As filed with the Securities and Exchange Commission on May 16, 2000
File No. 811-5028
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under the Investment Company Act of 1940 / X/
Amendment No. 61 / X/
PIMCO FUNDS
(Exact Name of Registrant as Specified in Charter)
840 Newport Center Drive
Newport Beach, California 92660
(Address of Principal Executive Offices) (Zip
Code) Registrant's Telephone Number, including
area code:
(949) 720-6533
Robert W. Helm, Esq. R. Wesley Burns
Dechert Price & Rhoads Pacific Investment Management Company
1775 Eye Street, N.W. 840 Newport Center Drive, Suite 300
Washington, D.C. 20006 Newport Beach, California 92660
(Name and Address of Agent for Service)
It is intended that this filing will become effective immediately upon
filing in accordance with Section 8 of the Investment Company Act of 1940 and
the rules thereunder.
<PAGE>
EXPLANATORY NOTE
This Amendment is filed by PIMCO Funds (the "Registrant") pursuant to
Section 8(b) of the Investment Company Act of 1940, as amended (the "1940 Act"),
for the purpose of offering shares of the California Municipal Bond Fund, a new
series of the PIMCO Funds: Pacific Investment Management Series.
The shares of beneficial interest in the California Municipal Bond
Fund are not registered under the Securities Act of 1933 (the "1933 Act") since
such shares will be issued by Registrant in a private placement transaction that
does not involve any "public offering" within the meaning of the 1933 Act.
Shares of the PIMCO California Municipal Bond Fund may be purchased only by
persons who are also "accredited investors," as defined in the 1933 Act and
Regulation D thereunder or pursuant to other applicable exemptions under the
1933 Act. This Amendment is not an offer to sell, or a solicitation of any offer
to buy, any security to the public within the meaning of the 1933 Act.
<PAGE>
PIMCO California Municipal Bond Fund
Offering Memorandum
May 16, 2000
This cover is not part of the Offering Memorandum. The Fund is issuing shares in
a private placement transaction in accordance with Regulation D or other
applicable exemptions under the Securities Act of 1933, as amended (the
"Securities Act"). The enclosed Offering Memorandum is not an offer to sell, or
a solicitation of any offer to buy, any security to the public within the
meaning of the Securities Act.
<PAGE>
PIMCO Funds: Pacific Investment Management Series
PIMCO Funds Offering Memorandum
PIMCO California Municipal Bond Fund
Institutional Class Shares
May 16, 2000
This Offering Memorandum describes the PIMCO California Municipal Bond
Fund (the "Fund") offered by PIMCO Funds: Pacific Investment Management
Series (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
Shares of the Fund have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), or the securities laws of any
state. The Fund is issuing its shares in private placement transaction
in accordance with Regulation D or other applicable exemptions under
the Securities Act. This Offering Memorandum is not an offer to sell,
or a solicitation of any offer to buy, any security to the public
within the meaning of the Securities Act.
Shares of the Fund may be purchased only by persons who are "accredited
investors," as defined in the Securities Act, Regulation D or pursuant
to other applicable exemptions under the Securities Act.
Shares of the Fund are subject to restrictions on transferability and
resale and may not be transferred or resold except as permitted under
the Securities Act. Shares may be redeemed in accordance with the
procedures set forth in this Offering Memorandum.
This Offering Memorandum is intended for use only by the person to whom
it has been issued. Reproduction of this Offering Memorandum is
prohibited.
The Securities and Exchange Commission has not approved or disapproved
these securities, or determined if this Offering Memorandum is truthful
or complete. Any representation to the contrary is a criminal offense.
The Fund provides access to the professional investment advisory
services offered by Pacific Investment Management Company ("PIMCO"). As
of March 31, 2000, PIMCO managed approximately $193 billion in assets.
This Offering Memorandum explains what you should know about the Fund
before you invest. Please read it carefully.
<PAGE>
Table of Contents
Summary Information.......................................................4
PIMCO California Municipal Bond Fund......................................6
Summary of Principal Risks................................................9
Management of the Fund...................................................12
Purchases, Redemptions and Exchanges.....................................13
How Fund Shares Are Priced...............................................15
Fund Distributions.......................................................16
Tax Consequences.........................................................16
Investment Restrictions..................................................17
Portfolio Transactions and Brokerage.....................................20
Characteristics and Risks of Securities and Investment Techniques........21
Appendix A...............................................................31
<PAGE>
Summary Information
The table below describes certain investment characteristics of the Fund. Other
important characteristics are described beginning on page 6. Following the table
are certain key concepts which are used throughout the Offering Memorandum.
<TABLE>
<S> <C> <C> <C> <C>
Securities of
Main Investments Duration Credit Quality(1) Non-U.S. Issuers
- --------------------------------------------------------------------------------------------------------------------
California California municipal securities 3-12 B to Aaa; max 10% 0%
Municipal Bond (exempt from federal and California years below Baa
Fund income tax)
(1) As rated by Moody's Investors Service, Inc., or equivalently rated by
Standard & Poor's Ratings Service, or if unrated, determined by PIMCO to be
of comparable quality.
Fixed Income While the Fund will primarily invest in debt securities whose
Instruments interest is, in the opinion of bond counsel for the issuer at the
time of issuance, exempt from federal income tax ("Municipal
Bonds"), it may invest other types of "Fixed Income Instruments,"
which as used in this Offering Memorandum include:
o securities issued or guaranteed by the U.S. Government,
its agencies or government-sponsored enterprises ("U.S.
Government Securities");
o corporate debt securities of U.S. and non-U.S. issuers,
including convertible securities and corporate
commercial paper;
o mortgage-backed and other asset-backed securities;
o inflation-indexed bonds issued both by governments and
corporations;
o structured notes, including hybrid or "indexed"
securities, event-linked bonds and loan participations;
o delayed funding loans and revolving credit facilities;
o bank certificates of deposit, fixed time deposits and
bankers' acceptances;
o repurchase agreements and reverse repurchase
agreements;
o debt securities issued by states or local governments
and their agencies, authorities and other
instrumentalities;
o obligations of non-U.S. governments or their
subdivisions, agencies and instrumentalities; and
o obligations of international agencies or supranational
entities.
<PAGE>
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 In this Offering Memorandum, references are made to credit
Ratings 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 Ratings Service ("S&P") or Moody's
Investors Service, 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:
o high quality
o investment grade
o 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 following summary identifies the Fund's investment
Description, objective, principal investments and strategies, principal
and Fees risks, and expenses. A more detailed "Summary of Principal
and Fees Risks" describing principal risks of investing in
the Fund begins after the Fund Summary.
It is possible to lose money on investments in the Fund.
An investment in the 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.
<PAGE>
PIMCO California Municipal Bond Fund
Principal Investment Objective Fund Focus Credit Quality
Investments and Seeks high current income Intermediate to long-term B to Aaa; maximum 10% below
Strategies exempt from federal and maturity municipal Baa
California income tax. securities (exempt from
Capital appreciation is a federal and California Dividend Frequency
secondary objective. income tax) Declared daily and
distributed monthly
Average Portfolio
Duration
3-12 years
The Fund seeks to achieve its investment objective by
investing under normal circumstances at least 80% of its net
assets in Municipal Bonds. 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 twelve-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, options on futures, 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. The Fund
may seek to obtain market exposure to the securities in
which it primarily invests by entering into a series of
purchase and sale contracts or by using other investment
techniques (such as buy backs or dollar rolls).
<PAGE>
Principal Among the principal risks of investing in the Fund, which
Risks could adversely affect its net asset value, yield and total
return are:
o Interest Rate Risk o Issuer Risk o Mortgage Risk
o Credit Risk o Issuer Non- o Leveraging Risk
o California State Specific Risk Diversification Risk o Management Risk
o Market Risk o Liquidity Risk
o Derivatives Risk
Please see "Summary of Principal Risks" 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.
Information Thus, no bar chart or annual returns table is included for
the Fund.
Fees and These tables describe the fees and expenses you may pay if
Expenses of you buy and hold Institutional Class shares of the Fund:
the Fund
Shareholder fees (fees paid directly from your investment) None
Annual Fund Operating Expenses (expenses that are deducted
from Fund assets):
Distribution and/or Other Total Annual Fund
Advisory Fees Service (12b-1) Fees Expenses(1) Operating Expenses
------------- -------------------- ----------- -------------------
0.25% None 0.24% 0.49%
</TABLE>
--------------------
(1) Other Expenses reflects a 0.24% Administrative Fee.
Examples. The Examples are intended to help you compare the
cost of investing in Institutional 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 Examples also
assume 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.
Year 1 Year 3
Institutional Class Shares $50 $157
<PAGE>
Summary of Principal Risks
The value of your investment in the Fund changes with the
values of the Fund's investments. Many factors can affect
those values. The factors that are most likely to have a
material effect on the Fund's portfolio as a whole are
called "principal risks." The principal risks of the Fund
are identified in the Fund Summary and are described in this
section. The Fund may be subject to additional principal
risks and risks other than those described below because the
types of investments made by the 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 Offering
Memorandum Supplement also include more information about
the Fund, its investments and the related risks. There is no
guarantee that the Fund will be able to achieve its
investment objective.
Interest As interest rates rise, the value of Fixed Income
Rate Risk Instruments held by the Fund 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 The Fund could lose money if the issuer or guarantor of a
Fixed Income Instrument, 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 the 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 Liquidity risk exists when particular investments are
Risk difficult to purchase or sell. The Fund's investments in
illiquid securities may reduce the returns of the Fund
because it may be unable to sell the illiquid securities at
an advantageous time or price. The Fund principal investment
strategies involve derivatives or securities with
substantial market and/or credit risk which tend to have the
greatest exposure to liquidity risk.
<PAGE>
Derivatives Derivatives are financial contracts whose value depends on,
Risk or is derived from, the value of an underlying asset,
reference rate or index. The various derivative instruments
that the Fund may use are referenced under "Characteristics
and Risks of Securities and Investment
Techniques--Derivatives" in this Offering Memorandum and
described in more detail under "Investment Objectives and
Policies" in the Offering Memorandum Supplement. The Fund
typically uses derivatives as a substitute for taking a
position in the underlying asset and/or as part of a
strategy designed to reduce exposure to other risks, such as
interest rate or currency risk. The Fund may also use
derivatives for leverage, in which case its use would
involve leveraging risk. The Fund's use of derivative
instruments involves risks different from, or possibly
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. The 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 the Fund will engage in these
transactions to reduce exposure to other risks when that
would be beneficial.
Mortgage The Fund may purchase mortgage-related securities which are
Risk 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,
mortgage-related securities may exhibit additional
volatility. This is known as extension risk. In addition,
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 the Fund because the Fund will have to reinvest that
money at the lower prevailing interest rates.
Issuer Non- Focusing investments in a small number of issuers,
Diversification industries or foreign currencies increases risk. The Fund is
Risk "non-diversified" and may invest a greater percentage of its
assets in the securities of a single issuer (such as bonds
issued by a particular state) than a fund that is
"diversified." The Fund's investment 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, the 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 the same state.
<PAGE>
Leveraging Certain transactions may give rise to a form of leverage.
Risk 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 the 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, may cause the 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 the Fund's portfolio securities.
Management The Fund is subject to management risk because it is an
Risk actively managed investment portfolio. PIMCO and the
individual portfolio manager will apply investment
techniques and risk analyses in making investment decisions
for the Fund, but there can be no guarantee that these will
produce the desired results.
California The Fund concentrates its investments in California
State Specific municipal bonds and may be affected significantly by
Risk 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.
<PAGE>
Management of the Fund
Investment PIMCO serves as the investment adviser and the administrator
Adviser and (serving in its capacity as administrator, the
Administrator "Administrator") for the Fund. Subject to the supervision of
the Board of Trustees, PIMCO is responsible for managing the
investment activities of the Fund and the Fund's 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 March 31, 2000, PIMCO had approximately
$193 billion in assets under management
Advisory The Fund pays PIMCO fees in return for providing investment
Fees advisory services at an annual rate equal to 0.25% of the
Fund's average daily net assets.
Administrative The Fund pays for the administrative services it requires
Fees under a fee structure which is essentially fixed.
Institutional Class shareholders of the Fund pay an
administrative fee to PIMCO at an annual rate equal to 0.24%
of the Fund's assets attributable in the aggregate to that
class of shares. PIMCO, in turn, provides or procures
administrative services for Institutional Class shareholders
and also bears the costs of various third-party services
required by the Fund, including audit, custodial, portfolio
accounting, legal, transfer agency and printing costs. The
result of this fee structure is an expense level for
Institutional Class shareholders of the Fund that, with
limited exceptions, is precise and predictable under
ordinary circumstances.
Individual The following individual has had primary responsibility for
Portfolio managing the Fund since its inception.
Manager
Portfolio Manager Recent Professional Experience
Mark V. McCray Senior Vice President, PIMCO. He joined
PIMCO as a Portfolio Manager in 2000.
Prior to that, he was a Bond trader from
1992-1999 at Goldman Sachs & Co. where
he was appointed Vice President in 1996
and named co-head of municipal bond
trading in 1997 with responsibility for
the firm's proprietary account and
supervised municipal bond traders.
<PAGE>
Distributor The Trust's Distributor is PIMCO Funds Distributors LLC, a
wholly owned subsidiary of PIMCO Advisors L.P. The
Distributor, located at 2187 Atlantic Street, Stamford CT
06902, is a broker-dealer registered with the Securities and
Exchange Commission.
Purchases, Redemptions and Exchanges
Purchasing Shares of the Fund are restricted securities and are being
Shares issued in a private placement transaction in accordance with
Regulation D or other applicable exemptions under the
Securities Act. This Offering Memorandum does not constitute
an offer to sell, or the solicitation of any offer to buy,
any "security" to the public within the meaning of the
Securities Act.
Shares of the Fund are offered only to persons who are
"accredited investors," within the meaning of the Securities
Act, Regulation D or pursuant to other applicable exemptions
under the Securities Act. Shares of the Fund may be
purchased at the relevant net asset value ("NAV") without a
sales charge or other fee.
Timing of Purchase Orders and Share Price Calculations. A
purchase order, together with payment in proper form,
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 of 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. 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.
Other Purchase Information. Purchases of the Fund's
Institutional 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 Fund 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.
Institutional Class shares of the Trust are not qualified or
registered for sale in any state. Shares of the Trust may
not be offered or sold in any state unless an exemption from
registration or qualification is available. Investors should
inquire as to whether shares of the Fund are available for
offer and sale in the investor's state of residence.
Subject to the approval of the Trust, an investor may
purchase shares of the 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 the 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.
<PAGE>
Redeeming As stated above, the Fund's shares are restricted securities
Shares that may not be sold to investors other than "accredited
investors" within the meaning of the Securities Act,
Regulation D or pursuant to other applicable exemptions
under the Securities Act, unless sold pursuant to another
available exemption from the Securities Act. Shares of the
Fund may not be assigned, resold or otherwise transferred
without the written consent of the Trust and, if requested,
an opinion of counsel acceptable to the Trust that an
exemption from registration is available. Any attempt at a
transfer to a third party in violation of this provision
shall be void. The trust may enforce the provisions of this
paragraph, either directly or through its agents, by
entering an appropriate stop-transfer or permit the
registration or transfer on its books of any purported
transfer not in accordance with these restrictions.
Timing of Redemption Requests and Share Price Calculations.
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 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 or shares), the Fund's name, and must be
executed or initiated by the appropriate signatories.
Other Redemption Information. 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. 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.
The Trust agrees to redeem shares of the 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 the
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.
<PAGE>
Exchange Exchanges of shares of the Fund for shares of any other
Privilege series of the Trust will be based on the respective NAVs of
the shares involved. Subject to compliance with applicable
private placement restrictions and the investment
restrictions of the Fund, shares of the Fund may be
purchased by exchanging Institutional Class shares of
another series of the Trust for shares of the Fund.
Shares may only be exchanged with respect to series that are
registered in an 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 Offering Memorandum and "Taxation" in the Offering
Memorandum Supplement.
How Fund Shares Are Priced
The NAV of the Fund's Institutional Class shares is
determined by dividing the total value of the Fund's
portfolio investments and other assets attributable to that
class, less any liabilities, by the total number of shares
of that class outstanding.
