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PIMCO Funds Prospectus
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PIMCO Funds: This Prospectus describes 3 mutual funds offered by PIMCO Funds: Pacific
Pacific Investment Investment Management Series. The Funds provide access to the professional
Management Series investment advisory services offered by Pacific Investment Management
Company ("PIMCO"). As of June 30, 1999 PIMCO managed approximately $172
August 31, 1999 billion in assets.
This Prospectus explains what you should know about the Funds before you
Share Classes invest. Please read it carefully.
Institutional
Administrative The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Table of Contents
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Summary Information...............................................................3
Fund Summaries
Short Duration Municipal Income Fund.............................................5
California Intermediate Municipal Bond Fund......................................7
New York Intermediate Municipal Bond Fund........................................9
Summary of Principal Risks.......................................................11
Management of the Funds..........................................................13
Investment Options...............................................................14
Purchases, Redemptions and Exchanges.............................................15
How Fund Shares Are Priced.......................................................19
Fund Distributions...............................................................19
Tax Consequences.................................................................20
Characteristics and Risks of Securities and Investment Techniques................21
Description of Securities Ratings...............................................A-1
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Summary Information
The table below compares certain investment characteristics of the Funds. Other
important characteristics are described in the individual Fund Summaries
beginning on page 5. Following the table are certain key concepts which are used
throughout the prospectus.
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Main Investments Duration Credit Quality(1) Foreign
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Tax Exempt Short Duration Short and intermediate maturity municipal 0-2 years Baa to Aaa 0%
Bond Funds Municipal Income securities (exempt from federal income
tax)
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California Intermediate maturity municipal 3-7 years B to Aaa; max 0%
Intermediate Municipal securities (exempt from federal and 10% below Baa
Bond California income tax)
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New York Intermediate Intermediate maturity municipal 3-7 years B to Aaa; max 0%
Municipal Bond securities (exempt from federal and New 10% below Baa
York income tax)
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(1) As rated by Moody's Investors Service, Inc., or if unrated, determined by PIMCO to be of comparable quality.
Fixed Income "Fixed Income Instruments" as used in this Prospectus includes:
Instruments
. securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S. Government
securities");
. corporate debt securities, including convertible securities and corporate commercial paper;
. mortgage-backed and other asset-backed securities;
. inflation-indexed bonds issued both by governments and corporations;
. structured notes, including hybrid or "indexed" securities, catastrophe bonds 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;
. debt securities issued by states or local governments and their agencies, authorities and other
instrumentalities;
. obligations of foreign governments or their subdivisions, agencies and instrumentalities; and
. obligations of international agencies or supranational entities.
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Duration Duration is a measure of the expected life of a fixed income security that is used to determine the
sensitivity of a security's price to changes in interest rates. The longer a security's duration, the more
sensitive it will be to changes in interest rates. Similarly, a Fund with a longer average portfolio duration
will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration.
Credit Ratings In this Prospectus, references are made to credit ratings of debt securities which measure an issuer's
expected ability to pay principal and interest on time. Credit ratings are determined by rating organizations,
such as Standard & Poor's Rating Service ("S&P") or Moody's Investors Services, Inc. ("Moody's"). The
following terms are generally used to describe the credit quality of debt securities depending on the
security's credit rating or, if unrated, credit quality as determined by PIMCO:
. high quality
. investment grade
. below investment grade ("high yield securities" or "junk bonds")
For a further description of credit ratings, see "Appendix A - Description of Securities Ratings."
Fund The Funds provide a range of investment choices. The following summaries identify each Fund's investment
Descriptions, objective, principal investments and strategies, principal risks, performance information and fees and
Performance expenses. A more detailed "Summary of Principal Risks" describing principal risks of investing in the Funds
and Fees begins after the Fund Summaries.
It is possible to lose money on investments in the Funds. An investment in a Fund is not a deposit of a bank
and is not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
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PIMCO Short Duration Municipal Income Fund
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Principal Investments Investment Objective Fund Focus Credit Quality
and Strategies Seeks high current income exempt from Short and intermediate maturity Baa to Aaa
federal income tax, consistent with municipal securities (exempt from
preservation of capital. federal income tax) Dividend Frequency
Declared daily and
Average Portfolio Duration distribute monthly
0-2 years
The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80%
of its net assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at
the time of issuance, exempt from federal income tax ("Municipal Bonds"). Municipal Bonds generally are
issued by or on behalf of states and local governments and their agencies, authorities and other
instrumentalities.
The Fund may invest without limit in "private activity" bonds whose interest is a tax-preference item
for purposes of the federal alternative minimum tax ("AMT"). For shareholders subject to the AMT, a
substantial portion of the Fund's distributions may not be exempt from federal income tax. The Fund may
invest up to 20% of its net assets in other types of Fixed Income Instruments. The Fund may invest more
than 25% of its assets in bonds of issuers in the same state. The Fund may only invest in investment
grade debt securities. The average portfolio duration of this Fund varies based on PIMCO's forecast for
interest rates and under normal market conditions is not expected to exceed two years. The Fund will
seek income that is high relative to prevailing rates from Municipal Bonds.
The Fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or
in mortgage-or asset-backed securities. The Fund may lend its portfolio securities to brokers, dealers
and other financial institutions to earn income. Rather than investing directly in securities in which
it primarily invests, the Fund may use other investment techniques to gain exposure to market movements
related to such securities, such as entering into a series of contracts to buy and sell such securities.
Principal Risks Among the principal risks of investing in the Fund, which could adversely affect its net asset value,
yield and total return, are:
. Interest Rate Risk . Issuer Risk . Leveraging Risk
. Credit Risk . Derivatives Risk . Management Risk
. Market Risk . Mortgage Risk
Please see "Summary of Principal Risks" following the Fund Summaries for a description of these and
other risks of investing in the Fund.
Performance Information The Fund does not have a full calendar year of performance. Thus, no bar chart or annual returns table
is included for the Fund.
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Fees and Expenses of These tables describe the fees and expenses you may pay if you buy and hold Institutional Class or
the Fund Administrative Class shares of the Fund:
Shareholder fees (fees paid directly from your investment) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Distribution Total Annual
and/or Service Other Fund Operating
Share Class Advisory Fees (12b-1) Fees Expenses (1) Expenses
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Institutional 0.20% None 0.19% 0.39%
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Administrative 0.20% 0.25% 0.19% 0.64%
(1) Other expenses reflects a 0.19% Administrative Fee paid by the class.
Examples. The Examples are intended to help you compare the cost of investing in
Institutional Class or Administrative Class shares of the Fund with the costs of investing
in other mutual funds. The Examples assume that you invest $10,000 in the noted class of
shares for the time periods indicated, and then redeem all your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, the Examples show what
your costs would be based on these assumptions.
Share Class Year 1 Year 3 Year 5 Year 10
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Institutional $40 $125 $219 $493
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Administrative $65 $205 $357 $798
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PIMCO California Intermediate Municipal Bond Fund
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Principal Investments Investment Objective Fund Focus Credit Quality
and Strategies Seeks high current income exempt from Intermediate maturity municipal B to Aaa; maximum 10%
federal and California income tax. securities (exempt from federal below Baa
Capital appreciation is a secondary and California income tax)
objective. Dividend Frequency
Average Portfolio Duration Declared daily and
3-7 years distributed monthly
The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80% of
its net assets in Municipal Bonds whose interest is, in the opinion of bond counsel for the issuer at the
time of issuance, exempt from federal income tax. The Fund invests under normal circumstances at least 65% of
its net assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at the
time of issuance, exempt from regular federal income tax and California income tax ("California Municipal
Bonds"). California Municipal Bonds generally are issued by or on behalf of the State of California and its
political subdivisions, financing authorities and their agencies.
The Fund may invest without limit in "private activity" bonds whose interest is a tax-preference item for
purposes of the federal alternative minimum tax ("AMT"). For shareholders subject to the AMT, a substantial
portion of the Fund's distributions may not be exempt from federal income tax. The Fund may invest up to 20%
of its net assets in other types of Fixed Income Instruments. The average portfolio duration of this Fund
normally varies within a three- to seven-year time frame based on the PIMCO's forecast for interest rates.
The Fund will seek income that is high relative to prevailing rates from Municipal Bonds. Capital
appreciation, if any, generally arises from decreases in interest rates or improving credit fundamentals for
a particular state, municipality or issuer.
The Fund invests primarily in investment grade debt securities, but may invest up to 10% of its assets in
high yield securities ("junk bonds") rated B or higher by Moody's or S&P, or, if unrated, determined by PIMCO
to be of comparable quality.
The Fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or in
mortgage- or asset-backed securities. The Fund may lend its portfolio securities to brokers, dealers and
other financial institutions to earn income. Rather than investing directly in securities in which it
primarily invests, the Fund may use other investment techniques to gain exposure to market movements related
to such securities, such as entering into a series of contracts to buy or sell such securities.
Principal Risks Among the principal risks of investing in the Fund, which could adversely affect its net asset value, yield
and total return are:
. Interest Rate Risk . Issuer Risk . Mortgage Risk
. Credit Risk . Concentration Risk . Leveraging Risk
. California State Specific Risk . Liquidity Risk . Management Risk
. Market Risk . Derivatives Risk
Please see "Summary of Principal Risks" following the Fund Summaries for a description of these
and other risks of investing in the Fund.
Performance The Fund does not have a full calendar year of performance. Thus, no bar chart or annual
Information returns table is included for the Fund.
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Fees and Expenses These tables describe the fees and expenses you may pay if you buy and hold Institutional Class
of the Fund or Administrative Class shares of the Fund:
Shareholder fees (fees paid directly from your investment) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Distribution Total Annual
and/or Service Other Fund Operating
Share Class Advisory Fees (12b-1) Fees Expenses (1) Expenses
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Institutional 0.25% None 0.24% 0.49%
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Administrative 0.25% 0.25% 0.24% 0.74%
(1) Other Expenses reflects a 0.24% Administrative Fee paid by the class.
Examples. The Examples are intended to help you compare the cost of investing in Institutional Class or
Administrative Class shares of the Fund with the costs of investing in other mutual funds. The Examples assume
that you invest $10,000 in the noted class of shares for the time periods indicated, and then redeem all your
shares at the end of those periods. The Example also assumes that your investment has a 5% return each year,
the reinvestment of all dividends and distributions, and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the Examples show what your costs would be based on these
assumptions.
Share Class Year 1 Year 3 Year 5 Year 10
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Institutional $50 $157 $274 $616
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Administrative $76 $237 $411 $918
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PIMCO New York Intermediate Municipal Bond Fund
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Principal Investment Objective Fund Focus Credit Quality
Investments and Seeks high current income exempt from Intermediate maturity B to Aaa; maximum 10% below Baa
Strategies federal and New York income tax. municipal securities (exempt
Capital appreciation is a secondary from federal and New York Dividend Frequency
objective. income tax) Declared daily and distributed
monthly
Average Portfolio Duration
3-7 years
The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80% of its
net assets in Municipal Bonds whose interest is, in the opinion of bond counsel for the issuer at the time of
issuance, exempt from federal income tax. The Fund will invest under normal circumstances at least 65% of its
net assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of
issuance, exempt from regular federal income tax and New York income tax ("New York Municipal Bonds"). New York
Municipal Bonds generally are issued by or on behalf of the State of New York and its political subdivisions,
financing authorities and their agencies.
The Fund may invest without limit in "private activity" bonds whose interest is a tax-preference item for
purposes of the federal alternative minimum tax ("AMT"). For shareholders subject to the AMT, a substantial
portion of the Fund's distributions may not be exempt from federal income tax. The Fund may invest up to 20% of
its net assets in other types of Fixed Income Instruments. The average portfolio duration of this Fund normally
varies within a three- to seven-year time frame, based on PIMCO's forecast for interest rates. The Fund will
seek income that is high relative to prevailing rates from municipal bonds. Capital appreciation, if any,
generally arises from decreases in interest rates or improving credit fundamentals for a particular state,
municipality or issuer.
The Fund invests primarily in investment grade debt securities, but may invest up to 10% of its assets in high
yield securities ("junk bonds") rated B or higher by Moody's or S&P, or, if unrated, determined by PIMCO to be
of comparable quality.
The Fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or in
mortgage- or asset-backed securities. The Fund may lend its portfolio securities to brokers, dealers and other
financial institutions to earn income. Rather than investing directly in securities in which it primarily
invests, this Fund may use other investment techniques to gain exposure to market movements related to such
securities, such as entering into a series of contracts to buy or sell such securities.
Principal Risks Among the principal risks of investing in the Fund, which could adversely affect its net asset
value, yield and total return are:
. Interest Rate Risk . Issuer Risk . Mortgage Risk
. Credit Risk . Concentration Risk . Leveraging Risk
. New York State Specific Risk . Liquidity Risk . Management Risk
. Market Risk . Derivatives Risk
Please see "Summary of Principal Risks" following the Fund Summaries for a description of these
and other risks of investing in the Fund.
Performance The Fund does not have a full calendar year of performance. Thus, no bar chart or annual
Information returns table is included for the Fund.
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Fees and Expenses These tables describe the fees and expenses you may pay if you buy and hold Institutional Class
of the Fund or Administrative Class shares of the Fund:
Shareholder fees (fees paid directly from your investment) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Distribution Total Annual
and/or Service Other Fund Operating
Share Class Advisory Fees (12b-1) Fees Expenses (1) Expenses
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Institutional 0.25% None 0.24% 0.49%
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Administrative 0.25% 0.25% 0.24% 0.74%
(1) Other Expenses reflects a 0.24% Administrative Fee paid by the class.
Examples. The Examples are intended to help you compare the cost of investing in Institutional Class or
Administrative Class shares of the Fund with the costs of investing in other mutual funds. The Examples assume
that you invest $10,000 in the noted class of shares for the time periods indicated, and then redeem all your
shares at the end of those periods. The Example also assumes that your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the Examples show what your costs would be based on these
assumptions.
Share Class Year 1 Year 3 Year 5 Year 10
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Institutional $50 $157 $274 $616
Administrative $76 $237 $411 $918
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Summary of Principal Risks
The value of your investment in a Fund changes with the values of that Fund's investments. Many factors can affect
those values. The factors that are most likely to have a material effect on a particular Fund's portfolio as a
whole are called "principal risks." The principal risks of each Fund are identified in the Fund Summaries and are
summarized in this section. Each Fund may be subject to additional principal risks and risks other than those
described below because the types of investments made by a Fund can change over time. Securities and investment
techniques mentioned in this summary and described in greater detail under "Characteristics and Risks of
Securities and Investment Techniques" appear in bold type. That section and "Investment Objectives and Policies"
in the Statement of Additional Information also include more information about the Funds, their investments and
the related risks. There is no guarantee that a Fund will be able to achieve its investment objective.
Interest As interest rates rise, the value of fixed income securities in a Fund's portfolio are likely to decrease.
Rate Risk Securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more
volatile than securities with shorter durations.
Credit Risk A Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty to a
derivatives contract, repurchase agreement or a loan of portfolio securities, is unable or unwilling to make
timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to
varying degrees of credit risk, which are often reflected in credit ratings. Municipal Bonds are subject to the
risk that litigation, legislation or other political events, local business or economic conditions, or the
bankruptcy of the issuer could have a significant effect on an issuer's ability to make payments of principal
and/or interest.
Market Risk The market price of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably. Securities
may decline in value due to factors affecting securities markets generally or particular industries represented in
the securities markets. The value of a security may decline due to general market conditions which are not
specifically related to a particular company, such as real or perceived adverse economic conditions, changes in
the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment
generally. They may also decline due to factors which affect a particular industry or industries, such as labor
shortages or increased production costs and competitive conditions within an industry. Equity securities generally
have greater price volatility than fixed income securities.
Issuer Risk The value of a security may decline for a number of reasons which directly relate to the issuer, such as
management performance, financial leverage and reduced demand for the issuer's goods or services.
Liquidity Risk Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing a Fund
from selling such illiquid securities at an advantageous time or price. Funds with principal investment strategies
that involve derivatives or securities with substantial market and/or credit risk tend to have the greatest
exposure to liquidity risk.
Derivatives Risk Each Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the value
of an underlying asset, reference rate or index. The various derivative instruments that the Funds may use are
referenced under "Characteristics and Risks of Securities and Investment Techniques--Derivatives" in this
Prospectus and described in more detail under "Investment Objectives and Policies" in the Statement of Additional
Information. The Funds may sometimes use derivatives as part of a strategy designed to reduce exposure to other
risks, such as interest rate risk. The Funds may also use derivatives for leverage, in which case their use would
involve leveraging risk. A Fund's use of derivative instruments involves risks different from, or greater than,
the risks associated with investing directly in securities and other traditional investments. Derivatives are
subject to a number of risks described elsewhere in this section, such as liquidity risk, interest rate risk,
market risk, credit risk and management risk. They also involve the risk of mispricing or improper valuation and
the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate
or index. A fund investing in a derivative instrument could lose more than the principal amount invested. Also,
suitable derivative transactions may not be available in all circumstances and there can be no assurance that a
Fund will engage in these
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transactions to reduce exposure to other risks when that would be beneficial.
Mortgage Risk A Fund that purchases mortgage-related securities is subject to certain additional risks. Rising interest rates
tend to extend the duration of mortgage-related securities, making them more sensitive to changes in interest
rates. As a result, in a period of rising interest rates, a Fund that holds mortgage-related securities are
subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than
expected. This can reduce the returns of a Fund because the Fund will have to reinvest that money at the lower
prevailing interest rates.
Concentration Concentration of investments in a small number of issuers, industries or foreign currencies increases risk. The
Risk California and New York Intermediate Municipal Bond Funds are "non-diversified," which means that each may invest
a greater percentage of its assets in the securities of a single issuer (such as bonds issued by a particular
state) than diversified Funds. Funds that invest in a relatively small number of issuers are more susceptible to
risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio
might be. Some of those issuers also may present substantial credit or other risks. Similarly, a Fund may be more
sensitive to adverse economic, business or political developments if it invests a substantial portion of its
assets in the bonds of similar projects or from issuers in a similar state.
Leveraging Risk Certain Funds may engage in transactions that give rise to a form of leverage. Such transactions may include,
among, others, reverse repurchase agreements, loans of portfolios securities, and the use of when-issued, delayed
delivery or forward commitment transactions. The use of derivatives may also create leveraging risk. To mitigate
leveraging risk, PIMCO will segregate liquid assets or otherwise cover the transactions that may give rise to such
risk. The use of leverage may cause a Fund to liquidate portfolio positions when it may not be advantageous to do
so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, will cause a
Fund to be more volatile than if the Fund had not been leveraged. This is because leverage tends to exaggerate the
effect of any increase or decrease in the value of a Fund's portfolio securities.
Management Risk Each Fund is subject to management risk because it is an actively managed investment portfolio. PIMCO and each
individual portfolio manager will apply investment techniques and risk analyses in making investment decisions for
the Funds, but there can be no guarantee that these will produce the desired results.
California State- Because the California Intermediate Municipal Bond Fund concentrates its investments in California
Specific Risk municipal bonds, the Fund may be affected significantly by economic, regulatory or political developments
affecting the ability of California issuers to pay interest or repay principal. Provisions of the California
Constitution and State statutes which limit the taxing and spending authority of California governmental entities
may impair the ability of California issuers to pay principal and/or interest on their obligations. While
California's economy is broad, it does have major concentrations in high technology, aerospace and defense-related
manufacturing, trade, entertainment, real estate and financial services, and may be sensitive to economic problems
affecting those industries. Future California political and economic developments, constitutional amendments,
legislative measures, executive orders, administrative regulations, litigation and voter initiatives could have an
adverse effect on the debt obligations of California issuers.
New York State- Because the New York Intermediate Municipal Bond Fund concentrates its investments in New York municipal
Specific Risk bonds, the Fund may be affected significantly by economic, regulatory or political developments affecting
the ability of New York issuers to pay interest or repay principal. Certain issuers of New York municipal bonds
have experienced serious financial difficulties in recent years. A reoccurrence of these difficulties may impair
the ability of certain New York issuers to pay principal or interest on their obligations. The financial health of
New York City affects that of the State, and when New York City experiences financial difficulty it may have an
adverse affect on New York municipal bonds held by the Fund. The growth rate of New York has recently been
somewhat slower than the nation overall. The economic and financial condition of New York also may be affected by
various financial, social, economic and political factors.
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Management of the Funds
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Investment PIMCO serves as the investment adviser and the administrator (serving in its capacity as administrator,
Adviser and the "Administrator") for the Funds. Subject to the supervision of the Board of Trustees, PIMCO is responsible
Administrator for managing the investment activities of the Funds and the Funds' business affairs and other administrative
matters.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660. Organized in 1971,
PIMCO provides investment management and advisory services to private accounts of institutional and
individual clients and to mutual funds. As of June 30, 1999, PIMCO had approximately $172 billion in assets
under management.
Advisory Fees Each Fund pays PIMCO fees in return for providing investment advisory services. The Funds were not
operational during the fiscal year ended March 31, 1999. The investment advisory fees are set at the
following annual rates (stated as a percentage of the average daily net assets of each Fund):
Fund Advisory Fees
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Short Duration Municipal Income Fund 0.20%
California Intermediate Municipal Bond and New York 0.25%
Intermediate Municipal Bond Funds
Administrative Fees Each Fund pays for the administrative services it requires under a fee structure which is essentially
fixed. Institutional and Administrative Class shareholders of each Fund pay an administrative fee to
PIMCO, computed as a percentage of the Fund's assets attributable in the aggregate to that class of
shares. PIMCO, in turn, provides administrative services for Institutional and Administrative Class
shareholders and also bears the costs of various third-party services required by the Funds, including
audit, custodial, portfolio accounting, legal transfer agency and printing costs. The result of this
fee structure is an expense level for Institutional and Administrative Class shareholders of each Fund
that, with limited exceptions, is precise and predictable under ordinary circumstances.
The Funds were not operational during the fiscal year ended March 31, 1999. The administrative fees
are set at the following annual rates (stated as a percentage of the average daily net assets
attributable in the aggregate to the Funds' Institutional and Administrative Class shares):
Fund Administrative Fees
------------------------------------------------------------------------------------------------------
Short Duration Municipal Income 0.19%
California Intermediate Municipal Bond and New York Intermediate Municipal Bond 0.24%
Funds
Individual The following individual has primary responsibility for managing each of the Funds.
Portfolio Manager
Portfolio Manager Since Recent Professional Experience
Benjamin Ehlert 9/99* Executive Vice President, PIMCO. He has been a Portfolio
Manager for PIMCO since 1986, and has managed fixed income
accounts for various institutional clients and funds since
that time.
-------------------------------
* Inception of the Funds.
Distributor The Trust's Distributor is PIMCO Funds Distributors LLC, a wholly owned subsidiary of PIMCO Advisors. The
Distributor, located at 2187 Atlantic Street, Stamford, CT 06902, is a broker-dealer registered with the SEC.
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Investment Options - Institutional Class and Administrative Class Shares
The Trust offers investors Institutional Class and Administrative Class shares of the Funds in this Prospectus.
The Trust does not charge any sales charges (loads) or other fees in connection with purchases, sales (redemptions) or
exchanges of Institutional Class or Administrative Class shares. Administrative Class shares are subject to a higher
level of operating expenses than Institutional Class shares due to the additional service and/or distribution fees paid
by Administrative Class shares as described below. Therefore, Institutional Class shares will generally pay higher
dividends and have a more favorable investment return than Administrative Class shares.
. Service and Distribution Fees (12b-1) - Administrative Class Shares. The Trust has adopted an Administrative Services
Plan for the Administrative Class shares of each Fund. It has also adopted a Distribution Plan for the Administrative
Class shares of each Fund. Each Plan has been adopted in accordance with the requirements of Rule 12b-1 under the
Investment Company Act of 1940 and is administered in accordance with that rule. However, shareholders do not have the
voting rights set forth in Rule 12b-1 with respect to the Administrative Services Plan.
Each Plan allows the Funds to use its Administrative Class assets to reimburse financial intermediaries that provide
services relating to Administrative Class shares. The Distribution Plan permits reimbursement for expenses in connection
with the distribution and marketing of Administrative Class shares and/or the provision of shareholder services to
Administrative Class shareholders. The Administrative Services Plan permits reimbursement for services in connection
with the administration of plans or programs that use Administrative Class shares of the Funds as their funding medium
and for related expenses.
In combination, the Plans permit a Fund to make total reimbursements at an annual rate of up to 0.25% of the Fund's
average daily net assets attributable to its Administrative Class shares. The same entity may not receive both
distribution and administrative services fees with respect to the same Administrative Class assets, but may receive fees
under each Plan with respect to separate assets. Because these fees are paid out of a Fund's Administrative Class assets
on an ongoing basis, over time they will increase the cost of an investment in Administrative Class shares and may cost
an investor more than other types of sales charges.
. Arrangements with Service Agents. Institutional Class and Administrative Class shares of the Funds may be offered
through certain brokers and financial intermediaries ("service agents") that have established a shareholder servicing
relationship with the Trust on behalf of their customers. The Trust pays no compensation to such entities other than
service and/or distribution fees paid with respect to Administrative Class shares. Service agents may impose additional
or different conditions than the Trust on purchases, redemptions or exchanges of Fund shares by their customers. Service
agents may also independently establish and charge their customers transaction fees, account fees and other amounts in
connection with purchases, sales and redemptions of Fund shares in addition to any fees charged by the Trust. These
additional fees may vary over time and would increase the cost of the customer's investment and lower investment
returns. Each service agent is responsible for transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases, redemptions and exchanges. Shareholders who are
customers of service agents should consult their service agents for information regarding these fees and conditions.
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Purchases, Redemptions and Exchanges
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Purchasing Investors may purchase Institutional Class and Administrative Class shares of the Funds at the
Shares relevant net asset value ("NAV") of that class without a sales charge or other fee.
Institutional Class shares are offered primarily for direct investment by investors such as pension
and profit sharing plans, employee benefit trusts, endowments, foundations, corporations and high
net worth individuals. Institutional Class shares may also be offered through certain financial
intermediaries that charge their customers transaction or other fees with respect to their
customers' investments in the Funds.
Administrative Class shares are offered primarily through employee benefit plan alliances,
broker-dealers and other intermediaries, and each Fund pays service and/or distribution fees to
these entities for services they provide to Administrative Class shareholders.
Pension and profit-sharing plans, employee benefit trusts and employee benefit plan alliances and
"wrap account" programs established with broker-dealers or financial intermediaries may purchase
shares of either class only if the plan or program for which the shares are being acquired will
maintain an omnibus or pooled account for each Fund and will not require a Fund to pay any type of
administrative payment per participant account to any third party. Shares may be offered to
clients of PIMCO and its affiliates, and to the benefit plans of PIMCO and its affiliates.
. Investment Minimums. The minimum initial investment for shares of either class is $5 million,
except that the minimum initial investment for a registered investment adviser purchasing
Institutional Class shares for its clients through omnibus accounts is $250,000 per Fund. In
addition, the minimum initial investment does not apply to Institutional Class shares offered
through fee-based programs sponsored and maintained by a registered broker-dealer and approved by
the Distributor which each investor pays an asset based fee at an annual rate of at least 0.50% of
the assets in the account to a financial intermediary for investment advisory and/or administrative
services.
The Trust and the Distributor may waive the minimum initial investment for other categories of
investors at their discretion.
The investment minimums discussed in this section and the limitations set forth in "Investment
Limitations" below do not apply to participants in PIMCO Advisors Portfolio Strategies, a managed
product sponsored by PIMCO Advisors.
. Timing of Purchase Orders and Share Price Calculations. A purchase order, received by the
Trust's transfer agent, National Financial Data Services ("Transfer Agent"), prior to the close of
regular trading (normally 4:00 p.m., Eastern time) on the New York Stock Exchange, on a day the
Trust is open for business, together with payment made in one to the ways described below, will be
effected at that day's NAV. An order received after the close of regular trading on the New York
Stock Exchange will be effected at the NAV determined on the next business day. However, orders
received by certain retirement plans and other financial intermediaries on a business day prior to
the close of regular trading on the New York Stock Exchange and communicated to the Transfer Agent
prior to 9:00 a.m., Eastern time, on the following business day will be effected at the NAV
determined on the prior business day. The Trust is "open for business" on each day the New York
Stock Exchange is open for trading, which excludes the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Purchase orders will be accepted only on days on which the
Trust is open for business.
. Initial Investment. Investors may open an account by completing and signing a Client
Registration Application and mailing it to PIMCO Funds at 840 Newport Center Drive, Suite 300,
Newport Beach, California 92660. A Client Registration Application may be obtained by calling
1-800-927-4648.
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Except as described below, an investor may purchase Institutional Class and Administrative Class
shares only by wiring federal funds to the Trust's Transfer Agent, National Financial Data
Services, 330 West 9th Street, 4th Floor, Kansas City, Missouri 64105. Before wiring federal
funds, the investor must telephone the Trust at 1-800-927-4648 to receive instructions for wire
transfer and must provide the following information: name of authorized person, shareholder name,
shareholder account number, name of Fund and share class, amount being wired, and wiring bank name.
An investor may purchase shares without first wiring federal funds if the proceeds of the
investment are derived from an advisory account the investor maintains with PIMCO or one of its
affiliates, from surrender or other payment from an annuity, insurance, or other contract held by
Pacific Life Insurance Company, or from an investment by broker-dealers, institutional clients or
other financial intermediaries which have established a shareholder servicing relationship with the
Trust on behalf of their customers.
. Additional Investments. An investor may purchase additional Institutional Class and
Administrative Class shares of the Funds at any time by calling the Trust and wiring federal funds
to the Transfer Agent as outlined above.
. Other Purchase Information. Purchases of a Fund's Institutional Class and Administrative Class
shares will be made in full and fractional shares. In the interest of economy and convenience,
certificates for shares will not be issued.
The Trust and the Distributor each reserves the right, in its sole discretion, to suspend the
offering of shares of the Funds or to reject any purchase order, in whole or in part, when, in the
judgment of management, such suspension or rejection is in the best interests of the Trust.
An investor should invest in the Funds for long-term investment purposes only. The Trust and PIMCO
each reserves the right to restrict purchases of Fund shares (including exchanges) when a pattern
of frequent purchases and sales made in response to short-term fluctuations in share price appears
evident. Notice of any such restrictions, if any, will vary according to the particular
circumstances.
Institutional Class and Administrative Class shares of the Trust are not qualified or registered
for sale in all states. Investors should inquire as to whether shares of a particular Fund are
available for offer and sale in the investor's state of residence. Shares of the Trust may not be
offered or sold in any state unless registered or qualified in that jurisdiction or unless an
exemption from registration or qualification is available.
Subject to the approval of the Trust, an investor may purchase shares of a Fund with liquid
securities that are eligible for purchase by the Fund (consistent with the Fund's investment
policies and restrictions) and that have a value that is readily ascertainable in accordance with
the Trust's valuation policies. These transactions will be effected only if PIMCO intends to retain
the security in the Fund as an investment. Assets purchased by a Fund in such a transaction will
be valued in generally the same manner as they would be valued for purposes of pricing the Fund's
shares, if such assets were included in the Fund's assets at the time of purchase. The Trust
reserves the right to amend or terminate this practice at any time.
. Retirement Plans. Shares of the Funds are available for purchase by retirement and savings
plans, including Keogh plans, 401(k) plans, 403(b) custodial accounts, and Individual Retirement
Accounts. The administrator of a plan or employee benefits office can provide participants or
employees with detailed information on how to participate in the plan and how to elect a Fund as an
investment option. Participants in a retirement or savings plan may be permitted to elect different
investment options, alter the amounts contributed to the plan, or change how contributions are
allocated among investment options in accordance with the plan's specific provisions. The plan
administrator or employee benefit office should be consulted for details. For questions about
participant accounts, participants should contact their employee benefits office, the plan
administrator, or the organization that provides recordkeeping services for the plan. Investors
who purchase shares through retirement plans should be aware that plan administrators may aggregate
purchase and redemption orders for participants in the plan. Therefore, there may be a delay
between the time the investor places an order with the plan administrator and the time the order is
forwarded to the Transfer Agent for execution.
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Redeeming Shares Redemptions by Mail. An investor may redeem (sell) Institutional Class and Administrative Class
shares by submitting a written request to PIMCO Funds at 840 Newport Center Drive, Suite 300,
Newport Beach, California 92660. The redemption request should state the Fund from which the
shares are to be redeemed, the class of shares, the number or dollar amount of the shares to be
redeemed and the account number. The request must be signed exactly as the names of the registered
owners appear on the Trust's account records, and the request must be signed by the minimum number
of persons designated on the Client Registration Application that are required to effect a
redemption.
Redemptions by Telephone or Other Wire Communication. An investor that elects this option on the
Client Registration Application (or subsequently in writing) may request redemptions of shares by
calling the Trust at 1-800-927-4648, by sending a facsimile to 1-949-725-46830, or by other means
of wire communication. Investors should state the Fund and class from which the shares are to be
redeemed, the number or dollar amount of the shares to be redeemed and the account number.
Redemption requests of an amount of $10 million or more may be initiated by telephone, but must be
confirmed in writing by an authorized party prior to processing.
In electing a telephone redemption, the investor authorizes PIMCO and the Transfer Agent to act on
telephone instructions from any person representing himself to be the investor, and reasonably
believed by PIMCO or the Transfer Agent to be genuine. Neither the Trust nor the Transfer Agent
may be liable for any loss, cost or expense for acting on instructions (whether in writing or by
telephone) believed by the party receiving such instructions to be genuine and in accordance with
the procedures described in this Prospectus. Shareholders should realize that by electing the
telephone or wire redemption option, they may be giving up a measure of security that they might
have if they were to redeem their shares in writing. Furthermore, interruptions in telephone
service may mean that a shareholder will be unable to effect a redemption by telephone when
desired. The Transfer Agent also provides written confirmation of transactions initiated by
telephone as a procedure designed to confirm that telephone instructions are genuine (written
confirmation is also provided for redemption requests received in writing). All telephone
transactions are recorded, and PIMCO or the Transfer Agent may request certain information in order
to verify that the person giving instructions is authorized to do so. The Trust or Transfer Agent
may be liable for any losses due to unauthorized or fraudulent telephone transactions if it fails
to employ reasonable procedures to confirm that instructions communicated by telephone are genuine.
All redemptions, whether initiated by letter or telephone, will be processed in a timely manner,
and proceeds will be forwarded by wire in accordance with the redemption policies of the Trust
detailed below. See "Other Redemption Information."
Shareholders may decline telephone exchange or redemption privileges after an account is opened by
instructing the Transfer Agent in writing at least seven business days prior to the date the
instruction is to be effective. Shareholders may experience delays in exercising telephone
redemption privileges during periods of abnormal market activity. During periods of volatile
economic or market conditions, shareholders may wish to consider transmitting redemption orders by
telegram, facsimile or overnight courier.
Defined contribution plan participants may request redemptions by contacting the employee benefits
office, the plan administrator or the organization that provides recordkeeping services for the
plan.
Other Redemption Information. Redemption requests for Fund shares are effected at the NAV per
share next determined after receipt of a redemption request by the Trust or its designee. The
request must properly identify all relevant information such as account number, redemption amount
(in dollars and shares), the Fund name, and must be executed or initiated by the appropriate
signatories. A redemption request received by the Trust or its designee prior to the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m., Eastern time), on a day the
Trust is open for business, is effective on that day. A redemption request received after that time
becomes effective on the next business day.
Redemption proceeds will ordinarily be wired to the investor's bank within three business days
after the redemption request, but may take up to seven business days. Redemption proceeds will be
sent by
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wire only to the bank name designated on the Client Registration Application. The Trust may suspend the
right of redemption or postpone the payment date at times when the New York Stock Exchange is closed, or
during certain other periods as permitted under the federal securities laws.
For shareholder protection, a request to change information contained in an account registration
(for example, a request to change the bank designated to receive wire redemption proceeds) must be
received in writing, signed by the minimum number of persons designated on the Client Registration
Application that are required to effect a redemption, and accompanied by a signature guarantee from
any eligible guarantor institution, as determined in accordance with the Trust's procedures.
Shareholders should inquire as to whether a particular institution is an eligible guarantor
institution. A signature guarantee cannot be provided by a notary public. In addition,
corporations, trusts, and other institutional organizations are required to furnish evidence of the
authority of the persons designated on the Client Registration Application to effect transactions
for the organization.
Due to the relatively high cost of maintaining small accounts, the Trust reserves the right to
redeem Institutional Class and Administrative Class shares in any account for their then-current
value (which will be promptly paid to the investor) if at any time, due to redemption by the
investor, the shares in the account do not have a value of at least $100,000. A shareholder will
receive advance notice of a mandatory redemption and will be given at least 30 days to bring the
value of its account up to at least $100,000. This mandatory redemption policy does not apply to
participants in PIMCO Advisors Portfolio Strategies, a managed product sponsored by PIMCO Advisors.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1% of
the Fund's net assets during any 90-day period for any one shareholder. In consideration of the
best interests of the remaining shareholders, the Trust reserves the right to pay any redemption
proceeds exceeding this amount in whole or in part by a distribution in kind of securities held by
a Fund in lieu of cash. It is highly unlikely that shares would ever be redeemed in kind. When
shares are redeemed in kind, the redeeming shareholder should expect to incur transaction costs
upon the disposition of the securities received in the distribution.
Exchange An investor may exchange Institutional Class or Administrative Class shares of a Fund for shares of
Privilege the same class of any other Fund or other series of the Trust that offers that class based on the
respective NAVs of the shares involved. An exchange may be made by following the redemption
procedure described above under "Redemptions by Mail" or, if the investor has elected the telephone
redemption option, by calling the Trust at 1-800-927-4648. An investor may also exchange shares of
a Fund for shares of the same class of a series of PIMCO Funds: Multi-Manager Series, an affiliated
mutual fund family composed primarily of equity portfolios managed by PIMCO Advisors and its
subsidiary partnerships. Shareholders interested in such an exchange may request a prospectus for
these other series by contacting PIMCO Funds at the same address and telephone number as the Trust.
An investor may exchange shares only with respect to Funds or other eligible series that are
registered in the investor's state of residence or where an exemption from registration is
available. An exchange order is treated the same for tax purposes as a redemption followed by a
purchase and may result in a capital gain or loss, and special rules may apply in computing tax
basis when determining gain or loss. See "Tax Consequences" in this Prospectus and "Taxation" in
the Statement of Additional Information.
The Trust reserves the right to refuse exchange purchases if, in the judgment of PIMCO, the
purchase would adversely affect a Fund and its shareholders. In particular, a pattern of exchanges
characteristic of "market-timing" strategies may be deemed by PIMCO to be detrimental to the Trust
or a particular Fund. Currently, the Trust limits the number of "round trip" exchanges investors
may make. An investor makes a "round trip" exchange when the investor purchases shares of a
particular Fund, subsequently exchanges those shares for shares of a different PIMCO Fund, and then
exchanges back into the originally purchased Fund. The Trust has the right to refuse any exchange
for any investor who completes (by making the exchange back into the shares of the originally
purchased Fund) more than six round trip exchanges in any twelve-month period. The Trust reserves
the right to impose additional restrictions on exchanges at any time, although it will attempt to
give shareholders 30 days'
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prior notice whenever it is reasonably able to do so.
How Fund Shares Are Priced
The net asset value ("NAV") of a Fund's Institutional and Administrative Class shares is determined
by dividing the total value of a Fund's portfolio investments and other assets attributable to that
class, less any liabilities, by the total number of shares outstanding of that class.
For purposes of calculating NAV, portfolio securities and other assets for which market quotes are
available are stated at market value. Market value is generally determined on the basis of last
reported sales prices, or if no sales are reported, based on quotes obtained from a quotation
reporting system, established market makers, or pricing services. Certain securities or
investments for which daily market quotations are not readily available may be valued, pursuant to
guidelines established by the Board of Trustees, with reference to other securities or indices.
Short-term investments having a maturity of 60 days or less are generally valued at amortized cost.
Exchange traded options, futures and options on futures are valued at the settlement price
determined by the exchange. Other securities for which market quotes are not readily available are
valued at fair value as determined in good faith by the Board of Trustees or persons acting at
their direction.
Fund shares are valued at the close of regular trading (normally 4:00 p.m., Eastern time) (the
"NYSE Close") on each day that the New York Stock Exchange is open. For purposes of calculating
the NAV, the Funds normally use pricing data for domestic equity securities received shortly after
the NYSE Close and do not normally take into account trading, clearances or settlements that take
place after the NYSE Close. Domestic fixed income and foreign securities are normally priced using
data reflecting the earlier closing of the principal markets for those securities. Information
that becomes known to the Funds or its agents after the NAV has been calculated on a particular day
will not generally be used to retroactively adjust the price of a security or the NAV determined
earlier that day.
In unusual circumstances, instead of valuing securities in the usual manner, the Funds may value
securities at fair value or estimate their value as determined in good faith by the Board of
Trustees, generally based upon recommendations provided by PIMCO. Fair valuation may also be used
if extraordinary events occur after the close of the relevant market but prior to the NYSE Close.
Under certain circumstances, the per share NAV of the Administrative Class shares of the Funds may
be lower than the per share NAV of the Institutional Class shares as a result of the daily expense
accruals of the service and/or distribution fees paid by Administrative Class shares. Generally,
for Funds that pay income dividends, those dividends are expected to differ over time by
approximately the amount of the expenses accrual difference between the two classes.
Fund Distributions
Each Fund distributes substantially all of its net investment income to shareholders in the form of
dividends. A shareholder begins earning dividends on Fund shares the day after the Trust receives
the shareholder's purchase payment. Dividends paid by each Fund with respect to each class of
shares are calculated in the same manner and at the same time, but dividends on Administrative
Class shares are expected to be lower than dividends on Institutional Class shares as a result of
the distribution fees applicable to Administrative Class shares. The Funds intend to declare
dividends daily and distribute dividends monthly to shareholders of record.
In addition, each Fund distributes any net capital gains it earns from the sale of portfolio
securities to shareholders no less frequently than annually. Net short-term capital gains may be
paid more frequently.
A Fund's dividend and capital gain distributions with respect to a particular class of shares will
automatically be reinvested in additional shares of the same class of the Fund at NAV unless the
shareholder elects to have the distributions paid in cash. A shareholder may elect to have
distributions paid in cash by calling the Trust at 1-800-927-4648. Shareholders do not pay any
sales charges on shares received through the reinvestment of Fund distributions.
For further information on distribution options, please contact the Trust at 1-800-927-4648.
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Tax Consequences
The following Information is meant as a general summary for U.S.
taxpayers. Please see the SAI for additional information. You should
rely on your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in each Fund.
