency options traded on U.S. or other exchanges may be
subject to position limits which may limit the ability of the 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 liquid-
ity as exchange-traded options. The Fund may be required to treat
as illiquid over-the-counter options purchased and securities be-
ing used to cover certain written over-the-counter options.
SWAP AGREEMENTS The Fund may enter into interest rate, index, eq-
uity and currency exchange rate swap agreements. These transac-
tions would be entered into in an attempt to obtain a particular
return when it is considered desirable to do so, possibly at a
lower cost to the Fund than if the Fund had invested directly in
the asset that yielded the desired return. Swap agreements are
two-party contracts entered into primarily by institutional in-
vestors for periods ranging from a few weeks to more than one
year. In a standard swap transaction, two parties agree to ex-
change the returns (or differentials in rates of return) earned or
realized on particular predetermined investments or instruments,
which may be adjusted for an interest factor. The gross returns to
be exchanged or "swapped" between the parties are generally calcu-
lated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a par-
ticular interest rate, in a particular foreign currency, or in a
"basket" of securities representing a particular index. Forms of
swap agreements include interest rate caps, under which, in return
for a premium, one party agrees to make payments to the other to
the extent that interest rates exceed a specified rate, or "cap";
interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that in-
terest rates fall below a specified level, or "floor"; and inter-
est rate collars, under which a party sells a cap and purchases a
floor or vice versa in an attempt to protect itself against inter-
est rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Fund calculate the ob-
ligations of the parties to the agreement on a "net basis." Conse-
quently, the 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"). The Fund's current obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Fund),
and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account con-
sisting of assets determined to be liquid by the Advisor in accor-
dance with procedures established by the Board of Trustees, to
limit any potential leveraging of the Fund's portfolio. Obliga-
tions under swap agreements so covered will not be construed to be
"senior securities" for purposes of the Fund's investment restric-
tion concerning senior securities. The 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 the Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Advisor's
ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Be-
cause they are two-party contracts and because they may have terms
of greater than seven days, swap agreements may be considered to
be illiquid investments. Moreover, the 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 Fund will enter into swap agreements only with
counterparties that meet certain standards for creditworthiness
(generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement
guidelines). Certain restrictions imposed on the Fund by the In-
ternal Revenue Code may limit the Fund's ability to use swap
agreements. The swaps market is a relatively new market and is
largely unregulated. It is
18
PIMCO Funds: Pacific Investment Management Series
<PAGE>
possible that developments in the swaps market, including poten-
tial government regulation, could adversely affect the Fund's
ability to terminate existing swap agreements or to realize
amounts to be received under such agreements.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS The Fund may
invest in interest rate futures contracts and options thereon
("futures options"), and to the extent it may invest in foreign
currency-denominated securities, may also invest in foreign cur-
rency futures contracts and options thereon.
There are several risks associated with the use of futures and
futures options for hedging purposes. There can be no guarantee
that there will be a correlation between price movements in the
hedging vehicle and in the portfolio securities being hedged. An
incorrect correlation could result in a loss on both the hedged
securities in the Fund and the hedging vehicle, so that the port-
folio return might have been greater had hedging not been attempt-
ed. There can be no assurance that a liquid market will exist at a
time when the Fund seeks to close out a futures contract or a
futures option position. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures con-
tract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day
at a price beyond that limit. In addition, certain of these in-
struments are relatively new and without a significant trading
history. As a result, there is no assurance that an active second-
ary market will develop or continue to exist. Lack of a liquid
market for any reason may prevent the Fund from liquidating an un-
favorable position, and the Fund would remain obligated to meet
margin requirements until the position is closed.
The Fund 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
Fund's immediate obligations. The Fund may use the same liquid as-
sets to cover both the call and put options where the exercise
price of the call and put are the same, or the exercise price of
the call is higher than that of the put. In such cases, the Fund
will also segregate liquid assets equivalent to the amount, if
any, by which the put is "in the money."
The Fund will only enter into futures contracts or futures op-
tions which are standardized and traded on a U.S. or foreign ex-
change or board of trade, or similar entity, or quoted on an auto-
mated quotation system. The Fund will use financial futures con-
tracts and related options only for "bona fide hedging" purposes,
as such term is defined in applicable regulations of the Commodity
Futures Trading Commission ("CFTC") or, with respect to positions
in financial futures and related options that do not qualify as
"bona fide hedging" positions, will enter such positions only to
the extent that aggregate initial margin deposits plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5%
of the Fund's net assets.
HYBRID A hybrid instrument can combine the characteristics of securities,
INSTRUMENTS futures, and options. For example, the principal amount or inter-
est rate of a hybrid could be tied (positively or negatively) to
the price of some commodity, currency or securities index or an-
other interest rate (each a "benchmark"). The interest rate or
(unlike most fixed income securities) the principal amount payable
at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration manage-
ment, and increased total return. Hybrids may not bear interest or
pay dividends. The value of a hybrid or its interest rate may be a
multiple of a benchmark and, as a result, may be leveraged and
move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political
events, such as commodity shortages and currency devaluations,
which cannot be readily foreseen by the purchaser of a hybrid. Un-
der certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant mar-
ket risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed princi-
pal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the Fund to the credit risk of
the issuer of the hybrids. These risks may cause significant fluc-
tuations in the net asset value of the Fund. Accordingly, the Fund
will invest no more than 5% of its assets in hybrid instruments.