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 Fund normally uses
pricing data for domestic equity securities received shortly
after the NYSE Close and does not normally take into account
trading, clearances or settlements that take place after the
NYSE Close. Domestic fixed income securities are normally
priced using data reflecting the earlier closing of the
principal markets for those securities. Information that
becomes known to the Fund 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 Fund may value securities at fair
value or estimate its 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.
<PAGE>
Fund Distributions
The 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.
The Fund intends to declare dividends daily and pay income
dividends monthly.
In addition, the 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.
The Fund's dividend and capital gain distributions will
automatically be reinvested in additional Institutional
Class shares of the Fund at NAV unless the shareholder
elects to have the distributions paid in cash. A shareholder
may elect future distributions paid in cash on the Client
Registration Application or by submitting a written request
indicating the account number, Fund name and wiring
instructions. Shareholders do not pay any sales charges on
shares received through the reinvestment of Fund
distributions.
Tax Consequences
The following information is meant as a general summary for
U.S. taxpayers. Please see the Offering Memorandum
Supplement 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 the Fund.
The 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 the 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 the Fund and derived from
Municipal Bond interest are expected to be designated by the
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 Fund intends to arrange
their affairs so that a portion of such distributions will
be exempt from state taxes in the respective state. The 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. The
interest on "private activity" bonds is a tax-preference
item for purposes of the federal alternative minimum tax. As
a result, for shareholders that are subject to the
alternative minimum tax, income derived from "private
activity" bonds will not be exempt from federal income tax.
The Fund seeks to produce income that is generally exempt
from federal income tax and will not benefit investors in
tax-sheltered retirement plans or individuals not subject to
federal income tax. Further, the Fund seeks 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.
<PAGE>
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 Fund. For federal
income tax purposes, Fund distributions that are taxable will
be taxable to you as either ordinary income or capital gains.
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 the 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 the Fund's 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 the 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.
This section relates only to federal income tax; the
consequences under other tax laws may differ. Shareholders
should consult their tax advisors as to the possible
application of foreign, state and local income tax laws to
Fund dividends and capital distributions. Please see the
Offering Memorandum Supplement for additional information
regarding the tax aspects of investing in the Fund.
Investment Restrictions
Fundamental The Fund's investment objective, as set forth in the
Investment Offering Memorandum under "Investment Objectives and
Restrictions Policies," together with the investment restrictions set
forth below, are fundamental policies of the Fund and may
not be changed with respect to the Fund without shareholder
approval by vote of a majority of the outstanding shares of
the Fund.
(1) The Fund may not concentrate its investments in a
particular industry, as that term is used in the Investment
Company Act of 1940, as amended, and as interpreted, modified,
or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
(2) The Fund may not 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.
<PAGE>
(3) The Fund may not purchase or sell commodities or
commodities contracts or oil, gas or mineral programs. This
restriction shall not prohibit the Fund, subject to
restrictions described in the Offering Memorandum and
elsewhere in this Offering Memorandum Supplement, from
purchasing, selling or entering into futures contracts,
options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate,
securities-related or foreign currency-related hedging
instrument, including swap agreements and other derivative
instruments, subject to compliance with any applicable
provisions of the federal securities or commodities.
(4) The Fund may borrow money or issue any senior security,
only as permitted under the Investment Company Act of 1940,
as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from
time to time.
(5) The Fund may make loans only as permitted under the
Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time.
(6) The Fund may not 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.
(7) Notwithstanding any other fundamental investment policy
or limitation, it is a fundamental policy of the Fund that
it may pursue its investment objective by investing in one
or more underlying investment companies or vehicles that
have substantially similar investment objectives, policies
and limitations as the Fund.
Non- The Fund is also subject to the following non-fundamental
Fundamental restrictions and policies(which may be changed without
Investment shareholder approval) relating to the investment of its
Restrictions assets and activities.
(A) The Fund may not invest more than 15% of its net assets
(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 the
Fund has purchased, securities or other liquid assets being
used to cover such options the Fund has written, securities
for which market quotations are not readily available, or
other securities which legally or in PIMCO'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) The Fund may not 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.
(C) The Fund may not invest more than 5% of its assets
(taken at market value at the time of investment) in any
combination of interest only, principal only, or inverse
floating rate securities.
<PAGE>
(D) The Fund may not 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 Offering Memorandum and in this Offering
Memorandum Supplement.
Portfolio Transactions and Brokerage
Investment Investment decisions for the Trust and for the other
Decisions investment advisory clients of PIMCO are and made with a
and Portfolio view to achieving their respective investment objectives.
Transactions 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 Fund may also be appropriate for
other clients served by PIMCO. 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 the Fund and one or more of these
clients served by PIMCO 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 PIMCO.
PIMCO may aggregate orders for the Fund with simultaneous
transactions entered into on behalf of other clients of
PIMCO 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 PIMCO'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.
<PAGE>
Brokerage There is generally no stated commission in the case of fixed
and income securities, which are traded in the over-the-counter
Research markets, but the price paid by the Trust usually includes an
Services 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.
PIMCO places all orders for the purchase and sale of
portfolio securities, options and futures contracts for the
Fund and buys and sells such securities, options and futures
for the Trust through a substantial number of brokers and
dealers. In so doing, PIMCO 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, PIMCO, 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.
<PAGE>
PIMCO places orders for the purchase and sale of portfolio
investments for the Fund's account with brokers or dealers
selected by it in its discretion. In effecting purchases and
sales of portfolio securities for the account of the Fund,
PIMCO will seek the best price and execution of the Fund's
orders. In doing so, the Fund may pay higher commission
rates than the lowest available when PIMCO 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. PIMCO 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 which execute
portfolio transactions for the clients of such advisers.
Consistent with this practice, PIMCO receives research
services from many broker-dealers with which PIMCO places
the Trust's portfolio transactions. PIMCO 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 the
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 PIMCO 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
PIMCO and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act
of 1934, PIMCO may cause the Trust to pay a broker-dealer
which provides "brokerage and research services" (as defined
in the Act) to PIMCO 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, PIMCO 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.
Characteristics and Risks of Securities and Investment
Techniques
This section provides additional information about some of
the principal investments and related risks of the Fund
described under "Summary Information" above. It also
describes characteristics and risks of additional securities
and investment techniques that may be used by the Fund 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 Offering Memorandum
does not attempt to disclose all of the various types of
securities and investment techniques that may be used by the
Fund. As with any mutual fund, investors in the Fund rely on
the professional investment judgment and skill of PIMCO and
the individual portfolio manager. Please see "Investment
Objectives and Policies" in the Offering Memorandum
Supplement 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 Fund.
<PAGE>
Securities In selecting securities for the Fund, PIMCO develops an
Selection outlook for interest rates, currency exchange rates and the
economy; analyzes credit and call risks, and uses other
security selection techniques. The proportion of the 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 and the economies of other countries in the world,
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 the following
sectors: money markets, governments, corporate, mortgages,
asset-backed and international. 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
Securities by, the U.S. Government, its agencies or
government-sponsored enterprises. 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.
Municipal Municipal bonds are generally issued by states and local
Bonds 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 Fund may invest
include municipal lease obligations. The Fund may also
invest in securities issued by entities whose underlying
assets are municipal bonds.
Mortgage- The Fund may invest in mortgage- or other asset-backed
Related and securities. Mortgage-related securities include mortgage
Other Asset- pass-through securities, collateralized mortgage obligations
Backed Securities ("CMOs"), commercial mortgage-backed securities, mortgage
dollar rolls, CMO residuals, stripped Securities
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 the 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.
<PAGE>
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 the Fund's yield to maturity from
these securities. The Fund may not invest more than 5% of
its assets in any combination of IO, PO, or inverse floater
securities. The Fund may invest in other asset-backed
securities that have been offered to investors.
Loan The Fund may invest in fixed- and floating-rate loans, which
Participations investments generally will be in the form of loan
and participations and assignments of portions of such loans.
Assignments Participations and assignments involve special types of
risk, including credit risk, interest rate risk, liquidity
risk, and the risks of being a lender. If the 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.
Corporate Corporate debt securities are subject to the risk of the
Debt issuer's inability to meet principal and interest payments
Securities 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.
High Yield Securities rated lower than Baa by Moody's Investors
Securities Securities Service, Inc. ("Moody's") or lower than BBB by
Standard & Poor's Ratings Service ("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.
<PAGE>
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 this Offering Memorandum 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.
The 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.
The 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 the 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.
Variable and Variable and floating rate securities provide for a periodic
Floating Rate adjustment in the interest rate paid on the obligations. The
Securities 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, the Fund will participate in any
declines in interest rates as well. The 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. The Fund may not invest more than 5% of its assets
in any combination of inverse floater, interest only, or
principal only securities.
Inflation- Inflation-indexed bonds are fixed income securities whose
Indexed principal value is periodically Indexed adjusted according
Bonds to the rate of inflation. If the index measuring inflation
falls, the Bonds 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.
<PAGE>
Event-Linked The Fund may invest in "event-linked bonds," which are fixed
Bonds income securities for which the return of principal and
payment of interest is contingent on the non-occurrence of a
specific "trigger" event, such as a hurricane, earthquake,
or other physical or weather-related phenomenon. Some
event-linked bonds are commonly referred to as "catastrophe
bonds." If a trigger event occurs, the Fund may lose a
portion or all of its principal invested in the bond.
Event-linked 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. Event-linked bonds may
also expose the Fund to certain unanticipated risks
including credit risk, adverse regulatory or jurisdictional
interpretations, and adverse tax consequences. Event-linked
bonds may also be subject to liquidity risk.
Convertible The Fund may invest in convertible securities. Convertible
and Equity securities are generally preferred and stocks and other
Securities 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. The 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 Fund intends to invest primarily in fixed income
securities, it may invest in convertible securities or
equity securities. While some 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, the Fund may
consider convertible securities or equity securities to gain
exposure to such investments.
Equity securities generally have greater price volatility
than fixed income securities. The market price of equity
securities owned by the Fund may go up or down, sometimes
rapidly or unpredictably. Equity securities may decline in
value due to factors affecting equity securities markets
generally or particular industries represented in those
markets. The value of an equity security may also 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.
Repurchase The Fund may enter into repurchase agreements, in which the
Agreements 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.
<PAGE>
Reverse The Fund may enter into reverse repurchase agreements and
Repurchase dollar rolls, subject to the Fund's limitations on
Agreements, borrowings. A reverse repurchase agreement or dollar roll
Dollar involves the sale of a security by the Fund and its
Rolls and agreement to repurchase the instrument at a specified time
Other Borrowings and price, and may be considered a form of borrowing for
some purposes. The Fund will segregate assets determined to
be liquid by PIMCO in accordance with procedures established
by the Board of Trustees or otherwise cover its obligations
under reverse repurchase agreements, dollar rolls, and other
borrowings. Reverse repurchase agreements, dollar rolls and
other forms of borrowings may create leveraging risk for the
Fund.
The Fund may borrow money to the extent permitted under the
Investment Company Act of 1940 ("1940 Act"), as amended.
This means that, in general, the Fund may borrow money from
banks for any purpose on a secured basis in an amount up to
1/3 of the Fund's total assets. The Fund may also borrow
money for temporary administrative purposes on an unsecured
basis in an amount not to exceed 5% of the Fund's total
assets.
Derivatives The Fund may, but is not required to, use 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. The Fund may invest some or all of its
assets in derivative instruments. The portfolio manager may
decide not to employ any of these strategies and there is no
assurance that any derivatives strategy used by the Fund
will succeed. A description of these and other derivative
instruments that the Fund may use are described under
"Investment Objectives and Policies" in the Offering
Memorandum Supplement.
The Fund's use of derivative instruments involves risks
different from, or possibly 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
Offering Memorandum Supplement. The following provides a
more general discussion of important risk factors relating
to all derivative instruments that may be used by the Fund.
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.
<PAGE>
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 the Fund uses derivatives for leverage,
investments in the Fund will tend to be more volatile,
resulting in larger gains or losses in response to market
changes. To limit leverage risk, the 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 the Fund will engage in derivatives
transactions at any time or from time to time. The 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 the 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 the 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. The 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 the 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, the 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.
Delayed The Fund may also enter into, or acquire participations in,
Funding delayed funding loans and revolving credit facilities, in
Loans and which a lender agrees to make loans up to a maximum amount
Revolving upon demand by the borrower during a specified term. These
Credit commitments may have the effect of requiring the Fund to
Facilities 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 the 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.
<PAGE>
When-Issued, The Fund may purchase securities which it is eligible to
Delayed purchase on a when-issued basis, may purchase and sell such
Delivery and securities for delayed delivery and may make contracts to
Forward purchase such securities for a fixed price at a future date
Commitment beyond normal settlement time (forward commitments).
Transactions 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 the Fund's overall
investment exposure. Typically, no income accrues on
securities the Fund has committed to purchase prior to the
time delivery of the securities is made, although the Fund
may earn income on securities it has segregated to cover
these positions.
Investment in The Fund may invest up to 10% of its assets in securities of
Other other investment companies, such as closed-end management
Investment investment companies, or in pooled accounts or other
Companies investment vehicles which invest in foreign markets. As a
shareholder of an investment company, the Fund may
indirectly bear service and other fees which are in addition
to the fees the Fund pays its service providers.
Subject to the restrictions and limitations of the 1940 Act,
the Fund may, in the future, elect to pursue its investment
objective by investing in one or more underlying investment
vehicles or companies that have substantially similar
investment objectives, policies and limitations as the Fund.
Short Sales The 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. Short sales expose the
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. The Fund making
a short sale 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.
<PAGE>
Illiquid The Fund may invest up to 15% of its net assets in illiquid
Securities 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 the 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 and
certain commercial paper) may be treated as liquid, although
they may be less liquid than registered securities traded on
established secondary markets.
Loans of For the purpose of achieving income, the Fund may lend its
Portfolio portfolio securities to brokers, dealers, and other
Securities financial institutions provided a number of conditions are
satisfied, including that the loan is fully collateralized.
Please see "Investment Objectives and Policies" in the
Offering Memorandum Supplement for details. When the 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. The Fund may pay lending fees
to a party arranging the loan.
Portfolio The length of time the Fund has held a particular security
Turnover is not generally a consideration in investment decisions. A
change in the securities held by the Fund is known as
"portfolio turnover." The 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 the
Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and
reinvestments in other securities. Such sales may 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 the Fund's performance.
Temporary For temporary or defensive purposes, the Fund may invest
Defensive without limit in U.S. debt securities, including taxable
Strategies securities and short-term money market securities, when
PIMCO deems it appropriate to do so. When the Fund engages
in such strategies, it may not achieve its investment
objective.
Changes in The investment objective of the Fund is fundamental and may
Investment not be changed without shareholder approval. Unless
Objectives otherwise stated, all other investment policies of the Fund
and Policies may be changed by the Board of Trustees without shareholder
approval.
Percentage Unless otherwise stated, all percentage limitations on Fund
Investment investments listed in this Offering Memorandum will apply at
Limitations the time of investment. The Fund would not violate these
limitations unless an excess or deficiency occurs or exists
immediately after and as a result of an investment.
Other The Fund may invest in other types of securities and use a
Investments variety of investment techniques strategies which are not
and described in this Offering Memorandum. These securities and
Techniques and techniques may subject the Fund to additional risks.
Please see the Offering Memorandum Supplement for additional
information about the securities and investment techniques
described in this Offering Memorandum and about additional
securities and techniques that may be used by the Fund.
<PAGE>
Appendix A
Description of Securities Ratings
The Fund's investments may range in quality from securities
rated in the lowest category in which the Fund is permitted to
invest to securities rated in the highest category (as rated
by Moody's or S&P or, if unrated, determined by PIMCO to be of
comparable quality). The percentage of the Fund's assets
invested in securities in a particular rating category will
vary. The following terms are generally used to describe 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 deemed predominately
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 Service, Inc.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise
what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present that make the long-term risks appear
somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present that
suggest a susceptibility to impairment sometime in the future.