Each Fund will distribute substantially all of its income and
gains to its shareholders every year, and shareholders will be taxed
on distributions they receive unless the distribution is derived from
tax-exempt income and is designated as an "exempt-interest dividend."
If a Fund declares a dividend in October, November or December but
pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
. Dividends paid to shareholders of each Fund and derived from
Municipal Bond interest are expected to be designated by each Fund as
"exempt-interest dividends" and shareholders may generally exclude
such dividends from gross income for federal income tax purposes. The
federal tax exemption for "exempt-interest dividends" from Municipal
Bonds does not necessarily result in the exemption of such dividends
from state and local taxes although the California Intermediate
Municipal Bond Fund and the New York Intermediate Municipal Bond Fund
intend to arrange their affairs so that a portion of such
distributions will be exempt from state taxes in the respective
state. Each Fund may invest a portion of its assets in securities
that generate income that is not exempt from federal or state income
tax. Dividends derived from taxable interest or capital gains will be
subject to federal income tax. If a Fund invests in "private activity
bonds," certain shareholder may become subject to alternative minimum
tax on the part of the Fund's distributions derived from interest on
such bonds.
. If you are subject to U.S. federal income tax, you will be
subject to tax on Fund distributions derived from taxable interest or
capital gains whether you received them in cash or reinvested them in
additional shares of the Funds. For federal income tax purposes, Fund
distributions that are taxable will be taxable to you as either
ordinary income or capital gains. Ordinary taxable Fund dividends
(i.e., distributions of investment income) are taxable to you as
ordinary income. If the Fund designates a dividend as a capital gain
distribution, you will pay tax on that dividend at the long-term
capital gains tax rate, no matter how long you have held your Fund
shares. Distributions of gains from investments that the Fund owned
for 12 months or less will generally be taxable to you as ordinary
income.
Taxable Fund distributions are taxable to you even if they are
paid from income or gains earned by a Fund prior to your investment
and thus were included in the price you paid for your shares. For
example, if you purchase shares on or just before the record date of
a Fund distribution, you will pay full price for the shares and may
receive a portion of your investment back as a taxable distribution.
You will generally have a taxable capital gain or loss if you
dispose of your Fund shares by redemption, exchange or sale. The
amount of the gain or loss and the rate of tax will depend primarily
upon how much you pay for the shares, how much you sell them for, and
how long you hold them. When you exchange shares of a Fund for shares
of another series, the transaction will be treated as a sale of the
Fund shares for these purposes, and any gain on those shares will
generally be subject to federal income tax. The Fund will send you a
tax report each year. The report will tell you which dividends and
redemptions must be treated as taxable ordinary income and which are
short-term or long-term capital gains.
The Funds seek to produce income that is generally exempt from
U.S. income tax and will not benefit investors in tax-sheltered
retirement plans or individuals not subject to U.S. income tax.
Further, the California and New York Intermediate Municipal Bond
Funds seek to produce income that is generally exempt from the
relevant state's income tax and will not benefit individuals that are
not subject to that state's income tax.
This section relates only to federal income tax; the consequences
under other tax laws may differ. Shareholders should consult their
tax advisers as to the possible application of foreign, state and
local income tax laws to Fund dividends and capital distributions.
Please see the Statement of Additional Information for additional
information regarding the tax aspects of investing in the Funds.
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Characteristics and Risks of Securities and
Investment Techniques
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This section provides additional information about some of the principal investments and related
risks of the Funds described under "Summary Information" above. It also describes characteristics
and risks of additional securities and investment techniques that may be used by the Funds from
time to time. Most of these securities and investment techniques are discretionary, which means
that PIMCO can decide whether to use them or not. This Prospectus does not attempt to disclose all
of the various types of securities and investment techniques that may be used by the Funds. As
with any mutual fund, investors in the Funds rely on the professional investment judgment and skill
of PIMCO and the individual portfolio managers. Please see "Investment Objectives and Policies" in
the Statement of Additional Information for more detailed information about the securities and
investment techniques described in this section and about other strategies and techniques that may
be used by the Funds.
Securities In selecting securities for a Fund, PIMCO develops an outlook for interest rates and the economy;
Selection analyzes credit and call risks, and uses other security selection techniques. The proportion of a
Fund's assets committed to investment in securities with particular characteristics (such as
quality, sector, interest rate or maturity) varies based on PIMCO's outlook for the U.S. economy,
the financial markets and other factors.
PIMCO attempts to identify areas of the bond market that are undervalued relative to the rest of
the market. PIMCO identifies these areas by grouping bonds into sectors. Sophisticated
proprietary software then assists in evaluating sectors and pricing specific securities. Once
investment opportunities are identified, PIMCO will shift assets among sectors depending upon
changes in relative valuations and credit spreads. There is no guarantee that PIMCO's security
selection techniques will produce the desired results.
U.S. Government U.S. Government securities are obligations of, or guaranteed by, the U.S. Government, its agencies
Securities or instrumentalities. U.S. Government securities are subject to market and interest rate risk, and
may be subject to varying degrees of credit risk. U.S. Government securities include zero coupon
securities, which tend to be subject to greater market risk than interest-paying securities of
similar maturities.
Corporate Debt Corporate debt securities are subject to the risk of the issuer's inability to meet principal and
Securities interest payments on the obligation and may also be subject to price volatility due to such factors
as interest rate sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity. When interest rates rise, the value of corporate debt securities can be expected
to decline. Debt securities with longer maturities tend to be more sensitive to interest rate
movements than those with shorter maturities.
Variable and Variable and floating rate securities provide for a periodic adjustment in the interest rate paid
Floating Rate on the obligations. Each Fund may invest in floating rate debt instruments ("floaters") and
Securities engage in credit spread trades. While floaters provide a certain degree of protection against rises
in interest rates, a Fund will participate in any declines in interest rates as well. Each Fund may
also invest in inverse floating rate debt instruments ("inverse floaters"). An inverse floater
may exhibit greater price volatility than a fixed rate obligation of similar credit quality. A Fund
may not invest more than 5% of its net assets in any combination of inverse floater, interest only,
or principal only securities.
High Yield Securities rated lower than Baa by Moody's or lower than BBB by S&P are sometimes referred to as
Securities "high yield" or "junk" bonds. Investing in high yield securities involves special risks in
addition to the risks associated with investments in higher-rated fixed income securities. While
offering a greater potential opportunity for capital appreciation and higher yields, high yield
securities typically entail greater potential price volatility and may be less liquid than
higher-rated securities. High yield securities may be regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest payments. They may also
be more susceptible to real or perceived adverse economic and competitive industry conditions than
higher-rated securities.
Credit Ratings and Unrated Securities. Rating agencies are private services that provide ratings of
the credit quality of fixed income securities, including convertible securities. Appendix A to the
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Prospectus describes the various ratings assigned to fixed income securities by Moody's and S&P.
Ratings assigned by a rating agency are not absolute standards of credit quality and do not
evaluate market risks. Rating agencies may fail to make timely changes in credit ratings and an
issuer's current financial condition may be better or worse than a rating indicates. A Fund will
not necessarily sell a security when its rating is reduced below its rating at the time of
purchase. PIMCO does not rely solely on credit ratings, and develops its own analysis of issuer
credit quality.
A Fund may purchase unrated securities (which are not rated by a rating agency) if its portfolio
manager determines that the security is of comparable quality to a rated security that the Fund may
purchase. Unrated securities may be less liquid than comparable rated securities and involve the
risk that the portfolio manager may not accurately evaluate the security's comparative credit
rating. Analysis of the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher-quality fixed income securities. To the extent that a Fund invests in
high yield and/or unrated securities, the Fund's success in achieving its investment objective may
depend more heavily on the portfolio manager's creditworthiness analysis than if the Fund invested
exclusively in higher-quality and rated securities.
Inflation-Indexed Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted
Bonds according to the rate of inflation. If the index measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these
securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of
U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the
adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest
rates. Real interest rates are tied to the relationship between nominal interest rates and the rate
of inflation. If nominal interest rates increase at a faster rate than inflation, real interest
rates may rise, leading to a decrease in value of inflation-indexed bonds. Short-term increases in
inflation may lead to a decline in value. Any increase in the principal amount of an
inflation-indexed bond will be considered taxable ordinary income, even though investors do not
receive their principal until maturity.
Derivatives Each Fund may, but is not required to, use certain derivative instruments for risk management
purposes or as part of its investment strategies. Generally, derivatives are financial contracts
whose value depends upon, or is derived from, the value of an underlying asset, reference rate or
index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates,
commodities, and related indexes. Examples of derivative instruments include options contracts,
futures contracts, options on futures contracts and swap agreements. A portfolio manager may
decide not to employ any of these strategies and there is no assurance that any derivatives
strategy used by a Fund will succeed. A description of these and other derivative instruments that
the Funds may use are described under "Investment Objectives and Policies" in the Statement of
Additional Information.
A Fund's use of derivative instruments involves risks different from, or greater than, the risks
associated with investing directly in securities and other more traditional investments. A
description of various risks associated with particular derivative instruments is included in
"Investment Objectives and Policies" in the Statement of Additional Information. The following
provides a more general discussion of important risk factors relating to all derivative instruments
that may be used by the Funds.
Management Risk Derivative products are highly specialized instruments that require investment
techniques and risk analyses different from those associated with stocks and bonds. The use of a
derivative requires an understanding not only of the underlying instrument but also of the
derivative itself, without the benefit of observing the performance of the derivative under all
possible market conditions.
Credit Risk The use of a derivative instrument involves the risk that a loss may be sustained as a
result of the failure of another party to the contract (usually referred to as a "counterparty") to
make required payments or otherwise comply with the contract's terms.
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Liquidity Risk Liquidity risk exists when a particular derivative instrument is difficult to
purchase or sell. If a derivative transaction is particularly large or if the relevant market is
illiquid (as is the case with many privately negotiated derivatives), it may not be possible to
initiate a transaction or liquidate a position at an advantageous time or price.
Leverage Risk Because many derivatives have a leverage component, adverse changes in the value or
level of the underlying asset, reference rate or index can result in a loss substantially greater
than the amount invested in the derivative itself. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment. When a Fund uses derivatives for
leverage, investments in that Fund will tend to be more volatile, resulting in larger gains or
losses in response to market changes. To limit leverage risk, each Fund will segregate assets
determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees
(or, as permitted by applicable regulation, enter into certain offsetting positions) to cover its
obligations under derivative instruments.
Lack of Availability Because the markets for certain derivative instruments (including markets
located in foreign countries) are relatively new and still developing, suitable derivatives
transactions may not be available in all circumstances for risk management or other purposes.
There is no assurance that a Fund will engage in derivatives transactions at any time or from time
to time. A Fund's ability to use derivatives may also be limited by certain regulatory and tax
considerations.
Market and Other Risks Like most other investments, derivative instruments are subject to the risk
that the market value of the instrument will change in a way detrimental to a Fund's interest. If
a portfolio manager incorrectly forecasts the values of securities, currencies or interest rates or
other economic factors in using derivatives for a Fund, the Fund might have been in a better
position if it had not entered into the transaction at all. While some strategies involving
derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain
or even result in losses by offsetting favorable price movements in other Fund investments. A Fund
may also have to buy or sell a security at a disadvantageous time or price because the Fund is
legally required to maintain offsetting positions or asset coverage in connection with certain
derivatives transactions.
Other risks in using derivatives include the risk of mispricing or improper valuation of
derivatives and the inability of derivatives to correlate perfectly with underlying assets, rates
and indexes. Many derivatives, in particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in increased cash payment requirements
to counterparties or a loss of value to a Fund. Also, the value of derivatives may not correlate
perfectly, or at all, with the value of the assets, reference rates or indexes they are designed to
closely track. In addition, a Fund's use of derivatives may cause the Fund to realize higher
amounts of short-term capital gains (generally taxed at ordinary income tax rates) than if the Fund
had not used such instruments.
Convertible Each Fund may invest in convertible securities. Convertible securities are generally preferred
Securities stocks and other securities, including fixed income securities and warrants, that are convertible
into or exercisable for common stock at a stated price or rate. The price of a convertible
security will normally vary in some proportion to changes in the price of the underlying common
stock because of this conversion or exercise feature. However, the value of a convertible security
may not increase or decrease as rapidly as the underlying common stock. A convertible security
will normally also provide income and is subject to interest rate risk. Convertible securities may
be lower-rated securities subject to greater levels of credit risk. A Fund may be forced to
convert a security before it would otherwise choose, which may have an adverse affect on the Fund's
ability to achieve its investment objective.
While the Funds intend to invest primarily in fixed income securities, each may invest in
convertible securities or equity securities. While some countries or companies may be regarded as
favorable investments, pure fixed income opportunities may be unattractive or limited due to
insufficient supply, or legal or technical restrictions. In such cases, a Fund may consider equity
securities or convertible securities to gain exposure to such investments.
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Mortgage-Related and Each Fund may invest in mortgage- or other asset-backed securities. Mortgage-related securities
Other Asset-Backed include mortgage pass-through securities, collateralized mortgage obligations ("CMOs"),
Securities commercial mortgage-backed securities, mortgage dollar rolls, CMO residuals, stripped
mortgage-backed securities ("SMBSs") and other securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real property.
The value of some mortgage- or asset-backed securities may be particularly sensitive to changes
in prevailing interest rates. Early repayment of principal on some mortgage-related securities
may expose a Fund to a lower rate of return upon reinvestment of principal. When interest rates
rise, the value of a mortgage-related security generally will decline; however, when interest
rates are declining, the value of mortgage-related securities with prepayment features may not
increase as much as other fixed income securities. The rate of prepayments on underlying
mortgages will affect the price and volatility of a mortgage-related security, and may shorten
or extend the effective maturity of the security beyond what was anticipated at the time of
purchase. If unanticipated rates of prepayment on underlying mortgages increase the effective
maturity of a mortgage-related security, the volatility of the security can be expected to
increase. The value of these securities may fluctuate in response to the market's perception of
the creditworthiness of the issuers. Additionally, although mortgages and mortgage-related
securities are generally supported by some form of government or private guarantee and/or
insurance, there is no assurance that private guarantors or insurers will meet their obligations.
One type of SMBS has one class receiving all of the interest from the mortgage assets (the
interest-only, or "IO" class), while the other class will receive all of the principal (the
principal-only, or "PO" class). The yield to maturity on an IO class is extremely sensitive to
the rate of principal payments (including prepayments) on the underlying mortgage assets, and a
rapid rate of principal payments may have a material adverse effect on a Fund's yield to
maturity from these securities. A Fund may not invest more than 5% of its net assets in any
combination of IO, PO, or inverse floater securities. The Funds may invest in other asset-backed
securities that have been offered to investors.
Municipal Municipal bonds are generally issued by states and local governments and their agencies,
Bonds authorities and other instrumentalities. Municipal bonds are subject to interest rate, credit
and market risk. The ability of an issuer to make payments could be affected by litigation,
legislation or other political events or the bankruptcy of the issuer. Lower rated municipal
bonds are subject to greater credit and market risk than higher quality municipal bonds. The
types of municipal bonds in which the Funds may invest include municipal lease obligations. The
Funds may also invest in securities issued by entities whose underlying assets are municipal
bonds.
Loan The Funds may invest in fixed- and floating-rate loans, which investments generally will be in
Participations the form of loan participations and assignments of portions of such loans. Participations and
and assignments involve special types of risk, including credit risk, interest rate risk, liquidity
Assignments risk, and the risks of being a lender. If a Fund purchases a participation, 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.
Delayed The Funds may also enter into, or acquire participations in, delayed funding loans and revolving
Funding Loans credit facilities, in which a lender agrees to make loans up to a maximum amount upon demand by
and Revolving the borrower during a specified term. These commitments may have the effect of requiring a Fund
Credit Facilities to increase its investment in a company at a time when it might not otherwise decide to do so
(including at a time when the company's financial condition makes it unlikely that such amounts
will be repaid). To the extent that a Fund is committed to advance additional funds, it will
segregate assets determined to be liquid by PIMCO in accordance with procedures established by
the Board of Trustees in an amount sufficient to meet such commitments. Delayed funding loans
and revolving credit facilities are subject to credit, interest rate and liquidity risk and the
risks of being a lender.
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Loans For the purpose of achieving income, each Fund may lend its portfolio securities to brokers,
of Portfolio dealers, and other financial institutions provided a number of conditions are satisfied,
Securities including that the loan is fully collateralized. Please see "Investment Objectives and
Policies" in the Statement of Additional Information for details. When a Fund lends portfolio
securities, its investment performance will continue to reflect changes in the value of the
securities loaned, and the Fund will also receive a fee or interest on the collateral.
Securities lending involves the risk of loss of rights in the collateral or delay in recovery of
the collateral if the borrower fails to return the security loaned or becomes insolvent. A Fund
may pay lending fees to a party arranging the loan.
Short Sales Each Fund may make short sales as part of its overall portfolio management strategies or to
offset a potential decline in value of a security. A short sale involves the sale of a security
that is borrowed from a broker or other institution to complete the sale. The Funds may make
short sales if the security sold short is held in the Fund's portfolio or if the Fund has the
right to acquire the security without the payment of further consideration (a "short sale
against the box"). For these purposes, a Fund may also hold or have the right to acquire
securities which, without the payment of any further consideration, are convertible into or
exchangeable for the securities sold short. Short sales expose a Fund to the risk that it will
be required to acquire, convert or exchange securities to replace the borrowed securities (also
known as "covering" the short position) at a time when the securities sold short have
appreciated in value, thus resulting in a loss to the Fund. A Fund making a short sale (other
than a "short sale against the box") must segregate assets determined to be liquid by PIMCO in
accordance with procedures established by the Board of Trustees or otherwise cover its position
in a permissible manner.
When-Issued, Each Fund may purchase securities which it is eligible to purchase on a when-issued basis, may
Delayed Delivery purchase and sell such securities for delayed delivery and may make contracts to purchase such
and Forward securities for a fixed price at a future date beyond normal settlement time (forward
Commitment commitments). When-issued transactions, delayed delivery purchases and forward commitments
Transactions involve a risk of loss if the value of the securities declines prior to the settlement date.
This risk is in addition to the risk that the Fund's other assets will decline in the value.
Therefore, these transactions may result in a form of leverage and increase a Fund's overall
investment exposure. Typically, no income accrues on securities a Fund has committed to
purchase prior to the time delivery of the securities is made, although a Fund may earn income
on securities it has segregated to cover these positions.
Repurchase Each Fund may enter into repurchase agreements, in which the Fund purchases a security from a
Agreements bank or broker-dealer and agrees to repurchase the security at the Fund's cost plus interest
within a specified time. If the party agreeing to repurchase should default, the Fund will seek
to sell the securities which it holds. This could involve procedural costs or delays in
addition to a loss on the securities if their value should fall below their repurchase price.
Repurchase agreements maturing in more than seven days are considered illiquid securities.
Reverse Each Fund may enter into reverse repurchase agreements and dollar rolls, subject to the Fund's
Repurchase limitations on borrowings. A reverse repurchase agreement or dollar roll involves the sale of a
Agreements, security by a Fund and its agreement to repurchase the instrument at a specified time and price,
Dollar Rolls And and may be considered a form of borrowing for some purposes. A Fund will segregate assets
Other Borrowings determined to be liquid by PIMCO in accordance with procedures established by the Board of
Trustees to cover its obligations under reverse repurchase agreements. A Fund also may borrow
money for investment purposes subject to any policies of the Fund currently described in this
Prospectus or in the Statement of Additional Information. Reverse repurchase agreements, dollar
rolls and other forms of borrowings may create leveraging risk for a Fund.
Catastrophe Each Fund may invest in "catastrophe bonds," which are fixed income securities for which the
Bonds return of principal and payment of interest is contingent on the non-occurrence of a specific
"trigger" catastrophic event, such as a hurricane or an earthquake. If a trigger event occurs,
a Fund may lose a portion or all of its principal invested in the bond. Catastrophe bonds often
provide for an extension of maturity to process and audit loss claims where a trigger event has,
or possibly has, occurred. An extension of maturity may increase volatility. Catastrophe bonds
may also expose the Fund to certain unanticipated risks including credit risk, adverse
regulatory or jurisdictional interpretations, and adverse tax consequences. Catastrophe bonds
may also be subject to liquidity risk.
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Portfolio The length of time a Fund has held a particular security is not generally a consideration in
Turnover investment decisions. A change in the securities held by a Fund is known as "portfolio
turnover." Each Fund may engage in frequent and active trading of portfolio securities to
achieve its investment objective, particularly during periods of volatile market movements.
High portfolio turnover (e.g., over 100%) involves correspondingly greater expenses to a 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 also result in realization of
taxable capital gains, including short-term capital gains (which are generally taxed at ordinary
income tax rates). The trading costs and tax effects associated with portfolio turnover may
adversely affect a Fund's performance.
Illiquid Securities Each Fund may invest up to 15% of its net assets in illiquid securities. Certain illiquid
securities may require pricing at fair value as determined in good faith under the supervision
of the Board of Trustees. A portfolio manager may be subject to significant delays in disposing
of illiquid securities, and transactions in illiquid securities may entail registration expenses
and other transaction costs that are higher than those for transactions in liquid securities.
The term "illiquid securities" for this purpose means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount at which a Fund
has valued the securities. Restricted securities, i.e., securities subject to legal or
contractual restrictions on resale, may be illiquid. However, some restricted securities (such
as securities issued pursuant to Rule 144A under the Securities Act of 1933 and certain
commercial paper) may be treated as liquid, although they may be less liquid than registered
securities traded on established secondary markets.
Investment in Other Each Fund may invest up to 10% of its assets in securities of other investment companies, such
Investment Companies as closed-end management investment companies, or in pooled accounts or other investment
vehicles. As a shareholder of an investment company, a Fund may indirectly bear service and
other fees which are in addition to the fees the Fund pays its service providers.
Year 2000 Many of the services provided to the Funds depend on the smooth functioning of computer systems.
Readiness Many systems in use today cannot distinguish between the year 1900 and the year 2000. Should any
Disclosure of the service systems fail to process information properly, this could have an adverse impact
on the Funds' operations and services provided to shareholders. PIMCO, the Distributor, the
Trust's shareholder servicing and transfer agent and custodian, and certain other service
providers to the Funds 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 Funds' operations and services provided to
shareholders will not be adversely affected, nor can there be any assurance that the year 2000
problem will not have an adverse effect on the entities whose securities are held by the Funds
or on domestic or global securities markets or economies, generally.
Temporary For temporary or defensive purposes, each fund may invest without limit in U.S. debt securities,
Defensive including taxable and short-term money market securities, when PIMCO deems it appropriate to do
Strategies so. When a Fund engages in such strategies, it may not achieve its investment objective.
Changes in The investment objective of each Fund is fundamental and may not be changed without shareholder
Investment approval. Unless otherwise stated, all other investment policies of the Funds may be changed by
Objectives and the Board of Trustees without shareholder approval.
Policies
Percentage Unless otherwise stated, all percentage limitations on Fund investments listed in this
Investment Prospectus will apply at the time of investment. A Fund would not violate these limitations
Limitations unless an excess or deficiency occurs or exists immediately after and as a result of an
investment.
Other The Funds may invest in other types of securities and use a variety of investment techniques and
Investments and strategies which are not described in this Prospectus. These securities and techniques may
Techniques subject the Funds to additional risks. Please see the Statement of Additional Information for
additional information about the securities and investment techniques described in this
Prospectus and about additional securities and techniques that may be used by the Funds.
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Appendix A
Description of Securities Ratings
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A Fund's investment 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 PIMCO to be of comparable quality). The percentage of a
Fund's assets invested in securities particular rating category will vary. The following terms
are generally used to described the credit quality of fixed income securities:
High Quality Debt Securities are those rated in one of the two highest rating categories (the
highest category for commercial paper) or, if unrated, deemed comparable by PIMCO.
Investment Grade Debt Securities are those rated in one of the four highest rating categories or,
if unrated deemed comparable by PIMCO. Below Investment Grade, High Yield Securities ("Junk
Bonds") are those rated lower than Baa by Moody's or BBB by S&P and comparable securities. They
are considered predominantly speculative with respect to the issuer's ability to repay principal
and interest.
Following is a description of Moody's and S&P's rating categories applicable to fixed income
securities.
Moody's Investors Corporate and Municipal Bond Ratings
Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with
the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered
as upper-medium-grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present that suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the contract over any long
period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be
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present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classified from Aa
through B in its corporate bond rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior
debt obligations which have an original maturity not exceeding one year. Obligations relying
upon support mechanisms such as letters of credit and bonds of indemnity are excluded unless
explicitly rated.
Moody's employs the following three designations, all judged to be investment grade, to indicate
the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment
of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many
of the following characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of financial markets
and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment
of senior short-term debt obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating categories.
Short-Term Municipal Bond Ratings
There are four rating categories for short-term municipal bonds that define an investment grade
situation, which are listed below. In the case of variable rate demand obligations (VRDOs), a
two-component rating is assigned. The first element represents an evaluation of the degree of
risk associated with scheduled principal and interest payments, and the other represents an
evaluation of the degree of risk associated with the demand feature. The short-term rating
assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or
short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a
function of each issue's specific structural or credit features.
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MIG 1/VMIG 1: This designation denotes best quality. There is present strong protection by
established cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are ample although not
so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements are accounted for
but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly regarded as required
of an investment security is present and although not distinctly or predominantly speculative,
there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this category lack margins
of protection.
Standard & Poor's Corporate and Municipal Bond Ratings
Ratings Services
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions, or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet
interest payments and principal repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon
favorable business, financial, and economic conditions to meet timely payment of interest and
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repayment of principal. In the event of adverse business, financial or economic conditions, it
is not likely to have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or implied B or B-
rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt that is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being paid.
D: Debt rated D is in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace period. The D
rating will also be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the likelihood of, or the
risk of default upon failure of, such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other obligations that S&P
believes may experience high volatility or high variability in expected returns due to non-credit
risks. Examples of such obligations are: securities whose principal or interest return is
indexed to equities, commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of
the obligor but do not take into account currency exchange and related uncertainties.
Commercial Paper An S&P commercial paper rating is a current assessment of the likelihood of timely payment of
Rating Definitions debt having an original maturity of no more than 365 days. Ratings are graded into several
categories, 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 designation 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 adverse effects of changes in circumstances than obligations
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carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity 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 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.
A commercial paper rating is not a recommendation to purchase, sell or hold a security inasmuch
as it does not comment as to market 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
occasion, rely on unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information.
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PIMCO Funds: INVESTMENT ADVISER AND ADMINISTRATOR
Pacific Investment PIMCO, 840 Newport Center Drive, Suite 300, Newport Beach, CA 92660
Management Series
CUSTODIAN
Investor Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO 64105
TRANSFER AGENT
National Financial Data Services, 330 W. 9th Street, 4th Floor, Kansas City, MO 64105
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, D.C. 20006
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PIMCO Funds: Pacific Investment Management Series
The Trust's Statement of Additional Information ("SAI") includes additional
information about the Funds. The SAI is incorporated by reference into this
Prospectus, which means it is part of this Prospectus for legal purposes.
You may get free copies of the SAI, request other information about a Fund, or
make shareholder inquiries by calling the Trust at 1-800-927-4648 or PIMCO
Infolink Audio Response Network at 1-800-987-4626, or by writing to:
PIMCO Funds: Pacific Investment Management Series
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
You can also visit our Web site at www.pimco.com for additional information
about the Funds.
You may review and copy information about the Trust, including its SAI, at the
Securities and Exchange Commission's public reference room in Washington, D.C.
You may call the Commission at 1-800-SEC-0330 for information about the
operation of the public reference room. You may also access reports and other
information about the Trust on the Commission's Web site at www.sec.gov. You
may get copies of this information, with payment of a duplication fee, by
writing the Public Reference Section of the Commission, Washington, D.C. 20549-
6009. You may need to refer to the Trust's file number under the Investment
Company Act, which is 811-5028.
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PIMCO Funds Prospectus
PIMCO Funds: This Prospectus describes 3 mutual funds offered by PIMCO Funds: Pacific
Pacific Investment Investment Management Series. The Funds provide access to the professional
Management Series investment advisory services offered by Pacific Investment Management Company
("PIMCO"). As of June 30, 1999 PIMCO managed approximately $172 billion in assets.
August 31, 1999
Share Classes This Prospectus explains what you should know about the Funds before you invest.
A, B and C Please read it carefully.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Table of Contents
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Summary Information...................................................... 3
Fund Summaries
Short Duration Municipal Income Fund.................................. 4
California Intermediate Municipal Bond Fund........................... 6
New York Intermediate Municipal Bond Fund............................. 8
Summary of Principal Risks............................................... 10
Management of the Funds.................................................. 12
Investment Options....................................................... 14
How Fund Shares Are Priced............................................... 18
How to Buy and Sell Shares............................................... 19
Fund Distributions....................................................... 24
Tax Consequences......................................................... 25
Characteristics and Risks of Securities and Investment Techniques........ 26
Description of Securities Ratings........................................ A-1
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2
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Summary Information
The table below compares certain investment characteristics of the Funds. Other
important characteristics are described in the individual Fund Summaries
beginning on page 5. Following the table are certain key concepts which are used
throughout the prospectus.
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Main Investments Duration Credit Quality(1) Foreign
- ------------------------------------------------------------------------------------------------------------------------------------
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Tax Exempt Bond Short Duration Short and intermediate maturity 0-2 years Baa to Aaa 0%
Funds Municipal Income municipal securities (exempt from
federal income tax)
--------------------------------------------------------------------------------------------------------------
California Intermediate maturity municipal 3-7 years B to Aaa; 0%
Intermediate securities (exempt from federal and max 10% below Baa
Municipal Bond California income tax)
--------------------------------------------------------------------------------------------------------------
New York Intermediate Intermediate maturity municipal 3-7 years B to Aaa; max 10% 0%
Municipal Bond securities (exempt from federal and below Baa
New York income tax)
__________
(1) As rated by Moody's Investors Service, Inc., or if unrated, determined by PIMCO to be of comparable
quality.
Fixed Income "Fixed Income Instruments" as used in this Prospectus includes:
Instruments
. securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S. Government
securities");
. corporate debt securities, including convertible securities and corporate commercial paper;
. mortgage-backed and other asset-backed securities;
. inflation-indexed bonds issued both by governments and corporations;
. structured notes, including hybrid or "indexed" securities, catastrophe bonds 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;
. debt securities issued by states or local governments and their agencies, authorities and other
instrumentalities;
. obligations of foreign governments or their subdivisions, agencies and instrumentalities; and
. obligations of international agencies or supranational entities.
Duration Duration is a measure of the expected life of a fixed income security that is used to determine the
sensitivity of a security's price to changes in interest rates. The longer a security's duration, the more
sensitive it will be to changes in interest rates. Similarly, a Fund with a longer average portfolio duration
will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration.
Credit Ratings In this Prospectus, references are made to credit ratings of debt securities which measure an issuer's
expected ability to pay principal and interest on time. Credit ratings are determined by rating organizations,
such as Standard & Poor's Rating Service ("S&P") or Moody's Investors Services, Inc. ("Moody's"). The
following terms are generally used to describe the credit quality of debt securities depending on the
security's credit rating or, if unrated, credit quality as determined by PIMCO:
. high quality
. investment grade
. below investment grade ("high yield securities" or "junk bonds")
For a further description of credit ratings, see "Appendix A-Description of Securities Ratings."
Fund Descriptions, The Funds provide a range of investment choices. The following summaries identify each Fund's investment
Performance and objective, principal investments and strategies, principal risks, performance information and fees and
Fees expenses. A more detailed "Summary of Principal Risks" describing principal risks of investing in the Funds
begins after the Fund Summaries.
It is possible to lose money on investments in the Funds. An investment in a Fund is not a deposit of a bank
and is not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
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3
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PIMCO Short Duration Municipal Income Fund
<S> <C>
Principal Investment Objective Fund Focus Credit Quality
Investments and Seeks high current income exempt from Short and intermediate maturity Baa to Aaa
Strategies federal income tax, consistent with municipal securities (exempt
preservation of capital. from federal income tax) Dividend Frequency
Declared daily and
Fund Category Average Portfolio Duration distributed monthly
Tax Exempt Bond Funds 0-2 years
The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80%
of its net assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at
the time of issuance, exempt from federal income tax ("Municipal Bonds"). Municipal Bonds generally are
issued by or on behalf of states and local governments and their agencies, authorities and other
instrumentalities.
The Fund may invest without limit in "private activity" bonds whose interest is a tax-preference item
for purposes of the federal alternative minimum tax ("AMT"). For shareholders subject to the AMT, a
substantial portion of the Fund's distributions may not be exempt from federal income tax. The Fund may
invest up to 20% of its net assets in other types of Fixed Income Instruments. The Fund may invest more
than 25% of its assets in bonds of issuers in the same state. The Fund may only invest in investment
grade debt securities. The average portfolio duration of this Fund varies based on PIMCO's forecast for
interest rates and under normal market conditions is not expected to exceed two years. The Fund will
seek income that is high relative to prevailing rates from Municipal Bonds.
The Fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or
in mortgage- or asset-backed securities. The Fund may lend its portfolio securities to brokers, dealers
and other financial institutions to earn income. Rather than investing directly in securities in which
it primarily invests, the Fund may use other investment techniques to gain exposure to market movements
related to such securities, such as entering into a series of contracts to buy and sell such securities.
Principal Risks Among the principal risks of investing in the Fund which could adversely affect its net asset value,
yield and total return are:
. Interest Rate Risk . Issuer Risk . Leveraging Risk
. Credit Risk . Derivatives Risk . Management Risk
. Market Risk . Mortgage Risk
Please see "Summary of Principal Risks" following the Fund Summaries for a description of these and
other risks of investing in the Fund.
Performance Information The Fund does not have a full calendar year of performance. Thus, no bar chart or annual returns table
is included for the Fund .
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Fees and Expenses These tables describe the fees and expenses you may pay if of the Fund you buy and hold Class A, B, or
of the fund: C shares of the Fund:
Shareholder fees (fees paid directly from your investment)
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed on Purchases 2% None None
(as a percentage of offering price)
Maximum Contingent Deferred Sales Charge (Load) 1%/(1)/ 5%/(2)/ 1%/(3)/
(as a percentage of original purchase price)
__________
(1) Imposed only in certain circumstances where Class A shares are purchased without a front-end sales
charge at the time of purchase.
(2) The maximum CDSC is imposed on shares redeemed in the first year. For shares held longer than one
year, the CDSC declines according to the schedule set forth under "Investment Options (Class A, B and C
Shares - Contingent Deferred Sales Charges (CDSCs)) -Class B Shares."
(3) The CDSC on Class C shares is imposed only on shares redeemed in the first year.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Distribution Total Annual
and/or Service Other Fund Operating
Share Class Advisory Fees (12b-1) Fees(1) Expenses Expenses
------------------------------------------------------------------------------------
A Shares 0.20% 0.25% 0.35 0.80%
------------------------------------------------------------------------------------
B Shares 0.20 1.00 0.35 1.55
------------------------------------------------------------------------------------
C Shares 0.20 0.55 0.35 1.10
(1) Due to the 12b-1 distribution fee imposed on Class B and Class C shares, a Class B or Class C
shareholder may, depending upon the length of time the shares are held, pay more than the economic
equivalent of the maximum front-end sales charges permitted by relevant rules of the National Association
of Securities Dealers, Inc.
(2) Other expenses reflect a 0.35% Administration Fee paid by the class.
Examples. The Examples are intended to help you compare the cost of investing in Classes A, B or C of the
Fund with the costs of investing in other mutual funds. The Examples assume that you invest $10,000 in
the noted class of shares for the time periods indicated, your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the Examples show what your costs would be based on
these assumptions.
Example: Assuming you redeem shares Example: Assuming you do not redeem your
at the end of each period shares
Share Class Year Year
1 3 5 10 1 3 5 10
-------------------------------------------------------------------------------------------------------
A Shares $ 280 $ 450 $ 635 $ 1,170 $ 280 $ 450 $ 635 $ 1,170
-------------------------------------------------------------------------------------------------------
B Shares 158 490 845 1,545 158 490 845 1,545
-------------------------------------------------------------------------------------------------------
C Shares 112 350 606 1,216 112 350 606 1,216
</TABLE>
5
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PIMCO California Intermediate Municipal Bond Fund
<S> <C>
Principal Investment Objective Fund Focus Credit Quality
Investments and Seeks high current income exempt from Intermediate maturity B to Aaa; maximum 10% below Baa
Strategies federal and California income tax. municipal securities (exempt
Capital appreciation is a secondary from federal and California Dividend Frequency
objective. income tax) Declared daily and distributed
monthly
Fund Category Average Portfolio Duration
Tax Exempt Bond Funds 3-7 years
The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80% of
its net assets in Municipal Bonds whose interest is, in the opinion of bond counsel for the issuer at the
time of issuance, exempt from federal income tax. The Fund invests under normal circumstances at least 65%
of its net assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at
the time of issuance, exempt from regular federal income tax and California income tax ("California
Municipal Bonds"). California Municipal Bonds generally are issued by or on behalf of the State of
California and its political subdivisions, financing authorities and their agencies.
The Fund may invest without limit in "private activity" bonds whose interest is a tax-preference item for
purposes of the federal alternative minimum tax ("AMT"). For shareholders subject to the AMT, a substantial
portion of the Fund's distributions may not be exempt from federal income tax. The Fund may invest up to
20% of its net assets in other types of Fixed Income Instruments. The average portfolio duration of this
Fund normally varies within a three- to seven-year time frame based on the PIMCO's forecast for interest
rates. The Fund will seek income that is high relative to prevailing rates from Municipal Bonds. Capital
appreciation, if any, generally arises from decreases in interest rates or improving credit fundamentals
for a particular state, municipality or issuer.
The Fund invests primarily in investment grade debt securities, but may invest up to 10% of its assets in
high yield securities ("junk bonds") rated B or higher by Moody's or S&P, or, if unrated, determined by
PIMCO to be of comparable quality.
The Fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or in
mortgage- or asset-backed securities. The Fund may lend its portfolio securities to brokers, dealers and
other financial institutions to earn income. Rather than investing directly in securities in which it
primarily invests, the Fund may use other investment techniques to gain exposure to market movements
related to such securities, such as entering into a series of contracts to buy or sell such securities.
Principal Risks Among the principal risks of investing in the Fund, which could adversely affect its net asset value, yield
and total return are:
. Interest Rate Risk . Issuer Risk . Mortgage Risk
. Credit Risk . Concentration Risk . Leveraging Risk
. California State Specific Risk . Liquidity Risk . Management Risk
. Market Risk . Derivatives Risk
Please see "Summary of Principal Risks" following the Fund Summaries for a description of these and other
risks of investing in the Fund.
Performance The Fund does not have a full calendar year of performance. Thus, no bar chart or annual returns table is
Information included for the Fund.
</TABLE>
6
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Fees and Expenses These tables describe the fees and expenses you may pay if you buy and hold Institutional Class or
of the Fund Administrative Class shares of the Fund:
Shareholder fees (fees paid directly from your investment)
Class A Class B Class C
----------- ----------- -----------
Maximum Sales Charge (Load) Imposed on Purchases 3% None None
(as a percentage of offering price)
Maximum Contingent Deferred Sales Charge (Load) 1%/(1)/ 5%/(2)/ 1%/(3)/
(as a percentage of original purchase price)
__________
(1) Imposed only in certain circumstances where Class A shares are purchased without a front-end sales
charge at the time of purchase.
(2) The maximum CDSC is imposed on shares redeemed in the first year. For shares held longer than one year,
the CDSC declines according to the schedule set forth under "Investment Options (Class A, B and C Shares -
Contingent Deferred Sales Charges (CDSCs)) -Class B Shares."
(3) The CDSC on Class C shares is imposed only on shares redeemed in the first year.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Distribution Total Annual
and/or Service Other Fund Operating
Share Class Advisory Fees (12b-1)Fees(1) Expenses(2) Expenses
------------------------------------------------------------------------------------------------
A Shares 0.25% 0.25% 0.35% 0.85%
------------------------------------------------------------------------------------------------
B Shares 0.25 1.00 0.35 1.60
------------------------------------------------------------------------------------------------
C Shares 0.25 0.75 0.35 1.35
(1) Due to the 12b-1 distribution fee imposed on Class B and Class C shares, a Class B or Class C
shareholder may, depending upon the length of time the shares are held, pay more than the economic equivalent
of the maximum front-end sales charges permitted by relevant rules of the National Association of Securities
Dealers, Inc.
(2) Other expenses reflect a 0.35% Administration Fee paid by the class.
Examples. The Examples are intended to help you compare the cost of investing in Classes A, B or C of the
Fund with the costs of investing in other mutual funds. The Examples assume that you invest $10,000 in the
noted class of shares for the time periods indicated, your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the Examples show what your costs would be based on these
assumptions.
Example: Assuming you redeem shares at Example: Assuming you do not redeem
the end of each period your shares
Year Year
Share Class 1 3 5 10 1 3 5 10
----------------------------------------------------------------------------------------------------------
A Shares $384 $563 $ 757 $1,318 $384 $563 $757 $1,318
----------------------------------------------------------------------------------------------------------
B Shares 663 805 1,071 1,601 163 505 871 1,601
----------------------------------------------------------------------------------------------------------
C Shares 237 428 739 1,624 137 428 739 1,624
</TABLE>
7
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PIMCO New York Intermediate Municipal Bond Fund
<S> <C>
Principal Investment Objective Fund Focus Credit Quality
Investments and Seeks high current income exempt from Intermediate maturity B to Aaa; maximum 10% below Baa
Strategies federal and New York income tax. municipal securities (exempt
Capital appreciation is a secondary from federal and New York Dividend Frequency
objective. income tax) Declared daily and distributed
monthly
Fund Category Average Portfolio Duration
Tax Exempt Bond Funds 3-7 years
The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80% of
its net assets in Municipal Bonds whose interest is, in the opinion of bond counsel for the issuer at the
time of issuance, exempt from federal income tax. The Fund will invest under normal circumstances at least
65% of its net assets in debt securities whose interest is, in the opinion of bond counsel for the issuer
at the time of issuance, exempt from regular federal income tax and New York income tax ("New York
Municipal Bonds"). New York Municipal Bonds generally are issued by or on behalf of the State of New York
and its political subdivisions, financing authorities and their agencies.
The Fund may invest without limit in "private activity" bonds whose interest is a tax-preference item for
purposes of the federal alternative minimum tax ("AMT"). For shareholders subject to the AMT, a
substantial portion of the Fund's distributions may not be exempt from federal income tax. The Fund may
invest up to 20% of its net assets in other types of Fixed Income Instruments. The average portfolio
duration of this Fund normally varies within a three- to seven-year time frame, based on PIMCO's forecast
for interest rates. The Fund will seek income that is high relative to prevailing rates from municipal
bonds. Capital appreciation, if any, generally arises from decreases in interest rates or improving credit
fundamentals for a particular state, municipality or issuer.