19
April 20, 1998 Prospectus
<PAGE>
Certain issuers of structured products such as hybrid instru-
ments may be deemed to be investment companies as defined in the
Investment Company Act of 1940 (the "1940 Act"). As a result, the
Fund's investments in these products will be subject to limits ap-
plicable to investments in investment companies and may be subject
to restrictions contained in the 1940 Act.
INVESTMENT The Fund may invest in securities of other investment companies,
IN such as closed-end management investment companies, or in pooled
INVESTMENT accounts or other investment vehicles. As a shareholder of an in-
COMPANIES vestment company, the Fund may indirectly bear service and other
fees which are in addition to the fees the Fund pays its service
providers.
PORTFOLIO The length of time the Fund has held a particular security is not
TURNOVER generally a consideration in investment decisions. The investment
policies of the Fund may lead to frequent changes in the Fund's
investments, particularly in periods of volatile market movements.
A change in the securities held by the Fund is known as "portfolio
turnover." High portfolio turnover (e.g., over 100%) involves cor-
respondingly greater expenses to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestments in other securities. Such
sales may result in realization of taxable capital gains. See
"Taxes." The portfolio turnover rate for the Fund is set forth un-
der "Financial Highlights."
ILLIQUID The Fund may invest up to 15% of its net assets in illiquid secu-
SECURITIES rities. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the
Board of Trustees. The Advisor may be subject to significant de-
lays in disposing of illiquid securities, and transactions in il-
liquid securities may entail registration expenses and other
transaction costs that are higher than transactions in liquid se-
curities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the or-
dinary course of business at approximately the amount at which the
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 op-
tions, 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 pen-
alties upon prepayment (other than overnight deposits), securities
that are subject to legal or contractual restrictions on resale
(such as privately placed debt securities) and other securities
whose disposition is restricted under the federal securities laws
(other than securities issued pursuant to Rule 144A under the Se-
curities Act of 1933 and certain commercial paper that Pacific In-
vestment Management has determined to be liquid under procedures
approved by the Board of Trustees).
Illiquid securities may include privately placed securities,
which are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not
registered under the federal securities laws. Although certain of
these securities may be readily sold, for example, under Rule
144A, others may be illiquid, and their sale may involve substan-
tial delays and additional costs.
SERVICE Many of the services provided to the Fund depend on the smooth
SYSTEMS-- functioning of computer systems. Many systems in use today cannot
YEAR 2000 distinguish between the year 1900 and the year 2000. Should any of
PROBLEM the service systems fail to process information properly, that
could have an adverse impact on the Fund's operations and services
provided to the shareholders. The Advisor, Distributor, Share-
holder Servicing and Transfer Agent, Custodian, and certain other
service providers to the Fund have reported that each is working
toward mitigating the risks associated with the so-called
"year 2000 problem." However, there can be no assurance that the
problem will be corrected in all respects and that the Fund's op-
erations and services provided to shareholders will not be ad-
versely effected.
Performance Information
From time to time the Trust may make available certain information
about the performance of the Class A shares of the Fund. Perfor-
mance information is compiled separately for each class of the
Fund's shares in accordance with the formulas described below.
From time to time, the yield and total return for each class of
shares of the Fund may be included in advertisements or reports to
shareholders or prospective investors. Quotations of yield for the
Fund or class will be based on the
20
PIMCO Funds: Pacific Investment Management Series
<PAGE>
investment income per share (as defined by the Securities and Ex-
change Commission) during a particular 30-day (or one-month) pe-
riod (including dividends and interest), less expenses accrued
during the period ("net investment income"), and will be computed
by dividing net investment income by the maximum public offering
price per share on the last day of the period.
The total return of Class A shares of the Fund may be included
in advertisements or other written material. When the Fund's total
return is advertised with respect to its Class A shares, it will
be calculated for the past year, the past five years, and since
the establishment of the Fund, as more fully described in the
Statement of Additional Information. Consistent with Securities
and Exchange Commission rules and informal guidance, for periods
prior to the initial offering date of a particular class, total
return presentations for the class will be based on the historical
performance of an older class of the Fund (the older class to be
used in each case is set forth in the Statement of Additional In-
formation) restated to reflect current sales charges (if any) of
the newer class, but not reflecting any higher operating expenses
(such as 12b-1 distribution and servicing fees and administrative
fee charges) associated with the newer class. All other things be-
ing equal, such higher expenses would have adversely affected
(i.e., reduced) total return for a newer class (i.e., if the newer
class had been issued since the inception of the Fund) by the
amount of such higher expenses, compounded over the relevant peri-
od. Total return for each class is measured by comparing the value
of an investment in the Fund at the beginning of the relevant pe-
riod (in the case of Class A shares, giving effect to the maximum
initial sales charge generally applicable to Class A shares) to
the redemption value of the investment in the Fund at the end of
the period (assuming immediate reinvestment of any dividends or
capital gains distributions at net asset value and giving effect
to the deduction of the maximum CDSC which would be payable). To-
tal return may be advertised using alternative methods that re-
flect all elements of return, but that may be adjusted to reflect
the cumulative impact of alternative fee and expense structures,
such as the currently effective advisory and administrative fees
for the Fund.
Current distribution information may also be provided to the
Trust's shareholders in shareholder reports or other shareholder
communications, or in certain types of sales literature provided
to prospective investors. Current distribution information for a
particular class of the Fund will be based on distributions for a
specified period (i.e., total dividends from net investment in-
come), divided by the relevant class net asset value per share on
the last day of the period and annualized. The rate of current
distributions does not reflect deductions for unrealized losses
from transactions in derivative instruments such as options and
futures, which may reduce total return. Current distribution rates
differ from standardized yield rates in that they represent what a
class of the Fund has declared and paid to shareholders as of the
end of a specified period rather than the Fund's actual net in-
vestment income for that period.