<PAGE>
Baa: Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classified from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have
an original maturity not exceeding one year. Obligations
relying upon support mechanisms such as letters of credit and
bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment
ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics: leading
market positions in well-established industries; high rates of
return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and
well-established access to a range of financial markets and
assured sources of alternate liquidity.
<PAGE>
PRIME-2: Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of
the Prime rating categories.
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.
<PAGE>
Standard & Poor's Ratings Service
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues
only in small degree.
A: Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions, or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB-rating.
CCC: Debt rated CCC has a currently identifiable vulnerability
to default and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or B-
rating.
CC: The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
<PAGE>
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 Rating Definitions
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original
maturity of no more than 365 days. Ratings are graded into
several categories, ranging from A for the highest quality
obligations to D for the lowest. These categories are as
follows:
<PAGE>
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.
<PAGE>
PIMCO Funds:
Pacific Investment
Management Series
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
PIMCO, 840 Newport Center Drive, Suite 300, Newport Beach, CA 92660
----------------------------------------------------------------------------------------------------
CUSTODIAN
State Street Bank & Trust Co., 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
</TABLE>
The Trust's Offering Memorandum Supplement includes additional information about
the Fund. The Offering Memorandum Supplement is incorporated by reference into
this Offering Memorandum, which means it is part of this Offering Memorandum for
legal purposes. Additional information about the Fund's investments will be
available in the Fund's annual report and semi-annual report to shareholders.
The Fund's annual report (when available) will discuss the market conditions and
investment strategies that significantly affected the Fund's performance during
its fiscal year.
You may obtain free copies of any of these materials, request other information
about the Fund, or make shareholder inquiries by writing to:
PIMCO Funds
840 Newport Center Drive
Suite 300
Newport Beach, CA 92660
You may review and copy information about the Trust, including the Offering
Memorandum Supplement, at the Securities and Exchange Commission's public
reference room in Washington, D.C. You may call the Commission at 1-202-942-8090
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, upon payment of a
duplication fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102, or by electronic request at [email protected].
The Fund is issuing shares in a private placement transaction in accordance with
Regulation D or other applicable exemptions under the Securities Act of 1933, as
amended (the "Securities Act"). The enclosed Offering Memorandum is not an offer
to sell, or a solicitation of any offer to buy, any security to the public
within the meaning of the Securities Act.
PIMCO Funds
840 Newport Center Drive
Suite 300
Newport Beach, CA 92660
www.pimco.com
Investment Company Act file no. 811-5028
<PAGE>
PIMCO Funds:
Pacific Investment Management Series
Offering Memorandum Supplement:
PIMCO California Municipal Bond Fund
This Offering Memorandum Supplement (the "Supplement") should be read in
conjunction with the Offering Memorandum for the PIMCO California Municipal Bond
Fund (the "Fund") series of PIMCO Funds: Pacific Investment Management Series
(the "Trust"), dated May 16, 2000. The Fund issues its shares only in private
placement transactions in accordance with Regulation D or other applicable
exemptions under the Securities Act of 1933, as amended (the "Securities Act").
This Supplement is not an offer to sell, or a solicitation of any offer to buy,
any security to the public within the meaning of the Securities Act.
Shares of the Fund may be purchased by persons who are "accredited investors,"
as defined in the Securities Act, Regulation D or pursuant to other applicable
exemptions under the Securities Act.
Shares of the Fund are subject to restrictions on transferability and resale and
may not be transferred or resold except as permitted under the Securities Act.
Shares may be redeemed in accordance with the procedures set forth in the
Offering Memorandum.
This Supplement is intended for use only by the person to whom it has been
issued. Reproduction of this Supplement is prohibited.
May 16, 2000
<PAGE>
Table Of Contents
INVESTMENT OBJECTIVES AND POLICIES............................................4
Borrowing............................................................4
Corporate Debt Securities............................................5
Convertible Securities...............................................6
High Yield Securities ("Junk Bonds").................................6
Variable and Floating Rate Securities................................7
Participation on Creditors Committees................................7
Mortgage-Related and Other Asset-Backed Securities...................8
Bank Obligations....................................................12
Loan Participations.................................................12
Loans of Portfolio Securities.......................................14
Short Sales.........................................................14
When-Issued, Delayed Delivery and Forward Commitment Transactions...14
Derivative Instruments..............................................15
Inflation-Indexed Bonds.............................................22
Hybrid Instruments..................................................23
Event-Linked Bonds..................................................23
Warrants to Purchase Securities.....................................24
Illiquid Securities.................................................24
Municipal Bonds.....................................................24
INVESTMENT RESTRICTIONS......................................................28
MANAGEMENT OF THE TRUST......................................................29
Trustees and Officers...............................................29
Compensation Table..................................................33
Investment Adviser..................................................34
Fund Administrator..................................................34
DISTRIBUTION OF TRUST SHARES.................................................35
Distributor.........................................................35
Purchases, Redemptions and Exchanges................................36
NET ASSET VALUE..............................................................37
TAXATION ....................................................................37
Distributions.......................................................39
Sales of Shares.....................................................39
Backup Withholding..................................................39
Options, Futures and Forward Contracts, and Swap Agreements.........39
Short Sales.........................................................40
Original Issue Discount and Market Discount.........................40
Constructive Sales..................................................41
Non-US Shareholders.................................................41
Other Taxation......................................................42
OTHER INFORMATION............................................................42
Capitalization......................................................42
Performance Information.............................................43
Calculation of Yield................................................43
Calculation of Total Return.........................................44
Voting Rights.......................................................46
Code of Ethics......................................................47
Custodian, Transfer Agent and Dividend Disbursing Agent.............47
Independent Accountants.............................................47
Counsel.............................................................48
Financial Statements................................................48
<PAGE>
THE TRUST
The Trust is an open-end management investment company ("mutual fund")
currently consisting of forty-one separate investment portfolios, one of which
is described in this Supplement: the PIMCO California Municipal Bond Fund. The
Fund is registered under the Investment Company Act of 1940, as amended (the
"1940 Act").
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of the Fund
are described in the Offering Memorandum. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.
Borrowing
The Fund may borrow money to the extent permitted under the Investment
Company Act of 1940 ("1940 Act"), as amended, and as interpreted, modified or
otherwise permitted by regulatory authority having jurisdiction, from time to
time. This means that, in general, the Fund may borrow money from banks for any
purpose on a secured basis in an amount up to 1/3 of the Fund's total assets.
The Fund may also borrow money for temporary administrative purposes on an
unsecured basis in an amount not to exceed 5% of the Fund's total assets.
Specifically, provisions of the 1940 Act require the 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, the 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, the 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 the 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 Fund. Borrowing will tend to
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed will be subject to interest
costs which may or may not be recovered by appreciation of the securities
purchased. The Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
The 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 the 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 PIMCO in
accordance with procedures established by the Board of Trustees, equal (on a
daily mark-to-market basis) to its obligations under reverse repurchase
agreements. However, reverse repurchase agreements involve the risk that the
market value of securities retained by the Fund may decline below the repurchase
price of the securities sold by the Fund which it is obligated to repurchase. To
the extent that positions in reverse repurchase agreements are not covered
through the segregation of liquid assets at least equal to the amount of any
forward purchase commitment, such transactions would be subject to the Fund's
limitations on borrowings, which would, among other things, restrict the
aggregate of such transactions (plus any other borrowings) to 1/3 of the Fund's
total assets.
<PAGE>
A "mortgage dollar roll" is similar to a reverse repurchase agreement
in certain respects. In a "dollar roll" transaction the 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 the Fund pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which the 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 the 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.
The 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 Fund's restrictions 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 the Fund's overall
limitations on investments in illiquid securities.
The 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. The 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
The Fund's investments in U.S. dollar corporate debt securities of
domestic 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 PIMCO'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.
<PAGE>
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's Investor Service, Inc. ("Moody's")
describes securities rated Baa as "medium-grade" obligations; they are "neither
highly protected nor poorly secured . . . [i]nterest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." Standard & Poor's Ratings Services ("S&P")
describes securities rated BBB as "regarded as having an adequate capacity to
pay interest and repay principal . . . [w]hereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal .
. . than in higher rated categories." 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 the 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. The 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 the Fund are described as "speculative" by both Moody's
and S&P. Investment in lower rated corporate debt securities ("high yield
securities" or "junk bonds") generally provides greater income and increased
opportunity for capital appreciation than investments in higher quality
securities, but they also typically entail greater price volatility and
principal and income risk. These high yield securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of debt securities that are high yield may be more complex than for
issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of high yield securities have been found to be less
sensitive to interest-rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Fund 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. PIMCO
seeks to reduce these risks through diversification, credit analysis and
attention to current developments and trends in both the economy and financial
markets.
<PAGE>
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 Fund
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.
PIMCO 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. PIMCO
does not rely solely on credit ratings when selecting securities for the Fund,
and develops its own independent analysis of issuer credit quality. If a credit
rating agency changes the rating of a portfolio security held by the Fund, the
Fund may retain the portfolio security if PIMCO 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.
The 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 the Fund with a certain degree of protection against rises in
interest rates, the 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.
The 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.
Participation on Creditors Committees
The 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 the Fund to expenses
such as legal fees and may make the 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 the Fund on such committees
also may expose the Fund to potential liabilities under the federal bankruptcy
laws or other laws governing the rights of creditors and debtors. The Fund will
participate on such committees only when PIMCO 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.
<PAGE>
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 Fund 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.
<PAGE>
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 Fund 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, PIMCO 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. The Fund will not purchase mortgage-related securities or any other
assets which in PIMCO'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 Fund's
industry concentration restrictions, set forth below under "Investment
Restrictions" in the Offering Memorandum, by virtue of the exclusion from that
test available to all securities that are issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities ("U.S. Government Securities").
In the case of privately issued mortgage-related securities, the Fund may 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.
<PAGE>
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 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.
<PAGE>
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
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.
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 the 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 the Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the 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 the Fund's limitations on investment in illiquid securities.
<PAGE>
Other Asset-Backed Securities. Similarly, PIMCO 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 ReceivablesSM
("CARSSM"). CARSSM 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 CARSSM 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 CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is 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 the Fund's investment objectives and policies, PIMCO
also may invest in other types of asset-backed securities.
Bank Obligations
Bank obligations in which the Fund 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. The 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.
Loan Participations
The 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
Fund may participate in such syndications, or can buy part of a loan, becoming a
part lender. When purchasing loan participations, the 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 the 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, the Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated
in the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the 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.
<PAGE>
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 the 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 the 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 Fund 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, the Fund bears a
substantial risk of losing the entire amount invested.
The 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" in the Offering Memorandum). For purposes of these limits, the
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 the 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 the percentage of total assets that
the Fund has invested in a single issuer. Treating a financial intermediary as
an issuer of indebtedness may restrict the 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 PIMCO believes to be a fair price. In addition,
valuation of illiquid indebtedness involves a greater degree of judgment in
determining the 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 Fund currently intend to
treat indebtedness for which there is no readily available market as illiquid
for purposes of the Fund's 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 the
Fund.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the 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, the 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 Fund rely on PIMCO's research in
an attempt to avoid situations where fraud or misrepresentation could adversely
affect the Fund.
<PAGE>
Loans of Portfolio Securities
For the purpose of achieving income, the 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 331/3% of the total assets of the Fund.
Short Sales
The Fund may make short sales of securities as part of their overall
portfolio management strategies involving the use of derivative instruments and
to offset potential declines in long positions in similar securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline.
When the 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 and dividends on such borrowed
securities.
If the price of the security sold short increases between the time of
the short sale and the time and the Fund replaces the borrowed security, the
Fund will incur a loss; conversely, if the price declines, the Fund will realize
a capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
To the extent that the 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 PIMCO in accordance with procedures
established by the Board of Trustees. The 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 Fund 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
The Fund 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
PIMCO in accordance with procedures established by the Board of Trustees, in an
amount sufficient to meet the purchase price. Typically, no income accrues on
securities the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
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.
<PAGE>
When the Fund has sold a security on a when-issued, delayed delivery,
or forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or could suffer a loss. The Fund may dispose of or renegotiate
a transaction after it is 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 Fund may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.
Derivative Instruments
In pursuing its objectives the Fund may purchase and sell (write) both
put options and call options on securities, and 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 Fund also may enter into swap
agreements with respect to interest rates and indexes of securities. The Fund
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, the 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 Fund invest may
be particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Fund, the ability of the Fund to successfully utilize
these instruments may depend in part upon the ability of PIMCO to forecast
interest rates and other economic factors correctly. If PIMCO incorrectly
forecasts such factors and has taken positions in derivative instruments
contrary to prevailing market trends, the Fund could be exposed to the risk of
loss.
The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If PIMCO incorrectly
forecasts interest rates, market values or other economic factors in utilizing a
derivatives strategy for the 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 the 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 the Fund to close out or to liquidate
its derivatives positions. In addition, the 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.
Under certain extreme circumstances, the Fund investing in a derivative
instrument could lose more than the principal amount invested, although PIMCO
will typically cover open derivatives positions by segregating liquid assets (or
other economically appropriate covering positions) in an attempt to minimize
this risk.
Options on Securities and Indexes. The Fund may, to the extent
specified herein or in the Offering Memorandum, purchase and sell both put and
call options on fixed income or other securities or indexes in standardized
contracts traded on foreign or domestic securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
<PAGE>
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.)
The 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 PIMCO 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 PIMCO 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 PIMCO 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 PIMCO 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 PIMCO in accordance with procedures established by the Board of
Trustees.
If an option written by the 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 the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
The 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. The 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 the Fund is an
asset of the Fund. The premium received for an option written by the 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.
<PAGE>
The Fund may write covered straddles consisting of a combination of a
call and a put written on the same underlying security. A straddle will be
covered when sufficient assets are deposited to meet the Fund's immediate
obligations. The 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
Fund 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 the Fund
seeks to close out an option position. If the 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 the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the 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 the 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. The Fund may invest
in interest rate futures contracts and options thereon ("futures options").
An interest rate, foreign currency or index futures contract provides
for the future sale by one party and purchase by another party of a specified
quantity of a financial instrument, foreign currency or the cash value of an
index at a specified price and time. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments, including: the S&P 500; the
S&P Midcap 400; the Nikkei 225; the NYSE composite; U.S. Treasury bonds; U.S.
Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day
commercial paper; and bank certificates of deposit.
<PAGE>
The Fund may purchase and write call and put futures options, as
specified for that Fund in the Offering Memorandum. 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 Fund avoid being deemed a
"commodity pool" or a "commodity pool operator," the 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, the 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. The 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.
The Fund will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the 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 PIMCO in accordance with
procedures established by the Board of Trustees ("initial margin"). The margin
required for a futures contract is set by the exchange on which the contract is
traded and may be modified during the term of the contract. Margin requirements
on foreign exchanges may be different than U.S. exchanges. The initial margin is
in the nature of a performance bond or good faith deposit on the futures
contract which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. The Fund expects to
earn interest income on its initial margin deposits. A futures contract held by
the 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 the 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, the Fund will mark to market its
open futures positions.
The 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, frequently 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.
<PAGE>
The Fund may write covered straddles consisting of a call and a put
written on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Fund's immediate obligations. The
Fund may use the same liquid 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 Fund 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. When purchasing a
futures contract, the Fund will maintain with its custodian (and mark-to-market
on a daily basis) assets determined to be liquid by PIMCO 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, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by PIMCO in accordance with procedures established by the Board of Trustees,
that are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Fund will
maintain with its custodian (and mark-to-market on a daily basis) assets
determined to be liquid by PIMCO 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, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by PIMCO 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 the 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 the 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 the Fund's portfolio securities. Thus, the use of a longer-term
security may require the 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 Offering Memorandum.
<PAGE>
The requirements for qualification as a regulated investment company
also may limit the extent to which the 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. Under extreme circumstances, purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract, even though PIMCO will typically cover open futures positions in an
attempt to minimize this risk. 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 Fund enters into such futures contracts, the value of such
futures will not vary in direct proportion to the value of the Fund's holdings
of Municipal Bonds. Thus, the anticipated spread between the price of the
futures contract and the hedged security may be distorted due to differences in
the nature of the markets. The spread also may be distorted by differences in
initial and variation margin requirements, the liquidity of such markets and the
participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a futures or a futures option position, and
that the Fund would remain obligated to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Additional Risks of Options on Securities, Futures Contracts, and
Options on Futures Contracts. Options on securities, futures contracts, and
options on futures contracts may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Trust's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.