The Fund invests primarily in investment grade debt securities, but may invest up to 10% of its assets in
high yield securities ("junk bonds") rated B or higher by Moody's or S&P, or, if unrated, determined by
PIMCO to be of comparable quality.
The Fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or in
mortgage- or asset-backed securities. The Fund may lend its portfolio securities to brokers, dealers and
other financial institutions to earn income. Rather than investing directly in securities in which it
primarily invests, this Fund may use other investment techniques to gain exposure to market movements
related to such securities, such as entering into a series of contracts to buy or sell such securities.
Principal Risks Among the principal risks of investing in the Fund which could adversely affect its net asset value, yield
and total return are:
. Interest Rate Risk . Issuer Risk . Mortgage Risk
. Credit Risk . Concentration Risk . Leveraging Risk
. New York State Specific Risk . Liquidity Risk . Management Risk
. Market Risk . Derivatives Risk
Please see "Summary of Principal Risks" following the Fund Summaries for a description of these and other
risks of investing in the Fund.
Performance The Fund does not have a full calendar year of performance. Thus, no bar chart or annual returns table is
Information included for the Fund.
</TABLE>
8
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<S> <C>
Fees and Expenses These tables describe the fees and expenses you may pay if you buy and hold Class D shares of the Fund:
of the Fund
Shareholder fees (fees paid directly from your investment)
Class A Class B Class C
------------ ------------ ------------
Maximum Sales Charge (Load) Imposed on Purchases 3% None None
(as a percentage of offering price)
Maximum Contingent Deferred Sales Charge (Load) 1%/(1)/ 5%/(2)/ 1%/(3)/
(as a percentage of original purchase price)
__________
(1) Imposed only in certain circumstances where Class A shares are purchased without a front-end sales
charge at the time of purchase.
(2) The maximum CDSC is imposed on shares redeemed in the first year. For shares held longer than one year,
the CDSC declines according to the schedule set forth under "Investment Options (Class A, B and C Shares -
Contingent Deferred Sales Charges (CDSCs)) -Class B Shares."
(3) The CDSC on Class C shares is imposed only on shares redeemed in the first year.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Distribution and/or Total Annual
Service (12b-1) Other Fund Operating
Share Class Advisory Fees Fees(1) Expenses Expenses
----------------------------------------------------------------------------------------
A Shares 0.25% 0.25% 0.35% 0.85%
----------------------------------------------------------------------------------------
B Shares 0.25 1.00 0.35 1.60
----------------------------------------------------------------------------------------
C Shares 0.25 0.75 0.35 1.35
(1) Due to the 12b-1 distribution fee imposed on Class B and Class C shares, a Class B or Class C shareholder
may, depending upon the length of time the shares are held, pay more than the economic equivalent of the
maximum front-end sales charges permitted by relevant rules of the National Association of Securities
Dealers, Inc.
(2) Other expenses reflect a 0.35% Administration Fee paid by the class.
Examples. The Examples are intended to help you compare the cost of investing in Classes A, B and C of the
Fund with the costs of investing in other mutual funds. The Examples assume that you invest $10,000 in the
noted class of shares for the time periods indicated, your investment has a 5% return each year, the
reinvestment of all dividends and distributions, and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the Examples show what your costs would be based on these
assumptions.
Example: Assuming you redeem shares at Example: Assuming you do not redeem your
the end of each period shares
Year Year
Share Class 1 3 5 10 1 3 5 10
------------------------------------------------------------------------------------------------------------
A Shares $384 $563 $ 757 $1,318 $384 $563 $757 $1,318
------------------------------------------------------------------------------------------------------------
B Shares 663 805 1,071 1,601 163 505 871 1,601
------------------------------------------------------------------------------------------------------------
C Shares 237 428 739 1,624 137 428 739 1,624
</TABLE>
9
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Summary of Principal Risks
The value of your investment in a Fund changes with the values of that Fund's investments. Many factors can
affect those values. The factors that are most likely to have a material effect on a particular Fund's
portfolio as a whole are called "principal risks." The principal risks of each Fund are identified in the Fund
Summaries and are summarized in this section. Each Fund may be subject to additional principal risks and risks
other than those described below because the types of investments made by a Fund can change over time.
Securities and investment techniques mentioned in this summary and described in greater detail under
"Characteristics and Risks of Securities and Investment Techniques" appear in bold type. That section and
"Investment Objectives and Policies" in the Statement of Additional Information also include more information
about the Funds, their investments and the related risks. There is no guarantee that a Fund will be able to
achieve its investment objective.
Interest Rate Risk As interest rates rise, the value of fixed income securities in a Fund's portfolio are likely to decrease.
Securities with longer durations tend to be more sensitive to changes in interest rates, usually making them
more volatile than securities with shorter durations.
Credit Risk A Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty to a
derivatives contract, repurchase agreement or a loan of portfolio securities, is unable or unwilling to make
timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to
varying degrees of credit risk, which are often reflected in credit ratings. Municipal Bonds are subject to the
risk that litigation, legislation or other political events, local business or economic conditions, or the
bankruptcy of the issuer could have a significant effect on an issuer's ability to make payments of principal
and/or interest.
Market Risk The market price of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably.
Securities may decline in value due to factors affecting securities markets generally or particular industries
represented in the securities markets. The value of a security may decline due to general market conditions
which are not specifically related to a particular company, such as real or perceived adverse economic
conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or
adverse investor sentiment generally. They may also decline due to factors which affect a particular industry
or industries, such as labor shortages or increased production costs and competitive conditions within an
industry. Equity securities generally have greater price volatility than fixed income securities.
Issuer Risk The value of a security may decline for a number of reasons which directly relate to the issuer, such as
management performance, financial leverage and reduced demand for the issuer's goods or services.
Liquidity Risk Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing a Fund
from selling such illiquid securities at an advantageous time or price. Funds with principal investment
strategies that involve derivatives or securities with substantial market and/or credit risk tend to have the
greatest exposure to liquidity risk.
Derivatives Risk Each Fund may use derivatives, which are financial contracts whose value depends on, or is derived from, the
value of an underlying asset, reference rate or index. The various derivative instruments that the Funds may
use are referenced under "Characteristics and Risks of Securities and Investment Techniques-Derivatives" in
this Prospectus and described in more detail under "Investment Objectives and Policies" in the Statement of
Additional Information. The Funds may sometimes use derivatives as part of a strategy designed to reduce
exposure to other risks, such as interest rate risk. The Funds may also use derivatives for leverage in which
case their use would involve leveraging risk. A Fund's use of derivative instruments involves risks different
</TABLE>
10
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from, or greater than, the risks associated with investing directly in securities and other traditional
investments. Derivatives are subject to a number of risks described elsewhere in this section, such as
liquidity risk, interest rate risk, market risk, credit risk and management risk. They also involve the risk of
mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate
perfectly with the underlying asset, rate or index. A fund investing in a derivative instrument could lose more
than the principal amount invested. Also, suitable derivative transactions may not be available in all
circumstances and there can be no assurance that a Fund will engage in these transactions to reduce exposure to
other risks when that would be beneficial.
Mortgage Risk A Fund that purchases mortgage-related securities is subject to certain additional risks. Rising interest rates
tend to extend the duration of mortgage-related securities, making them more sensitive to changes in interest
rates. As a result, in a period of rising interest rates, a Fund that holds mortgage-related securities are
subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than
expected. This can reduce the returns of a Fund because the Fund will have to reinvest that money at the lower
prevailing interest rates.
Concentration Risk Concentration of investments in a small number of issuers, industries or foreign currencies increases risk. The
California and New York Intermediate Municipal Bond Funds are "non-diversified," which means that each may
invest a greater percentage of its assets in the securities of a single issuer (such as bonds issued by a
particular state) than diversified Funds. Funds that invest in a relatively small number of issuers are more
susceptible to risks associated with a single economic, political or regulatory occurrence than a more
diversified portfolio might be. Some of those issuers also may present substantial credit or other risks.
Similarly, a Fund may be more sensitive to adverse economic, business or political developments if it invests a
substantial portion of its assets in the bonds of similar projects or from issuers in a similar state.
Leveraging Risk Certain Funds may engage in transactions that give rise to a form of leverage. Such transactions may include,
among, others, reverse repurchase agreements, loans of portfolios securities, and the use of when-issued,
delayed delivery or forward commitment transactions. The use of derivatives may also create leveraging risk. To
mitigate leveraging risk, PIMCO will segregate liquid assets or otherwise cover the transactions that may give
rise to such risk. The use of leverage may cause a Fund to liquidate portfolio positions when it may not be
advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including
borrowing, will cause a Fund to be more volatile than if the Fund had not been leveraged. This is because
leverage tends to exaggerate the effect of any increase or decrease in the value of a Fund's portfolio
securities.
Management Risk Each Fund is subject to management risk because it is an actively managed investment portfolio. PIMCO and each
individual portfolio manager will apply investment techniques and risk analyses in making investment decisions
for the Funds, but there can be no guarantee that these will produce the desired results.
California State Because the California Intermediate Municipal Bond Fund concentrates its investments in California municipal
Specific Risk bonds, the Fund may be affected significantly by economic, regulatory or political developments affecting the
ability of California issuers to pay interest or repay principal. Provisions of the California Constitution and
State statutes which limit the taxing and spending authority of California governmental entities may impair the
ability of California issuers to pay principal and/or interest on their obligations. While California's economy
is broad, it does have major concentrations in high technology, aerospace and defense-related manufacturing,
trade, entertainment, real estate and financial services, and may be sensitive to economic problems affecting
those industries. Future California political and economic developments, constitutional amendments, legislative
measures, executive orders, administrative regulations, litigation and voter initiatives could have an adverse
effect on the debt obligations of California issuers.
</TABLE>
11
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New York State Because the New York Intermediate Municipal Bond Fund concentrates its investments in New York municipal bonds,
Specific Risk the Fund may be affected significantly by economic, regulatory or political developments affecting the ability
of New York issuers to pay interest or repay principal. Certain issuers of New York municipal bonds have
experienced serious financial difficulties in recent years. A reoccurrence of these difficulties may impair the
ability of certain New York issuers to pay principal or interest on their obligations. The financial health of
New York City affects that of the State, and when New York City experiences financial difficulty it may have an
adverse affect on New York municipal bonds held by the Fund. The growth rate of New York has recently been
somewhat slower than the nation overall. The economic and financial condition of New York also may be affected
by various financial, social, economic and political factors.
Management of the Funds
Investment PIMCO serves as the investment adviser and the administrator (serving in its capacity as administrator, the
Adviser and "Administrator") for the Funds. Subject to the supervision of the Board of Trustees, PIMCO is responsible for
Administrator managing the investment activities of the Funds and the Funds' business affairs and other administrative
matters.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660. Organized in 1971, PIMCO
provides investment management and advisory services to private accounts of institutional and individual clients
and to mutual funds. As of June 30, 1999, PIMCO had approximately $172 billion in assets under management.
Advisory Fees Each Fund pays PIMCO fees in return for providing investment advisory services. The Funds were not operational
during the fiscal year ended March 31, 1999. The investment advisory fees are set at the following annual rates
(stated as a percentage of the average daily net assets of each Fund):
Fund Advisory Fees
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Short Duration Municipal Income Fund 0.20%
California Intermediate Municipal Bond and
New York Intermediate Municipal Bond Funds 0.25%
Administrative Each Fund pays for the administrative services it requires under a fee structure which is essentially fixed.
Fees Class A, Class B and Class C shareholders of each Fund pay an administrative fee to PIMCO, computed as a
percentage of the Fund's assets attributable in the aggregate to that class of shares. PIMCO, in turn, provides
administrative services for Class A, Class B and Class C shareholders and also bears the costs of various third-
party services required by the Funds, including audit, custodial, portfolio accounting, legal transfer agency
and printing costs. The result of this fee structure is an expense level for Class A, Class B and Class C
shareholders of each Fund that, with limited exceptions, is precise and predictable under ordinary
circumstances.
The Funds were not operational during the fiscal year ended March 31, 1999. The administrative fees are set at
the following annual rates (stated as a percentage of the average daily net assets attributable in the aggregate
to the Fund's Class A, Class B and Class C shares):
Fund Administrative Fees
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Short Duration Municipal Income, California 0.35%
Intermediate Municipal Bond and New York
Intermediate Municipal Bond Funds
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Individual The following individual has primary responsibility for managing each of the noted Funds.
Portfolio
Manager Portfolio Manager Since Recent Professional Experience
Benjamin Ehlert 9/99* Executive Vice President, PIMCO. He has been a Portfolio Manager for PIMCO
since 1986, and has managed fixed income accounts for various institutional
clients and funds since that time.
__________
* Inception of the Funds.
Distributor The Trust's Distributor is PIMCO Funds Distributors LLC, a wholly owned subsidiary of PIMCO Advisors. The
Distributor, located at 2187 Atlantic Street, Stamford, CT 06902, is a broker-dealer registered with the SEC.
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Investment Options--Class A, B and C Shares
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The Trust offers investors Class A, Class B and Class C shares of each Fund in this Prospectus. Each
class of shares is subject to different types and levels of sales charges than the other classes and
bears a different level of expenses.
The class of shares that is best for you depends upon a number of factors, including the amount and the
intended length of your investment. The following summarizes key information about each class to help you
make your investment decision, including the various expenses associated with each class. More extensive
information about the Trust's multi-class arrangements is included in the PIMCO Funds Shareholders Guide
for Class A, B and C Shares (the "Guide"), which is included as part of the Statement of Additional
Information and can be obtained free of charge from the Distributor. See "How to Buy and Sell Shares -
PIMCO Funds Shareholders Guide" below.
Class A Shares . You pay an initial sales charge when you buy Class A shares of any Fund. The maximum initial sales
charge is 2.00% for the Short Duration Municipal Income Fund and 3.00% for the California Intermediate
Municipal Bond and New York Intermediate Municipal Bond Funds. The sales charge is deducted from your
investment so that not all of your purchase payment is invested.
. You may be eligible for a reduction or a complete waiver of the initial sales charge under a number of
circumstances. For example, you normally pay no sales charge if you purchase $1,000,000 or more of
Class A shares. Please see the Guide for details.
. Class A shares are subject to lower 12b-1 fees than Class B or Class C shares. Therefore, Class A
shareholders generally pay lower annual expenses and receive higher dividends than Class B or Class C
shareholders.
. You normally pay no contingent deferred sales charge ("CDSC") when you redeem Class A shares, although
you may pay a 1% CDSC if you purchase $1,000,000 or more of Class A shares (and therefore pay no
initial sales charge) and then redeem the shares during the first 18 months after your initial
purchase. The Class A CDSC is waived for certain categories of investors and does not apply if you are
otherwise eligible to purchase Class A shares without a sales charge. Please see the Guide for
details.
Class B Shares . You do not pay an initial sales charge when you buy Class B shares. The full amount of your purchase
payment is invested initially.
. You normally pay a CDSC of up to 5% if you redeem Class B shares during the first six years after your
CDSC if you redeem during the seventh year and thereafter. The Class B CDSC is waived for certain
categories of investors. Please see the Guide for details.
. Class B shares are subject to higher 12b-1 fees than Class A shares for the first seven years they are
held. During this time, Class B shareholders normally pay higher annual expenses and receive lower
dividends than Class A shareholders.
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. Class B shares automatically convert into Class A shares after they have been held for seven years.
After the conversion takes place, the shares are subject to the lower 12b-1 fees paid by Class A
shares.
Class C Shares . You do not pay an initial sales charge when you buy Class C shares. The full amount of your purchase
payment is invested initially.
. You normally pay a CDSC of 1% if you redeem Class C shares during the first year after your initial
purchase. The Class C CDSC is waived for certain categories of investors. Please see the Guide for
details.
. Class C shares are subject to higher 12b-1 fees than Class A shares. Therefore, Class C shareholders
normally pay higher annual expenses and receive lower dividends than Class A shareholders.
. Class C shares do not convert into any other class of shares. Because Class B shares convert into
Class A shares after seven years, Class C shares will normally be subject to higher expenses and will
pay lower dividends than Class B shares if the shares are held for more than seven years.
The following provides additional information about the sales charges and other expenses associated with
Class A, Class B and Class C shares.
Initial Sales Charges - Unless you are eligible for a waiver, the public offering price you pay when you buy Class A shares of
Class A shares the Funds is the net asset value ("NAV") of the shares plus an initial sales charge. The initial sales
charge varies depending upon the size of your purchase, as set forth below. No sales charge is imposed
where Class A shares are issued to you pursuant to the automatic reinvestment of income dividends or
capital gains distributions.
Short Duration Initial Sales Charge Initial Sales Charge
Municipal Income Fund Amount of as % of Net as % of Public
Purchase Amount Invested Offering Price
$0-$49,999 2.04% 2.00%
$50,000-$99,999 1.78% 1.75%
$100,000-$249,999 1.52% 1.50%
$250,000 + 0.00%* 0.00%*
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California and New Initial Sales Charge Initial Sales Charge
York Intermediate Amount of as % of Net as % of Public
Municipal Bond Funds Purchase Amount Invested Offering Price
$0-$49,999 3.09% 3.00%
$50,000-$99,999 2.56% 2.50%
$100,000-$249,999 2.04% 2.00%
$250,000-$499,999 1.52% 1.50%
$500,000-$999,999 1.27% 1.25%
$1,000,000 + 0.00%* 0.00%*
* As shown, investors that purchase $1,000,000 or more of any Fund's Class A shares ($250,000 in the case
of the Short Duration Municipal Income Fund) will not pay any initial sales charge on the purchase.
However, purchasers of $1,000,000 or more of Class A shares ($250,000 in the case of the Short Duration
Municipal Income Fund) may be subject to a CDSC of 1% if the shares are redeemed during the first 18
months after their purchase. See "CDSCs on Class A Shares" below.
Contingent Deferred Unless you are eligible for a waiver, if you sell (redeem) your Class B or Class C shares shares time
Sales Charges periods specified below, you will pay a CDSC according to the following schedules.
(CDSCs) - Class B and
Class C Shares
Class B Shares Years Since Purchase Percentage Contingent
Payment was Made Deferred Sales Charge
First 5
Second 4
Third 3
Fourth 3
Fifth 2
Sixth 1
Seventh 0*
*After the seventh year, Class B shares convert into Class A shares.
Class C Shares Years Since Purchase Percentage Contingent
Payment was Made Deferred Sales Charge
First 1
Second 0
CDSCs on Class A Shares Unless a waiver applies, investors who purchase $1,000,000 ($250,000 in the case of the Short Duration
Municipal Income Fund) or more of Class A of a Fund shares (and, thus, pay no initial sales charge) will
be subject to a 1% CDSC if the shares are redeemed within 18 months of their purchase. The Class A CDSC
does not apply if you are otherwise eligible to purchase Class A shares without an initial sales charge
or are eligible for a waiver of the CDSC. See "Reductions and Waivers of Initial Sales Charges and CDSCs"
below.
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How CDSCs are Calculated A CDSC is imposed on redemptions of Class B and Class C shares (and where applicable, Class A shares) on
the amount of the redemption which causes the current value of your account for the particular class of
shares of a Fund to fall below the total dollar amount of your purchase payments subject to the CDSC.
However, no CDSC is imposed if the shares redeemed have been acquired through the reinvestment of
dividends or capital gains distributions or if the amount redeemed is derived from increases in the value
of your account above the amount of the purchase payments subject to the CDSC. CDSCs are deducted from
the proceeds of your redemption, not from amounts remaining in your account. In determining whether a
CDSC is payable, it is assumed that the purchase payment from which the redemption is made is the
earliest purchase payment for the particular class of shares in your account (from which a redemption or
exchange has not already been effected).
For instance, the following example illustrates the operation of the Class B CDSC:
. Assume that an individual opens an account and makes a purchase payment of $10,000 for Class B shares
of a Fund and that six months later the value of the investor's account for that Fund has grown through
investment performance and reinvestment of distributions to $11,000. The investor then may redeem up to
$1,000 from that Fund ($11,000 minus $10,000) without incurring a CDSC. If the investor should redeem
$3,000, a CDSC would be imposed on $2,000 of the redemption (the amount by which the investor's account
for the Fund was reduced below the amount of the purchase payment). At the rate of 5%, the Class B CDSC
would be $100.
In determining whether an amount is available for redemption without incurring a CDSC, the purchase
payments made for all shares of a particular class of a Fund in the shareholder's account are aggregated,
and the current value of all such shares is aggregated.
Reductions and Waivers The initial sales charges on Class A shares and the CDSCs on Class A, Class B and Class C shares may be
of Initial Sales Charges reduced or waived under certain purchase arrangements and for certain categories of investors. Please see
and CDSCs the Guide for details. The Guide is available free of charge from the Distributor. See "How to Buy and
Sell Shares - PIMCO Funds Shareholders Guide" below.
Distribution and The Funds pay fees to the Distributor on an ongoing basis as compensation for the services the
Servicing (12b-1) Plans Distributor renders and the expenses it bears in connection with the sale and distribution of Fund shares
("distribution fees") and/or in connection with personal services rendered to Fund shareholders and the
maintenance of shareholder accounts ("servicing fees"). These payments are made pursuant to Distribution
and Servicing Plans ("12b-1 Plans") adopted by each Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940.
There is a separate 12b-1 Plan for each class of shares offered in this Prospectus. Class A shares pay
only servicing fees. Class B and Class C shares pay both distribution and servicing fees. The following
lists the maximum annual rates at which the distribution and/or servicing fees may be paid under each
12b-1 Plan (calculated as a percentage of each Fund's average daily net assets attributable to the
particular class of shares):
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Servicing Distribution
Class A Fee Fee
All Funds 0.25% 0.00%
Class B
All Funds 0.25% 0.75%
Class C
Short Duration Municipal Income Fund 0.25% 0.30%
All other Funds 0.25% 0.50%
Because 12b-1 fees are paid out of a Fund's assets on an ongoing basis, over time these fees will
increase the cost of your investment and may cost you more than sales charges which are deducted at the
time of investment. Therefore, although Class B and Class C shares do not pay initial sales charges, the
distribution fees payable on Class B and Class C shares may, over time, cost you more than the initial
sales charge imposed on Class A shares. Also, because Class B shares convert into Class A shares after
they have been held for seven years and are not subject to distribution fees after the conversion, an
investment in Class C shares may cost you more over time than an investment in Class B shares.
How Fund Shares Are Priced
The net asset value ("NAV") of a Fund's Class A, Class B and Class C shares is determined by dividing the
total value of a Fund's portfolio investments and other assets attributable to that class, less any
liabilities, by the total number of shares outstanding of that class.
For purposes of calculating NAV, portfolio securities and other assets for which market quotes are
available are stated at market value. Market value is generally determined on the basis of last reported
sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system,
established market makers, or pricing services. Certain securities or investments for which daily market
quotations are not readily available may be valued, pursuant to guidelines established by the Board of
Trustees, with reference to other securities or indices. Short-term investments having a maturity of 60
days or less are generally valued at amortized cost. Exchange traded options, futures and options on
futures are valued at the settlement price determined by the exchange. Other securities for which market
quotes are not readily available are valued at fair value as determined in good faith by the Board of
Trustees or persons acting at their direction.
Fund shares are valued at the close of regular trading (normally 4:00 p.m., Eastern time) (the "NYSE
Close") on each day that the New York Stock Exchange is open. For purposes of calculating the NAV, the
Funds normally use pricing data for domestic equity securities received shortly after the NYSE Close and
do not normally take into account trading, clearances or settlements that take place after the NYSE
Close. Domestic fixed income and foreign securities are normally priced using data reflecting the earlier
closing of the principal markets for those securities. Information that becomes known to the Funds or its
agents after the NAV has been calculated on a particular day will not generally be used to retroactively
adjust the price of a security or the NAV determined earlier that day.
In unusual circumstances, instead of valuing securities in the usual manner, the Funds may value
securities at fair value or estimate their value as determined in good faith by the Board of
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Trustees, generally based upon recommendations provided by PIMCO. Fair valuation may also be used if
extraordinary events occur after the close of the relevant market but prior to the NYSE Close.
How to Buy and Sell Shares
PIMCO Funds
Shareholders Guide The following section provides basic information about how to buy, sell (redeem) and exchange shares of the
Funds.
More detailed information about the Trust's purchase, sale and exchange arrangements Fund shares is
provided in the PIMCO Funds Shareholders Guide, which is included in the Statement of Additional
Information and can be obtained free of charge from the Distributor by written request or by calling 1-800-
426-0107. The Guide provides technical information about the basic arrangements described below and also
describes special purchase, sale and exchange features and programs offered by the Trust, including:
. Automated telephone and wire transfer procedures
. Automatic purchase, exchange and withdrawal programs
. Programs that establish a link from your Fund account to your bank account
. Special arrangements for tax-qualified retirement plans
. Investment programs which allow you to reduce or eliminate the initial sales
charges on Class A shares
Calculation of Share When you buy shares of the Funds, you pay a price equal to the NAV of the shares, plus any applicable sales
Price and Redemption charge. When you sell (redeem) shares, you receive an amount equal to the NAV of the shares, minus any
Payments applicable CDSC. NAVs are determined at the close of regular trading (normally, 4:00 p.m. Eastern time) on
each day the New York Stock Exchange is open. See "How Fund Shares Are Priced" above for details.
Generally, purchase and redemption orders for Fund shares are processed at the NAV next calculated after
your order is received by the Distributor. There are certain exceptions where an order is received by a
broker or dealer prior to the close of regular trading on the New York Stock Exchange and then transmitted
to the Distributor after the NAV has been calculated for that day (in which case the order may be processed
according to that day's NAV). Please see the Guide for details. The Trust does not calculate NAVs or
process orders on days when the New York Stock Exchange is closed. If your purchase or redemption order is
received by the Distributor on a day when the New York Stock Exchange is closed, it will be processed on
the next succeeding day when the New York Stock Exchange is open (according to the succeeding day's NAV).
Buying Shares You can buy Class A, Class B or Class C shares of the Funds in the following ways: Through your broker,
dealer or other financial intermediary. Your broker, dealer or other intermediary may establish higher
minimum investment requirements than the Trust and may also independently charge you transaction fees and
additional amounts (which may vary) in return for its services, which will reduce your return. Shares you
purchase through your broker, dealer or other intermediary will normally be held in your account with that
firm.
Directly from the Trust. To make direct investments, you must open an account with the Distributor and send
payment for your shares either by mail or through a variety of other purchase options and plans offered by
the Trust.
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If you wish to invest directly by mail, please send a check payable to PIMCO Funds Distributors LLC, along
with a completed application form to:
PIMCO Funds Distributors LLC
P.O. Box 9688
Providence, RI 02940-0926
The Trust accepts all purchases by mail subject to collection of checks at full value and conversion into
federal funds. You may make subsequent purchases by mailing a check to the address above with a letter
describing the investment or with the additional investment portion of a confirmation statement. Checks for
subsequent purchases should be payable to PIMCO Funds Distributors LLC and should clearly indicate your
account number. Please call the Distributor at 1-800-426-0107 if you have any questions regarding purchases
by mail.
The Guide describes a number of additional ways you can make direct investments, including through the
PIMCO Funds Auto-Invest and PIMCO Funds Fund Link programs. You can obtain a Guide free of charge from the
Distributor by written request or by calling 1-800-426-0107. See "PIMCO Funds Shareholders Guide" above.
The Distributor, in its sole discretion, may accept or reject any order for purchase of Fund shares. No
share certificates will be issued unless specifically requested in writing.
Investment Minimums. The following investment minimums apply for purchases of Class A, Class B and Class C
shares.
Initial Investment Subsequent Investments
$2,500 per Fund $100 per Fund
Lower minimums may apply for certain categories of investors, including certain tax-qualified retirement
plans, and for special investment programs and plans offered by the Trust, such as the PIMCO Funds Auto-
Invest and PIMCO Funds Fund Link programs. Please see the Guide for details.
Small Account Fee Because of the disproportionately high costs of servicing accounts with low balances, if you have a direct
account with the Distributor, you will be charged a fee at the annual rate of $16 if your account balance
for any Fund falls below a minimum level of $2,500. However, you will not be charged this fee if the
aggregate value of all of your PIMCO Funds accounts is at least $50,000. Any applicable small account fee
will be deducted automatically from your below-minimum Fund account in quarterly installments and paid to
the Administrator. Each Fund account will normally be valued, and any deduction taken, during the last five
business days of each calendar quarter. Lower minimum balance requirements and waivers of the small account
fee apply for certain categories of investors. Please see the Guide for details.
Minimum Account Size Due to the relatively high cost to the Funds of maintaining small accounts, you are asked to maintain an
account balance in each Fund in which you invest of at least the minimum investment necessary to open the
particular type of account. If your balance for any Fund remains below the minimum for three months or
longer, the
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Administrator has the right (except in the case of employer-sponsored retirement accounts) to redeem your
remaining shares and close that Fund account after giving you 60 days to increase your balance. Your Fund
account will not be liquidated if the reduction in size is due solely to a decline in market value of your
Fund shares or if the aggregate value of all your PIMCO Funds accounts exceeds $50,000.
Exchanging Shares You may exchange your Class A, Class B or Class C shares of any Fund for the same Class of shares of any
other Fund or of a series of PIMCO Funds: Pacific Investment Management Series or PIMCO Funds: Multi-
Manager Series. Shares are exchanged on the basis of their respective NAVs next calculated after your
exchange order is received by the Distributor. Currently, the Trust does not charge any exchange fees or
charges. Exchanges are subject to the $2,500 minimum initial purchase requirements for each Fund, except
with respect to tax-qualified programs and exchanges effected through the PIMCO Funds Auto-Exchange plan.
If you maintain your account with the Distributor, you may exchange shares by completing a written exchange
request and sending it to PIMCO Funds Distributors LLC, P.O. Box 9688, Providence, RI 02940-0926. You can
get an exchange form by calling the Distributor at 1-800-426-0107.
The Trust reserves the right to refuse exchange purchase if, in the judgment of PIMCO, the purchase would
adversely affect a Fund and its shareholders. In particular, a pattern of exchanges characteristic of
"market-timing" strategies may be deemed by PIMCO to be detrimental to the Trust or a particular Fund.
Currently, the Trust limits the number of "round trip" exchanges an investor may make. An investor makes a
"round trip" exchange when the investor purchases shares of a particular Fund, subsequently exchanges those
shares for shares of a different PIMCO Fund and then exchanges back into the originally purchased Fund. The
Trust has the right to refuse any exchange for any investor who completes (by making the exchange back into
the shares of the originally purchased Fund) more than six round trip exchanges in any twelve-month period.
Although the Trust has no current intention of terminating or modifying the exchange privilege other than
as set forth in the preceding sentence, it reserves the right to do so at any time. Except as otherwise
permitted by the Securities and Exchange Commission, the Trust will give you 60 days' advance notice if it
exercises its right to terminate or materially modify the exchange privilege. The Guide provides more
detailed information about the exchange privilege, including the procedures you must follow and additional
exchange options. You can obtain a Guide free of charge from the Distributor by written request or by
calling 1-800-426-0107. See "PIMCO Funds Shareholders' Guide" above.
Selling Shares You can sell (redeem) Class A, Class B or Class C shares of the Funds in the following ways:
. Through your broker, dealer or other financial intermediary. Your broker, dealer or other intermediary
may independently charge you transaction fees and additional amounts in return for its services, which
will reduce your return.
. Directly from the Trust by Written Request. To redeem shares directly from the Trust by written
request (whether or not the shares are represented by certificates), you must send the following items
to the Trust's Transfer Agent, First Data Investor Services Group, Inc., P.O. Box 9688, Providence, RI
02940-0926:
(1) a written request for redemption signed by all registered owners exactly as the
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account is registered on the Transfer Agent's records, including fiduciary titles, if any, and specifying
the account number and the dollar amount or number of shares to be redeemed;
(2) for certain redemptions described below, a guarantee of all signatures on the written request or on
the share certificate or accompanying stock power, if required, as described under "Signature Guarantee"
below;
(3) any share certificates issued for any of the shares to be redeemed (see "Certificated Shares"
below); and
(4) any additional documents which may be required by the Transfer Agent for redemption by corporations,
partnerships or other organizations, executors, administrators, trustees, custodians or guardians, or if
the redemption is requested by anyone other than the shareholder(s) of record. Transfers of shares are
subject to the same requirements.
A signature guarantee is not required for redemptions, requested by and payable to all shareholders of
record for the account, and to be sent to the address of record for that account. To avoid delay in
redemption or transfer, if you have any questions about these requirements you should contact the
Transfer Agent in writing or call 1-800-426-0107 before submitting a request. Written redemption or
transfer requests will not be honored until all required documents in the proper form have been received
by the Transfer Agent. You cannot redeem your shares by written request if they are held in broker
"street name" accounts you must redeem through your broker.
If the proceeds of your redemption (i) are to be paid to a person other than the record owner, (ii) are
to be sent to an address other than the address of the account on the Transfer Agent's records, and/or
(iii) are to be paid to a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be guaranteed as described under
"Signature Guarantee" below. The Distributor may, however, waive the signature guarantee requirement for
redemptions up to $2,500 by a trustee of a qualified retirement plan, the administrator for which has an
agreement with the Distributor.
The Guide describes a number of additional ways you can redeem your shares, including:
. Telephone requests to the Transfer Agent
. PIMCO Funds Automated Telephone System (ATS)
. Expedited wire transfers
. Automatic Withdrawal Plan
. PIMCO Funds Fund Link
Unless you specifically elect otherwise, your initial account application permits you to redeem shares by
telephone subject to certain requirements. To be eligible for ATS, expedited wire transfer, Automatic
Withdrawal Plan, and Fund Link privileges, you must specifically elect the particular option on your
account application and satisfy certain other requirements. The Guide describes each of these options and
provides additional information about selling shares. You can obtain an Guide free of charge from the
Distributor by written request or by calling 1-800-426-0107.
Other than an applicable CDSC, you will not pay any special fees or charges to the
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Trust or the Distributor when you sell your shares. However, if you sell your shares through your broker,
dealer or other financial intermediary, that firm may charge you a commission or other fee for processing
your redemption request.
Redemptions of Fund shares may be suspended when trading on the New York Stock Exchange is restricted or
during an emergency which makes it impracticable for the Funds to dispose of their securities or to
determine fairly the value of their net assets, or during any other period as permitted by the Securities
and Exchange Commission for the protection of investors.
Timing of Redemption Redemption proceeds will normally be mailed to the redeeming shareholder within seven calendar days or,
Payments in the case of wire transfer or Fund Link redemptions, sent to the designated bank account within one
business day. Fund Link redemptions may be received by the bank on the second or third business day. In
cases where shares have recently been purchased by personal check, redemption proceeds may be withheld
until the check has been collected, which may take up to 15 days. To avoid such withholding, investors
should purchase shares by certified or bank check or by wire transfer. Under unusual circumstances, the
Trust may delay your redemption payments for more than seven days, as permitted by law.
Redemptions In Kind The Trust will redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1% of the Fund's
net assets during any 90-day period for any one shareholder. In consideration of the best interests of
the remaining shareholders, the Trust may pay any redemption proceeds exceeding this amount in whole or
in part by a distribution in kind of securities held by a Fund in lieu of cash. It is highly unlikely
that your shares would ever be redeemed in kind. If your shares are redeemed in kind, you should expect
to incur transaction costs upon the disposition of the securities received in the distribution.
Certificated Shares If you are redeeming shares for which certificates have been issued, the certificates must be mailed to
or deposited with the Trust, duly endorsed or accompanied by a duly endorsed stock power or by a written
request for redemption. Signatures must be guaranteed as described under "Signature Guarantee" below. The
Trust may request further documentation from institutions or fiduciary accounts, such as corporations,
custodians (e.g., under the Uniform Gifts to Minors Act), executors, administrators, trustees or
guardians. Your redemption request and stock power must be signed exactly as the account is registered,
including indication of any special capacity of the registered owner.
Signature Guarantee When a signature guarantee is called for, you should have "Signature Guaranteed" stamped under your
signature and guaranteed by any of the following entities: U.S. banks, foreign banks having a U.S.
correspondent bank, credit unions, savings associations, U.S. registered dealers and brokers, municipal
securities dealers and brokers, government securities dealers and brokers, national securities exchanges,
registered securities associations and clearing agencies (each an "Eligible Guarantor Institution"). The
Distributor reserves the right to reject any signature guarantee pursuant to its written signature
guarantee standards or procedures, which may be revised in the future to permit it to reject signature
guarantees from Eligible Guarantor Institutions that do not, based on credit guidelines, satisfy such
written standards or procedures. The Trust may change the signature guarantee requirements from time to
time upon notice to shareholders, which may be given by means of a new or supplemented Prospectus.
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Investments initially valued in foreign currencies are converted to U.S. dollars using foreign exchange
rates obtained from pricing services. As a result, the NAV of a Fund's shares may be affected by changes
in the value of foreign currencies in relation to the U.S. dollar. The value of securities traded in
foreign markets or denominated in foreign currencies may be affected significantly on a day that the New
York Stock Exchange is closed and an investor is not able to buy, redeem or exchange shares.
Fund Distributions
Each Fund distributes substantially all of its net investment income to shareholders in the form of
dividends. You begin earning dividends on Fund shares the day after the Trust receives your purchase
payment. Dividends paid by each Fund with respect to each class of shares are calculated in the same
manner and at the same time, but dividends on Class B and Class C shares are expected to be lower than
dividends on Class A shares as a result of the distribution fees applicable to Class B and Class C
shares. The Funds intend to declare daily and distribute dividends monthly to shareholders of record.
In addition, each Fund distributes any net capital gains it earns from the sale of portfolio securities
to shareholders no less frequently than annually. Net short-term capital gains may be paid more
frequently. You can choose from the following distribution options:
. Reinvest all distributions in additional shares of the same class of your Fund at NAV. This will be
done unless you elect another option.
. Invest all distributions in shares of the same class of any other Fund or another series of PIMCO
Funds: Pacific Investment Management Series or PIMCO Funds: Multi-Manager Series which offers that
class at NAV. You must have an account existing in the Fund or series selected for investment with the
identical registered name. You must elect this option on your account application or by a telephone
request to the Transfer Agent at 1-800-426-0107.
. Receive all distributions in cash (either paid directly to you or credited to your account with your
broker or other financial intermediary. You must elect this option on your account application or by a
telephone request to the Transfer Agent at 1-800-426-0107.
You do not pay any sales charges on shares you receive through the reinvestment of Fund
distributions.
If you elect to receive Fund distributions in cash and the postal or other delivery service is
unable to deliver checks to your address of record, the Trust's Transfer Agent will hold the returned
check for your benefit in a non-interest bearing account.
For further information on distribution options, please contact your financial service firm or call
the Distributor at 1-800-426-0107.
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Tax Consequences
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The following Information is meant as a general summary for U.S. taxpayers. Please see the SAI for
additional information. You should rely on your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in each Fund.
Each Fund will distribute substantially all of its income and gains to its shareholders every year,
and shareholders will be taxed on distributions they receive unless the distribution is derived from tax-
exempt income and is designated as an "exempt-interest dividend." If a Fund declares a dividend in
October, November or December but pays it in January, you may be taxed on the dividend as if you received
it in the previous year.
. Dividends paid to shareholders of each Fund and derived from Municipal Bond interest are expected to
be designated by each Fund as "exempt-interest dividends" and shareholders may generally exclude such
dividends from gross income for federal income tax purposes. The federal tax exemption for "exempt-
interest dividends" from Municipal Bonds does not necessarily result in the exemption of such dividends
from state and local taxes although the California Intermediate Municipal Bond Fund and the New York
Intermediate Municipal Bond Fund intend to arrange their affairs so that a portion of such distributions
will be exempt from state taxes in the respective state. Each Fund may invest a portion of its assets in
securities that generate income that is not exempt from federal or state income tax. Dividends derived
from taxable interest or capital gains will be subject to federal income tax. If a Fund invests in
"private activity bonds," certain shareholder may become subject to alternative minimum tax on the part
of the Fund's distributions derived from interest on such bonds.
. If you are subject to U.S. federal income tax, you will be subject to tax on Fund distributions
derived from taxable interest or capital gains whether you received them in cash or reinvested them in
additional shares of the Funds. For federal income tax purposes, Fund distributions that are taxable will
be taxable to you as either ordinary income or capital gains. Ordinary taxable Fund dividends (i.e.,
distributions of investment income) are taxable to you as ordinary income. If the Fund designates a
dividend as a capital gain distribution, you will pay tax on that dividend at the long-term capital gains
tax rate, no matter how long you have held your Fund shares. Distributions of gains from investments that
the Fund owned for 12 months or less will generally be taxable to you as ordinary income.
Taxable Fund distributions are taxable to you even if they are paid from income or gains earned by a
Fund prior to your investment and thus were included in the price you paid for your shares. For example,
if you purchase shares on or just before the record date of a Fund distribution, you will pay full price
for the shares and may receive a portion of your investment back as a taxable distribution.
You will generally have a taxable capital gain or loss if you dispose of your Fund shares by
redemption, exchange or sale. The amount of the gain or loss and the rate of tax will depend primarily
upon how much you pay for the shares, how much you sell them for, and how long you hold them. When you
exchange shares of a Fund for shares of another series, the transaction will be treated as a sale of the
Fund shares for these purposes, and any gain on those shares will generally be subject to federal income
tax. The Fund will send you a tax report each year. The report will tell you which dividends and
redemptions must be treated as taxable ordinary income and
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which are short-term or long-term capital gains.
The Funds seek to produce income that is generally exempt from U.S. income tax and will not benefit
investors in tax-sheltered retirement plans or individuals not subject to U.S. income tax. Further, the
California and New York Intermediate Municipal Bond Funds seek to produce income that is generally exempt
from the relevant state's income tax and will not benefit individuals that are not subject to that
state's income tax.
This section relates only to federal income tax; the consequences under other tax laws may differ.
Shareholders should consult their tax advisers as to the possible application of foreign, state and local
income tax laws to Fund dividends and capital distributions. Please see the Statement of Additional
Information for additional information regarding the tax aspects of investing in the Funds.
Characteristics and Risks of Securities and Investment Techniques
This section provides additional information about some of the principal investments and related risks of
the Funds described under "Summary Information" above. It also describes characteristics and risks of
additional securities and investment techniques that may be used by the Funds from time to time. Most of
these securities and investment techniques are discretionary, which means that PIMCO can decide whether
to use them or not. This Prospectus does not attempt to disclose all of the various types of securities
and investment techniques that may be used by the Funds. As with any mutual fund, investors in the Funds
rely on the professional investment judgment and skill of PIMCO and the individual portfolio managers.