Performance information for the Trust may also be compared to
various unmanaged indexes, such as the Standard & Poor's 500 Com-
posite Stock Price Index, the Lehman Brothers Aggregate Bond In-
dex, the Lehman Brothers Mortgage-Backed Securities Index, the
Merrill Lynch 1 to 3 Year Treasury Index, the Lehman Intermediate
and 20+ Year Treasury Blend Index, the Lehman BB Intermediate Cor-
porate Index, indexes prepared by Lipper Analytical Services, the
J.P. Morgan Global Index, the J.P. Morgan Emerging Markets Bond
Index Plus, the Salomon Brothers World Government Bond Index-10
Non U.S.-Dollar Hedged and the J.P. Morgan Government Bond Index
Non U.S.-Dollar Hedged, and other entities or organizations which
track the performance of investment companies or investment advis-
ers. Unmanaged indexes (i.e., other than Lipper) generally do not
reflect deductions for administrative and management costs and ex-
penses. The Advisor may also report to shareholders or to the pub-
lic in advertisements concerning the performance of the Advisor as
adviser to clients other than the Trust, and on the comparative
performance or standing of the Advisor in relation to other money
managers. Such comparative information may be compiled or provided
by independent ratings services or by news organizations. Any per-
formance information, whether related to the Fund or to the Advi-
sor, should be considered in light of the Fund's investment objec-
tives and policies, characteristics and quality of the portfolio,
and the market conditions during the time period indicated, and
should not be considered to be representative of what may be
achieved in the future. For a description of the methods used to
determine yield and total return for the Fund, see the Statement
of Additional Information.
21
April 20, 1998 Prospectus
<PAGE>
Investment results of the Fund will fluctuate over time, and
any presentation of the Fund's total return or yield for any prior
period should not be considered as a representation of what an in-
vestor's total return or yield may be in any future period.
How to Buy Shares
Class A shares of the Fund of the Trust are continuously offered
through the Trust's principal underwriter, PIMCO Funds Distribu-
tors LLC (the "Distributor"). Class A shares of the Fund are
available as an investment option in retirement or savings plans.
The administrator of such a plan or a prospective participant's
employee benefits office can provide detailed information on how
to participate in such a plan and how to elect the Fund as an in-
vestment option.
A participant may be permitted to elect different investment
options, alter the amounts contributed to the participant's plan,
or change how contributions are allocated among investment options
in accordance with the plan's specific provisions. A participant
should consult the plan administrator or the participant's em-
ployee benefits office for more details.
Questions about the Fund should be directed to the Distributor
at 800-426-0107. Questions about a participant's plan account
should be directed to the plan administrator or the organization
that provides recordkeeping services for the plan.
All contributions received by the Distributor prior to the
close of regular trading (normally 4:00 p.m., Eastern time) on the
New York Stock Exchange (the "Exchange"), on a regular business
day, are processed at that day's offering price, which will be net
asset value next determined after acceptance of a contribution.
However, contributions received by the Distributor after the of-
fering price is determined that day will receive such offering
price if the contributions were received by the plan administrator
prior to such determination and were transmitted to and received
by the Distributor prior to 10:00 a.m. Eastern time on the next
business day. Contributions received on other than a regular busi-
ness day will be executed on the next succeeding regular business
day. The Distributor, in its sole discretion, may accept or reject
any order for purchase of Fund shares. The sale of shares will be
suspended during any period in which the Exchange is closed for
other than weekends or holidays, or if permitted by the rules of
the Securities and Exchange Commission, when trading on the Ex-
change is restricted or during an emergency which makes it imprac-
ticable for the Fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period as
permitted by the Securities and Exchange Commission for the pro-
tection of investors. No share certificates will be issued.
SALES AT NET ASSET VALUE The Fund may sell its Class A shares at
net asset value without a sales charge to, among others, (a)
trustees or other fiduciaries purchasing shares for certain em-
ployer sponsored plans that have at least 100 eligible partici-
pants or at least $1 million in total plan assets, and (b) trust-
ees or other fiduciaries purchasing shares for certain employer-
sponsored plans, the trustee, administrator, fiduciary, broker,
trust company or registered investment adviser for which has an
agreement with the Distributor with respect to such purchases. The
Distributor will pay a commission to dealers who sell Class A
shares of the Fund at net asset value to certain employer-spon-
sored plans according to the following schedule: .50% of the first
$2,000,000 and .25% of amounts over $2,000,000. From time to time,
the Distributor, its parent and/or its affiliates may make addi-
tional payments to one or more participating brokers based upon
factors such as the level of sales or the length of time clients'
assets have remained in the Trust.
Exchange Privilege
A participant's plan may allow exchanges from one investment op-
tion to another. A participant should check with the plan adminis-
trator for details on the rules governing exchanges in the plan,
including the frequency of permitted exchanges. Certain investment
options may be subject to unique restrictions. Exchanges are ac-
cepted by the Trust only as permitted by a participant's plan.
22
PIMCO Funds: Pacific Investment Management Series
<PAGE>
How to Redeem
Shares are redeemed at their net asset value next determined after
a proper redemption request has been received. There is no charge
by the Distributor with respect to a redemption. Requests for re-
demption received by the Distributor prior to the close of the
Distributor's business day will be confirmed at the net asset
value effective as of the closing of the Exchange on that day.