<PAGE>
Swap Agreements. The Fund may enter into interest rate and index swap
agreements. These transactions are entered into in a attempt to obtain a
particular return when it is considered desirable to do so, possibly at a lower
cost to the Fund than if the Fund had invested directly in an instrument that
yielded that desired return. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or "swapped" between the
parties are generally calculated with respect to a "notional amount," i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate, or in a "basket" of securities representing a
particular index. Forms of swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
rate, or "floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). The Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by PIMCO in accordance with
procedures established by the Board of Trustees, to avoid any potential
leveraging of the Fund's portfolio. Obligations under swap agreements so covered
will not be construed to be "senior securities" for purposes of the Fund's
investment restriction concerning senior securities.
Whether the Fund's use of swap agreements will be successful in
furthering its investment objective of total return will depend on PIMCO's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, the Fund bears the risk
of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. The Fund
will enter into swap agreements only with counterparties that meet certain
standards of creditworthiness (generally, such counterparties would have to be
eligible counterparties under the terms of the Fund's repurchase agreement
guidelines). Certain restrictions imposed on the Fund by the Internal Revenue
Code may limit the Fund's ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect the Fund's ability to terminate existing swap agreements
or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the CFTC effective February 22, 1993. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants," which includes the
following, provided the participants' total assets exceed established levels: a
bank or trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
<PAGE>
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Fund invests in these
securities, however, PIMCO analyzes these securities in its overall assessment
of the effective duration of the Fund's portfolio in an effort to monitor the
Fund's interest rate risk.
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 the 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 Fund 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.
<PAGE>
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The 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 the 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.
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 Fund's investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.
Event-Linked Bonds
Event-linked 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" event, such as a hurricane, earthquake, or other physical or
weather-related phenomenon. 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, the 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 event-linked 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
event-linked 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, event-linked 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.
<PAGE>
Event-linked 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 the Fund may be forced to
liquidate positions when it would not be advantageous to do so. Event-linked
bonds are typically rated, and the Fund will only invest in catastrophe bonds
that meet the credit quality requirements for the Fund.
Warrants to Purchase Securities
The Fund 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 the 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. Warrants
acquired in units or attached to securities will be deemed without value for
purposes of this restriction.
Illiquid Securities
The Fund may invest up to 15% of its 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 the Fund has valued the securities. Illiquid
securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such 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 PIMCO 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
The Fund may invest in securities issued by states, municipalities and
other political subdivisions, agencies, authorities and instrumentalities of
states and multi-state agencies or authorities. It is the policy of the Fund to
have 80% of its net assets invested in debt obligations the interest on which,
in the opinion of bond counsel to the issuer at the time of issuance, is exempt
from federal income tax ("Municipal Bonds"). The Fund 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 issuers at the time of issuance,
exempt from federal income tax and California income tax. The ability of the
Fund to invest in securities other than Municipal Bonds is limited by a
requirement of the Internal Revenue Code that at least 50% of the Fund's total
assets be invested in Municipal Bonds at the end of each calendar quarter. See
"Taxes."
<PAGE>
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 Municipal Bonds
generally are issued by or on behalf of the State of California and its
political subdivisions and financing authorities, and local governments. The
Municipal Bonds that the Fund may purchase include general obligation bonds and
limited obligation bonds (or revenue bonds), including industrial development
bonds issued pursuant to former federal tax law. General obligation bonds are
obligations involving the credit of an issuer possessing taxing power and are
payable from 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 Fund may invest in municipal lease obligations. A lease is not a
full faith and credit obligation of the issuer and is usually backed only by the
borrowing government's unsecured pledge to make annual appropriations for lease
payments. There have been challenges to the legality of lease financing in
numerous states, and, from time to time, certain municipalities have considered
not appropriating money for lease payments. In deciding whether to purchase a
lease obligation, the Fund will 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 Fund may also purchase
unrated lease obligations if determined by the Adviser to be of comparable
quality to rated securities in which the Fund is permitted to invest.
The Fund may seek to enhance its yield through the purchase of private
placements. These securities are sold through private negotiations, usually to
institutions or mutual funds, and may have resale restrictions. Their yields are
usually higher than comparable public securities to compensate the investor for
their limited marketability. The Fund may not invest more than 15% of its net
assets in illiquid securities, including unmarketable private placements.
Some longer-term Municipal Bonds give the investor the right to "put"
or sell the security at par (face value) within a specified number of days
following the investor's request-usually one to seven days. This demand feature
enhances a security's liquidity by shortening its effective maturity and enables
it to trade at a price equal to or very close to par. If a demand feature
terminates prior to being exercised, the Fund would hold the longer-term
security, which could experience substantially more volatility.
The Fund may invest in municipal warrants, which are essentially call
options on Municipal Bonds. In exchange for a premium, they give the purchaser
the right, but not the obligation, to purchase a Municipal Bond in the future.
The Fund might purchase a warrant to lock in forward supply in an environment
where the current issuance of bonds is sharply reduced. Like options, warrants
may expire worthless and they may have reduced liquidity. The Fund will not
invest more than 5% of its net assets in municipal warrants.
<PAGE>
The Fund may invest in Municipal Bonds with credit enhancements such as
letters of credit, municipal bond insurance and Standby Bond Purchase Agreements
("SBPAs"). Letters of credit that are issued by a third party, usually a bank,
to enhance liquidity and ensure repayment of principal and any accrued interest
if the underlying Municipal Bond should default. Municipal bond insurance, which
is usually purchased by the bond issuer from a private, nongovernmental
insurance company, provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due. Insurance does not
guarantee the price of the bond or the share price of any fund. The credit
rating of an insured bond reflects the credit rating of the insurer, based on
its claims-paying ability. The obligation of a municipal bond insurance company
to pay a claim extends over the life of each insured bond. Although defaults on
insured Municipal Bonds have been low to date and municipal bond insurers have
met their claims, there is no assurance this will continue. A
higher-than-expected default rate could strain the insurer's loss reserves and
adversely affect its ability to pay claims to bondholders. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating. An SBPA is a liquidity facility provided to pay the purchase
price of bonds that cannot be re-marketed. The obligation of the liquidity
provider (usually a bank) is only to advance funds to purchase tendered bonds
that cannot be remarketed and does not cover principal or interest under any
other circumstances. The liquidity provider's obligations under the SBPA are
usually subject to numerous conditions, including the continued creditworthiness
of the underlying borrower.
The Fund may invest in Residual Interest Bonds, which are created by
dividing the income stream provided by an underlying bond to create two
securities, one short term and one long term. The interest rate on the
short-term component is reset by an index or auction process normally every
seven to 35 days. After income is paid on the short-term securities at current
rates, the residual income goes to the long-term securities. Therefore, rising
short-term interest rates result in lower income for the longer-term portion,
and vice versa. The longer-term bonds can be very volatile and may be less
liquid than other Municipal Bonds of comparable maturity. The Fund will not
invest more than 10% of its total assets in Residual Interest Bonds.
The Fund also may invest in participation interests. Participation
interests are various types of securities created by converting fixed rate bonds
into short-term, variable rate certificates. These securities have been
developed in the secondary market to meet the demand for short-term, tax-exempt
securities. The Fund will invest only in securities deemed tax-exempt by a
nationally recognized bond counsel, but there is no guarantee the interest will
be exempt because the IRS has not issued a definitive ruling on the matter.
Municipal Bonds are subject to credit and market risk. Generally,
prices of higher quality issues tend to fluctuate less with changes in market
interest rates than prices of lower quality issues and prices of longer maturity
issues tend to fluctuate more than prices of shorter maturity issues.
The Fund may purchase and sell portfolio investments to take advantage
of changes or anticipated changes in yield relationships, markets or economic
conditions. The Fund may also sell Municipal Bonds due to changes in the
Adviser's evaluation of the issuer or cash needs resulting from redemption
requests for Fund shares. The secondary market for Municipal Bonds typically has
been less liquid than that for taxable debt/fixed income securities, and this
may affect the Fund's ability to sell particular Municipal Bonds at then-current
market prices, especially in periods when other investors are attempting to sell
the same securities.
<PAGE>
Prices and yields on Municipal Bonds are dependent on a variety of
factors, including general money- market conditions, the financial condition of
the issuer, general conditions of the Municipal Bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of Municipal Bonds may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
Obligations of issuers of Municipal Bonds are subject to the provisions
of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of interest and principal on their Municipal Bonds may be materially
affected or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for Municipal Bonds or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments might affect all or
a substantial portion of the Fund's Municipal Bonds in the same manner. In
particular, the Fund is 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.
PIMCO has not independently verified the information, but has no reason to
believe that it is not correct.
<PAGE>
California. The Fund may be particularly 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 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 Fund may be impaired.
Certain tax-exempt securities in which the 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, 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.
<PAGE>
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 affect 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.
The 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
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. To the extent that borrowings for temporary administrative purposes
exceed 5% of the total assets of the Fund, such excess shall be subject to the
300% asset coverage requirement.
To the extent the 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.
<PAGE>
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 Fund has adopted an investment
policy pursuant to which the Fund will not purchase or sell OTC options if, as a
result of such transactions, the sum of: 1) the market value of OTC options
currently outstanding which are held by the Fund, 2) the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and 3) 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 Fund and may be amended by the Trustees
without the approval of shareholders. However, the Fund 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 Supplement) 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 the Fund's
investment portfolio, resulting from market fluctuations or other changes in the
Fund's total assets will not require the Fund to dispose of an investment until
PIMCO 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, PIMCO 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.
<PAGE>
The Fund interprets its policies with respect to borrowing and lending
to permit such activities as may be lawful for the Fund, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom pursuant
to exemptive order of the SEC. The Trust has filed an application seeking an
order from the SEC to permit the Fund to enter into transactions with respect to
the investment of daily cash balances of the Fund in shares of the PIMCO Money
Market Fund, another series of the Trust, as well as the use of daily excess
cash balances of the PIMCO Money Market Fund in inter-fund lending transactions
with the other series of the Trust for temporary cash management purposes. The
interest paid by the Fund in such an arrangement will be less than that
otherwise payable for an overnight loan, and will be 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.
<PAGE>
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>
<S> <C> <C>
Position with Principal Occupation(s)
Name, Address and Age the Trust During the Past Five Years
Brent R. Harris* Chairman of the Board and Managing Director, PIMCO; Board of Governors,
Age 40 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 Director,
Age 40 PIMCO Commercial Mortgage Securities Trust, Inc.;
President and Trustee, PIMCO Variable Insurance
Trust; Executive Vice President, PIMCO Funds:
Multi-Manager Series.
Guilford C. Babcock Trustee Associate Professor of Finance, University of
1500 Park Place Southern California; Director, PIMCO Commercial
San Marino, California 91108 Mortgage Securities Trust, Inc.; Trustee, PIMCO
Age 68 Variable Insurance Trust; Director, Growth Fund of
America and Fundamental Investors Fund of the
Capital Group; Director, Good Hope Medical
Foundation.
E. Philip Cannon Trustee Proprietor, Cannon & Company, an affiliate of
3838 Olympia Inverness Management LLC, a private equity
Houston, Texas 77019 investment firm; Trustee of PIMCO Funds:
Age 59 Multi-Manager Series. Formerly, Headmaster, St.
John's School, Houston, Texas; Trustee of PIMCO
Advisors Funds ("PAF") and Cash Accumulation Trust
("CAT"); General Partner, J.B. Poindexter & Co.,
Houston, Texas, a private equity investment firm;
and Partner, Iberia Petroleum Company, an oil and
gas production company.
Vern O. Curtis Trustee Private Investor; Director, PIMCO Commercial
14158 N.W. Bronson Creek Drive Mortgage Securities Trust, Inc.; Trustee, PIMCO
Portland, Oregon 97229 Variable Insurance Trust; Director, Public Storage
Age 65 Business Parks Inc., a Real Estate Investment Trust;
Director, Fresh Choice, Inc. (restaurant company)
Formerly charitable work, The Church of Jesus Christ
of Latter-day Saints.
<PAGE>
J. Michael Hagan Trustee Retired from Furon Company (manufacturing) where he
6 Merced served as Chairman and CEO from June 1991 to
San Clemente, California 92673 November 1999, and in other capacities since 1967.
Age 60 He was previously associated with Ross Laboratories
and Standard Oil of California. Mr. Hagan serves on
the Boards of Directors for Ameron International
(manufacturing), Freedom Communications, Remedy Temp
(staffing) and Saint-Gobain Company. He is also a
member of the Board of Regents at Santa Clara
University, the Board of Taller San Jose, and the
Board of Trustees of the South Coast Repertory
Theater.
Thomas P. Kemp Trustee Private Investor; Director, PIMCO Commercial
1141 Marine Drive Mortgage Securities Trust, Inc.; Trustee, PIMCO
Laguna Beach, California 92651 Variable Insurance Trust. Formerly Chairman and CEO,
Age 69 Coca-Cola Bottling Co. of Los Angeles; Co-Chairman,
U.S. Committee to Assist Russian Reform; Director,
Union Financial Corp. (savings & loan).
William J. Popejoy Trustee President, Pacific Capital Investors; Chairman,
29 Chatham Court PacPro (vinyl assembly products; formerly Western
Newport Beach, California 92660 Printing); Director, PIMCO Commercial Mortgage
Age 61 Securities Trust, Inc.; Trustee, PIMCO Variable
Insurance Trust. Formerly Director, California State
Lottery; Chief Executive Officer, Orange County,
California.
Michael G. Dow Senior Vice President Senior Vice President, PIMCO. Formerly Fixed Income
Age 36 Specialist, Salomon Brothers, Inc.; Vice President
Operations, Citibank NA Global Consumer Banking
Group.
William H. Gross Senior Vice President Managing Director, PIMCO; Senior Vice President,
Age 55 PIMCO Variable Insurance Trust.
Margaret Isberg Senior Vice President Managing Director, PIMCO.
Age 43
<PAGE>
Jeffrey M. Sargent Senior Vice President Senior Vice President and Manager of Investment
Age 37 Operations Shareholder Services, PIMCO; Senior Vice
President, PIMCO Commercial Mortgage Securities
Trust, Inc., and PIMCO Variable Insurance Trust;
Vice President, PIMCO Funds: Multi-Manager Series.
Leland T. Scholey Senior Vice President Senior Vice President, PIMCO. Formerly Vice
Age 47 President, PIMCO.
Raymond C. Hayes Vice President Vice President, PIMCO. Formerly Marketing Director,
Age 55 Pacific Financial Asset Management Corporation.
Thomas J. Kelleher, III Vice President Vice President, PIMCO. Previously associated with
Age 49 Delaware Trust, Mellon Bank and Girard Trust (bank
trust departments).
Henrik P. Larsen Vice President Vice President and Manager, Fund Administration,
Age 30 PIMCO; Vice 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 President,
Age 41 Fidelity Investments; Institutional Sales
Representative, CS First Boston.
Andre Mallegol Vice President Vice President, PIMCO. Formerly associated with
Age 33 Fidelity Investments Institutional Services
Company.
Scott Millimet Vice President Vice President, PIMCO. Formerly Executive Vice
Age 42 President with Back Bay Advisors.
James F. Muzzy Vice President Managing Director, PIMCO; Senior Vice President,
Age 60 PIMCO Variable Insurance Trust.
Douglas J. Ongaro Vice President Vice President, PIMCO. Formerly Regional Marketing
Age 39 Manager, Charles Schwab & Co., Inc.
David J. Pittman Vice President Vice President, PIMCO. Formerly a senior executive
Age 52 with Bank of America, the Northern Trust Co. and
NationsBank.
<PAGE>
Mark A. Romano Vice President Vice President, PIMCO. Previously associated with
Age 41 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 Director,
Age 54 PIMCO; Senior Vice President, PIMCO Variable
Insurance Trust; Vice President, PIMCO Commercial
Mortgage Securities Trust, Inc.
John P. Hardaway Treasurer Senior 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. Formerly Vice President, PIMCO.