Please see "Investment Objectives and Policies" in the Statement of Additional Information for more
detailed information about the securities and investment techniques described in this section and about
other strategies and techniques that may be used by the Funds.
Securities Selection In selecting securities for a Fund, PIMCO develops an outlook for interest rates and the economy;
analyzes credit and call risks, and uses other security selection techniques. The proportion of a Fund's
assets committed to investment in securities with particular characteristics (such as quality, sector,
interest rate or maturity) varies based on PIMCO's outlook for the U.S. economy, the financial markets
and other factors.
PIMCO attempts to identify areas of the bond market that are undervalued relative to the rest of the
market. PIMCO identifies these areas by grouping bonds into sectors. Sophisticated proprietary software
then assists in evaluating sectors and pricing specific securities. Once investment opportunities are
identified, PIMCO will shift assets among sectors depending upon changes in relative valuations and
credit spreads. There is no guarantee that PIMCO's security selection techniques will produce the desired
results.
U.S. Government U.S. Government securities are obligations of, or guaranteed by, the U.S. Government, its agencies or
Securities instrumentalities. U.S. Government securities are subject to market and interest rate risk, and may be
subject to varying degrees of credit risk. U.S. Government securities include zero coupon securities,
which tend to be subject to greater market risk than interest-paying securities of similar maturities.
Corporate Debt Corporate debt securities are subject to the risk of the issuer's inability to meet principal and
Securities interest payments on the obligation and may also be subject to price
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volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of
the issuer and general market liquidity. When interest rates rise, the value of corporate debt securities
can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest
rate movements than those with shorter maturities.
Variable and Floating Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on
Rate Securities the obligations. Each Fund may invest in floating rate debt instruments ("floaters") and engage in
credit spread trades. While floaters provide a certain degree of protection against rises in interest
rates, a Fund will participate in any declines in interest rates as well. Each Fund may also invest in
inverse floating rate debt instruments ("inverse floaters"). An inverse floater may exhibit greater
price volatility than a fixed rate obligation of similar credit quality. A Fund may not invest more than
5% of its net assets in any combination of inverse floater, interest only, or principal only securities.
High Yield Securities Securities rated lower than Baa by Moody's or lower than BBB by S&P are sometimes referred to as "high
yield" or "junk" bonds. Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher-rated fixed income securities. While offering a greater
potential opportunity for capital appreciation and higher yields, high yield securities typically entail
greater potential price volatility and may be less liquid than higher-rated securities. High yield
securities may be regarded as predominately speculative with respect to the issuer's continuing ability
to meet principal and interest payments. They may also be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher-rated securities.
Credit Ratings and Unrated Securities. Rating agencies are private services that provide ratings of the
credit quality of fixed income securities, including convertible securities. Appendix A to the Prospectus
describes the various ratings assigned to fixed income securities by Moody's and S&P. Ratings assigned by
a rating agency are not absolute standards of credit quality and do not evaluate market risks. Rating
agencies may fail to make timely changes in credit ratings and an issuer's current financial condition
may be better or worse than a rating indicates. A Fund will not necessarily sell a security when its
rating is reduced below its rating at the time of purchase. PIMCO does not rely solely on credit ratings,
and develops its own analysis of issuer credit quality.
A Fund may purchase unrated securities (which are not rated by a rating agency) if its portfolio manager
determines that the security is of comparable quality to a rated security that the Fund may purchase.
Unrated securities may be less liquid than comparable rated securities and involve the risk that the
portfolio manager may not accurately evaluate the security's comparative credit rating. Analysis of the
creditworthiness of issuers of high yield securities may be more complex than for issuers of higher-
quality fixed income securities. To the extent that a Fund invests in high yield and/or unrated
securities, the Fund's success in achieving its investment objective may depend more heavily on the
portfolio manager's creditworthiness analysis than if the Fund invested exclusively in higher-quality and
rated securities.
Inflation-Indexed Bonds Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted
according to the rate of inflation. If the index measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these
securities (calculated with respect to a
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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. For bonds
that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may
be less than the original principal. The value of inflation-indexed bonds is expected to change in
response to changes in real interest rates. Real interest rates are tied to the relationship between
nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate
than inflation, real interest rates may rise, leading to a decrease in value of inflation-indexed bonds.
Short-term increases in inflation may lead to a decline in value. Any increase in the principal amount of
an inflation-indexed bond will be considered taxable ordinary income, even though investors do not
receive their principal until maturity.
Derivatives Each Fund may, but is not required to, use certain derivative instruments for risk management purposes or
as part of its investment strategies. Generally, derivatives are financial contracts whose value depends
upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to
stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes.
Examples of derivative instruments include options contracts, futures contracts, options on futures
contracts and swap agreements. A portfolio manager may decide not to employ any of these strategies and
there is no assurance that any derivatives strategy used by a Fund will succeed. A description of these
and other derivative instruments that the Funds may use are described under "Investment Objectives and
Policies" in the Statement of Additional Information.
A Fund's use of derivative instruments involves risks different from, or greater than, the risks
associated with investing directly in securities and other more traditional investments. A description of
various risks associated with particular derivative instruments is included in "Investment Objectives and
Policies" in the Statement of Additional Information. The following provides a more general discussion of
important risk factors relating to all derivative instruments that may be used by the Funds.
Management Risk Derivative products are highly specialized instruments that require investment techniques
and risk analyses different from those associated with stocks and bonds. The use of a derivative requires
an understanding not only of the underlying instrument but also of the derivative itself, without the
benefit of observing the performance of the derivative under all possible market conditions.
Credit Risk The use of a derivative instrument involves the risk that a loss may be sustained as a result
of the failure of another party to the contract (usually referred to as a "counterparty") to make
required payments or otherwise comply with the contract's terms.
Liquidity Risk Liquidity risk exists when a particular derivative instrument is difficult to purchase or
sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the
case with many privately negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price.
Leverage Risk Because many derivatives have a leverage component, adverse changes in the value or level
of the underlying asset, reference rate or index can result in a loss substantially greater than the
amount invested in the derivative itself. Certain
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derivatives have the potential for unlimited loss, regardless of the size of the initial investment. When
a Fund uses derivatives for leverage, investments in that Fund will tend to be more volatile, resulting
in larger gains or losses in response to market changes. To limit leverage risk, each Fund will segregate
assets determined to be liquid by PIMCO in accordance with procedures established by the Board of
Trustees (or, as permitted by applicable regulation, enter into certain offsetting positions) to cover
its obligations under derivative instruments.
Lack of Availability Because the markets for certain derivative instruments (including markets located in
foreign countries) are relatively new and still developing, suitable derivatives transactions may not be
available in all circumstances for risk management or other purposes. There is no assurance that a Fund
will engage in derivatives transactions at any time or from time to time. A Fund's ability to use
derivatives may also be limited by certain regulatory and tax considerations.
Market and Other Risks Like most other investments, derivative instruments are subject to the risk that
the market value of the instrument will change in a way detrimental to a Fund's interest. If a portfolio
manager incorrectly forecasts the values of securities, currencies or interest rates or other economic
factors in using derivatives for a Fund, the Fund might have been in a better position if it had not
entered into the transaction at all. While some strategies involving derivative instruments can reduce
the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in other Fund investments. A Fund may also have to buy or sell a security at a
disadvantageous time or price because the Fund is legally required to maintain offsetting positions or
asset coverage in connection with certain derivatives transactions.
Other risks in using derivatives include the risk of mispricing or improper valuation of derivatives and
the inability of derivatives to correlate perfectly with underlying assets, rates and indexes. Many
derivatives, in particular privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to counterparties or a loss of
value to a Fund. Also, the value of derivatives may not correlate perfectly, or at all, with the value of
the assets, reference rates or indexes they are designed to closely track. In addition, a Fund's use of
derivatives may cause the Fund to realize higher amounts of short-term capital gains (generally taxed at
ordinary income tax rates) than if the Fund had not used such instruments.
Convertible Securities Each Fund may invest in convertible securities. Convertible securities are generally preferred stocks and
other securities, including fixed income securities and warrants, that are convertible into or
exercisable for common stock at a stated price or rate. The price of a convertible security will normally
vary in some proportion to changes in the price of the underlying common stock because of this conversion
or exercise feature. However, the value of a convertible security may not increase or decrease as rapidly
as the underlying common stock. A convertible security will normally also provide income and is subject
to interest rate risk. Convertible securities may be lower-rated securities subject to greater levels of
credit risk. A Fund may be forced to convert a security before it would otherwise choose, which may have
an adverse effect on the Fund's ability to achieve its investment objective.
While the Funds intend to invest primarily in fixed income securities, each may invest in convertible
securities or equity securities. While some countries or companies may be regarded as favorable
investments, pure fixed income opportunities may be
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unattractive or limited due to insufficient supply, or legal or technical restrictions. In such cases, a
Fund may consider equity securities or convertible securities to gain exposure to such investments.
Mortgage-Related and Each Fund may invest in mortgage- or other asset-backed securities. Mortgage-related securities
Other Asset-Backed include mortgage pass-through securities, collateralized mortgage obligations ("CMOs"), commercial
Securities mortgage-backed securities, mortgage dollar rolls, CMO residuals, stripped mortgage-backed securities
("SMBSs") and other securities that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property.
The value of some mortgage- or asset-backed securities may be particularly sensitive to changes in
prevailing interest rates. Early repayment of principal on some mortgage-related securities may expose a
Fund to a lower rate of return upon reinvestment of principal. When interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates are declining, the value
of mortgage-related securities with prepayment features may not increase as much as other fixed income
securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a
mortgage-related security, and may shorten or extend the effective maturity of the security beyond what
was anticipated at the time of purchase. If unanticipated rates of prepayment on underlying mortgages
increase the effective maturity of a mortgage-related security, the volatility of the security can be
expected to increase. The value of these securities may fluctuate in response to the market's perception
of the creditworthiness of the issuers. Additionally, although mortgages and mortgage-related securities
are generally supported by some form of government or private guarantee and/or insurance, there is no
assurance that private guarantors or insurers will meet their obligations.
One type of SMBS has one class receiving all of the interest from the mortgage assets (the interest-only,
or "IO" class), while the other class will receive all of the principal (the principal-only, or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these securities. A Fund may not invest
more than 5% of its net assets in any combination of IO, PO, or inverse floater securities. The Funds may
invest in other asset-backed securities that have been offered to investors.
Municipal Bonds Municipal bonds are generally issued by states and local governments and their agencies, authorities and
other instrumentalities. Municipal bonds are subject to interest rate, credit and market risk. The
ability of an issuer to make payments could be affected by litigation, legislation or other political
events or the bankruptcy of the issuer. Lower rated municipal bonds are subject to greater credit and
market risk than higher quality municipal bonds. The types of municipal bonds in which the Funds may
invest include municipal lease obligations. The Funds may also invest in securities issued by entities
whose underlying assets are municipal bonds.
Loan Participations and The Funds may invest in fixed- and floating-rate loans, which investments generally will be in the
Assignments form of loan participations and assignments of portions of such loans. Participations and assignments
involve special types of risk, including credit risk, interest rate risk, liquidity risk, and the risks
of being a lender. If a Fund purchases a participation, it may only be able to enforce its rights through
the lender, and may
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assume the credit risk of the lender in addition to the borrower.
Delayed Funding Loans The Funds may also enter into, or acquire participations in, delayed funding loans and revolving credit
and Revolving Credit facilities, in which a lender agrees to make loans up to a maximum amount upon demand by the borrower
Facilities during a specified term. These commitments may have the effect of requiring a Fund to increase its
investment in a company at a time when it might not otherwise decide to do so (including at a time when
the company's financial condition makes it unlikely that such amounts will be repaid). To the extent that
a Fund is committed to advance additional funds, it will segregate assets determined to be liquid by
PIMCO in accordance with procedures established by the Board of Trustees in an amount sufficient to meet
such commitments. Delayed funding loans and revolving credit facilities are subject to credit, interest
rate and liquidity risk and the risks of being a lender.
Loans of Portfolio For the purpose of achieving income, each Fund may lend its portfolio securities to brokers, dealers,
Securities and other financial institutions provided a number of conditions are satisfied, including that the loan
is fully collateralized. Please see "Investment Objectives and Policies" in the Statement of Additional
Information for details. When a Fund lends portfolio securities, its investment performance will continue
to reflect changes in the value of the securities loaned, and the Fund will also receive a fee or
interest on the collateral. Securities lending involves the risk of loss of rights in the collateral or
delay in recovery of the collateral if the borrower fails to return the security loaned or becomes
insolvent. A Fund may pay lending fees to a party arranging the loan.
Short Sales Each Fund may make short sales as part of its overall portfolio management strategies or to offset a
potential decline in value of a security. A short sale involves the sale of a security that is borrowed
from a broker or other institution to complete the sale. The Funds may make short sales if the security
sold short is held in the Fund's portfolio or if the Fund has the right to acquire the security without
the payment of further consideration (a "short sale against the box"). For these purposes, a Fund may
also hold or have the right to acquire securities which, without the payment of any further
consideration, are convertible into or exchangeable for the securities sold short. Short sales expose a
Fund to the risk that it will be required to acquire, convert or exchange securities to replace the
borrowed securities (also known as "covering" the short position) at a time when the securities sold
short have appreciated in value, thus resulting in a loss to the Fund. A Fund making a short sale (other
than a "short sale against the box") must segregate assets determined to be liquid by PIMCO in accordance
with procedures established by the Board of Trustees or otherwise cover its position in a permissible
manner.
When-Issued, Delayed Each Fund may purchase securities which it is eligible to purchase on a when-issued basis, may
Delivery and Forward purchase and sell such securities for delayed delivery and may make contracts to purchase such
Commitment Transactions securities for a fixed price at a future date beyond normal settlement time (forward commitments). When-
issued transactions, delayed delivery purchases and forward commitments involve a risk of loss if the
value of the securities declines prior to the settlement date. This risk is in addition to the risk that
the Fund's other assets will decline in the value. Therefore, these transactions may result in a form of
leverage and increase a Fund's overall investment exposure. Typically, no income accrues on securities a
Fund has committed to purchase prior to the time delivery of the securities is made, although a Fund may
earn income on securities it has segregated to cover these positions.
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Repurchase Agreements Each Fund may enter into repurchase agreements, in which the Fund purchases a security from a bank or
broker-dealer and agrees to repurchase the security at the Fund's cost plus interest within a specified
time. If the party agreeing to repurchase should default, the Fund will seek to sell the securities which
it holds. This could involve procedural costs or delays in addition to a loss on the securities if their
value should fall below their repurchase price. Repurchase agreements maturing in more than seven days
are considered illiquid securities.
Reverse Repurchase Each Fund may enter into reverse repurchase agreements and dollar rolls, subject to the Fund's
Agreements, Dollar limitations on borrowings. A reverse repurchase agreement or dollar roll involves the sale of a
Rolls And Other security by a Fund and its agreement to repurchase the instrument at a specified time and price, and
Borrowings may be considered a form of borrowing for some purposes. A Fund will segregate assets determined to be
liquid by PIMCO in accordance with procedures established by the Board of Trustees to cover its
obligations under reverse repurchase agreements. A Fund also may borrow money for investment purposes
subject to any policies of the Fund currently described in this Prospectus or in the Statement of
Additional Information. Reverse repurchase agreements, dollar rolls and other forms of borrowings may
create leveraging risk for a Fund.
Catastrophe Bonds Each Fund may invest in "catastrophe bonds," which are fixed income securities for which the return of
principal and payment of interest is contingent on the non-occurrence of a specific "trigger"
catastrophic event, such as a hurricane or an earthquake. If a trigger event occurs, a Fund may lose a
portion or all of its principal invested in the bond. Catastrophe bonds often provide for an extension of
maturity to process and audit loss claims where a trigger event has, or possibly has, occurred. An
extension of maturity may increase volatility. Catastrophe bonds may also expose the Fund to certain
unanticipated risks including credit risk, adverse regulatory or jurisdictional interpretations, and
adverse tax consequences. Catastrophe bonds may also be subject to liquidity risk.
Portfolio Turnover The length of time a Fund has held a particular security is not generally a consideration in investment
decisions. A change in the securities held by a Fund is known as "portfolio turnover." Each Fund may
engage in frequent and active trading of portfolio securities to achieve its investment objective,
particularly during periods of volatile market movements. High portfolio turnover (e.g., over 100%)
involves correspondingly greater expenses to a 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 also result in realization of taxable capital gains, including short-term capital gains (which are
generally taxed at ordinary income tax rates). The trading costs and tax effects associated with
portfolio turnover may adversely affect a Fund's performance.
Illiquid Securities Each Fund may invest up to 15% of its net assets in illiquid securities. Certain illiquid securities may
require pricing at fair value as determined in good faith under the supervision of the Board of Trustees.
A portfolio manager may be subject to significant delays in disposing of illiquid securities, and
transactions in illiquid securities may entail registration expenses and other transaction costs that are
higher than those for transactions in liquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the securities. Restricted securities, i.e.,
securities subject to legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities (such as securities issued
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pursuant to Rule 144A under the Securities Act of 1933 and certain commercial paper) may be treated as
liquid, although they may be less liquid than registered securities traded on established secondary
markets.
Investment in Other Each Fund may invest up to 10% of its assets in securities of other investment companies, such as
Investment Companies closed-end management investment companies, or in pooled accounts or other investment vehicles. As a
shareholder of an investment company, a Fund may indirectly bear service and other fees which are in
addition to the fees the Fund pays its service providers.
Year 2000 Readiness Many of the services provided to the Funds depend on the smooth functioning of computer systems. Many
Disclosure systems in use today cannot distinguish between the year 1900 and the year 2000. Should any of the
service systems fail to process information properly, this could have an adverse impact on the Funds'
operations and services provided to shareholders. PIMCO, the Distributor, the Trust's shareholder
servicing and transfer agent and custodian, and certain other service providers to the Funds 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 Funds' operations and services provided to shareholders will not be adversely affected, nor can there
be any assurance that the year 2000 problem will not have an adverse effect on the entities whose
securities are held by the Funds or on domestic or global securities markets or economies, generally.
Temporary Defensive For temporary or defensive purposes, each fund may invest without limit in U.S. debt securities,
Strategies including taxable and short-term money market securities, when PIMCO deems it appropriate to do so. When
a Fund engages in such strategies, it may not achieve its investment objective.
Changes in Investment The investment objective of each Fund is fundamental and may not be changed without shareholder approval.
Objectives and Policies Unless otherwise stated, all other investment policies of the Funds may be changed by the Board of
Trustees without shareholder approval.
Percentage Investment Unless otherwise stated, all percentage limitations on Fund investments listed in this Prospectus will
Limitations apply at the time of investment. A Fund would not violate these limitations unless an excess or
deficiency occurs or exists immediately after and as a result of an investment.
Other Investments and The Funds may invest in other types of securities and use a variety of investment techniques and
Techniques strategies which are not described in this Prospectus. These securities and techniques may subject the
Funds to additional risks. Please see the Statement of Additional Information for additional information
about the securities and investment techniques described in this Prospectus and about additional
securities and techniques that may be used by the Funds.
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Appendix A
Description of Securities Ratings
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A Fund's investment 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 PIMCO to be of comparable quality). The percentage of a Fund's assets invested in securities
particular rating category will vary. The following terms are generally used to described the credit quality
of fixed income securities:
High Quality Debt Securities are those rated in one of the two highest rating categories (the highest
category for commercial paper) or, if unrated, deemed comparable by PIMCO.
Investment Grade Debt Securities are those rated in one of the four highest rating categories or, if unrated
deemed comparable by PIMCO.
Below Investment Grade, High Yield Securities ("Junk Bonds") are those rated lower than Baa by Moody's or BBB
by S&P and comparable securities. They are considered predominantly speculative with respect to the issuer's
ability to repay principal and interest.
Following is a description of Moody's and S&P's rating categories applicable to fixed income securities.
Moody's Investors Corporate and Municipal Bond Ratings
Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the long-term risks appear
somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but
elements may be present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered
as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and
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bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classified from Aa through B in
its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt
obligations which have an original maturity not exceeding one year. Obligations relying upon support
mechanisms such as letters of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of
senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the
following characteristics: leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation;
and well-established access to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of
senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of
senior short-term obligations. The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
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categories.
Short-Term Municipal Bond Ratings
There are four rating categories for short-term municipal bonds that define an investment grade situation,
which are listed below. In the case of variable rate demand obligations (VRDOs), a two-component rating is
assigned. The first element represents an evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other represents an evaluation of the degree of risk associated with
the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When
either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or
NR/VMIG 1. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a
function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes best quality. There is present strong protection by established
cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are ample although not so
large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements are accounted for but
there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly regarded as required of an
investment security is present and although not distinctly or predominantly speculative, there is specific
risk.
SG: This designation denotes speculative quality. Debt instruments in this category lack margins of
protection.
Standard & Corporate and Municipal Bond Ratings
Poor's Ratings
Services Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal
is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions, or changing
circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in
this category than in higher-rated categories.
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Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect
to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the
highest. While such debt will likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon
favorable business, financial, and economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that is assigned an actual or
implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt that is assigned an actual or
implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being paid.
D: Debt rated D is in payment default. The D rating category is used when interest payments or principal
payments are not made on the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood and risk.
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r: The "r" is attached to highlight derivative, hybrid, and certain other obligations that S&P believes
may experience high volatility or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as
domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Commercial Paper An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an
Rating Definitions original maturity of no more than 365 days. Ratings are graded into several categories, 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 designation 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 adverse effects of changes in circumstances than obligations carrying the higher
designations.
B: Issues rated B are regarded as having only speculative capacity 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
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.
A commercial paper rating is not a recommendation to purchase, sell or hold a security inasmuch as it
does not comment as to market 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 occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability
of such information.
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PIMCO Funds: INVESTMENT ADVISER AND ADMINISTRATOR
Pacific Investment PIMCO, 840 Newport Center Drive, Suite 300, Newport
Management Series Beach, CA 92660
DISTRIBUTOR
PIMCO Funds Distributors LLC, 2187 Atlantic Street,
Stamford, CT 06902-6896
CUSTODIAN
Investor Fiduciary Trust Company, 801 Pennsylvania,
Kansas City, MO 64105
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT
First Data Investor Services Group, Inc., P.O. Box
9688, Providence, RI 02940
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas
City, MO 64105
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street N.W.,
Washington, D.C. 20006
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PIMCO Funds: Pacific Investment Management Series
The Trust's Statement of Additional Information ("SAI") includes additional
information about the Funds. The SAI is incorporated by reference into this
Prospectus, which means it is part of this Prospectus for legal purposes.
The SAI includes the PIMCO Funds Shareholders Guide for Class A, B and C Shares,
a separate booklet which contains more detailed information about Fund purchase,
redemption and exchange options and procedures and other information about the
Funds. You can get a free copy of the Guide together with or separately from
the rest of the SAI.
You may get free copies of the SAI, request other information about a Fund, or
make shareholder inquiries by calling the Trust at 1-800-426-0107, or PIMCO
Infolink Audio Response Network at 1-800-987-4626, or by writing to:
PIMCO Funds Pacific Investment Management Series
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
You can also visit our Web site at www.pimco.com for additional information
about the Funds.
You may review and copy information about the Trust, including its SAI, at the
Securities and Exchange Commission's public reference room in Washington, D.C.
You may call the Commission at 1-800-SEC-0330 for information about the
operation of the public reference room. You may also access reports and other
information about the Trust on the Commission's Web site at www.sec.gov. You
may get copies of this information, with payment of a duplication fee, by
writing the Public Reference Section of the Commission, Washington, D.C. 20549-
6009. You may need to refer to the Trust's file number under the Investment
Company Act, which is 811-5028.
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PIMCO Funds: Pacific Investment Management Series
Short Duration Municipal Income Fund
California Intermediate Municipal Bond Fund
New York Intermediate Municipal Bond Fund
Statement of Additional Information
This Statement of Additional Information is not a prospectus, and should be
read in conjunction with the prospectuses of PIMCO Funds: Pacific Investment
Management Series -- Short Duration Municipal Income Fund, California
Intermediate Municipal Bond Fund, New York Intermediate Municipal Bond Fund
(each a "Fund"), as supplemented from time to time. Each Fund offers five
classes of shares. Class A, Class B, and Class C shares of these Funds are
offered through the "Class A, B and C Prospectus," and Institutional Class and
Administrative Class shares of the Funds are offered through the "Institutional
Prospectus" each dated August 31, 1999, each as amended or supplemented from
time to time (collectively, the "Prospectuses").
Copies of Prospectuses and the PIMCO Funds Shareholders' Guide for Class A,
B and C Shares (the "Guide"), which is a part of this Statement of Additional
Information, may be obtained free of charge at the addresses and telephone
number(s) listed below.
Institutional Prospectus Class A, B and C
PIMCO Funds PIMCO Funds Distributors LLC
840 Newport Center Drive 2187 Atlantic Street
Suite 300 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: (800) 426-0107
Telephone: (800) 927-4648
August 31, 1999
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TABLE OF CONTENTS
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THE TRUST............................................................................. 1
Borrowing........................................................................ 1
Corporate Debt Securities........................................................ 2
Convertible Securities........................................................... 3
High Yield Securities ("Junk Bonds")............................................. 3
Variable and Floating Rate Securities............................................ 4
Participation on Creditors Committees............................................ 4
Mortgage-Related and Other Asset-Backed Securities............................... 5
Bank Obligations................................................................. 9
Loan Participations.............................................................. 9
Delayed Funding Loans and Revolving Credit Facilities............................ 11
Loans of Portfolio Securities.................................................... 11
Short Sales...................................................................... 11
When-Issued, Delayed Delivery and Forward Commitment Transactions................ 12
Derivative Instruments........................................................... 12
Inflation-Indexed Bonds.......................................................... 18
Hybrid Instruments............................................................... 19
Catastrophe Bonds................................................................ 19
Warrants to Purchase Securities.................................................. 20
Illiquid Securities.............................................................. 20
Municipal Bonds.................................................................. 20
INVESTMENT RESTRICTIONS............................................................... 26
Fundamental Investment Restrictions.............................................. 26
Non-Fundamental Investment Restrictions.......................................... 27
MANAGEMENT OF THE TRUST............................................................... 29
Trustees and Officers............................................................ 29
Compensation Table............................................................... 32
Investment Adviser............................................................... 33
Fund Administrator............................................................... 34
DISTRIBUTION OF TRUST SHARES.......................................................... 35
Distributor and Multi-Class Plan................................................. 35
Contingent Deferred Sales Charge and Initial Sales Charge........................ 36
Distribution and Servicing Plans for Class A, Class B and Class C Shares......... 37
Distribution and Administrative Services Plans for Administrative Class Shares... 39
Purchases, Exchanges and Redemptions............................................. 41
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 42
Investment Decisions and Portfolio Transactions.................................. 43
Brokerage and Research Services.................................................. 43
Portfolio Turnover............................................................... 44
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NET ASSET VALUE....................................................................... 44
TAXATION.............................................................................. 45
Distributions.................................................................... 47
Sales of Shares.................................................................. 47
Backup Withholding............................................................... 47
Options, Futures and Forward Contracts, and Swap Agreements...................... 47
Short Sales...................................................................... 48
Original Issue Discount and Market Discount...................................... 48
Non-U.S. Shareholders............................................................ 49
Other Taxation................................................................... 50
OTHER INFORMATION..................................................................... 50
Capitalization................................................................... 50
Performance Information.......................................................... 50
Potential College Cost Table..................................................... 54
Voting Rights.................................................................... 56
Code of Ethics................................................................... 57
Year 2000 Readiness Disclosure................................................... 57
Custodian, Transfer Agent and Dividend Disbursing Agent.......................... 58
Independent Accountants.......................................................... 58
Registration Statement........................................................... 58
SHAREHOLDER GUIDE FOR CLASS A, B AND C SHARES......................................... SG-1
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THE TRUST
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") currently consisting of thirty separate investment portfolios,
three of which (the "Funds") are described in this SAI: the PIMCO Short Duration
Municipal Income Fund; the PIMCO California Intermediate Municipal Bond Fund;
and the PIMCO New York Intermediate Municipal Bond Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund are
described in the Prospectuses. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
Borrowing
A Fund may borrow for temporary administrative purposes. This borrowing
may be unsecured. Provisions of the Investment Company Act of 1940 ("1940 Act")
require a Fund to maintain continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed, with an exception for borrowings not in excess of 5% of the
Fund's total assets made for temporary administrative purposes. Any borrowings
for temporary administrative purposes in excess of 5% of the Fund's total assets
must maintain continuous asset coverage. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, a Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time. As noted below,
a Fund also may enter into certain transactions, including reverse repurchase
agreements, mortgage dollar rolls, and sale-buybacks, that can be viewed as
constituting a form of borrowing or financing transaction by the Fund. To the
extent a Fund covers its commitment under a reverse repurchase agreement (or
economically similar transaction) by the segregation of assets determined in
accordance with procedures adopted by the Trustees, equal in value to the amount
of the Fund's commitment to repurchase, such an agreement will not be considered
a "senior security" by the Fund and therefore will not be subject to the 300%
asset coverage requirement otherwise applicable to borrowings by the Funds.
Borrowing will tend to exaggerate the effect on net asset value of any increase
or decrease in the market value of a Fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements, mortgage dollar rolls, and economically similar
transactions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. Under a reverse repurchase agreement,
the Fund continues to receive any principal and interest payments on the
underlying security during the term of the agreement. The Fund typically will
segregate assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, equal (on a daily mark-to-
market basis) to its obligations under reverse repurchase agreements. However,
reverse repurchase agreements involve the risk that the market value of
securities retained by the Fund may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. To the extent
that positions in reverse repurchase agreements are not covered through the
segregation of liquid assets at least equal to the amount of any
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forward purchase commitment, such transactions would be subject to the Funds'
limitations on borrowings, which would restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% of a Fund's total assets.
A "mortgage dollar roll" is similar to a reverse repurchase agreement in
certain respects. In a "dollar roll" transaction a Fund sells a mortgage-
related security, such as a security issued by the Government National Mortgage
Association ("GNMA"), to a dealer and simultaneously agrees to repurchase a
similar security (but not the same security) in the future at a pre-determined
price. A "dollar roll" can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which a Fund pledges a mortgage-related security to
a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,
the dealer with which a Fund enters into a dollar roll transaction is not
obligated to return the same securities as those originally sold by the Fund,
but only securities which are "substantially identical." To be considered
"substantially identical," the securities returned to a Fund generally must:
(1) be collateralized by the same types of underlying mortgages; (2) be issued
by the same agency and be part of the same program; (3) have a similar original
stated maturity; (4) have identical net coupon rates; (5) have similar market
yields (and therefore price); and (6) satisfy "good delivery" requirements,
meaning that the aggregate principal amounts of the securities delivered and
received back must be within 2.5% of the initial amount delivered.
A Fund's obligations under a dollar roll agreement must be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Fund. As with reverse repurchase agreements, to the extent that
positions in dollar roll agreements are not covered by segregated liquid assets
at least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Funds' limitations on borrowings.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to a Fund's overall limitations on investments in illiquid securities.
A Fund also may effect simultaneous purchase and sale transactions that are
known as "sale-buybacks". A sale-buyback is similar to a reverse repurchase
agreement, except that in a sale-buyback, the counterparty who purchases the
security is entitled to receive any principal or interest payments make on the
underlying security pending settlement of the Fund's repurchase of the
underlying security. A Fund's obligations under a sale-buyback typically would
be offset by liquid assets equal in value to the amount of the Fund's forward
commitment to repurchase the subject security.
Corporate Debt Securities
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are in the
Adviser's opinion comparable in quality to corporate debt securities in which
the Fund may invest.
Corporate income-producing securities may 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. 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. Debt securities may be acquired with warrants
attached.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's Investor Service, Inc. ("Moody's")
describes securities rated Baa as "medium-grade" obligations; they are "neither
highly protected nor poorly secured . . . [i]nterest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." Standard & Poor's Ratings Services ("S&P")
describes securities rated BBB as "regarded as having an adequate capacity to
pay interest and repay principal . . . [w]hereas it
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normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal . . . than in higher rated categories." For a
discussion of securities rated below investment grade, see "High Yield
Securities ("Junk Bonds")" below.
Convertible Securities
A convertible debt security is a bond, debenture, note, or other security
that entitles the holder to acquire common stock or other equity securities of
the same or a different issuer. A convertible security generally entitles the
holder to receive interest paid or accrued until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to non-convertible debt securities.
Convertible securities rank senior to common stock in a corporation's capital
structure and, therefore, generally entail less risk than the corporation's
common stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security.
Because of the conversion feature, the price of the convertible security
will normally fluctuate in some proportion to changes in the price of the
underlying asset, and as such is subject to risks relating to the activities of
the issuer and/or general market and economic conditions. The income component
of a convertible security may tend to cushion the security against declines in
the price of the underlying asset. However, the income component of convertible
securities causes fluctuations based upon changes in interest rates and the
credit quality of the issuer. In addition, convertible securities are often
lower-rated securities.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party, which may have an adverse effect on the
Fund's ability to achieve its investment objective. A Fund generally would
invest in convertible securities for their favorable price characteristics and
total return potential and would normally not exercise an option to convert.
High Yield Securities ("Junk Bonds")
Investments in securities rated below investment grade that are eligible
for purchase by certain of the Funds (i.e., rated B or better by Moody's or
S&P), are described as "speculative" by both Moody's and S&P. Investment in
lower rated corporate debt securities ("high yield securities" or "junk bonds")
generally provides greater income and increased opportunity for capital
appreciation than investments in higher quality securities, but they also
typically entail greater price volatility and principal and income risk. These
high yield securities are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of debt securities that are high
yield may be more complex than for issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities have been found to be less sensitive to
interest-rate changes than higher-rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection
of an economic downturn or of a period of rising interest rates, for example,
could cause a decline in high yield security prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Funds investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash. The
Adviser seeks to
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reduce these risks through diversification, credit analysis and attention to
current developments and trends in both the economy and financial markets.
The secondary market on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Funds
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly-traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
The Adviser seeks to minimize the risks of investing in all securities through
diversification, in-depth credit analysis and attention to current developments
in interest rates and market conditions.
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 Adviser does not rely solely on credit ratings when selecting securities for
the Funds, and develops its own independent analysis of issuer credit quality.
If a credit rating agency changes the rating of a portfolio security held by a
Fund, the Fund may retain the portfolio security if the Adviser deems it in the
best interest of shareholders.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
Each Fund may invest in floating rate debt instruments ("floaters") and
engage in credit spread trades. The interest rate on a floater is a variable
rate which is tied to another interest rate, such as a money-market index or
Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide a Fund with a certain degree of protection against rises in
interest rates, a Fund will participate in any declines in interest rates as
well. 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 difference between
the prices or interest rates, as the case may be, of the respective securities
or currencies.
Each Fund may also invest in inverse floating rate debt instruments
("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 Funds
have adopted a policy under which no Fund will invest more than 5% of its net
assets in any combination of inverse floater, interest only ("IO"), or principal
only ("PO") securities.
Participation on Creditors Committees
A Fund may from time to time participate on committees formed by creditors
to negotiate with the management of financially troubled issuers of securities
held by the Fund. Such participation may subject a Fund to expenses such as
legal fees and may make a Fund an "insider" of the issuer for purposes of the
federal securities laws, and therefore may restrict such Fund's ability to trade
in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by a Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws
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governing the rights of creditors and debtors. A Fund will participate on such
committees only when the Adviser believes that such participation is necessary
or desirable to enforce the Fund's rights as a creditor or to protect the value
of securities held by the Fund.
Mortgage-Related and Other Asset-Backed Securities
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." The Funds may also invest in debt securities which are secured
with collateral consisting of mortgage-related securities (see "Collateralized
Mortgage Obligations"), and in other types of mortgage-related securities.
Mortgage Pass-Through Securities. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment
on underlying mortgages increase in the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs
(the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government. FHLMC was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. It is a government-sponsored corporation
formerly owned by the twelve Federal Home Loan Banks and now owned entirely by
private stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the United
States Government.
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Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Funds may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Adviser determines that the securities meet the Trust's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. No Fund will purchase mortgage-related securities or any other
assets which in the Adviser's opinion are illiquid if, as a result, more than
15% of the value of the Fund's net assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
VA. In the case of private issue mortgage-related securities whose underlying
assets are neither U.S. Government securities nor U.S. Government-insured
mortgages, to the extent that real properties securing such assets may be
located in the same geographical region, the security may be subject to a
greater risk of default than other comparable securities in the event of adverse
economic, political or business developments that may affect such region and,
ultimately, the ability of residential homeowners to make payments of principal
and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, on a monthly basis. CMOs
may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the
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Bonds. Principal and interest payments from the Collateral are used to pay
principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all
bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including mortgage dollar rolls, CMO residuals or stripped
mortgage-backed securities ("SMBS"). Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
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flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities--Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped mortgage-
backed securities, in certain circumstances a Fund may fail to recoup fully its
initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. SMBS are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the "IO"
class), while the other class will receive all of the principal (the principal-
only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to recoup some or all of
its initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Adviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables/SM/
("CARS/SM/"). CARS/SM/ represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS/SM/ are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS/SM/ may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is
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exhausted, the trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Consistent with a Fund's investment objectives and policies, the Adviser
also may invest in other types of asset-backed securities.
Bank Obligations
Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 15% of its net assets would be invested in such deposits,
repurchase agreements maturing in more than seven days and other illiquid
assets.
Each Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
Loan Participations
Each Fund may purchase participations in commercial loans. Such
indebtedness may be secured or unsecured. Loan participations typically
represent direct participation in a loan to a corporate borrower, and generally
are offered by banks or other financial institutions or lending syndicates. The
Funds may participate in such syndications, or can buy part of a loan, becoming
a part lender. When purchasing loan participations, a Fund assumes the credit
risk associated with the corporate borrower and may assume the credit risk
associated with an interposed bank or other financial intermediary. The
participation interests in which a Fund intends to invest may not be rated by
any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated in
the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement
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should remain available to holders of such indebtedness. However, if assets held
by the agent bank for the benefit of a Fund were determined to be subject to the
claims of the agent bank's general creditors, the Fund might incur certain costs
and delays in realizing payment on a loan or loan participation and could suffer
a loss of principal and/or interest. In situations involving other interposed
financial institutions (e.g., an insurance company or governmental agency)
similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the corporate borrower for payment of principal and
interest. If a Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer a Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower's obligation, or that the collateral
can be liquidated.
The Funds may invest in loan participations with credit quality comparable
to that of issuers of its securities investments. Indebtedness of companies
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Some companies may never pay off their indebtedness, or may
pay only a small fraction of the amount owed. Consequently, when investing in
indebtedness of companies with poor credit, a Fund bears a substantial risk of
losing the entire amount invested.
Each Fund limits the amount of its total assets that it will invest in any
one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, a Fund generally will treat the
corporate borrower as the "issuer" of indebtedness held by the Fund. In the case
of loan participations where a bank or other lending institution serves as a
financial intermediary between a Fund and the corporate borrower, if the
participation does not shift to the Fund the direct debtor-creditor relationship
with the corporate borrower, Securities and Exchange Commission ("SEC")
interpretations require the Fund to treat both the lending bank or other lending
institution and the corporate borrower as "issuers" for the purposes of
determining whether the Fund has invested more than 5% of its total assets in a
single issuer. Treating a financial intermediary as an issuer of indebtedness
may restrict a Funds' ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
Loans and other types of direct indebtedness may not be readily marketable
and may be subject to restrictions on resale. In some cases, negotiations
involved in disposing of indebtedness may require weeks to complete.
Consequently, some indebtedness may be difficult or impossible to dispose of
readily at what the Adviser believes to be a fair price. In addition, valuation
of illiquid indebtedness involves a greater degree of judgment in determining a
Fund's net asset value than if that value were based on available market
quotations, and could result in significant variations in the Fund's daily share
price. At the same time, some loan interests are traded among certain financial
institutions and accordingly may be deemed liquid. As the market for different
types of indebtedness develops, the liquidity of these instruments is expected
to improve. In addition, the Funds currently intend to treat indebtedness for
which there is no readily available market as illiquid for purposes of the
Funds' limitation on illiquid investments. Investments in loan participations
are considered to be debt obligations for purposes of the Trust's investment
restriction relating to the lending of funds or assets by a Portfolio.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Funds. For example, if a loan is foreclosed, a Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, a Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct
indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, the Funds
rely on the Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Funds.
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Delayed Funding Loans and Revolving Credit Facilities
The Funds may enter into, or acquire participations in, delayed funding
loans and revolving credit facilities. Delayed funding loans and revolving
credit facilities are borrowing arrangements in which the lender agrees to make
loans up to a maximum amount upon demand by the borrower during a specified
term. A revolving credit facility differs from a delayed funding loan in that
as the borrower repays the loan, an amount equal to the repayment may be
borrowed again during the term of the revolving credit facility. Delayed
funding loans and revolving credit facilities usually provide for floating or
variable rates of interest. These commitments may have the effect of requiring a
Fund to increase its investment in a company at a time when it might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that a Fund is committed to advance additional funds, it will at all times
segregate assets, determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, in an amount sufficient to meet
such commitments. The Funds may invest in delayed funding loans and revolving
credit facilities with credit quality comparable to that of issuers of its
securities investments. Delayed funding loans and revolving credit facilities
may be subject to restrictions on transfer, and only limited opportunities may
exist to resell such instruments. As a result, a Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value. The Funds currently intend to treat delayed funding loans and
revolving credit facilities for which there is no readily available market as
illiquid for purposes of the Funds' limitation on illiquid investments. For a
further discussion of the risks involved in investing in loan participations and
other forms of direct indebtedness see "Loan Participations." Participation
interests in revolving credit facilities will be subject to the limitations
discussed in "Loan Participations." Delayed funding loans and revolving credit
facilities are considered to be debt obligations for purposes of the Trust's
investment restriction relating to the lending of funds or assets by a
Portfolio.
Loans of Portfolio Securities
For the purpose of achieving income, each Fund may lend its portfolio
securities to brokers, dealers, and other financial institutions, provided: (i)
the loan is secured continuously by collateral consisting of U.S. Government
securities, cash or cash equivalents (negotiable certificates of deposits,
bankers' acceptances or letters of credit) maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (ii) the 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.