Distributor and Distribution and Servicing Plan
The Distributor, a wholly owned subsidiary of PIMCO Advisors L.P.,
is the principal underwriter of the Fund's shares and in that con-
nection makes servicing payments to participating brokers, certain
banks and other financial intermediaries in connection with the
sale of Class A shares. Pursuant to a Distribution Contract with
the Trust, with respect to the Fund's Class A shares, the Distrib-
utor bears various other promotional and sales related expenses,
including the cost of printing and mailing prospectuses to persons
other than current shareholders. The Distributor, located at 2187
Atlantic Street, Stamford, Connecticut 06902 is a broker-dealer
registered with the Securities and Exchange Commission.
CLASS A SERVICING FEES As compensation for services rendered and
expenses borne by the Distributor in connection with personal
services rendered to Class A shareholders of the Fund and the
maintenance of Class A shareholder accounts, the Trust pays the
Distributor servicing fees up to the annual rate of .25% of the
Fund's average daily net assets attributable to Class A shares.
The Class A servicing fees paid to the Distributor are paid un-
der a Distribution and Servicing Plan adopted pursuant to Rule
12b-l under the 1940 Act, and is of the type known as a "compensa-
tion" plan. This means that, although the Trustees of the Trust
are expected to take into account the expenses of the Distributor
and its predecessors in their periodic review of the Distribution
and Servicing Plan, the fees are payable to compensate the Dis-
tributor for services rendered even if the amount paid exceeds the
Distributor's expenses.
The servicing fee applicable to Class A shares of the Fund may
be spent by the Distributor on personal services rendered to
shareholders of the Fund and the maintenance of shareholder ac-
counts, including compensation to, and expenses (including tele-
phone and overhead expenses) of, financial consultants or other
employees of participating or introducing brokers, certain banks
and other financial intermediaries who aid in the processing of
purchase or redemption requests or the processing of dividend pay-
ments, who provide information periodically to shareholders show-
ing their positions in the Fund's shares, who forward communica-
tions from the Trust to shareholders, who render ongoing advice
concerning the suitability of particular investment opportunities
offered by the Trust in light of the shareholders' needs, who re-
spond to inquiries from shareholders relating to such services, or
who train personnel in the provision of such services. Distribu-
tion and servicing fees may also be spent on interest relating to
unreimbursed distribution or servicing expenses from prior years.
Many of the Distributor's servicing efforts involve the Trust
as a whole, so that fees paid by Class A shares of the Fund may
indirectly support servicing efforts relating to shares of the
same class of the other series of the Trust. In reporting its ex-
penses to the Trustees, the Distributor itemizes expenses that re-
late to the distribution and/or servicing of the Fund's shares,
and allocates other expenses among all of the operational series
based on their relative net assets. Expenses allocated to the Fund
are further allocated among its classes of shares annually based
on the relative sales of each class, except for any expenses that
relate only to the sale or servicing of a single class. The Dis-
tributor may make payments to brokers (and with respect to servic-
ing fees only, to certain banks and other financial intermediar-
ies) of up to .25% annually of the average daily net assets at-
tributable to shares in the accounts of their customers or cli-
ents. Payments may be made, in part, with respect to Class A
shares of the Fund issued to former shareholders of PIMCO Advisors
Funds in connection with the reorganizations of series of PIMCO
Advisors Funds with series of the Trust, including the Fund, in a
transaction which took place on January 17, 1997.
23
April 20, 1998 Prospectus
<PAGE>
The Distributor may from time to time pay additional cash bo-
nuses or other incentives to selected participating brokers in
connection with the servicing of Class A shares of the Fund. On
some occasions, such bonuses or incentives may be conditioned upon
the sale of a specified minimum dollar amount of the shares of the
Fund and/or all of the series of the Trust together or a particu-
lar class of shares, during a specific period of time. The Dis-
tributor currently expects that such additional bonuses or incen-
tives will not exceed .50% of the amount of any sale. Pacific In-
vestment Management (in its capacity as administrator) may also
pay participating brokers and other intermediaries for transfer
agency and other services.
If in any year the Distributor's expenses incurred in connec-
tion with the servicing of shareholders and the maintenance of
shareholder accounts exceed the servicing fees paid by the Trust,
the Distributor would recover such excess only if the Distribution
and Servicing Plan with respect to Class A shares continues to be
in effect in some later year when the servicing fees exceed the
Distributor's expenses. The Trust is not obligated to repay any
unreimbursed expenses that may exist at such time, if any, as the
relevant Distribution and Servicing Plan terminates.
How Net Asset Value Is Determined
The net asset value per share of Class A shares of the Fund is de-
termined as of the close of trading (normally 4:00 p.m., Eastern
time) on the Exchange by dividing the total market value of the
Fund's portfolio investments and other assets attributable to that
class, less any liabilities, by the number of total outstanding
shares of that class. Net asset value will not be determined on
days on which the Exchange is closed.
Portfolio securities and other assets for which market quota-
tions are readily available are stated at market value. Market
value is determined on the basis of last reported sales prices, or
if no sales are reported, as is the case for most securities
traded over-the-counter, at the mean between representative bid
and asked quotations obtained from a quotation reporting system or
from established market makers. Fixed income securities, including
those to be purchased under firm commitment agreements (other than
obligations having a maturity of 60 days or less), are normally
valued on the basis of quotations obtained from brokers and deal-
ers or pricing services, which take into account appropriate fac-
tors such as institutional-sized trading in similar groups of se-
curities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data.