Garlin G. Flynn Secretary Specialist, PIMCO; Secretary, PIMCO Commercial
Age 53 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 Reporting
Age 36 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.
Michael J. Willemsen Assistant Secretary Manager, PIMCO; Assistant Secretary, PIMCO
Age 40 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.
<PAGE>
Compensation Table
The following table sets forth information regarding compensation
received by the Trustees for the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C>
Aggregate Total Compensation from
Compensation Trust and Fund Complex
Name and Position from Trust(1) Paid to Trustees(2)
Guilford C. Babcock $58,000 $78,750
Trustee
E. Philip Cannon 0 $57,000(3)
Trustee
Vern O. Curtis $60,297 $82,619
Trustee
J. Michael Hagan 0 0
Trustee
Thomas P. Kemp $58,000 $78,750
Trustee
William J. Popejoy $58,000 $78,750
Trustee
</TABLE>
(1) Each Trustee, other than those affiliated with PIMCO 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
PIMCO 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 $234,297.
(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
PIMCO or its affiliates, receives an additional annual retainer of $500.
For the fiscal year ended December 31, 1999, the unaffiliated Directors as
a group received compensation in the amount of $42,786.
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 PIMCO or its affiliates, receives an additional annual
retainer of $500. For the fiscal year ended December 31, 1999, the
unaffiliated Trustees as a group received compensation in the amount of
$41,786.
(3) Mr. Cannon also serves as a Trustee of PIMCO Funds: Multi-Manager Series
which has adopted a deferred compensation plan. Mr. Cannon elected to have
$57,000 in compensation deferred from that Trust.
<PAGE>
Investment Adviser
PIMCO serves as investment adviser to the Fund pursuant to an
investment advisory contract ("Advisory Contract") between PIMCO and the Trust.
On May 5, 2000, Allianz of America, Inc., a subsidiary of Allianz AG,
completed the acquisition of approximately 70% of the outstanding partnership
interests in PIMCO Advisors L.P. ("PIMCO Advisors"), of which PIMCO is a
subsidiary partnership. In connection with the acquisition, Allianz of America,
Inc. entered into a put/call arrangement with Pacific Life Insurance Company,
which holds the remainder of the partnership interests in PIMCO Advisors, for
the possible disposition of Pacific Life Insurance Company's stake in PIMCO
Advisors.
As a result of this transaction, PIMCO Advisors and its subsidiaries,
including PIMCO, are now controlled by Allianz AG, a leading provider of
financial services, particularly in Europe. However, PIMCO remains operationally
independent, continues to operate under its existing name, and now leads the
global fixed income investment efforts of Allianz AG. With the addition of PIMCO
Advisors, the Allianz group manages assets of approximately $650 billion,
including more than 300 mutual funds for retail and institutional clients.
Significant institutional shareholders of Allianz AG currently include
Dresdner Bank AG, Deutsche Bank AG, Munich Reinsurance and HypoVereinsbank. BNP
Paribas, Credit Lyonnais, Munich Reinsurance, HypoVereinsbank, Dresdner Bank AG
and Deutsche Bank AG, as well as certain broker-dealers that might be controlled
by or affiliated with these entities, such as DB Alex. Brown LLC, Deutsche Bank
Securities, Inc. and Dresdner Klienwort Benson North America LLC (collectively,
the "Affiliated Brokers"), may be considered to be affiliated persons of PIMCO.
Absent an SEC exemption or other relief, the Fund generally is precluded from
effecting principal transactions with the Affiliated Brokers, and its ability to
purchase securities being underwritten by an Affiliated Broker or to utilize the
Affiliated Brokers for agency transactions is subject to restrictions. PIMCO
does not believe that the restrictions on transactions with the Affiliated
Brokers described above materially adversely affect its ability to provide
services to the Fund, the Fund's ability to take advantage of market
opportunities, or the Fund's overall performance.
Under the terms of the Advisory Contract, PIMCO is obligated to manage
the Fund 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 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 PIMCO, on 60 days' written notice by either party to the contract
and will terminate automatically if assigned.
For the services it provides to the Fund, PIMCO receives a monthly
investment advisory fee from the Fund equal to 0.25%, at an annual rate, of the
average daily net assets of the Fund.
<PAGE>
Fund Administrator
PIMCO also serves as Administrator to the Fund pursuant to an
administration agreement (the "Administration Agreement") with the Trust. PIMCO
provides the Fund 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 Fund,
including coordination of the services performed by the Fund' transfer agent,
custodian, legal counsel, independent accountants, and others. PIMCO (or an
affiliate of PIMCO) also furnishes the Fund with office space facilities
required for conducting the business of the Fund, 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 Fund, and is responsible for
the costs of registration of the Trust's shares and the printing of Offering
Memorandum and shareholder reports for current shareholders. For the services it
provides to the Fund, PIMCO receives a monthly administration fee from the Fund
equal to 0.24%, at an annual rate, of the average daily net assets of the Fund.
Except for the expenses paid by PIMCO, the Trust bears all costs of its
operations. The Fund is 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.
The Administration Agreement may be terminated by the Trustees, or by a
vote of a majority of the outstanding voting securities of the Trust or Fund 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). In approving the Administration Agreement, the
Trustees determined that: (1) the Administration Agreement is in the best
interests of the Fund and their shareholders; (2) the services to be performed
under the Agreement are services required for the operation of the Fund; (3)
PIMCO is able to provide, or to procure, services for the Fund 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
PIMCO Funds Distributors LLC (the "Distributor") serves as the
principal underwriter of the Fund'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 the Fund without penalty, at
any time, by the Fund 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.
<PAGE>
The Distribution Contract will continue in effect with respect to the
Fund 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 or the
Administration Agreement 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 Fund, it may continue in effect with respect to any Fund
as to which it has not been terminated (or has been renewed).
Shares of the Fund are offered only to persons who are "accredited
investors," as defined in the Securities Act, Regulation D or pursuant to other
applicable exemptions under the Securities Act.
Purchases, Redemptions and Exchanges
Purchases, redemptions and exchanges of shares of the Fund are
discussed in the Offering Memorandum under the headings "Purchasing Shares,"
"Redeeming Shares," and "Exchange Privilege." The Fund issues its shares only in
private placement transactions in accordance with Regulation D or other
applicable exemptions under the Securities Act. This Supplement is not an offer
to sell, or a solicitation of any offer to buy, any security to the public
within the meaning of the Securities Act.
The Fund is not qualified or registered for sale in all states.
Prospective investors should inquire as to whether shares of the Fund are
available for offer and sale in their state of domicile or residence. Shares of
the 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.
As described in the Offering Memorandum under the caption "Exchange
Privilege," Institutional Class shares of the Fund may be exchanged for
Institutional Class shares of any other series of the Trust on the basis of
their respective net asset values. In addition, subject to compliance with
applicable private placement restrictions and the investment restrictions of the
Fund, shares of the Fund may be purchased by exchanging Institutional Class
shares of another series of the Trust for shares of the Fund.
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. The Trust
reserves the right to modify or discontinue the exchange privilege at any time.
The Trust reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions
by any shareholder of record of the Fund, 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 Fund's portfolios.
<PAGE>
NET ASSET VALUE
Net Asset Value is determined as indicated under "How Fund Shares are
Priced" in the Offering Memorandum. Net asset value will not be determined on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
The Fund's portfolio securities and other assets for which market
quotations are readily available are stated at market value. Market value is
determined on the basis of last reported sales prices, or if no sales are
reported, as is the case for most securities traded over-the-counter, at the
mean between representative bid and asked quotations obtained from a quotation
reporting system or from established market makers. Fixed income securities,
including those to be purchased under firm commitment agreements (other than
obligations having a maturity of 60 days or less), are normally valued on the
basis of quotations obtained from brokers and dealers or pricing services, which
take into account appropriate factors such as institutional-sized trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
TAXATION
The following summarizes certain additional federal income tax
considerations generally affecting the Fund and its 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 Fund. 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 Offering Memorandum is not intended as a substitute
for careful tax planning.
The 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, the 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 other income derived with respect to its
business of investing in such stock, securities or currencies ("Qualifying
Income Test"); (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government Securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government Securities or the securities of other regulated investment
companies); and (c) distribute each taxable year the sum of (i) at least 90% of
its investment company taxable income (which includes dividends, interest and
net short-term capital gains in excess of any net long-term capital losses) and
(ii) 90% of its tax exempt interest, net of expenses allocable thereto. The
Treasury Department is authorized to promulgate regulations under which gains
from foreign currencies (and options, futures, and forward contracts on foreign
currency) would constitute qualifying income for purposes of the Qualifying
Income Test only if such gains are directly related to investing in securities.
To date, such regulations have not been issued.
<PAGE>
As a regulated investment company, the 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. The Fund intends to declare and pay income
dividends quarterly. In addition, the Fund distributes any net capital gains it
earns from the sale of Fund securities to shareholders no less frequently than
annually. Amounts not distributed by the 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, the 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 the 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, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
The Fund must have at least 50% of its total assets invested in
Municipal Bonds at the end of each calendar quarter so that dividends derived
from its net interest income on Municipal Bonds and so designated by the Fund
will be "exempt-interest dividends," which are generally exempt from federal
income tax when received by an investor. Certain exempt-interest dividends may
increase alternative minimum taxable income for purposes of determining a
shareholder's liability for the alternative minimum tax. In addition,
exempt-interest dividends allocable to interest from certain "private activity
bonds" will not be tax exempt for purposes of the regular income tax to
shareholders who are "substantial users" of the facilities financed by such
obligations or "related persons" of "substantial users." The tax-exempt portion
of dividends paid for a calendar year constituting "exempt-interest dividends"
will be designated after the end of that year and will be based upon the ratio
of net tax-exempt income to total net income earned by the Fund during the
entire year. That ratio may be substantially different than the ratio of net
tax-exempt income to total net income earned during a portion of the year. Thus,
an investor who holds shares for only a part of the year may be allocated more
or less tax-exempt interest dividends than would be the case if the allocation
were based on the ratio of net tax-exempt income to total net income actually
earned by the Fund while the investor was a shareholder. All or a portion of
interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund will not be deductible by the shareholder. The portion
of interest that is not deductible is equal to the total interest paid or
accrued on the indebtedness multiplied by the percentage of the Fund's total
distributions (not including distributions of the excess of net long-term
capital gains over net short-term capital losses) paid to the shareholder that
are exempt-interest dividends. Under rules used by the Internal Revenue Service
for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
Shareholders of the Fund receiving social security or railroad
retirement benefits may be taxed on a portion of those benefits as a result of
receiving tax exempt income (including exempt-interest dividends distributed by
the Fund). The tax may be imposed on up to 50% of a recipient's benefits in
cases where the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits,
exceeds a base amount. In addition, up to 85% of a recipient's benefits may be
subject to tax if the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits
exceeds a higher base amount. Shareholders receiving social security or railroad
retirement benefits should consult with their tax advisors.
<PAGE>
In years when the 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 the Fund's expenses attributable to
earning tax-exempt income do not reduce the Fund's current earnings and profits,
it is possible that distributions, if any, in excess of the Fund's net
tax-exempt and taxable income will be treated as taxable dividends to the extent
of the Fund's remaining earnings and profits (i.e., the amount of such
expenses).
Distributions
Except for exempt interest dividends paid by the Fund, all dividends
and distributions of the 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 the 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 Fund 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 the
Fund's shares and are not eligible for the dividends received deduction. Any
distributions that are not from the 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 the 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
The 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 Fund may be "section 1256 contracts." Any gains or losses
on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by the 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.
<PAGE>
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the 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 the Fund. In addition,
losses realized by the 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 the Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by the
Fund which is taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intend to account for such transactions in a manner they deem to be
appropriate, the Internal Revenue Service might not accept such treatment. If it
did not, the status of the Fund as a regulated investment company might be
affected. The Trust intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for the Fund to qualify as
a regulated investment company may limit the extent to which the Fund will be
able to engage in swap agreements.
The qualifying income and diversification requirements applicable to
the Fund's assets may limit the extent to which the Fund will be able to engage
in transactions in options, futures contracts, forward contracts, and swap
agreements.
Short Sales
The Fund may make short sales of securities. Short sales may increase
the amount of short-term capital gain realized by the 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 the 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.
<PAGE>
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 the 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. The Fund may make one or more of the elections applicable to debt
securities having market discount, which could affect the character and timing
of recognition of income.
Some debt securities (with a fixed maturity date of one year or less
from the date of issuance) that may be acquired by the 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.
The 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
the Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the 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-US Shareholders
Withholding of Income Tax on Dividends: Under 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 the 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.
<PAGE>
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 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 an applicable
estate tax treaty 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
relevant treaty.
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). The Fund will provide information
annually to shareholders indicating the amount and percentage of the 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 the Fund.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated February 19, 1987, and amended and restated effective
March 31, 2000. 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 the 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.
<PAGE>
Performance Information
From time to time the Trust may make available certain information
about the performance of some or all of the Fund. Information about the Fund's
performance is based 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 shares of the Fund may be included in sales
literature or other written materials provided to investors. When the 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. Total return 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 Fund 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 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 the 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.
The Fund may from time to time include in sales literature or other
written materials provided to investors, 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. The Fund
also may compute current distribution rates and use this information in the
Offering Memorandum and Supplement, in reports to current shareholders, or in
certain types of sales literature provided to prospective investors.
Calculation of Yield
Quotations of yield for the Fund will be based on all investment income
per share (as defined by the SEC) during a particular 30-day (or one month)
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[( a-b + 1)6-1]
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of
the period.
<PAGE>
The yield of the such Fund will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses of the Trust allocated to the Fund. These factors and possible
differences in the methods used in calculating yield should be considered when
comparing the Fund's yield to yields published for other investment companies
and other investment vehicles. Yield should also be considered relative to
changes in the value of the Fund's shares. These yields do not take into account
any applicable contingent deferred sales charges.
The Trust, in its sales literature or other written materials provided
to investors, 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 the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund 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 expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid. The Fund 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.
Current distribution information for the 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 the 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 the 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.
<PAGE>
Performance information for the Fund may also be compared to various
unmanaged indexes, such as the Lehman BB Intermediate Corporate Index and the
Salomon Brothers 3-Month Treasury Bill Index. Unmanaged indexes 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 Fund,
performance information for the Fund 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 Fund or to PIMCO, should be
considered in light of the Fund' investment objectives and policies,
characteristics and quality of the Fund, 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.
In the sales literature or other written materials provided to
investors, 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 Fund 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 Ibbotson'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>
<S> <C> <C> <C> <C> <C> <C>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION FUND
---- ------ ----- ------- --------- ----
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
1998 28.58% 10.76% 4.86% 1.61% 16.70%
</TABLE>
<PAGE>
*Returns of unmanaged indices do not reflect past or future performance of any
of the Fund 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.
Articles or reports that include information relating to performance,
rankings and other characteristics of the Fund 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
Portfolio Magazine, The New York Times, Kiplinger's Personal Finance, Fortune,
Money Magazine, Morningstar's Mutual Portfolio 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 Fund, and may provide information relating to PIMCO, including
descriptions of assets under management and client base, and opinions of the
author(s) regarding the skills of personnel and employees of PIMCO who have
portfolio management responsibility. From time to time, the Trust may include
references to or reprints of such publications or reports in its sales
literature or other written materials provided to investors.
From time to time, the Trust may set forth in its sales literature or
other written materials information about the growth of a certain dollar-amount
invested in the Fund 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 PIMCO who assist with portfolio management and research
activities on behalf of the Fund. The following lists various analysts
associated with PIMCO: Mark Hudoff, Doris Nakamura and Ray Kennedy.
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.
<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 May 8, 2000, no persons owned of record or
beneficially 5% or more of shares of the Fund.
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.
Custodian, Transfer Agent and Dividend Disbursing Agent
State Street Bank and Trust Company ("State Street") 801 Pennsylvania,
Kansas City, Missouri 64105 serves as custodian for assets of the Fund. Under
the custody 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 Fund 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
Fund.
Independent Accountants
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105,
serves as independent public accountants for the Fund. 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.