Short Sales
Certain of the Funds, may make short sales of securities as part of their
overall portfolio management strategies involving the use of derivative
instruments and to offset potential declines in long positions in similar
securities. A short sale is a transaction in which a Fund sells a security it
does not own in anticipation that the market price of that security will
decline.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of the
short sale and the time and the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
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To the extent that a Fund engages in short sales, it will provide
collateral to the broker-dealer and (except in the case of short sales "against
the box") will maintain additional asset coverage in the form of segregated
assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees. Each Fund, does not intend to enter into
short sales (other than those "against the box") if immediately after such sale
the aggregate of the value of all collateral plus the amount of the segregated
assets exceeds one-third of the value of the Fund's net assets. This percentage
may be varied by action of the Trustees. A short sale is "against the box" to
the extent that the Fund contemporaneously owns, or has the right to obtain at
no added cost, securities identical to those sold short. The Funds will engage
in short selling to the extent permitted by the 1940 Act and rules and
interpretations thereunder.
When-Issued, Delayed Delivery and Forward Commitment Transactions
Each of the Funds may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. When such purchases are outstanding, the
Fund will segregate until the settlement date assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees,
in an amount sufficient to meet the purchase price. Typically, no income
accrues on securities a Fund has committed to purchase prior to the time
delivery of the securities is made, although a Fund may earn income on
securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the
Fund is not required to pay for the security until the delivery date, these
risks are in addition to the risks associated with the Fund's other investments.
If the Fund remains substantially fully invested at a time when when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage.
When the 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. A Fund may dispose of or renegotiate
a transaction after it is entered into, and may sell when-issued, delayed
delivery or forward commitment securities before they are delivered, which may
result in a capital gain or loss. There is no percentage limitation on the
extent to which the Funds may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.
Derivative Instruments
In pursuing their individual objectives the Funds may purchase and sell
(write) both put options and call options on securities, securities indexes, and
enter into interest rate and index futures contracts and purchase and sell
options on such futures contracts ("futures options") for hedging purposes or as
part of their overall investment strategies. The Funds also may enter into swap
agreements with respect to interest rates and indexes of securities. The Funds
may invest in structured notes. If other types of financial instruments,
including other types of options, futures contracts, or futures options are
traded in the future, a Fund may also use those instruments, provided that the
Trustees determine that their use is consistent with the Fund's investment
objective.
The value of some derivative instruments in which the Funds invest may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Funds, the ability of a Fund to successfully utilize
these instruments may depend in part upon the ability of the Adviser to forecast
interest rates and other economic factors correctly. If the Adviser incorrectly
forecasts such factors and has taken positions in derivative instruments
contrary to prevailing market trends, the Funds could be exposed to the risk of
loss.
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The Funds might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If the Adviser
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a derivatives strategy for a Fund, the Fund might have been in a
better position if it had not entered into the transaction at all. Also,
suitable derivative transactions may not be available in all circumstances. The
use of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments. While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in related investments or otherwise, due to the
possible inability of a Fund to purchase or sell a portfolio security at a time
that otherwise would be favorable or the possible need to sell a portfolio
security at a disadvantageous time because the Fund is required to maintain
asset coverage or offsetting positions in connection with transactions in
derivative instruments, and the possible inability of a Fund to close out or to
liquidate its derivatives positions. In addition, a Fund's use of such
instruments may cause the Fund to realize higher amounts of short-term capital
gains (generally taxed at ordinary income tax rates) than if it had not used
such instruments.
Options on Securities and Indexes. A Fund may, to the extent specified
herein or in the Prospectuses, purchase and sell both put and call options on
fixed income or other securities or indexes in standardized contracts traded on
domestic securities exchanges, boards of trade, or similar entities, or quoted
on NASDAQ, and agreements, sometimes called cash puts, which may accompany the
purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees,
in such amount are segregated by its custodian) upon conversion or exchange of
other securities held by the Fund. For a call option on an index, the option is
covered if the Fund maintains with its custodian assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, in an amount equal to the contract value of the index. A call option
is also covered if the Fund holds a call on the same security or index as the
call written where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise
price of the call written, provided the difference is maintained by the Fund in
segregated assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees. A put option on a security or
an index is "covered" if the Fund segregates assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of Trustees
equal to the exercise price. A put option is also covered if the Fund holds a
put on the same security or index as the put written where the exercise price of
the put held is (i) equal to or greater than the exercise price of the put
written, or (ii) less than the exercise price of the put written, provided the
difference is maintained by the Fund in segregated assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised,
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the Fund realizes a capital loss equal to the premium paid. Prior to the earlier
of exercise or expiration, an exchange traded option may be closed out by an
offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Fund desires.
A Fund may sell put or call options it has previously purchased, 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. Prior to exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option of the same
series. A Fund will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the market
value of a put or a call option include supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or
index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
The Funds may write covered straddles consisting of a combination of a call
and a put written on the same underlying security. A straddle will be covered
when sufficient assets are deposited to meet the Funds' immediate obligations.
The Funds may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, the Funds will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
During the option period, the covered call writer has, in return for the
premium on the option, given up the opportunity to profit from a price increase
in the underlying security above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline. The writer of an option has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price. If a put
or call option purchased by the Fund is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price (in the case of a put), or remains less than or equal to
the exercise price (in the case of a call), the Fund will lose its entire
investment in the option Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying
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security unless the option expired without exercise. As the writer of a covered
call option, a Fund forgoes, during the option's life, the opportunity to profit
from increases in the market value of the security covering the call option
above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Futures Contracts and Options on Futures Contracts. Each of the Fixed
Income may invest in interest rate futures contracts and options thereon
("futures options"). The Funds may purchase and sell futures contracts on U.S.
Government securities and Municipal Bonds, as well as purchase put and call
options on such futures contracts. The Funds may invest in interest rate,
indexes, futures contracts and options thereon.
An interest rate, or index futures contract provides for the future sale by
one party and purchase by another party of a specified quantity of a financial
instrument or the cash value of an index at a specified price and time. A
futures contract on an index is an agreement pursuant to which two parties agree
to take or make delivery of an amount of cash equal to the difference between
the value of the index at the close of the last trading day of the contract and
the price at which the index contract was originally written. Although the value
of an index might be a function of the value of certain specified securities, no
physical delivery of these securities is made. A public market exists in
futures contracts covering a number of indexes as well as financial instruments,
including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-
month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit. It is expected that other futures contracts will be developed and
traded in the future.
A Fund may purchase and write call and put futures options, as specified
for that Fund in the Prospectuses. Futures options possess many of the same
characteristics as options on securities and indexes (discussed above). A
futures option gives the holder the right, in return for the premium paid, to
assume a long position (call) or short position (put) in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in the futures
contract and the writer is assigned the opposite short position. In the case of
a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission
("CFTC") under which the Trust and the Funds avoid being deemed a "commodity
pool" or a "commodity pool operator," each Fund intends generally to limit its
use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. A Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce that Fund's exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
A Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. exchange, board of trade, or similar entity,
or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets determined to be liquid by the Adviser in accordance
with procedures established by the Board of Trustees ("initial margin"). The
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margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. Margin
requirements on foreign exchanges may be different than U.S. exchanges. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
The Funds may write covered straddles consisting of a call and a put
written on the same underlying futures contract. A straddle will be covered
when sufficient assets are deposited to meet the Funds' immediate obligations.
A Fund may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, the Funds will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
Limitations on Use of Futures and Futures Options. In general, the Funds
intend to enter into positions in futures contracts and related options only for
"bona fide hedging" purposes. With respect to positions in futures and related
options that do not constitute bona fide hedging positions, a Fund will not
enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of the Fund's net
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees,
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, that
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on
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which the futures contract is based), or by holding a call option permitting the
Fund to purchase the same futures contract at a price no higher than the price
of the contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that, when added to the amounts deposited with a futures commission
merchant as margin, equal the total market value of the futures contract
underlying the call option. Alternatively, the Fund may cover its position by
entering into a long position in the same futures contract at a price no higher
than the strike price of the call option, by owning the instruments underlying
the futures contract, or by holding a separate call option permitting the Fund
to purchase the same futures contract at a price not higher than the strike
price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Adviser in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the Fund may cover the position either by entering
into a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Fund.
To the extent that securities with maturities greater than one year are
used to segregate assets to cover a Fund's obligations under futures contracts
and related options, such use will not eliminate the risk of a form of leverage,
which may tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio, and may require liquidation
of portfolio positions when it is not advantageous to do so. However, any
potential risk of leverage resulting from the use of securities with maturities
greater than one year may be mitigated by the overall duration limit on a Fund's
portfolio securities. Thus, the use of a longer-term security may require a
Fund to hold offsetting short-term securities to balance the Fund's portfolio
such that the Fund's duration does not exceed the maximum permitted for the Fund
in the Prospectuses.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures contracts on U.S. Government securities historically have reacted
to an increase or decrease in interest rates in a manner similar to that in
which the underlying U.S. Government securities reacted. To the extent,
however, that the Funds into such futures contracts, the value of such futures
will not vary in direct proportion to the value of the Funds' holdings of
Municipal bonds (as defined below). Thus, the anticipated spread between the
price of the futures contract and the hedged security may be distorted due to
differences in the nature of the markets. The spread also may be distorted by
differences
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in initial and variation margin requirements, the liquidity of such markets and
the participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Inflation-Indexed Bonds
Inflation-indexed bonds are fixed income securities whose principal value
is periodically adjusted according to the rate of inflation. Two structures are
common. The U.S. Treasury and some other issuers use a structure that accrues
inflation into the principal value of the bond. Most other issuers pay out the
CPI accruals as part of a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of
five, ten or thirty years, although it is possible that securities with other
maturities will be issued in the future. The U.S. Treasury securities pay
interest on a semi-annual basis, equal to a fixed percentage of the inflation-
adjusted principal amount. For example, if a Fund purchased an inflation-indexed
bond with a par value of $1,000 and a 3% real rate of return coupon (payable
1.5% semi-annually), and inflation over the first six months were 1%, the mid-
year par value of the bond would be $1,010 and the first semi-annual interest
payment would be $15.15 ($1,010 times 1.5%). If inflation during the second
half of the year resulted in the whole years' inflation equaling 3%, the end-of-
year par value of the bond would be $1,030 and the second semi-annual interest
payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than
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inflation (for example, due to changes in currency exchange rates), investors in
these securities may not be protected to the extent that the increase is not
reflected in the bond's inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
Hybrid Instruments
A hybrid instrument can combine the characteristics of securities, futures,
and options. For example, the principal amount or interest rate of a hybrid
could be tied (positively or negatively) to the price of some commodity,
currency or securities index or another interest rate (each a "benchmark"). The
interest rate or (unlike most fixed income securities) the principal amount
payable at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and increased
total return. Hybrids may not bear interest or pay dividends. The value of a
hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the
benchmark. These benchmarks may be sensitive to economic and political events,
such as commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the redemption
value of a hybrid could be zero. Thus, an investment in a hybrid may entail
significant market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal amount and
pays a fixed rate or floating rate of interest. The purchase of hybrids also
exposes a Fund to the credit risk of the issuer of the hybrids. These risks may
cause significant fluctuations in the net asset value of the Fund. Accordingly,
no Fund will invest more than 5% of its assets in hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Funds' investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.
Catastrophe Bonds
Catastrophe bonds are fixed income securities, for which the return of
principal and payment of interest is contingent on the non-occurrence of a
specific "trigger" catastrophic event, such as a hurricane or an earthquake.
They may be issued by government agencies, insurance companies, reinsurers,
special purpose corporations or other on-shore or off-shore entities. If a
trigger event causes losses exceeding a specific amount in the geographic region
and time period specified in a bond, a Fund investing in the bond may lose a
portion or all of its principal invested in the bond. If no trigger event
occurs, the Fund will recover its principal plus interest. For some catastrophe
bonds, the trigger event or losses may be based on company-wide losses, index-
portfolio losses, industry indices, or readings of scientific instruments rather
than specified actual losses. Often the catastrophe bonds provide for
extensions of maturity that are mandatory, or optional at the discretion of the
issuer, in order to process and audit loss claims in those cases where a trigger
event has, or possibly has, occurred. In addition to the specified trigger
events, catastrophe
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bonds may also expose the Fund to certain unanticipated risks including but not
limited to issuer (credit) default, adverse regulatory or jurisdictional
interpretations, and adverse tax consequences.
Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Illiquid Securities" below. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility that a Fund may be forced to
liquidate positions when it would not be advantageous to do so. Catastrophe
bonds are typically rated, and a Fund will only invest in catastrophe bonds that
meet the credit quality requirements for the Fund.
Warrants to Purchase Securities
The Funds may invest in or acquire warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a Fund to buy
additional bonds at the favorable rate or to sell the warrants at a profit. If
interest rates rise, the warrants would generally expire with no value.
A Fund will not invest more than 5% of its net assets, valued at the lower
of cost or market, in warrants to purchase securities. Warrants acquired in
units or attached to securities will be deemed without value for purposes of
this restriction.
Illiquid Securities
The Funds may invest up to 15% of their net assets in illiquid securities.
The term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the securities. Illiquid
securities are considered to include, among other things, written over-the-
counter options, securities or other liquid assets being used as cover for such
options, repurchase agreements with maturities in excess of seven days, certain
loan participation interests, fixed time deposits which are not subject to
prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), and other securities whose disposition is restricted under
the federal securities laws (other than securities issued pursuant to Rule 144A
under the 1933 Act and certain commercial paper that the Adviser has determined
to be liquid under procedures approved by the Board of Trustees).
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, others may be
illiquid, and their sale may involve substantial delays and additional costs.
Municipal Bonds
It is a policy of each Fund to have 80% of their net assets invested in
debt obligations the interest on which, in the opinion of bond counsel to the
issuer at the time of issuance, is exempt from federal income tax ("Municipal
Bonds"). In the case of the California Intermediate Municipal Bond Fund and New
York Intermediate Municipal Bond Fund, the Funds will invest, under normal
circumstances, at least 65% of their net assets in debt securities whose
interest is, in the opinion of bond counsel for the issuers at the time of
issuance, exempt from federal income tax and California or New York income tax,
respectively. The ability of a Fund to invest in securities other than Municipal
Bonds is limited by a requirement of the Internal Revenue Code that at least 50%
of a Fund's total assets be invested in Municipal Bonds at the end of each
calendar quarter. See "Taxes."
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Municipal Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and multi-
state agencies or authorities. Specifically, California and New York Municipal
Bonds generally are issued by or on behalf of the State of California and New
York, respectively, and their political subdivisions and financing authorities,
and local governments. The Municipal Bonds which the Funds may purchase
generally include general obligation bonds and limited obligation bonds (or
revenue bonds), including industrial development bonds issued pursuant to former
federal tax law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such issuer's general
revenues and not from any particular source. Limited obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Tax-exempt private activity bonds and industrial
development bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user (and/or any
guarantor).
Under the Internal Revenue Code, certain limited obligation bonds are
considered "private activity bonds" and interest paid on such bonds is treated
as an item of tax preference for purposes of calculating federal alternative
minimum tax liability.
The Funds may invest in municipal lease obligations. A lease is not a full
faith and credit obligation of the issuer and is usually backed only by the
borrowing government's unsecured pledge to make annual appropriations for lease
payments. There have been challenges to the legality of lease financing in
numerous states, and, from time to time, certain municipalities have considered
not appropriating money for lease payments. In deciding whether to purchase a
lease obligation, Funds would assess the financial condition of the borrower,
the merits of the project, the level of public support for the project, and the
legislative history of lease financing in the state. These securities may be
less readily marketable than other municipals. The Funds may also purchase
unrated lease obligations if determined by the Adviser to be of comparable
quality to rated securities in which the Fund are permitted to invest.
The Funds may seek to enhance their yield through the purchase of private
placements. These securities are sold through private negotiations, usually to
institutions or mutual funds, and may have resale restrictions. Their yields
are usually higher than comparable public securities to compensate the investor
for their limited marketability. The Funds may not invest more than 15% of
their net assets in illiquid securities, including unmarketable private
placements.
Some longer-term Municipal Bonds give the investor the right to "put" or
sell the security at par (face value) within a specified number of days
following the investor's requestusually one to seven days. This demand feature
enhances a security's liquidity by shortening its effective maturity and enables
it to trade at a price equal to or very close to par. If a demand feature
terminates prior to being exercised, the Fund would hold the longer-term
security, which could experience substantially more volatility.
The Funds may invest in municipal warrants, which are essentially call
options on Municipal Bonds. In exchange for a premium, they give the purchaser
the right, but not the obligation, to purchase a Municipal Bond in the future.
The Funds might purchase a warrant to lock in forward supply in an environment
where the current issuance of bonds is sharply reduced. Like options, warrants
may expire worthless and they may have reduced liquidity. The Funds will not
invest more than 5% of their net assets in municipal warrants.
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The Funds may invest in Municipal Bonds with credit enhancements such as
letters of credit, municipal bond insurance and Standby Bond Purchase Agreements
("SBPAs"). Letters of credit that are issued by a third party, usually a bank,
to enhance liquidity and ensure repayment of principal and any accrued interest
if the underlying Municipal Bond should default. Municipal bond insurance, which
is usually purchased by the bond issuer from a private, nongovernmental
insurance company, provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due. Insurance does not
guarantee the price of the bond or the share price of any fund. The credit
rating of an insured bond reflects the credit rating of the insurer, based on
its claims-paying ability. The obligation of a municipal bond insurance company
to pay a claim extends over the life of each insured bond. Although defaults on
insured Municipal Bonds have been low to date and municipal bond insurers have
met their claims, there is no assurance this will continue. A higher-than-
expected default rate could strain the insurer's loss reserves and adversely
affect its ability to pay claims to bondholders. The number of municipal bond
insurers is relatively small, and not all of them have the highest rating. An
SBPA is a liquidity facility provided to pay the purchase price of bonds that
cannot be re-marketed. The obligation of the liquidity provider (usually a bank)
is only to advance funds to purchase tendered bonds that cannot be remarketed
and does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to numerous
conditions, including the continued creditworthiness of the underlying borrower.
The Funds may invest in Residual Interest Bonds, which are created by
dividing the income stream provided by an underlying bond to create two
securities, one short term and one long term. The interest rate on the short-
term component is reset by an index or auction process normally every seven to
35 days. After income is paid on the short-term securities at current rates,
the residual income goes to the long-term securities. Therefore, rising short-
term interest rates result in lower income for the longer-term portion, and vice
versa. The longer-term bonds can be very volatile and may be less liquid than
other Municipal Bonds of comparable maturity. The Funds will not invest more
than 10% of their total assets in Residual Interest Bonds.
The Funds also may invest in participation interests. Participation
interests are various types of securities created by converting fixed rate bonds
into short-term, variable rate certificates. These securities have been
developed in the secondary market to meet the demand for short-term, tax-exempt
securities. The Funds will invest only in securities deemed tax-exempt by a
nationally recognized bond counsel, but there is no guarantee the interest will
be exempt because the IRS has not issued a definitive ruling on the matter.
Municipal Bonds are subject to credit and market risk. Generally, prices
of higher quality issues tend to fluctuate less with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues.
The Funds may purchase and sell portfolio investments to take advantage of
changes or anticipated changes in yield relationships, markets or economic
conditions. The Funds may also sell Municipal Bonds due to changes in the
Adviser's evaluation of the issuer or cash needs resulting from redemption
requests for Fund shares of the Funds. The secondary market for Municipal Bonds
typically has been less liquid than that for taxable debt/fixed income
securities, and this may affect the Funds' ability to sell particular Municipal
Bonds at then-current market prices, especially in periods when other investors
are attempting to sell the same securities.
Prices and yields on Municipal Bonds are dependent on a variety of factors,
including general money- market conditions, the financial condition of the
issuer, general conditions of the Municipal Bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of Municipal Bonds may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
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Obligations of issuers of Municipal Bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of interest and principal on their Municipal Bonds may be materially
affected or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for Municipal Bonds or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments might affect all or
a substantial portion of the Funds' Municipal Bonds in the same manner. In
particular, the California and New York Intermediate Municipal Bond Funds are
subject to the risks inherent in concentrating investment in a particular state
or region. The following summarizes information drawn from official statements,
and other public documents available relating to issues potentially affecting
securities offerings of the states of California and New York. PIMCO has not
independently verified the information, but has no reason to believe that it is
not correct.
. California. The California Intermediate Municipal Fund may be
affected by political, economic or regulatory developments affecting the ability
of California issuers to pay interest or repay principal. Provisions of the
California Constitution and State statutes which limit the taxing and spending
authority of California governmental entities may impair the ability of
California issuers to maintain debt service on their obligations. Future
California political and economic developments, constitutional amendments,
legislative measures, executive orders, administrative regulations, litigation
and voter initiatives could have an adverse effect on the debt obligations of
California issuers.
Certain debt obligations held by the California Intermediate Municipal Bond
Fund may be obligations of issuers which rely in whole or in substantial part on
California state revenues for the continuance of their operations and payment of
their obligations. Whether and to what extent the California Legislature will
continue to appropriate a portion of the State's General Fund to counties,
cities and their various entities, is not entirely certain. To the extent local
entities do not receive money from the State to pay for their operations and
services, their ability to pay debt service on obligations held by the
California Municipal Bond Fund may be impaired.
Certain tax-exempt securities in which the California Intermediate
Municipal Bond Fund may invest may be obligations payable solely from the
revenues of specific institutions, or may be secured by specific properties,
which are subject to provisions of California law which could adversely affect
the holders of such obligations. For example, the revenues of California health
care institutions may be subject to state laws, and California law limits the
remedies of a creditor secured by a mortgage or deed of trust on real property.
California is the most populous state in the nation with a total population
estimated at 32.9 million. The State now comprises 12.3% of the nation's
population and 12.5% of its total personal income. Its economy is broad and
diversified with major concentrations in high technology research and
manufacturing, aerospace and defense-related manufacturing, trade,
entertainment, real estate, and financial services. After experiencing strong
growth throughout much of the 1980s, from 1990-1993 the State suffered through a
severe recession, the worst since the 1930's, heavily influenced by large
cutbacks in defense/aerospace industries and military base closures and a major
drop in real estate construction. California's economy has been recovering and
growing steadily stronger since the start of 1994, to the point where the
State's economic growth is outpacing the rest of the nation. The unemployment
rate, while still higher than the national average, fell to an average of 5.9%
in 1998,
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compared to over 10% at the worst of the recession. California's
economic recovery from the recession is continuing at a strong pace. Recent
economic reports indicate that, while the rate of economic growth in California
is expected to moderate over the next year, the increases in employment and
income may exceed those of the nation as a whole. The unsettled financial
situation occurring in certain Asian economies, and its spillover effect
elsewhere, may adversely affect the State's export-related industries and,
therefore, the State's rate of economic growth.
Revenue bonds represent both obligations payable from State revenue-
producing enterprises and projects, which are not payable from the General Fund,
and conduit obligations payable only from revenues paid by private users of
facilities financed by such revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition projects,
educational facilities (including the California State University and University
of California systems), housing, health facilities, and pollution control
facilities.
In years past, because of the State's budget problems, the State's General
Obligation bonds were downgraded. In 1996, however, citing California's
improving economy and budget situation, Fitch and S&P raised their ratings from
A to A+. In October, 1997, Fitch raised its rating from A+ to AA-referring to
the State's fundamental strengths, the extent of its economic recovery and the
return of financial stability. In October 1998, Moody's raised its rating from
A1 to Aa3 citing the State's continuing economic recovery and a number of
actions taken to improve the State's credit condition, including the rebuilding
of cash and budget reserves. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the State Municipal Obligations in which the California
Intermediate Municipal Bond Fund invests.
The State is party to numerous legal proceedings, many of which normally
occur in governmental operations and which, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources.
Constitutional and statutory amendments as well as budget developments may
effect the ability of California issuers to pay interest and principal on their
obligations. The overall effect may depend upon whether a particular California
tax-exempt security is a general or limited obligation bond and on the type of
security provided for the bond. It is possible that other measures affecting
the taxing or spending authority of California or its political subdivisions may
be approved or enacted in the future.
. New York. Because the New York Intermediate Municipal Bond Fund
concentrates its investments in New York tax-exempt bonds, the Fund may be
affected significantly by economic or regulatory developments affecting the
ability of New York tax-exempt issuers to pay interest or repay principal.
Investors should be aware that certain issuers of New York tax-exempt securities
have experienced serious financial difficulties in recent years. A reoccurrence
of these difficulties may impair the ability of certain New York issuers to
maintain debt service on their obligations.
The economic and financial condition of the State also may be affected by
various financial, social, economic and political factors. Such factors can be
very complex, may vary from year to year and are frequently the result of
actions taken not only by the State and its agencies and instrumentalities, but
also by entities, such as the Federal government, that are not under the control
of the State.
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The fiscal stability of New York State is related to the fiscal stability
of the State's municipalities, its agencies and authorities (which generally
finance, construct and operate revenue-producing public benefit facilities).
This is due in part to the fact that agencies, authorities and local governments
in financial trouble often seek State financial assistance. The experience has
been that if New York City or any of the agencies or authorities suffers serious
financial difficulty, both the ability of the State, the City, the State's
political subdivisions, the agencies and the authorities to obtain financing in
the public credit markets and the market price of outstanding New York tax-
exempt securities are adversely affected.
The New York state economy has continued to expand, but growth remains
somewhat slower than in the nation overall. Although the State has added
approximately 400,000 jobs since late 1992, employment growth in the State has
been hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense and banking industries.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy and
actions of the federal government have helped to create projected budget gaps
for the State. These gaps result from a significant disparity between recurring
revenues and the costs of maintaining or increasing the level of support for
State programs. To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
The fiscal stability of the State is related to the fiscal stability of its
public authorities. Authorities have various responsibilities, including those
which finance, construct and/or operate revenue-producing public facilities.
Authorities are not subject to the constitutional restrictions on the incurrence
of debt which apply to the State itself, and may issue bonds and notes within
the amounts and restrictions set forth in their legislative authorization.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as tolls charged for use of highways, bridges or
tunnels, charges for electric power, electric and gas utility services, rentals
charged for housing units and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
authorities. Also, there are statutory arrangements providing for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to authorities. Although the State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to authorities under these arrangements, if local assistance payments are
diverted the affected localities could seek additional State assistance. Some
authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs.
S&P rates the State's general obligation bonds A, and Moody's rates the
State's general obligation bonds A2. There is no assurance that a particular
rating will continue for any given period of time or that any such rating will
not be revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the State Municipal Obligations in which the New York
Intermediate Bond Fund invests.
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Over the long term, the State and New York City face potential economic
problems. New York City accounts for a large portion of the State's population
and personal income, and New York City's financial health affects the State in
numerous ways. New York City continues to require significant financial
assistance from the State. New York City depends on State aid both to enable
it to balance its budget and to meet its cash requirements. The State could
also be affected by the ability of the City to market its securities
successfully in the public credit markets.
Each Fund may purchase custodial receipts representing the right to receive
either the principal amount or the periodic interest payments or both with
respect to specific underlying Municipal Bonds. In a typical custodial receipt
arrangement, an issuer or third party owner of Municipal Bonds deposits the
bonds with a custodian in exchange for two classes of custodial receipts. The
two classes have different characteristics, but, in each case, payments on the
two classes are based on payments received on the underlying Municipal Bonds.
In no event will the aggregate interest paid with respect to the two classes
exceed the interest paid by the underlying Municipal Bond. Custodial receipts
are sold in private placements. The value of a custodial receipt may fluctuate
more than the value of a Municipal Bond of comparable quality and maturity.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Each Fund's investment objective, as set forth in the Prospectuses under
"Investment Objectives and Policies," together with the investment restrictions
set forth below, are fundamental policies of the Fund and may not be changed
with respect to a Fund without shareholder approval by vote of a majority of the
outstanding shares of that Fund. Under these restrictions a Fund may not:
(1) invest in a security if, as a result of such investment, more than 25% of
its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry,
or in industry, or in industrial development revenue bonds based, directly
or indirectly, on the credit of private entities in any one industry;
except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (or
repurchase agreements with respect thereto). Investments of the Funds in
utilities, gas, electric, water and telephone companies will be considered
as being in separate industries;
(2) for the Short Duration Municipal Income Fund, with respect to 75% of its
assets, invest in a security if, as a result of such investment, more than
5% of its total assets (taken at market value at the time of such
investment) would be invest in the securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities. For the purpose
of this restriction, each state and each separate political subdivision,
agency, authority or instrumentality of such state, each multi-state agency
or authority, and each guarantor, if any, are treated as separate issuers
of Municipal Bonds;
(3) for the Short Duration Municipal Income Funds, with respect to 75% of its
assets, invest in a security if, as a result of such investment, it would
hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any one issuer;
(4) purchase or sell real estate, although it may purchase securities secured
by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein;
(5) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit a Fund, subject to
restrictions described in the Prospectuses and elsewhere in this Statement
of Additional Information, from purchasing, selling or entering into
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futures contracts, options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate, securities-
related or foreign currency-related hedging instrument, including swap
agreements and other derivative instruments, subject to compliance with any
applicable provisions of the federal securities or commodities laws;
(6) borrow money, issue senior securities, or pledge, mortgage or hypothecate
its assets, except that a Fund may (i) borrow from banks or enter into
reverse repurchase agreements, or employ similar investment techniques, and
pledge its assets in connection therewith, but only if immediately after
each borrowing there is asset coverage of 300% and (ii) enter into
transactions in options, futures, options on futures, and other derivative
instruments as described in the Prospectuses and in this Statement of
Additional Information (the deposit of assets in escrow in connection with
the writing of covered put and call options and the purchase of securities
on a when-issued or delayed delivery basis, collateral arrangements with
respect to initial or variation margin deposits for futures contracts and
commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of a Fund's assets);
(7) lend any funds or other assets, except that a Fund may, consistent with its
investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances
and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and
(c) lend its portfolio securities in an amount not to exceed one-third of
the value of its total assets, provided such loans are made in accordance
with applicable guidelines established by the Securities and Exchange
Commission and the Trustees of the Trust;
(8) act as an underwriter of securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under the federal securities laws;
(9) maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except on such conditions as
may be set forth in the Prospectuses and in this Statement of Additional
Information.
Non-Fundamental Investment Restrictions
Each Fund is also subject to the following non-fundamental restrictions and
policies (which may be changed without shareholder approval) relating to the
investment of its assets and activities. Unless otherwise indicated, a Fund may
not:
(A) invest more than 15% of the net assets of a (taken at market value at the
time of the investment) in "illiquid securities," illiquid securities being
defined to include securities subject to legal or contractual restrictions
on resale (which may include private placements), repurchase agreements
maturing in more than seven days, certain loan participation interests,
fixed time deposits which are not subject to prepayment or provide for
withdrawal penalties upon prepayment (other than overnight deposits),
certain options traded over the counter that a Fund has purchased,
securities or other liquid assets being used to cover such options a Fund
has written, securities for which market quotations are not readily
available, or other securities which legally or in the Adviser's opinion
may be deemed illiquid (other than securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper that PIMCO
has determined to be liquid under procedures approved by the Board of
Trustees);
(B) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but
it may make margin deposits in connection with covered transactions in
options, futures, options on futures and short positions;
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(C) invest more than 5% of the assets of a Fund (taken at market value at the
time of investment) in any combination of interest only, principal only, or
inverse floating rate securities;
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes
if it is repaid within sixty days and is not extended or renewed.
Notwithstanding the provisions of fundamental investment restriction (7)(a)
above, a Fund may borrow money for temporary administrative purposes. To the
extent that borrowings for temporary administrative purposes exceed 5% of the
total assets of a Fund, such excess shall be subject to the 300% asset coverage
requirement of that restriction.
To the extent a Fund covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the segregation of assets
determined to be liquid in accordance with procedures adopted by the Trustees,
equal in value to the amount of the Fund's commitment to repurchase, such an
agreement will not be considered a "senior security" by the Fund and therefore
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by the Fund.
The staff of the SEC has taken the position that purchased over-the-counter
("OTC") options and the assets used as cover for written OTC options are
illiquid securities. Therefore, the Funds have adopted an investment policy
pursuant to which a Fund will not purchase or sell OTC options if, as a result
of such transactions, the sum of the market value of OTC options currently
outstanding which are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding which were sold by
the Fund and margin deposits on the Fund's existing OTC options on futures
contracts exceeds 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are otherwise
not readily marketable. However, if an OTC option is sold by the Fund to a
primary U.S. Government securities dealer recognized by the Federal Reserve Bank
of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities equal to
the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
is not a fundamental policy of the Funds and may be amended by the Trustees
without the approval of shareholders. However, the Funds will not change or
modify this policy prior to the change or modification by the SEC staff of its
position.
Unless otherwise indicated, all limitations applicable to Fund investments
(as stated above and elsewhere in this Statement of Additional Information)
apply only at the time a transaction is entered into. Any subsequent change in a
rating assigned by any rating service to a security (or, if unrated, deemed to
be of comparable quality), or change in the percentage of Fund assets invested
in certain securities or other instruments, or change in the average duration of
a Fund's investment portfolio, resulting from market fluctuations or other
changes in a Fund's total assets will not require a Fund to dispose of an
investment until the Adviser determines that it is practicable to sell or close
out the investment without undue market or tax consequences to the Fund. In the
event that ratings services assign different ratings to the same security, the
Adviser will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the several assigned
ratings.
The Funds interpret their policies with respect to borrowing and lending to
permit such activities as may be lawful for the Funds, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom pursuant
to exemptive order of the SEC. The Funds have filed an application seeking an
order from the SEC to permit the Funds to enter into transactions among
themselves with respect to the investment of daily cash balances of the Funds in
shares of the PIMCO Money Market Fund, as well as the use of daily excess cash
balances of the PIMCO Money Market Fund in inter-fund lending transactions with
the other Funds for temporary cash management purposes. The interest paid by a
Fund in such an arrangement will be less than that otherwise payable for an
overnight loan, and will be
28
<PAGE>
in excess of the overnight rate the PIMCO Money Market Fund could otherwise earn
as lender in such a transaction.
MANAGEMENT OF THE TRUST
Trustees and Officers
The business of the Trust is managed under the direction of the Trust's
Board of Trustees. Subject to the provisions of the Trust's Declaration of
Trust, its By-Laws and Massachusetts law, the Trustees have all powers necessary
and convenient to carry out this responsibility, including the election and
removal of the Trust's officers.
The Trustees and Executive Officers of the Trust, their ages, their
business address and a description of their principal occupations during the
past five years are listed below. Unless otherwise indicated, the address of
all persons below is 840 Newport Center Drive, Suite 300, Newport Beach,
California 92660.
<TABLE>
<CAPTION>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Brent R. Harris* Chairman of the Board and Managing Director, PIMCO; Board of Governors,
Age 39 Trustee Investment Company Institute; Chairman and
Director, PIMCO Commercial Mortgage Securities
Trust, Inc.; Chairman and Trustee, PIMCO
Variable Insurance Trust.
R. Wesley Burns* President and Trustee Managing Director, PIMCO; President and
Age 39 Director, PIMCO Commercial Mortgage
Securities Trust, Inc.; President and
Trustee, PIMCO Variable Insurance Trust;
Executive Vice President, PIMCO Funds:
Multi-Manager Series. Formerly Executive Vice
President, PIMCO.
Guilford C. Babcock Trustee Associate Professor of Finance, University of
1575 Circle Drive Southern California; Director, PIMCO
San Marino, California Commercial Mortgage Securities Trust, Inc.;
91108 Trustee, PIMCO Variable Insurance Trust;
Age 68 Director, Growth Fund of America and
Fundamental Investors Fund of the Capital
Group; Director, Good Hope Medical Foundation.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Vern O. Curtis Trustee Private Investor; Director, PIMCO Commercial
14158 N.W. Bronson Creek Drive Mortgage Securities Trust, Inc.; Trustee,
Portland, Oregon PIMCO Variable Insurance Trust; Director,
97229 American Office Park Properties, Inc., a Real
Age 65 Estate Investment Trust; Director, Fresh
Choice, Inc. (restaurant company). Formerly
charitable work, The Church of Jesus Christ
of Latter Day Saints.
Thomas P. Kemp Trustee Private Investor; Director, PIMCO Commercial
1141 Marine Drive Mortgage Securities Trust, Inc.; Trustee,
Laguna Beach, California PIMCO Variable Insurance Trust. Formerly
92651 Co-Chairman, U.S. Committee to Assist Russian
Age 68 Reform; Director, Union Financial Corp.;
Senior Consultant, World Cup 1994 Organizing
Committee.
William J. Popejoy Trustee Director, PacPro (vinyl assembly products;
29 Chatham Court formerly Western Printing); Director, PIMCO
Newport Beach, California Commercial Mortgage Securities Trust, Inc.;
92660 Trustee, PIMCO Variable Insurance Trust.
Age 61 Formerly Director, California State Lottery;
Chief Executive Officer, Orange County,
California.
Michael G. Dow Senior Vice President Account Manager, PIMCO. Formerly Fixed
Age 35 Income Specialist, Salomon Brothers, Inc.;
Vice President Operations, Citibank NA Global
Consumer Banking Group.
William H. Gross Senior Vice President Managing Director, PIMCO; Senior Vice
Age 55 President, PIMCO Variable Insurance Trust.
Margaret Isberg Senior Vice President Managing Director, PIMCO.
Age 42
Jeffrey M. Sargent Senior Vice President Vice President and Manager of Investment
Age 36 Operations Shareholder Services, PIMCO; Vice
President, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds:
Multi-Manager Series and PIMCO Variable
Insurance Trust.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO. Formerly Vice
Age 47 President, PIMCO.
Raymond C. Hayes Vice President Account Manager, PIMCO. Formerly Marketing
Age 54 Director, Pacific Financial Asset Management
Corporation.
Thomas J. Kelleher, III Vice President Vice President, PIMCO. Previously associated
Age 48 with Delaware Trust, Mellon Bank and Girard
Trusts (bank trust departments).
Henrik P. Larsen Vice President Manager, Fund Administration, PIMCO; Vice
Age 29 President, PIMCO Commercial Mortgage
Securities Trust, Inc. and PIMCO Variable
Insurance Trust. Formerly Supervisor, PIMCO.
Daniel T. Ludwig Vice President Account Manager, PIMCO. Formerly Vice
Age 40 President, Fidelity Investments;
Institutional Sales Representative, CS First
Boston.
Andre Mallegol Vice President Vice President, PIMCO. Formerly associated
Age 33 with Fidelity Investments Institutional
Services Company.
James F. Muzzy Vice President Managing Director, PIMCO; Senior Vice
Age 60 President, PIMCO Variable Insurance Trust.
Douglas J. Ongaro Vice President Account Manager, PIMCO. Formerly Regional
Age 38 Marketing Manager, Charles Schwab & Co., Inc.
David J. Pittman Vice President Vice President, PIMCO. Formerly a senior
Age 51 executive with Bank of America, the Northern
Trust Co. and NationsBank.
Mark A. Romano Vice President Vice President, PIMCO. Previously associated
Age 41 with Wells Fargo's institutional money
management group and First Interstate's
Pacifica family of mutual funds.
William S. Thompson, Jr. Vice President Chief Executive Officer and Managing
Age 54 Director, PIMCO; Senior Vice President, PIMCO
Variable Insurance Trust. Formerly Managing
Director, Salomon Brothers, Inc.
</TABLE>
31
<PAGE>
<TABLE>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John P. Hardaway Treasurer Vice President and Manager of Investment
Age 42 Operations Accounting, PIMCO; Treasurer,
PIMCO Commercial Mortgage Securities Trust,
Inc., PIMCO Funds: Multi-Manager Series and
PIMCO Variable Insurance Trust.
Garlin G. Flynn Secretary Specialist, PIMCO; Secretary, PIMCO
Age 53 Commercial Mortgage Securities Trust, Inc.
and PIMCO Variable Insurance Trust; Assistant
Secretary, PIMCO Funds: Multi-Manager Series.
Formerly Senior Fund Administrator, PIMCO;
Senior Mutual Fund Analyst, PIMCO Advisors
Institutional Services.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Financial
Age 35 Reporting and Taxation, PIMCO; Assistant
Treasurer, PIMCO Funds: Multi-Manager Series,
PIMCO Commercial Mortgage Securities Trust,
Inc. and PIMCO Variable Insurance Trust.
Formerly, Manager of Fund Taxation, PIMCO;
Director of Financial Reporting, Carl I.
Brown & Co.; Tax Manager, Price Waterhouse
LLP.
Michael J. Willemsen Assistant Secretary Manager, PIMCO; Assistant Secretary, PIMCO
Age 39 Commercial Mortgage Securities Trust, Inc.
and PIMCO Variable Insurance Trust. Formerly
Project Lead, PIMCO.
</TABLE>
___________________
*Each of Mr. Harris and Mr. Burns is an "interested person" of the Trust
(as that term is defined in the 1940 Act) because of his affiliations with
PIMCO.
Compensation Table
The following table sets forth information regarding compensation received by
the Trustees for the fiscal year ended March 31, 1999.
32
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Compensation Trust and Fund Complex
Name and Position from Trust/1/ Paid to Trustees/2/
- --------------------------- ------------ -----------------------
<S> <C> <C>
Guilford C. Babcock $58,000 $78,500
Trustee
Vern O. Curtis $59,500 $81,000
Trustee
Thomas P. Kemp $58,000 $78,500
Trustee
William J. Popejoy $58,000 $78,500
Trustee
</TABLE>
1 Each Trustee, other than those affiliated with the Adviser or its affiliates,
receives an annual retainer of $45,000 plus $3,000 for each Board of Trustees
meeting attended in person and $500 for each meeting attended telephonically,
plus reimbursement of related expenses. In addition, a Trustee serving as a
Committee Chair, other than those affiliated with the Adviser or its
affiliates, receives an additional annual retainer of $1,500. For the fiscal
year ended March 31, 1999, the unaffiliated Trustees as a group received
compensation in the amount of $233,500.
2 Each Trustee also serves as a Director of PIMCO Commercial Mortgage Securities
Trust, Inc., a registered closed-end management investment company, and as a
Trustee of PIMCO Variable Insurance Trust, a registered open-end management
investment company. For their services to PIMCO Commercial Mortgage
Securities Trust, Inc., the Directors listed above received an annual retainer
of $6,000 plus $1,000 for each Board of Directors meeting attended in person
and $500 for each meeting attended telephonically, plus reimbursement of
related expenses. In addition, a Director serving as a Committee Chair, other
than those affiliated with the Adviser or its affiliates, receives an
additional annual retainer of $500. For the one year period ended March 31,
1999, the unaffiliated Directors as a group received compensation in the
amount of $42,500.
The Trustees listed above, for their services as Trustees of PIMCO Variable
Insurance Trust, receive an annual retainer of $4,000 plus $1,500 for each
Board of Trustees meeting attended in person and $500 for each meeting
attended telephonically, plus reimbursement of related expenses. In addition,
a Trustee serving as a Committee Chair, other than those affiliated with the
Adviser or its affiliates, receives an additional annual retainer of $500.