Quotations of foreign securities in foreign currency are con-
verted to U.S. dollar equivalents using foreign exchange quota-
tions received from independent dealers. Short-term investments
having a maturity of 60 days or less are valued at amortized cost,
when the Board of Trustees determines that amortized cost is their
fair value. Certain fixed income securities for which daily market
quotations are not readily available may be valued, pursuant to
guidelines established by the Board of Trustees, with reference to
fixed income securities whose prices are more readily obtainable
and whose durations are comparable to the securities being valued.
Subject to the foregoing, other securities for which market quota-
tions are not readily available are valued at fair value as deter-
mined in good faith by the Board of Trustees.
The Fund's liabilities are allocated among its classes. The to-
tal of such liabilities allocated to a class plus that class's
distribution and/or servicing fees and any other expenses spe-
cially allocated to that class are then deducted from the class's
proportionate interest in the Fund's assets, and the resulting
amount for each class is divided by the number of shares of that
class outstanding to produce the class's "net asset value" per
share.
Distributions
The Fund pays out as dividends substantially all of its net in-
vestment income (which comes from dividends and interest it re-
ceives or is deemed to receive from its investments) and net real-
ized short-term capital gains. For these purposes and for federal
income tax purposes, a portion of the premiums from certain ex-
pired call or put options written by the Fund,
24
PIMCO Funds: Pacific Investment Management Series
<PAGE>
net gains from closing purchase and sale transactions with respect
to such options, and net gains from futures transactions are
treated as short-term capital gains. The Fund distributes substan-
tially all of its net realized capital gains, if any, after giving
effect to any available capital loss carry-over.
Shares begin earning dividends on the effective date of pur-
chase, which is the date that funds are received by the Trust for
the purchase of shares. Dividends are declared daily from net in-
vestment income to shareholders of record at the close of the pre-
vious business day, and distributed to shareholders monthly. Any
net realized capital gains from the sale of portfolio securities
will be distributed no less frequently than once yearly. Dividend
and capital gain distributions of the Fund will be reinvested in
additional shares of the Fund unless the shareholder elects to
have them paid in cash.
Dividends and capital gains distributions may be declared more
or less frequently in the discretion of the Trustees. There are no
sales charges on reinvested dividends.
Taxes
The Fund intends to qualify as a regulated investment company an-
nually and to elect to be treated as a regulated investment com-
pany under the Internal Revenue Code of 1986, as amended. As such,
the Fund generally will not pay federal income tax on the income
and gains it pays as dividends to its shareholders. In order to
avoid a 4% federal excise tax, the Fund intends to distribute each
year substantially all of its net income and gains.
Distributions received by tax-exempt shareholders will not be
subject to federal income tax to the extent permitted under appli-
cable tax law. To the extent that a shareholder is not exempt from
tax on Fund distributions, such shareholder will be subject to tax
on dividends received from the Fund, regardless of whether re-
ceived in cash or reinvested in additional shares. All sharehold-
ers must treat dividends, other than capital gain dividends or
dividends that represent a return of capital to shareholders, as
ordinary income.
Dividends designated by the Fund as capital gain dividends
derived from the Fund's net capital gain (that is, the excess of
net long-term gain over net short-term loss) are taxable to
shareholders as long-term capital gain except as provided by an
applicable tax exemption. Under the Taxpayer Relief Act of 1997,
long-term capital gains will generally be taxed at a 28% or 20%
rate, depending upon the holding period of the portfolio
securities. Any distributions that are not from the Fund's net
investment income, short-term capital gain, or net capital gain
may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. Certain dividends declared in
October, November or December of a calendar year are taxable to
shareholders (who are subject to tax on dividends) as though
received on December 31 of that year if paid to shareholders
during January of the following calendar year. For state income
tax purposes, interest on some federal obligations generally is
not exempt from taxation, whether received directly by a
shareholder or through distributions of investment company taxable
income (for example, interest on FNMA and GNMA Certificates). The
Fund will advise shareholders annually of the amount and nature of
the dividends paid to them.
Interest accrued by the Fund from inflation-indexed bonds will
be includable in the Fund's gross income in the period in which
they accrue. Periodic adjustments for inflation in the principal
value of these securities also may give rise to original issue
discount, which, likewise, will be includable in the Fund's gross
income on a current basis, regardless of whether the Fund receives
any cash payments. See "Taxation--Original Issue Discount" in the
Statement of Additional Information. Amounts includable in the
Fund's gross income become subject to tax-related distribution re-
quirements. Accordingly, the Fund may be required to make annual
distributions to shareholders in excess of the cash received in a
given period from these investments. As a result, the Fund may be
required to liquidate certain investments at a time when it is not
advantageous to do so. If the principal value of an inflation-in-
dexed bond is adjusted downward in any period as a result of de-
flation, the reduction may be treated as a loss to the extent the
reduction exceeds coupon payments received in that period; in that
case, the amount distributable by the Fund may be reduced and
amounts distributed previously in the taxable year may be charac-
terized in some circumstances as a return of capital.
25
April 20, 1998 Prospectus
<PAGE>
Taxable shareholders should note that the timing of their in-
vestment could have undesirable tax consequences. If shares are
purchased on or just before the record date of a dividend, taxable
shareholders will pay full price for the shares and may receive a
portion of their investment back as a taxable distribution.