Financial Statements
As the Fund commenced operations in May 2000, financial information for
the Fund is not available.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
<TABLE>
<S> <C> <C> <C>
(a) (1) Declaration of Trust of Registrant/7/
(2) Form of Amendment to Declaration of Trust/16/
(3) Form of Amended and Restated Declaration of Trust/20/
(4) Form of Amended and Restated Establishment and
Designation of Series of Shares of Beneficial
Interest/8/
(5) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to Long Duration Fund/11/
(6) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to Convertible Bond Fund/12/
(7) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to Low Duration Municipal Bond, California Intermediate Municipal Bond and
New York Intermediate Municipal Bond Funds/15/
(8) Form of Establishment and Designation of Classes J and Class K/16/
(9) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to Loan Obligation Fund/16/
(10) Form of Amended Designation of Series Relating to Short Duration Municipal Income
Fund/16/
(11) Form of Establishment and Designation of Series of Shares of Beneficial
Interest Relating to the PIMCO Private Account Portfolios/17/
(12) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to the Real Return Bond Portfolio/17/
<PAGE>
(13) Form of Amended Designation of Series Relating to the U.S. Government Sector,
U.S. Government Sector II, Mortgage, Mortgage II, Investment Grade Corporate,
Select Investment, High Yield, International and Emerging Markets
Portfolios/17/
(14) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to Investment Grade Corporate Bond Fund/19/
(15) Form of Establishment and Designation of Series of Shares of Beneficial Interest
Relating to PIMCO California Municipal Bond Fund and PIMCO Short-Term Emerging Markets
Portfolio
(b) Form of By-laws of Registrant/7/
(c) Not applicable
(d) (1) Form of Investment Advisory Contract/7/
(2) Form of Amendment to Investment Advisory Contract/7/
(3) Form of Supplement to Investment Advisory Contract Relating to StocksPLUS Short
Strategy Fund/2/
(4) Form of Supplement to Investment Advisory Contract Relating to Balanced Fund/3/
(5) Form of Supplement to Investment Advisory Contract Relating to Global Bond Fund II/5/
(6) Form of Supplement to Investment Advisory Contract Relating to Real Return Bond Fund/5/
(7) Form of Supplement to Investment Advisory Contract Relating to Low Duration Mortgage
Fund, Total Return Mortgage Fund, Emerging Markets Bond Fund, and Emerging Markets
Bond Fund II/6/
(8) Form of Supplement to Investment Advisory Contract Relating to Municipal Bond Fund /9/
(9) Form of Supplement to Investment Advisory Contract Relating to Long Duration Fund/11/
(10) Form of Supplement to Investment Advisory Contract Relating to Convertible Bond
Fund/13/
(11) Form of Supplement to Investment Advisory Contract Relating to Low Duration Municipal
Bond, California Intermediate Municipal Bond and New York Intermediate Municipal Bond
Funds/15/
(12) Form of Supplement to Investment Advisory Contract Relating to PIMCO Private Account
Portfolios/17/
(13) Form of Supplement to Investment Advisory Contract Relating to Loan Obligation Fund/20/
(14) Form of Investment Advisory Contract
(15) Form of Supplement to Investment Advisory Contract Relating to PIMCO California
Municipal Bond Fund and PIMCO Short-Term Emerging Markets Portfolio
<PAGE>
(e) (1) Form of Amended and Restated Distribution Contract/14/
(2) Form of Supplement to Amended and Restated Distribution Contract Relating to Low
Duration Municipal Bond, California Intermediate Municipal Bond and New York
Intermediate Municipal Bond Funds/15/
(3) Form of Japan Dealer Sales Contract/14/
(4) Form of Supplement to Amended and Restated Distribution Contract Relating to PIMCO
Private Account Portfolios/17/
(5) Form of Distribution Contract/20/
(6) Form of Supplement to Distribution Contract Relating to PIMCO California Municipal
Bond Fund and PIMCO Short-Term Emerging Markets Portfolio/20/
(f) Not applicable
(g) Form of Custody and Investment Accounting Agreement/14/
(h) (1) Form of Amended and Restated Administration Agreement /9/
(2) Form of Supplement to Amended and Restated Administration Agreement relating to Long
Duration Fund/11/
(3) Form of Supplement to Amended and Restated Administration Agreement Relating to
Convertible Bond Fund/13/
(4) Form of Supplement to Amended and Restated
Administration Agreement Relating to Class J and
Class K Shares/14/
(5) Form of Supplement to Amended and Restated Administration Agreement Relating to Low
Duration Municipal Bond, California Intermediate Municipal Bond and New York
Intermediate Municipal Bond Funds/15/
(6) Form of Supplement to Amended and Restated Administration Agreement Relating to PIMCO
Private Account Portfolios/17/
(7) Form of Second Amended and Restated Administration Agreement/20/
(8) Form of Supplement to Second Amended and Restated Administration Agreement Relating to
PIMCO California Municipal Bond Fund and PIMCO Short-Term Emerging Markets
Portfolio/20/
(9) Form of Supplement to Second Amended and Restated Administration Agreement Relating to
Loan Obligation Fund/20/
(10) Form of Shareholder Servicing Agreement /9/
<PAGE>
(11) Form of Transfer Agency Agreement/7/
(12) Form of Transfer Agency Agreement with Shareholder Services, Inc./1/
(i) (1) Opinion of Counsel/18/
(2) Consent of Counsel/20/
(j) Not Applicable
(k) Not applicable
(l) Not applicable
(m) (1) Form of Distribution and Servicing Plan for Class A Shares/4/
(2) Form of Distribution and Servicing Plan for Class B Shares/4/
(3) Form of Distribution and Servicing Plan for Class C Shares/4/
(4) Form of Amended and Restated Distribution Plan for Administrative Class Shares/7/
(5) Form of Amended and Restated Administrative Services Plan for Administrative Class
Shares/7/
(6) Form of Distribution and Servicing Plan for Class J Shares/14/
(7) Form of Distribution and Servicing Plan for Class K Shares/14/
(n) Form of Amended and Restated Multi-Class Plan adopted pursuant to
Rule 18f-3/14/
(p)(1) Form of Code of Ethics for the Registrant/20/
(p)(2) Form of Code of Ethics for PIMCO/20/
(p)(3) Form of Code of Ethics for PIMCO Funds Distributors LLC/20/
<PAGE>
* Form of Power of Attorney/20/
---------------------
/1/ Filed with Post Effective Amendment No. 33 to the Registration
Statement of PIMCO Advisors Funds (File No. 2-87203) on November 30, 1995.
/2/ Filed with Post-Effective Amendment No. 27 on January 16, 1996.
/3/ Filed with Post-Effective Amendment No. 28 on April 1, 1996.
/4/ Filed with Registration Statement on Form N-14 (File No. 333-12871)
on September 27, 1996.
/5/ Filed with Post Effective Amendment No. 33 on January 13, 1997.
/6/ Filed with Post-Effective Amendment No. 36 on July 11, 1997.
/7/ Filed with Post-Effective Amendment No. 37 on November 17, 1997.
/8/ Filed with Post-Effective Amendment No. 39 on January 15, 1998.
/9/ Filed with Post-Effective Amendment No. 40 on March 13, 1998.
/10/ Filed with Post-Effective Amendment No. 41 on July 31, 1998.
/11/ Filed with Post-Effective Amendment No. 42 on September 11, 1998.
/12/ Filed with Post-Effective Amendment No. 43 on January 15, 1999.
/13/ Filed with Post-Effective Amendment No. 44 on April 2, 1999.
/14/ Filed with Post-Effective Amendment No. 45 on May 26, 1999.
/15/ Filed with Post-Effective Amendment No. 46 on June 17, 1999.
/16/ Filed with Post-Effective Amendment No. 50 on October 1, 1999.
/17/ Filed with Amendment No. 55 to the Registration Statement
under the Investment Company Act of 1940 on October 8, 1999.
/18/ Filed with Post-Effective Amendment No. 51 on October 22, 1999.
/19/ Filed with Post-Effective Amendment No. 52 on December 15, 1999.
/20/ To be filed by Amendment.
</TABLE>
Item 24. Persons Controlled by or Under Common Control With Registrant
No person is controlled by or under common control with the Registrant.
Item 25. Indemnification
Reference is made to Article IV of the Registrant's Declaration of
Trust, which was filed with the Registrant's initial Registration
Statement.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant by the Registrant pursuant to the Declaration
of Trust or otherwise, the Registrant is aware that in the opinion of
the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and, public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such trustees,
officers or controlling persons in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issues.
<PAGE>
Item 26. Business and Other Connections of Investment Adviser
The directors and officers of PIMCO and their business and other
connections are as follows:
Name Business and Other Connections
Allan, George C. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Ariza, Jr., Augustine Vice President, PIMCO and PIMCO
Management, Inc.
Arnold, Tamara J. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Asay, Michael R. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Baker, Brian P. Vice President, PIMCO and PIMCO
Management, Inc.
Barbi, Leslie A. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Beaumont, Stephen B. Vice President, PIMCO and PIMCO
Management, Inc.
Benz, William R. II Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Member of PIMCO Partners LLC.
Bishop, Gregory A. Vice President, PIMCO and PIMCO
Management, Inc.
Brick, Andrew Senior Vice President, PIMCO and PIMCO
Management, Inc.
Brynjolfsson, John B. Executive Vice President, PIMCO and
PIMCO Management, Inc.
<PAGE>
Burns, R. Wesley Managing Director and Executive
Committee Member, PIMCO. Director and
Managing Director, PIMCO Management,
Inc.; Member of PIMCO Partners LLC.
President and Trustee of the Trust and
PIMCO Variable Insurance Trust;
President and Director of PIMCO
Commercial Mortgage Securities Trust,
Inc.; Director, PIMCO Funds: Global
Investors Series plc and PIMCO Global
Advisors (Ireland) Limited.
Callin, Sabrina C. Vice President, PIMCO and PIMCO
Management, Inc.
Clark, Marcia K. Vice President, PIMCO and PIMCO
Management, Inc.
Coleman, Jerry Vice President, PIMCO and PIMCO
Management, Inc.
Conseil, Cyrille Vice President, PIMCO and PIMCO
Management, Inc.
Cummings, Doug Vice President, PIMCO and PIMCO
Management, Inc.
Cupps, Wendy W. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Dialynas, Chris Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Member of PIMCO Partners LLC.
Dorff, David J. Vice President, PIMCO and PIMCO
Management, Inc.
Dow, Michael Senior Vice President, PIMCO, PIMCO
Management, Inc. and the Trust.
Dunn, Anita Vice President, PIMCO and PIMCO
Management, Inc.
Durn, Sandra Senior Vice President, PIMCO and PIMCO
Management, Inc.
Ehlert, A. Benjamin Executive Vice President, PIMCO and
PIMCO Management, Inc.
El-Erian, Mohamed A. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.
Esquibel, Albert Vice President, PIMCO and PIMCO
Management, Inc.
Ettl, Robert A. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Evans, Stephanie D. Vice President, PIMCO and PIMCO
Management, Inc.
<PAGE>
Fitzgerald, Robert M. Chief Financial Officer and Treasurer,
PIMCO, PIMCO Management, Inc., Cadence
Capital Management, Inc., NFJ Investment
Group, NFJ Management, Inc., Parametric
Portfolio Associates, Parametric
Management Inc., StocksPLUS Management
Inc. and PIMCO Funds Distributors LLC;
Chief Financial Officer and Assistant
Treasurer, Cadence Capital Management;
Director, Senior Vice President and
Chief Financial Officer, Oppenheimer
Group, Inc.; Chief Financial Officer and
Senior Vice President, PIMCO Advisors;
Chief Financial Officer, PIMCO Global
Advisors LLC.
Foulke, Steve A. Vice President, PIMCO and PIMCO
Management, Inc.
Frisch, Ursula T. Vice President, PIMCO and PIMCO
Management, Inc.
Garbuzov, Yuri P. Vice President, PIMCO and PIMCO
Management, Inc.
Gross, William H. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Director and Vice President,
StocksPLUS Management, Inc.; Senior Vice
President of the Trust and PIMCO
Variable Insurance Trust; Member of
Management Board, PIMCO Advisors; Member
of PIMCO Partners LLC.
Hague, John L. Managing Director and Executive
Committee Member, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Member of PIMCO Partners LLC.
Hally, Gordon C. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Hamalainen, Pasi M. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.
Hardaway, John P. Senior Vice President, PIMCO and PIMCO
Management, Inc.; Treasurer of the
Trust, PIMCO Variable Insurance Trust,
PIMCO Funds: Multi-Manager Series and
PIMCO Commercial Mortgage Securities
Trust, Inc.
<PAGE>
Harris, Brent R. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Director and Vice President,
StocksPLUS Management, Inc.; Trustee and
Chairman of the Trust and PIMCO Variable
Insurance Trust; Director and Chairman,
PIMCO Commercial Mortgage Securities
Trust, Inc.; Member of Management Board
and Executive Committee, PIMCO Advisors;
Member of PIMCO Partners LLC.
Hattesohl, Joseph D. Vice President, PIMCO and PIMCO
Management, Inc. Assistant Treasurer,
the Trust, PIMCO Variable Insurance
Trust, PIMCO Funds: Multi-Manager Series
and PIMCO Commercial Mortgage Securities
Trust, Inc.
Hayes, Raymond C. Vice President, PIMCO, PIMCO Management,
Inc. and the Trust.
Hinman, David C. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Hocson, Liza M. Vice President, PIMCO and PIMCO
Management, Inc.
Hodge, Douglas M. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Holden, Brent L. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.
Holloway, Dwight F., Jr. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Hudoff, Mark Senior Vice President, PIMCO and PIMCO
Management, Inc.
Isberg, Margaret E. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Senior Vice President of the
Trust.
Kelleher, Thomas J. Vice President, PIMCO, PIMCO Management,
Inc. and the Trust
Keller, James M. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Kennedy, Raymond G. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Kiesel, Mark R. Vice President, PIMCO and PIMCO
Management, Inc.
Kilmer, Sharon Executive Vice President, PIMCO and
PIMCO Management, Inc.
<PAGE>
Kirkbaumer, Steven P. Vice President, PIMCO, PIMCO Management,
Inc. and PIMCO Variable Insurance Trust.
Loftus, John S. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Vice President and Assistant
Secretary, StocksPLUS Management, Inc.
Lown, David Vice President, PIMCO and PIMCO
Management, Inc.
Lyon, Laura, M. Vice President, PIMCO and PIMCO
Management, Inc.
Mallegol, Andre J. Vice President, PIMCO, PIMCO Management,
Inc. and the Trust.
Martin, Scott W. Vice President, PIMCO and PIMCO
Management, Inc.
Martini, Michael E. Vice President, PIMCO and PIMCO
Management, Inc.
Mather, Scott A. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Mayer, Benjamin L. Vice President, PIMCO and PIMCO
Management, Inc.
McCray, Mark V. Senior Vice President, PIMCO and PIMCO
Management, Inc.
McCulley, Paul A. Executive Vice President, PIMCO and
PIMCO Management, Inc.
McDevitt, Joseph E. Executive Vice President, PIMCO and
PIMCO Management, Inc.; Director and
Chief Executive Officer, PIMCO Global
Advisors (Europe) Limited.
Meiling, Dean S. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Vice President, PIMCO Commercial
Mortgage Securities Trust, Inc.;
Director, PIMCO Funds: Global Investors
Series plc and PIMCO Global Advisors
(Ireland) Limited; Member, PIMCO
Partners LLC.
Metsch, Mark E. Vice President, PIMCO and PIMCO
Management, Inc.
Mewbourne, Curtis Vice President, PIMCO and PIMCO
Management, Inc.
Millimet, Scott Vice President, PIMCO and PIMCO
Management, Inc.
Moll, Jonathan D. Vice President, PIMCO and PIMCO
Management, Inc.
Monson, Kirsten S. Senior Vice President, PIMCO and PIMCO
Management, Inc.
<PAGE>
Muzzy, James F. Managing Director and Executive
Committee Member, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Director and Vice President,
StocksPLUS Management, Inc.; Senior Vice
President, PIMCO Variable Insurance
Trust; Vice President of the Trust;
Member of PIMCO Partners LLC.
Nakamura, Doris S. Vice President, PIMCO and PIMCO
Management, Inc.