For the one year period ended March 31, 1999, the unaffiliated Trustees as a
group received compensation in the amount of $40,500.
Investment Adviser
PIMCO serves as investment adviser to the Funds pursuant to an investment
advisory contract ("Advisory Contract") between PIMCO and the Trust. PIMCO is a
subsidiary partnership of PIMCO Advisors. The general partners of PIMCO
Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings L.P. ("PAH").
PIMCO Partners, G.P. is a general partnership between PIMCO Holding LLC, a
Delaware limited liability company and an indirect wholly-owned subsidiary of
Pacific Life Insurance Company, and PIMCO Partners LLC, a California limited
liability company controlled by the current Managing Directors and two former
Managing Directors of PIMCO. PIMCO Partners, G.P. is the sole general partner of
PAH.
PIMCO is responsible for making investment decisions and placing orders for
the purchase and sale of the Trust's investments directly with the issuers or
with brokers or dealers selected by it in its discretion. See "Portfolio
Transactions." PIMCO also furnishes to the Board of Trustees, which has overall
33
<PAGE>
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of each Fund.
Under the terms of the Advisory Contract, PIMCO is obligated to manage the
Funds in accordance with applicable laws and regulations. The investment
advisory services of PIMCO to the Trust are not exclusive under the terms of the
Advisory Contract. PIMCO is free to, and does, render investment advisory
services to others. The current Advisory Contract was approved by the Board of
Trustees, including a majority of the Trustees who are not parties to the
Advisory Contract or interested persons of such parties ("Independent
Trustees"), at a meeting held on November 22, 1994, as supplemented at meetings
held on October 1, 1995, November 21, 1995, February 27, 1996, November 19,
1996, January 14, 1997, May 27, 1997, February 24, 1998, August 25, 1998, and
May 25, 1999 and was last approved by the Trustees on August 25, 1998 and by
shareholders of all then-operational Funds on October 17, 1994.
The Advisory Contract will continue in effect on a yearly basis provided
such continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Trust or by the Board of Trustees and (ii)
by a majority of the Independent Trustees. The Advisory Contract may be
terminated without penalty by vote of the Trustees or the shareholders of the
Trust, or by the Adviser, on 60 days' written notice by either party to the
contract and will terminate automatically if assigned.
The Adviser currently receives a monthly investment advisory fee from each
Fund at an annual rate based on average daily net assets of the Funds as
follows:
Advisory
Fund Fee Rate
- ---- --------
Short Duration Municipal Income Fund 0.20%
California Intermediate Municipal Bond 0.25%
New York Intermediate Municipal Bond 0.25%
Fund Administrator
PIMCO also serves as Administrator to the Funds pursuant to an
administration agreement (the "Administration Agreement") with the Trust. PIMCO
provides the Funds with certain administrative and shareholder services
necessary for Fund operations and is responsible for the supervision of other
Fund service providers. PIMCO may in turn use the facilities or assistance of
its affiliates to provide certain services under the Administration Agreement,
on terms agreed between PIMCO and such affiliates. The administrative services
provided by PIMCO include but are not limited to: (1) shareholder servicing
functions, including preparation of shareholder reports and communications, (2)
regulatory compliance, such as reports and filings with the SEC and state
securities commissions, and (3) general supervision of the operations of the
Funds, including coordination of the services performed by the Funds' transfer
agent, custodian, legal counsel, independent accountants, and others. PIMCO (or
an affiliate of PIMCO) also furnishes the Funds with office space facilities
required for conducting the business of the Funds, and pays the compensation of
those officers, employees and Trustees of the Trust affiliated with PIMCO. In
addition, PIMCO, at its own expense, arranges for the provision of legal, audit,
custody, transfer agency and other services for the Funds, and is responsible
for the costs of registration of the Trust's shares and the printing of
prospectuses and shareholder reports for current shareholders. PIMCO has
contractually agreed to provide these services, and to bear these expenses, at
the following rates for each Fund (each expressed as a percentage of the Fund's
average daily net assets attributable to its classes of shares on an annual
basis):
34
<PAGE>
<TABLE>
<CAPTION>
Administrative Fee Rate
-----------------------------------------------------
Institutional and
Fund Administrative Class Class A, B and C
- ---- -------------------- ----------------
<S> <C> <C>
Short Duration Municipal Income Fund 0.19% 0.35%
California Intermediate Municipal Bond 0.24% 0.35%
New York Intermediate Municipal Bond 0.24% 0.35%
</TABLE>
Except for the expenses paid by PIMCO, the Trust bears all costs of its
operations. The Funds are responsible for: (i) salaries and other compensation
of any of the Trust's executive officers and employees who are not officers,
directors, stockholders, or employees of PIMCO or its subsidiaries or
affiliates; (ii) taxes and governmental fees; (iii) brokerage fees and
commissions and other portfolio transaction expenses; (iv) costs of borrowing
money, including interest expenses; (v) fees and expenses of the Trustees who
are not "interested persons" of PIMCO or the Trust, and any counsel retained
exclusively for their benefit; (vi) extraordinary expenses, including costs of
litigation and indemnification expenses; (vii) expenses, such as organizational
expenses, which are capitalized in accordance with generally accepted accounting
principles; and (viii) any expenses allocated or allocable to a specific class
of shares ("Class-specific expenses").
Class-specific expenses include distribution and service fees payable with
respect to different classes of shares and administrative fees as described
above, and may include certain other expenses as permitted by the Trust's
Amended and Restated Multi-Class Plan adopted pursuant to Rule 18f-3 under the
1940 Act and subject to review and approval by the Trustees.
The Administration Agreement may be terminated by the Trustees, or by a
vote of a majority of the outstanding voting securities of the Trust, Fund, or
Class as applicable, at any time on 60 days' written notice. Following the
expiration of the one-year period commencing with the effectiveness of the
Administration Agreement, it may be terminated by PIMCO, also on 60 days'
written notice.
The Administration Agreement is subject to annual approval by the Board,
including a majority of the Trust's Independent Trustees (as that term is
defined in the 1940 Act). The current Administration Agreement was approved by
the Board of Trustees, including all of the Independent Trustees at a meeting
held on February 24, 1998, as supplemented on August 25, 1998, February 23, 1999
and May 25, 1999. In approving the Administration Agreement, the Trustees
determined that: (1) the Administration Agreement is in the best interests of
the Funds and their shareholders; (2) the services to be performed under the
Agreement are services required for the operation of the Funds; (3) PIMCO is
able to provide, or to procure, services for the Funds which are at least equal
in nature and quality to services that could be provided by others; and (4) the
fees to be charged pursuant to the Agreement are fair and reasonable in light of
the usual and customary charges made by others for services of the same nature
and quality.
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distributors LLC (the "Distributor") serves as the principal
underwriter of each class of the Trust's shares pursuant to a distribution
contract ("Distribution Contract") with the Trust which is subject to annual
approval by the Board. The Distributor is a wholly owned subsidiary of PIMCO
Advisors. The Distributor, located at 2187 Atlantic Street, Stamford,
Connecticut 06902, is a broker-dealer registered with the Securities and
Exchange Commission. The Distribution Contract is terminable with respect to a
Fund or class without penalty, at any time, by the Fund or class by not more
than 60 days' nor less than 30 days' written notice to the Distributor, or by
the Distributor upon not more than 60 days' nor less than 30 days' written
notice to the Trust. The Distributor is not obligated to sell any specific
amount of Trust shares.
35
<PAGE>
The Distribution Contract will continue in effect with respect to each Fund
and each class of shares thereof for successive one-year periods, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Trustees who are not interested persons of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the Distribution
Contract, the Administration Agreement or the Distribution and/or Servicing
Plans described below; and (ii) by the vote of a majority of the entire Board of
Trustees cast in person at a meeting called for that purpose. If the
Distribution Contract is terminated (or not renewed) with respect to one or more
Funds or classes thereof, it may continue in effect with respect to any class of
any Fund as to which it has not been terminated (or has been renewed).
The Trust offers up to eight classes of shares: Class A, Class B, Class C,
Class D, Class J, Class K, the Institutional Class and the Administrative Class.
Shares of the Funds are available in Class A, Class B, Class C, the
Institutional Class and the Administrative Class.
Class A, Class B and Class C shares of the Trust are offered through firms
("participating brokers") which are members of the National Association of
Securities Dealers, Inc. ("NASD"), and which have dealer agreements with the
Distributor, or which have agreed to act as introducing brokers for the
Distributor ("introducing brokers").
Institutional Class shares are offered primarily for direct investment by
investors such as pension and profit sharing plans, employee benefit trusts,
endowments, foundations, corporations and high net worth individuals.
(Institutional Class shares may also be offered through certain financial
intermediaries that charge their customers transaction or other fees with
respect to the customer's investment in the Funds.) Administrative Class shares
are offered primarily through employee benefit plans alliances, broker-dealers,
and other intermediaries, and each Fund pays service or distribution fees to
such entities for services they provide to Administrative Class shareholders.
The Trust has adopted an Amended and Restated Multi-Class Plan ("Multi-
Class Plan") pursuant to Rule 18f-3 under the 1940 Act. Under the Multi-Class
Plan, shares of each class of each Fund represent an equal pro rata interest in
such Fund and, generally, have identical voting, dividend, liquidation, and
other rights, preferences, powers, restrictions, limitations, qualifications and
terms and conditions, except that: (a) each class has a different designation;
(b) each class of shares bears any class-specific expenses allocated to it; and
(c) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its distribution or service arrangements,
and each class has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class.
Each class of shares bears any class specific expenses allocated to such
class, such as expenses related to the distribution and/or shareholder servicing
of such class. In addition, each class may, at the Trustees' discretion, also
pay a different share of other expenses, not including advisory or custodial
fees or other expenses related to the management of the Trust's assets, if these
expenses are actually incurred in a different amount by that class, or if the
class receives services of a different kind or to a different degree than the
other classes. All other expenses are allocated to each class on the basis of
the net asset value of that class in relation to the net asset value of the
particular Fund. In addition, each class may have a differing sales charge
structure, and differing exchange and conversion features.
Contingent Deferred Sales Charge and Initial Sales Charge
As described in the Class A, B and C Prospectus under the caption
"Investment Options (Class A, B and C Shares)," a contingent deferred sales
charge is imposed upon certain redemptions of the Class A, Class B and Class C
shares. No contingent deferred sales charge is currently imposed upon
redemptions of Class D, Institutional Class or Administrative Class shares.
Because contingent deferred sales charges are calculated on a Fund-by-Fund
basis, shareholders should consider whether to exchange shares of one Fund for
shares of another Fund prior to redeeming an investment if such an exchange
would reduce the contingent deferred sales charge applicable to such
redemptions.
36
<PAGE>
In certain cases described in the Class A, B and C Prospectus, the
contingent deferred sales charge is waived on redemptions of Class A, Class B or
Class C shares for certain classes of individuals or entities on account of (i)
the fact that the Trust's sales-related expenses are lower for certain of such
classes than for classes for which the contingent deferred sales charge is not
waived, (ii) waiver of the contingent deferred sales charge with respect to
certain of such classes is consistent with certain Internal Revenue Code
policies concerning the favored tax treatment of accumulations, and (iii) with
respect to certain of such classes, considerations of fairness, and competitive
and administrative factors.
As described in the Class A, B and C Prospectus under the caption
"Investment Options (Class A, B and C Shares)," Class A shares of the Trust
(except with respect to the Money Market Fund) are sold pursuant to an initial
sales charge, which declines as the amount of purchase reaches certain defined
levels.
Distribution and Servicing Plans for Class A, Class B and Class C Shares
As stated in the text of the Class A, B and C Prospectus under the caption
"Management of the Trust--Distribution and Servicing (12b-1) Plans," Class A,
Class B and Class C shares of the Trust are continuously offered through
participating brokers which are members of the NASD and which have dealer
agreements with the Distributor, or which have agreed to act as introducing
brokers.
Pursuant to separate Distribution and Servicing Plans for Class A, Class B
and Class C shares (the "Retail Plans"), as described in the Class A, B and C
Prospectus, in connection with the distribution of Class B and Class C shares of
the Trust, the Distributor receives certain distribution fees from the Trust,
and in connection with personal services rendered to Class A, Class B and Class
C shareholders of the Trust and the maintenance of shareholder accounts, the
Distributor receives certain servicing fees from the Trust. Subject to the
percentage limitations on these distribution and servicing fees set forth below,
the distribution and servicing fees may be paid with respect to services
rendered and expenses borne in the past with respect to Class A, Class B and
Class C shares as to which no distribution and servicing fees were paid on
account of such limitations. As described in the Class A, B and C Prospectus,
the Distributor pays (i) all or a portion of the distribution fees it receives
from the Trust to participating and introducing brokers, and (ii) all or a
portion of the servicing fees it receives from the Trust to participating and
introducing brokers, certain banks and other financial intermediaries.
The Distributor makes distribution and servicing payments to participating
brokers and servicing payments to certain banks and other financial
intermediaries in connection with the sale of Class B and Class C shares and
servicing payments to participating brokers, certain banks and other financial
intermediaries in connection with the sale of Class A shares. In the case of
Class A shares, these parties are also compensated based on the amount of the
front-end sales charge reallowed by the Distributor, except in cases where Class
A shares are sold without a front-end sales charge (although the Distributor may
pay brokers additional compensation in connection with sales of Class A shares
without a sales charge). In the case of Class B shares, participating brokers
and other financial intermediaries are compensated by an advance of a sales
commission by the Distributor. In the case of Class C shares, part or all of the
first year's distribution and servicing fee is generally paid at the time of
sale. Pursuant to a Distribution Contract with the Trust, with respect to each
Fund's Class A, Class B and Class C shares, the Distributor bears various other
promotional and sales related expenses, including the cost of printing and
mailing prospectuses to persons other than current shareholders.
The Retail Plans were adopted pursuant to Rule 12b-l under the 1940 Act and
are of the type known as "compensation" plans. This means that, although the
Trustees of the Trust are expected to take into account the expenses of the
Distributor and its predecessors in their periodic review of the Retail Plans,
the fees are payable to compensate the Distributor for services rendered even if
the amount paid exceeds the Distributor's expenses.
The distribution fee applicable to Class B and Class C shares may be spent
by the Distributor on any activities or expenses primarily intended to result in
the sale of Class B or Class C shares, respectively,
37
<PAGE>
including compensation to, and expenses (including overhead and telephone
expenses) of, financial consultants or other employees of the Distributor or of
participating or introducing brokers who engage in distribution of Class B or
Class C shares, printing of prospectuses and reports for other than existing
Class B or Class C shareholders, advertising, and preparation, printing and
distribution of sales literature. The servicing fee, applicable to Class A,
Class B and Class C shares of the Trust, may be spent by the Distributor on
personal services rendered to shareholders of the Trust and the maintenance of
shareholder accounts, including compensation to, and expenses (including
telephone and overhead expenses) of, financial consultants or other employees of
participating or introducing brokers, certain banks and other financial
intermediaries who aid in the processing of purchase or redemption requests or
the processing of dividend payments, who provide information periodically to
shareholders showing their positions in a Fund's shares, who forward
communications from the Trust to shareholders, who render ongoing advice
concerning the suitability of particular investment opportunities offered by the
Trust in light of the shareholders' needs, who respond to inquiries from
shareholders relating to such services, or who train personnel in the provision
of such services. Distribution and servicing fees may also be spent on interest
relating to unreimbursed distribution or servicing expenses from prior years.
Many of the Distributor's sales and servicing efforts involve the Trust as
a whole, so that fees paid by Class A, Class B or Class C shares of any Fund may
indirectly support sales and servicing efforts relating to the other Funds'
shares of the same class. In reporting its expenses to the Trustees, the
Distributor itemizes expenses that relate to the distribution and/or servicing
of a single Fund's shares, and allocates other expenses among the Funds based on
their relative net assets. Expenses allocated to each Fund are further allocated
among its classes of shares annually based on the relative sales of each class,
except for any expenses that relate only to the sale or servicing of a single
class. The Distributor may make payments to brokers (and with respect to
servicing fees only, to certain banks and other financial intermediaries) of up
to the following percentages annually of the average daily net assets
attributable to shares in the accounts of their customers or clients:
<TABLE>
<CAPTION>
Servicing Distribution
Class A Fee Fee
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<S> <C> <C>
All Funds 0.25% None
Class B(1)
- -------------------------------------------------------------------------------
All Funds 0.25% 0.75%
Class C
- -------------------------------------------------------------------------------
Short Duration
Municipal Income Fund 0.25% 0.30%
All other Funds(2) 0.25% 0.50%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
1. Payable only with respect to shares outstanding for one year or more.
The Distributor may from time to time pay additional cash bonuses or other
incentives to selected participating brokers in connection with the sale or
servicing of Class A, Class B and Class C shares of the Funds. On some
occasions, such bonuses or incentives may be conditioned upon the sale of a
specified minimum dollar amount of the shares of a Fund and/or all of the Funds
together or a particular class of shares, during a specific period of time. The
Distributor currently expects that such additional bonuses or incentives will
not exceed .50% of the amount of any sale. Pacific Investment Management (in its
capacity
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as administrator) may also pay participating brokers and other intermediaries
for sub-transfer agency and other services.
If in any year the Distributor's expenses incurred in connection with the
distribution of Class B and Class C shares and, for Class A, Class B and Class C
Shares, in connection with the servicing of shareholders and the maintenance of
shareholder accounts, exceed the distribution and/or servicing fees paid by the
Trust, the Distributor would recover such excess only if the Retail Plan with
respect to such class of shares continues to be in effect in some later year
when the distribution and/or servicing fees exceed the Distributor's expenses.
The Trust is not obligated to repay any unreimbursed expenses that may exist at
such time, if any, as the relevant Retail Plan terminates.
Each Retail Plan may be terminated with respect to any Fund to which the
Plan relates by vote of a majority of the Trustees who are not interested
persons of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or the Distribution
Contract ("Disinterested Trustees") or by vote of a majority of the outstanding
voting securities of the relevant class of that Fund. Any change in any Retail
Plan that would materially increase the cost to the class of shares of any Fund
to which the Plan relates requires approval by the affected class of
shareholders of that Fund. The Trustees review quarterly written reports of such
costs and the purposes for which such costs have been incurred. Each Retail
Plan may be amended by vote of the Disinterested Trustees cast in person at a
meeting called for the purpose. As long as the Retail Plans are in effect,
selection and nomination of those Trustees who are not interested persons of the
Trust shall be committed to the discretion of such Disinterested Trustees.
The Retail Plans will continue in effect with respect to each Fund and each
class of shares thereof for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a majority of the
Disinterested Trustees and (ii) by the vote of a majority of the entire Board of
Trustees cast in person at a meeting called for that purpose.
The Retail Plans went into effect for the Trust in January 1997. If a
Retail Plan is terminated (or not renewed) with respect to one or more Funds, it
may continue in effect with respect to any class of any Fund as to which it has
not been terminated (or has been renewed).
The Trustees believe that the Retail Plans will provide benefits to the
Trust. The Trustees believe that the Retail Plans will result in greater sales
and/or fewer redemptions of Trust shares, although it is impossible to know for
certain the level of sales and redemptions of Trust shares that would occur in
the absence of the Retail Plans or under alternative distribution schemes.
Although the Funds' expenses are essentially fixed, the Trustees believe that
the effect of the Retail Plans on sales and/or redemptions may benefit the Trust
by reducing Fund expense ratios and/or by affording greater flexibility to
Portfolio Managers. From time to time, expenses of the Distributor incurred in
connection with the sale of Class B and Class C shares of the Funds, and in
connection with the servicing of Class B and Class C shareholders of the Funds
and the maintenance of shareholder accounts, may exceed the distribution and
servicing fees collected by the Distributor. The Trustees consider such
unreimbursed amounts, among other factors, in determining whether to cause the
Funds to continue payments of distribution and servicing fees in the future with
respect to Class B and Class C shares.
Distribution and Administrative Services Plans for Administrative Class Shares
The Trust has adopted an Administrative Services Plan and an Administrative
Distribution Plan (together, the "Administrative Plans") with respect to the
Administrative Class shares of each Fund.
Under the terms of the Administrative Distribution Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each Fund, in an amount up to 0.25% on an annual basis of the
average daily net assets of that class, financial intermediaries for costs and
expenses incurred in connection with the distribution and marketing of
Administrative Class shares and/or the
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provision of certain shareholder services to its customers that invest in
Administrative Class shares of the Funds. Such services may include, but are not
limited to, the following: providing facilities to answer questions from
prospective investors about a Fund; receiving and answering correspondence,
including requests for prospectuses and statements of additional information;
preparing, printing and delivering prospectuses and shareholder reports to
prospective shareholders; complying with federal and state securities laws
pertaining to the sale of Administrative Class shares; and assisting investors
in completing application forms and selecting dividend and other account
options.
Under the terms of the Administrative Services Plan, the Trust is permitted
to reimburse, out of the assets attributable to the Administrative Class shares
of each Fund, in an amount up to 0.25% on an annual basis of the average daily
net assets of that class, financial intermediaries that provide certain
administrative services for Administrative Class shareholders. Such services
may include, but are not limited to, the following functions: receiving,
aggregating and processing shareholder orders; furnishing shareholder sub-
accounting; providing and maintaining elective shareholder services such as
check writing and wire transfer services; providing and maintaining pre-
authorized investment plans; communicating periodically with shareholders;
acting as the sole shareholder of record and nominee for shareholders;
maintaining accounting records for shareholders; answering questions and
handling correspondence from shareholders about their accounts; and performing
similar account administrative services.
The same entity may be the recipient of fees under both the Administrative
Class Distribution Plan and the Administrative Services Plan, but may not
receive fees under both plans with respect to the same assets. Fees paid
pursuant to either Plan may be paid for shareholder services and the maintenance
of shareholder accounts, and therefore may constitute "service fees" for
purposes of applicable rules of the National Association of Securities Dealers,
Inc. Each Plan has been adopted in accordance with the requirements of Rule
12b-1 under the 1940 Act and will be administered in accordance with the
provisions of that rule, except that shareholders will not have the voting
rights set forth in Rule 12b-1 with respect to the Administrative Services Plan
that they will have with respect to the Administrative Distribution Plan.
Each Administrative Plan provides that it may not be amended to materially
increase the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (ii) those Trustees who are not "interested persons" of the Trust
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreements related to it (the "Plan
Trustees"), cast in person at a meeting called for the purpose of voting on the
Plan and any related amendments.
Each Administrative Plan provides that it may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Trustees defined above. The Administrative Class Distribution
Plan further provides that it may not take effect unless approved by the vote of
a majority of the outstanding voting securities of the Administrative Class.
Each Administrative Plan provides that it shall continue in effect so long
as such continuance is specifically approved at least annually by the Trustees
and the disinterested Trustees defined above. Each Administrative Plan provides
that any person authorized to direct the disposition of monies paid or payable
by a class pursuant to the Plan or any related agreement shall provide to the
Trustees, and the Board shall review at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made.
Each Administrative Plan is a "reimbursement plan," which means that fees
are payable to the relevant financial intermediary only to the extent necessary
to reimburse expenses incurred pursuant to such plan. Each Administrative Plan
provides that expenses payable under the Plan may be carried forward for
reimbursement for up to twelve months beyond the date in which the expense is
incurred, subject to the limit that not more that 0.25% of the average daily net
assets of Administrative Class shares may be used in
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any month to pay expenses under the Plan. Each Plan requires that Administrative
Class shares incur no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that some, if not
all, of the fees paid pursuant to both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
Institutional and Administrative Class shares of the Trust may also be
offered through certain brokers and financial intermediaries ("service agents")
that have established a shareholder servicing relationship with the Trust on
behalf of their customers. The Trust pays no compensation to such entities
other than service fees paid with respect to Administrative Class shares.
Service agents may impose additional or different conditions than the Trust on
the purchase, redemption or exchanges of Trust shares by their customers.
Service agents may also independently establish and charge their customers
transaction fees, account fees and other amounts in connection which purchases,
sales and redemption of Trust shares in addition to any fees charged by the
Trust. Each service agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Shareholders who are customers
of service agents should consult their service agents for information regarding
these fees and conditions.
Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of Class A, Class B, and Class C
shares are discussed in the Class A, B and C Prospectus under the headings "How
to Buy Shares," "Exchange Privilege," and "How to Redeem," and that information
is incorporated herein by reference. Purchases, exchanges and redemptions of
Institutional and Administrative Class shares are discussed in the Institutional
Prospectus under the headings "Purchase of Shares," "Redemption of Shares," and
"Net Asset Value," and that information is incorporated herein by reference.
Certain managed account clients of the Adviser may purchase shares of the
Trust. To avoid the imposition of duplicative fees, the Adviser may be required
to make adjustments in the management fees charged separately by the Adviser to
these clients to offset the generally higher level of management fees and
expenses resulting from a client's investment in the Trust.
Certain clients of the Adviser whose assets would be eligible for purchase
by one or more of the Funds may purchase shares of the Trust with such assets.
Assets so purchased by a Fund will be valued in accordance with procedures
adopted by the Board of Trustees.
Certain shares of the Funds are not qualified or registered for sale in all
states. Prospective investors should inquire as to whether shares of a
particular Fund or class are available for offer and sale in their state of
domicile or residence. Shares of a Fund may not be offered or sold in any state
unless registered or qualified in that jurisdiction, unless an exemption from
registration or qualification is available.
Independent financial intermediaries unaffiliated with PIMCO may perform
shareholder servicing functions with respect to certain of their clients whose
assets may be invested in the Funds. These services, normally provided by PIMCO
directly to Trust shareholders, may include the provision of ongoing information
concerning the Funds and their investment performance, responding to shareholder
inquiries, assisting with purchases, redemptions and exchanges of Trust shares,
and other services. PIMCO may pay fees to such entities for the provision of
these services which PIMCO normally would perform, out of PIMCO's own resources.
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As described in the Class A, B and C Prospectus under the caption
"Exchanging Shares," and in the Institutional Prospectus under the caption
"Exchange Privilege," a shareholder may exchange shares of any Fund for shares
of any other Fund of the Trust or any series of PIMCO Funds: Multi-Manager
Series, within the same class on the basis of their respective net asset values.
The original purchase date(s) of shares exchanged for purposes of calculating
any contingent deferred sales charge will carry over to the investment in the
new Fund. For example, if a shareholder invests in the Class C shares of one
Fund and 6 months later (when the contingent deferred sales charge upon
redemption would normally be 1%) exchanges his shares for Class C shares of
another Fund, no sales charge would be imposed upon the exchange but the
investment in the other Fund would be subject to the 1% contingent deferred
sales charge until one year after the date of the shareholder's investment in
the first Fund as described in the Class A, B and C Prospectus under
"Alternative Purchase Arrangements." With respect to Class B or Class C shares,
or Class A shares subject to a contingent deferred sales charge, if less than
all of an investment is exchanged out of a Fund, any portion of the investment
attributable to capital appreciation and/or reinvested dividends or capital
gains distributions will be exchanged first, and thereafter any portions
exchanged will be from the earliest investment made in the Fund from which the
exchange was made.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of regular
trading on the Exchange on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12-month
period or in any calendar quarter;
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Funds, limited in amount with respect to each
shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1%
of the net asset value of the Trust at the beginning of such period. Although
the Trust will normally redeem all shares for cash, it may, in unusual
circumstances, redeem amounts in excess of the lesser of (i) or (ii) above by
payment in kind of securities held in the Funds' portfolios.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, the minimums of which are currently set at $250 for Class A,
Class B and Class C shares, and $100,000 for Institutional Class and
Administrative Class shares. The Prospectuses may set higher minimum account
balances for one or more classes from time to time depending upon the Trust's
current policy. An investor will be notified that the value of his account is
less than the minimum and allowed at least 30 days to bring the value of the
account up to at least the specified amount before the redemption is processed.
The Declaration of Trust also authorizes the Trust to redeem shares under
certain other circumstances as may be specified by the Board of Trustees. The
Trust may also charge periodic account fees for accounts that fall below minimum
balances, as described in the Prospectuses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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Investment Decisions and Portfolio Transactions
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved (including the
Trust). Some securities considered for investments by the Funds may also be
appropriate for other clients served by the Adviser. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. If a purchase or sale
of securities consistent with the investment policies of a Fund and one or more
of these clients served by the Adviser 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 Adviser. The Adviser may aggregate
orders for the Funds with simultaneous transactions entered into on behalf of
other clients of the Adviser so long as price and transaction expenses are
averaged either for that transaction or for the day. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the Adviser's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
Brokerage and Research Services
There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction.
Transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the relevant Fund and buys and
sells such securities, options and futures for the Trust through a substantial
number of brokers and dealers. In so doing, the Adviser uses its best efforts
to obtain for the Trust the most favorable price and execution available, except
to the extent it may be permitted to pay higher brokerage commissions as
described below. In seeking the most favorable price and execution, the
Adviser, having in mind the Trust's best interests, considers all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions.
The Adviser places orders for the purchase and sale of portfolio
investments for the Funds' accounts with brokers or dealers selected by it in
its discretion. In effecting purchases and sales of portfolio securities for the
account of the Funds, the Adviser will seek the best price and execution of the
Funds' orders. In doing so, a Fund may pay higher commission rates than the
lowest available when the Adviser believes it is reasonable to do so in light of
the value of the brokerage and research services provided by the broker
effecting the transaction, as discussed below. The Adviser also may consider
sales of shares of the Trust as a factor in the selection of broker-dealers to
execute portfolio transactions for the Trust.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers
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which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Adviser receives research services from many
broker-dealers with which the Adviser places the Trust's portfolio transactions.
The Adviser may also receive research or research credits from brokers which are
generated from underwriting commissions when purchasing new issues of fixed
income securities or other assets for a Fund. These services, which in some
cases may also be purchased for cash, include such matters as general economic
and security market reviews, industry and company reviews, evaluations of
securities and recommendations as to the purchase and sale of securities. Some
of these services are of value to the Adviser in advising various of its clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fee paid by the Trust is not
reduced because the Adviser and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser may cause the Trust to pay a broker-dealer which provides "brokerage and
research services" (as defined in the Act) to the Adviser an amount of disclosed
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, the Adviser may also consider sales of shares of the Trust as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Trust.
Portfolio Turnover
A change in the securities held by a Fund is known as "portfolio turnover."
The Adviser manages the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on their ability to engage in short-
term trading by provisions of the federal tax laws, see "Taxation." The use of
certain derivative instruments with relatively short maturities may tend to
exaggerate the portfolio turnover rate for some of the Funds. Trading in fixed
income securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. The use of futures
contracts may involve the payment of commissions to futures commission
merchants. High portfolio turnover (e.g., greater than 100%) involves
correspondingly greater expenses to a Fund, including brokerage commissions or
dealer mark-ups and other transaction costs on the sale of securities and
reinvestments in other securities. The higher the rate of portfolio turnover of
a Fund, the higher these transaction costs borne by the Fund generally will be.
Such sales may result in realization of taxable capital gains (including short-
term capital gains which are generally taxed to shareholders at ordinary income
tax rates).
The portfolio turnover rate of a Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less. Proceeds from short sales and assets used to
cover short positions undertaken are included in the amounts of securities sold
and purchased, respectively, during the year.
NET ASSET VALUE
Net Asset Value is determined as indicated under "How Fund Shares are
Priced" in the Prospectuses. Net asset value will not be determined on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
For all Funds portfolio securities and other assets for which market
quotations are readily available are stated at market value. Market value is
determined on the basis of last reported sales prices, or if no sales are
reported, as is the case for most securities traded over-the-counter, at the
mean between
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representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. Fixed income securities, including
those to be purchased under firm commitment agreements (other than obligations
having a maturity of 60 days or less), are normally valued on the basis of
quotations obtained from brokers and dealers or pricing services, which take
into account appropriate factors such as institutional-sized trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data.
Each Fund's liabilities are allocated among its classes. The total of such
liabilities allocated to a class plus that class's distribution and/or servicing
fees and any other expenses specially allocated to that class are then deducted
from the class's proportionate interest in the 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. Under certain
circumstances, the per share net asset value of the Class B and Class C shares
of the Funds that do not declare regular income dividends on a daily basis may
be lower than the per share net asset value of the Class A shares as a result of
the daily expense accruals of the distribution fee applicable to the Class B and
Class C shares. Generally, for Funds that pay income dividends, those dividends
are expected to differ over time by approximately the amount of the expense
accrual differential between a particular Fund's classes.
TAXATION
The following summarizes certain additional federal income tax
considerations generally affecting the Funds and their shareholders. The
discussion is for general information only and does not purport to consider all
aspects of U.S. federal income taxation that might be relevant to beneficial
owners of shares of the Funds. The discussion is based upon current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, which change could
be retroactive. The discussion applies only to beneficial owners of Fund shares
in whose hands such shares are capital assets within the meaning of Section 1221
of the Code, and may not apply to certain types of beneficial owners of shares
(such as insurance companies, tax exempt organizations, and broker-dealers) who
may be subject to special rules. Persons who may be subject to tax in more than
one country should consult the provisions of any applicable tax treaty to
determine the potential tax consequences to them. Prospective investors should
consult their own tax advisers with regard to the federal tax consequences of
the purchase, ownership and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction. The discussion here and in the Prospectuses is not
intended as a substitute for careful tax planning.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under the Code. To qualify as a regulated
investment company, each Fund generally must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test"); (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies); and (c) distribute each taxable year the sum of
(i) at least 90% of its investment company taxable income (which includes
dividends, interest and net short-term capital gains in excess of any net long-
term capital losses) and (ii) 90% of its tax exempt interest, net of expenses
allocable thereto. The Treasury Department is authorized to promulgate
regulations under which gains from foreign currencies (and options, futures, and
forward contracts on foreign currency) would constitute qualifying income for
purposes of the Qualifying
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Income Test only if such gains are directly related to investing in securities.
To date, such regulations have not been issued.
As a regulated investment company, a Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders on a
timely basis. Each Fund intends to distribute to its shareholders, at least
annually, all or substantially all of its investment company taxable income and
any net capital gains. In addition, amounts not distributed by a Fund on a
timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To avoid the tax, a Fund must
distribute during each calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses (and adjusted for certain ordinary losses) for the twelve month
period ending on October 31, and (3) all ordinary income and capital gains for
previous years that were not distributed during such years. A distribution will
be treated as paid on December 31 of the calendar year if it is declared by a
Fund in October, November, or December of that year to shareholders of record on
a date in such a month and paid by the Fund during January of the following
year. Such distributions will be taxable to shareholders (other than those not
subject to federal income tax) in the calendar year in which the distributions
are declared, rather than the calendar year in which the distributions are
received. To avoid application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
The Funds must have at least 50% of their total assets invested in
Municipal Bonds at the end of each calendar quarter so that dividends derived
from its net interest income on Municipal Bonds and so designated by the Funds
will be "exempt-interest dividends," which are generally exempt from federal
income tax when received by an investor. Certain exempt-interest dividends, as
described in the Class A, B and C Prospectus, may increase alternative minimum
taxable income for purposes of determining a shareholder's liability for the
alternative minimum tax. In addition, exempt-interest dividends allocable to
interest from certain "private activity bonds" will not be tax exempt for
purposes of the regular income tax to shareholders who are "substantial users"
of the facilities financed by such obligations or "related persons" of
"substantial users." The tax-exempt portion of dividends paid for a calendar
year constituting "exempt-interest dividends" will be designated after the end
of that year and will be based upon the ratio of net tax-exempt income to total
net income earned by the Funds during the entire year. That ratio may be
substantially different than the ratio of net tax-exempt income to total net
income earned during a portion of the year. Thus, an investor who holds shares
for only a part of the year may be allocated more or less tax-exempt interest
dividends than would be the case if the allocation were based on the ratio of
net tax-exempt income to total net income actually earned by the Funds while the
investor was a shareholder. All or a portion of interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Funds
will not be deductible by the shareholder. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness
multiplied by the percentage of the Funds' total distributions (not including
distributions of the excess of net long-term capital gains over net short-term
capital losses) paid to the shareholder that are exempt-interest dividends.
Under rules used by the Internal Revenue Service for determining when borrowed
funds are considered used for the purpose of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though such funds are not directly traceable to the purchase of
shares.
Shareholders of the Funds receiving social security or railroad retirement
benefits may be taxed on a portion of those benefits as a result of receiving
tax exempt income (including exempt-interest dividends distributed by the
Funds). The tax may be imposed on up to 50% of a recipient's benefits in cases
where the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits,
exceeds a base amount. In addition, up to 85% of a recipient's benefits may be
subject to tax if the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits
exceeds a higher base
46
<PAGE>
amount. Shareholders receiving social security or railroad retirement benefits
should consult with their tax advisors.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares. Since certain of the Funds expenses
attributable to earning tax-exempt income do not reduce such Fund's current
earnings and profits, it is possible that distributions, if any, in excess of
such Funds' net tax-exempt and taxable income will be treated as taxable
dividends to the extent of such Funds' remaining earnings and profits (i.e., the
amount of such expenses).
Distributions
Except for exempt-interest dividends paid by the Funds, all dividends and
distributions of a Fund, whether received in shares or cash, generally are
taxable and must be reported on each shareholder's federal income tax return.
Dividends paid out of a Fund's investment company taxable income will be taxable
to a U.S. shareholder as ordinary income. Distributions received by tax-exempt
shareholders will not be subject to federal income tax to the extent permitted
under the applicable tax exemption.
Dividends paid by the Funds generally are not expected to qualify for the
deduction for dividends received by corporations. Distributions of net capital
gains, if any, designated as capital gain dividends, are taxable as long-term
capital gains, regardless of how long the shareholder has held a Fund's shares
and are not eligible for the dividends received deduction. Any distributions
that are not from a Fund's investment company taxable income or net realized
capital gains may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. The tax treatment of dividends and distributions
will be the same whether a shareholder reinvests them in additional shares or
elects to receive them in cash.
Sales of Shares
Upon the disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Any loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of shares held by the shareholder for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect to such shares.
Backup Withholding
A Fund may be required to withhold 31% of all taxable distributions payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
Options, Futures and Forward Contracts, and Swap Agreements
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Funds may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains
47
<PAGE>
and losses from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by a Fund at the end of each taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the
Code) are "marked to market" with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or loss is treated
as ordinary or 60/40 gain or loss.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund, may result in
"straddles" for U.S. federal income tax purposes. In some cases, the straddle
rules also could apply in connection with swap agreements. The straddle rules
may affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to a Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
The qualifying income and diversification requirements applicable to a
Fund's assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, and forward contracts, swap
agreements.
Short Sales
Certain Funds may make short sales of securities. Short sales may increase
the amount of short-term capital gain realized by a Fund, which is taxed as
ordinary income when distributed to shareholders.
Original Issue Discount and Market Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. A
Fund may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
48
<PAGE>
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
Constructive Sales
Recently enacted rules may affect the timing and character of gain if a
Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
Non-U.S. Shareholders
Withholding of Income Tax on Dividends: Under the 1972 Convention and U.S.
federal tax law, dividends paid on shares beneficially held by a person who is a
"foreign person" within the meaning of the Internal Revenue Code of 1986, as
amended, are, in general, subject to withholding of U.S. federal income tax at a
rate of 30% of the gross dividend, which may, in some cases, be reduced by an
applicable tax treaty. However, if a beneficial holder who is a foreign person
has a permanent establishment in the United States, and the shares held by such
beneficial holder are effectively connected with such permanent establishment
and, in addition, the dividends are effectively connected with the conduct by
the beneficial holder of a trade or business in the United States, the dividend
will be subject to U.S. federal net income taxation at regular income tax rates.
Distributions of long-term net realized capital gains will not be subject to
withholding of U.S. federal income tax.
Income Tax on Sale of a Fund's shares: Under U.S. federal tax law, a
beneficial holder of shares who is a foreign person is not, in general, subject
to U.S. federal income tax on gains (and is not allowed a deduction for losses)
realized on the sale of such shares unless (i) the shares in question are
effectively connected with a permanent establishment in the United States of the
beneficial holder and such gain is effectively connected with the conduct of a
trade or business carried on by such holder within the United States or (ii) in
the case of an individual holder, the holder is present in the United States for
a period or periods aggregating 183 days or more during the year of the sale and
certain other conditions are met.
State and Local Tax: A beneficial holder of shares who is a foreign person
may be subject to state and local tax in addition to the federal tax on income
referred above.
Estate and Gift Taxes: Under existing law, upon the death of a beneficial
holder of shares who is a foreign person, such shares will be deemed to be
property situated within the United States and will be subject to U.S. federal
estate tax. If at the time of death the deceased holder is a resident of a
foreign country and not a citizen or resident of the United States, such tax
will be imposed at graduated rates from 18% to 55% on the total value (less
allowable deductions and allowable credits) of the decedent's
49
<PAGE>
property situated within the United States. In general, there is no gift tax on
gifts of shares by a beneficial holder who is a foreign person.
The availability of reduced U.S. taxation pursuant to the 1972 Convention
or the applicable estate tax convention depends upon compliance with established
procedures for claiming the benefits thereof and may further, in some
circumstances, depend upon making a satisfactory demonstration to U.S. tax
authorities that a foreign investor qualifies as a foreign person under U.S.
domestic tax law and the 1972 Convention.
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund will provide information
annually to shareholders indicating the amount and percentage of a Fund's
dividend distribution which is attributable to interest on federal obligations,
and will indicate to the extent possible from what types of federal obligations
such dividends are derived. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under a Declaration
of Trust dated February 19, 1987. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.0001 each. The Board of Trustees may establish additional series (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of a Fund, each shareholder is
entitled to receive his pro rata share of the net assets of that Fund.
Under Massachusetts law, shareholders could, under certain circumstances,
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 provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust. The risk of
a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which such disclaimer is inoperative or the Trust
itself is unable to meet its obligations, and thus should be considered remote.
Performance Information
From time to time the Trust may make available certain information about
the performance of some or all of the classes of shares of some or all of the
Funds. Information about a Fund's performance is based
50
<PAGE>
on that Fund's (or its predecessor's) record to a recent date and is not
intended to indicate future performance.
The total return of classes of shares of all Funds may be included in
advertisements or other written material. When a Fund's total return is
advertised , it will be calculated for the past year, the past five years, and
the past ten years (or if the Fund has been offered for a period shorter than
one, five or ten years, that period will be substituted) since the establishment
of the Fund as more fully described below. For periods prior to the initial
offering date of a particular class of shares, total return presentations for
the class will be based on the historical performance of an older class of the
Fund (if any) restated to reflect any different sales charges and/or operating
expenses (such as different administrative fees and/or 12b-1/servicing fee
charges) associated with the newer class. In certain cases, such a restatement
will result in performance of the newer class which is higher than if the
performance of the older class were not restated to reflect the different
operating expenses of the newer class. In such cases, the Trust's advertisements
will also, to the extent appropriate, show the lower performance figure
reflecting the actual operating expenses incurred by the older class for periods
prior to the initial offering date of the newer class. Total return for each
class is measured by comparing the value of an investment in the Fund at the
beginning of the relevant period 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). Total return may
be advertised using alternative methods that reflect all elements of return, but
that may be adjusted to reflect the cumulative impact of alternative fee and
expense structures.