If the Fund is used as an investment option in an employer-
sponsored retirement savings plan, dividend and capital gains
distributions from the Fund generally will not be subject to
current taxation, but will accumulate on a tax-deferred basis. In
general, employer-sponsored retirement and savings plans are
governed by a complex set of tax rules. Participants in such a
plan should consult the plan administrator, the plan's Summary
Plan Description, or a professional tax advisor regarding the tax
consequences of participation in the plan and of any plan
contributions or withdrawals.
The preceding discussion relates only to federal income tax;
the consequences under other tax laws may differ. For additional
information relating to the tax aspects of investing in the Fund,
see the Statement of Additional Information.
Management of the Trust
The business affairs of the Trust are managed under the direction
of the Board of Trustees. The Trustees are Guilford C. Babcock, R.
Wesley Burns, Vern O. Curtis, Brent R. Harris, Thomas P. Kemp, and
William J. Popejoy. Additional information about the Trustees and
the Trust's executive officers may be found in the Statement of
Additional Information under the heading "Management--Trustees and
Officers."
INVESTMENT Pacific Investment Management serves as investment adviser ("Advi-
ADVISOR sor") to the Fund pursuant to an investment advisory contract. The
Advisor is an investment counseling firm founded in 1971, and had
approximately $118 billion in assets under management as of Decem-
ber 31, 1997. Pacific Investment Management is a subsidiary of
PIMCO Advisors L.P. ("PIMCO Advisors"). The general partners of
PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors Hold-
ings L.P. PIMCO Partners, G.P. is a general partnership between
PIMCO Holding LLC, a Delaware limited liability company and indi-
rect wholly-owned subsidiary of Pacific Life Insurance Company,
and PIMCO Partners LLC, a California limited liability company
controlled by the Managing Directors of Pacific Investment Manage-
ment. PIMCO Partners, G.P. is the sole general partner of PIMCO
Advisors Holdings L.P. Pacific Investment Management's address is
840 Newport Center Drive, Suite 360, Newport Beach, California
92660. Pacific Investment Management is registered as an invest-
ment adviser with the Securities and Exchange Commission and as a
commodity trading advisor with the CFTC.
The Advisor manages the investment and reinvestment of the as-
sets of the Fund. The Advisor is responsible for placing orders
for the purchase and sale of the Fund's investments directly with
brokers or dealers selected by it in its discretion. See "Portfo-
lio Transactions" in the Statement of Additional Information.
The portfolio manager responsible for management of the Fund is
William H. Gross, Managing Director, Pacific Investment Manage-
ment. A Fixed Income Portfolio Manager, Mr. Gross is one of the
founders of Pacific Investment Management and has managed the Fund
since its inception, May 11, 1987.
FUND Pacific Investment Management also serves as administrator for the
ADMINIS- Fund's Class A shares pursuant to an administration agreement with
TRATOR the Trust. Pacific Investment Management provides administrative
services for Class A shareholders of the Fund, which include cler-
ical help and accounting, bookkeeping, internal audit services,
and certain other services required by the Fund, preparation of
reports to the Fund's shareholders and regulatory filings. Pacific
Investment Management may also retain certain of its affiliates to
provide certain of these services. In addition, Pacific Investment
Management, at its own expense, arranges for the provision of le-
gal, audit, custody, transfer agency (including sub-transfer
agency and other administrative services) and other services for
the Fund, and is responsible for the costs of registration of the
Fund's shares and the printing of prospectuses and shareholder re-
ports for current shareholders.
26
PIMCO Funds: Pacific Investment Management Series
<PAGE>
The Fund (and not Pacific Investment Management) is responsible
for the following expenses: (i) salaries and other compensation of
any of the Trust's executive officers and employees who are not
officers, directors, stockholders or employees of Pacific Invest-
ment Management or its subsidiaries or affiliates; (ii) taxes and
governmental fees; (iii) brokerage fees and commissions and other
portfolio transaction expenses; (iv) the costs of borrowing money,
including interest expenses; (v) fees and expenses of the Trustees
who are not "interested persons" of Pacific Investment Management
or the Trust, and any counsel retained exclusively for their bene-
fit; (vi) extraordinary expenses, including costs of litigation
and indemnification expenses; (vii) expenses, such as organiza-
tional expenses, which are capitalized in accordance with gener-
ally accepted accounting principles; and (viii) any expenses allo-
cated or allocable to a specific class of shares, which include
servicing fees payable with respect to Class A shares, and may in-
clude certain other expenses as permitted by the Trust's Multi-
Class Plan adopted pursuant to Rule 18f-3 under the 1940 Act, sub-
ject to review and approval by the Trustees.
ADVISORY The Fund features fixed advisory and administrative fee rates. For
AND providing investment advisory and administrative services to the
ADMINIS- Fund as described above, Pacific Investment Management receives
TRATIVE monthly fees from the Fund at an annual rate (i) based on the av-
FEES erage daily net assets of the Fund for advisory fees and, (ii) at-
tributable in the aggregate to the Fund's Class A, Class B and
Class C shares for administrative fees, as follows:
<TABLE>
<CAPTION>
ADVISORY ADMINISTRATIVE
FEE RATE FEE RATE
--------------------------
<S> <C>
.25% .40%
</TABLE>
Both the investment advisory contract and administration agree-
ment with respect to Class A shares of the Fund may be terminated
by the Trustees at any time on 60 days' written notice. The in-
vestment advisory contract may be terminated by Pacific Investment
Management on 60 days' written notice. Following the expiration of
the one-year period commencing with the effectiveness of the ad-
ministration agreement, it may be terminated by Pacific Investment
Management on 60 days' written notice. Following its initial two-
year term, the investment advisory contract will continue from
year to year if approved by the Trustees. Following its initial
one-year term, the administration agreement with respect to Class
A shares of the Fund will continue from year-to-year if approved
by the Trustees.