Nellemann, Mark D. Vice President, PIMCO and PIMCO
Management, Inc.
Nguyen, Vinh T. Controller, PIMCO; Vice President and
Controller, PIMCO Advisors, Cadence
Capital Management, Inc., NJF
Management, Inc., Parametric Management,
Inc., StocksPLUS Management, Inc., PIMCO
Funds Distributors LLC, PIMCO
Management, Inc., PIMCO Global Advisors
LLC.
Ongaro, Douglas J. Vice President, PIMCO, PIMCO Management,
Inc. and the Trust.
Otterbein, Thomas J. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Palghat, Kumar N. Vice President, PIMCO and PIMCO
Management, Inc.
Perez, Keith Vice President, PIMCO and PIMCO
Management, Inc.
Phansalker, Mohan V. Senior Vice President, Senior Legal
Officer and Assistant Secretary, PIMCO
and PIMCO Management, Inc.; Vice
President and Assistant Secretary,
StocksPLUS Management, Inc.
Philipp, Elizabeth M. Vice President, PIMCO and PIMCO
Management, Inc.
Pittman, David J. Vice President, PIMCO, PIMCO Management,
Inc. and the Trust.
Podlich, William F. III Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Member of Management Board, PIMCO
Advisors; Member of PIMCO Partners LLC.
Powers, William C. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Senior Vice President, PIMCO
Commercial Mortgage Securities Trust,
Inc.; Member of PIMCO Partners LLC.
Randall, Terry A. Vice President, PIMCO and PIMCO
Management, Inc.
<PAGE>
Romano, Mark Vice President, PIMCO, PIMCO Management,
Inc. and the Trust
Roney, Scott L. Senior Vice President, PIMCO and PIMCO
Management, Inc.; Director and Chief
Executive Officer, PIMCO Global Advisors
(Japan) Limited.
Rosborough, Michael J. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Rowe, Cathy T. Vice President, PIMCO and PIMCO
Management, Inc.
Ruthen, Seth R. Vice President, PIMCO and PIMCO
Management, Inc.
Sargent, Jeffrey M. Vice President, PIMCO, PIMCO Management,
Inc. and PIMCO Funds: Multi-Manager
Series; Senior Vice President of the
Trust, PIMCO Variable Insurance Trust,
and PIMCO Commercial Mortgage Securities
Trust, Inc.
Schmider, Ernest L. Managing Director and Secretary, PIMCO;
Director, Managing Director and
Secretary, PIMCO Management, Inc.;
Secretary, PIMCO Partners LLC; Director
and Assistant Secretary, StocksPLUS
Management, Inc.; Senior Vice President,
PIMCO Advisors.
Scholey, Leland T. Senior Vice President, PIMCO, PIMCO
Management, Inc. and the Trust.
Schulist, Stephen O. Vice President, PIMCO and PIMCO
Management, Inc.
Scibisz, Iwona E. Vice President, PIMCO and PIMCO
Management, Inc.
Seliga, Denise C. Vice President, PIMCO and PIMCO
Management, Inc.
Seymour, Rita J. Vice President, PIMCO and PIMCO
Management, Inc.
Simon, Scott Executive Vice President, PIMCO and
PIMCO Management, Inc.
Sullivan, Christopher Vice President, PIMCO and PIMCO
Management, Inc.
Theodore, Kyle, J. Vice President, PIMCO and PIMCO
Management, Inc.
Thomas, Lee R. Managing Director, PIMCO; Director and
Managing Director, PIMCO Management,
Inc.; Member PIMCO Partners LLC.
<PAGE>
Thompson, William S. Jr. Chief Executive Officer, Managing
Director and Executive Committee Member,
PIMCO; Director, Managing Director and
Chief Executive Officer, PIMCO
Management, Inc.; Director and
President, StocksPLUS Management, Inc.;
Senior Vice President of PIMCO Variable
Insurance Trust; Vice President of the
Trust and PIMCO Commercial Mortgage
Securities Trust, Inc.; Member of
Management Board and Executive Committee
Member, PIMCO Advisors; Member,
President and Chief Executive Officer of
PIMCO Partners LLC.
Trinidad, Ronaele K. Vice President, PIMCO and PIMCO
Management, Inc.
Trosky, Benjamin L. Managing Director, PIMCO;
Director and Managing Director, PIMCO
Management, Inc.; Senior Vice President,
PIMCO Commercial Mortgage Securities
Trust, Inc.; Member of Management Board,
PIMCO Advisors; Member of PIMCO Partners
LLC.
Tyson, Richard E. Vice President, PIMCO and PIMCO
Management, Inc.
Van de Zilver, Peter A. Vice President, PIMCO and PIMCO
Management, Inc.
Wantanabe, Koichi Vice President, PIMCO and PIMCO
Management, Inc.; Executive Vice
President and Director, PIMCO Global
Advisors (Japan) Limited.
Wegener, Marilyn Vice President, PIMCO and PIMCO
Management, Inc.
Weil, Richard M. Assistant Secretary, PIMCO, PIMCO
Management, Inc., Cadence Capital
Management, and PIMCO Funds Distributors
LLC; General Counsel and Senior Vice
President, PIMCO Advisors; Secretary,
Cadence Capital Management, Inc. NFJ
Management, Inc., Parametric Management,
Inc., NFJ Investment Group, Parametric
Portfolio Associates, and StocksPLUS
Management, Inc.; Vice President, PIMCO
Funds: Multi-Manager Series; Senior Vice
President, General Counsel and Assistant
Secretary, PIMCO Global Advisors LLC;
Senior Vice President and Assistant
Secretary, PIMCO Global Advisors (Japan)
Limited.
Westhead, Paul C. Vice President, PIMCO and PIMCO
Management, Inc.
Wilson, Susan Vice President, PIMCO and PIMCO
Management, Inc.
<PAGE>
Wood, George H. Executive Vice President, PIMCO and
PIMCO Management, Inc.
Yetter, Michael A. Senior Vice President, PIMCO and PIMCO
Management, Inc.
Young, David Vice President, PIMCO, PIMCO Management,
Inc. and PIMCO Global Advisors (Europe)
Limited.
Zhu, Changhong Vice President, PIMCO and PIMCO
Management, Inc.
The address of PIMCO is 840 Newport Center Drive, Newport Beach, CA 92260.
The address of PIMCO Advisors L.P. is 800 Newport Center Drive, Newport Beach,
CA 92660.
The address of PIMCO Funds Distributors LLC is 2187 Atlantic Street, Stamford,
CT 06902.
Item 27. Principal Underwriters
(a) PIMCO Funds Distributors LLC (the "Distributor") serves as Distributor of
Shares of the Trust. The Distributor also acts as the principal underwriter
for PIMCO Funds: Multi-Manager Series. The Distributor is a wholly-owned
subsidiary of PIMCO Advisors.
(b)
<TABLE>
<S> <C> <C> <C>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
--------------------- ------------------------ --------------------
Aarts, Erik M. Vice President None
Bosch, James D. Regional Vice President None
Brennan, Deborah P. Vice President, Compliance Officer None
Clark, Timothy R. Executive Vice President None
Crean, Kelly Regional Vice President None
DeNicolo, Paul Regional Vice President None
Fessel, Jonathan P. Regional Vice President None
Fitzgerald, Robert M. Chief Financial Officer and Treasurer None
Gallagher, Michael J. Regional Vice President None
Gengo, Joseph Regional Vice President None
<PAGE>
Goldsmith, David S. Regional Vice President None
Gray, Ronald H. Regional Vice President None
Hally, Dan Regional Vice President None
Hammond, Ned Regional Vice President None
Hans, Charles Regional Vice President None
Hayes, Derek B. Vice President None
Horan, Christopher Regional Vice President None
Hooper, Kristina Vice President None
Hussey, John B. Regional Vice President None
Jobe, Stephen R. Senior Vice President None
Lynch, William E. Senior Vice President None
Maginn, Stephen Executive Vice President None
Meyer, Wayne Regional Vice President None
Meyers, Andrew J. Executive Vice President None
Murphy, George Regional Vice President None
Murphy, Kerry A. Vice President None
Moyer, Fiora N. Regional Vice President None
Neugebauer, Phil J. Senior Vice President None
Nguyen, Vinh T. Vice President, Controller None
Pearlman, Joffrey H. Regional Vice President None
Pisapia, Glynne Regional Vice President None
Poli, Frank C. Vice President, Compliance Officer None
Russo, Anne Marie Vice President None
<PAGE>
Seymour, Christopher Regional Vice President None
Schlingheyde, Keith Regional Vice President None
Schott, Newton B., Jr. Executive Vice President/ Secretary, None
Chief Administrative/ Legal Officer
Short, Elizabeth Vice President None
Smith Jr., Eugene M. Vice President None
Smith, Robert M. Regional Vice President None
Spear, Ellen Z. Vice President None
Spezakis, Zinovia Vice President None
Thomas, William H., Jr. Senior Vice President None
Treadway, Stephen J. Chairman, President and Chief None
Executive Officer
Troyer, Paul H. Senior Vice President None
Vlachos, Teresa Vice President None
Weil, Richard M. Assistant Secretary None
Zimmerman, Glen A. Vice President None
</TABLE>
- --------------------------------
* The business address of all officers of the Distributor is either 2187
Atlantic Street, Stamford, CT 06902 or 800 Newport Center Drive,
Newport Beach, CA 92660.
<PAGE>
Item 28. Location of Accounts and Records
The account books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder will
be maintained at the offices of Pacific Investment Management
Company, 840 Newport Center Drive, Newport Beach, California
92660, State Street Bank & Trust Co., 801 Pennsylvania, Kansas
City, Missouri 64105, and Shareholder Services, Inc., P.O. Box
5866, Denver, Colorado 80217.
Item 29. Management Services
Not applicable
Item 30. Undertakings
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Washington
in the District of Columbia on the 16th day of May, 2000.
PIMCO FUNDS
(Registrant)
By: _______________________________________________
R. Wesley Burns*
President
*By: /s/ Robert W. Helm
______________________________________________
Robert W. Helm, as attorney-in-fact
-------------------
* Pursuant to power of attorney filed with Post-Effective Amendment No.
36 to Registration Statement No. 33-12113 on July 11, 1997.
<PAGE>
PIMCO Funds
EXHIBIT INDEX
Exhibit No. Exhibit
(a)(15) Form of Establishment and Designation of Series of Shares of
Beneficial Interest Relating to the PIMCO California
Municipal Bond Fund and Short-Term Emerging Markets
Portfolio
(d)(14) Form of Investment Advisory Contract
(d)(15) Form of Supplement to Investment Advisory Contract Relating
to PIMCO California Municipal Bond Fund and PIMCO Short-Term
Emerging Markets Portfolio
Form of
Establishment and Designation of
Additional Series of Shares of Beneficial Interest,
Par Value $0.01 Per Share, of
PIMCO Funds
(formerly Pacific Investment Management Institutional Trust)
RESOLVED, pursuant to Sections 5.11 and 5.13 of the Amended and
Restated Declaration of Trust of PIMCO Funds (formerly the Pacific Investment
Management Institutional Trust) (the "Trust") dated March 31, 2000,
("Declaration"), the shares of beneficial interest of the Trust shall be divided
into two additional separate Series (the "Series") effective May 16, 2000.
FURTHER RESOLVED, that the Series hitherto established and designated
as follows:
PIMCO California Municipal Bond Fund
PIMCO Short-Term Emerging Markets Portfolio
(series in the Private Account Portfolio Series)
shall have the following special and relative rights:
1. The PIMCO California Municipal Bond Fund shall issue its shares of
beneficial interest with respect to six separate classes: Class A, Class B,
Class C, Class D, Institutional Class and Administrative Class; and the PIMCO
Short-Term Emerging Markets Portfolio shall issue its shares of beneficial
interest in institutional shares only.
2. The Series shall be authorized to invest in cash, securities,
instruments and other property as described from time to time in the offering
materials of the Series ("Eligible Portfolio Instruments"). Each share of
beneficial interest of a Series ("Share") shall be redeemable, shall be entitled
to one vote (or fraction thereof in respect of a fractional Share) on matters on
which Shares of the Series shall be entitled to vote, shall represent a pro rata
beneficial interest in the assets allocated to the Series, and shall be entitled
to receive its pro rata share of net assets of the Series upon liquidation of
the Series, all as provided in the Declaration.
3. Shares of each Series shall be subject to such selling restrictions,
restrictions as to transfer or other terms as shall be established by the
Trustees and described in the offering materials for each Series.
4. Each Series may pursue its investment objective directly by
investment in Eligible Portfolio Instruments or indirectly by investment in one
or more underlying investment vehicles or funds that in turn invest in Eligible
Portfolio Instruments and whose shares may be offered to other parties as well
as to the Series.
5. Shareholders of each Series shall vote separately as a class on any
matter, except, consistent with the Investment Company Act of 1940, as amended
("the Act"), the rules thereunder, and the offering materials of each Series,
with respect to (i) the election of Trustees, (ii) any amendment of the
Declaration, unless the amendment affects fewer than all classes of Shares, in
which case only shareholders of the affected classes shall vote, and (iii)
ratification of the selection of auditors, and except when the Trustees have
determined that the matter affects only the interests of shareholders of a
particular Series of the Trust, in which case only the shareholders of such
Series shall be entitled to vote thereon. In each case of separate voting, the
Trustees shall determine whether, for the matter to be effectively acted upon
within the meaning of Rule 18f-2 under the Act (or any successor rule) as to a
Series, the applicable percentage (as specified in the Declaration, or the Act
and the rules thereunder) of the shares of that Series alone must be voted in
favor of the matter, or whether the favorable vote of such applicable percentage
of the shares of each Series entitled to vote on the matter is required.
6. The assets and liabilities of the Trust shall be allocated among the
Series of the Trust as set forth in Section 5.11 of the Declaration, except that
only the preexisting Series shall bear their allocable portion of the remaining
unamortized costs incurred and payable in connection with their organization and
registration; costs of establishing the Series and of the registration and
public offering of their Shares shall be amortized for such Series over the
period beginning on the date such costs become payable and ending sixty months
thereafter, or such earlier date as is required by applicable law, rule or
accounting standard or principle.
7. The Trustees shall have the right at any time and from time to time
to reallocate assets and expenses or to change the designation of each series
hereby created, or to otherwise change the special and relative rights of each
Series, provided that such change shall not adversely affect the rights of the
Shareholders of each Series.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this instrument the
16th day of May, 2000.
---------------------------
Guilford C. Babcock
---------------------------
R. Wesley Burns
---------------------------
E. Philip Cannon
---------------------------
Vern O. Curtis
---------------------------
J. Michael Hagan
---------------------------
Brent R. Harris
---------------------------
Thomas P. Kemp, Sr.
---------------------------
William J. Popejoy
FORM OF
INVESTMENT ADVISORY CONTRACT
PIMCO FUNDS
840 Newport Center Drive
Newport Beach, California 92660
May 5, 2000
Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, California 92660
Dear Sirs:
This will confirm the agreement between the undersigned (the "Trust")
and Pacific Investment Management Company (the "Adviser") as follows:
1. The Trust is an open-end investment company which currently has
forty-two separate investment portfolios, all of which are subject to this
agreement, as supplemented: the Money Market Fund; the Short-Term Fund; the Low
Duration Fund; the Low Duration Fund II; the Low Duration Fund III; the Low
Duration Mortgage Fund; the Moderate Duration Fund; the Real Return Bond Fund;
the Total Return Fund; the Total Return Fund II; the Total Return Fund III; the
Total Return Mortgage Fund; the High Yield Fund; the Investment Grade Corporate
Bond Fund; the Long-Term U.S. Government Fund; the Long Duration Fund; the Short
Duration Municipal Income Fund; the Municipal Bond Fund; the California
Intermediate Municipal Bond Fund; the New York Intermediate Municipal Bond Fund;
the Global Bond Fund; the Global Bond Fund II; the Foreign Bond Fund; the
Emerging Markets Bond Fund; the Strategic Balanced Fund; the Convertible Bond
Fund; the StocksPLUS Fund; the Commercial Mortgage Securities Fund; and the
StocksPLUS Short Strategy Fund (the "Funds") and the Short-Term Portfolio; the
Short-Term Portfolio II; the U.S. Government Sector Portfolio; the U.S.