The Funds may also provide current distribution information to its
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 a Fund will be based on
distributions for a specified period (i.e., total dividends from net investment
income), 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 a Fund has declared and paid to shareholders as of the end of a
specified period rather than the Fund's actual net investment income for that
period.
Performance information is computed separately for each class of a Fund.
The Trust may, from time to time, include the yield and total return for each
class of shares of all of the Funds in advertisements or information furnished
to shareholders or prospective investors. Each Fund may from time to time
include in advertisements the ranking of the Fund's performance figures relative
to such figures for groups of mutual funds categorized by Lipper Analytical
Services as having the same investment objectives. Information provided to any
newspaper or similar listing of the Fund's net asset values and public offering
prices will separately present each class of shares. The Funds also may compute
current distribution rates and use this information in their prospectuses and
statement of additional information, in reports to current shareholders, or in
certain types of sales literature provided to prospective investors.
Calculation of Yield
Quotations of yield for the Funds will be based on all investment income
per share (as defined by the SEC) during a particular 30-day (or one month)
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD=2[(a-b + 1)/6/-1]
---
cd
where a=dividends and interest earned during the period,
b=expenses accrued for the period (net of reimbursements),
51
<PAGE>
c=the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d=the maximum offering price per share on the last day of the
period.
The Funds may advertise a tax equivalent yield of each class of its shares,
calculated as described above except that, for any given tax bracket, net
investment income of each class will be calculated using as gross investment
income an amount equal to the sum of (i) any taxable income of each class of the
Fund plus (ii) the tax exempt income of each class of the Fund divided by the
difference between 1 and the effective federal income tax rates for taxpayers in
that tax bracket. For example, taxpayers with the marginal federal income tax
rates indicated in the following table would have to earn the tax equivalent
yields shown in order to realize an after-tax return equal to the corresponding
tax-exempt yield shown.
<TABLE>
<CAPTION>
A tax-exempt yield of
Filing Status is equivalent to a taxable yield of
<S> <C> <C> <C> <C> <C> <C> <C>
Single (Married filing jointly) 3% 4% 5% 6% 7%
Taxable income Marginal tax rate*
$23,350 or less $39,000 or less 15% 3.53% 4.71% 5.88% 7.06% 8.24%
Over $23,350 but Over $39,000 but 28% 4.17% 5.56% 6.94% 8.33% 9.72%
not over $56,550 not over $94,250
Over $56,550 but Over $94,250 but 31% 4.35% 5.80% 7.25% 8.70% 10.14%
not over $117,950 not over $143,600
Over $117,950 but Over $143,600 but 36% 4.69% 6.25% 7.81% 9.38% 10.94%
not over $256,500 not over $256,500
Over $256,500 Over $256,500 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
- -------------------
</TABLE>
* These marginal tax rates do not take into account the effect of the phaseout
of itemized deductions and personal exemptions.
As is shown in the above table, the advantage of tax-exempt investing
becomes more advantageous to an investor as his or her marginal tax rate
increases.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time
in the future, yields and total return may be higher or lower than past yields
and there can be no assurance that any historical results will continue.
Calculation of Total Return
Quotations of average annual total return for a Fund or class will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, five and ten
years (up to the life of the Fund), calculated pursuant to the following
formula: P (1 + T)/n/ = ERV (where P = a hypothetical initial payment of $1,000,
T = the average annual total return, n = the number of years, and ERV = the
ending redeemable value of a hypothetical $1,000 payment made at the beginning
of the period). Except as noted below all total return figures reflect the
deduction of a proportional share of Fund or class expenses on an annual basis,
and assume that (i) the maximum sales load (or other charges deducted from
payments) is deducted from the initial $1,000 payment and that the maximum
contingent deferred sales charge, if any, is deducted at the times, in the
amounts, and under the terms disclosed in the Prospectuses and (ii) all
dividends and distributions are reinvested when paid. The Funds also may, with
respect to certain periods of less than one year, provide total return
information for that period that is unannualized. Quotations of total return may
also be shown for other periods. Any such information would be accompanied by
standardized total return information.
52
<PAGE>
Current distribution information for a Fund will be based on distributions for
a specified period (i.e., total dividends from net investment income), divided
by Fund net asset value per share on the last day of the period and annualized
according to the following formula:
DIVIDEND YIELD = (((a/b)*365)/c)
where a = actual dividends distributed for the calendar month in
question,
b = number of days of dividend declaration in the month in
question, and
c = net asset value (NAV) calculated on the last business day of
the month in question.
The rate of current distributions does not reflect deductions for unrealized
losses from transactions in derivative instruments such as options and futures,
which may reduce total return. Current distribution rates differ from
standardized yield rates in that they represent what a Fund has declared and
paid to shareholders as of the end of a specified period rather than the Fund's
actual net investment income for that same period. Distribution rates will
exclude net realized short-term capital gains. The rate of current
distributions for a Fund should be evaluated in light of these differences and
in light of the Fund's total return figures, which will always accompany any
calculation of the rate of current distributions.
Performance information for a Fund may also be compared to various unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the Dow
Jones Industrial Average, the Lehman Brothers Aggregate Bond Index, the Lehman
Brothers Mortgage-Backed Securities Index, the Merrill Lynch 1 to 3 Year
Treasury Index, the Lehman Intermediate and 20+ Year Treasury Blend Index, the
Lehman BB Intermediate Corporate Index, indexes prepared by Lipper Analytical
Services, the J.P. Morgan Global Index, the J.P. Morgan Emerging Markets Bond
Index Plus, the Salomon Brothers World Government Bond Index-10 Non U.S.-Dollar
Hedged and the J.P. Morgan Government Bond Index Non U.S.-Dollar Hedged.
Unmanaged indexes (i.e., other than Lipper) generally do not reflect deductions
for administrative and management costs and expenses. PIMCO may report to
shareholders or to the public in advertisements concerning the performance of
PIMCO as adviser to clients other than the Trust, or on the comparative
performance or standing of PIMCO in relation to other money managers. PIMCO
also may provide current or prospective private account clients, in connection
with standardized performance information for the Funds, performance information
for the Funds gross of fees and expenses for the purpose of assisting such
clients in evaluating similar performance information provided by other
investment managers or institutions. Comparative information may be compiled or
provided by independent ratings services or by news organizations. Any
performance information, whether related to the Funds or to the Adviser, should
be considered in light of the Funds' investment objectives and policies,
characteristics and quality of the Funds, and the market conditions during the
time period indicated, and should not be considered to be representative of what
may be achieved in the future.
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1996/1997 costs of college and an assumed rate of increase for such costs. For
example, the table below sets forth the projected cost of four years of college
at a public college and a private college assuming a steady increase in both
cases of 3% per year. In presenting this information, the Trust is making no
prediction regarding what will be the actual growth rate in the cost of a
college education, which may be greater or less than 3% per year and may vary
significantly from year to year. The Trust makes no representation that an
investment in any of the Funds will grow at or above the rate of growth of the
cost of a college education.
53
<PAGE>
<TABLE>
<CAPTION>
Potential College Cost Table
<S> <C> <C> <C> <C> <C>
Start Public Private Start Public Private
Year College College Year College College
- --------------- ------------- ------- ----- ------- -------
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306 2012 $20,278 $89,061
</TABLE>
Costs assume a steady increase in the annual cost of college of 3% per year from
a 1996-97 base year amount. Actual rates of increase may be more or less than 3%
and may vary.
In its advertisements and other materials, the Trust may compare the returns
over periods of time of investments in stocks, bonds and treasury bills to each
other and to the general rate of inflation. For example, the average annual
return of each during the 25 years from 1974 to 1998 was:
*Stocks: 14.9%
Bonds: 9.9%
T-Bills: 7.0%
Inflation: 5.2%
*Returns of unmanaged indices do not reflect past or future performance of
any of the Funds of PIMCO Funds: Pacific Investment Management Series. Stocks
are represented by Ibbotson's Large Company Total Return Index. Bonds are
represented by Ibbotson's Long-term Corporate Bond Index. T-bills are
represented by Ibbotson's Treasury Bill Index and Inflation is represented by
the Cost of Living Index. These are all unmanaged indices, which can not be
invested in directly. While Treasury bills are insured and offer a fixed rate of
return, both the principal and yield of investment securities will fluctuate
with changes in market conditions. Source: Ibbotson, Roger G., and Rex A.
Sinquefiled, Stocks, Bonds, Bill and Inflation (SBBI), 1989, updated in Stocks,
Bonds, Bills and Inflation 1999 Yearbook, Ibbotson Associates, Chicago. All
rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 20 years
from 1979-1998, the average annual return of stocks comprising the Ibbotson's
Large Company Stock Total Return Index ranged from -4.9% to 37.4% while the
annual return of a hypothetical portfolio comprised 40% of such common stocks,
40% of bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -1.0% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1979
through 1998 is set forth in the following table.
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- -------- ------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
</TABLE>
54
<PAGE>
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
1998 28.58% 10.76% 4.86% 1.61% 16.70%
*Returns of unmanaged indices do not reflect past or future performance of any
of the Funds of PIMCO Funds: Pacific Investment Management Series. Stocks are
represented by Ibbotson's Large Company Stock Total Return Index. Bonds are
represented by Ibbotson's Long-term Corporate Bond Index. T'bills are
represented by Ibbotson's Treasury Bill Index and Inflation is represented by
the Cost of Living Index. These are all unmanaged indices, which can not be
invested in directly. While Treasury bills are insured and offer a fixed rate of
return, both the principal and yield of investment securities will fluctuate
with changes in market conditions. Source: Ibbotson, Roger G., and Rex A.
Sinquefiled, Stocks, Bonds, Bill and Inflation (SBBI), 1989, updated in Stocks,
Bonds, Bills and Inflation 1999 Yearbook, Ibbotson Associates, Chicago. All
rights reserved.
The Trust may use in its advertisement and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
- ---------------- ------------ ------------ --------
<S> <C> <C> <C>
30 Years $ 1,979 $ 59,370 $200,000
25 Years $ 2,955 $ 73,875 $200,000
20 Years $ 4,559 $ 91,180 $200,000
15 Years $ 7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</TABLE>
This hypothetical example assumes a fixed 7% return compounded annually and a
guaranteed return of principal. The example is intended to show the benefits of
a long-term, regular investment program, and is in no way representative of any
past or future performance of a PIMCO Fund. There can be no guarantee that you
will be able to find an investment that would provide such a return at the times
you invest and an investor in any of the PIMCO Funds should be aware that
certain of the PIMCO Funds have experienced periods of negative growth in the
past and may again in the future.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1997:
% of Income for Individuals
Aged 65 Years and Older in 1997*
--------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
55
<PAGE>
1997 43% 57%
* For individuals with an annual income of at least $51,000. Other
includes personal savings, earnings and other undisclosed sources of income.
Source: Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds may appear in various national
publications and services including, but not limited to: The Wall Street
Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual Fund
Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies and The
Donoghue Organization. Some or all of these publications or reports may publish
their own rankings or performance reviews of mutual funds, including the Funds,
and may provide information relating to the Adviser, including descriptions of
assets under management and client base, and opinions of the author(s) regarding
the skills of personnel and employees of the Adviser who have portfolio
management responsibility. From time to time, the Trust may include references
to or reprints of such publications or reports in its advertisements and other
information relating to the Funds.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Funds over a specified period of time and may use charts and
graphs to display that growth.
From time to time, the Trust may set forth in its advertisements and other
materials the names of and additional information regarding investment analysts
employed by the Adviser who assist with portfolio management and research
activities on behalf of the Funds. The following lists various analysts
associated with the Adviser: Mark Hudoff, Doris Nakamura and Ray Kennedy.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
Funds and relevant benchmark market indexes in a variety of market conditions.
Based on its independent research and analysis, Ibbotson has developed model
portfolios of the Funds and series of PIMCO Funds: Multi-Manager Series ("MMS")
which indicate how, in Ibbotson's opinion, a hypothetical investor with a 5+
year investment horizon might allocate his or her assets among the Funds and
series of MMS. Ibbotson bases its model portfolios on five levels of investor
risk tolerance which it developed and defines as ranging from "Very
Conservative" (low volatility; emphasis on capital preservation, with some
growth potential) to "Very Aggressive" (high volatility; emphasis on long-term
growth potential). However, neither Ibbotson nor the Trust offers Ibbotson's
model portfolios as investments. Moreover, neither the Trust, the Adviser nor
Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. In addition, the Declaration of Trust provides that
the holders of not less than two-thirds of the outstanding shares of the Trust
may remove a person serving as Trustee either by declaration in writing or at a
meeting called for such purpose. The Trustees are required to call a meeting
for the purpose of considering the removal of a person serving as Trustee if
requested in writing to do so by the holders of not less than ten percent of the
outstanding shares of the Trust. In the event that such a request was made, the
Trust has represented that it would assist with any necessary shareholder
communications. Shareholders of a class of shares have different voting rights
with respect to matters that affect only that class.
56
<PAGE>
The Trust's shares do not have cumulative voting rights, so that the holder
of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees. As of August 30, 1999, the Funds did not have any
shareholders.
Code of Ethics
The Trust and PIMCO have each adopted a Code of Ethics governing personal
trading activities of all Trustees and officers of the Trust, and Directors,
officers and employees of PIMCO who, in connection with their regular functions,
play a role in the recommendation of any purchase or sale of a security by the
Trust or obtain information pertaining to such purchase or sale or who have the
power to influence the management or policies of the Trust or PIMCO. Such
persons are prohibited from effecting certain transactions, allowed to effect
certain exempt transactions, required to preclear certain security transactions
with PIMCO's Compliance Officer or his designee and to report certain
transactions on a regular basis. PIMCO has developed procedures for
administration of the Codes.
Year 2000 Readiness Disclosure
Many of the world's computer systems may be unable to correctly recognize,
interpret or use dates beyond the year 1999. This inability might lead to
significant business disruptions. PIMCO Advisors and PIMCO are taking steps to
assure that their computer systems will function properly. PIMCO Advisors has
designated a team of information and business professionals to address the Year
2000 problem and developed a written Year 2000 Plan.
The PIMCO Advisors Year 2000 Plan consists of five general phases:
Awareness, Assessment, Remediation, Testing, and Implementation. During the
Awareness phase, the Year 2000 team informs the employees of PIMCO Advisors and
its subsidiaries, including the highest levels of management, about the Year
2000 problem. A written Year 2000 Plan and budget is prepared and approved by
the PIMCO Advisors Management Board. During the Assessment phase, the Year 2000
team prepares an inventory of information technology ("IT") and non-IT systems
used in PIMCO Advisors and its subsidiaries business. Systems are classified as
oftware, hardware, ing the Remediation phase, software, hardware, and embedded
chips identified during the Assessment phase to be non-Year 2000 compliant are
corrected or replaced. Necessarily, further corrections and replacements may
need to be made after the Remediation phase has been completed as a result of
problems identified during the Testing phase or otherwise. During the Testing
phase, PIMCO Advisors performs internal testing, point-to-point testing, and
industry testing programs. Testing generally will be performed in order of
criticality (mission critical, then non-mission critical). Several PIMCO
Advisors subsidiaries plan on participating in the Securities Industry
Association's industry-wide testing forum. During the Implementation phase,
systems that have been tested and identified as being Year 2000 Compliant are
put into normal business operation and contingency plans are finalized .
As all investment advisers, PIMCO Advisors' and PIMCO's business operations
are heavily dependent upon a complex worldwide network of financial systems that
utilize date fields. PIMCO Advisors' and PIMCO's ability to endure any adverse
effects of the transition to Year 2000 is highly dependent upon the efforts of
third parties, particularly brokers, dealers, and custodians. The failure of
third party organizations to resolve their own processing issues with respect to
the Year 2000 Problem in a timely manner could have a material adverse effect on
PIMCO Advisors' or PIMCO's business. The management of PIMCO Advisors and PIMCO
believe that the transition to Year 2000 will not have a material adverse effect
on their business or operations as of the date of this Statement of Additional
57
<PAGE>
Information. However, complications as yet unidentified may arise in internal
or external systems, with data providers, with other securities firms or
institutions, with issuers, with other counterparties, with other entities, or
even with general economic conditions related to the Year 2000 in general. The
Year 2000 Problem may be particularly acute with respect to foreign markets and
securities of foreign issuers in which the Funds invest due to a potential lack
of Year 2000 compliance efforts in foreign markets or by foreign companies.
Although PIMCO Advisors' efforts and expenditures on Year 2000 issues are
substantial, there can be no assurances that shareholders or others will not
suffer from disruptions or adverse results arising as a consequence of entering
Year 2000.
Custodian, Transfer Agent and Dividend Disbursing Agent
Investors Fiduciary Trust Company ("IFTC") 801 Pennsylvania, Kansas City,
Missouri 64105 serves as custodian for assets of all Funds. Pursuant to a sub-
custody agreement between IFTC and State Street Bank and Trust Company ("State
Street"), State Street serves as subcustodian of the Trust for the custody of
the foreign securities acquired by those Funds that invest in foreign
securities. Under the agreement, State Street may hold the foreign securities
at its principal office at 225 Franklin Street, Boston. Massachusetts 02110, and
at State Street's branches, and subject to approval by the Board of Trustees, at
a foreign branch of a qualified U.S. bank, with an eligible foreign
subcustodian, or with an eligible foreign securities depository.
Pursuant to rules adopted under the 1940 Act, the Trust may maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Trust; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Trust assets. The Board of Trustees reviews annually the
continuance of foreign custodial arrangements for the Trust. No assurance can
be given that the Trustees' appraisal of the risks in connection with foreign
custodial arrangements will always be correct or that expropriation,
nationalization, freezes, or confiscation of assets that would impact assets of
the Funds will not occur, and shareholders bear the risk of losses arising from
these or other events.
National Financial Data Services, 330 W. 9th Street, 4th Floor, Kansas
City, Missouri serves as transfer agent and dividend disbursing agent for the
Institutional Class and Administrative Class shares of the Funds. First Data
Investor Services Group, Inc., P.O. Box 9688, Providence, Rhode Island 02940-
9688 serves as transfer agent and dividend disbursing agent for the Class A,
Class B, Class C and Class D shares of the Funds.
Independent Accountants
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105, serves
as independent public accountants for all Funds. PricewaterhouseCoopers LLP
provides audit services, tax return preparation and assistance and consultation
in connection with review of SEC filings.
Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also act as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectuses do not
contain all of the information included in the Trust's registration statement
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations
58
<PAGE>
of the SEC. The registration statement, including the exhibits filed therewith,
may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
116267.4.03
59
<PAGE>
[Front Cover]
PIMCO Funds Shareholders' Guide for Class A, B and C Shares
August 31, 1999
This Guide relates to the mutual funds (each, a "Fund") that are series of PIMCO
Funds: Multi-Manager Series (the "MMS Trust") and PIMCO Funds: Pacific
Investment Management Series (the "PIMS Trust" and, together with the MMS Trust,
the "Trusts"). Unless otherwise indicated, references to the Funds include the
PIMCO Funds Asset Allocation Series portfolios (each, a "Portfolio"). The
Portfolios are so called "funds-of-funds" which are also series of the MMS
Trust, but are offered through a separate prospectus. The MMS Trust, the PIMS
Trust and PIMCO Funds Asset Allocation Series each offer Class A, B and C shares
of their respective Funds in separate prospectuses (each, a "Retail
Prospectus").
This Guide contains detailed information about Fund purchase, redemption and
exchange options and procedures and other information about the Funds. This
Guide is not a prospectus, and should be used in conjunction with the applicable
Retail Prospectus. This Guide, and the information disclosed herein, is
incorporated by reference in, and considered part of, each Retail Prospectus.
PIMCO Funds Distributors LLC distributes the Funds' shares. You can call PIMCO
Funds Distributors LLC at 1-800-426-0107 to find out more about the Funds and
other funds in the PIMCO Funds family. You can also visit our Web site at
www.pimcofunds.com.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
How to Buy Shares.................... SG-3
Alternative Purchase Arrangements.... SG-8
Exchange Privilege................... SG-21
How to Redeem........................ SG-22
</TABLE>
SG-2
<PAGE>
How to Buy Shares
Class A, Class B and Class C shares of each Fund are continuously offered
through the Trusts' principal underwriter, PIMCO Funds Distributors LLC (the
''Distributor'') and through other firms which have dealer agreements with the
Distributor (''participating brokers'') or which have agreed to act as
introducing brokers for the Distributor (''introducing brokers''). The
Distributor is a wholly owned subsidiary of PIMCO Advisors L.P. ("PIMCO
Advisors"), the investment adviser to the Funds that are series of the MMS
Trust, and an affiliate of Pacific Investment Management Company ("Pacific
Investment Management"), the investment adviser to the Funds that are series of
the PIMS Trust. PIMCO Advisors and Pacific Investment Management are each
referred to herein as an "Adviser."
There are two ways to purchase Class A, Class B or Class C shares: either
(i) through your dealer or broker which has a dealer agreement with the
Distributor or (ii) directly by mailing a PIMCO Funds account application (an
''account application'') with payment, as described below under the heading
Direct Investment, to the Distributor (if no dealer is named in the account
application, the Distributor may act as dealer). Class A, Class B and Class C
shares of the Short Duration Municipal Income, California Intermediate Municipal
Bond and New York Intermediate Municipal Bond Funds are not offered as of the
date of this Guide; however, investment opportunities in these Funds may be
available in the future.
Shares may be purchased at a price equal to their net asset value per share
next determined after receipt of an order, plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of the purchase
in the case of Class A shares (the ''initial sales charge alternative''), (ii)
on a contingent deferred basis in the case of Class B shares (the ''deferred
sales charge alternative'') or (iii) by the deduction of an ongoing asset based
sales charge in the case of Class C shares (the ''asset based sales charge
alternative''). In certain circumstances, Class A and Class C shares are also
subject to a Contingent Deferred Sales Charge ("CDSC"). See ''Alternative
Purchase Arrangements.'' Purchase payments for Class B and Class C shares are
fully invested at the net asset value next determined after acceptance of the
trade. Purchase payments for Class A shares, less the applicable sales charge,
are invested at the net asset value next determined after acceptance of the
trade.
All purchase orders received by the Distributor prior to the close of
regular trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange on a regular business day are processed at that day's offering price.
However, orders received by the Distributor from dealers or brokers after the
offering price is determined that day will receive such offering price if the
orders were received by the dealer or broker from its customer prior to such
determination and were transmitted to and received by the Distributor prior to
its close of business that day (normally 5:00 p.m., Eastern time) or, in the
case of certain retirement plans, received by the Distributor prior to 9:30
a.m., Eastern time on the next business day. Purchase orders received on other
than a regular business day will be executed on the next succeeding regular
business day. The Distributor, in its sole discretion, may accept or reject any
order for purchase of Fund shares. The sale of shares will be suspended during
any period in which the New York Stock 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 New York Stock Exchange is restricted
or during an emergency which makes it impracticable for the Funds to dispose of
their securities or to determine fairly the value of their net assets, or during
any other period as permitted by the Securities and Exchange Commission for the
protection of investors.
SG-3
<PAGE>
Except for purchases through the PIMCO Funds Auto-Invest plan, the PIMCO
Funds Auto-Exchange plan, investments pursuant to the Uniform Gifts to Minors
Act, and tax-qualified and wrap programs referred to below under ''Tax-Qualified
Retirement Plans'' and ''Alternative Purchase Arrangements--Sales at Net Asset
Value,'' the minimum initial investment in Class A, Class B or Class C shares of
any Fund is $2,500, and the minimum additional investment is $100 per Fund. For
information about dealer commissions, see ''Alternative Purchase Arrangements''
below. Persons selling Fund shares may receive different compensation for
selling Class A, Class B or Class C shares. Normally, Fund shares purchased
through participating brokers are held in the investor's account with that
broker. No share certificates will be issued unless specifically requested in
writing by an investor or broker-dealer.
Direct Investment
Investors who wish to invest in Class A, Class B or Class C shares of a
Fund directly, rather than through a participating broker, may do so by opening
an account with the Distributor. To open an account, an investor should complete
the account application. All shareholders who open direct accounts with the
Distributor will receive from the Distributor individual confirmations of each
purchase, redemption, dividend reinvestment, exchange or transfer of Fund
shares, including the total number of Fund shares owned as of the confirmation
date, except that purchases which result from the reinvestment of daily-accrued
dividends and/or distributions will be confirmed once each calendar quarter. See
''Distributions'' in the applicable Retail Prospectus. Information regarding
direct investment or any other features or plans offered by the Trusts may be
obtained by calling the Distributor at 1-800-426-0107 or by calling your broker.
Purchase by Mail
Investors who wish to invest directly may send a check payable to PIMCO
Funds Distributors LLC, along with a completed application form to:
PIMCO Funds Distributors LLC
P.O. Box 9688
Providence, RI 02940-0926
Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any member of the
Federal Reserve System can normally be converted into federal funds within two
business days after receipt of the check. Checks drawn on a non-member bank may
take up to 15 days to convert into federal funds. In all cases, the purchase
price is based on the net asset value next determined after the purchase order
and check are accepted, even though the check may not yet have been converted
into federal funds.
Subsequent Purchases of Shares
Subsequent purchases of Class A, Class B or Class C shares can be made as
indicated above by mailing a check with a letter describing the investment or
with the additional
SG-4
<PAGE>
investment portion of a confirmation statement. Except for subsequent purchases
through the PIMCO Funds Auto-Invest plan, the PIMCO Funds Auto-Exchange plan,
tax-qualified programs and PIMCO Funds Fund Link referred to below, and except
during periods when an Automatic Withdrawal Plan is in effect, the minimum
subsequent purchase is $100 in any Fund. All payments should be made payable to
PIMCO Funds Distributors LLC and should clearly indicate the shareholder's
account number. Checks should be mailed to the address above under ''Purchase by
Mail.''
Tax-Qualified Retirement Plans
The Distributor makes available retirement plan services and documents for
Individual Retirement Accounts (IRAs), including Roth IRAs, for which Boston
Safe Deposit & Trust Company serves as trustee and for IRA Accounts established
with Form 5305-SIMPLE under the Internal Revenue Code of 1986, as amended (the
''Code''). These accounts include Simplified Employee Pension Plan (SEP) and
Salary Reduction Simplified Employee Pension Plan (SAR/SEP) IRA and SIMPLE IRA
accounts and prototype documents. In addition, prototype documents are available
for establishing 403(b)(7) custodial accounts with Boston Safe Deposit & Trust
Company as custodian. This type of plan is available to employees of certain
non-profit organizations.
The Distributor also makes available prototype documents for establishing
Money Purchase and/or Profit Sharing Plans and 401(k) Retirement Savings Plans.
These prototype plans require certain minimum per participant account sizes and
certain minimum aggregate investments in the Trust, but are not subject to the
small account fees described below that will apply to other plans./1/ Investors
should call the Distributor at 1-800-426-0107 for further information about
these plans and should consult with their own tax advisers before establishing
any retirement plan. Investors who maintain their accounts with participating
brokers should consult their broker about similar types of accounts that may be
offered through the broker. The minimum initial investment for all tax-qualified
plans (except for employer-sponsored plans, SIMPLE IRAs, SEPs and SAR/SEPs) is
$1,000 per Fund and the minimum subsequent investment is $100. The minimum
initial investment for employer-sponsored plans, SIMPLE IRAs, SEPs and SAR/SEPs
and the minimum subsequent investment per Fund for all such plans is $50.
PIMCO Funds Auto-Invest
The PIMCO Funds Auto-Invest plan provides for periodic investments into the
shareholder's account with the Trust by means of automatic transfers of a
designated amount from the shareholder's bank account. The minimum investment
for eligibility in the PIMCO Funds Auto-Invest plan is $1,000 per Fund.
Investments may be made monthly or quarterly, and may be in any amount subject
to a minimum of $50 per month for each Fund in which shares are purchased
through the plan. Further information regarding the PIMCO Funds Auto-
__________
/1/ Effective September 1, 1999, these prototype plans will be subject to the
small account fee and minimum balance size requirements described below under
"Small Account Fee" and "Minimum Account Size."
SG-5
<PAGE>
Invest plan is available from the Distributor or participating brokers. You may
enroll by completing the appropriate section on the account application, or you
may obtain an Auto-Invest application by calling the Distributor or your broker.
PIMCO Funds Auto-Exchange
The PIMCO Funds Auto-Exchange plan establishes regular, periodic exchanges
from one Fund account to another Fund account. The plan provides for regular
investments into a shareholder's account in a specific Fund by means of
automatic exchanges of a designated amount from another Fund account of the same
class of shares and with identical account registration.
Exchanges may be made monthly or quarterly, and may be in any amount
subject to a minimum of $1,000 to open a new Fund account and of $50 for any
existing Fund account for which shares are purchased through the plan.
Further information regarding the PIMCO Funds Auto-Exchange plan is
available from the Distributor at 1-800-426-0107 or participating brokers. You
may enroll by completing an application which may be obtained from the
Distributor or by telephone request at 1-800-426-0107. For more information on
exchanges, see ''Exchange Privilege.''
PIMCO Funds Fund Link
PIMCO Funds Fund Link (''Fund Link'') connects your Fund account(s) with a
bank account. Fund Link may be used for subsequent purchases and for redemptions
and other transactions described under ''How to Redeem.'' Purchase transactions
are effected by electronic funds transfers from the shareholder's account at a
U.S. bank or other financial institution that is an Automated Clearing House
(''ACH'') member. Investors may use Fund Link to make subsequent purchases of
shares in amounts from $50 to $10,000. To initiate such purchases, call 1-800-
426-0107. All such calls will be recorded. Fund Link is normally established
within 45 days of receipt of a Fund Link application by First Data Investor
Services Group, Inc. (the ''Transfer Agent''), the Funds' transfer agent for
Class A, B and C shares. The minimum investment by Fund Link is $50 per Fund.
Shares will be purchased on the regular business day the Distributor receives
the funds through the ACH system, provided the funds are received before the
close of regular trading on the New York Stock Exchange. If the funds are
received after the close of regular trading, the shares will be purchased on the
next regular business day.
Fund Link privileges must be requested on the account application. To
establish Fund Link on an existing account, complete a Fund Link application,
which is available from the Distributor or your broker, with signatures
guaranteed from all shareholders of record for the account. See ''Signature
Guarantee'' below. Such privileges apply to each shareholder of record for the
account unless and until the Distributor receives written instructions from a
shareholder of record canceling such privileges. Changes of bank account
information must be made by completing a new Fund Link application signed by all
owners of record of the account, with all signatures guaranteed. The
Distributor, the Transfer Agent and the Fund may rely on any telephone
instructions believed to be genuine and will not be responsible to
SG-6
<PAGE>
shareholders for any damage, loss or expenses arising out of such instructions.
The Fund reserves the right to amend, suspend or discontinue Fund Link
privileges at any time without prior notice. Fund Link does not apply to shares
held in broker ''street name'' accounts.
Signature Guarantee
When a signature guarantee is called for, the shareholder should have
''Signature Guaranteed'' stamped under his signature and guaranteed by any of
the following entities: U.S. banks, foreign banks having a U.S. correspondent
bank, credit unions, savings associations, U.S. registered dealers and brokers,
municipal securities dealers and brokers, government securities dealers and
brokers, national securities exchanges, registered securities associations and
clearing agencies (each an ''Eligible Guarantor Institution''). The Distributor
reserves the right to reject any signature guarantee pursuant to its written
signature guarantee standards or procedures, which may be revised in the future
to permit it to reject signature guarantees from Eligible Guarantor Institutions
that do not, based on credit guidelines, satisfy such written standards or
procedures. The Funds may change the signature guarantee requirements from time
to time upon notice to shareholders, which may be given by means of a new or
supplemented Retail Prospectus.
Account Registration Changes
Changes in registration or account privileges may be made in writing to the
Transfer Agent. Signature guarantees may be required. See ''Signature
Guarantee'' above. All correspondence must include the account number and must
be sent to:
PIMCO Funds Distributors LLC
P.O. Box 9688
Providence, RI 02940-0926
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a fee at an annual rate of $16 (paid to the applicable Fund's
administrator) will automatically be deducted from direct Fund accounts with
balances falling below a minimum level. The valuation of Fund accounts and the
deduction are expected to take place during the last five business days of each
calendar quarter. The fee will be deducted in quarterly installments from Fund
accounts with balances below $2,500 except for Uniform Gift to Minors, IRA, Roth
IRA and Auto-Invest accounts, for which the limit is $1,000. Except for
prototype plans described above,/2/ the fee also applies to employer-sponsored
retirement plan accounts, Money Purchase and/or Profit Sharing plans, 401(k)
plans, 403(b)(7) custodial accounts, SIMPLE IRAs, SEPs and SAR/SEPs. (A separate
custodial fee may apply to IRAs, Roth IRAs and other retirement
__________
/2/ Effective September 1, 1999, these prototype plans will be subject to the
small account fee and minimum balance size requirements described below under
"Small Account Fee" and "Minimum Account Size."
SG-7
<PAGE>
accounts.) No fee will be charged on any Fund account of a shareholder if the
aggregate value of all of the shareholder's Fund accounts is at least $50,000.
No small account fee will be charged to employee and employee-related accounts
of PIMCO Advisors and/or its affiliates.
Minimum Account Size
Due to the relatively high cost to the Funds of maintaining small accounts,
you are asked to maintain an account balance in each Fund in which you invest of
at least the amount necessary to open the type of account involved. If your
balance for any Fund is below such minimum for three months or longer, the
applicable Fund's administrator shall have the right (except in the case of
employer-sponsored retirement accounts) to close that Fund account after giving
you 60 days in which to increase your balance. Your Fund account will not be
liquidated if the reduction in size is due solely to market decline in the value
of your Fund shares or if the aggregate value of all your accounts in PIMCO
Funds exceeds $50,000.
Alternative Purchase Arrangements
Each Fund offers investors Class A, Class B and Class C shares in the
applicable Retail Prospectus. Class A, B and C shares bear sales charges in
different forms and amounts and bear different levels of expenses, as described
below. Through separate prospectuses, certain of the Funds currently offer up to
three additional classes of shares in the United States: Class D, Institutional
Class and Administrative Class shares. Class D shares are offered through
financial intermediaries. Institutional Class and Administrative Class shares
are offered to pension and profit sharing plans, employee benefit trusts,
endowments, foundations, corporations and other high net worth individuals.
Class D, Institutional Class and Administrative Class shares are sold without a
sales charge and have different expenses than Class A, Class B and Class C
shares. As a result of lower sales charges and/or operating expenses, Class D,
Institutional Class and Administrative Class shares are generally expected to
achieve higher investment returns than Class A, Class B or Class C shares.
Certain Funds also offer up to two additional classes of shares that are offered
only to non-U.S. investors outside the United States: Class J and Class K
shares. To obtain more information about the other classes of shares, please
call the applicable Trust at 1-800-927-4648 (for Institutional and
Administrative Class shares) or the Distributor at 1-888-87-PIMCO (for Class D
shares).
The alternative purchase arrangements described in this Guide are designed
to enable a retail investor to choose the method of purchasing Fund shares that
is most beneficial to the investor based on all factors to be considered,
including the amount and intended length of the investment, the particular Fund
and whether the investor intends to exchange shares for shares of other Funds.
Generally, when making an investment decision, investors should consider the
anticipated life of an intended investment in the Funds, the accumulated
distribution and servicing fees plus CDSCs on Class B or Class C shares, the
initial sales charge plus accumulated servicing fees on Class A shares (plus a
CDSC in certain circumstances), the possibility that the anticipated higher
return on Class A shares due to the lower ongoing charges will offset the
initial sales charge paid on such shares, the automatic conversion of Class B
shares to Class A shares and the difference in the CDSCs applicable to Class A,
Class B and Class C shares.
SG-8
<PAGE>
Class A The initial sales charge alternative (Class A) might be preferred by
investors purchasing shares of sufficient aggregate value to qualify for
reductions in the initial sales charge applicable to such shares. Similar
reductions are not available on the contingent deferred sales charge alternative
(Class B) or the asset based sales charge alternative (Class C). Class A shares
are subject to a servicing fee but are not subject to a distribution fee and,
accordingly, such shares are expected to pay correspondingly higher dividends on
a per share basis. However, because initial sales charges are deducted at the
time of purchase, not all of the purchase payment for Class A shares is invested
initially. Class B and Class C shares might be preferable to investors who wish
to have all purchase payments invested initially, although remaining subject to
higher distribution and servicing fees and, for certain periods, being subject
to a CDSC. An investor who qualifies for an elimination of the Class A initial
sales charge should also consider whether he or she anticipates redeeming shares
in a time period which will subject such shares to a CDSC as described below.
See ''Initial Sales Charge Alternative--Class A Shares--Class A Deferred Sales
Charge'' below.
Class B Class B shares might be preferred by investors who intend to invest in
the Funds for longer periods and who do not intend to purchase shares of
sufficient aggregate value to qualify for sales charge reductions applicable to
Class A shares. Both Class B and Class C shares can be purchased at net asset
value without an initial sales charge. However, unlike Class C shares, Class B
shares convert into Class A shares after the shares have been held for seven
years. After the conversion takes place, the shares will no longer be subject to
a CDSC, and will be subject to the servicing fees charged for Class A shares
which are lower than the distribution and servicing fees charged on either Class
B or Class C shares. See ''Deferred Sales Charge Alternative--Class B Shares''
below. Class B shares are not available for purchase by employer sponsored
retirement plans.
Class C Class C shares might be preferred by investors who intend to purchase
shares which are not of sufficient aggregate value to qualify for Class A sales
charges of 1% or less and who wish to have all purchase payments invested
initially. Class C shares are preferable to Class B shares for investors who
intend to maintain their investment for intermediate periods and therefore may
also be preferable for investors who are unsure of the intended length of their
investment. Unlike Class B shares, Class C shares are not subject to a CDSC
after they have been held for one year and are subject to only a 1% CDSC during
the first year. However, because Class C shares do not convert into Class A
shares, Class B shares are preferable to Class C shares for investors who intend
to maintain their investment in the Funds for long periods. See ''Asset Based
Sales Charge Alternative--Class C Shares'' below.
In determining which class of shares to purchase, an investor should always
consider whether any waiver or reduction of a sales charge or a CDSC is
available. See generally ''Initial Sales Charge Alternative--Class A Shares''
and ''Waiver of Contingent Deferred Sales Charges'' below.
The maximum single purchase of Class B shares of a Fund is $249,999. The
maximum single purchase of Class C shares of a Fund is $999,999. The Funds may
refuse any order to purchase shares.
SG-9
<PAGE>
For a description of the Distribution and Servicing Plans and distribution
and servicing fees payable thereunder with respect to Class A, Class B and Class
C shares, see ''Distributor and Distribution and Servicing Plans'' below.
Waiver of Contingent Deferred Sales Charges The CDSC applicable to Class A and
Class C shares is currently waived for (i) any partial or complete redemption in
connection with (a) required minimum distributions to IRA account owners or
beneficiaries who are age 70 1/2 or older or (b) distributions to participants
in employer-sponsored retirement plans upon attaining age 59 1/2 or on account
of death or disability; (ii) any partial or complete redemption in connection
with a qualifying loan or hardship withdrawal from an employer sponsored
retirement plan; (iii) any complete redemption in connection with a distribution
from a qualified employer retirement plan in connection with termination of
employment or termination of the employer's plan and the transfer to another
employer's plan or to an IRA (with the exception of a Roth IRA); (iv) any
partial or complete redemption following death or disability (as defined in the
Internal Revenue Code) of a shareholder (including one who owns the shares as
joint tenant with his or her spouse) from an account in which the deceased or
disabled is named, provided the redemption is requested within one year of the
death or initial determination of disability; (v) any redemption resulting from
a return of an excess contribution to a qualified employer retirement plan or an
IRA (with the exception of a Roth IRA); (vi) up to 10% per year of the value of
a Fund account which (a) has the value of at least $10,000 at the start of such
year and (b) is subject to an Automatic Withdrawal Plan; (vii) redemptions by
Trustees, officers and employees of either Trust, and by directors, officers and
employees of the Distributor, PIMCO Advisors or Pacific Investment Management;
(viii) redemptions effected pursuant to a Fund's right to involuntarily redeem a
shareholder's Fund account if the aggregate net asset value of shares held in
such shareholder's account is less than a minimum account size specified in such
Fund's prospectus; (ix) involuntary redemptions caused by operation of law; (x)
redemption of shares of any Fund that is combined with another Fund, investment
company, or personal holding company by virtue of a merger, acquisition or other
similar reorganization transaction; (xi) redemptions by a shareholder who is a
participant making periodic purchases of not less than $50 through certain
employer sponsored savings plans that are clients of a broker-dealer with which
the Distributor has an agreement with respect to such purchases; (xii)
redemptions effected by trustees or other fiduciaries who have purchased shares
for employer-sponsored plans, the trustee, administrator, fiduciary, broker,
trust company or registered investment adviser for which has an agreement with
the Distributor with respect to such purchases; (xiii) redemptions in connection
with IRA accounts established with Form 5305-SIMPLE under the Code for which the
Trust is the designated financial institution; (xiv) a redemption by a holder of
Class A shares who purchased $1,000,000 or more of Class A shares (and therefore
did not pay a sales charge) where the participating broker or dealer involved in
the sale of such shares waived the commission it would normally receive from the
Distributor pursuant to an agreement with the Distributor; or (xv) a redemption
by a holder of Class A shares where the participating broker or dealer involved
in the purchase of such shares waived the commission it normally would receive
from the Distributor in connection with such purchase pursuant to an agreement
with the Distributor.
The CDSC applicable to Class B shares is currently waived for any partial
or complete redemption in each of the following cases: (a) in connection with
required minimum
SG-10
<PAGE>
distributions to IRA account owners or to plan participants or beneficiaries who
are age 70 1/2 or older; (b) involuntary redemptions caused by operation of law;
(c) redemption of shares of any Fund that is combined with another Fund,
investment company, or personal holding company by virtue of a merger,
acquisition or other similar reorganization transaction; (d) following death or
disability (as defined in the Code) of a shareholder (including one who owns the
shares as joint tenant with his or her spouse) from an account in which the
deceased or disabled is named, provided the redemption is requested within one
year of the death or initial determination of disability; and (e) up to 10% per
year of the value of a Fund account which (i) has a value of at least $100,000
at the start of such year and (ii) is subject to an Automatic Withdrawal Plan.