PORTFOLIO Pursuant to the advisory contract, the Advisor places orders for
TRANSAC- the purchase and sale of portfolio investments for the Fund's ac-
TIONS counts with brokers or dealers selected by it in its discretion.
In effecting purchases and sales of portfolio securities for the
account of the Fund, the Advisor will seek the best price and exe-
cution of the Fund's orders. In doing so, the Fund may pay higher
commission rates than the lowest available when the Advisor be-
lieves it is reasonable to do so in light of the value of the bro-
kerage and research services provided by the broker effecting the
transaction. The Advisor also may consider sales of shares of the
Trust as a factor in the selection of broker-dealers to execute
portfolio transactions for the Fund.
The Advisor manages the Fund without regard generally to re-
strictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the fed-
eral tax laws. The use of certain derivative instruments with rel-
atively short maturities may tend to exaggerate the portfolio
turnover rate for the Fund. Trading in fixed income securities
does not generally involve the payment of brokerage commissions,
but does involve indirect transaction costs. The use of futures
contracts may involve the payment of commissions to futures com-
mission merchants. The higher the rate of portfolio turnover of
the Fund, the higher all these transaction costs borne by the Fund
generally will be. The portfolio turnover rate for the Fund is set
forth under "Financial Highlights."
Some securities considered for investments by the Fund may also
be appropriate for other clients served by the Advisor. If a pur-
chase or sale of securities consistent with the investment poli-
cies of the Fund and one or more of these clients served by the
Advisor is considered at or about the same time, transactions in
such securities will be allocated among the Fund and clients in a
manner deemed fair and reasonable by the Advisor.
April 20, 1998 Prospectus
27
<PAGE>
Description of the Trust
CAPITALI- The Trust was organized as a Massachusetts business trust on Feb-
ZATION ruary 19, 1987. The Board of Trustees may establish additional
portfolios in the future. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest
with a par value of $0.0001 each. When issued, shares of the Trust
are fully paid, non-assessable and freely transferable.
Under Massachusetts law, shareholders could, under certain cir-
cumstances, be held personally liable for the obligations of the
Trust. However, the Declaration of Trust disclaims liability of
the shareholders, Trustees or officers of the Trust for acts or
obligations of the Trust, which are binding only on the assets and
property of the Trust, and requires that notice of the disclaimer
be given in each contract or obligation entered into or executed
by the Trust or the Trustees. The Declaration of Trust also pro-
vides for indemnification out of Trust property for all loss and
expense of any shareholder held personally liable for the obliga-
tions of the Trust. The risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circum-
stances in which such disclaimer is inoperative or the Trust it-
self is unable to meet its obligations, and thus should be consid-
ered remote.
MULTIPLE In addition to Class A shares, the Fund offers Class B, Class C,
CLASSES OF Class D, Institutional Class and Administrative Class shares,
SHARES through separate propectuses. Class A shares sold for personal in-
vestment and the other classes of the Fund may have different
sales charges and expense levels, which will affect performance
accordingly. This Prospectus relates only to the Class A shares of
the Fund. To obtain more information about the other classes,
please call the Distributor at 800-927-4648 (for Institutional and
Administrative Classes), 800-426-0107 (for Class B and C), or 888-
87-PIMCO (for Class D).
VOTING Shareholders have the right to vote on the election of Trustees
and on any and all matters on which the law or the Declaration of
Trust states they may be entitled to vote. The Trust is not re-
quired to hold regular annual meetings of Trust shareholders and
does not intend to do so. Shareholders of Class A shares or the
Fund have separate voting rights with respect to matters that only
affect that class or the Fund. See "Other Information--Voting
Rights" in the Statement of Additional Information.
The Declaration of Trust provides that the holders of not less
than two-thirds of the outstanding shares of the Trust may remove
a person serving as Trustee either by declaration in writing or at
a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of a
person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the
Trust. Shares entitle their holders to one vote per share (with
proportionate voting for fractional shares).
Mailings to Shareholders
To reduce the volume of mail shareholders receive, it is antici-
pated that only one copy of most Trust reports, such as the
Trust's annual report, will be mailed to a shareholder's household
(same surname, same address). A shareholder may call 800-426-0107
if additional shareholder reports are desired.
28
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Appendix A
Description of Duration
Duration is a measure of the expected life of a fixed income secu-
rity that was developed as a more precise alternative to the con-
cept of "term to maturity." Traditionally, a fixed income
security's "term to maturity" has been used as a proxy for the
sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the securi-
ty). However, "term to maturity" measures only the time until a
fixed income security provides its final payment, taking no ac-
count of the pattern of the security's payments prior to maturity.
In contrast, duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Dura-
tion management is one of the fundamental tools used by the Advi-
sor.
Duration is a measure of the expected life of a fixed income
security on a present value basis. Duration takes the length of
the time intervals between the present time and the time that the
interest and principal payments are scheduled or, in the case of a
callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in
time. For any fixed income security with interest payments occur-
ring prior to the payment of principal, duration is always less
than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security,
the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security,
the shorter the duration of the security.