Government Sector Portfolio II; the Mortgage Portfolio; the Mortgage Portfolio
II; the Investment Grade Corporate Portfolio; the High Yield Portfolio; the
Municipal Sector Portfolio; the International Portfolio; the Emerging Markets
Portfolio; the Real Return Bond Portfolio, and the Opportunity Portfolio (the
"Portfolios"). Additional investment portfolios may be established in the
future. This Contract shall pertain to the Funds and Portfolios and to such
additional investment portfolios as shall be designated in Supplements to this
Contract, as further agreed between the Trust and the Adviser. Eight separate
classes of shares of beneficial interest in the Trust are offered to investors
in each Fund. The Trust engages in the business of investing and reinvesting the
assets of each Fund and Portfolio in the manner and in accordance with the
investment objective and restrictions applicable to that Fund and Portfolio as
specified in the currently effective Prospectus (the "Prospectus") for the Trust
included in the registration statements, as amended from time to time (the
"Registration Statement"), filed by the Trust under the Investment Company Act
of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies
of the documents referred to in the preceding sentence have been furnished to
the Adviser. Any amendments to those documents shall be furnished to the Adviser
promptly. Pursuant to a Distribution Contract, as amended (the "Distribution
Contract"), between the Trust and PIMCO Funds Distributors LLC (the
"Distributor"), the Funds and Portfolios have employed the Distributor to serve
as principal underwriter for the shares of beneficial interest of the Trust.
Pursuant to an Administration Agreement ("Administration Agreement") between the
Trust and the Adviser, the Trust has also retained the Adviser to provide the
Funds and Portfolios with administrative and other services.
<PAGE>
2. The Trust hereby appoints the Adviser to provide the investment
advisory services specified in this Contract and the Adviser hereby accepts such
appointment.
3. (a) The Adviser shall, at its expense, (i) employ or associate with
itself such persons as it believes appropriate to assist it in performing its
obligations under this Contract and (ii) provide all services, equipment and
facilities necessary to perform its obligations under this Contract. The Adviser
may from time to time seek research assistance and rely on investment management
resources available to it through its affiliated companies, but in no case shall
such reliance relieve the Adviser of any of its obligations hereunder, nor shall
the Trust be responsible for any additional fees or expenses hereunder as a
result.
(b) The Trust shall be responsible for all of its expenses and
liabilities, including compensation of its Trustees who are not affiliated with
the Adviser, the Distributor or any of their affiliates; taxes and governmental
fees; interest charges; fees and expenses of the Trust's independent accountants
and legal counsel; trade association membership dues; fees and expenses of any
custodian (including maintenance of books and accounts and calculation of the
net asset value of shares of the Trust), transfer agent, registrar and dividend
disbursing agent of the Trust; expenses of issuing, selling, redeeming,
registering and qualifying for sale shares of beneficial interest in the Trust;
expenses of preparing and printing share certificates, prospectuses and reports
to shareholders, notices, proxy statements and reports to regulatory agencies;
the cost of office supplies, including stationery; travel expenses of all
officers, Trustees and employees; insurance premiums; brokerage and other
expenses of executing portfolio transactions; expenses of shareholders'
meetings; organizational expenses; and extraordinary expenses. Notwithstanding
the foregoing, the Trust may enter into a separate agreement, which shall be
controlling over this contract, as amended, pursuant to which some or all of the
foregoing expenses of this Section 3(b) shall be the responsibility of the other
party or parties to that agreement.
4. (a) The Adviser shall provide to the Trust investment guidance and
policy direction in connection with the management of the Funds and Portfolios,
including oral and written research, analysis, advice, and statistical and
economic data and information.
<PAGE>
Consistent with the investment objectives, policies and restrictions
applicable to the Trust and its Funds and Portfolios, the Adviser will determine
the securities and other assets to be purchased or sold by each Fund or
Portfolio of the Trust and will determine what portion of each Fund or Portfolio
shall be invested in securities or other assets, and what portion, if any,
should be held uninvested.
The Trust will have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to investment
advisory clients of the Adviser. It is understood that the Adviser will not use
any inside information pertinent to investment decisions undertaken in
connection with this Contract that may be in its possession or in the possession
of any of its affiliates, nor will the Adviser seek to obtain any such
information.
(b) The Adviser also shall provide to the officers of the Trust
administrative assistance in connection with the operation of the Trust, the
Funds, and Portfolios which shall include (i) compliance with all reasonable
requests of the Trust for information, including information required in
connection with the Trust's filings with the Securities and Exchange Commission
and state securities commissions, and (ii) such other services as the Adviser
shall from time to time determine to be necessary or useful to the
administration of the Trust, Funds and Portfolios.
(c) As manager of the assets of the Funds and Portfolios, the
Adviser shall make investments for the account of the Funds and Portfolios in
accordance with the Adviser's best judgment and within the investment
objectives, policies, and restrictions set forth in the Prospectus, the 1940 Act
and the provisions of the Internal Revenue Code relating to regulated investment
companies, subject to policy decisions adopted by the Trust's Board of Trustees.
(d) The Adviser shall furnish to the Trust's Board of Trustees
periodic reports on the investment performance of the Trust and its Funds and
Portfolios and on the performance of its obligations under this Contract and
shall supply such additional reports and information as the Trust's officers or
Board of Trustees shall reasonably request.
(e) On occasions when the Adviser deems the purchase or sale of a
security to be in the best interest of a Fund or Portfolio as well as other of
its clients, the Adviser, to the extent permitted by applicable law, may
aggregate the securities to be so sold or purchased in order to obtain the best
execution of the order or lower brokerage commissions, if any. The Adviser may
also on occasion purchase or sell a particular security for one or more clients
in different amounts. On either occasion, and to the extent permitted by
applicable law and regulations, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Trust and to such other customers.
<PAGE>
(f) The Adviser may cause a Fund and/or Portfolio to pay a broker
which provides brokerage and research services to the Adviser a commission for
effecting a securities transaction in excess of the amount another broker might
have charged. Such higher commissions may not be paid unless the Adviser
determines in good faith that the amount paid is reasonable in relation to the
services received in terms of the particular transaction or the Adviser's
overall responsibilities to the Trust and any other of the Adviser's clients.
5. The Adviser shall give the Trust the benefit of the Adviser's best
judgment and efforts in rendering services under this Contract. As an inducement
to the Adviser's undertaking to render these services, the Trust agrees that the
Adviser shall not be liable under this Contract for any mistake in judgment or
in any other event whatsoever, provided that nothing in this Contract shall be
deemed to protect or purport to protect the Adviser against any liability to the
Trust or its shareholders to which the Adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of the Adviser's duties under this Contract or by reason of the Adviser's
reckless disregard of its obligations and duties hereunder.
6. In consideration of the services to be rendered by the Adviser under
this Contract, each Fund and each Portfolio of the Trust shall pay the Adviser a
monthly fee on the first business day of each month, based upon the average
daily value (as determined on each business day at the time set forth in the
Prospectus for determining net asset value per share) of the net assets of the
Fund or Portfolio, as applicable, during the preceding month, at the following
annual rates: Money Market Fund -- 0.15%; Short-Term Fund, Low Duration Fund,
Low Duration Fund II, Low Duration Fund III, Low Duration Mortgage Fund,
Moderate Duration Fund, Real Return Bond Fund, Total Return Fund, Total Return
Fund II, Total Return Fund III, Total Return Mortgage Fund, High Yield Fund,
Investment Grade Corporate Bond Fund, Long-Term U.S. Government Fund, Municipal
Bond Fund, Global Bond Fund, Global Bond Fund II, Foreign Bond Fund, California
Intermediate Municipal Bond Fund, New York Intermediate Municipal Bond Fund, and
Long Duration Fund -- 0.25%; Commercial Mortgage Securities Fund, Strategic
Balanced Fund, StocksPLUS Fund, StocksPLUS Short Strategy Fund, and Convertible
Bond Fund -- 0.40%; Emerging Markets Bond Fund; -- 0.45%; Short Duration
Municipal Income Fund -- 0.20%; Short-Term Portfolio, Short-Term Portfolio II,
U.S. Government Sector Portfolio, U.S. Government Sector Portfolio II, Mortgage
Portfolio, Mortgage Portfolio II, Investment Grade Corporate Portfolio; High
Yield Portfolio, Municipal Sector Portfolio, International Portfolio, Emerging
Markets Portfolio, Real Return Bond Portfolio, and Opportunity Portfolio --
0.02%.
If the fees payable to the Adviser pursuant to this paragraph 6
begin to accrue before the end of any month or if this Contract terminates
before the end of any month, the fees for the period from that date to the end
of that month or from the beginning of that month to the date of termination, as
the case may be, shall be prorated according to the proportion which the period
bears to the full month in which the effectiveness or termination occurs. For
purposes of calculating the monthly fees, the value of the net assets of each
Fund and each Portfolio shall be computed in the manner specified in the
Prospectus for the computation of net asset value. For purposes of this
Contract, a "business day" is any day the New York Stock Exchange is open for
trading.
<PAGE>
7. If the aggregate expenses of every character incurred by, or
allocated to, the Trust in any fiscal year, other than interest, taxes,
brokerage commissions and other portfolio transaction expenses, other
expenditures which are capitalized in accordance with generally accepted
accounting principles and any extraordinary expense (including, without
limitation, litigation and indemnification expense), but including the fees
payable under this Contract ("includable expenses"), exceed any expense
limitations applicable to the Trust imposed by state securities laws or
regulations thereunder, as these limitations may be raised or lowered from time
to time, the Adviser shall pay the Trust an amount equal to that excess. With
respect to portions of a fiscal year in which this Contract shall be in effect,
the foregoing limitations shall be prorated according to the proportion which
that portion of the fiscal year bears to the full fiscal year. At the end of
each month of the Trust's fiscal year, the Adviser will review the includable
expenses accrued during that fiscal year to the end of the period and shall
estimate the contemplated includable expenses for the balance of that fiscal
year. If, as a result of that review and estimation, it appears likely that the
includable expenses will exceed the limitations referred to in this paragraph 7
for a fiscal year with respect to the Trust, the monthly fees relating to the
Trust payable to the Adviser under this Contract and under the Administration
Agreement for such month shall be reduced, subject to a later reimbursement to
reflect actual expenses, by an amount equal to a pro rata portion (prorated on
the basis of the remaining months of the fiscal year, including the month just
ended) of the amount by which the includable expenses for the fiscal year (less
an amount equal to the aggregate of actual reductions made to this provision
with respect to prior months of the fiscal year) are expected to exceed the
limitations provided in this paragraph 7. For purposes of the foregoing, the
value of the net assets of each Fund of the Trust shall be computed in the
manner specified in paragraph 6, and any payments required to be made by the
Adviser shall be made once a year promptly after the end of the Trust's fiscal
year.
8. (a) This Contract shall become effective with respect to the Funds
and Portfolios on May 5, 2000 (and, with respect to any amendment, or with
respect to any additional fund, the date of the amendment or Supplement hereto)
and shall continue in effect with respect to a Fund or Portfolio for a period of
more than two years from that date (or, with respect to any additional fund, the
date of the Supplement) only so long as the continuance is specifically approved
at least annually (i) by the vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund or Portfolio or by the
Trust's Board of Trustees and (ii) by the vote, cast in person at a meeting
called for the purpose, of a majority of the Trust's trustees who are not
parties to this Contract or "interested persons" (as defined in the 1940 Act) of
any such party.
(b) This Contract may be terminated with respect to a Fund or
Portfolio (or any additional fund) at any time, without the payment of any
penalty, by a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund or Portfolio or by a vote of a majority of
the Trust's entire Board of Trustees on 60 days' written notice to the Adviser
or by the Adviser on 60 days' written notice to the Trust. This Contract (or any
Supplement hereto) shall terminate automatically in the event of its assignment
(as defined in the 1940 Act).
<PAGE>
9. Except to the extent necessary to perform the Adviser's obligations
under this Contract, nothing herein shall be deemed to limit or restrict the
right of the Adviser, or any affiliate of the Adviser, or any employee of the
Adviser, to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
10. The investment management services of the Adviser to the Trust
under this contract are not to be deemed exclusive as to the Adviser and the
Adviser will be free to render similar services to others.
11. This Contract shall be construed in accordance with the laws of the
State of California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act.
12. The Declaration of Trust establishing the Trust, dated March 31,
2000, a copy of which, together with all amendments thereto (the "Declaration"),
is on file in the Office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "PIMCO Funds" refers to the trustees under the
Declaration collectively as trustees and not as individuals or personally, and
that no shareholder, trustee, officer, employee or agent of the Trust shall be
subject to claims against or obligations of the Trust to any extent whatsoever,
but that the Trust estate only shall be liable.
<PAGE>
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
PIMCO FUNDS
By: ____________________
Title:
ACCEPTED:
PACIFIC INVESTMENT MANAGEMENT COMPANY
By: ________________
Title:
FORM OF
SUPPLEMENT TO
INVESTMENT ADVISORY CONTRACT
PIMCO Funds: Pacific Investment Management Series
840 Newport Center Drive
Newport Beach, California 92660
________________, 2000
Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, California 92660
RE: PIMCO California Municipal Bond Fund
PIMCO Short-Term Emerging Markets Portfolio
Dear Sirs:
This will confirm the agreement between the undersigned (the "Trust")
and Pacific Investment Management Company (the "Adviser") as follows:
1. This Trust is an open-end investment company organized as a
Massachusetts business trust, and consisting of such investment portfolios as
have been or may be established by the Trustees of the Trust from time to time.
A separate series of shares of beneficial interest of the Trust is offered to
investors with respect to each investment portfolio. The PIMCO California
Municipal Bond Fund and PIMCO Short-Term Emerging Markets Portfolio (the
"Portfolios") are separate investment portfolios of the Trust.
2. The Trust and the Adviser have entered into an Investment Advisory
Contract ("Contract") dated May 5, 2000, pursuant to which the Trust has
employed the Adviser to provide investment advisory and other services specified
in the Contract, and the Adviser has accepted such employment.
3. As provided in paragraph 2 of the Contract, the Trust hereby
appoints the Adviser to serve as Investment Adviser with respect to the
Portfolios, and the Adviser accepts such appointment, the terms and conditions
of such employment to be governed by the Contract, which is hereby incorporated
herein by reference.
4. As provided in paragraph 6 of the Contract and subject to further
conditions as set forth therein, the Trust shall with respect to each Portfolio
pay the Adviser a monthly fee on the first business day of each month, based
upon the average daily value (as determined on each business day at the time set
forth in the Prospectus or Offering Memorandum for determining net asset value
per share) of the net assets of the Portfolio during the preceding month, at an
annual rate of 0.25% for the California Municipal Bond Fund, and at an annual
rate of 0.02% for the Short-Term Emerging Markets Portfolio.
5. This Supplement and the Contract shall become effective with respect
to each Portfolio on ______________, ______ and shall continue in effect with
respect to each Portfolio for a period of more than two years from that date
only so long as the continuance is specifically approved at least annually (a)
by the vote of a majority of the outstanding voting securities (as defined in
the 1940 Act) of the Portfolio or by the Trust's Board of Trustees and (b) by
the vote, cast in person at a meeting called for the purpose, of a majority of
the Trust's trustees who are not parties to this Contract or "interested
persons" (as defined in the 1940 Act) of any such party. This Contract may be
terminated with respect to a Portfolio at any time, without the payment of any
penalty, by a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Portfolio or by a vote of a majority of the
Trust's entire Board of Trustees on 60 days' written notice to the Adviser or by
the Adviser on 60 days' written notice to the Trust. This Contract shall
terminate automatically in the event of its assignment (as defined in the 1940
Act).
<PAGE>
If the foregoing correctly sets forth the agreement between the Trust and the
Adviser, please so indicate by signing and returning to the Trust the enclosed
copy hereof.
Very truly yours,
PIMCO FUNDS: PACIFIC INVESTMENT
MANAGEMENT SERIES
By: ________________________________
Title: President
ACCEPTED:
PACIFIC INVESTMENT MANAGEMENT COMPANY
By: _________________________________
Title: Managing Director