See ''How to Redeem--Automatic Withdrawal Plan.''
The Distributor may require documentation prior to waiver of the CDSC for
any class, including distribution letters, certification by plan administrators,
applicable tax forms, death certificates, physicians' certificates, etc.
Initial Sales Charge Alternative--Class A Shares
Class A shares are sold at a public offering price equal to their net asset
value per share plus a sales charge, as set forth below. As indicated below
under ''Class A Deferred Sales Charge,'' certain investors that purchase
$1,000,000 or more of any Fund's Class A shares (and thus pay no initial sales
charge) may be subject to a 1% CDSC if they redeem such shares during the first
18 months after their purchase.
Initial Sales Charge -- Class A Shares
PIMCO Growth, Target, Opportunity, Capital Appreciation, Mid-Cap Growth, Small-
Cap Growth, Equity Income, Renaissance, Value, Value 25, Small-Cap Value, Tax-
Efficient Equity, International, Innovation, Precious Metals and Balanced Funds,
and PIMCO Funds Asset Allocation Series -- 90/10 and 40/60 Portfolios
<TABLE>
<CAPTION>
Amount of Purchase Sales Charge as % of Net Sales Charge as % of Public Discount or Commission to
Amount Invested Offering Price dealers as % of Public Offering
Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 5.82% 5.50% 4.75%
- --------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.71% 4.50% 4.00%
- --------------------------------------------------------------------------------------------------------------------
$100,000 - 249,999 3.63% 3.50% 3.00%
- --------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.56% 2.50% 2.00%
- --------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.04% 2.00% 1.75%
- --------------------------------------------------------------------------------------------------------------------
$1,000,000 + 0.00%/(1)/ 0.00%/(1)/ 0.75%/(2)/
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SG-11
<PAGE>
30/70 Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Amount of Purchase Sales Charge as % of Net Sales Charge as % of Public Discount or Commission to
Amount Invested Offering Price dealers as % of Public Offering
Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 4.71% 4.50% 4.00%
- --------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.17% 4.00% 3.50%
- --------------------------------------------------------------------------------------------------------------------
$100,000 - 249,999 3.63% 3.50% 3.00%
- --------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.56% 2.50% 2.00%
- --------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.04% 2.00% 1.75%
- --------------------------------------------------------------------------------------------------------------------
$1,000,000 + 0.00%/(1)/ 0.00%/(1)/ 0.50%/(2)/
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PIMCO Total Return, High Yield, Long-Term U.S. Government, Global Bond II,
Foreign Bond, Emerging Markets Bond, Strategic Balanced and Convertible Bond
Funds
<TABLE>
<CAPTION>
Amount of Purchase Sales Charge as % of Net Sales Charge as % of Public Discount or Commission to
Amount Invested Offering Price dealers as % of Public Offering
Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 4.71% 4.50% 4.00%
- --------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.17% 4.00% 3.50%
- --------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 3.63% 3.50% 3.00%
- --------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.56% 2.50% 2.00%
- --------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.04% 2.00% 1.75%
- --------------------------------------------------------------------------------------------------------------------
$1,000,000+ 0.00%/(1)/ 0.00%/(1)/ 0.50%/(3)/
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SG-12
<PAGE>
PIMCO Low Duration, Real Return Bond, Municipal Bond, California Intermediate
Municipal Bond, New York Intermediate Municipal Bond and StocksPLUS Funds
<TABLE>
<CAPTION>
Amount of Purchase Sales Charge as % of Net Sales Charge as % of Public Discount or Commission to
Amount Invested Offering Price dealers as % of Public Offering
Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 3.09% 3.00% 2.50%
- --------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 2.56% 2.50% 2.00%
- --------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 2.04% 2.00% 1.75%
- --------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 1.52% 1.50% 1.25%
- --------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 1.27% 1.25% 1.00%
- --------------------------------------------------------------------------------------------------------------------
$1,000,000+ 0.00%/(1)/ 0.00%/(1)/ 0.50%/(3)/
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PIMCO Short-Term and Short Duration Municipal Income Funds
<TABLE>
<CAPTION>
Amount of Purchase Sales Charge as % of Net Sales Charge as % of Public Discount or Commission to
Amount Invested Offering Price dealers as % of Public Offering
Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 2.04% 2.00% 1.75%
- --------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 1.78% 1.75% 1.50%
- --------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 1.52% 1.50% 1.25%
- --------------------------------------------------------------------------------------------------------------------
$250,000+ 0.00%/(1)/ 0.00%/(1)/ 0.25%/(3)/
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1. As shown, investors that purchase more than $1,000,000 of any Fund's Class
A shares ($250,000 in the case of the PIMCO Short-Term and Short Duration
Municipal Income Funds) will not pay any initial sales charge on such
purchase. However, except with regard to purchases of Class A shares of the
PIMCO Money Market Fund, purchasers of $1,000,000 or more ($250,00 in the
case of the PIMCO Short-Term and Short Duration Municipal Income Funds) of
Class A shares (other than those purchasers described below under "Sales at
Net Asset Value" where no commission is paid) will be subject to a CDSC of
1% if such shares are redeemed during the first 18 months after such shares
are purchased unless such purchaser is eligible for a waiver of the CDSC as
described under "Waiver of Contingent Deferred Sales Charges" above. See
"Class A Deferred Sales Charge" below.
2. The Distributor will pay a commission to dealers who sell amounts of
$1,000,000 or more of Class A shares (or who sell Class A shares at net
asset value to certain employer-sponsored plans as outlined in "Sales at
Net Asset Value" below) of each of these Funds and the Portfolios (except
for the 30/70 Portfolio) according to the following schedule: 0.75% of the
first $2,000,000, 0.50% of amounts from $2,000,001 to $5,000,000, and 0.25%
of amounts over $5,000,000; and of the 30/70 Portfolio according to the
following schedule: 0.50% of the first $2,000,000, and 0.25% of amounts
over $2,000,000.
3. The Distributor will pay a commission to dealers who sell amounts of
$1,000,000 ($250,000 in the case of the PIMCO Short-Term and Short Duration
Municipal Income Funds) or more of Class A shares (or who sell Class A
shares at net asset value to certain employer-sponsored plans as outlined
in "Sales at Net Asset Value") of each of these Funds except for the PIMCO
Money Market Fund (for which no payment is made) and the PIMCO Short-Term
and Short Duration Municipal Income Funds, according to the following
schedule: 0.50% of the first $2,000,000 and 0.25% of amounts over
$2,000,000; and 0.25% of sales of Class A shares of the PIMCO Short-Term
and Short Duration Municipal Income Funds in excess of $250,000.
SG-13
<PAGE>
Each Fund receives the entire net asset value of its Class A shares
purchased by investors. The Distributor receives the sales charge shown above
less any applicable discount or commission ''reallowed'' to participating
brokers in the amounts indicated in the table above. The Distributor may,
however, elect to reallow the entire sales charge to participating brokers for
all sales with respect to which orders are placed with the Distributor for any
particular Fund during a particular period. During such periods as may from time
to time be designated by the Distributor, the Distributor will pay an additional
amount of up to 0.50% of the purchase price on sales of Class A shares of all or
selected Funds purchased to each participating broker which obtains purchase
orders in amounts exceeding thresholds established from time to time by the
Distributor. From time to time, the Distributor, its parent and/or its
affiliates may make additional payments to one or more participating brokers
based upon factors such as the level of sales or the length of time clients'
assets have remained in the Trust.
Shares issued pursuant to the automatic reinvestment of income dividends or
capital gains distributions are issued at net asset value and are not subject to
any sales charges.
Under the circumstances described below, investors may be entitled to pay
reduced sales charges for Class A shares.
Combined Purchase Privilege Investors may qualify for a reduced sales charge by
combining purchases of the Class A shares of one or more Funds which offer Class
A shares (together, "eligible PIMCO Funds") into a "single purchase," if the
resulting purchase totals at least $50,000. The term single purchase refers to:
(i) a single purchase by an individual, or concurrent purchases, which
in the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of 21
years purchasing Class A shares of the eligible PIMCO Funds for his,
her or their own account;
(ii) single purchase by a trustee or other fiduciary purchasing shares
for a single trust, estate or fiduciary account although more than
one beneficiary is involved; or
(iii) a single purchase for the employee benefit plans of a single
employer.
For further information, call the Distributor at 1-800-426-0107 or your
broker.
Cumulative Quantity Discount (Right of Accumulation) A purchase of additional
Class A shares of any eligible PIMCO Fund may qualify for a Cumulative Quantity
Discount at the rate applicable to the discount bracket obtained by adding:
(i) the investor's current purchase;
(ii) the value (at the close of business on the day of the current
purchase) of all Class A shares of any eligible PIMCO Fund held by
the investor computed at the maximum offering price; and
SG-14
<PAGE>
(iii) the value of all shares described in paragraph (ii) owned by another
shareholder eligible to be combined with the investor's purchase
into a "single purchase" as defined above under "Combined
Purchase Privilege."
For example, if you owned Class A shares of the PIMCO Equity Income Fund
worth $25,000 at the current maximum offering price and wished to purchase
Class A shares of the PIMCO Growth Fund worth an additional $30,000, the
sales charge for the $30,000 purchase would be at the 4.50% rate applicable
to a single $55,000 purchase of shares of the PIMCO Growth Fund, rather
than the 5.50% rate.
Letter of Intent An investor may also obtain a reduced sales charge by means of
a written Letter of Intent, which expresses an intention to invest not less than
$50,000 within a period of 13 months in Class A shares of any eligible PIMCO
Fund(s) other than the PIMCO Money Market Fund. Each purchase of shares under a
Letter of Intent will be made at the public offering price or prices applicable
at the time of such purchase to a single transaction of the dollar amount
indicated in the Letter. At the investor's option, a Letter of Intent may
include purchases of Class A shares of any eligible PIMCO Fund (other than the
PIMCO Money Market Fund) made not more than 90 days prior to the date the Letter
of Intent is signed; however, the 13-month period during which the Letter is in
effect will begin on the date of the earliest purchase to be included and the
sales charge on any purchases prior to the Letter will not be adjusted.
Investors qualifying for the Combined Purchase Privilege described above
may purchase shares of the eligible PIMCO Funds under a single Letter of Intent.
For example, if at the time you sign a Letter of Intent to invest at least
$100,000 in Class A shares of any Fund (other than the PIMCO Money Market Fund),
you and your spouse each purchase Class A shares of the PIMCO Growth Fund worth
$30,000 (for a total of $60,000), it will only be necessary to invest a total of
$40,000 during the following 13 months in Class A shares of any of the Funds
(other than the PIMCO Money Market Fund) to qualify for the 3.50% sales charge
on the total amount being invested (the sales charge applicable to an investment
of $100,000 in any of the Funds other than the PIMCO Money Market, Short-Term,
Low Duration, Real Return Bond, Short Duration Municipal Income, Municipal Bond
and StocksPLUS Funds).
A Letter of Intent is not a binding obligation to purchase the full amount
indicated. The minimum initial investment under a Letter of Intent is 5% of such
amount. Shares purchased with the first 5% of such amount will be held in escrow
(while remaining registered in your name) to secure payment of the higher sales
charge applicable to the shares actually purchased in the event the full
intended amount is not purchased. If the full amount indicated is not purchased,
a sufficient amount of such escrowed shares will be involuntarily redeemed to
pay the additional sales charge applicable to the amount actually purchased, if
necessary. Dividends on escrowed shares, whether paid in cash or reinvested in
additional eligible PIMCO Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released.
If you wish to enter into a Letter of Intent in conjunction with your
initial investment in Class A shares of a Fund, you should complete the
appropriate portion of the account
SG-15
<PAGE>
application. If you are a current Class A shareholder desiring to do so you may
obtain a form of Letter of Intent by contacting the Distributor at 1-800-426-
0107 or any broker participating in this program.
Reinstatement Privilege A Class A shareholder who has caused any or all of his
shares (other than PIMCO Money Market Fund shares that were not acquired by
exchanging Class A shares of another Fund) to be redeemed may reinvest all or
any portion of the redemption proceeds in Class A shares of any eligible PIMCO
Fund at net asset value without any sales charge, provided that such
reinvestment is made within 120 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined. See "How Net Asset Value is Determined" in the applicable Retail
Prospectus. A reinstatement pursuant to this privilege will not cancel the
redemption transaction and, consequently, any gain or loss so realized may be
recognized for federal tax purposes except that no loss may be recognized to the
extent that the proceeds are reinvested in shares of the same Fund within 30
days. The reinstatement privilege may be utilized by a shareholder only once,
irrespective of the number of shares redeemed, except that the privilege may be
utilized without limit in connection with transactions whose sole purpose is to
transfer a shareholder's interest in a Fund to his Individual Retirement Account
or other qualified retirement plan account. An investor may exercise the
reinstatement privilege by written request sent to the Distributor or to the
investor's broker.
Sales at Net Asset Value Each Fund may sell its Class A shares at net asset
value without a sales charge to (a) current or retired officers, trustees,
directors or employees of either Trust, PIMCO Advisors, Pacific Investment
Management or the Distributor, affiliates of PIMCO Advisors, Pacific Investment
Management or the Distributor, a parent, brother or sister of any such officer,
trustee, director or employee or a spouse or child of any of the foregoing
persons, or any trust, profit sharing or pension plan for the benefit of any
such person and to any other person if the Distributor anticipates that there
will be minimal sales expenses associated with the sale, (b) current registered
representatives and other full-time employees of participating brokers or such
persons' spouses or for trust or custodial accounts for their minor children,
(c) trustees or other fiduciaries purchasing shares for certain plans sponsored
by employers, professional organizations or associations or charitable
organizations, the trustee, administrator, fiduciary, broker, trust company or
registered investment adviser for which has an agreement with the Distributor
with respect to such purchases (including provisions related to minimum levels
of investment in the Trust), and to participants in such plans and their spouses
purchasing for their account(s) or IRAs (with the exception of Roth IRAs), (d)
participants investing through accounts known as "wrap accounts" established
with brokers or dealers approved by the Distributor where such brokers or
dealers are paid a single, inclusive fee for brokerage and investment management
services, (e) client accounts of broker-dealers or registered investment
advisers affiliated with such broker-dealers with which the Distributor has an
agreement for the use of a Fund in particular investment products or programs
and (f) accounts for which a trust company affiliated with the Trust or the
Fund's Adviser serves as trustee or custodian. As described above, the
Distributor will not pay any initial commission to dealers upon the sale of
Class A shares to the purchasers described in this paragraph except for sales to
purchasers described under (c) in this paragraph.
SG-16
<PAGE>
Notification of Distributor An investor or participating broker must notify the
Distributor whenever a quantity discount or reduced sales charge is applicable
to a purchase and must provide the Distributor with sufficient information at
the time of purchase to verify that each purchase qualifies for the privilege or
discount. Upon such notification, the investor will receive the lowest
applicable sales charge. The quantity discounts described above may be modified
or terminated at any time.
Class A Deferred Sales Charge For all Funds, except the PIMCO Money Market Fund,
investors who purchase $1,000,000 ($250,000 in the case of the PIMCO Short-Term
Fund) or more of Class A shares (and, thus, purchase such shares without any
initial sales charge) may be subject to a 1% CDSC (the "Class A CDSC") if such
shares are redeemed within 18 months of their purchase. The Class A CDSC does
not apply to investors purchasing $1,000,000 ($250,000 in the case of the PIMCO
Short-Term and Short Duration Municipal Income Funds or more of any Fund's Class
A shares if such investors are otherwise eligible to purchase Class A shares
without any sales charge because they are described under "Sales at Net Asset
Value" above.
For purchases subject to the Class A CDSC, a 1% CDSC will apply for any
redemption of such Class A shares that occurs within 18 months of their
purchase. No CDSC will be imposed if the shares redeemed have been acquired
through the reinvestment of dividends or capital gains distributions or if the
amount redeemed is derived from increases in the value of the account above the
amount of purchase payments subject to the CDSC. In determining whether a CDSC
is payable, it is assumed that Class A shares acquired through the reinvestment
of dividends and distributions are redeemed first, and thereafter that Class A
shares that have been held by an investor for the longest period of time are
redeemed first.
The Class A CDSC does not apply to Class A shares of the PIMCO Money Market
Fund but, if PIMCO Money Market Fund Class A shares are purchased in a
transaction that, for any other Fund, would be subject to the CDSC (i.e., a
purchase of $1,000,000 ($250,000 in the case of the PIMCO Short-Term and Short
Duration Municipal Income Funds or more) and are subsequently exchanged for
Class A shares of any other Fund, a Class A CDSC will apply to the shares of the
Fund acquired by exchange for a period of 18 months from the date of the
exchange.
The Class A CDSC is currently waived in connection with certain redemptions
as described above under "Alternative Purchase Arrangements--Waiver of
Contingent Deferred Sales Charges." For more information about the Class A
CDSC, call the Distributor at 1-800-426-0107.
Participating Brokers Investment dealers and other financial intermediaries
provide varying arrangements for their clients to purchase and redeem Fund
shares. Some may establish higher minimum investment requirements than set forth
above. Firms may arrange with their clients for other investment or
administrative services and may independently establish and charge transaction
fees and/or other additional amounts to their clients for such services, which
charges would reduce clients' return. Firms also may hold Fund shares in nominee
or street name as agent for and on behalf of their customers. In such instances,
the Trust's transfer agent will have no information with respect to or control
over accounts of specific shareholders. Such shareholders may obtain access to
their accounts and information about their accounts only from their broker. In
addition, certain privileges with respect to the
SG-17
<PAGE>
purchase and redemption of shares or the reinvestment of dividends may not be
available through such firms. Some firms may participate in a program allowing
them access to their clients' accounts for servicing including, without
limitation, transfers of registration and dividend payee changes; and may
perform functions such as generation of confirmation statements and disbursement
of cash dividends. This Guide and the Retail Prospectuses should be read in
connection with such firms' material regarding their fees and services.
Deferred Sales Charge Alternative--Class B Shares
Class B shares are sold at their current net asset value without any
initial sales charge. The full amount of an investor's purchase payment will be
invested in shares of the Fund(s) selected. A CDSC will be imposed on Class B
shares if an investor redeems an amount which causes the current value of the
investor's account for a Fund to fall below the total dollar amount of purchase
payments subject to the CDSC, except that no CDSC is imposed if the shares
redeemed have been acquired through the reinvestment of dividends or capital
gains distributions or if the amount redeemed is derived from increases in the
value of the account above the amount of purchase payments subject to the CDSC.
Class B shares of the PIMCO Short-Term Fund and the PIMCO Money Market Fund
are not offered for initial purchase but may be obtained through exchanges of
Class B shares of other Funds. See "Exchange Privilege" below. Class B shares
are not available for purchase by employer sponsored retirement plans.
Whether a CDSC is imposed and the amount of the CDSC will depend on the
number of years since the investor made a purchase payment from which an amount
is being redeemed. Purchases are subject to the CDSC according to the following
schedule:
<TABLE>
<CAPTION>
Years Since Purchase Percentage Contingent
Payment was Made Deferred Sales Charge
---------------- ---------------------
<S> <C>
First 5
Second 4
Third 3
Fourth 3
Fifth 2
Sixth 1
Seventh 0*
</TABLE>
* After the seventh year, Class B shares convert into Class A shares as
described below.
In determining whether a CDSC is payable, it is assumed that the purchase
payment from which a redemption is made is the earliest purchase payment from
which a redemption or exchange has not already been fully effected.
SG-18
<PAGE>
The following example will illustrate the operation of the Class B CDSC:
Assume that an individual opens a Fund account and makes a purchase payment
of $10,000 for Class B shares of a Fund and that six months later the value of
the investor's account for that Fund has grown through investment performance
and reinvestment of distributions to $11,000. The investor then may redeem up to
$1,000 from that Fund account ($11,000 minus $10,000) without incurring a CDSC.
If the investor should redeem $3,000 from that Fund account, a CDSC would be
imposed on $2,000 of the redemption (the amount by which the investor's account
for the Fund was reduced below the amount of the purchase payment). At the rate
of 5%, the Class B CDSC would be $100.
In determining whether an amount is available for redemption without
incurring a CDSC, the purchase payments made for all Class B shares in the
shareholder's account for the particular Fund are aggregated, and the current
value of all such shares is aggregated. Any CDSC imposed on a redemption of
Class B shares is paid to the Distributor.
Class B shares are subject to higher distribution fees than Class A shares
for a fixed period after their purchase, after which they automatically convert
to Class A shares and are no longer subject to such higher distribution fees.
Class B shares of each Fund automatically convert into Class A shares after they
have been held for seven years.
For sales of Class B shares made and services rendered to Class B
shareholders, the Distributor intends to make payments to participating brokers,
at the time a shareholder purchases Class B shares, of 4.00% of the purchase
amount for each of the Funds. During such periods as may from time to time be
designated by the Distributor, the Distributor will pay selected participating
brokers an additional amount of up to .50% of the purchase price on sales of
Class B shares of all or selected Funds purchased to each participating broker
which obtains purchase orders in amounts exceeding thresholds established from
time to time by the Distributor.
The Class B CDSC is currently waived in connection with certain redemptions
as described above under "Alternative Purchase Arrangements --Waiver of
Contingent Deferred Sales Charges." For more information about the Class B
CDSC, call the Distributor at 1-800-426-0107.
Asset Based Sales Charge Alternative--Class C Shares
Class C shares are sold at their current net asset value without any
initial sales charge. A CDSC is imposed on Class C shares if an investor redeems
an amount which causes the current value of the investor's account for a Fund to
fall below the total dollar amount of purchase payments subject to the CDSC,
except that no CDSC is imposed if the shares redeemed have been acquired through
the reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of purchase payments subject to the CDSC. All of an investor's purchase payments
are invested in shares of the Fund(s) selected.
SG-19
<PAGE>
Whether a CDSC is imposed and the amount of the CDSC will depend on the
number of years since the investor made a purchase payment from which an amount
is being redeemed. Purchases are subject to the CDSC according to the following
schedule:
Years Since Purchase Percentage Contingent
Payment was Made Deferred Sales Charge
---------------- ---------------------
First 1
Thereafter 0
In determining whether a CDSC is payable, it is assumed that the purchase
payment from which the redemption is made is the earliest purchase payment (from
which a redemption or exchange has not already been effected).
The following example will illustrate the operation of the Class C CDSC:
Assume that an individual opens a Fund account and makes a purchase payment
of $10,000 for Class C shares of a Fund and that six months later the value of
the investor's account for that Fund has grown through investment performance
and reinvestment of distributions to $11,000. The investor then may redeem up to
$1,000 from that Fund account ($11,000 minus $10,000) without incurring a CDSC.
If the investor should redeem $3,000 from that Fund account, a CDSC would be
imposed on $2,000 of the redemption (the amount by which the investor's account
for the Fund was reduced below the amount of the purchase payment). At the rate
of 1%, the Class C CDSC would be $20.
In determining whether an amount is available for redemption without
incurring a CDSC, the purchase payments made for all Class C shares in the
shareholder's account for the particular Fund are aggregated, and the current
value of all such shares is aggregated. Any CDSC imposed on a redemption of
Class C shares is paid to the Distributor. Unlike Class B shares, Class C shares
do not automatically convert to any other class of shares of the Funds.
Except as described below, for sales of Class C shares made and services
rendered to Class C shareholders, the Distributor expects to make payments to
participating brokers, at the time the shareholder purchases Class C shares, of
1.00% (representing .75% distribution fees and .25% servicing fees) of the
purchase amount for all Funds, except the Money Market, Short-Term Duration,
Real Return Bond, Municipal Bond and StocksPLUS Funds. For the PIMCO Low
Duration, Real Return Bond, Municipal Bond and StocksPLUS Funds, the Distributor
expects to make payments of .75% (representing .50% distribution fees and .25%
service fees); for the PIMCO Short-Term and Short Duration Municipal Income
Funds, the Distributor expects to make payments of .55% (representing .30%
distribution fees and .25% service fees); and for the PIMCO Money Market Fund,
the Distributor expects to make no payment. For sales of Class C shares made to
participants making periodic purchases of not less than $50 through certain
employer sponsored savings plans which are clients of a broker-dealer with which
the Distributor has an agreement with respect to such purchases, no payments are
made at the time of purchase. During such periods as may from time to time be
designated by the Distributor, the Distributor will pay an additional amount of
up to .50% of the purchase price on sales of Class C shares
SG-20
<PAGE>
of all or selected Funds purchased to each participating broker which obtains
purchase orders in amounts exceeding thresholds established from time to time by
the Distributor.
The Class C CDSC is currently waived in connection with certain redemptions
as described above under "Alternative Purchase Arrangements--Waiver of
Contingent Deferred Sales Charges." For more information about the Class C
CDSC, contact the Distributor at 1-800-426-0107.
Exchange Privilege
Except with respect to exchanges for shares of Funds for which sales may be
suspended to new investors, a shareholder may exchange Class A, Class B and
Class C shares of any Fund for the same Class of shares of any other Fund in an
account with identical registration on the basis of their respective net asset
values (except that a sales charge will apply on exchanges of Class A shares of
the PIMCO Money Market Fund on which no sales charge was paid at the time of
purchase.) Class A shares of the PIMCO Money Market Fund may be exchanged for
Class A shares of any other Fund, but the usual sales charges applicable to
investments in such other Fund apply on shares for which no sales charge was
paid at the time of purchase. There are currently no exchange fees or charges.
All exchanges are subject to the $2,500 minimum initial purchase requirement for
each Fund, except with respect to tax-qualified programs and exchanges effected
through the PIMCO Funds Auto-Exchange plan. An exchange will constitute a
taxable sale for federal income tax purposes.
Investors who maintain their account with the Distributor may exchange
shares by a written exchange request sent to PIMCO Funds Distributors LLC, P.O.
Box 9688, Providence, RI 02940-0926 or, unless the investor has specifically
declined telephone exchange privileges on the account application or elected in
writing not to utilize telephone exchanges, by a telephone request to the
Distributor at 1-800-426-0107. Each Trust will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine, and may be
liable for any losses due to unauthorized or fraudulent instructions if it fails
to employ such procedures. Each Trust will require a form of personal
identification prior to acting on a caller's telephone instructions, will
provide written confirmations of such transactions and will record telephone
instructions. Exchange forms are available from the Distributor at 1-800-426-
0107 and may be used if there will be no change in the registered name or
address of the shareholder. Changes in registration information or account
privileges may be made in writing to the Transfer Agent, First Data Investor
Services Group, Inc., P.O. Box 9688, Providence, RI 02940-0926, or by use of
forms which are available from the Distributor. A signature guarantee is
required. See "How to Buy Shares--Signature Guarantee." Telephone exchanges
may be made between 9:00 a.m., Eastern time and the close of regular trading
(normally 4:00 p.m., Eastern time) on the New York Stock Exchange on any day the
Exchange is open (generally weekdays other than normal holidays). The Trusts
reserve the right to refuse exchange purchases if, in the judgment of the Fund's
Adviser, the purchase would adversely affect the Fund and its shareholders. In
particular, a pattern of exchanges characteristic of "market-timing"
strategies may be deemed by an Adviser to be detrimental to a Trust or a
particular Fund.
SG-21
<PAGE>
Currently, each Trust limits the number of "round trip" exchanges an
investor may make. An investor makes a "round trip" exchange when the investor
purchases shares of a particular Fund, subsequently exchanges those shares for
shares of a different PIMCO Fund, and then exchanges back into the originally
purchased Fund. The Trusts have the right to refuse any exchange for any
investor who completes (by making the exchange back into the shares of the
originally purchased Fund) more than six round trip exchanges in any twelve-
month period. Although the Trusts have no current intention of terminating or
modifying the exchange privilege other than as set forth in the preceding
sentence, each reserves the right to do so at any time. Except as otherwise
permitted by the Securities and Exchange Commission, each Trust will give 60
days' advance notice to shareholders of any termination or material modification
of the exchange privilege. For further information about exchange privileges,
contact your participating broker or call the Distributor at 1-800-426-0107.
With respect to Class B and Class C shares, or Class A shares subject to a
CDSC, if less than all of an investment is exchanged out of a Fund, any portion
of the investment attributable to capital appreciation and/or reinvested
dividends or capital gains distributions will be exchanged first, and thereafter
any portions exchanged will be from the earliest investment made in the Fund
from which the exchange was made. Shareholders should take into account the
effect of any exchange on the applicability of any CDSC that may be imposed upon
any subsequent redemption.
Investors may also select the PIMCO Funds Auto-Exchange plan which
establishes automatic periodic exchanges. For further information on automatic
exchanges see "How to Buy Shares--PIMCO Funds Auto-Exchange" above.
How to Redeem
Class A, Class B or Class C shares may be redeemed through a participating
broker, by telephone, by submitting a written redemption request directly to the
Transfer Agent (for non-broker accounts), or through an Automatic Withdrawal
Plan or PIMCO Funds Fund Link.
A CDSC may apply to a redemption of Class A, Class B or Class C shares. See
"Alternative Purchase Arrangements" above. Shares are redeemed at their net
asset value next determined after a redemption request has been received as
described below, less any applicable CDSC. There is no charge by the Distributor
(other than an applicable CDSC) with respect to a redemption; however, a
participating broker who processes a redemption for an investor may charge
customary commissions for its services. Dealers and other financial services
firms are obligated to transmit orders promptly. Requests for redemption
received by dealers or other firms prior to the close of regular trading
(normally 4:00 p.m., Eastern time) on the New York Stock Exchange on a regular
business day and received by the Distributor prior to the close of the
Distributor's business day will be confirmed at the net asset value effective as
of the closing of the Exchange on that day, less any applicable CDSC.
SG-22
<PAGE>
Direct Redemption
A shareholder's original account application permits the shareholder to
redeem by written request and by telephone (unless the shareholder specifically
elects not to utilize telephone redemptions) and to elect one or more of the
additional redemption procedures described below. A shareholder may change the
instructions indicated on his original account application, or may request
additional redemption options, only by transmitting a written direction to the
Transfer Agent. Requests to institute or change any of the additional redemption
procedures will require a signature guarantee.
Redemption proceeds will normally be mailed to the redeeming shareholder
within seven days or, in the case of wire transfer or Fund Link redemptions,
sent to the designated bank account within one business day. Fund Link
redemptions may be received by the bank on the second or third business day. In
cases where shares have recently been purchased by personal check, redemption
proceeds may be withheld until the check has been collected, which may take up
to 15 days. To avoid such withholding, investors should purchase shares by
certified or bank check or by wire transfer.
Written Requests
To redeem shares in writing (whether or not represented by certificates), a
shareholder must send the following items to the Transfer Agent, First Data
Investor Services Group, Inc., P.O. Box 9688, Providence, RI 02940-0926.
(1) a written request for redemption signed by all registered owners exactly as
the account is registered on the Transfer Agent's records, including
fiduciary titles, if any, and specifying the account number and the dollar
amount or number of shares to be redeemed;
(2) for certain redemptions described below, a guarantee of all signatures on
the written request or on the share certificate or accompanying stock
power, if required, as described under "How to Buy Shares--Signature
Guarantee";
(3) any share certificates issued for any of the shares to be redeemed (see
"Certificated Shares" below); and
(4) any additional documents which may be required by the Transfer Agent for
redemption by corporations, partnerships or other organizations, executors,
administrators, trustees, custodians or guardians, or if the redemption is
requested by anyone other than the shareholder(s) of record.
Transfers of shares are subject to the same requirements. A signature
guarantee is not required for a redemption requested by and payable to all
shareholders of record for the account that is to be sent to the address of
record for that account. To avoid delay in redemption or transfer, shareholders
having any questions about these requirements should contact the Transfer Agent
in writing or call the Distributor at 1-800-426-0107 before submitting a
request. Redemption or transfer requests will not be honored until all required
SG-23
<PAGE>
documents have been completed by the shareholder and received by the Transfer
Agent. This redemption option does not apply to shares held in broker "street
name" accounts. Shareholders whose shares are held in broker "street name"
accounts must redeem through their broker.
If the proceeds of the redemption (i) are to be paid to a person other than
the record owner, (ii) are to be sent to an address other than the address of
the account on the Transfer Agent's records or (iii) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed as
described above, except that the Distributor may waive the signature guarantee
requirement for redemptions up to $2,500 by a trustee of a qualified retirement
plan, the administrator for which has an agreement with the Distributor.
Telephone Redemptions
Each Trust accepts telephone requests for redemption of uncertificated
shares for amounts up to $50,000 within any 7 calendar day period, except for
investors who have specifically declined telephone redemption privileges on the
account application or elected in writing not to utilize telephone redemptions.
The proceeds of a telephone redemption will be sent to the record shareholder at
his record address. Changes in account information must be made in a written
authorization with a signature guarantee. See "How to Buy Shares--Signature
Guarantee." Telephone redemptions will not be accepted during the 30-day period
following any change in an account's record address. This redemption option does
not apply to shares held in broker "street name" accounts. Shareholders whose
shares are held in broker "street name" accounts must redeem through their
broker.
By completing an account application, an investor agrees that the
applicable Trust, the Distributor and the Transfer Agent shall not be liable for
any loss incurred by the investor by reason of the Trust accepting unauthorized
telephone redemption requests for his account if the Trust reasonably believes
the instructions to be genuine. Thus, shareholders risk possible losses in the
event of a telephone redemption not authorized by them. Each Trust may accept
telephone redemption instructions from any person identifying himself as the
owner of an account or the owner's broker where the owner has not declined in
writing to utilize this service. Each Trust will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine, and may be
liable for any losses due to unauthorized or fraudulent instructions if it fails
to employ such procedures. Each Trust will require a form of personal
identification prior to acting on a caller's telephone instructions, will
provide written confirmations of such transactions and will record telephone
instructions.
A shareholder making a telephone redemption should call the Distributor at
1-800-426-0107 and state (i) the name of the shareholder as it appears on the
Transfer Agent's records, (ii) his account number with the Trust, (iii) the
amount to be withdrawn and (iv) the name of the person requesting the
redemption. Usually the proceeds are sent to the investor on the next Trust
business day after the redemption is effected, provided the redemption request
is received prior to the close of regular trading (normally 4:00 p.m., Eastern
time) on the New York Stock Exchange that day. If the redemption request is
received after the close of the New York Stock Exchange, the redemption is
effected on the following Trust business day at that
SG-24
<PAGE>
day's net asset value and the proceeds are usually sent to the investor on the
second following Trust business day. Each Trust reserves the right to terminate
or modify the telephone redemption service at any time. During times of severe
disruptions in the securities markets, the volume of calls may make it difficult
to redeem by telephone, in which case a shareholder may wish to send a written
request for redemption as described under "Written Requests" above. Telephone
communications may be recorded by the Distributor or the Transfer Agent.
Fund Link Redemptions
If a shareholder has established Fund Link, the shareholder may redeem
shares by telephone and have the redemption proceeds sent to a designated
account at a financial institution. Fund Link is normally established within 45
days of receipt of a Fund Link application by the Transfer Agent. To use Fund
Link for redemptions, call the Distributor at 1-800-426-0107. Subject to the
limitations set forth above under "Telephone Redemptions," the Distributor, a
Trust and the Transfer Agent may rely on instructions by any registered owner
believed to be genuine and will not be responsible to any shareholder for any
loss, damage or expense arising out of such instructions. Requests received by
the Transfer Agent prior to the close of regular trading (normally 4:00 p.m.,
Eastern time) on the New York Stock Exchange on a business day will be processed
at the net asset value on that day and the proceeds (less any CDSC) will
normally be sent to the designated bank account on the following business day
and received by the bank on the second or third business day. If the redemption
request is received after the close of regular trading on the New York Stock
Exchange, the redemption is effected on the following business day. Shares
purchased by check may not be redeemed through Fund Link until such shares have
been owned (i.e., paid for) for at least 15 days. Fund Link may not be used to
redeem shares held in certificated form.
Changes in bank account information must be made by completing a new Fund
Link application, signed by all owners of record of the account, with all
signatures guaranteed. See "How to Buy Shares--Signature Guarantee." See "How
to Buy Shares--PIMCO Funds Fund Link" for information on establishing the Fund
Link privilege. Either Trust may terminate the Fund Link program at any time
without notice to its shareholders. This redemption option does not apply to
shares held in broker "street name" accounts. Shareholders whose shares are
held in broker "street name" accounts must redeem through their broker.
PIMCO Funds Automated Telephone System
PIMCO Funds Automated Telephone System ("ATS") is an automated telephone
system that enables shareholders to perform a number of account transactions
automatically using a touch-tone telephone. ATS may be used on already-
established Fund accounts after you obtain a Personal Identification Number
(PIN) by calling the special ATS number: 1-800-223-2413.
Purchasing Shares. You may purchase shares in amounts up to $100,000 by
telephone by calling 1-800-223-2413. You must have established ATS privileges to
link your bank account with the Fund to pay for these purchases.
SG-25
<PAGE>
Exchanging Shares. With the PIMCO Funds Exchange Privilege, you can exchange
shares automatically by telephone from your Fund Link Account to another PIMCO
Funds account you have already established by calling 1-800-223-2413. Please
refer to "Exchange Privilege" for details.
Redemptions. You may redeem shares by telephone automatically by calling 1-
800-223-2413 and the Fund will send the proceeds directly to your Fund bank
account. Please refer to "How to Redeem" for details.
Expedited Wire Transfer Redemptions
If a shareholder has given authorization for expedited wire redemption,
shares can be redeemed and the proceeds sent by federal wire transfer to a
single previously designated bank account. Requests received by a Trust prior to
the close of the New York Stock Exchange will result in shares being redeemed
that day at the next determined net asset value (less any CDSC). Normally the
proceeds will be sent to the designated bank account the following business day.
The bank must be a member of the Federal Reserve wire system. Delivery of the
proceeds of a wire redemption request may be delayed by the applicable Trust for
up to 7 days if the Distributor deems it appropriate under then current market
conditions. Once authorization is on file with a Trust, such Trust will honor
requests by any person identifying himself as the owner of an account or the
owner's broker by telephone at 1-800-426-0107 or by written instructions. A
Trust cannot be responsible for the efficiency of the Federal Reserve wire
system or the shareholder's bank. Neither Trust currently charges for wire
transfers. The shareholder is responsible for any charges imposed by the
shareholder's bank. The minimum amount that may be wired is $2,500. Each Trust
reserves the right to change this minimum or to terminate the wire redemption
privilege. Shares purchased by check may not be redeemed by wire transfer until
such shares have been owned (i.e., paid for) for at least 15 days. Expedited
wire transfer redemptions may be authorized by completing a form available from
the Distributor. Wire redemptions may not be used to redeem shares in
certificated form. To change the name of the single bank account designated to
receive wire redemption proceeds, it is necessary to send a written request with
signatures guaranteed to PIMCO Funds Distributors LLC, P.O. Box 9688,
Providence, RI 02940-0926. See "How to Buy Shares--Signature Guarantee." This
redemption option does not apply to shares held in broker "street name"
accounts. Shareholders whose shares are held in broker "street name" accounts
must redeem through their broker.
Certificated Shares
To redeem shares for which certificates have been issued, the certificates
must be mailed to or deposited with the applicable Trust, duly endorsed or
accompanied by a duly endorsed stock power or by a written request for
redemption. Signatures must be guaranteed as described under "How to Buy
Shares--Signature Guarantee." Further documentation may be requested from
institutions or fiduciary accounts, such as corporations, custodians (e.g.,
under the Uniform Gifts to Minors Act), executors, administrators, trustees or
guardians ("institutional account owners"). The redemption request and stock
power must be signed exactly as the account is registered, including indication
of any special capacity of the registered owner.
SG-26
<PAGE>
Automatic Withdrawal Plan
An investor who owns or buys shares of a Fund having a net asset value of
$10,000 or more may open an Automatic Withdrawal Plan and have a designated sum
of money (not less than $100 per Fund) paid monthly (or quarterly) to the
investor or another person. Such a plan may be established by completing the
appropriate section of the account application or by obtaining an Automatic
Withdrawal Plan application from the Distributor or your broker. If an Automatic
Withdrawal Plan is set up after the account is established providing for payment
to a person other than the record shareholder or to an address other than the
address of record, a signature guarantee is required. See "How to Buy Shares--
Signature Guarantee." Class A, Class B and Class C shares of any Fund are
deposited in a plan account and all distributions are reinvested in additional
shares of the particular class of the Fund at net asset value. Shares in a plan
account are then redeemed at net asset value (less any applicable CDSC) to make
each withdrawal payment. Any applicable CDSC may be waived for certain
redemptions under an Automatic Withdrawal Plan. See "Alternative Purchase
Arrangements--Waiver of Contingent Deferred Sales Charges."
Redemptions for the purpose of withdrawals are ordinarily made on the
business day preceding the day of payment at that day's closing net asset value
and checks are mailed on the day of payment selected by the shareholder. The
Transfer Agent may accelerate the redemption and check mailing date by one day
to avoid weekend delays. Payment will be made to any person the investor
designates; however, if the shares are registered in the name of a trustee or
other fiduciary, payment will be made only to the fiduciary, except in the case
of a profit-sharing or pension plan where payment will be made to the designee.
As withdrawal payments may include a return of principal, they cannot be
considered a guaranteed annuity or actual yield of income to the investor. The
redemption of shares in connection with an Automatic Withdrawal Plan may result
in a gain or loss for tax purposes. Continued withdrawals in excess of income
will reduce and possibly exhaust invested principal, especially in the event of
a market decline. The maintenance of an Automatic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be disadvantageous to the
investor because of the CDSC that may become payable on such withdrawals in the
case of Class A, Class B or Class C shares and because of the initial sales
charge in the case of Class A shares. For this reason, the minimum investment
accepted for a Fund while an Automatic Withdrawal Plan is in effect for that
Fund is $1,000, and an investor may not maintain a plan for the accumulation of
shares of the Fund (other than through reinvestment of distributions) and an
Automatic Withdrawal Plan at the same time. The Trust or the Distributor may
terminate or change the terms of the Automatic Withdrawal Plan at any time.
Because the Automatic Withdrawal Plan may involve invasion of capital,
investors should consider carefully with their own financial advisers whether
the plan and the specified amounts to be withdrawn are appropriate in their
circumstances. The Trust and the Distributor make no recommendations or
representations in this regard.
SG-27
<PAGE>
Redemptions In Kind
Each Trust agrees to redeem shares of its Funds solely in cash up to the
lesser of $250,000 or 1% of the Fund's net assets during any 90-day period for
any one shareholder. In consideration of the best interests of the remaining
shareholders, each Trust reserves the right to pay any redemption proceeds
exceeding this amount in whole or in part by a distribution in kind of
securities held by a Fund in lieu of cash. Except for Funds with a tax-efficient
management strategy, it is highly unlikely that shares would ever be redeemed in
kind. When shares are redeemed in kind, the redeeming shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the distribution.
SG-28