Futures, options and options on futures have durations which,
in general, are closely related to the duration of the securities
which underlie them. Holding long futures or call option positions
(backed by a segregated account of cash and cash equivalents) will
lengthen the Fund's duration by approximately the same amount that
holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly
equal to the negative duration of the securities that underlie
these positions, and have the effect of reducing portfolio dura-
tion by approximately the same amount that selling an equivalent
amount of the underlying securities would.
There are some situations where even the standard duration cal-
culation does not properly reflect the interest rate exposure of a
security. For example, floating and variable rate securities often
have final maturities of ten or more years; however, their inter-
est rate exposure corresponds to the frequency of the coupon re-
set. For inflation-indexed bonds, duration is calculated on the
basis of modified real duration, which measures price changes of
inflation-indexed bonds on the basis of changes in real, rather
than nominal, interest rates. Another example where the interest
rate exposure is not properly captured by duration is the case of
mortgage pass-through securities. The stated final maturity of
such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest
rate exposure. Finally, the duration of a fixed income security
may vary over time in response to changes in interest rates and
other market factors. In these and other similar situations, the
Advisor will use more sophisticated analytical techniques that in-
corporate the anticipated economic life of a security into the de-
termination of its interest rate exposure.
29
April 20, 1998 Prospectus
<PAGE>
Appendix B
Description of Securities Ratings
The Fund's investments may range in quality from securities rated
in the lowest category in which the Fund is permitted to invest to
securities rated in the highest category (as rated by Moody's or
S&P or, if unrated, determined by the Advisor to be of comparable
quality). The percentage of the Fund's assets invested in securi-
ties in a particular rating category will vary. Following is a de-
scription of Moody's and S&P's ratings applicable to fixed income
securities.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
INVESTORS Aaa: Bonds which are rated Aaa are judged to be of the best
SERVICE, quality. They carry the smallest degree of investment risk and are
INC. generally referred to as "gilt edge." Interest payments are pro-
tected by a large or by an exceptionally stable margin and princi-
pal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to im-
pair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than with Aaa se-
curities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obliga-
tions. Factors giving security to principal and interest are con-
sidered adequate but elements may be present that suggest a sus-
ceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative el-
ements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very mod-
erate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B: Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long pe-
riod of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such is-
sues may be in default or there may be present elements of danger
with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor pros-
pects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each ge-
neric rating classified from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 in-
dicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of is-
suers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters of credit and bonds of indem-
nity are excluded unless explicitly rated.
30
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment ability of
rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds em-
ployed; conservative capitalization structure with moderate reli-
ance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash genera-
tion; and well-established access to a range of financial markets
and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term debt ob-
ligations. This will normally be evidenced by many of the charac-
teristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior short-term ob-
ligations. The effect of industry characteristics and market com-
positions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protec-
tion measurements and may require relatively high financial lever-
age. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of
the Prime rating categories.
STANDARD & CORPORATE AND MUNICIPAL BOND RATINGS
POOR'S
RATINGS Investment Grade
SERVICES AAA: Debt rated AAA has the highest rating assigned by S&P. Ca-
pacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only
in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions, or
changing circumstances are more likely to lead to a weakened ca-
pacity to pay interest and repay principal for debt in this cate-
gory than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predomi-
nantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing un-
certainties or exposure to adverse business, financial, or eco-
nomic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but cur-
rently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and re-
pay principal. The B rating category is also used for debt subor-
dinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability
to default and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and re-
payment of principal. In the
April 20, 1998 Prospectus
31
<PAGE>
event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay princi-
pal. The CCC rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC- debt rat-
ing. The C rating may be used to cover a situation where a bank-
ruptcy petition has been filed, but debt service payments are con-
tinued.
CI: The rating CI is reserved for income bonds on which no in-
terest is being paid.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The D rating will also be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modi-
fied by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful com-
pletion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such com-
pletion. The investor should exercise his own judgment with re-
spect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities,
or currencies; certain swaps and options; and interest only and
principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indica-
tion that an obligation will exhibit no volatility or variability
in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity
of no more than 365 days. Ratings are graded into several catego-
ries, ranging from A for the highest quality obligations to D for
the lowest. These categories are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designa-
tion is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
A-3: Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the ad-
verse effects of changes in circumstances than obligations carry-
ing the higher designations.
B: Issues rated B are regarded as having only speculative ca-
pacity for timely payment.
C: This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal
32
PIMCO Funds: Pacific Investment Management Series
<PAGE>
payments are not made on the date due, even if the applicable
grace period has not expired, unless S&P believes that such pay-
ments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase,
sell or hold a security inasmuch as it does not comment as to mar-
ket price or suitability for a particular investor. The ratings
are based on current information furnished to S&P by the issuer or
obtained from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occa-
sion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in or un-
availability of such information.
April 20, 1998 Prospectus
33
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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PIMCO INVESTMENT ADVISOR AND ADMINISTRATOR
Total Return Fund
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660
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DISTRIBUTOR
PIMCO Funds Distributors LLC, 2187 Atlantic Street, Stamford, CT 06902
------------------------------------------------------------------------------------------
CUSTODIAN
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO 64105
------------------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT
Shareholder Services, Inc., P.O. Box 5866, Denver, CO 80217
------------------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1055 Broadway, Kansas City, MO 64105
------------------------------------------------------------------------------------------
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, D.C. 20006
------------------------------------------------------------------------------------------
For further information about the PIMCO Funds, call 1-800-426-0107 or visit our Web site
at http://www.pimcofunds.com.
</TABLE>
